-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IU580TL/T4G5j0PAHF8lHCm1A0giPiNzQb661YP1lp1H0OJR7yZ7eEhmrX/AJXli 1sx5SwWxMy5O2CvWuQbwLA== 0000950114-97-000519.txt : 19971212 0000950114-97-000519.hdr.sgml : 19971212 ACCESSION NUMBER: 0000950114-97-000519 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19971211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNING CORP CENTRAL INDEX KEY: 0000801051 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 431719355 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-35993 FILM NUMBER: 97736571 BUSINESS ADDRESS: STREET 1: 700 MARKET ST STREET 2: 185 ASYLUM ST CITY: ST LOUIS STATE: MO ZIP: 63101 BUSINESS PHONE: 3144440498 MAIL ADDRESS: STREET 1: CONNING CORP STREET 2: 700 MARKET ST CITY: ST LOUIS STATE: MO ZIP: 63101 S-1/A 1 CONNING CORPORATION AMENDMENT NO. 3 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1997 REGISTRATION NO. 333-35993 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ CONNING CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 6282 43-1719355 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR CLASSIFICATION IDENTIFICATION NUMBER) ORGANIZATION) CODE NUMBER)
700 MARKET STREET ST. LOUIS, MO 63101 (314) 444-0498 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------------------------------------------- LEONARD M. RUBENSTEIN CHAIRMAN AND CHIEF EXECUTIVE OFFICER CONNING CORPORATION 700 MARKET STREET ST. LOUIS, MO 63101 (314) 444-0498 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------------------------------------------- COPIES TO: JAMES L. NOUSS, JR., ESQ. GARY I. HOROWITZ, ESQ. R. RANDALL WANG, ESQ. ROBERT M. KANER, ESQ. BRYAN CAVE LLP SIMPSON THACHER & BARTLETT 211 NORTH BROADWAY, SUITE 3600 425 LEXINGTON AVENUE ST. LOUIS, MO 63102 NEW YORK, NY 10017 (314) 259-2000 (212) 455-2000 FAX: (314) 259-2020 FAX: (212) 455-2502 ---------------------------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. =============================================================================== 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 11, 1997 PROSPECTUS , 1997 [CONNING LOGO] 2,500,000 SHARES CONNING CORPORATION COMMON STOCK All of the 2,500,000 shares of Common Stock offered hereby are being sold by Conning Corporation (the "Company" or "Conning"). After completion of the offering, General American Life Insurance Company ("General American") will beneficially own approximately 65% of the Company's Common Stock (approximately 63% if the Underwriters' over-allotment option is exercised in full). See "Risk Factors--Dependence on Principal Shareholder" and "--Potential Conflicts of Interest." Prior to this offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $12.50 and $14.50 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has received approval for the trading of its Common Stock on the Nasdaq National Market under the symbol "CNNG," subject to official notice of issuance. SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE- SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------------------- PRICE UNDERWRITING TO THE DISCOUNTS AND PROCEEDS TO THE PUBLIC COMMISSIONS COMPANY - -------------------------------------------------------------------------------------------------------------- Per Share....................................... $ $ $ Total .................................. $ $ $ - -------------------------------------------------------------------------------------------------------------- The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." Before deducting offering expenses estimated at $1,375,000, payable by the Company. The Company has granted to the Underwriters a 30-day option to purchase up to 375,000 additional shares of Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $ , $ and $ , respectively. --------------- -------------- -------------- See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them and subject to various prior conditions, including their right to reject any order in whole or in part. It is expected that delivery of the certificates for such shares will be made against payment therefor in New York, New York on or about , 1997. DONALDSON, LUFKIN & JENRETTE A.G. EDWARDS & SONS, INC. SECURITIES CORPORATION 3 [CONNING LOGO] [REPRESENTATION OF FLOW CHART] CORE STRATEGIC PRODUCTS & COMPETENCIES CRITERIA SERVICES INVESTMENT ASSET EXPERTISE RECURRING MANAGEMENT REVENUE INSURANCE SPECIALIZED INDUSTRY MARKET ABILITY TO ASSETS KNOWLEDGE & -----> LEADERSHIP DIFFERENTIATE ------> REPUTATION INVESTMENT ADVISORY CLIENT SERVICE INVESTMENT FOCUS ACCOUNTING & REPORTING HIGH VALUE ADDED PRIVATE EQUITY INSURANCE RESEARCH SERVICES Using its core competencies, Conning's business strategy is to apply one or more of its strategic criteria to provide products and services to its clients. "Conning" and the related logo are service marks of the Company. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET. IN ADDITION, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all information in this Prospectus: (i) reflects the conversion of all outstanding shares of Series A Convertible Preferred Stock into an aggregate of 3,190,000 shares of Common Stock, the conversion of all outstanding shares of Series B Convertible Preferred Stock into an aggregate of 365,000 shares of Common Stock for additional consideration to the Company of $1.67 per share, and the conversion of all outstanding shares of Non-Voting Common Stock into an aggregate of 110,000 shares of Common Stock, upon or prior to the completion of this offering (the "Capital Stock Conversions") and (ii) assumes that the over-allotment option granted to the Underwriters by the Company will not be exercised. The Company is the successor to the business 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 for the insurance industry. GAIMCO was a registered investment adviser which provided investment advisory services primarily to its parent, General American Life Insurance Company ("General American"), and its affiliates. The parties effected the Strategic Merger in order to combine complementary businesses, each with specialties in the insurance industry, to build a platform from which to leverage additional growth. See "Certain Relationships and Related Transactions--The Strategic Merger." Other than historical financial statements and data, information herein concerning the Company regarding periods prior to the date of the Strategic Merger, including without limitation with respect to assets under management and private equity funds, includes the Company and its predecessors unless the context indicates otherwise. 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 Prospectus, the terms "Company" and "Conning" refer to Conning Corporation and its subsidiaries. See "Glossary" for definitions of certain terms used in this Prospectus. THE COMPANY GENERAL Conning is a nationally recognized asset management company providing services to the insurance industry and is also a leading provider of insurance research. As of September 30, 1997, the Company had approximately $26.4 billion of assets under discretionary management and, in total, provided services with respect to approximately $73.6 billion of assets for insurance company clients. The Company believes it is well positioned to take advantage of the continued growth in insurance industry assets and the willingness of insurance companies to consider utilizing external investment management expertise. During the period from 1992 through 1996, assets under discretionary management of the Company increased by an average of 24% per year, on a pro forma basis after giving effect to the Strategic Merger and the inclusion of assets of General American for all years. In 1996, its first full year of operations following the Strategic Merger, the Company had revenues of approximately $53.7 million and net earnings of approximately $6.2 million. During the nine months ended September 30, 1997, the Company had revenues of approximately $46.9 million and net earnings of approximately $6.4 million. The Company believes that it possesses competitive strengths in insurance asset management which may support its prospects for growth: INSURANCE INDUSTRY FOCUS AND KNOWLEDGE. Based upon the Company's extensive work with insurance companies, the Company believes that its focus on the insurance industry allows it to provide substantially all of the services and products that an insurance company seeks from an asset manager. By utilizing its specialized knowledge of insurance company investment considerations, the Company believes, based upon feedback from clients, that it offers 3 5 a more comprehensive set of asset management services than many of its competitors, including asset allocation, asset and liability matching, cash forecasts, tax modeling and investment accounting & reporting. The Company offers expertise in asset classes that many insurance companies traditionally utilize, including commercial mortgage loans, investment real estate and private placements. NAME RECOGNITION WITHIN THE INSURANCE INDUSTRY. The Company believes that the established reputation of Conning within the insurance industry provides the Company with a marketing advantage. According to a 1996 survey by Eager & Associates of 156 domestic, non-captive insurance companies and 110 groups of insurance companies (representing 692 individual companies) each with assets over $30 million (the "Eager Study"), the Company ranks among the top two insurance asset management firms in terms of name recognition among survey respondents. The Company's in-depth insurance industry research has been targeted to senior executives in the insurance industry for more than 20 years, and its Strategic Studies Series is subscribed to by 44 of the 50 largest U.S. property-casualty insurance companies and 42 of the 50 largest U.S. life-health insurance companies (based on 1996 premiums as reported by OneSource Information Services, Inc. as provided to it by third parties). CLIENT SERVICE AND PERFORMANCE FOCUS. The Company attempts to differentiate itself from competitors through its insurance-specific capabilities, investment performance and frequent, responsive client communication. During the period from 1992 through 1996, the Company retained an average of approximately 95% of unaffiliated clients on an annual basis. EXPERIENCED MANAGEMENT WITH SIGNIFICANT STOCK OWNERSHIP. The Company employs an experienced management team, the members of which have an average of approximately 15 years of experience in the investment or insurance business. In total, the employees of the Company will own in the aggregate approximately 29% of the Common Stock on a fully diluted basis after the offering (including options to be granted upon the closing of this offering). See "Management" and "Principal Shareholders." COMPANY OPERATIONS The Company's business is asset management for insurance companies, which is supplemented by its in-depth research focused on the insurance industry. The Company's asset management services consist of three components: (i) discretionary asset management services, (ii) investment advisory services and (iii) investment accounting & reporting services. In connection with its discretionary asset management services, the Company originates and services commercial mortgages and manages investments in real estate assets. The Company also sponsors and manages private equity funds investing in insurance and insurance-related companies. ASSET MANAGEMENT. The Company's insurance asset management services are designed to optimize investment returns for clients within the guidelines imposed by insurance regulatory, accounting, tax and asset/liability management considerations. As of September 30, 1997, the Company provided services with respect to approximately $73.6 billion in assets, of which approximately (i) $26.4 billion represented assets under discretionary management, (ii) $21.0 billion represented assets serviced under investment advisory agreements and (iii) $26.2 billion represented assets receiving investment accounting & reporting services on a stand-alone basis. As part of its discretionary asset management services, as of September 30, 1997, the Company managed approximately $2.6 billion of commercial mortgage loans and investment real estate. The Company manages private equity funds which invest in insurance and insurance-related companies. Since 1985, the Company has sponsored five private equity funds, raising approximately $360 million in committed capital and investing more than $193 million of these proceeds in 39 portfolio company investments. INSURANCE RESEARCH. The Company believes that Conning & Company is one of the leading insurance industry research firms in the United States. 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 United States institutional money managers as well as pension funds, banks, mutual funds, and insurance companies. Conning & Company also from time to time participates in the underwriting of public offerings of equity securities for insurance and insurance-related companies. 4 6 The Company's principal executive offices are currently located at 700 Market Street, St. Louis, Missouri 63101 (telephone number: (314) 444-0498) and at CityPlace II, 185 Asylum Street, Hartford, Connecticut 06103 (telephone number: (860) 527-1131). DEVELOPING TRENDS IN THE INSURANCE INDUSTRY Certain key insurance industry trends that also affect the management of insurance company assets are as follows: GROWING INSURANCE COMPANY ASSETS. Insurance company assets have grown over several decades and during the period from 1986 to 1996 grew at an average rate of approximately 9% per year, from approximately $1.3 trillion, to approximately $3.1 trillion, according to a standard industry source. ACCEPTANCE OF OUTSOURCING. The Company believes that many insurance companies are utilizing non-affiliated asset managers in order to respond to competitive product requirements and the pressure to achieve higher returns on investments while maintaining an acceptable level of risk. According to the Eager Study, assets under management by external, non-affiliated managers (which represented approximately 15% of industry assets in 1996) increased at a rate of 17% per year from $300 billion in 1994 to $415 billion in 1996. Based upon information provided by an industry source, insurance company assets increased at a rate of approximately 9% per year, from $2.6 trillion in 1994 to $3.1 trillion in 1996. The authors of the Eager Study concluded that externally managed assets would continue to grow, but believed that the growth rate would lose momentum over the next few years covered by the study. STRATEGY The Company's primary operating strategy is to grow recurring, fee-based asset management-related revenues, cash flow and profits through the following: LEVERAGE ESTABLISHED ASSET MANAGEMENT PLATFORM TO GENERATE GROWTH AND PROFITABILITY. The Company believes that it has established a platform, made up of core investment professionals, product expertise and systems, to support future growth in fee-based asset management revenues. Opportunities for asset management growth are expected to come from new and existing clients, strategic acquisitions and alliances and through General American and its affiliates. GENERATE GROWTH FROM NEW AND EXISTING CLIENTS. The Company intends to take advantage of the growth in insurance industry assets and a trend among insurance companies to seek external investment management expertise. The Company will pursue growth in assets under management from new clients by increasing the Company's sales and marketing efforts and by leveraging the Company's strong name recognition. Additionally, the Company will continue to pursue growth in assets under management from existing clients by seeking to increase its share of its clients' assets and from underlying growth in existing assets. PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES TO EXPAND MARKET PENETRATION. The Company regularly evaluates strategic acquisitions, joint ventures and marketing alliances as a means of increasing assets under management, expanding the range of its product offerings and increasing its sales and marketing capabilities. LEVERAGE STRATEGIC ALLIANCE WITH GROWING PARTNER. The Company's relationship with General American, the Company's principal shareholder, provides opportunities for distribution of the Company's products and services to General American and its affiliates. The Company has benefited from the internal growth and acquisition activity of General American and its affiliates, with assets under management of General American and its affiliates increasing at an average rate of approximately 14% per year, from approximately $5.4 billion as of December 31, 1991 to approximately $10.6 billion as of December 31, 1996. At September 30, 1997, such affiliated assets under management totaled approximately $13.5 billion. RISK FACTORS No assurances can be given that the Company's objectives or strategies will be achieved. Prospective investors should consider carefully the factors discussed in detail elsewhere in this Prospectus under the captions "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors." 5 7 THE OFFERING
Common Stock offered by the Company..................... 2,500,000 shares Common Stock outstanding after the offering................ 12,875,000 shares Dividend Policy............... The Company currently intends to pay quarterly cash dividends of approximately $0.04 per share of Common Stock ($0.16 annually), commencing in the first quarter of 1998. However, any dividends will be (i) dependent upon the Company's earnings, capital requirements, operating and financial condition and other relevant factors, (ii) subject to declaration by the Company's Board of Directors, and (iii) subject to certain regulatory constraints. See "Risk Fac- tors--Regulation" and "Dividend Policy." Use of Proceeds............... For general corporate purposes, including possible strategic acqui- sitions or alliances. See "Use of Proceeds." Nasdaq National Market symbol...................... "CNNG" - -------- Assumes no exercise of outstanding stock options. As of the date of this Prospectus, there are outstanding options to purchase 1,237,500 shares of Common Stock at a weighted average price of $5.65 per share. In addition, upon the closing of this offering the Company intends to grant options to purchase an additional estimated 1,294,987 shares of Common Stock at the initial public offering price. Does not include an aggregate of an estimated 905,013 shares of Common Stock reserved for future issuance under the Company's employee stock plans. See "Management--Employee Stock Plans" and Note 12 of Notes to the Company's Consolidated Financial Statements.
6 8 SUMMARY CONSOLIDATED FINANCIAL DATA
YEARS ENDED NINE MONTHS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, ------------------------------------------ -------------------- -------------------- 1992 1993 1994 1995 1995 1996 1996 1997 PRO FORMA INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Asset management and related fees........................... $1,716 $2,446 $3,484 $24,050 $30,675 $40,456 $29,365 $36,018 Research services................ 0 0 0 4,090 9,480 12,148 9,582 10,278 Other income..................... 51 36 57 663 996 1,062 792 629 ------ ------ ------ ------- ------- ------- ------- ------- Total revenues............... 1,767 2,482 3,541 28,803 41,151 53,666 39,739 46,925 ------ ------ ------ ------- ------- ------- ------- ------- Operating income................... 832 1,341 2,112 6,292 7,389 11,792 9,093 10,972 Interest expense................. 0 0 0 521 1,365 729 592 233 ------ ------ ------ ------- ------- ------- ------- ------- Income before provision for income taxes............................ 832 1,341 2,112 5,771 6,025 11,063 8,501 10,739 Provision for income taxes......... 311 507 827 2,359 2,739 4,851 3,762 4,317 ------ ------ ------ ------- ------- ------- ------- ------- Net income................... $ 521 $ 834 $1,285 $ 3,412 $ 3,286 $ 6,212 $ 4,739 $ 6,422 ====== ====== ====== ======= ======= ======= ======= ======= Preferred stock dividends.......... 0 0 0 351 906 906 669 750 ------ ------ ------ ------- ------- ------- ------- ------- Net earnings available to common shareholders..................... $ 521 $ 834 $ 1,285 $ 3,061 $ 2,380 $ 5,306 $ 4,070 $ 5,672 ====== ====== ========= ======= ======= ======= ======= ======= Pro forma net income per common share and common share equivalents ..... $ 0.57 $ 0.58 ======= ======= AS OF DECEMBER 31, AS OF SEPTEMBER 30, ----------------------------------------------------- -------------------- 1992 1993 1994 1995 1996 1997 1997 AS ADJUSTED BALANCE SHEET DATA: (IN THOUSANDS) Total assets....................... $1,395 $1,386 $1,683 $46,177 $50,020 $54,646 $85,255 Long-term debt..................... 0 0 0 9,000 2,000 0 0 Convertible preferred stock........ 0 0 0 17,003 24,782 36,152 0 Total common shareholders' equity........................... 958 792 1,327 4,623 4,368 68 66,829 Number of common shares outstanding end of period.................... 0.1 0.1 0.1 6,710 6,710 6,820 12,875 ----------------------------------------------------- AS OF 1992 1993 1994 1995 1996 9/30/97 OTHER OPERATING DATA: (IN BILLIONS, EXCEPT AS NOTED) Average assets under discretionary management: Unaffiliated.............................................. $ 3.3 $ 5.4 $ 6.2 $ 7.7 $ 9.5 $ 12.9 General American & affiliates............................. 5.5 6.0 6.6 7.8 9.6 13.5 --------- --------- --------- --------- --------- --------- Total................................................. 8.8 11.4 12.8 15.5 19.1 26.4 Average assets under advisory services...................... 5.2 10.1 14.7 15.3 18.3 21.0 Average assets under accounting & reporting services........ 0.0 1.3 2.6 4.8 9.2 26.2 --------- --------- --------- --------- --------- --------- Total assets serviced................................. $ 14.0 $ 22.8 $ 30.1 $ 35.6 $ 46.6 $ 73.6 ========= ========= ========= ========= ========= ========= - --------- The years 1992 to 1994 reflect the results of GAIMCO only. The year 1995 reflects the results of the consolidated activity from August 1, 1995 to December 31, 1995 and the results of GAIMCO only from January 1, 1995 to July 31, 1995. See Note 1 to the Company's Consolidated Financial Statements. Pro forma 1995 reflects the consolidated activity for the year assuming the Strategic Merger took place on January 1, 1995. The year 1996 reflects actual consolidated results. See Note 2 to the Company's Consolidated Financial Statements. Pro forma earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents considered outstanding during the period after giving effect to all dilutive common stock and common stock equivalents shares issued within twelve months of the public offering of the Company's common stock and to the Capital Stock Conversions. Gives effect to the Capital Stock Conversions and the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.50 per share and the receipt of the estimated net proceeds therefrom. 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 1992, 1993 and 1994. Data for 1995 and prior periods is presented on a pro forma basis to include both Conning and GAIMCO assets under management.
7 9 SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED) The following financial information represents certain financial data of Conning, Inc. and its subsidiaries for the years ended December 31, 1992, 1993 and 1994, and for the six months ended June 30, 1995:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------- -------- CONNING, INC. AND SUBSIDIARIES 1992 1993 1994 1995 (IN THOUSANDS) INCOME STATEMENT DATA: Revenues: Asset management and related fees....................... $ 6,643 $ 8,107 $ 9,840 $ 5,662 Research services....................................... 9,487 13,473 8,165 4,564 Other income............................................ 132 1,282 472 275 ------- ------- ------ ------- Total revenues...................................... 16,262 22,862 18,477 10,501 ------- ------- ------- ------- Operating income............................................ 582 4,441 2,751 2,092 Interest expense........................................ 111 85 0 0 ------- ------- ------- ------- Income before provision for income taxes and cumulative effect of accounting change............................... 471 4,356 2,751 2,092 Provision for income taxes.................................. 66 947 1,244 809 ------- ------- ------- ------- Income before cumulative effect of accounting change........ 405 3,409 1,507 1,283 Cumulative effect of accounting change...................... 0 131 0 0 ------- ------- ------- ------- Net income.......................................... $ 405 $ 3,540 $ 1,507 $ 1,283 ======= ======= ======= ======= Preferred stock dividends................................... 53 320 320 160 ------- ------- ------- ------- Net earnings available to common shareholders............... $ 352 $ 3,220 $ 1,187 $ 1,123 ======= ======= ======= ======= AS OF AS OF DECEMBER 31, JUNE 30, ------------------------------- -------- 1992 1993 1994 1995 (IN THOUSANDS) BALANCE SHEET DATA: Total assets................................................ $10,922 $11,274 $14,228 $16,003 Long-term debt.............................................. 0 0 0 0 Redeemable preferred stock.................................. 5,425 0 0 0 Cumulative preferred stock.................................. 0 3,650 3,650 3,650 Total common shareholders' equity (deficit)................. (2,682) 2,552 4,186 5,426 Number of common shares outstanding end of period........... 446 93 106 108
8 10 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained herein, including, without limitation, under the captions "Prospectus Summary," "Risk Factors," "Business--General," "--Company Operations--Overview," "--Industry Background and Trends," "--Strategy" and "--Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as possible or assumed future results of operations of the Company, and other statements contained herein or therein regarding matters that are not historical facts, are or may constitute forward-looking statements, including, without limitation, statements relating to the Company's financial position, plans to increase revenues, competitive strengths, business objectives or strategies, insurance industry trends and expectations regarding General American's assets or activities. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially (the "Cautionary Statements") include, but are not limited to, those discussed under "Risk Factors." 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 to these forward-looking statements after the completion of this offering to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully by prospective investors in evaluating the Company before purchasing the Common Stock offered hereby. 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. See "Business--Industry Background and Trends--Developing Trends in the Insurance Industry." 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, an indirect wholly-owned subsidiary of General American Mutual Holding Company. See "Principal Shareholders." As of September 30, 1997, General American and its affiliates accounted for approximately $13.5 billion of the approximately $26.4 billion in assets which the Company had under discretionary management. The advisory agreements between General American or one of its affiliates and the Company are subject to termination upon 30 to 90 days' notice without penalty; General American is a co-licensee with the Company to the Company's investment accounting & reporting software. There can be no assurance that General American and its affiliates will maintain or not seek to renegotiate their existing investment advisory relationships with the Company in the future, and the renegotiation of such relationships could have, and the termination of such relationships would have, a materially adverse effect on the Company's business, financial condition, results of operations and business prospects. Additionally, General American presently leases to the Company all of the Company's office space in St. Louis and provides to the Company certain administrative services. There can be no assurance that such arrangements will continue or that the Company would be able to 9 11 procure replacement office space or services on similar or otherwise favorable terms. See "Business--Asset Management," "Business--Facilities," "Certain Relationships and Related Transactions" and Note 11 of Notes to the Company's Consolidated Financial Statements. POTENTIAL CONFLICTS OF INTEREST General American will beneficially own approximately 65% of the Common Stock after the consummation of the offering (approximately 63% if the Underwriters' over-allotment option is exercised in full). The Company's Board of Directors consists of five directors, three of whom are officers of the Company or General American, and two of whom are not otherwise affiliated with the Company or General American (the "Independent Directors"). After the offering, General American will have the power to elect the Board of Directors and to approve certain actions requiring shareholder approval, including adopting amendments to the Company's articles of incorporation, and to control certain other actions requiring shareholder approval, including mergers or sales of substantially all of the assets of the Company or its subsidiaries. For financial reporting purposes, General American will include its share of the Company's net income or loss in its consolidated financial statements. The Company's Board of Directors, including members who also are affiliated with General American, may consider not only the short-term and long-term impact of operating decisions on the Company but also the impact of such decisions on General American. See "--Certain Other Anti-Takeover Provisions," "Management" and "Certain Relationships and Related Transactions." The Company is a party to investment advisory, administrative services, and other agreements with General American and certain of its affiliates. Certain officers of the Company were also officers of General American when such agreements were entered into. Although the Company believes that the terms of such agreements are at least as favorable to the Company as those it could negotiate with unrelated parties, these agreements may be modified or renegotiated in the future and additional agreements or transactions may be entered into between the Company, on the one hand, and General American or its affiliates, on the other hand. Conflicts of interest could arise between General American and its affiliates with respect to any of the foregoing, or any future agreements or arrangements between them. See "Certain Relationships and Related Transactions." Executive officers, directors and employees of the Company from time to time receive a profit interest in, and in the future may invest in, investment funds in which the Company, or an affiliate of the Company, is a sponsor or an investor or for which the Company performs asset management services, publishes research or acts as a market-maker. In addition, the Company may in the future organize businesses in which employees of the Company acquire minority interests. There is a risk that, as a result of any such profit or investment interest, a director, officer or employee may take actions which could conflict with the best interests of the Company. See "Certain Relationships and Related Transactions." DEPENDENCE ON KEY PERSONNEL The Company's future performance depends to a significant degree upon the continued contributions of its officers and key management personnel listed in the tables under the caption "Management--Directors, Executive Officers and Certain Other Significant Officers." The Company is party to three-year employment agreements, entered into in connection with the Strategic Merger in August, 1995, with all of the then shareholders and option holders, which agreements are terminable at any time by written notice, subject to certain conditions. The employment agreements may not be specifically enforceable against the employees as it is not possible to compel employees to work for the Company, and there can be no assurance that the non-competition covenants in such agreements are enforceable. Further, the Company does not have employment agreements with its senior management members who were hired after August 1995. See "Management--Directors, Executive Officers and Certain Other Significant Officers" and "Management--Employment Agreements and Other Compensation Arrangements." In addition, the Company's business is dependent on the highly skilled, and often highly specialized, individuals it employs. Retention of asset management, investment advisory, private equity, research, sales and trading, and administrative professionals is particularly important to the Company's business, financial condition, results of operations and business prospects. There can be no assurance that losses of key personnel will not occur in the future, which could materially and adversely affect the and adversely affect the Company's business, financial condition, results of operations and business prospects. 10 12 The Company expects further growth in the number of its personnel. Competition for employees with the qualifications desired by the Company is intense, especially with respect to asset management and research professionals with expertise in the insurance industry, and the Company expects that continuing competition will cause its compensation costs to continue to increase. There can be no assurance that the Company will be able to recruit a sufficient number of new employees with the desired qualifications in a timely manner. The failure to recruit new employees 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. 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. The Company's asset management business competes for assets under discretionary management with a large number of other specialty and diversified investment advisory firms and divisions, including internal investment divisions of insurance companies. The intensity of competition could increase if the rate of growth in insurance company assets managed externally were to decline. See "Business--Industry Background and Trends--Developing Trends in the Insurance Industry." The asset management industry is characterized by relatively low cost of entry, and new 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 that specialize in providing services to the insurance sector. Additionally, other insurance companies may determine to spin out their investment management divisions, which might then become competitors. The Company's asset management, real estate, private equity and investment accounting & reporting services are also subject to intense competition, and are characterized by limited capital requirements and low barriers to entry. 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. Many of the Company's current and potential competitors are larger and have access to greater resources and a number of the Company's current competitors ranked more highly in the Eager Study than the Company with respect to their perceived ability to generate good performance, all of which could be used to compete effectively against the Company. Such competition could have a material adverse effect on the Company's business, financial condition, results of operations and business prospects, as well as its ability to attract and retain highly skilled individuals as employees. See "Business--Competition." RISKS ASSOCIATED WITH ACQUISITIONS As part of its business strategy, the Company intends to consider acquisitions of similar or complementary businesses. No assurance can be given that the Company will be successful in identifying attractive acquisition candidates or completing acquisitions on favorable terms. In addition, any future acquisitions will be accompanied by the risks commonly associated with acquisitions. These risks include potential exposure to unknown liabilities of acquired companies or to acquisition costs and expenses, the difficulty and expense of integrating the operations and personnel of the acquired companies, the potential disruption to the business of the combined company and potential diversion of management's time and attention, the impairment of relationships with and the possible loss of key employees and clients as a result of the changes in management, the incurrence of amortization expenses if an acquisition is accounted for as a purchase and dilution to the shareholders of the combined company if the acquisition is made for stock of the combined company. There can be no assurance that products, technologies or businesses of acquired companies will be effectively assimilated into the business or product offerings of the combined company or will have a positive effect on the combined company's revenues or earnings. Further, the combined company may incur significant expense to complete acquisitions and to support the acquired products and businesses. Any such acquisitions may be funded with cash, debt or equity, which could have the effect of diluting or otherwise adversely affecting the holdings or the rights of existing shareholders of the Company, including investors acquiring Common Stock in this offering. 11 13 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 revenue is derived from asset management fees, which are generally based on the market value of assets under management. Consequently, significant fluctuations in the values of securities (e.g., as the result of substantial changes in the equity and fixed income markets resulting from changes in interest rates, inflation rates or other economic factors) may affect materially the amount of assets under management and thus the Company's revenues and profitability. Due to the Company's focus on insurance companies, which tend to invest more predominantly in interest-sensitive securities, the Company's assets under management are particularly sensitive to interest rate volatility. In addition to the potential reduction in market value of assets under management, adverse market conditions could also cause the Company's clients to reduce the amount of new funds contributed to accounts under management, withdraw funds or reduce the allocation of assets to particular types of investments, all of which could reduce the Company's revenues. The amount of assets under management is also affected by fluctuations in the investment patterns of the Company's clients. Because the Company's clients are predominantly in the insurance business, regulatory changes (such as changes in insurance company investment regulations or adverse tax law changes) could negatively impact the Company's revenues. See "--Risks Associated with Insurance Industry Focus." The Company's mortgage origination and mortgage and real estate servicing business is dependent on local economic conditions. Although the Company has mortgage activity in approximately 25 states, significant declines in the local economies in a number of such states could reduce the availability of, and increase competition for, high quality mortgages and real estate developments. Economic and market conditions may also result in a decline in client demand for mortgages. The Company from time to time serves as an underwriter of publicly offered securities. Underwriting revenues, as well as brokerage commissions, are highly volatile, depending on a variety of factors, including market conditions and transaction activity; accordingly, no assurance can be given as to the amount of such revenues, if any, that may arise in future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Asset Management." REGULATION INTRODUCTION The securities industry and the business of the Company are subject to extensive regulation by the Securities and Exchange Commission (the "SEC" or the "Commission"), state securities regulators and other governmental regulatory authorities. The business of the Company also is regulated by the National Association of Securities Dealers, Inc. (the "NASD"). Conning & Company and Conning Asset Management Company, both subsidiaries of the Company, are registered as investment advisers with the SEC. As registered investment advisers, each is subject to the requirements of the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and the SEC's regulations thereunder. Conning Asset Management Company acts as an investment adviser to certain registered investment companies, and therefore is also subject to regulation under the Investment Company Act of 1940, as amended (the "Investment Company Act"). Conning & Company is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and various state broker-dealer registration laws. Conning Asset Management Company is a fiduciary under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 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. In addition, the Company's mortgage origination activities are subject to the licensing requirements of certain states. See "Regulation." GENERAL RISKS ASSOCIATED WITH REGULATION Due to the extensive regulation to which the Company is subject, the Company may be restricted in its activities, and the Company's management may be required to devote substantial time and effort to regulatory compliance issues. Furthermore, 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 12 14 by issuers. See "Business--Legal Proceedings." Violations of federal or state laws or regulations or rules of industry self-regulatory organizations ("SROs"), such as the NASD, including without limitation with respect to fiduciary duties, could subject the Company, its subsidiaries and/or its employees to disciplinary proceedings or civil or criminal liability, including revocation of licenses, censures, fines or temporary suspension or permanent bar from the conduct of their business. Any such proceeding or liability could have a material adverse effect upon the Company's business, financial condition, results of operations and business prospects. See "Regulation." RISK OF PENALTIES DUE TO NONCOMPLIANCE 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 noncompliance by the Company 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 fiduciary with respect to the investment of assets subject to ERISA, and other adverse consequences. The Company has not experienced any such penalties to date. Such violations or noncompliance could also subject the Company and/or its employees to civil actions by private parties. 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 and state securities laws. Failure to meet the requirements of any such exemptions could have a material adverse effect on the Company's business, financial condition, results of operations and business prospects and the manner in which the Company, its affiliates and the private equity funds they manage carry out their investment activities and on the compensation received by Conning & Company and its affiliates from the private equity funds. See "Regulation." RISKS ASSOCIATED WITH CHANGING REGULATORY ENVIRONMENT 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 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. See "Regulation." RISK OF CHANGES IN OTHER BUSINESS REGULATIONS 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 asset management revenue in a given time period could be affected by, among other things, existing and proposed tax legislation and other governmental regulations and policies (including, without limitation, 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. See "Regulation." POTENTIAL LIMITS ON OPERATIONS AND DIVIDENDS DUE TO NET CAPITAL REQUIREMENTS As a registered broker-dealer and member of the NASD, Conning & Company is subject to the net capital rules of the SEC, various states and the NASD. These rules specify minimum net capital requirements for registered broker-dealers and NASD members, are designed to assure that broker-dealers maintain adequate regulatory capital in relation to their liabilities and the size of their customer business, and have the effect of requiring that a substantial portion of a broker-dealer's assets be kept in cash or highly liquid investments. Such net capital requirements could have a materially adverse effect on the Company's ability to distribute any declared dividends to its shareholders. The Company is a holding company, the principal assets of which consist of the common stock of Conning, Inc. Conning, Inc. owns all of the common stock of Conning & Company. The primary source of funds for the Company to make dividend distributions, if any, will be dividends paid to the Company by Conning, Inc. Conning, Inc.'s principal source 13 15 of funds is dividends received from Conning & Company, which may be restricted in its distribution of any such dividends by such net capital rules. See "Regulation--Net Capital Requirements." TERMINATION PROVISIONS OF INVESTMENT ADVISORY AGREEMENTS A large portion of the Company's revenues are derived from investment advisory agreements with insurance companies, particularly General American and its affiliates, and institutional clients, which agreements are generally terminable upon 30 to 90 days' notice without penalty. The termination of any of these agreements representing a material portion of assets under management could have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. See "Regulation." CONSEQUENCES OF A CHANGE OF CONTROL ON INVESTMENT ADVISORY AGREEMENTS; LIMITATIONS ON VOTING RIGHTS Under the Advisers Act, investment advisory agreements are voidable upon assignment unless the client consents to such assignment. Under the Investment Company Act, investment advisory agreements terminate upon 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. Under Section 15(f) of the Investment Company Act, during the two-year period after a change of control of an investment adviser of a registered investment company, there may not be imposed an "unfair burden" on such company as a result of a change in control. Section 15(f) could be interpreted to restrict increases in investment advisory fees during such two-year period and, accordingly, may discourage potential purchasers from acquiring any interest in the Company that might constitute a change of control under the Investment Company Act. See "Regulation." Following the completion of the offering, sales of Common Stock by General American or other shareholders of the Company or issuances of Common Stock by the Company, among other things, could result in a deemed assignment of the Company's investment advisory agreements under the Advisers Act and the Investment Company Act. 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. There can be no assurance that the Company's clients would consent to the assignment of investment advisory agreements or approve new investment advisory agreements with the Company in such an event. The Company's Restated Articles of Incorporation (the "Articles") provide that no person or group deemed to be a beneficial owner (as defined therein) of the Common Stock may vote more than 20% of the total number of shares of Common Stock outstanding. This provision of the Articles does not apply to General American Mutual Holding Company, General American, General American Holding Company or their subsidiaries or affiliates, direct or indirect subsidiaries of the Company and certain employee plans established or to be established by the Company. The Company's Board of Directors may approve the exemption of other persons or groups from the provisions described above. While this voting limitation is in place to reduce the likelihood, under certain circumstances, of inadvertent terminations of the Company's advisory agreements as a result of "assignments" of such contracts, there can be no guarantees that this voting limitation will prevent such a termination from occurring. In addition, such limitation could be deemed to have an anti-takeover effect and to make changes in management more difficult. See "Regulation" and "Certain Charter and Bylaw Provisions--Limitations on Voting of Shares in Certain Circumstances." CERTAIN OTHER ANTI-TAKEOVER PROVISIONS In addition to the provision in the Articles described in the preceding paragraph, certain other provisions of Missouri law, the Articles and the Company's Bylaws (the "Bylaws") could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company, including, without limitation, the business combination provisions of the Missouri General and Business Corporation Law. Such provisions of Missouri law include, among others: (i) Missouri's "business combination" statute which imposes restrictions and conditions on certain transactions with an "interested shareholder" (generally a shareholder owning more than 20% of the corporation's voting stock) for five years following the date on which such shareholder became an interested shareholder; and (ii) Missouri's "take-over bid disclosure" statute which provides that prior to making a tender offer for certain Missouri corporations the offeror must file certain disclosure materials. The 14 16 Company's Articles and Bylaws, among other things, (i) contain certain limitations on the voting power of certain shareholders, (ii) provide for a classified Board of Directors, (iii) limit the right of shareholders to remove directors or change the size of the Board of Directors, to fill vacancies on the Board of Directors, to act by written consent and to call a special meeting of shareholders, (iv) require a higher percentage of shareholders than would otherwise be required to amend, alter, change or repeal certain provisions of the Articles and Bylaws, and (v) provide that the Bylaws may be amended only by the majority vote of the Board of Directors. See "Certain Charter and Bylaw Provisions." Such provisions could also limit or depress the price that certain investors might be willing to pay in the future for shares of the Common Stock. The Company is also authorized to issue preferred stock with rights senior to, and that may adversely affect, the Common Stock, without the necessity of shareholder approval and with such rights, preferences and privileges as the Company's Board of Directors may determine. The Company, however, has no present plans to issue any shares of preferred stock. See "Principal Shareholders" and "Description of Capital Stock." NO PRIOR PUBLIC MARKET FOR COMMON STOCK Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market will develop or be sustained after this offering or that investors will be able to sell the Common Stock should they desire to do so. The initial public offering price will be determined by negotiations between the Company and the Underwriters and may bear no relationship to the price at which the Common Stock will trade upon completion of this offering. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICES Following the completion of the offering, sales of substantial numbers of additional shares of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the market price of the Common Stock and make it more difficult for the Company to raise funds through future equity offerings. General American will beneficially own approximately 65% of the Common Stock after the consummation of the offering (approximately 63% if the Underwriters' over-allotment option is exercised in full) and a sale of such shares could adversely affect the market price of the Common Stock. The Company's directors and executive officers and other shareholders holding all of the 10,375,000 shares outstanding on the date hereof have entered into lock-up agreements under which they have agreed, other than with the consent of Donaldson, Lufkin & Jenrette Securities Corporation, not to sell such shares for a period of 180 days following the completion of the offering. The Company believes that, following the lock-up period, up to 1,472,288 shares held by existing shareholders could be eligible for sale without restriction and up to 8,902,712 "affiliate" shares held by executive officers, directors and other affiliates could be eligible for sale, subject to certain volume and other limitations of Rule 144; all such shares, however, may be subject to additional holding periods under Rule 144 based on, among other things, particular interpretative considerations, facts and circumstances relating to such shareholders. Following effectiveness of the registration statement covering the shares offered hereby, the Company will register on Form S-8 under the Securities Act an aggregate of 3,437,500 shares of Common Stock issuable under employee stock plans, which registrations are expected to become effective upon filing. There are options to purchase 1,237,500 shares of Common Stock outstanding on the date hereof, 400,000 of which are currently exercisable, an additional 600,000 of which will be exercisable upon completion of the offering and the remaining 237,500 of which will become exercisable over a five-year vesting period commencing November 22, 1997. Upon the closing of this offering, certain incentive stock options will be recharacterized as other than incentive stock options; the Company intends to compensate for such recharacterization by granting new non-qualified stock options to purchase an estimated aggregate 329,987 shares to holders of such recharacterized options upon the closing of this offering, which options are exercisable immediately upon the closing of this offering. See "Management--Employee Stock Plans." In addition, upon the closing of this offering, the Company intends to grant options to purchase an additional 965,000 shares of Common Stock, which options will become exercisable over a five-year vesting period commencing on the first anniversary of the closing of this offering. Upon the first anniversary of the date hereof, General American and the other shareholders of the Company have certain rights to require the Company to register 8,780,005 of their 10,375,000 shares of Common Stock for sale under the Securities Act. See "Management--Employee Stock Plans," "Certain Relationships and Related Transactions," "Description of Capital Stock" and "Shares Eligible for Future Sale." 15 17 POSSIBLE VOLATILITY OF STOCK PRICE The market price of the shares of Common Stock could be subject to wide fluctuations in response to factors such as actual or anticipated variations in the Company's operating results, changes in financial estimates by securities analysts, conditions and trends in the asset management or insurance industries, adoption of new accounting standards affecting the investment advisory or insurance industries, general market conditions and other factors. Further, the stock market in general has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of such companies. These market fluctuations, as well as general economic, political and market conditions, may adversely affect the market price of the Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such company. Such litigation, if instituted, could result in substantial costs and a diversion of management attention and resources, which would have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. DILUTION Purchasers of the Common Stock offered hereby will experience immediate estimated dilution of approximately $10.00 per share in the net tangible book value of their shares from the assumed initial public offering price. To the extent outstanding options to purchase Common Stock are exercised, there will be further dilution. See "Dilution." DISCRETIONARY USE OF PROCEEDS Although the Company has not yet identified specific uses for the net proceeds to be received by it from this offering, such proceeds are expected to be used for general corporate purposes, including possible acquisitions of related businesses or investments in strategic or joint venture relationships. The Company has no present understandings, agreements or commitments with respect to any such acquisitions or investments, and no assurance can be given that any such acquisition or investment will take place. Pending application to such purposes, the net proceeds will be invested in short-term, investment grade, interest-bearing securities. The Company's management will have discretion over the use and investment of such net proceeds. Accordingly, there can be no assurance regarding the utilization or timing of the utilization of the remaining net proceeds of this offering. See "Use of Proceeds." 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 & reporting services depend on the timeliness and accuracy of reports furnished by the Company to its customers. Although the Company believes it has adequate procedures in place to ensure the timeliness and accuracy of the Company's services, 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. Significant portions of the Company's business are dependent on the Company's ability to protect its computer equipment and the information stored in its data processing centers against damage that may be caused by fire, power loss, telecommunications failures, unauthorized access and other events. The Company's data processing centers are located in Hartford, Connecticut and St. Louis, Missouri. Software and related data files are expected to be backed-up regularly and stored off-site. The Company has contracted with an outside service to provide disaster recovery services. There can be no assurance that these measures are sufficient to eliminate the risk of extended interruption in the Company's operations. Further, there can be no assurance that the Company will continue to be able to obtain timely and accurate securities pricing information from third-party vendors on an ongoing basis, which is vital to the Company's ability to provide investment accounting & reporting services because it enables the Company to value its clients' portfolios. Any delays or inaccuracies in securities pricing information could give rise to claims against the Company, which could have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. 16 18 Under a software license agreement with SS&C Technologies, Inc. ("SS&C"), effective as of January 27, 1996 (the "License Agreement"), the Company has a perpetual non-exclusive license to use, maintain and modify its investment accounting & reporting software, including both CAMRA(TM) and FILMS(TM), in both source code and object code (the "Software"). SS&C Technologies, Inc. represents that it is the owner of the trademarks CAMRA(TM) and FILMS(TM). The License Agreement permits the Software to be used by the Company for accounting, reporting and similar purposes in the asset management business and for outsourcing to customers in the insurance industry and by General American and its subsidiaries in certain circumstances. The Company is obligated to make annual payments under the License Agreement until the year 2000. Additional license fees may be due as a result of an increase of assets under management or advisement only if the assets under management or advisement increase as the result of certain business combinations involving the Company. SS&C may terminate the License Agreement in the event of, among other things, a breach by the Company which is not cured after written notice, certain bankruptcy, insolvency or similar events affecting the Company or certain other transactions such as the acquisition of a controlling interest in the Company by, or the entering into of certain transactions between the Company and, an entity that competes with SS&C. While the Company has contracted to receive certain updates to its software, there can be no assurance that it will obtain updated software in a timely manner. Any failure or interruption of the Company's systems or a failure to receive timely and accurate securities pricing information or updates to software could have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. See "Business--Asset Management--Investment Accounting & Reporting." YEAR 2000 COMPLIANCE As the year 2000 approaches, a critical business issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. In brief, many existing application software products in the marketplace were designed to only accommodate a two digit date position which represents the year (e.g., '95 is stored on the system and represents the year 1995). As a result, the year 1999 (i.e., '99) could be the maximum date value these systems will be able to accurately process. Management is in the process of working with its software vendors to assure that the Company is prepared for the year 2000. Based on information currently available, management does not anticipate that the Company will incur significant operating expenses or be required to invest heavily in computer system improvements to be year 2000 compliant, however the Company is still in the preliminary stages of analyzing its systems and requirements. To the extent the Company's systems are not fully year 2000 compliant, there can be no assurance that potential systems interruptions or the cost necessary to update software would not have a material adverse effect on the Company's business, financial condition, results of operations and business prospects. USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,500,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $30.0 million, assuming an initial public offering price of $13.50 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. The principal purposes of this offering are to increase the Company's equity capital and to create a public market for the Common Stock, which will facilitate the Company's future access to the public equity markets and enhance the ability of the Company to use its Common Stock as consideration for acquisitions and as a means of attracting and retaining key employees. The net proceeds of this offering will be used for general corporate purposes. The Company's business strategy contemplates that it will seek to complement internal growth with strategic investments and acquisitions. Accordingly, a portion of the net proceeds may also be used for acquiring related businesses or investing in strategic or joint venture relationships. The Company has no present understandings, agreements or commitments with respect to any such acquisition or investment, and no assurance can be given that any such acquisition or investment will take place. Pending application to the uses described above, the Company intends to invest the net proceeds of this offering in short-term, investment-grade, interest-bearing securities. 17 19 DIVIDEND POLICY The Company initially intends to establish a policy after this offering of declaring quarterly dividends, commencing in the first quarter of 1998, at the rate of approximately $0.04 per share ($0.16 annually) on the Common Stock. 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. See "Regulation." CAPITALIZATION The following table sets forth the long-term borrowings and capitalization of the Company at September 30, 1997 on a historical basis, and as adjusted to give effect to the Capital Stock Conversions and the sale by the Company of 2,500,000 shares of Common Stock in the offering (assuming the Underwriters' over-allotment option is not exercised) at an assumed initial public offering price of $13.50 per share, less the underwriting discounts, commissions and estimated offering expenses and the application of the estimated net proceeds therefrom. See "Use of Proceeds". This table should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
AS OF SEPTEMBER 30, 1997 -------------------------- ACTUAL AS ADJUSTED (DOLLARS IN THOUSANDS) Long-term debt............................................................................ $ -0- $ -0- Series A Convertible Preferred Stock, $.01 par value, $5.33 liquidation value: 3,190,000 shares authorized, issued and outstanding; no as adjusted shares issued and outstanding......................................................................... $32,894 -0- Series B Convertible Preferred Stock, $.01 par value, $5.33 liquidation value: 600,000 shares authorized, 365,000 shares issued and outstanding; no as adjusted shares issued and outstanding..................................................................... 3,257 -0- Non-Voting Common Stock, $.01 par value: 20,000,000 shares authorized; 110,000 shares issued and outstanding; no as adjusted shares issued and outstanding................ 1 -0- Common Stock, $.01 par value: 50,000,000 shares authorized; 6,710,000 shares issued and outstanding; 12,875,000 as adjusted shares issued and outstanding............... 67 129 Additional paid-in capital................................................................ -0- 66,700 Retained earnings......................................................................... -0- -0- ------- ------- Total common shareholders' equity................................................. 68 66,829 ------- ------- Total capitalization.......................................................... $36,219 $66,829 ======= ======= - -------- Gives effect to changes in the Company's capitalization effected in June 1997, including the increase in the numbers of authorized shares of Common Stock and authorized but undesignated shares of preferred stock. Upon the completion of this offering, the Company intends to file an amendment to its Articles to eliminate the Series A and Series B Convertible Preferred Stock and the Non-Voting Common Stock. See "Description of Capital Stock." Assumes no exercise of outstanding stock options. As of the date of this Prospectus, there are outstanding options to purchase 1,237,500 shares of Common Stock at a weighted average exercise price of $5.65 per share. In addition, upon the closing of this offering, the Company intends to grant options to purchase an additional estimated 1,294,987 shares of Common Stock at the initial public offering price. An additional estimated 905,013 shares are currently reserved for future grants under the Company's employee benefit plans. See "Management--Employee Stock Plans" and Note 12 of Notes to the Company's Consolidated Financial Statements.
18 20 DILUTION The adjusted net tangible book value of the Company as of September 30, 1997 was approximately $14.5 million, or $1.39 per share of Common Stock. Adjusted net tangible book value per share is equal to the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding, after giving effect to the Capital Stock Conversions. After giving effect to the sale by the Company of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.50 per share and the application of the estimated net proceeds therefrom (see "Use of Proceeds"), the pro forma adjusted net tangible book value of the Company at September 30, 1997 would have been approximately $45 million, or $3.50 per share. This represents an immediate increase in adjusted net tangible book value of $2.11 per share to existing shareholders and an immediate dilution of $10.00 per share to new investors purchasing shares in the offering. The following table illustrates this per share dilution: Assumed initial public offering price per share............................. $13.50 Adjusted net tangible book value per share as of September 30, 1997......... $1.39 Increase in adjusted net tangible book value per share attributable to new investors.................................................................. 2.11 Pro forma adjusted net tangible book value per share after the offering......... 3.50 ------ Dilution in adjusted net tangible book value per share to new investors..... $10.00 ====== - -------- Before deducting estimated underwriting discounts and commissions and estimated expenses of the offering payable by the Company. The above computation assumes no exercise of outstanding stock options. As of the date of this Prospectus, there are outstanding options to purchase 1,237,500 shares of Common Stock at a weighted average exercise price of $5.65 per share which would result in total dilution in adjusted net tangible book value per share to new investors of $9.81 if all such options were exercised. In addition, upon the closing of this offering, the Company intends to grant options to purchase an additional estimated 1,294,987 shares of Common Stock at the assumed initial public offering price. To the extent these options are exercised total dilution in adjusted net tangible book value per share to new investors would be $8.99. An additional estimated 905,013 shares are currently reserved for future grants under the Company's employee benefit plans. See "Manage- ment--Employee Stock Plans" and Note 12 of Notes to the Company's Consolidated Financial Statements.
The following table summarizes on a pro forma basis, at September 30, 1997, the difference between existing shareholders and new investors with respect to the number of shares of Common Stock purchased from the Company (assuming no exercise of the Underwriters' over-allotment option), the approximate total consideration paid, and the average price per share paid, by existing holders of Common Stock and by the investors purchasing shares of Common Stock in this offering before deduction of underwriting discounts and commissions and estimated offering expenses and assuming an initial public offering price of $13.50 per share.
SHARES PURCHASED TOTAL CONSIDERATION ------------------------ ------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE Existing shareholders................... 10,375,000 81.0% $32,726,818 49.2% $ 3.15 New investors........................... 2,500,000 19.0% 33,750,000 50.8% $13.50 ---------- ----- ----------- ----- Total....................... 12,875,000 100.0% $66,476,818 100.0% - -------- A portion of the total consideration with respect to existing shareholders other than General American is calculated based on values established in connection with the Strategic Merger, and in the case of General American reflects book value of assets contributed pursuant to the Strategic Merger plus subsequent purchases. The above computation assumes no exercise of outstanding stock options.
19 21 BUSINESS GENERAL Conning is a nationally recognized asset management company providing services to the insurance industry, and is also a leading provider of insurance research. As of September 30, 1997, the Company had approximately $26.4 billion of assets under discretionary management and, in total, provided services with respect to approximately $73.6 billion of assets for insurance company clients. The Company believes it is well positioned to take advantage of the continued growth in insurance industry assets and the willingness of insurance companies to consider utilizing external investment management expertise. The Company believes that many insurance companies are responding to increasing competitive, financial and regulatory pressures by engaging outside asset managers for (i) sophisticated asset management, (ii) access to specialized asset classes supported by a comprehensive analytical methodology, and (iii) comprehensive investment accounting & reporting services. During the period from 1992 through 1996, assets under discretionary management of the Company increased by an average of 24% per year, on a pro forma basis after giving effect to the Strategic Merger and the inclusion of assets of General American for all years. In 1996, its first full year of operations following the Strategic Merger, the Company had revenues of approximately $53.7 million and net earnings of approximately $6.2 million. During the nine months ended September 30, 1997, the Company had revenues of approximately $46.9 million and net earnings of approximately $6.4 million. The Company was formed pursuant to the Strategic Merger in 1995 and is the successor to the businesses formerly conducted independently by Conning, Inc. and GAIMCO. The parties effected the Strategic Merger in order to combine complementary businesses, each with specialties in the insurance industry, to build a platform from which to leverage additional growth. See "Certain Relationships and Related Transactions--The Strategic Merger." Since January 1, 1995, the assets of the general account of General American have been under contract with Conning Asset Management Company (formerly, GAIMCO). Prior to such time, the assets of the general account were managed by the investment division of General American, a predecessor of GAIMCO. The Company believes that it possesses competitive strengths in insurance asset management which may support its prospects for growth: INSURANCE INDUSTRY FOCUS AND KNOWLEDGE. Based upon the Company's extensive work with insurance companies, the Company believes that its focus on the insurance industry allows it to provide substantially all of the services and products that an insurance company seeks from an asset manager. By utilizing its specialized knowledge of insurance company investment considerations, the Company believes, based upon feedback from clients, that it offers a more comprehensive set of asset management services than many of its competitors, including asset allocation, asset and liability matching, cash forecasts, tax modeling and investment accounting & reporting. The Company offers expertise in asset classes that many insurance companies traditionally utilize, including commercial mortgage loans, investment real estate and private placements. NAME RECOGNITION WITHIN THE INSURANCE INDUSTRY. The Company believes that the established reputation of Conning within the insurance industry provides the Company with a marketing advantage. According to the Eager Study, the Company ranks among the top two insurance asset management firms in terms of name recognition among domestic, non-captive insurance companies with assets over $30 million which responded to the survey. The Company's in-depth insurance industry research has been targeted to senior executives in the insurance industry for more than 20 years, and its Strategic Studies Series is subscribed to by 44 of the 50 largest U.S. property-casualty insurance companies and 42 of the 50 largest U.S. life-health insurance companies (based on 1996 premiums as reported by OneSource Information Services, Inc. as provided to it by third parties). CLIENT SERVICE AND PERFORMANCE FOCUS. The Company attempts to differentiate itself from competitors through its insurance-specific capabilities, investment performance and frequent, responsive client communication. During the period from 1992 through 1996, the Company retained an average of approximately 95% of unaffiliated clients on an annual basis. * Capabilities--The Company utilizes a team approach to managing each client's portfolios, combining the talents of investment, insurance, actuarial, tax and accounting specialists. The Company utilizes a set of 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. 20 22 * Performance--The Company tailors its asset management services to the specific needs and objectives of each client's investment portfolio and seeks to achieve favorable results based upon risk and return parameters established for each client's portfolio. The Company ranked below a number of competitors in the Eager Study with respect to its perceived ability to generate good performance, which was also cited by survey respondents as the most common criteria in the selection of investment manager candidates. However, the Company believes that other criteria on which the Company did rank highly, including knowledge and experience with insurance industry issues and the provision of services beyond investment management, are also important in the selection of investment managers, particularly in light of regulatory constraints applicable to insurance companies. See "Risk Factors--Risks Associated with Insurance Industry Focus," and "Risk Factors--Significant Industry Competition." 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. * Responsiveness--The Company communicates frequently with its clients to pursue the clients' investment objectives in light of changing business and market conditions. The Company believes such responsiveness is critical to strong client relationships and client satisfaction. The Company believes that its comprehensive investment accounting & reporting services are integral to client communications. EXPERIENCED MANAGEMENT WITH SIGNIFICANT STOCK OWNERSHIP. The Company employs an experienced management team, the members of which have an average of approximately 15 years of experience in the investment or insurance business. In total, the employees of the Company will own in the aggregate approximately 29% of the Common Stock on a fully diluted basis after the offering (including options to be granted upon the closing of this offering). See "Management" and "Principal Shareholders." COMPANY OPERATIONS--OVERVIEW The Company's business is asset management for insurance companies, which is supplemented by its in-depth research focused on the insurance industry. The Company's asset management services consist of three components: (i) discretionary asset management services, (ii) investment advisory services and (iii) investment accounting & reporting services. In connection with its discretionary asset management services, the Company originates and services commercial mortgages and manages investments in real estate assets. The Company also sponsors and manages private equity funds investing in insurance and insurance-related companies. ASSET MANAGEMENT. The Company's insurance asset management services are designed to optimize investment returns for clients within the guidelines imposed by insurance regulatory, accounting, tax and asset/liability management considerations. As of September 30, 1997, the Company provided services with respect to approximately $73.6 billion in assets, of which approximately (i) $26.4 billion represented assets under discretionary management, (ii) $21.0 billion represented assets serviced under investment advisory agreements and (iii) $26.2 billion represented assets receiving investment accounting & reporting services on a stand-alone basis. As part of its discretionary asset management services, as of September 30, 1997, the Company managed approximately $2.6 billion of commercial mortgage loans and investment real estate. The Company manages private equity funds which invest in insurance and insurance-related companies. Since 1985, the Company has sponsored five private equity funds, raising approximately $360 million in committed capital. The private equity funds have invested more than $193 million of these proceeds in 39 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. INSURANCE RESEARCH. The Company believes that Conning & Company is one of the leading insurance industry investment research firms in the United States. 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 United States institutional money managers as well as pension funds, banks, mutual funds, and insurance companies. Conning & Company also from time to time participates in the underwriting of public offerings of equity securities for insurance and insurance-related companies. 21 23 INDUSTRY BACKGROUND AND TRENDS Due to the unique financial characteristics and the regulatory environment governing the various segments of the insurance industry, effective management of insurance company assets requires specialized industry knowledge. In addition to an in-depth understanding of an insurance company's business and products, the Company believes that insurance companies expect that their assets should be carefully tailored to meet the company's specific regulatory and tax requirements and profitability objectives, and that the asset manager should manage investment risk to reflect the underlying income and cash flow characteristics of the insurance products which the investments support. INSURANCE INDUSTRY OVERVIEW Dynamics of Insurance. The insurance industry reduces the risk of significant financial loss for individuals, families and businesses resulting from the loss of life or ability to lead a productive life or from a property or casualty-related loss. The dynamics of the insurance industry are significantly influenced on a broad level by changes in economic or market conditions, regulations, and natural disasters and by individual factors such as personal health and longevity, accidents and personal misfortune. Unique Financial Characteristics. Insurance companies must carefully monitor cash flow patterns with respect to premium collections and claims payments in order to ensure that invested assets are adequate to cover the payment of potential future claims. Cash flow patterns vary depending on the type of insurance (i.e., life/health and property/casualty). For example, life insurance policies typically have either an up-front premium or steady premiums collected over the life of the policy, and claims are typically paid in a lump sum or a stream of payments many years after the policy's inception. Many life insurance products combine a tax-efficient savings component with the insurance component. Health insurance premiums, on the other hand, are generally collected in a steady stream and closely match the projected stream of medical claims payments. Property insurance premiums are typically collected over the life of the policy and claims are typically paid within the life of the policy or shortly after the policy term expires. Casualty insurance premiums are typically paid over the life of the policy and if claims are made, usually after litigation, typically many years after the policy period. Regulatory Environment. Insurance companies are heavily regulated by state laws and regulatory agencies, which require, among other things, that insurance companies comply with risk-based capital requirements. Additionally, insurance company portfolios are constrained in the asset classes and allocations they can hold and are typically heavily weighted toward fixed income securities of investment grade or higher. Property/casualty companies typically hold limited amounts of real estate investments, while life insurance companies invest more heavily in real estate. Further, insurance companies must submit to state regulators statutory financial statements which conform to regulatory requirements. The Company believes that its understanding of the dynamics of the insurance industry, the unique financial characteristics of different insurance products, and the insurance industry's regulatory environment enables it to provide comprehensive asset management services to insurance companies. 22 24 DEVELOPING TRENDS IN THE INSURANCE INDUSTRY Certain key insurance industry trends that also affect the management of insurance company assets are as follows: Growing Insurance Company Assets. Insurance company assets have grown over several decades and during the period from 1986 to 1996 grew at an average rate of approximately 9% per year, from approximately $1.3 trillion to approximately $3.1 trillion, according to a standard industry source, as shown in the following table: INSURANCE COMPANY ASSETS (IN MILLIONS) [GRAPH]
1986 1987 1988 1989 1990 1991 - -------------- -------------- -------------- -------------- -------------- -------------- $1,305,366 $1,460,109 $1,634,187 $1,811,072 $1,947,021 $2,105,350 1992 1993 1994 1995 1996 - -------------- -------------- -------------- -------------- -------------- $2,259,960 $2,474,023 $2,629,529 $2,891,085 $3,105,321
Continuing Trend Towards Increased Savings. As the "baby-boom" generation continues to age, the Company believes that the demographics of the population of the United States should favor wealth accumulation. Thus, the Company anticipates that the growth of asset accumulation products (e.g., annuities) will outpace the growth of mortality based products (e.g., term life insurance). The Company believes this trend will cause insurance companies to focus increasingly on the importance of investment management to support competition in investment-oriented products. Acceptance of Outsourcing. The Company believes that many insurance companies are utilizing non-affiliated asset managers in order to respond to competitive product requirements and the pressure to achieve higher returns on investments while maintaining an acceptable level of risk. According to the Eager Study, assets under management by external, non-affiliated managers (which represented approximately 15% of industry assets in 1996) increased at a rate of 17% per year from $300 billion in 1994 to $415 billion in 1996. Based upon information provided by an industry source, insurance company assets increased at a rate of approximately 9% per year, from $2.6 trillion in 1994 to $3.1 trillion in 1996. The authors of the Eager Study concluded that externally managed assets would continue to grow, but believed that the growth rate would lose momentum over the next few years covered by the study. The Eager Study indicated that the percentage of insurance companies using one or more non-affiliated external managers increased 6% from 1992 to 1994, but did not increase from 1994 to 1996. In addition, the study reported that the median (typical) company indicated that it had about reached the maximum percentage of assets expected to be managed externally. The Company believes that outsourcing can provide insurance companies the opportunity to access the specialized expertise, scale and technology needed to manage assets more effectively. The Company also believes outsourcing has become an accepted business approach in the insurance industry. The Company believes many insurance companies and other financial service providers, including banks and investment managers, will be driven by increased competition, regulatory considerations and increased capital needs to divest themselves of non-core businesses and to seek to acquire, merge with or otherwise strategically align themselves with complementary businesses in order to achieve economies of scale. The Eager Study indicated that merger and consolidation activity had appeared to offset some growth activity among investment management firms and may have created economies favoring internal asset management by insurance companies. However, the Company also believes that such merger or consolidation activity in the insurance industry may also create additional outsourcing opportunities as the remaining companies seek ways to achieve increased efficiencies. See "Risk Factors--Risks Associated with Insurance Industry Focus" and "Risk Factors--Significant Industry Competition." 23 25 STRATEGY The Company's growth is built on a foundation of recurring, fee-based revenues. Fee-based revenues represented approximately 80% of the Company's total revenues both in 1996 and for the first nine months of 1997. The Company's primary operating strategy is to grow recurring, fee-based asset management related revenues through the following strategies: LEVERAGE ESTABLISHED ASSET MANAGEMENT PLATFORM TO GENERATE GROWTH AND PROFITABILITY The Company believes that it has established a platform, made up of core investment professionals, product expertise and systems, to support future growth in fee-based asset management revenues. Opportunities for asset management growth are expected to come from new and existing clients, strategic acquisitions and alliances and through General American and its affiliates. GENERATE GROWTH FROM NEW AND EXISTING CLIENTS The Company intends to take advantage of the growth in insurance industry assets and a trend among insurance companies to seek external investment management expertise. The Company will pursue growth in assets under management from new clients by increasing the Company's sales and marketing efforts and by leveraging the Company's strong name recognition. Additionally, the Company will continue to pursue growth in assets under management from existing clients by seeking to increase its share of its clients' assets and from underlying growth in existing assets. PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES TO EXPAND MARKET PENETRATION The Company regularly evaluates strategic acquisitions, joint ventures and marketing alliances as a means of increasing assets under management, expanding the range of its product offerings and increasing its sales and marketing capabilities. LEVERAGE STRATEGIC ALLIANCE WITH GROWING PARTNER The Company's relationship with General American, the Company's principal shareholder, provides opportunities for distribution of the Company's products and services to General American and its affiliates. The Company has benefited from the internal growth and acquisition activity of General American and its affiliates, with assets under management of General American and its affiliates increasing at an average rate of approximately 14% per year, from approximately $5.4 billion as of December 31, 1991 to approximately $10.6 billion as of December 31, 1996. At September 30, 1997, such affiliated assets under management totaled approximately $13.5 billion. No assurance can be given that the Company's objectives or strategies will be achieved. See "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors." ASSET MANAGEMENT The Company's business is asset management for insurance companies, which is supplemented by its in-depth research focused on the insurance industry. The Company's asset management services consist of three components: (i) discretionary asset management services, (ii) investment advisory services and (iii) investment accounting & reporting services. In connection with its discretionary asset management services, the Company originates and services commercial mortgages and manages investments in real estate assets. The Company also sponsors and manages private equity funds investing in insurance and insurance-related companies. 24 26 As of September 30, 1997, the Company provided services with respect to approximately $73.6 billion in assets, of which approximately (i) $26.4 billion represented assets under discretionary management, (ii) $21.0 billion represented assets serviced under investment advisory agreements and (iii) $26.2 billion represented assets receiving investment accounting & 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 35% from December 31, 1991 to December 31, 1996, as shown in the following table: ASSETS SERVICED BY THE COMPANY (IN BILLIONS)
AVERAGE ASSETS AS OF ------------------------------------------ AS OF AS OF 12/31/91 1992 1993 1994 1995 1996 12/31/96 9/30/97 Assets under discretionary management Unaffiliated.................................. $ 1.7 $ 3.3 $ 5.4 $ 6.2 $ 7.7 $ 9.5 $10.1 $12.9 Affiliated.................................... 5.4 5.5 6.0 6.6 7.8 9.6 10.6 13.5 ----- ----- ----- ----- ----- ----- ----- ----- Total..................................... 7.1 8.8 11.4 12.8 15.5 19.1 20.7 26.4 Investment advisory............................... 4.9 5.2 10.1 14.7 15.3 18.3 20.8 21.0 Investment accounting & reporting................. -- -- 1.3 2.6 4.8 9.2 11.7 26.2 ----- ----- ----- ----- ----- ----- ----- ----- Total................................. $12.0 $14.0 $22.8 $30.1 $35.6 $46.6 $53.2 $73.6 ===== ===== ===== ===== ===== ===== ===== ===== - -------- 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.
Discretionary Asset Management & Investment Advisory Services. The Company's assets under discretionary management have increased at a compounded annualized rate of approximately 24% from December 31, 1991 through December 31, 1996, with assets of General American-related (affiliated) accounts increasing approximately 14% and assets of other clients (unaffiliated) increasing approximately 44% over the period. 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: ASSETS UNDER DISCRETIONARY MANAGEMENT (IN BILLIONS)
AS OF ASSET CLASSES SEPTEMBER 30, 1997 Corporate bonds................................... $ 7.5 Asset-backed securities........................... 5.8 Mortgage loans.................................... 2.4 Municipal bonds................................... 2.6 Government bonds.................................. 2.0 Private placements................................ 2.2 Indexed equity.................................... 1.4 Short-term obligations............................ 1.0 Equity............................................ 1.3 Real estate....................................... 0.2 ----- Total..................................... $26.4 =====
25 27 The Company works with each client individually to conduct an in-depth analysis of its insurance operations and investment objectives. This broad strategic approach is designed to address each client's core needs to model asset and liability durations and manage risk and maximize returns. In particular, the Company analyzes the client's strategic objectives, operational forecasts, business needs, cash flows, regulatory and rating agency concerns, and accounting and tax issues. The Company utilizes a "top down" investment methodology, beginning with an analysis of macro-economic and capital market conditions. Additionally, the Company considers the client's current portfolio characteristics, management's risk tolerance, investment guidelines, performance benchmarks and desired asset allocation. The Company undertakes quantitative analyses, including (i) asset/liability analyses, (ii) analyses of cash flows, interest rate risk and surplus adequacy, (iii) peer group comparisons and (iv) asset allocation modeling. The Company also utilizes its insurance related research products, including property/casualty and life/health profitability models, a loss ratio and loss reserve analysis service, and a tax optimization model. The Company assists its clients in the development of new insurance products by advising them as to investment strategies required to meet the profitability goals set for such products. The Company is integral to the product management, administration and distribution of one of General American's stable value insurance products. The Company also serves as the investment adviser to several registered investment companies and unit investment trusts sponsored by General American. Investment advisory agreements with registered investment companies and unit investment trusts may be terminated at any time by the entity upon specified notice, terminate automatically in the event of their assignment, and are subject to annual renewal by the board of the entity. The Company also provides stand-alone investment advisory services to clients who are seeking only business analysis and asset allocation or diversification advice. Such advice typically includes a review of the portfolio from the standpoint of liability structure, capital adequacy, return on equity, asset allocation, regulatory and rating agency implications, and income and cash flow requirements. As of September 30, 1997, the Company had approximately $21.0 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 30-90 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. 26 28 Mortgage Origination and Service of Real Estate. The Company has developed expertise in the origination and servicing of commercial mortgage loans and the management of real estate, asset classes which are frequently utilized by life insurance companies. As of September 30, 1997, the Company managed approximately $2.4 billion in commercial mortgage loans and approximately $200 million in investment real estate. The Company has originated more than $2.2 billion of mortgage loans for its clients since January 1, 1994, 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 following chart shows the growth of the amount of new mortgage loans that the Company has originated during the period from 1992 through 1996. NEW MORTGAGE LOAN FUNDINGS (IN MILLIONS) [GRAPH]
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- $89.3 $139.1 $361.5 $529.0 $819.7
During the first nine months of 1997, the Company originated approximately $520 million of new mortgage loans. The Company believes it has the capacity, under favorable market conditions, to generate approximately $900 million in commercial mortgage loans annually. The Company has traditionally focused on originating commercial mortgage loans generally ranging in size from $2 million to $15 million, with varying maturities of five to twenty years, secured by office, industrial, retail or multi-family properties. The Company also provides development, advisory and management services with respect to real estate investment properties. The Company originates, actively monitors and manages its commercial mortgage loan and real estate portfolios through its St. Louis home office location and eleven field offices located in Arizona, California (2), Colorado (2), Florida, Georgia, Illinois, Missouri, Texas and Washington, D.C. The Company performs a full array of mortgage loan origination and portfolio management services including lease analysis, property valuation, economic and financial reviews, tenant analysis and oversight of default and bankruptcy proceedings. All properties are inspected each year and evaluated periodically based on internal quality ratings for purposes of loan loss reserve and internal management. The Company also provides ongoing servicing, generally as part of an integrated mortgage loan origination program and in several cases on a stand-alone basis. As of September 30, 1997, the Company provided mortgage loan servicing for approximately $2.8 billion of mortgage loans, primarily for General American and its affiliates. Of this amount, approximately $0.4 billion was serviced on a stand-alone basis. The Company is rated as an acceptable master servicer and an average special servicer for purposes of servicing securitized loan portfolios by Fitch Investors Service, L.P. and has received an average ranking as a commercial loan servicer by Standard & Poor's. The Company also provides a wide range of mortgage loan and real estate accounting services, including reconciliation reports, mortgage loan and real estate reporting for regulatory agencies, management and outside clients, and tax analysis and support. See "--Investment Accounting & Reporting." The Company established a relationship with an investment banking firm to originate mortgage loans. In 1995 the Company originated loans in the amount of approximately $172 million for a securitized offering by such investment banking firm, and the Company retained the master servicing of the entire loan portfolio totaling approximately $278 million. During the first quarter of 1997, the Company originated approximately $200 million of mortgage loans for such firm. Additionally, the Company is expanding 27 29 efforts to market its mortgage loan origination and servicing and accounting capabilities to other life insurance companies. The Company generally receives a fee associated with loan origination, which is usually approximately 1% of the loan balance. The Company also receives ongoing servicing fees and management fees with respect to mortgage loans in portfolios managed by the Company. Private Placement Investing. The Company believes it has considerable expertise in evaluating private placement securities. As of September 30, 1997, the Company managed approximately $2.2 billion in private placement securities, most of which were purchased on behalf of General American and its affiliates. Private placement securities are acquired pursuant to negotiated transactions between investors and issuers pursuant to exemptions from registration with the SEC. While less liquid than public securities, private placements often contain investment characteristics favorable to investors such as more stringent financial covenants, prepayment protection, collateral or higher yields than similar public securities. The Company purchases both fixed and floating rate, U.S. dollar denominated private securities on behalf of its client accounts, primarily of investment grade quality and primarily according to a "buy and hold" strategy. Such an investment in a private placement is generally between $5 million and $15 million. The Company conducts in-depth reviews of each private placement security's credit, structure, terms and proposed pricing prior to making a commitment to purchase a private placement on behalf of a client. The Company considers credit analysis to be critical to its success in private placement investing and such credit analysis consists of an evaluation of all aspects of a borrowing, including analysis of financial statements and ratios, cash flow, industry and competitive position, operating trends and any collateral securing the loan. Investment Accounting & Reporting. As of September 30, 1997, the Company's investment accounting & reporting services provided stand-alone investment accounting for approximately $26.2 billion in assets. All $73.6 billion in assets serviced by the Company are supported by the Company's investment accounting & reporting system. The Company's investment accounting & 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 as well as risk-based capital allocations, including Schedules B and D of the standard insurance industry annual statutory financial report. The Company's accounting & reporting system utilizes the Complete Asset Management, Reporting and Accounting software system (known as CAMRA(TM)) and the Fully Integrated Loan Management Information Software System (known as FILMS(TM)) under a software license agreement with SS&C Technologies, Inc. ("SS&C"), effective as of January 27, 1996 (the "License Agreement"). SS&C represents that it is the owner of the trademarks CAMRA(TM) and FILMS(TM). In connection with insurance investment accounting, the Company obtains pertinent client information through frequent and ongoing contact with the client, portfolio manager, brokers and custodians, in addition to standard industry sources. The Company utilizes detailed portfolio information as the foundation for asset allocation and portfolio management as well as to support its clients' operational and information needs. By utilizing CAMRA(TM), the Company is able to provide a number of services, such as: (i) portfolio management and market analyses, including a comprehensive securities database supporting on-line daily, monthly, quarterly and on-demand calculation of a range of information, including book and market value, yields, duration, average life and various user-selected scenarios; (ii) comprehensive accounting and reporting capabilities, including four accounting bases--GAAP, statutory, management and tax--exporting data directly to spreadsheets, word processors and databases for ease of delivery and presentation; (iii) multi-currency processing, calculating transaction and translation values in accordance with applicable accounting and insurance industry rules; and (iv) regulatory compliance, providing performance measurement calculations. The Company utilizes FILMS(TM) to enable its mortgage professionals to process, analyze and report on a comprehensive basis information regarding their loan portfolios. CAMRA(TM) and FILMS(TM) allow for detailed and timely reporting to the Company's clients, providing them with valuable management tools. Such reporting is an integral component of the Company's focus on client service. Under the License Agreement, the Company has a perpetual non-exclusive license to use, maintain and modify its investment accounting & 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. See "Risk Factors--Risk of Systems Failure; Dependence on Vendors." 28 30 Investment accounting & reporting services are typically provided in conjunction with insurance asset management services and are therefore subject to the terms of an overall management agreement. See "--Discretionary Asset Management & Investment Advisory Services." 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 believes it is a leader in facilitating the provision of private equity capital to the insurance and insurance-related industries. Since 1985, the Company has organized five funds that have raised approximately $360 million in committed capital. The private equity funds have invested more than $193 million of these proceeds in 39 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Relationships and Related Transactions." Management believes that limited partners invest in the Company's private equity funds to obtain the opportunity for potential private equity returns on investments in insurance or insurance-related enterprises. Investors also receive exposure to new business strategies and entrepreneurial developments in the insurance industry. More than 70 limited partners have invested in the Company's private equity funds since 1985, including financial companies, banks, pension funds and some of the largest insurance companies in the world. A number of limited partners have invested in multiple private equity funds over time. The following table shows the average private equity committed capital over the past five years. PRIVATE EQUITY COMMITTED CAPITAL (IN MILLIONS)
AVERAGE COMMITTED CAPITAL ----------------------------------------------- AS OF 1992 1993 1994 1995 1996 9/30/97 Fund I.............. $ 50.5 $ 42.4 $ 28.4 $ 18.9 $ 7.7 $ -0- Fund II............. 67.7 67.7 67.7 67.7 67.7 67.7 Fund III............ -- 21.8 50.1 56.6 56.6 56.6 Fund IV............. -- -- -- 18.7 38.9 40.4 Fund V.............. -- -- -- -- -- 146.5 ------ ------ ------ ------ ------ ------ Total....... $118.2 $131.9 $146.2 $161.9 $170.9 $311.2 ====== ====== ====== ====== ====== ======
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. See "Certain Relationships and Related Transactions-- Participation in Private Equity Funds." 29 31 INSURANCE RESEARCH Name recognition associated with the Company's insurance research business is an integral component of the marketing strategy for the Company's insurance asset management services. The Company believes that Conning & Company is viewed as one of the leading insurance industry investment research firms in the United States. 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 United States institutional money managers as well as pension funds, banks, mutual funds, and insurance companies. The Company's in-depth insurance industry research has been targeted to senior executives in the insurance industry for more than 20 years, and its Strategic Studies Series is subscribed to by 44 of the 50 largest U.S. property-casualty insurance companies and 42 of the 50 largest U.S. life-health insurance companies (based on 1996 premiums as reported by OneSource Information Services, Inc. as provided to it by third parties). During 1996 and the first nine months of 1997, the Company published the following studies: LIFE/HEALTH/ASSET ACCUMULATION The High Net Worth Market for Financial Services--Leveraging Customer Specialization to Achieve Sustainable Competitive Advantage The Pension/Retirement Assets Business--Sleeping With the Enemy The Rise of Multiple Life Distribution Channels--Covering All Bases Individual Annuities--Rising Tide Will Not Lift All Carriers Social Security Reform--Private Market Opportunities? FINANCIAL Alternative Markets--Evolving to a New Layer Lloyd's of London--A New World of Capital. Is the Genie Out of the Bottle? Mergers & Acquisitions and Public Equity Offerings--Sink, Swim Fast or be Swallowed Technology I--Electronic Commerce and the Internet Banking--New Opportunities for Banks in Insurance Mergers & Acquisitions and Public Equity Offerings--Mid-Year 1997 Review Insurance and Technology--Leveraging the Drivers of Competitive Advantage HEALTHCARE Medicare and Medicaid--The Private Sector Steps to the Plate Reinvesting Individual Disability Income Insurance--The Long Road Back The Health Care Marketplace--The Move Toward Managed Care Accelerates From Medical Malpractice to Managed Care Liability--Fifty Ways to Meet the Future PROPERTY/CASUALTY The Property-Casualty Underwriting Cycle--Lifting the Veil of Abnormal Losses Insurance Fraud--The Quiet Catastrophe Property-Casualty Expenses--Building Muscles While Losing Fat Personal Auto Insurance--Winning Strategies for the Year 2000 The Independent P/C Agent--The Squeeze Is Still On Strategic Customer Specialization--The Patchwork Quilt of Minority Owned Businesses Strategic Customer Segmentation--Women Business Owners--Doing It Their Way REINSURANCE Outlook for the Reinsurance Industry--A New Definition of Quality Life and Health Reinsurance--Pockets of Opportunity A Portrait of Reinsurance--Back to the Basics and Beyond In addition, 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 approximately 120 insurance-related underwritings for both initial and follow-on public offerings. Payment for the 30 32 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. In addition, the research services revenues received by the Company reflect underwriting fees with participation in public offerings of insurance and insurance-related companies. ACCOUNTING, ADMINISTRATION AND OPERATIONS The Company's accounting, administration and operations personnel are responsible for financial controls, internal and external financial reporting, compliance with regulatory and legal requirements, office and personnel services, the Company's management information and telecommunications systems, and the processing of the Company's securities transactions. General American provides certain of these functions pursuant to an Administrative Services Agreement. See "Certain Relationships and Related Transactions--Transactions with General American." The Company contracts with outside services for securities pricing information in connection with its asset management and investment accounting & reporting services. See "Risk Factors--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. 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. See "Business--Industry Background and Trends--Developing Trends in the Insurance Industry." 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 & reporting services face competition from certain other asset management firms as well as software companies, including SS&C. The Company believes the most important factors affecting competition for investment accounting & 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. See "Risk Factors--Significant Industry Competition." 31 33 FACILITIES 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 anticipates leasing up to an additional 10,000 square feet at this location during 1997 on substantially the same terms and conditions. See "Certain Relationships and Related Transactions--Transactions with General American." The Company also maintains executive offices in a 49,500 square foot office space located at 185 Asylum Street, Hartford, Connecticut pursuant to a lease expiring in 2005 with annual base rental expense of approximately $1.0 million until 1999 and a base rental expense of approximately $1.2 million from 1999 until 2004, subject to increases for taxes, insurance and operating expenses. The Company also leases from third parties, or subleases from General American, each of eleven other office sites for its various mortgage loan and real estate offices located in Arizona, California (2), Colorado (2), Florida, Georgia, Illinois, Missouri, Texas and Washington, D.C. The Company's principal offices in St. Louis and all but one of the remote office spaces described above are rented pursuant to written leases and a sublease between the Company and General American. See "Certain Relationships and Related Transactions--Transactions with 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. 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 believes its facilities have been generally well maintained, are in good operating condition, and, upon lease of the additional space described above, will be adequate for its current requirements. EMPLOYEES As of September 30, 1997, the Company employed approximately 275 employees. None of the Company's employees is subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. LEGAL PROCEEDINGS On November 14, 1994, the Insurance Commissioner of the Commonwealth of Pennsylvania, in its capacity as statutory liquidator of Rockwood Insurance Company ("Rockwood"), initiated an action in the Commonwealth Court of Pennsylvania against Conning & Company and certain of the officers of Conning & Company styled Maleski v. Conning & Company, et al., No. 94-7507 (subsequently amended to Linda S. Kaiser v. Conning). The action arises out of the Commissioner's previous retention of Conning & Company as placement agent for the sale of one of Rockwood's subsidiaries. The complaint alleges breach of fiduciary duty, breach of contract, professional negligence, bad faith and conspiracy, and seeks compensatory damages for approximately $6.5 million and unspecified punitive damages, costs and interest. Conning & Company is defending the action vigorously and the Company believes that Conning & Company has meritorious defenses to all claims. Although the matter is subject to uncertainty, as it remains in the preliminary stages and discovery has not been completed, the Company believes that the probable outcome should not have a material adverse effect upon the Company. On July 8, 1997, a consolidated amended class-action complaint was filed against SS&C Technologies, Inc. ("SS&C") in the United States District Court, District of Connecticut, styled Marc A. Feiner, M.D., et al. v. SS&C Technologies, Inc., et al. (Civil Action No. 397CV00656(JBA) consolidated with Civil Action No. 397CV01077). The complaint names SS&C, the directors of SS&C at the time of SS&C's initial public offering (including John B. Clinton, an officer of the Company), and lead underwriters Alex. Brown & Sons Incorporated and Hambrecht & Quist as defendants. The complaint alleges, among other things, there were material misstatements in the prospectus used by SS&C in an initial public offering in May 1996 and seeks, among other things, rescission and/or money damages, equitable relief and costs and expenses. Conning & Company, a subsidiary of the Company, was a participant of the underwriting syndicate in connection with SS&C's initial public offering, and thus may share, to the extent of its participation in the initial public offering, in any potential liability of the lead underwriters. General American and Fund I were selling shareholders in SS&C's initial public offering, and the lead underwriters have demanded of the selling shareholders indemnity against any losses, claims, damages or liabilities arising out of the action and reimbursement for legal or other expenses incurred in connection with investigating or defending the action. Although the matter is subject to uncertainty as, among other things, the action is in the preliminary stages, the Company believes that the probable outcome of the pending action should not have a material adverse effect upon the Company. 32 34 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. The income statement and balance sheet data for, and as of the end of, each of the years in the three-year period ended December 31, 1996 are derived from the financial statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated financial statements for each of the years in the three-year period ended December 31, 1996, and the report thereon, are included elsewhere in this Prospectus. The selected financial data of the Company presented below for the years ended December 31, 1992 and 1993 and as of December 31, 1992, 1993 and 1994 are derived from audited financial statements not included in this Prospectus. The selected consolidated financial data for the nine months ended September 30, 1997 and the nine months ended September 30, 1996 have been derived from the unaudited consolidated financial statements of the Company, which have been prepared on the same basis as the audited consolidated financial statements of the Company and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations as of the end of and for such periods. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. Also set forth below is certain operating and financial information.
YEARS ENDED NINE MONTHS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, ------------------------------------ ---------------- ----------------- 1992 1993 1994 1995 1995 1996 1996 1997 PRO FORMA (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenues: Asset management and related fees......................... $1,716 $2,446 $3,484 $24,050 $30,675 $40,456 $29,365 $36,018 Research services.............. 0 0 0 4,090 9,480 12,148 9,582 10,278 Other income................... 51 36 57 663 996 1,062 792 629 ------ ------ ------ ------- ------- ------- ------- ------- Total revenues............. 1,767 2,482 3,541 28,803 41,151 53,666 39,739 46,925 ------ ------ ------ ------- ------- ------- ------- ------- Expenses: Employee compensation and benefits..................... 0 0 0 12,027 18,336 26,002 18,522 23,559 Amortization of goodwill and other........................ 0 0 0 1,289 2,911 2,721 2,062 1,953 All other expenses............. 935 1,141 1,429 9,195 12,515 13,151 10,062 10,441 ------ ------ ------ ------- ------- ------- ------- ------- Total expenses............. 935 1,141 1,429 22,511 33,762 41,874 30,646 35,953 ------ ------ ------ ------- ------- ------- ------- ------- Operating income................... 832 1,341 2,112 6,292 7,389 11,792 9,093 10,972 Interest expense............... 0 0 0 521 1,365 729 592 233 ------ ------ ------ ------- ------- ------- ------- ------- Income before provision for income taxes............................ 832 1,341 2,112 5,771 6,025 11,063 8,501 10,739 Provision for income taxes......... 311 507 827 2,359 2,739 4,851 3,762 4,317 ------ ------ ------ ------- ------- ------- ------- ------- Net income................. $ 521 $ 834 $1,285 $ 3,412 $ 3,286 $ 6,212 $ 4,739 $ 6,422 ====== ====== ====== ======= ======= ======= ======= ======= Preferred stock dividends.......... 0 0 0 351 906 906 669 750 ------ ------ ------ ------- ------- ------- ------- ------- Net earnings available to common shareholder...................... $ 521 $ 834 $1,285 $ 3,061 $ 2,380 $ 5,306 $ 4,070 $ 5,672 ====== ====== ====== ======= ======= ======= ======= ======= Pro forma net income per common share and common share equivalents.............. $ 0.57 $ 0.58 ======= ======= - -------- Footnotes on next page.
33 35
AS OF DECEMBER 31, AS OF SEPTEMBER 30, -------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1997 1997 AS ADJUSTED (IN THOUSANDS) BALANCE SHEET DATA: Total assets....................... $1,395 $1,386 $1,683 $46,177 $50,020 $54,646 $85,255 Long-term debt..................... 0 0 0 9,000 2,000 0 0 Total liabilities.................. 437 594 356 24,552 20,870 18,426 18,426 Convertible preferred stock........ 0 0 0 17,003 24,782 36,152 0 Total common shareholder's equity........................... 958 792 1,327 4,623 4,368 68 66,829 Number of common shares outstanding end of period.................... 0.1 0.1 0.1 6,710 6,710 6,820 12,875
Set forth below is certain operating and financial information.
------------------------------------------------ AS OF 1992 1993 1994 1995 1996 9/30/97 (IN BILLIONS, EXCEPT AS NOTED) OTHER OPERATING DATA: Average assets under discretionary management: Unaffiliated.................................. $ 3.3 $ 5.4 $ 6.2 $ 7.7 $ 9.5 $ 12.9 General American & affiliates................. 5.5 6.0 6.6 7.8 9.6 13.5 ------ ------ ------ ------ ------ ------- Total..................................... 8.8 11.4 12.8 15.5 19.1 26.4 Average assets under advisory services............ 5.2 10.1 14.7 15.3 18.3 21.0 Average assets under accounting & reporting services........................................ 0.0 1.3 2.6 4.8 9.2 26.2 ------ ------ ------ ------ ------ ------- Total assets serviced..................... $ 14.0 $ 22.8 $ 30.1 $ 35.6 $ 46.6 $ 73.6 ====== ====== ====== ====== ====== ======= - -------- The years 1992 to 1994 reflect the results of GAIMCO only. The year 1995 reflects the results of the consolidated activity, from August 1, 1995 to December 31, 1995 and the results of GAIMCO only from January 1, 1995 to July 31, 1995. See Note 1 to the Company's Consolidated Financial Statements. Pro forma 1995 reflects the consolidated activity for the year assuming the Strategic Merger took place on January 1, 1995. The year 1996 reflects actual consolidated results. See Note 2 to the Company's Consolidated Financial Statements. Pro forma earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents considered outstanding during the period after giving effect to all dilutive common stock and common stock equivalents shares issued within twelve months of the public offering of the Company's common stock and to the Capital Stock Conversions. Gives effect to the Capital Stock Conversions and the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.50 per share and the receipt of the estimated net proceeds therefrom. 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 or GAIMCO, and are included in assets under management for 1992, 1993 and 1994. Data for 1995 and prior periods is presented on a pro forma basis to include both Conning and GAIMCO assets under management.
34 36 The following financial information represents financial data of Conning, Inc. and its subsidiaries for the years ended December 31, 1992, 1993 and 1994, and for the six months ended June 30, 1995 and should be read in conjunction with Conning, Inc.'s Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus. The income statement and balance sheet data for, and as of the end of, the year ended December 31, 1994 are derived from the financial statements of Conning, Inc. and its subsidiaries, which financial statements have been audited by Price Waterhouse LLP, independent certified public accountants. The income statement and balance sheet data for, and as of the end of, the six month period ended June 30, 1995 are derived from the financial statements for the six month period ended June 30, 1995, which financial statements have been audited by KPMG Peat Marwick LLP, certified public accountants. The consolidated financial statements for the year ended December 31, 1994 and the report thereon, and the financial statements for the six month period ended June 30, 1995 are included elsewhere in this Prospectus. The selected financial data presented below for the years ended December 31, 1992 and 1993 and as of December 31, 1992 and 1993 are derived from audited financial statements not included in this Prospectus.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------- -------- CONNING, INC. AND SUBSIDIARIES 1992 1993 1994 1995 (IN THOUSANDS) INCOME STATEMENT DATA: Revenues: Asset management and related fees....................... $ 6,643 $ 8,107 $ 9,840 $ 5,662 Research services....................................... 9,487 13,473 8,165 4,564 Other income............................................ 132 1,282 472 275 ------- ------- ------- ------- Total revenues...................................... 16,262 22,862 18,477 10,501 ------- ------- ------- ------- Expenses: Employee compensation and benefits...................... 9,382 10,616 10,196 5,322 Amortization of goodwill and other...................... 0 0 0 0 All other expenses...................................... 6,298 7,805 5,530 3,087 ------- ------- ------- ------- Total expenses...................................... 15,680 18,421 15,726 8,409 ------- ------- ------- ------- Operating income............................................ 582 4,441 2,751 2,092 Interest expense........................................ 111 85 0 0 ------- ------- ------- ------- Income before provision for income taxes and cumulative effect of accounting change............................... 471 4,356 2,751 2,092 Provision for income taxes.................................. 66 947 1,244 809 ------- ------- ------- ------- Income before cumulative effect of accounting change........ 405 3,409 1,507 1,283 Cumulative effect of accounting change...................... 0 131 0 0 ------- ------- ------- ------- Net income.......................................... $ 405 $ 3,540 $ 1,507 $ 1,283 ======= ======= ======= ======= Preferred stock dividends................................... 53 320 320 160 ------- ------- ------- ------- Net earnings available to common shareholders............... $ 352 $ 3,220 $ 1,187 $ 1,123 ======= ======= ======= ======= AS OF AS OF DECEMBER 31, JUNE 30, -------------------------- -------- 1992 1993 1994 1995 (IN THOUSANDS) BALANCE SHEET DATA: Total assets................................................ $10,922 $11,274 $14,228 $16,003 Long-term debt.............................................. 0 0 0 0 Total liabilities........................................... 8,179 5,071 6,392 6,927 Redeemable preferred stock.................................. 5,425 0 0 0 Cumulative preferred stock.................................. 0 3,650 3,650 3,650 Total common shareholders' equity (deficit)................. (2,682) 2,552 4,186 5,426 Number of common shares outstanding end of period........... 446 93 106 108
35 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's revenues consist of asset management and related fees, research 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 are generated when the Company provides investment advisory services as well as when the Company provides investment accounting and reporting services on a stand-alone basis. Assets under management are affected by the addition of new client accounts or client contributions to existing accounts, withdrawals of assets from or terminations of client accounts and investment performance, which may depend on general market conditions. The Company's private equity fund management fees represent annual management fees based on a percentage of committed capital and a participation in specified net gains of the funds. The Company's commercial mortgage fees primarily reflect fees associated with loan originations, which usually approximate 1% of the loan balance, as well as fees associated with ongoing servicing and management fees with respect to loans in portfolios managed by the Company. In addition to loans for General American and its affiliates, the Company has originated mortgage loans in a securitized offering for 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 with participation in public offerings of insurance and insurance-related companies. EFFECTS OF THE STRATEGIC MERGER The Company was formed on August 11, 1995 as a holding company to effect the Strategic Merger. See "Certain Relationships and Related Transactions" and Note 1 of Notes to the Company's Consolidated Financial Statements. Upon consummation of the Strategic Merger, General American owned 100% of the outstanding Common Stock. If all of the outstanding shares of convertible preferred stock were converted as of the date of the Strategic Merger, General American would have owned approximately 65% of the outstanding Common Stock, without giving effect to outstanding stock options. Under generally accepted accounting principles, the GAIMCO contribution was recorded at historical book value as a combination of entities under common control. The Conning & Company contribution was recorded utilizing the purchase accounting method. The historical financial statements include the operations and financial position of GAIMCO through July 31, 1995, and consolidated operations thereafter and consolidated financial position at December 31, 1995 and December 31, 1996. The excess of purchase price over the fair value of net assets acquired resulted in goodwill of $20.3 million. As a result of the required accounting presentation and the inherent difficulties of analyzing the historical financial statements for periods prior to 1996 and comparing them to the 1996 results, also included is financial information on a pro forma basis as if the Strategic Merger occurred on January 1, 1995. The following discussion begins with a comparison of the historical financial statements and follows with a discussion of results based on the pro forma financial information which is found in Note 2 of Notes to the Company's Consolidated Financial Statements. See also "Selected Consolidated Financial Data." RESULTS OF OPERATIONS HISTORICAL FINANCIAL STATEMENTS Statement of Income for the nine months ended September 30, 1997 compared to the nine months ended September 30, 1996 Total revenues increased 18% from $39.7 million for the first nine months of 1996 to $46.9 million for the first nine months of 1997, primarily as the result of the addition of new clients and growth in assets of existing clients. 36 38 Assets under discretionary management increased from approximately $19.9 billion at September 30, 1996 to approximately $26.4 billion at September 30, 1997. Asset management and related fees increased 23% from $29.4 million for the nine month period ended September 30, 1996 to $36.0 million for the nine months ended September 30, 1997. Fees for research services increased slightly from $9.6 million for the first nine months of 1996 to $10.3 million for the first nine months of 1997. Conning & Company was a co-manager of four public offerings which produced revenues of $2.0 million in 1996 and $1.1 million in 1997. Excluding the effect of revenues from these transactions, fees for research services would have increased 21% from the first nine months of 1996 to the first nine months of 1997. Underwriting revenues are highly volatile, depending on a variety of factors, including market conditions and transaction activity; accordingly, no assurance can be given as to the amount of such revenues, if any, that may arise in future periods. Other income decreased by approximately $0.2 million from $0.8 million for the first nine months of 1996 to $0.6 million for the first nine months of 1997, primarily due to the $0.3 million non-recurring realized gain from the sale of securities that occurred in the first quarter of 1996. Total expense increased 17% from $30.6 million for the first nine months of 1996 to $36.0 million for the first nine months of 1997, primarily due to increased employee compensation and benefits. Employee compensation and benefits increased 27% from $18.5 million for the first nine months ended September 30, 1996 to $23.6 million for the nine months ended September 30, 1997, primarily due to additional staffing to keep pace with increased revenue activity and additional incentive compensation accruals as a result of the increased operating income. The Company's incentive compensation practice is based on the level of and growth in the Company's operating profits. Interest expense decreased significantly from $0.6 million for the nine months ended September 30, 1996 to $0.2 million for the nine months ended September 30, 1997 due to the continuing reduction of principal on long term debt payable to affiliates, of which the final payment of principal and interest was made in February, 1997. Provision for income taxes increased 15% from $3.8 million for the first nine months of 1996 to $4.3 million for the first nine months of 1997 as a direct result of the increase in income before provision for income taxes. However, the effective federal and state income tax rates decreased from 44.3% for the nine month period ended September 30, 1996 to 40.2% for the nine month period ended September 30, 1997 due to the Company being able to recognize state net operating loss carryforwards in 1997. As a result of all of the above, net income increased 36% from $4.7 million for the first nine months of 1996 to $6.4 million for the first nine months of 1997. Statement of Income for 1996 compared to 1995 All consolidated revenue and expense categories are greater in 1996 than 1995 because each consolidated revenue and expense category includes the full year's results of Conning & Company in 1996 and only five months of Conning & Company results in 1995. The effective federal and state tax rate increased from 40.9% in 1995 to 43.8% in 1996. The higher state tax rate from Conning & Company's operations is included for the full year in 1996 and for only five months in 1995. Goodwill arising from the Strategic Merger in the amount of $20.3 million is being amortized on a straight-line basis over 20 years. This resulted in amortization expense of $0.4 million in 1995 and $1.0 million in 1996. Statement of Income for 1995 compared to 1994 All revenue and expense categories increased substantially from 1994 to 1995 principally due to the following: (i) 1995 includes the results of Conning & Company for the five months ended December 31, 1995 and there are no Conning & Company results included in 1994; and (ii) the contract to manage the general account assets of General American by GAIMCO was entered into effective January 1, 1995. The effective federal and state income tax rate increased from 39.2% in 1994 to 40.9% in 1995 due to the inclusion of goodwill in 1995 and the higher state tax rate applied to Conning & Company's results for the five months ended December 31, 1995. PRO FORMA FINANCIAL INFORMATION Statement of Income for 1996 compared to Pro Forma 1995 Asset Management and Related Fees. Asset management and related fees increased 32% from $30.7 million in 1995 to $40.5 million in 1996 primarily due to the addition of new clients and growth in assets of existing clients, and to 37 39 a lesser extent as a result of a resurgence in the real estate market and growth in mortgage assets from new and existing clients. Assets under management increased 18% from $17.6 billion at December 31, 1995 to $20.7 billion at December 31, 1996, 6% because of additions of new clients and 12% because of growth of assets of existing clients. Private equity fund management and related fees increased 21% from $3.9 million in 1995 to $4.7 million in 1996 due primarily to the March 1996 completion of Fund IV with committed capital of $40 million. See "Business--Private Equity Funds." Research Fees. Research services revenues increased 28% from $9.5 million in 1995 to $12.1 million in 1996 due primarily to the increased capital markets activity in the insurance industry and the increase in core research revenues in 1996. Conning is often a member of underwriting syndicates of insurance company offerings and twice during 1996 acted as co-manager of a secondary offering. In the aggregate, the Company generated revenues from underwriting activities of $4.0 million in 1996, as compared to $1.2 million in 1995. Underwriting revenues are highly volatile, depending on a variety of factors, including market conditions and transaction activity; accordingly, no assurance can be given as to the amount of such revenues, if any, that may arise in future periods. Other Income. Other income remained virtually unchanged at $1.1 million, primarily reflecting miscellaneous non-recurring revenues. Expenses. Employee compensation and benefits increased 42% from $18.3 million in 1995 to $26.0 million in 1996 primarily due to the higher incentive compensation as a result of the large increase in operating results from 1995 to 1996, as well as additions to staff during 1996. The Company's incentive compensation practice is based on the level of and growth in the Company's operating profits. Other operating expenses increased 5% from $12.5 million in 1995 to $13.2 million in 1996, reflecting additional ancillary costs from increased hiring and increased marketing expenses. Goodwill of $20.3 million resulting from the Strategic Merger is being amortized on a straight-line basis over 20 years. Amortization of goodwill and other charges totaling $2.9 million in 1995 and $2.7 million in 1996 are noncash expenses and do not affect cash available for other operating or capital needs. Interest Expense. Interest expense decreased 47% from $1.4 million in 1995 to $0.7 million in 1996 due primarily to prepayments of debt during 1996. Debt outstanding was $9.0 million and $2.0 million at December 31, 1995 and 1996, respectively. Such debt arose from the Strategic Merger and was payable to General American. See "Certain Relationships and Related Transactions." Income Taxes. The provision for income taxes increased $2.1 million from $2.7 million in 1995 to $4.8 million in 1996 due to the increase in pre-tax earnings of the Company. Net Income. As a result of all of the above, net income increased $2.9 million from $3.3 million in 1995 to $6.2 million in 1996. Statement of Income for 1995 compared to 1994 The investment management contract between GAIMCO and General American relating to the General American--General Account assets of $5.2 billion was entered into effective January 1, 1995. As such, the Company believes comparisons between 1995 and 1994, even on a pro forma basis after giving effect to the Strategic Merger, are not useful. 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. At September 30, 1997, the Company's capital structure included 6,710,000 shares of Common Stock, 110,000 shares of Non-Voting Common Stock, 3,190,000 shares of Series A Convertible Preferred Stock and 365,000 shares of Series B Convertible Preferred Stock. The Series A Convertible Stock is entitled to quarterly dividends, equal to the 90 day United States Treasury Bill rate as in effect from time to time. Such dividends amounted to approximately $669,900 for the period commencing on January 1, 1997 and ending on September 30, 1997. The Series B Convertible 38 40 Preferred Stock which was issued commencing in November 1996 is entitled to quarterly dividends of 5% per annum, or $80,600 in the aggregate, through September 30, 1997. Upon the completion of this offering, it is anticipated that all of the Non-Voting Common Stock and Series A and Series B Convertible Preferred Stock will have been converted to Common Stock and the Company will no longer have any preferred stock outstanding. Conning & Company is subject to the net capital requirements imposed on registered broker-dealers by the Exchange Act. See "Regulation." At December 31, 1996, Conning & Company had net capital (as defined by the Exchange Act) of approximately $2.4 million, which was approximately $1.8 million in excess of the regulatory minimum, and at September 30, 1997, Conning & Company had net capital of approximately $6.2 million, which was approximately $5.7 million in excess of the regulatory minimum. Conning & Company has in place a revolving subordinated loan facility with a commercial bank for $2.0 million that, when utilized, qualifies as capital for purposes of the Exchange Act's net capital rules. The agreement expires on December 31, 1997 and management believes that such line will be renewed at the end of its current term. 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 September 30, 1997, the Company had no outstanding long-term debt. The Company had total outstanding long-term debt at December 31, 1996 in the principal amount of $2.0 million. Such debt arose from the Strategic Merger and was payable to General American in the initial principal amount of $13.0 million bearing interest at an annual rate of 7.0%. See "Certain Relationships and Related Transactions." The remaining debt was paid in full in February 1997. The Company or a subsidiary acts as the general partner of certain private equity funds and maintains a 1% general partner capital interest in such funds. The Company may also invest as a limited partner in future funds it may organize. See "Certain Relationships and Related Transactions." Interests in such private equity funds are generally illiquid. The $30.0 million in estimated net proceeds of this offering will be used for general corporate purposes. The Company's business strategy contemplates that it will seek to complement internal growth with strategic investments and acquisitions. Accordingly, a portion of the net proceeds may also be used for acquiring related businesses or investing in strategic or joint venture relationships. The Company has no present understandings, agreements or commitments with respect to any such acquisition, and no assurance can be given that any such acquisition will take place. Pending application to the uses described above, the Company intends to invest the net proceeds of this offering in short-term, investment-grade, interest-bearing securities. NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies 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. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision and (c) revising the contingent share provisions and the supplemental EPS data requirements. SFAS No. 128 also makes a number of changes to existing disclosure requirements. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company has not yet determined impact of the implementation of SFAS No. 128. IMPACT OF INFLATION The Company does not believe that inflation has had a significant impact on the Company's consolidated operations. 39 41 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 SROs. 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 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 subject to registration and regulation by state securities regulators in those 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 investment advisers, each is subject to the requirements of 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 state laws regarding fiduciaries. Federal and state regulations provide, among other things, limitations on the ability of investment advisers to charge performance-based or non-refundable fees to clients, record-keeping and reporting requirements, disclosure requirements, limitations on principal transactions between an adviser or its affiliates and advisory clients, requirements as to fees paid to solicitors, restrictions on commission and fee arrangements with broker-dealers, and advertising restrictions, as well as general anti-fraud prohibitions. The state securities law requirements applicable to employees of investment advisers include certain qualification requirements as to advisory employees. In addition, Conning Asset Management Company, as investment adviser to two mutual funds registered under the Investment Company Act, is subject to requirements under the Investment Company Act and the SEC's regulations thereunder. The Company's mortgage origination and servicing activities are subject to the licensing requirements of certain states. Such requirements include, among other things, record-keeping and reporting requirements, procedures for handling funds, and requirements that certain employees obtain and maintain appropriate licenses. In connection with the Company's private equity activities, Conning & Company, its affiliates and the private equity funds which they manage are relying on exemptions from registration under the Investment Company Act, the Securities Act 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 Connecticut, New York and Texas, and is a member of, and subject to regulation by, the NASD. As a result of federal and state broker-dealer registration and SRO memberships, Conning & Company is subject to overlapping schemes of regulation which cover many aspects of its securities business. Such regulations cover matters including capital requirements, the use and safekeeping of customers' funds and securities, record keeping and reporting requirements, supervisory and organizational procedures intended to assure compliance with securities laws and to prevent the improper trading on material nonpublic information, employee-related matters, including qualification and licensing of supervisory and sales personnel, limitations on extensions of credit in securities transactions, clearance and settlement procedures, requirements for the registration, underwriting, sale and distribution of securities and rules of the SROs designed to promote high standards of commercial honor and just and equitable principles of trade. A particular focus of the applicable regulations concerns the relationship between broker-dealers and their customers. As a result, many aspects of the broker-dealer customer relationship are subject to regulation, including in some instances "suitability" determinations as to certain customer transactions, limitations in the amounts that may be charged to customers, timing of proprietary trading in relation to customers' trades and disclosures to customers. Conning Asset Management Company is a fiduciary under 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 40 42 certain duties on persons who are fiduciaries of a plan and prohibit certain transactions involving the assets of a plan and its fiduciaries or other interested parties. Under ERISA and the Code, any person who exercises any authority or control over the management or disposition of the assets of a plan is generally considered to be a fiduciary of the plan. Under ERISA or the Code, in situations where the Company and its affiliates are providing investment management or other services to a plan, (i) the Company's actions would be governed by prudence and other fiduciary responsibility standards and (ii) certain transactions in which the Company might seek to engage could constitute "prohibited transactions." If a prohibited transaction occurs for which no exemption is available, the Company and any other party in interest that has engaged in the prohibited transaction could be required, among other things, (i) to restore to the plan any profit realized on the transaction, (ii) to reimburse the plan for any losses suffered as a result of the transaction, (iii) to pay an excise tax equal to 15% of the amount involved in the prohibited transaction for each year the transaction continues and (iv) unless the transaction is corrected within statutorily required periods, to pay an additional tax equal to 100% of the amount involved in the transaction. Plan fiduciaries who participate in transactions with the Company could, under certain circumstances, be liable for prohibited transactions or other violations as a result of an investment or as co-fiduciaries for actions taken by or on behalf of the plan by the Company. Compliance with many of the regulations applicable to the Company involves a number of risks, particularly because applicable regulations in a number of areas, such as those governing affiliated transactions involving clients, may be subject to varying interpretation. Regulators make periodic examinations and review annual, monthly and other reports on the Company's operations and financial condition. In the event of a violation of or non-compliance with any applicable law or regulation, governmental regulators and SROs may institute administrative or judicial proceedings that may result in censure, fine, civil penalties (including treble damages in the case of insider trading violations), criminal penalties, the issuance of cease-and-desist orders, the deregistration or suspension of the non-compliant broker-dealer or investment adviser, the suspension or disqualification of the broker-dealer's or investment adviser's officers or employees, the removal of the Company from its role as a fiduciary with respect to the investments of assets subject to ERISA and other adverse consequences. The Company has not experienced any such penalties to date. Such violations or non-compliance could also subject the Company, and/or its employees to civil actions by private persons. As an underwriter from time to time, Conning & Company is exposed to liability under federal and state securities laws and court decisions, including decisions with respect to underwriters' liability and limitations on indemnification of underwriters by issuers. For example, a firm that acts as an underwriter may be held liable for material misstatements or omissions of fact in a prospectus used in connection with the securities being offered or for statements made by its securities analysts or other personnel. Any governmental, SRO or private proceeding alleging violation of or non-compliance with laws or regulations could have a material adverse effect upon the Company's business, financial condition, results of operations and business prospects. The regulatory environment in which the Company operates is subject to change. The Company may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other United States, state or foreign governmental regulatory authorities or SROs. The Company also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and SROs. The Company's businesses may be materially affected not only by securities regulations but also by regulations of general application. For example, the volume of the Company's principal investment advisory businesses in a given time period could be affected by, among other things, existing and proposed tax legislation and other governmental regulations and policies (including the interest rate policies of the Federal Reserve Board) and changes in the interpretation or enforcement of existing laws and rules that affect the business and financial communities. The level of business and financing activity in the insurance industry can be affected not only by such legislation or regulations of general applicability, but also by industry-specific legislation or regulations. Under the Advisers Act, every investment advisory agreement with its clients must expressly provide that it 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 41 43 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. Following completion of the offering, sales by General American or other shareholders or issuances of Common Stock by the Company, among other things, could result in a deemed assignment of the Company's investment advisory agreements under such statutes. The Company's Articles provide that no person or group deemed to be a beneficial owner (as defined therein) of the Common Stock may vote more than 20% of the total number of shares of Common Stock outstanding. These provisions of the Articles do not apply to General American Mutual Holding Company, General American, General American Holding Company or their subsidiaries or affiliates, direct or indirect subsidiaries of the Company and certain employee plans established or to be established by the Company. The Company's Board of Directors may approve the exemption of other persons or groups from the provisions described above. While this voting limitation is in place to reduce the likelihood, under certain circumstances, of inadvertent terminations of the Company's advisory agreements as a result of "assignments" of the Company's investment advisory contracts, there can be no guarantees that this limitation will prevent such a termination from occurring. In addition, such limitation could be deemed to have an anti-takeover effect and to make changes in management more difficult. See "Risk Factors--Regulation," "Risk Factors--Termination Provisions of Investment Advisory Agreements," "Risk Factors--Consequences of a Change of Control on Investment Advisory Agreements; Limitations on Voting Rights," "Description of Capital Stock--Common Stock" and "Certain Charter and Bylaw Provisions-- Limitations on Voting of Shares in Certain Circumstances." The officers, directors and employees of the Company's investment management subsidiaries may from time to time own securities which are also owned by one or more of their clients. Each subsidiary has internal policies with respect to individual investments and requires reporting of securities transactions and restricts certain transactions so as to reduce the possibility of conflicts of interest. NET CAPITAL REQUIREMENTS As a broker-dealer registered with the SEC and various states and a member firm of the NASD, Conning & Company is subject to the capital requirements of the SEC, the states, and the NASD. These capital requirements specify minimum levels of capital, computed in accordance with regulatory requirements ("net capital"), that such firm is required to maintain and also limit the amount of leverage that such firm is able to obtain in its respective business. A failure of a broker-dealer to maintain its minimum required capital would require it to cease executing customer transactions until it returned to capital compliance, and could cause it to lose its membership on an exchange, or in an SRO, to lose its registration with the SEC or a state, or require its liquidation. Further, the decline in a broker-dealer's net capital below certain "early warning levels," even though above minimum capital requirements, could cause material adverse consequences to the broker-dealer. For example, the SEC's capital regulations prohibit payment of dividends, redemption of stock and the prepayment of subordinated indebtedness if a broker-dealer's net capital thereafter would be less than 5% of aggregate debit items. These regulations also prohibit principal payments in respect of subordinated indebtedness if a broker-dealer's net capital thereafter would be less than 5% of aggregate debit items. Compliance with regulatory capital requirements could limit the operations of Conning & Company or Conning Asset Management Company that require the intensive use of capital, such as underwriting and trading activities, and financing of customer account balances, and also could restrict the Company's ability to withdraw capital from Conning & Company and Conning Asset Management Company, which in turn could limit its ability to pay dividends, repay debt and redeem or purchase shares of its outstanding capital stock. At September 30, 1997, Conning & Company was required to maintain minimum net capital, in accordance with SEC rules, of approximately $525,000 and had total net capital of approximately $6.2 million, or approximately $5.7 million in excess of the amount required. 42 44 MANAGEMENT DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN OTHER SIGNIFICANT OFFICERS Directors and Executive Officers The directors and executive officers of the Company are as follows:
NAME AGE POSITION Leonard M. Rubenstein................... 51 Chairman and Chief Executive Officer Maurice W. Slayton...................... 59 President and Director John A. Fibiger......................... 65 Director Richard A. Liddy........................ 62 Director John C. Shaw............................ 63 Director Mark E. Hansen.......................... 48 Executive Vice President Fred M. Schpero......................... 44 Senior Vice President and Chief Financial Officer
Following is certain additional information concerning each director and executive officer of the Company. Each such individual has served in his present capacity of his principal occupation for the last five years, unless otherwise indicated. LEONARD M. RUBENSTEIN, C.F.A., is in the Office of the Chairman and has been Chairman and Chief Executive Officer of the Company since 1995 and also serves as Chairman, Chief Executive Officer and Chief Investment Officer of Conning Asset Management Company. Mr. Rubenstein has 25 years of investment experience. Prior to his position with Conning, Mr. Rubenstein spent 23 years in the investment operations of General American, where he held various positions, including Executive Vice President of Investments. Mr. Rubenstein is a director of a number of General American subsidiaries, none of which is registered with the Commission except Reinsurance Group of America, Incorporated. From 1984 to 1991, he served as Vice President of General American. He is a past president of the St. Louis Society of Financial Analysts. Mr. Rubenstein and the Company entered into an Employment Agreement in August 1995. See "--Employment Agreements and Other Compensation Arrangements." MAURICE W. SLAYTON is in the Office of the Chairman and has been the President of the Company since 1995 and also serves as President and Chief Executive Officer of Conning & Company. Mr. Slayton joined Conning in 1973. Prior thereto, he had 12 years of experience with Hartford Steam Boiler Inspection and Insurance Company and National Life of Vermont in a number of insurance and investment positions. He is currently a director of several insurance related entities, none of which is registered with the Commission except PennCorp Financial Group, Inc. Mr. Slayton is a member and past president of The Hartford Society of Financial Analysts. Mr. Slayton and the Company entered into an Employment Agreement in August 1995. See "--Employment Agreements and Other Compensation Arrangements." JOHN A. FIBIGER has been a director of the Company since June 1997. Until April 1997, he was Chairman of the Board of Transamerica Occidental Life Insurance Company as well as a director of four of its wholly owned life insurance subsidiaries. He remains 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 chief financial officer 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. Prior to that, he 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 has been a director of the Company since November 1996. He is President, Chief Executive Officer and Chairman of the Board of General American Life Insurance Company, and President and Chairman of GenAmerica Corporation and General American Mutual Holding Company. From 1982 through 1988 he was Senior 43 45 Vice President and Executive Vice President of Continental Corporation, and President, Financial Services Group of Continental Insurance Company. He is also Chairman of the Board of General American Capital Company and The Walnut Street Funds, Inc., each a registered investment company, Chairman of Paragon Life Insurance Company, Chairman of Reinsurance Group of America, Incorporated, Chairman of Security Equity Life Insurance Company, Chairman of Security Mutual Life Insurance Company of New York and a director of Brown Group, Inc., Ralston Purina Company and Union Electric Company. JOHN C. SHAW has been a director of the Company since June 1997. He is the founding partner of the Shaw Group LLC, a management consulting firm specializing in transformation management. From 1994 to 1997, he served in the Office of Chairman of Well Point Health Network, Inc., a large, publicly-traded managed healthcare company. From 1966 to 1994, he was a partner of Deloitte & Touche, most recently serving as Vice Chairman. Previously he has served as national director for Strategic Planning, Partner-In-Charge of the New York office and a member of the Board of Directors and Board of Governors for Touche Ross. Mr. Shaw has taught at Stanford Business School and the Wharton School, lectured at several national seminars and authored several books and articles on modern business techniques. MARK E. HANSEN, C.F.A., has been the Executive Vice President of the Company since 1995, Executive Vice President of Conning & Company since 1993 and Executive Vice President of Conning Asset Management Company since August 1996. Mr. Hansen also served as a director of the Company from August 1995 until March 1997. Mr. Hansen has over 25 years of investment experience, having joined Conning in 1984 from the Bank of Boston-Connecticut. Mr. Hansen and the Company entered into an Employment Agreement in August 1995. See "--Employment Agreements and Other Compensation Arrangements." FRED M. SCHPERO, C.P.A., has been a Senior Vice President and Chief Financial Officer of the Company since January 1997. Prior to that time, Mr. Schpero was Vice President and Chief Financial Officer of Conning & Company from 1985 through 1996 and at Conning Asset Management Company from August 1996 through December 1996. Prior to joining Conning, he was 2nd Vice President--Finance with Security Connecticut Life Insurance Company and a senior accountant at the public accounting firm of Coopers & Lybrand LLP. Mr. Schpero and the Company entered into an Employment Agreement in August 1995. See "--Employment Agreements and Other Compensation Arrangements." Classified Board of Directors All of the current directors were elected pursuant to action of the Company's shareholders in June 1997 and have been divided into three classes with terms expiring, respectively, at the annual meetings of shareholders in 1998 (Mr. Fibiger), 1999 (Messrs. Liddy and Shaw) and 2000 (Messrs. Rubenstein and Slayton). Commencing with the next annual meeting of shareholders in 1998, directors then standing for election will be elected for three-year terms, with one class of directors being elected at each annual meeting of shareholders thereafter. See "Certain Charter and Bylaw Provisions." Officers are elected annually and serve at the discretion of the Board of Directors, subject to the terms of applicable employment agreements. See "--Employment Agreements and Other Compensation Arrangements." Committees The Board of Directors has an Audit Committee comprised of Messrs. Fibiger, Liddy and Shaw, a Compensation Committee comprised of Messrs. Rubenstein and Slayton and an Executive Compensation Committee comprised of Messrs. Fibiger and Shaw. 44 46 Certain Other Significant Officers Certain other significant officers of the Company or its subsidiaries who are not directors or executive officers (the "Other Significant Officers") are as follows:
NAME AGE POSITION DIVISION Thomas A. Byrne............... 40 Senior Vice President Research Stephan L. Christiansen....... 48 Senior Vice President Private Equity John B. Clinton............... 42 Senior Vice President Private Equity Paul S. Goulekas.............. 42 Senior Vice President Research Charles P. Kapp............... 38 Senior Vice President Mortgage Loans and Real Estate Glen D. Keller................ 45 Senior Vice President Asset Management Douglas R. Koester............ 43 Senior Vice President Asset Management Donald L. McDonald............ 35 Senior Vice President Asset Management Michael D. McLellan........... 41 Senior Vice President Mortgage Loans and Real Estate Steven F. Piaker.............. 35 Senior Vice President Private Equity Stephen R. Pivacek............ 54 Senior Vice President Research Gordon G. Pratt............... 35 Senior Vice President Private Equity Gary K. Ransom................ 45 Senior Vice President Research David N. Reid................. 36 Senior Vice President Asset Management Thomas D. Sargent............. 39 Senior Vice President Research William C. Shenton............ 43 Senior Vice President Asset Management Christopher J. Swift.......... 37 Senior Vice President Asset Management J. Terri Tanaka............... 35 Senior Vice President Asset Management John W. Zimmerman............. 35 Senior Vice President Asset Management
Following is certain information concerning the Other Significant Officers. Each such individual has served in his or her present capacity or his or her principal occupation for the last five years, unless otherwise indicated. THOMAS A. BYRNE has been a Senior Vice President of the Company since 1993 and has been with the Company since 1984. Before joining the Company, Mr. Byrne had prior experience at Travelers Insurance Companies. STEPHAN L. CHRISTIANSEN, F.C.A.S., M.A.A.A., has been a Senior Vice President of the Company since 1989. Prior to joining the Company in 1986, Mr. Christiansen had 16 years of insurance industry experience with Colonial Penn Insurance and Insurance Company of North America. JOHN B. CLINTON, C.P.C.U., C.P.A., has been a Senior Vice President of the Company since 1992. Mr. Clinton's previous experience has been with KCP Holding Company and its subsidiary, National American Insurance Company of California, where he was CFO and Director. Prior to this, he was a Vice President of Dillon Read & Co., Inc. and a founding partner of Concord Partners, a private equity fund. He previously worked for New Court Securities and KPMG Peat Marwick LLP. PAUL S. GOULEKAS has been a Senior Vice President of the Company since 1994. Mr. Goulekas joined the firm after 12 years experience at Aetna Life & Casualty, most recently as operations controller/treasurer of Aetna Health Plans, and prior to that worked as an economist at The Hartford Insurance Group. CHARLES P. KAPP joined the Company as Senior Vice President in July 1997. For seven years prior to joining the Company, Mr. Kapp held various positions with Mark Twain Bancshares in Chicago, Illinois, most recently as Senior Vice President in the area of institutional bond sales. GLEN D. KELLER, F. S. A., has been a Senior Vice President at the Company since 1996. Mr. Keller has over 20 years of experience in the life insurance industry. Prior to joining the Company, he managed the Canadian Pension and Annuity business for Metropolitan Life. Prior to that, he was the investment actuary for National Life of Vermont. 45 47 DOUGLAS R. KOESTER, C.F.A., is Senior Vice President and has been with the Company since 1986. Prior to his current position, Mr. Koester spent 14 years with GAIMCO and in the investment operations division of General American. He served as a director of the Company from August 1995 until April 1997 and has been an executive officer of Conning Asset Management Company and its predecessor GAIMCO from 1988 to present. DONALD L. MCDONALD has been a Senior Vice President at the Company since 1993. Mr. McDonald joined the Company in 1992 from Daiwa Securities of America and his prior investment experience includes Roosevelt & Cross and Salomon Brothers. MICHAEL D. MCLELLAN is a Senior Vice President and has been with the Company since 1995. Mr. McLellan served as a director of the Company from August 1995 until April 1997. Prior to his position with the Company, Mr. McLellan spent 13 years with GAIMCO and General American 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). STEVEN F. PIAKER, C.F.A., has been a Senior Vice President for the Company since January 1997. Prior to joining the Company, Mr. Piaker was a Senior Vice President of Conseco, Inc., where he worked on the company's acquisitions and private equity-linked investments. His previous experience was with G.E. Capital as Vice President of the Corporate Finance Group. STEPHEN R. PIVACEK has been a Senior Vice President of the Company since 1993. Mr. Pivacek joined the Company in 1986 from Aetna Life & Casualty where he was employed as a Director in the trading department. GORDON G. PRATT has been a Senior Vice President of the Company since 1994. Prior to joining the Company in 1992 he was Vice President and Product Manager in the Insurance M&A and Insurance Leveraged Acquisitions areas of The Chase Manhattan Bank, N.A. Prior to that, he was with the Consulting Division of The First National Bank of Chicago. GARY K. RANSOM, F.C.A.S., M.A.A.A., has been a Senior Vice President since 1989. Prior to joining the Company in 1979, Mr. Ransom worked at Travelers Insurance Companies in various actuarial positions. DAVID N. REID has been a Senior Vice President of the Company since 1996. Mr. Reid has over 13 years of investment accounting, operations, reporting and systems experience. Prior to joining the Company in 1991, Mr. Reid spent four years with SS&C Technologies, Inc. (formerly known as Securities Software & Consulting, Inc.) where he directed the development and marketing of LAN based investment management and accounting system, and five years with The Hartford Insurance Group. THOMAS D. SARGENT, C.F.A., has been a Senior Vice President of the Company since 1993. Prior to joining the Company in 1986, Mr. Sargent was in the commercial lending area at Connecticut Bank & Trust Company. He also completed an internship with Willis Faber, a London-based insurance broker. WILLIAM C. SHENTON has been a Senior Vice President of the Company since 1993. Prior to joining the Company in 1990, he held numerous management positions with Control Data, including domestic and international assignments concentrating on the financial services industry, most recently involving the international insurance investment community. CHRISTOPHER J. SWIFT, C.P.A., has been a Senior Vice President of the Company since October 1997. Prior to joining the Company, Mr. Swift was a financial services partner of the St. Louis office of KPMG Peat Marwick LLP specializing in the insurance and mutual fund industries and also served as the market leader of the insurance practice for the St. Louis office. J. TERRI TANAKA, C.F.A., has been a Senior Vice President of the Company since 1995. Ms. Tanaka also served as a director of the Company from August 1995 until April 1997. Prior to her current position, Ms. Tanaka spent eight years with GAIMCO and in the investment operations division of General American. She has been an executive officer of Conning Asset Management Company and its predecessor GAIMCO from 1995 to present. JOHN W. ZIMMERMAN, C.F.A., joined the Company as a Senior Vice President in April 1997. Prior to joining the Company, Mr. Zimmerman worked for NationsBank Private Investments (formerly Boatmen's Trust Company), where he held various positions since 1987, most recently as Vice President, Manager of Fundamental Research. 46 48 DIRECTORS' COMPENSATION The Board pays each director who is not employed by the Company or General American a $10,000 annual retainer and a $1,000 fee for each Board meeting attended, plus expenses, and may also award stock options to directors. Upon the closing of this offering, the Company intends to grant options to purchase 5,000 shares to each of Messrs. Fibiger and Shaw. Officers of the Company do not receive any additional compensation for serving the Company as members of the Board of Directors or any of its Committees. Messrs. McLellan and Koester and Ms. Tanaka, who served as directors until June 1997, and Mr. Liddy have also received stock options and purchased shares of Series B Convertible Preferred Stock of the Company as described in "Certain Relationships and Related Transactions." EXECUTIVE COMPENSATION Compensation Summary. The following table sets forth the compensation paid to the Chief Executive Officer and the three other executive officers of the Company. SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
LONG-TERM COMPENSATION ------------------ SECURITIES NAME AND FISCAL UNDERLYING OPTIONS ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS (#SHS) COMPENSATION Leonard M. Rubenstein................... 1996 $270,000 $325,000 20,000 $32,913 Chairman and Chief Executive Officer Maurice W. Slayton...................... 1996 $260,000 $325,000 -- $12,300 President and Director Mark E. Hansen.......................... 1996 $235,000 $275,000 -- $12,300 Executive Vice President Fred M. Schpero......................... 1996 $120,000 $120,000 10,000 $11,604 Senior Vice President and Chief Financial Officer - -------- Perquisites and other personal benefits are not included, as they do not exceed the lesser of $50,000 and 10% of total of salary and bonus for any named executive officer. Includes amounts deferred at the election of the officer under the General American Life Insurance Company Executive Deferred Savings Plan (a defined contribution plan), with respect to Mr. Rubenstein, and the Conning & Company Profit Sharing and 401(k) Savings Plan, with respect to Messrs. Slayton, Hansen and Schpero. Bonuses are for services performed during 1996. Does not include 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." See "Option Grants in Last Fiscal Year." For Mr. Rubenstein, amount represents contributions by the Company to the General American Executive Deferred Savings Plan and Augmented Progress Sharing Plan (defined contribution plans). For Messrs. Slayton, Hansen and Schpero, amounts represent contributions by the Company to the Conning & Company Profit Sharing and 401(k) Savings Plan. Mr. Rubenstein continues to accrue certain pension and post-retirement health benefits under General American benefit plans. See "Management--Employee Agreements and Other Compensation Arrangements." Although the cost of such benefits for 1996 was deducted from Mr. Rubenstein's bonus, such cost has not been deducted from the bonus shown above. The actual bonus paid to Mr. Rubenstein for 1996 was $292,100.
47 49 Stock Option Awards. The following tables show information regarding awards of stock options in 1996 and the number and value of unexercised options held by the named executive officers at the end of fiscal 1996. The value of unexercised options is based on a value of $13.50 per share for the Company's Common Stock, which is the assumed initial public offering price. No stock options were exercised by the named executive officers in fiscal 1996. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE NUMBER OF % OF TOTAL VALUE AT ASSUMED SHARES OPTIONS ANNUAL RATES OF STOCK UNDERLYING GRANTED TO PRICE APPRECIATION FOR OPTIONS EMPLOYEES EXERCISE OR OPTION TERM GRANTED IN BASE PRICE EXPIRATION ---------------------------- NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) Leonard M. Rubenstein......... 20,000 8.70% $7.00 11/21/06 $88,000 $223,200 Maurice W. Slayton............ -- -- -- -- -- -- Mark E. Hansen................ -- -- -- -- -- -- Fred M. Schpero............... 10,000 4.35% $7.00 11/21/06 $44,000 $111,600 - -------- Options granted in 1996 are exercisable with respect to 20% of the option shares on the first anniversary of the grant date and with respect to an additional 20% on each of the four succeeding anniversary dates. Options are intended to qualify as incentive stock options under the Internal Revenue Code. Each option is forfeitable if not exercised within a specified time after the holder's death, disability or termination for any reason. See "Management--Employee Stock Plans." The options have terms of 10 years, subject to earlier termination in certain events related to termination of employment. Amounts represent the potential realizable value of each grant of options at the time of grant, assuming that the price of the underlying shares appreciates in value from the date of grant to the end of the term, at annualized rates of 5% and 10%, respectively.
AGGREGATED OPTIONS AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END -------------------------- -------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE Leonard M. Rubenstein......... 24,000 116,000 $196,080 $914,320 Maurice M. Slayton............ 24,000 96,000 $196,080 $784,320 Mark E. Hansen................ 24,000 96,000 $196,080 $784,320 Fred M. Schpero............... 2,000 18,000 $ 16,340 $130,360 - -------- Represents the estimated fair value of the shares of Common Stock subject to outstanding options, based on the assumed initial offering price of $13.50 per share, less the aggregate exercise price of the options. Includes options to purchase 28,000 shares that became exercisable after December 31, 1996 and options to purchase 72,000 shares that will become exercisable upon closing of the offering. All such options will become exercisable upon closing of the offering. Includes options to purchase 4,000 shares that became exercisable after December 31, 1996 and options to purchase 6,000 shares that will become exercisable upon closing of the offering.
All options have been issued as incentive stock options under the Internal Revenue Code; the Company intends to compensate the individual for the additional federal income taxes that accrue to such optionholder in excess of then applicable federal income tax on capital gain transactions as a result of the recharacterization as other than incentive stock options. In such an event, the Company would be entitled to a tax deduction for any compensation recognized by the option holder. Upon the closing of this offering, a total of 471,587 incentive stock options will have been so recharacterized. The Company intends to compensate for such recharacterization by granting new non-qualified options to all holders of such recharacterized options upon the closing of this offering. The Company also intends to grant options to purchase an additional 965,000 shares of Common Stock upon closing of this offering. See "--Employee Stock Plans." 48 50 EMPLOYEE STOCK PLANS The Board of Directors and shareholders of the Company approved the 1997 Flexible Stock Plan in December 1997 (the "1997 Plan"). The 1997 Plan provides for the award of benefits (collectively, "Benefits") of various types, including stock options, stock appreciation rights ("SARs"), restricted stock, performance shares, cash awards and other stock-based awards. Set forth below is a description of the principal features of the 1997 Plan. This description is subject to and qualified in its entirety by the full text of the 1997 Plan, which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Company has adopted the 1997 Plan to attract, retain, motivate, and reward officers, employees and other individuals, to encourage ownership of Common Stock by officers, employees and directors, and to promote and further the best interests of the Company. The number of shares of Common Stock which may be issued in connection with Benefits is 2,200,000 shares. The 1997 Plan will be administered with respect to executive officers by the Executive Compensation Committee of the Board, with respect to non-employee directors by the full Board, and with respect to all other participants by the Compensation Committee of the Board. The Board may amend the 1997 Plan at any time, provided that the Board may not amend the 1997 Plan without shareholder approval if such amendment would (i) cause options that are intended to qualify as incentive stock options to fail to qualify as such, (ii) cause the Plan to fail to meet the requirements of Rule 16b-3 under the Exchange Act, or (iii) violate applicable law. The 1997 Plan has no fixed termination date and will continue in effect until terminated by the Board. Under the 1997 Plan, the appropriate Committee may grant Benefits at such times, in such amounts, and to such recipients as such Committee may determine. Benefits may be awarded only to officers, employees and directors of the Company and its subsidiaries, employees and owners of non-affiliated entities and entities with which the Company or its subsidiaries have business relationships, and persons providing services to the Company or a subsidiary. Incentive stock options and non-qualified stock options may be granted under the 1997 Plan. In the case of non-qualified stock options, the option price shall be no less than the fair market value of the shares of Common Stock on the date the option is granted, and, in the case of incentive stock options, the price will be determined by the Committee but shall be not less than the fair market value of the shares of Common Stock on the date the option is granted. The other terms of options will be determined by the Compensation Committee, the Executive Compensation Committee or the Board, as applicable. The 1997 Plan also permits the award of SARs, restricted stock, performance shares, cash awards and other stock-based awards, including performance-based compensation subject to certain requirements. The maximum number of shares subject to options and SARs which may be granted to a participant in any year is 500,000. The 1997 Plan also provides for the award of other Benefits valued in whole or in part by reference to, or otherwise based on, the Common Stock. In the event of a Change in Control, as defined below, the Compensation Committee, the Executive Compensation Committee or the Board, as applicable, may provide such protection as it deems necessary to maintain a participant's rights; including (without in any way limiting the generality of the foregoing or requiring any specific protection) to: (i) provide for the acceleration of the exercise or realization of any Benefit; (ii) provide for the purchase of a Benefit upon the participant's request for an amount in cash equal to the amount which could have been attained upon the exercise or realization of the Benefit had it been currently exercisable or payable; (iii) make such adjustment to the outstanding Benefits as it deems appropriate; and/or (iv) cause the outstanding Benefits to be assumed, or new Benefits substituted therefor, by the surviving corporation. "Change in Control" means: (i) the acquisition after the adoption of the 1997 Plan, without the approval of the Board, by any person or group (as that term is used in Section 13(d) and 14(d)(2) of the Exchange Act), other than the Company and certain related entities, of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of more than 20% of the combined voting power in the election of directors of the then outstanding shares of the Company's voting securities; (ii) the liquidation or dissolution of the Company following a sale or other disposition of all or substantially all of its assets; (iii) a merger or consolidation involving the Company as a result of which persons who were shareholders of the Company immediately prior to the effective date of the merger or consolidation shall have beneficial ownership of less than 50% of the combined voting power in the election of directors of the surviving corporation following the effective date of such merger or consolidation; or (iv) a change in the majority of the members of the Board (other than as a result of death or disability) during any period of two years or less unless the election or nomination for 49 51 election of such members was approved by at least two-thirds of (x) the then remaining members of the Board who were members at the beginning of such period plus (y) the then remaining members whose election or nomination for election was approved by at least two-thirds of the members of the Board who were members at the start of such period. Awards under the 1997 Plan may be granted in tandem. However, no Benefit may be granted in tandem with an incentive stock option except an SAR. Upon the exercise of any option or in the case of any other Benefit that requires a payment to the Company, payment may be made either (i) in cash, or (ii) with the consent of the Compensation Committee, Executive Compensation Committee or Board, as applicable, (a) by the surrender of all or part of a Benefit, (b) by the tender to the Company of shares of Common Stock having an aggregate fair market value equal to the amount due the Company, (c) in other property, rights or credits deemed acceptable by such Committee or (d) by any combination of the foregoing. At the time any Benefit is distributed under the Plan, the Company may withhold, in cash or in shares of Common Stock, from such distribution any amount necessary to satisfy income withholding requirements applicable to such distribution. The Compensation Committee, Executive Compensation Committee or Board, as applicable, may impose restrictions upon the transferability of any Benefit. The Board has approved two other plans, the 1996 Flexible Stock Plan in November 1996 (the "1996 Plan") and the 1995 Flexible Stock Plan in August 1995 (the "1995 Plan"), that are substantially similar to the 1997 Plan, except that the definition of "Change of Control" under the 1995 Plan and the 1996 Plan means: (i) the acquisition, without the approval of the Board, by any person or entity, other than the Company or certain related entities, of more than 20% of the outstanding shares of the Company's voting common stock through a tender offer, exchange offer or otherwise; (ii) the liquidation or dissolution of the Company following a sale or other disposition of all or substantially all of its assets; (iii) a merger or consolidation involving the Company which results in the Company not being the surviving parent corporation; or (iv) any time during any two-year period in which individuals who constituted the Board at the start of such period (or whose election was approved by at least two-thirds of the then members of the Board who were members at the start of the two-year period) do not constitute at least 50% of the Board for any reason. The Board authorized the award of 2,100,000 shares for each Plan and options for a total of 1,237,500 shares have been granted. As a result of the approval of the 1997 Plan, the Company has determined not to award any additional benefits pursuant to the 1995 Plan or the 1996 Plan. Upon the closing of this offering, the Company intends to grant options to purchase a total of 965,000 shares at the initial public offering price to certain Company employees and directors, including options to purchase 25,000 shares to Mr. Schpero and 5,000 shares each to Messrs. Fibiger and Shaw. All of such options are subject to the same terms. Each award will become exercisable in varying percentages of the shares it covers over five years, beginning on the first anniversary of the closing of this offering. In addition, upon the closing of this offering, the Company intends to grant options to certain employees of the Company in order to compensate such persons for certain tax liabilities resulting from the recharacterization of their existing incentive stock options as other than incentive stock options. See "--Executive Compensation--Stock Option Awards." All of such non-qualified options will have an exercise price equal to the initial public offering price and will be 100% vested upon the closing of the offering. Options to purchase an estimated total of 329,987 shares would be granted, including options to purchase approximately 61,388, 57,712 and 57,712 shares to Messrs. Rubenstein, Slayton and Hansen, respectively. The actual number of shares subject to the options is subject to increase or decrease, depending on the actual initial public offering price. All of the options to be granted upon closing of the offering may only be exercised if the individual is an employee, officer or director of the Company at the time of exercise, subject to certain exceptions in the case of death, disability, retirement or a Change of Control. EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION ARRANGEMENTS The Company is party to employment agreements, entered into in connection with the Strategic Merger in August, 1995 (the "Employment Agreements"), with all of its then executive officers and certain other employees, each with a term of three years ending August 11, 1998. Under each Employment Agreement, the employee (the "Employee") receives an annual base salary, in the case of Messrs. Rubenstein, Slayton, Hansen and Schpero, of $257,500, $250,000, $225,000 and $115,000, respectively, subject to increases pursuant to periodic salary reviews consistent with the Company's corporate policies. In addition, each Employee is eligible, in the sole discretion of the Board of Directors, to participate as a limited partner in Conning Investment Partners LP III or in the Company's Venture Carried Interests Allocation Plan and the Company's Bonus Plan, as modified to reflect the Strategic Merger. 50 52 The Employee's employment may be terminated without cause: (i) at any time upon the mutual written agreement of the parties; (ii) immediately upon the Employee's death or total disability; or (iii) upon not less than 30 days' advance written notice by either party. The Employee's employment may be terminated by the Company upon written notice to the Employee at any time for any of the following reasons, each of which shall constitute "termination for cause": (i) any material breach of the agreement by the Employee which is not cured within 20 days after written notice by the Company; (ii) the Employee's fraud, embezzlement, dishonesty or unlawful acts in connection with the business of the Company or its affiliates; (iii) the Employee's conviction for any felony; or (iv) the Employee's substantial and continuing willful failure to perform, or grossly negligent performance of, the duties of the Employee's position. Upon termination of employment, the Company has no obligation to the Employee except for compensation due the Employee under the agreement through the termination date; provided that, in the event of a termination by the Company other than for cause (as defined above) (excluding terminations by agreement or on account of death or disability), the Company is required to pay the Employee an amount equal to 150% of the annual base salary for each year (or portion thereof, pro rated) for the balance of the term of the agreement and provide all insurance, welfare, sick leave and other benefits described in the agreement through the balance of the term. Upon execution of the applicable Employment Agreement, Messrs. Slayton, Hansen and Schpero were paid a signing bonus in cash (the "Signing Bonus"), subject to the forfeiture described below, equal to $195,000, $95,000 and $35,000, respectively. Certain other employees also received signing bonuses. See "Certain Relationships and Related Transactions--The Strategic Merger." Upon termination of the agreement for cause (as defined above) or because such employee has resigned, the employee is required to repay the specified percentage of the Signing Bonus indicated in parentheses, depending upon the year in which such termination occurs: Year 1 (100%), Year 2 (66.6%), and Year 3 (33.3%). Each Employee is prohibited from disclosing, directly or indirectly, to any other firm or person any of the Company's or its affiliates' confidential information, including customer lists, trade secrets, and know-how relating to its or their businesses. Additionally, each Employee has agreed that until August, 1998, regardless of whether the Employee remains employed by the Company and regardless of whether the Employee's termination, if any, is with or without cause, neither the Employee nor any entity controlling, controlled by or under common control with the Employee will (i) engage in, or have any direct or indirect interest in any other person, firm, corporation, or other entity engaged in any business activities competitive with the business activities of the Company and the subsidiaries it controls, or (ii) become an employee, director, adviser, consultant, independent contractor, or agent of any such person, firm, corporation, or other entity, except with the Company's prior written consent. Mr. Slayton's Employment Agreement provides that for the term of the Agreement Mr. Slayton will be employed as President of the Company and have responsibility for (i) marketing for the Company, (ii) managing the Company's Hartford office, (iii) participating in identifying and negotiating acquisitions, and (iv) participating in the development and execution of any initial public offering of the Common Stock. Pursuant to an Amended and Restated Shareholders' Agreement among the Company and its shareholders and optionholders and General American, as amended (the "Shareholders Agreement"), the Company has agreed to place Mr. Slayton on the Board of Directors until the earlier of August 11, 2000 or the consummation of an initial public offering of the Common Stock. See "Certain Relationships and Related Transactions--The Strategic Merger." The Company does not have a defined benefit plan. Mr. Rubenstein, as a result of his 25 years of service with General American, is eligible to continue to participate in the General American Life Insurance Company Pension Plan and Trust, a qualified defined benefit plan, and the General American Augmented Plan, a non-qualified defined benefit plan as well as General American's post-retirement medical plan (collectively, the "GA Retirement Plans"). Retirement benefits under the GA Retirement Plans are based on a 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 General American from December 31, 1995 (the date on which his benefits under the qualified plan were frozen) through his retirement at age 65. Mr. Rubenstein will receive credit for years of service under the GA Retirement Plans while serving as Chief Executive Officer of the Company and has agreed to pay for the cost of the additional retirement benefits, which has been determined to be approximately 10% of Mr. Rubenstein's assumed annual General American salary and bonus in any year. The amount of any bonus paid to Mr. Rubenstein by the Company will be reduced by this cost. Such amount 51 53 was approximately $32,900 in 1996. Based on Mr. Rubenstein's predetermined final average compensation, the annual pension benefit payable to Mr. Rubenstein upon his retirement from the Company at age 65 would be $367,000. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee of the Board of Directors currently are Messrs. Rubenstein and Slayton. See "Certain Relationships and Related Transactions" for a description of certain transactions involving Messrs. Rubenstein and Slayton. Prior to October 1997, the Compensation Committee of the Board was responsible for making all compensation decisions. In October 1997, the Company established an Executive Compensation Committee comprised of Messrs. Fibiger and Shaw. The Executive Compensation Committee is responsible for making all stock-based compensation decisions regarding the Company's executive officers. Neither Mr. Fibiger nor Mr. Shaw is a current or former officer or employee of the Company or any of its affiliates. INDEMNIFICATION As permitted by The General and Business Corporation Law of Missouri (the "GBCL"), the Articles provide (i) that the Company is required to indemnify its directors and officers to the fullest extent permitted by Missouri law, (ii) the Company is permitted to indemnify employees or agents as set forth in the GBCL, (iii) to the fullest extent permitted by the GBCL, the Company is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding (subject to certain exceptions), (iv) the rights conferred in the GBCL are not exclusive, and (v) the Company is authorized to enter into indemnification agreements with its directors, officers, employees and agents without further approval of the shareholders. Directors or officers of the Company who are directors or officers of General American may also be entitled to indemnification under the provisions of General American's Articles of Incorporation, which provide indemnification to them since they serve, at General American's request, as directors or officers of the Company. Such individuals are also covered by General American's director's and officer's liability insurance policy. General American Mutual Holding Company maintains a policy of insurance under which the directors and officers of the Company are insured, subject to the limits of the policy, against certain losses, as defined in the policy, arising from claims made against such directors and officers by reason of any wrongful acts, as defined in the policy, in their respective capacities as directors or officers of the Company. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS THE STRATEGIC MERGER The Company was formed in August 1995 as a holding company for all of the operations of the Company following the Strategic Merger. The parties effected the Strategic Merger in order to combine complementary businesses, each with specialties in the insurance industry, to build a platform from which to leverage additional growth. The Strategic Merger was effected in August 1995 when (i) General American Holding Company contributed to the Company all of the issued and outstanding common stock of GAIMCO (now known as Conning Asset Management Company), a registered investment adviser which provided investment advisory services to General American and its affiliates (including General American Capital Company's family of mutual funds), endowment funds, corporate non-qualified assets, and pension/profit sharing funds of other entities in exchange for 6,710,000 shares of Company Common Stock; and (ii) each of the shareholders of Conning, Inc., other than three non-employee directors and two institutional shareholders (the "Non-Contributing Shareholders"), contributed all of the common stock then owned by such shareholders to the Company and each holder of options to acquire Conning, Inc. common stock canceled all of such options in exchange for $4,505,000 in cash and 3,190,000 shares of the Company's Series A Convertible Preferred Stock having a value at the date of issuance of $17,002,700, with Messrs. Slayton, Hansen and Schpero receiving cash payments of $898,708, $438,661, and $40,164, respectively, and 636,376, 310,616, and 28,441 shares of Series A Convertible Preferred Stock, respectively; and the Other Significant Officers, as a group, and officers of the Company who are not Executive Officers or Other Significant Officers (the "Other Officers"), as a group, receiving cash payments of $2,736,122 and $391,345, respectively, and 1,937,455 and 277,112 shares of Series A Convertible Preferred Stock, respectively. By agreement among the former shareholders of Conning, Inc., the shares 52 54 of Conning, Inc. owned by the Non-Contributing Shareholders were acquired in exchange for cash payments in the aggregate of $7,495,000. See Note 1 of Notes to the Company's Consolidated Financial Statements. In connection with the Strategic Merger, the Company, General American and its other shareholders and option holders entered into the Shareholders Agreement, which restricts the transfer of shares of the Company by any shareholder (other than General American), except pursuant to a right of first refusal in favor of General American with respect to shares acquired in connection with the Strategic Merger or pursuant to a right of first refusal in favor of the Company in the case of shares acquired subsequent to the Strategic Merger (and with respect to all shares, in favor of the other shareholders if General American or the Company does not purchase such shares). The Shareholders Agreement further provides for the rights of shareholders to require General American, or in some cases the Company, to purchase their shares in certain situations including death, disability and termination of employment with the Company and, in certain other situations, provides General American, or in some cases the Company, with the right to purchase such shares. The Shareholders Agreement also provides that, until August 1998, (i) the Company will maintain the general approach and methodology regarding cash compensation and private equity carried interest allocations, (ii) the Company will have a Board of Directors comprised of no more than seven members, at least two of whom will be members of management (including Mr. Slayton or his successor), (iii) the Company will have a Compensation Committee of the Board of which the President will be a member, (iv) Mr. Slayton will serve as President of the Company and Conning Asset Management Company and as President and CEO of Conning, Inc. and Conning & Company and Mr. Rubenstein will serve as Chairman and CEO of the Company and Conning Asset Management Company, and (v) Mr. Slayton will serve as a senior member of management of the Company with certain specified responsibilities. Upon consummation of this offering, the Shareholders Agreement will terminate, except for certain provisions requiring the Company to maintain certain compensation approaches as described in clause (i) of the preceding sentence. The Series A Convertible Preferred Stock pays a quarterly dividend equal to the 90 day United States Treasury Bill rate as in effect from time to time. Pursuant to the terms of the Series A Convertible Preferred Stock, upon the consummation of the sale of the Common Stock offered hereby, the Series A Convertible Preferred Stock will convert automatically on a one-for-one basis into shares of Common Stock. Pursuant to the Shareholders Agreement, in June 1997 General American exercised a right in connection with the amendment and restatement of such agreement (the "call right"), to purchase 1,594,995 shares of Series A Convertible Preferred Stock, representing approximately 50% of the outstanding Series A Convertible Preferred Stock, for the negotiated per share price of $11.25, with Messrs. Slayton, Hansen and Schpero receiving cash payments of $3,579,615, $1,747,215, and $159,975, respectively; and Other Significant Officers, as a group, and Other Officers, as a group, receiving cash payments of $10,898,156 and $1,558,733, respectively. Prior to the amendment and restatement of the Shareholders Agreement in June, 1997, General American had the right to purchase up to 50% of the Series A Convertible Preferred Stock only upon the occurrence of an initial public offering of the Company's Common Stock. See "Principal Shareholders." Each Employee who entered into an employment agreement in connection with the Strategic Merger received a signing bonus that is subject to forfeiture in the event that such Employee's employment is terminated under certain circumstances during the first three years after the Strategic Merger. As of the date hereof, of the $195,000, $95,000 and $35,000 of signing bonus paid to Messrs. Slayton, Hansen and Schpero, respectively, $65,000, $31,667 and $11,667 are subject to forfeiture; of the $465,000 and $80,000 of signing bonuses paid to the Other Significant Officers and Other Officers, respectively, $155,000 and $26,667 are subject to forfeiture, which forfeiture obligations expire on August 11, 1998. See "Management--Employment Agreements and Other Compensation Arrangements." In connection with the Strategic Merger certain employees of the Company entered into option cancellation agreements and received payments from the Company, which, based upon an understanding among the selling shareholders, are subject to forfeiture in the event that any such employee's employment is terminated under certain circumstances during the first three years after the Strategic Merger. As of the date hereof, of the $1,176,196, $804,491 and $55,237 of the payments paid in connection with the option cancellation agreements to Messrs. Slayton, Hansen and Schpero, respectively, $265,961, $129,829 and $11,887 are subject to forfeiture; of the $4,353,082 and $605,119 of payments to the Other Significant Officers and Other Officers, respectively, $809,803 and $115,853 are subject to forfeiture, which forfeiture obligations expire on August 11, 1998. In connection with the Strategic Merger, the parties agreed to indemnify each other for breaches of representations and warranties, certain tax matters and certain litigation matters. Most of these indemnification obligations 53 55 expired by their own terms on February 11, 1997. The indemnification obligations of the former shareholders and optionholders of Conning, Inc. that survived beyond that date have been released, which benefited all of the former shareholders and optionholders of Conning, Inc., including Messrs. Slayton, Hansen and Schpero. General American's and the Company's obligations to indemnify the former shareholders and optionholders of Conning, Inc. remains in force with respect to certain potential tax liabilities of the Company and certain potential tax liabilities of the former shareholders and optionholders. Also in connection with the Strategic Merger, the Company granted certain employees of the Company options ("1995 Options") to purchase in the aggregate 1,000,000 shares of the Company's Class B Non-Voting Common Stock ("Non-Voting Common Stock") at a price of $5.33 per share, with Messrs. Rubenstein, Slayton, Hansen, and Schpero receiving options to purchase 120,000, 120,000, 120,000, and 10,000 shares, respectively; with the Other Significant Officers and Other Officers receiving options to purchase 460,000 and 170,000 shares, respectively, which includes Messrs. Koester and McLellan and Ms. Tanaka each receiving options to purchase 70,000 shares. These options vest annually in equal portions over the five years between August 11, 1995 and August 11, 2000, but upon the consummation of this offering all of these options will become fully vested. Also upon the consummation of this offering, the Company's Non-Voting Common Stock will convert automatically on a one-for-one basis into shares of Common Stock. Thus, the 1995 Options will become exercisable for shares of Common Stock at a price of $5.33 per share. All 1995 Options were issued as Incentive Stock Options. In connection with the Strategic Merger, General American loaned the Company $13,000,000 on an unsecured basis bearing interest at the rate of 7% per annum, payable as follows: (a) commencing January 1, 1996, semi-annual interest payments until September 1, 2002, (b) on September 1, 2003 and September 1, 2004, principal payments of $4,333,333, together with all interest accrued through such dates, and (c) on September 1, 2005, the final payment of principal in the amount of $4,333,334, together with all interest accrued through such date. As of December 31, 1996, the outstanding principal balance on this loan was $2,000,000 and this remaining principal was paid in February 1997. Also in connection with the Strategic Merger, General American made a $2,500,000 short term loan to the Company on an unsecured basis bearing interest at 6.75% per annum. This loan was due August 31, 1996 and was fully paid by June, 1996. The Company intends to declare prior to the closing of this offering, and to pay, dividends on the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock approximating the amounts that would have been payable on the next dividend payment date, pro rated through the date of closing of this offering, in the aggregate amount of approximately $213,000, of which General American will receive approximately $96,000 and no director or executive officer of the Company will receive in excess of $25,000. RECENT EMPLOYEE OFFERINGS Commencing in November 1996, in conjunction with an employee incentive program, the Company has sold shares of its Series B Convertible Preferred Stock to certain employees of the Company at a price of $5.33 per share. To date, 475,000 shares of Series B Convertible Preferred Stock have been sold in connection with such program, with Messrs. Rubenstein, Liddy and Schpero acquiring 40,000, 50,000 and 20,000 shares, respectively; with Other Significant Officers and Other Officers acquiring 175,000 and 175,000 shares, respectively (which includes Messrs. Koester and McLellan and Ms. Tanaka each acquiring 20,000 shares). The Series B Convertible Preferred Stock is convertible upon demand on a one-for-one basis into shares of Non-Voting Common Stock at a conversion price of $1.67 per share, subject to anti-dilution adjustments, and pays a quarterly dividend of 5% per annum. As noted above, upon the consummation of this offering, the Company's Non-Voting Common Stock will convert automatically on a one-for-one basis into shares of Common Stock. Thus, shares of Series B Convertible Preferred Stock effectively will become convertible into shares of Common Stock upon payment of the conversion price of $1.67 per share (i.e., for a total purchase price of $7.00 per share). Pursuant to the Shareholders Agreement, as amended and restated, subject to the consummation of this offering, the Company has the right to redeem the Series B Convertible Preferred Stock for the price of $5.33 per share plus accrued dividends. In connection with the Company's private offering of Series B Convertible Preferred Stock to certain employees and directors of the Company in 1996 and January 1997, General American holds unsecured recourse demand notes from certain shareholders totaling $2,265,250, including $213,200 due from Mr. Rubenstein and $106,600 due from Mr. Schpero, respectively, and $932,750 from the Other Significant Officers, as a group including $106,600 each from 54 56 Mr. Koester, Mr. McLellan and Ms. Tanaka, and $932,750 from the Other Officers, as a group, 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 beginning January, 1998 in the amount of 25% of the gross bonus earned by the obligor in the immediately preceding year. General American has issued or will issue loans to certain shareholders to finance the conversion of Series B Convertible Preferred Stock on terms similar to those described above and in the aggregate amount of $642,950, including $66,800 for Mr. Rubenstein, $33,400 for Mr. Schpero, $292,250 for the Other Significant Officers (including $33,400 for each of Mr. Koester, Mr. McLellan and Ms. Tanaka) and $292,250 for the Other Officers. Also commencing in November 1996, the Company has granted certain of its employees options ("1996 Options") to purchase in the aggregate 237,500 shares of the Company's Non-Voting Common Stock for the price of $7.00 per share. See "Management--Executive Compensation." The Company granted options to Messrs. Rubenstein, Liddy and Schpero to purchase 20,000, 25,000 and 10,000 shares, respectively; options to purchase 87,500 shares to the Other Significant Officers, as a group (including 10,000 shares each to Mr. McLellan, Mr. Koester and Ms. Tanaka); and options to purchase 87,500 shares to the Other Officers, as a group. These options vest annually in equal portions over the five-year period commencing on the date of grant. The consummation of the sale of Common Stock offered hereby will not affect the vesting of the 1996 Options. As noted above, upon the consummation of this offering, the Company's Non-Voting Common Stock will convert automatically on a one-for-one basis into shares of Common Stock. Thus, the 1996 Options effectively will become exercisable for shares of Common Stock at a price of $7.00 per share. The Underwriters have reserved approximately 125,000 shares of the Common Stock for sale, at the initial public offering price, to directors, officers and employees of the Company and its affiliates, directors of General American and family members of the foregoing, in order to permit such persons to purchase such shares of Common Stock in the offering. See "Underwriting." TRANSACTIONS WITH GENERAL AMERICAN General American, an indirect wholly owned subsidiary of General American Mutual Holding Company, currently is the principal shareholder of the Company. After completion of the offering, General American will beneficially own approximately 65% of the Company's outstanding Common Stock (approximately 63% if the Underwriters' over-allotment option is exercised in full). General American is a Missouri state life insurance company which began operations as a stock company in 1933, was converted to a mutual company in a process that ended in 1946 and became a stock company in 1997 in connection with the formation of its mutual holding company parent. General American is principally engaged in issuing individual and group life and health insurance policies and annuity contracts. The principal offices of General American are located at 700 Market Street, St. Louis, Missouri 63101. See "Risk Factors--Dependence on Principal Shareholder," "--Potential Conflicts of Interest," "--Termination Provisions of Investment Advisory Agreements," "--Consequences of a Change of Control on Investment Advisory Agreements; Limitations on Voting Rights" and "--Certain Other Anti-Takeover Provisions," "Management," and "Principal Shareholders." The Company, through its subsidiary Conning Asset Management Company, acts as the investment adviser for the general and separate accounts of General American and certain of its affiliates, including the General American Capital Company funds, COVA 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. The Company 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 upon 30 to 90 days' notice without penalty. The Company is generally compensated on the basis of fees calculated at a percentage of the market value of the assets under management. The fees are billed and are payable quarterly in arrears. Investment management fees from these affiliated entities for the years ended December 31, 1995 and 1996 amounted to $12,573,489 and $14,300,367, respectively. Effective January 1, 1995, General American and Conning Asset Management Company entered into an investment advisory agreement pursuant to which the Company would manage all of the general account assets of 55 57 General American. As of December 31, 1994, such assets totaled approximately $5.2 billion. While investment management contracts were not in place during 1994 for General American's general account and COVA, investment management fees earned from the other affiliated entities for the year ended December 31, 1994 totaled $2,618,635. See Note 11 of Notes to the Company's Consolidated Financial Statements. After the 180-day period during which General American has agreed not to offer for sale, sell, or otherwise dispose of, directly or indirectly, any shares of Common Stock without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation (see "Underwriting"), it is possible that General American will, from time to time depending on future conditions, further reduce or increase its beneficial ownership of the Common Stock. Additionally, the Company has granted General American certain rights with respect to the registration of shares of Common Stock that will be owned by General American upon completion of the offering. See "Shares Eligible for Future Sale." Pursuant to an Administrative Services Agreement, General American provides the Company with certain management and administrative services at the Company's request. Such services include legal, employee benefit, payroll, personnel, facilities and information services. 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 to General American $871,221, $12,308,103 and $14,611,221 for administrative services rendered for the years ended December 31, 1994, 1995 and 1996, respectively, of which a substantial portion reflects reimbursement of salaries and employee-related costs. Until January 1, 1997, certain employees of the historical operations of GAIMCO who were employees of General American and costs associated with such employees were allocated and charged to the Company pursuant to such Agreement. The Administrative Services Agreement is terminable by General American on 180 days' written notice and by the Company on 90 days' written notice. General American, however, has agreed not to terminate the Agreement prior to July 19, 1998. See Note 11 of Notes to the Company's Consolidated Financial Statements. Effective July 31, 1996, Conning Asset Management Company entered into an agreement with General American for the lease of approximately 25,000 square feet of office space located at 700 Market Street, St. Louis, Missouri. Such lease has a five-year term, is terminable by the Company upon 30 days' notice and calls for annual lease payments of approximately $600,000. The Company anticipates leasing up to an additional 10,000 square feet at this location during 1997 on substantially the same terms and conditions. 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 five offices are located in California, Florida, Georgia, Illinois and Texas. The sublease terminates with respect to a particular location immediately prior to termination of the applicable lease. The underlying leases have terms of varying lengths ranging from month-to-month to a fixed term ending in 2000. Either party may terminate the sublease with respect to one or more locations on 90 days' written notice. The Company's total annual base rent for 1997 under the sublease totals approximately $124,000. The terms of all of the foregoing leases and the sublease (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 of approximately $300,000, $624,000 and $613,000 in 1994, 1995 and 1996, respectively. 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. See Note 11 of Notes to the Company's Consolidated Financial Statements. The Company and General American Mutual Holding Company have entered into 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 is a member of such group (i.e., from June 12, 1997 to the closing of this offering) will be allocated among the members of the group in proportion to their separately calculated tax liabilities. The Tax Agreement also provides that any savings resulting from the tax benefits of a particular member will be paid to that member, rather than accruing to the benefit of the other members, and requires, among other things, that certain payments be made between the Company and General American Mutual Holding Company in the event there is a change in the pre-offering tax liabilities of the Company. In addition, under the Tax Agreement, 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. From August 11, 1995 (the date of the Strategic Merger) to June 12, 1997, the Company was not a member of the General American Tax Group but was a party to a Tax Sharing Agreement with General American providing for indemnification rights and tax sharing liabilities in a manner similar to the current Tax Agreement for the period during which Conning 56 58 Asset Management Company was a member of such group. The tax liabilities of the members of the General American Tax Group prior to the Strategic Merger, which included Conning Asset Management Company, are allocated under a Tax Allocation Agreement dated as of October 30, 1992, in a manner similar to the Tax Agreement. Mr. Liddy is also an executive officer and director of General American and certain of its affiliates. His son has been employed by the Company since 1995. Mr. Rubenstein is also a director of certain of General American's affiliates. See "Management--Directors, Executive Officers and Certain Significant Officers." The Company's mortgage origination activities have been historically operated pursuant to informal agreements through General American. Since January 1, 1995, the Company has generally received a fee associated with loan originations of approximately 1% of the loan balance. The Company also receives ongoing servicing fees and management fees with respect to mortgage loans in portfolios managed by the Company. Such loans have been originated primarily for General American and its affiliates. Total fees received from General American and its affiliates for loan originations, servicing and management fees during 1994, 1995 and 1996 were approximately $0, $7,424,000, and $11,830,000, respectively. See "Business--Asset Management--Mortgage Origination and Service of Real Estate" for information regarding the amounts of mortgage loan originations. The existing and proposed agreements between the Company, on the one hand, and General American and its affiliates, on the other hand, may be modified or renegotiated in the future and additional transactions or agreements may be entered into between the Company and General American and its affiliates. See "Risk Factors--Potential Conflicts of Interest." See "--Recent Employee Offerings" for a description of the Company's directed share program. PARTICIPATION IN PRIVATE EQUITY FUNDS The Company, directly or indirectly through intermediary partnerships, is the general partner of the following private equity funds with a 1% general partner capital interest: 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 September 30, 1997, the Company's commitment to fund future required capital contributions was approximately $2.1 million. 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. Collectively, Fund I, Fund II, Fund III, Fund IV and Fund V are referred to as the "Funds". Each Fund has a term of eight to ten years, subject to certain extensions for liquidation purposes. Fund I commenced December, 1985, Fund II commenced December, 1988, Fund III commenced December, 1993, Fund IV commenced December, 1995 and Fund V commenced August, 1997. The Company and its predecessors received investment management fees from the Funds, in the aggregate, of approximately $3.2 million, $3.2 million, $4.0 million and $3.3 million for 1994, 1995, 1996 and the first nine months of 1997, respectively. 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 $4,040,000 for purposes of capitalizing the general partner. The amount is payable only in the event of insolvency on the part of the Conning Connecticut Investors, L.L.C. See Note 15 of Notes to the Company's Consolidated Financial Statements. 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 in accordance with the applicable partnership or limited liability company agreement. Certain officers and directors of the Company and its subsidiaries receive participation percentages annually over a five-year period, in a portion of the Company's carried interest, which participations are subject to a climbing vesting schedule varying 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 September 30, 1997, the percentage interests in the general partner of Fund V held by Messrs. Rubenstein, Slayton, Hansen and Schpero were 0.55%, 1.35%, 0.375% and 0.25%, respectively; and ranged from 0.0% to 1.65% for each of the Other Significant Officers; and ranged from 0.0% to 1.1% for each of the Other Officers; the percentage interests in the general partner of Fund IV held by Messrs. Rubenstein, Slayton, Hansen and Schpero were 0.50%, 2.80%, 1.40% and 0.45%, respectively; the percentage interests held by Messrs. Koester and McLellan and Ms. Tanaka were 0.15% each; and ranged from 0.15% to 3.40% for each of the Other Significant Officers; and ranged from 0.10% to 2.06% for each of the Other Officers; the percentage interests in the general partner of Fund III held by Messrs. 57 59 Rubenstein, Slayton, Hansen and Schpero were 0.50%, 6.07%, 3.19% and 0.57%, respectively, the percentage interests held by Messrs. Koester and McLellan and Ms. Tanaka were 0.15% each, and ranged from 0.15% to 6.86% for each of the Other Significant Officers and ranged from 0.10% to 4.17% for each of the Other Officers; and the percentage interests in the general partners of Funds I and II held by Messrs. Slayton, Hansen and Schpero were 8.54%, 5.86% and 0.84%, respectively, and the percentage interests held by each of the Other Significant Officers ranged from 1.47% to 6.75%; and the percentage interests held by each of the Other Officers ranged from 0.13% to 2.80%. Participation percentages are complete for Funds I and II; Fund III has approximately one year remaining for completion of the determination of participation percentages; Fund IV has approximately three years remaining for completion of the determination of participation percentages; and Fund V has approximately four years remaining for completion of the determination of participation percentages. With the exception of Fund I, none of the Funds has generated a carried interest as of September 30, 1997 and the value, if any, of such participations cannot be readily determined. Distributions to date of the carried interest from Fund I were made during 1996 and 1997 to Messrs. Slayton, Hansen and Schpero in the amounts of $678,669, $466,025 and $67,092, respectively, and ranged from $117,252 to $536,496 for each of the Other Significant Officers and ranged from $3,975 to $222,659 for each of the Other Officers. General American and its affiliates other than the Company have committed or invested a total of $30.0 million in four of the Funds. A subsidiary of Transamerica Occidental Life Insurance Company ("Transamerica"), of which Mr. Fibiger was Chairman of the Board, has invested a total of $4.0 million in two 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. PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of November 20, 1997, giving effect to the Capital Stock Conversions and the vesting of certain options upon the closing of the offering and as adjusted to reflect the sale of shares offered hereby, for (i) each person known to the Company to own beneficially 5% or more of the outstanding shares of Common Stock, (ii) the Company's directors and named executive officers, and (iii) all the Company's directors and executive officers as a group. Except as otherwise noted in the footnotes to this table, the named beneficial owner has sole voting and investment power. As of November 20, 1997, there were 43 shareholders of record.
PERCENTAGE OF SHARES BENEFICIALLY NUMBER OF OWNED SHARES -------------------- BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING ------------------------ --------- -------- -------- General American Life Insurance Company................. 8,304,995 80.0% 64.5% Leonard M. Rubenstein................................... 225,388 2.1 1.7 Maurice W. Slayton...................................... 495,900 4.7 3.8 Mark E. Hansen.......................................... 333,020 3.2 2.6 Fred M. Schpero......................................... 46,221 John A. Fibiger............................................. -- -- -- Richard A. Liddy........................................ 55,000 John C. Shaw................................................ -- -- -- All Directors and Executive Officers as a group (7 persons)........................................... 1,155,529 10.6 8.6 Other Significant Officers as a group (19 persons)...... 1,764,682 16.0 13.1 Other Officers as a group (36 persons)................. 510,781 4.8 3.9 - -------- Less than 1% Except for shares owned by General American, which represent 6,710,000 shares of Common Stock and 1,594,995 shares of Series A Convertible Preferred Stock, all shares owned prior to the offering represent shares of Series A Convertible Preferred Stock, shares of Series B Convertible Preferred Stock, shares of Non-Voting Common Stock and shares of Non-Voting Common Stock subject to outstanding stock options that are 58 60 exercisable within 60 days, including the vesting of certain options upon the closing of the offering. All shares, other than shares of Common Stock, are currently non-voting. The Series A Convertible Preferred Stock and Non-Voting Common Stock will automatically convert into an equal number of shares of Common Stock upon completion of the offering and the holders of Series B Convertible Preferred Stock have agreed to convert such shares into an equal number of shares of Common Stock for additional consideration of $1.67 per share, upon completion of the offering. See "Description of Capital Stock." Assumes no exercise of the Underwriters' over-allotment option. Shares owned before and after the offering include the following options to purchase Common Stock: (i) outstanding options which are currently exercisable or are exercisable within 60 days of the date hereof; (ii) outstanding options which will become exercisable upon the closing of this offering; and (iii) options the Company intends to grant upon the closing of this offering which will be immediately exercisable. The number of immediately exercisable options to be granted at closing has been estimated; the number of options actually granted will depend upon the actual initial public offering price. See "Management--Employee Stock Plans." Represents shares owned by General American Holding Company, a wholly-owned subsidiary of General American. The address of General American is 700 Market Street, St. Louis, Missouri 63101. General American is a wholly-owned subsidiary of GenAmerica Corporation, which is a wholly-owned subsidiary of General American Mutual Holding Company. Includes 52,000 shares which may be acquired pursuant to currently exercisable options, 72,000 shares which may be acquired pursuant to options that will become exercisable upon the closing of the offering and an estimated 61,388 shares subject to exercisable options that will be granted upon the closing of the offering. Includes 48,000 shares which may be acquired pursuant to currently exercisable options, 72,000 shares which may be acquired pursuant to options that will become exercisable upon the closing of the offering and an estimated 57,712 shares subject to exercisable options that will be granted upon the closing of the offering. Includes 6,000 shares which may be acquired pursuant to currently exercisable options and 6,000 shares which may be acquired pursuant to options that will become exercisable upon the closing of the offering. Includes 5,000 shares which may be acquired pursuant to currently exercisable options. Mr. Liddy, a director of the Company, is also Chairman and Chief Executive Officer of General American. Mr. Liddy disclaims beneficial ownership of the shares owned by General American. Includes 159,000 shares which may be acquired pursuant to currently exercisable options, 222,000 shares which may be acquired pursuant to options that will become exercisable upon the closing of the offering and an estimated 176,812 shares subject to exercisable options that will be granted upon the closing of the offering. Consists of the 19 persons listed under the caption "Management--Directors, Executive Officers and Certain Other Significant Officers--Certain Other Significant Officers." Includes 201,500 shares which may be acquired pursuant to currently exercisable options, 276,000 shares which may be acquired pursuant to options that will become exercisable upon the closing of the offering and an estimated 143,452 shares subject to exercisable options that will be granted upon the closing of the offering. Consists of 36 officers who are neither Executive Officers nor Other Significant Officers. Includes 85,500 shares which may be acquired pursuant to currently exercisable options, 102,000 shares which may be acquired pursuant to options that will become exercisable upon the closing of the offering and an estimated 9,723 shares subject to exercisable options that will be granted upon the closing of the offering.
59 61 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect market prices prevailing from time to time and the ability of the Company to raise equity capital in the future. RESTRICTION ON SALES Upon completion of this offering and assuming no exercise of outstanding options, the Company will have outstanding 12,875,000 shares of Common Stock (13,250,000 shares if the Underwriters' over allotment option is exercised in full). Of these shares, the 2,500,000 shares sold in the offering will be immediately eligible for resale in the public market without restriction under the Securities Act, except for any shares purchased by an "Affiliate" (as that term is defined under the Securities Act) of the Company, which shares will be subject to the resale limitations of Rule 144 under the Securities Act. The remaining 10,375,000 shares outstanding following this offering (the "Previously Issued Shares") were issued by the Company in private transactions not involving a public offering and are thus treated as "restricted securities" within the meaning of Rule 144 under the Securities Act. Subject to the Lock-up Agreements described below, the Previously Issued Shares may be sold in the public market only if registered or pursuant to an exemption from registration such as those afforded by Rules 144, 144A, 701 and Regulation S under the Securities Act of 1933. The holders of the Previously Issued Shares of Common Stock have entered into agreements with the Company ("Lock-up Agreements") pursuant to which they have agreed that, during the 180-day period after the date of this prospectus, they will not, except with the prior consent of Donaldson, Lufkin & Jenrette Securities Corporation or in certain limited circumstances, offer, sell, contract to sell or grant an option to purchase any of such Previously Issued Shares. In addition, the Company has agreed that during such period it will not, without the prior consent of Donaldson, Lufkin & Jenrette Securities Corporation or in certain limited circumstances, offer, sell, contract to sell or grant an option to purchase any shares of Common Stock. See "Underwriting." The Company believes that, following the lock-up period, up to 1,472,288 shares held by existing shareholders could be eligible for sale without restriction and up to 8,902,712 "affiliate" shares held by executive officers, directors, and other affiliates could be eligible for sale, subject to certain volume and other limitations of Rule 144 as described below; all such shares, however, may be subject to additional holding periods under Rule 144 based on, among other things, particular interpretative considerations, facts and circumstances relating to such shareholders. Outstanding options to purchase 1,000,000 shares of Common Stock will be exercisable upon completion of the offering. Upon the closing of this offering, certain incentive stock options will be recharacterized as other than incentive stock options; the Company intends to compensate for such recharacterization by granting new non-qualified stock options to purchase an estimated aggregate 329,987 shares to holders of such recharacterized options upon the closing of this offering, which options are exercisable immediately upon the closing of this offering. See "Management--Employee Stock Plans." In addition, upon the closing of this offering, the Company intends to grant options to purchase an additional 965,000 shares of Common Stock, which options will become exercisable over a five-year vesting period commencing on the first anniversary of the closing of this offering. Upon the first anniversary of the date hereof, General American and the holders of shares issuable upon the Capital Stock Conversions have the right to require the Company in certain circumstances to register their shares of Common Stock for sale under the Securities Act. See "--Registration Rights" below and "Certain Relationships and Related Transactions." In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, an Affiliate of the Company or other person (or persons whose shares are aggregated) who has beneficially owned Previously Issued Shares for at least one year will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of the Company's Common Stock (approximately 132,500 shares immediately after the offering, if the Underwriters' over-allotment option is exercised in full) or (ii) the average weekly trading volume of the Company's Common Stock on the Nasdaq National Market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an Affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned Restricted Shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. 60 62 Previously Issued Shares may also be resold (1) to a person whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A under the Securities Act purchasing for its own account or for the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A and (2) in an off-shore transaction complying with Rules 903 or 904 of Regulation S under the Securities Act. An employee of the Company who purchased shares or was awarded options to purchase shares pursuant to a written compensatory plan or contract meeting the requirements of Rule 701 under the Securities Act is entitled to rely on the resale provisions of Rule 701 under the Securities Act which permits Affiliates and non-Affiliates to sell their Rule 701 shares without having to comply with the holding period restrictions of Rule 144, in each case commencing 90 days after the date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares without complying with the public information, volume and notice provisions of Rule 144. Following the effectiveness of the registration statement covering the shares of Common Stock offered hereby, the Company will register under the Securities Act the shares of Common Stock reserved for issuance under the Company's employee stock plans covering 3,437,500 shares. The Company expects that these registrations will automatically become effective upon filing. Accordingly, shares registered under such registration statements and acquired pursuant to such Plans will be available for sale in the open market upon the expiration of the public sale restrictions described below (see "Underwriting"), subject to Rule 144 volume limitations applicable to Affiliates. 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 that will be owned by General American upon completion of the offering (the "Registrable Securities"). Subject to certain limitations, General American and permitted assignees have the right at any time after the first anniversary of the date hereof to require the Company to register the sale of such shares under the Securities Act (a "demand registration"). The number of demand registrations is limited to two. A demand registration must be requested by holders of Registrable Securities representing at least 10% of the outstanding Common Stock and must include at least 10% of such Registrable Securities. The Company is not required to effect more than one demand registration in any twelve-month period. The holders of Registrable Securities are also entitled to 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. A piggy-back registration is counted as one of the demand registrations if the holder sold at least 80% of the Registrable Securities it requested be registered. In addition to the demand and piggy-back registration rights described above after the first anniversary of the date hereof, 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 when such form is available to the Company. A demand registration on Form S-3 will count as 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. The registration rights expire for any Holder owning Registrable Securities representing less than 1% of the outstanding Common Stock on the date such Holder is able to dispose of all of its shares in any 90-day period pursuant to Rule 144, and, in any event, on the date such Holder's Registrable Securities can be sold pursuant to Rule 144(k) under the Securities Act. The registration rights are not assignable by General American other than to General American Holding Company, a direct or indirect subsidiary of General American or General American Holding Company, a parent of General American or General American Holding Company, or a direct or indirect subsidiary of such parent entity. The Company has granted the holders of the 2,070,005 shares of Common Stock issued upon the Capital Stock Conversions the right to require the Company to file a registration statement on Form S-3 on or about the first anniversary of the date hereof covering the resale of such shares, provided that such Form S-3 is available to the Company; provided further, that (i) the Company would be under no obligation to maintain the effectiveness of such registration statement for more than twelve months and (ii) the holders of such stock enter into a registration rights agreement at that time containing such limitations and conditions as the Company deems appropriate. 61 63 DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK Under the Company's Restated Articles of Incorporation (previously defined as the "Articles"), the Company's authorized capital stock consists of 50,000,000 shares of Common Stock, par value $.01 per share, 20,000,000 shares of Non-Voting Common Stock, par value $.01 per share and 23,790,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The Company will have outstanding, immediately prior to the issuance and sale of shares of Common Stock pursuant to the offering 10,375,000 shares of Common Stock, after giving effect to the Capital Stock Conversions. Upon the closing of this offering, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding stock options, the Company will have outstanding 12,875,000 shares of Common Stock and no shares of Preferred Stock. Upon the closing of this offering, the Company intends to file an amendment to its Articles to eliminate the Non-Voting Common Stock and to reduce the number of authorized shares of Preferred Stock to 20,000,000. COMMON STOCK All of the outstanding shares of Common Stock are, and the shares offered hereby will be, fully paid and nonassessable. Each holder of Common Stock is entitled to one vote for each share held of record on all matters presented to a vote of shareholders, including the election of directors, except that, as provided in the Articles, no person or group other than General American, certain affiliates of General American, certain savings, profit sharing, stock bonus and employee stock ownership plans established by the Company or certain subsidiaries of the Company and other persons approved in advance by the Board of Directors of the Company, shall have the right to vote more than 20% of the combined voting power of the Company's Voting Stock (as defined in the Articles). See "Certain Charter and Bylaw Provisions--Limitations on Voting of Shares in Certain Circumstances" for a more detailed description of this 20% voting limitation. Accordingly, assuming such 20% voting restriction does not apply, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Subject to the prior rights of the holders of any shares of Preferred Stock which subsequently may be issued and outstanding, the holders of Common Stock are entitled to receive dividends as and when declared by the Board of Directors out of funds legally available therefor, and, in the event of liquidation, dissolution, or winding up of the Company, to share ratably in all assets remaining after payment of liabilities. Holders of Common Stock do not have cumulative voting rights in the election of directors or preemptive rights to purchase or subscribe for any stock or other securities and there are no conversion rights or redemption or sinking fund provisions with respect to such stock. Additional shares of authorized Common Stock may be issued without shareholder approval. As of September 30, 1997, there were outstanding 110,000 shares of Non-Voting Common Stock. Such shares of Non-Voting Common Stock have no voting or dividend rights. Upon the closing of this offering, all issued and outstanding shares of Non-Voting Common Stock will be converted into an aggregate of 110,000 shares of Common Stock. PREFERRED STOCK As of September 30, 1997, there were outstanding 3,190,000 shares of Series A Convertible Preferred Stock and 365,000 shares of Series B Convertible Preferred Stock. Upon or prior to the closing of this offering, all issued and outstanding shares of Series A Convertible Preferred Stock will be converted into an aggregate of 3,190,000 shares of Common Stock, and all outstanding shares of Series B Convertible Preferred Stock will be converted into an aggregate of 365,000 shares of Common Stock for additional consideration to the Company of $1.67 per share. Upon the closing of this offering, the Company intends to file an amendment to its Articles to eliminate the series designations of the Series A and B Convertible Preferred Stock. Following the closing of this offering, the Board will have the authority to issue up to an aggregate of 20,000,000 shares of Preferred Stock from time to time in one or more series without shareholder approval. The Board of Directors has the authority to prescribe for each series of Preferred Stock it establishes the number of shares in that series, the dividend rate, and the voting rights, conversion privileges, redemption and liquidation rights, if any, and any other rights, preferences and limitations of the particular series. Depending upon the rights of such Preferred Stock, the issuance of Preferred Stock could have an adverse effect on the holders of Common Stock by delaying or preventing a change of control of the Company, making removal of the present management of the Company more 62 64 difficult, or resulting in restrictions upon the payment of dividends and other distributions to the holders of Common Stock. The Company has no present plans to issue any Preferred Stock. CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK Upon the completion of this offering, there will be 34,592,513 shares of Common Stock and 20,000,000 shares of Preferred Stock available for future issuance without shareholder approval, taking into consideration the 1,237,500 shares of Common Stock reserved for issuance upon exercise of currently outstanding options and an estimated 1,294,987 shares of Common Stock reserved for issuance upon exercise of options to be granted upon the closing of this offering. These additional shares may be issued for a variety of proper corporate purposes, including raising additional capital, corporate acquisitions, and implementing employee benefit plans. Except as contemplated by the Company's existing and other possible employee benefit or stock purchase plans, the Company does not currently have any plans to issue additional shares of Common Stock or Preferred Stock. See "Management--Employee Stock Plans." One of the effects of the existence of unissued and unreserved Common Stock and Preferred Stock may be to enable the Board of Directors to issue shares to persons friendly to current management, which could render more difficult or discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest, or otherwise, and thereby protect the continuity of the Company's management and possibly deprive the shareholders of opportunities to sell their shares of Common Stock at prices higher than the prevailing market prices. Such additional shares also could be used to dilute the stock ownership of persons seeking to obtain control of the Company. See also "Certain Charter and Bylaw Provisions." TRANSFER AGENT The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C., Overpeck, New Jersey. CERTAIN CHARTER AND BYLAW PROVISIONS The Company's Articles and Bylaws, among other things, (i) contain certain limitations on the voting power of certain shareholders, (ii) provide for a classified Board of Directors, (iii) limit the right of shareholders to remove directors or change the size of the Board of Directors, to fill vacancies on the Board of Directors, to act by written consent and to call a special meeting of shareholders, and (iv) require a higher percentage of shareholders than would otherwise be required to amend, alter, change, or repeal the provisions of the Articles and Bylaws discussed in this section, as well as those described above under "Management--Indemnification." The Articles also provide that the Bylaws may be amended only by the majority vote of the Board of Directors; thus shareholders will not be able to amend the Bylaws without first amending the Articles. These provisions, which are summarized below, may have the effect of discouraging certain types of transactions that involve an actual or threatened change of control of the Company. Reference is made to the full text of the Articles and Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus is a part. The following summary is qualified in its entirety by such reference. LIMITATIONS ON VOTING OF SHARES IN CERTAIN CIRCUMSTANCES In order to limit the likelihood under certain circumstances of a deemed assignment, under the Advisers Act or the Investment Company Act, of the investment advisory contracts that the Company's subsidiaries have with their clients (see "Regulation"), the Articles include provisions limiting the voting power of shares of Common Stock in certain circumstances. The Investment Company Act and the Advisers Act define the term "assignment" to include any "direct or indirect transfer" of "a controlling block of the voting securities" of the issuer's outstanding voting securities. The Investment Company Act presumes that any person holding 25% of the voting stock of the Company "controls" the Company. The Articles provide that a person or "group" (which includes affiliates and associates of a person, as defined in the Articles) that owns (as defined in the Articles) more than 20% of the voting shares of the Company's issued and outstanding capital stock ("Voting Stock") shall have the right to vote not more than 20% of the outstanding shares of Voting Stock entitled to vote. The remaining shares of Voting Stock owned by such person or group ("Excludable Shares") shall have no voting rights and shall not be counted for quorum or shareholder 63 65 approval purposes. These provisions do not apply to General American Mutual Holding Company, General American, General American Holding Company or their subsidiaries or affiliates, direct or indirect subsidiaries of the Company and certain employee plans established or to be established by the Company. The Company's Board of Directors may approve the exemption of other persons or groups from the provisions described above. The foregoing limitation is intended to have the effect of decreasing the chance of any assignment occurring for purposes of the Advisers Act and the Investment Company Act, including in connection with future issuances or sales of Common Stock. However, no assurances can be given that such an "assignment" will not occur under these or other circumstances. The Company has the right to inquire of any owner of Voting Stock, or person who purports to exercise voting rights with respect to such stock, and the owner will have the obligation to provide such information to the Company as the Company may reasonably request, as to the number of shares owned, whether such shares are owned by any other person and the identity of such person, whether affiliates or associates of such person own any shares, whether such person is a member of a "group" owning such shares or whether such person, or any of such person's affiliates or associates, has any agreement, arrangement or understanding with any other person with respect to the Voting Stock. The limitation on voting may be viewed as having the effect of making more difficult or of discouraging, absent the support of General American, a proxy contest, a merger or other combination involving the Company, a tender offer, an open-market purchase program or other purchase of Common Stock that could give shareholders an opportunity to realize a premium over the then-prevailing market price for their shares. However, given the authority that General American will exercise over the affairs of the Company following the completion of the offering in any event, the Company does not consider the likely effect of this limitation to be significant. SIZE OF BOARD, ELECTION OF DIRECTORS, CLASSIFIED BOARD, REMOVAL OF DIRECTORS AND FILLING VACANCIES The Articles provide that the number of directors to constitute the board of directors initially shall be five and thereafter the number of directors shall be fixed from time to time as provided in the Bylaws. The Bylaws provide for a Board of Directors of five directors, but in no event less than three, and permit the Board of Directors to change the number of directors with a majority vote. The Articles further provide that the Bylaws may be amended only by majority vote of the Board of Directors. In order for a shareholder to nominate a candidate for director, the Bylaws require that timely notice be given to the Company in advance of the meeting. Ordinarily, such notice must be given not less than 60 days nor more than 90 days before the first anniversary of the preceding year's annual meeting, or not less than 60 days nor more than 90 days before May 12, 1998, in the case of the next annual meeting; provided, however, that if the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, then the shareholder must give such notice not earlier than 90 days nor later than 60 days prior to such meeting or 10 days after notice of the meeting is mailed or other public disclosure of the meeting is made. In certain cases, notice may be delivered later if the number of directors to be elected is increased. The shareholder filing the notice of nomination must describe various matters regarding the nominee, including, without limitation, such information as name, address, occupation, and shares held. The Articles do not permit cumulative voting in the election of directors, and the Bylaws provide that the majority of the votes cast in the election of directors shall elect those directors. Accordingly, the holders of a majority of the then outstanding shares of voting stock can elect all the directors then being elected at that meeting of shareholders. The Articles and Bylaws provide that the Board shall be divided into three classes, with the classes to be as nearly equal in number as possible, and that one class shall be elected each year and serve for a three-year term. Missouri law provides that, unless a corporation's articles of incorporation provide otherwise, the holders of a majority of the corporation's voting stock may remove any director from office. The Articles provide that, except as described below, a director may be removed by shareholders only "for cause" and with the approval of the holders of 85% of the Company's voting stock. Missouri law further provides that, unless a corporation's articles of incorporation or bylaws provide otherwise, all vacancies on a corporation's board of directors, including any vacancies resulting from an increase in the number of directors, may be filled by the vote of a majority of the remaining directors even if that number is less than a quorum. The Articles provide that, subject to the rights, if any, of the holders of any class of preferred stock then 64 66 outstanding and except as described below, vacancies may be filled only by the vote of a majority of the remaining directors. The classification of directors, the inability to vote shares cumulatively, the advance notice requirements for nominations, and the provisions in the Articles that limit the ability of shareholders to increase the size of the Board or to remove directors and that permit the remaining directors to fill any vacancies on the Board will have the effect of making it more difficult for shareholders to change the composition of the Board. As a result, at least two annual meetings of shareholders may be required for the shareholders to change a majority of the directors, whether or not a change in the Board would be beneficial to the Company and its shareholders and whether or not a majority of the Company's shareholders believes that such change would be desirable. LIMITATIONS ON SHAREHOLDER ACTION BY WRITTEN CONSENT; LIMITATIONS ON CALLING SHAREHOLDER MEETINGS As required by Missouri law, the Bylaws provide that any action by written consent of shareholders in lieu of a meeting must be unanimous. Under the Bylaws, except as described below, shareholders are not permitted to call special meetings of shareholders or to require the Board to call a special meeting of shareholders and a special meeting of shareholders may be called only by a majority of the entire Board of Directors, the Chairman of the Board, or the President. In order for a shareholder to bring a proposal before a shareholder meeting, the Bylaws require that timely notice be given to the Company in advance of the meeting. Ordinarily, such notice must be given not less than 60 days nor more than 90 days before the first anniversary of the preceding year's annual meeting, or not less than 60 days nor more than 90 days before May 12, 1998 in the case of the next annual meeting; provided, however, that if the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, then the shareholder must give such notice not earlier than 90 days nor later than 60 days prior to such meeting or 10 days after notice of the meeting is mailed or other public disclosure of the meeting is made. Such notice must include a description of the proposal, the reasons therefor, and other specified matters. The Board may reject any such proposals that are not made in accordance with these procedures or that are not a proper subject for shareholder action in accordance with the provisions of applicable law. The provision of the Bylaws requiring unanimity for shareholder action by written consent gives all the shareholders of the Company entitled to vote on a proposed action the opportunity to participate in such action and will prevent the holders of a majority of the voting power of the Company from using the written consent procedure to take shareholder action. Moreover, a shareholder cannot force a shareholder consideration of a proposal over the opposition of the Board of Directors by calling a special meeting of shareholders or forcing consideration of such a proposal. These provisions are designed in part to make it more difficult and time-consuming to obtain majority control of the Board of Directors of the Company or otherwise to bring a matter before the shareholders without the Board's consent, and thus to reduce the vulnerability of the Company to an unsolicited takeover proposal. These provisions are designed to enable the Company to develop its business in a manner which will foster its long-term growth, with the threat of a takeover not deemed by the Board to be in the best interests of the Company and its shareholders and the potential disruption entailed by such a threat reduced to the extent practicable. On the other hand, these provisions may have an adverse effect on the ability of shareholders to influence the governance of the Company and the possibility of shareholders receiving a premium above the prevailing market price for their securities from a potential acquiror who is unfriendly to management. CERTAIN MISSOURI STATUTORY PROVISIONS The GBCL has a control share acquisition statute. A "control share acquisition" is defined as the acquisition, directly or indirectly, of either ownership or the power to direct the exercise of voting power with respect to "control shares," which are defined as shares which, when added to all other shares of the issuing corporation owned by the acquiring person, would entitle such person to exercise certain degrees of voting power with respect to stock of the issuing corporation. Under the Missouri control share acquisition statute (which is only applicable to certain corporations that have 100 or more shareholders), shareholders who acquire enough shares to give them (1) one-fifth or more to less than one-third, (2) one-third or more to less than a majority, or (3) a majority or more of the outstanding stock of the Company will not be able to vote those excess shares unless certain disclosure requirements are satisfied and the retention of voting rights by the acquiror is approved by at least a majority of shares entitled to 65 67 vote and a majority of all non-interested shares entitled to vote. A corporation's articles of incorporation or bylaws may provide that a corporation will not be subject to Missouri's control share acquisition statute. The Articles contain a provision exempting the Company from Missouri's control share acquisition statute. The GBCL restricts a "business combination" (defined to include generally a merger or consolidation, a sale, exchange or other dispositions of 10% or more of the aggregate market value of all assets or stock of the corporation, or certain other transactions which have the effect of disproportionately increasing the share ownership) with an "interested shareholder" (defined generally as the beneficial owner or at least 20% of the corporation's voting stock) for five years following the stock acquisition date (i.e., the date the person became an interested shareholder), unless the board of directors approves the business combination or the purchase of stock by the interested shareholder before the stock acquisition date. Business combinations with an interested shareholder are permitted only if (i) the board of directors approved the business combination or acquisition of the stock prior to the stock acquisition date, (ii) the business combination is approved by a majority of the outstanding voting stock not beneficially owned by the interested shareholder no earlier than five years after the stock acquisition date, or (iii) the consideration to be received by shareholders meets certain requirements of the statute with respect to form and amount. The Articles contain a provision electing to subject the Company to the business combination statute of the GBCL; such provision has the effect, among other things, of rendering the statute inapplicable to transactions with "interested shareholders," such as General American, that acquired their status prior to the effective date of such provision. The Articles further provide that General American and its affiliates are expressly deemed not to constitute "interested shareholders." Missouri law contains certain requirements concerning disclosures which must be made in connection with "take-over bids." Take-over bids are defined as the acquisition of or offer to acquire any equity security of a domestic target company, if after acquisition thereof the offeror would, directly or indirectly, be a beneficial owner of more than five percent of any class of the issued and outstanding equity securities of such target company. A take-over bid does not include an offer to acquire such equity security solely in exchange for other securities, or the acquisition of such equity security pursuant to such offer, for the sole account of the offeror, in good faith and not to avoid Missouri's statutory regulation of take-over bids, and not involving any public offering within the meaning of the Securities Act. Unless the offeror, prior to making a take-over bid, files with the Commissioner of Securities and delivers to the target company certain materials, including copies of all offering information, certain information regarding the offeror, the source of funds financing the offer, the number of shares to be acquired and whether the offeror intends to sell the assets of the company, the offeror will be subject to civil monetary and criminal penalties. 66 68 UNDERWRITING Subject to certain terms and conditions contained in the Underwriting Agreement, the syndicate of Underwriters named below, for whom Donaldson, Lufkin & Jenrette Securities Corporation and A.G. Edwards & Sons, Inc. are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company an aggregate of 2,500,000 shares of Common Stock. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES Donaldson, Lufkin & Jenrette Securities Corporation................................ A.G. Edwards & Sons, Inc........................................................... ---------- Total.......................................................................... 2,500,000 ==========
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase shares of Common Stock are subject to the approval of certain legal matters by counsel and to certain other conditions. If any of the shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all such shares of Common Stock (other than the shares of Common Stock covered by the over-allotment option described below) must be so purchased. Prior to the offering, there has been no established trading market for the Common Stock. The initial price to the public for the Common Stock offered hereby will be determined by negotiation between the Company and the Representatives. The factors to be considered in determining the initial price to the public include the history of and the prospects for the industry in which the Company competes, the ability of the Company's management, the past and present operations of the Company, the historical results of operations of the Company, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the offering and the recent market prices of and the demand for publicly traded common stock of generally comparable companies. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company has been advised by the Representatives that the Underwriters propose to offer the Common Stock to the public initially at the price set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price less a concession not to exceed $---------- per share. The Underwriters may allow, and such dealers may reallow, discounts not in excess of $---------- per share to any other Underwriter and certain other dealers. The Underwriters have reserved approximately 125,000 shares of the Common Stock for sale, at the initial public offering price, to directors, officers and employees of the Company, and its affiliates, directors of General American and family members of the foregoing, in order to permit such persons to purchase such shares of Common Stock in the offering. Each purchaser of such reserved shares will agree to certain transfer restrictions with respect to such shares for a period of five months following the closing of this offering. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares of Common Stock. Any reserved shares of the Common Stock not so purchased will be offered by the Underwriters to the general public on the same basis as the shares of the Common Stock offered pursuant to the offering. The Company has granted to the Underwriters an option to purchase up to 375,000 additional shares of Common Stock, at the initial public offering price less underwriting discounts and commissions, solely to cover over-allotments. Such option may be exercised at any time until 30 days after the effective date of the Registration Statement of which this Prospectus is part. To the extent that the Underwriters exercise such option each of the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment as indicated in the preceding table. All shareholders of the Company have agreed that they will not directly or indirectly offer, sell, contract to sell, or otherwise dispose of or transfer any shares of Common Stock of the Company owned by them without the prior 67 69 written consent of Donaldson, Lufkin & Jenrette Securities Corporation, for a period of 180 days after the date of this Prospectus except in certain non-public transactions in which the acquiror or acquirors of such shares agree(s) to such restrictions. In addition, the Company has agreed that for a period of 180 days after the date of this Prospectus it will not, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for such Common Stock or in any other manner transfer all or a portion of the economic consequences associated with such Common Stock, except for (i) shares of Common Stock offered hereby, (ii) shares of Common Stock issued pursuant to the exercise of options outstanding on the date of this Prospectus, (iii) options or other stock-based awards granted or shares of Common Stock after the date of this Prospectus pursuant to the Company's employee stock plans and other plans and (iv) shares or options issued in acquisitions in which the acquiror or acquirors of such shares agree(s) to such restrictions. See "Shares Eligible for Future Sale." In connection with the offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot the offering, creating a syndicate short position. In addition, the Underwriters may bid for, and purchase, shares of Common Stock in the open market to cover syndicate shorts or to stabilize the price of the Common Stock. Finally, the underwriting syndicate may reclaim selling concessions allowed for distributing the Common Stock in the offering, if the syndicate repurchases previously distributed Common Stock in syndicate covering transactions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Underwriters and dealers may engage in passive market making transactions in the Common Stock in accordance with Rule 103 of Regulation M promulgated by the Securities and Exchange Commission. In general, a passive market maker may not bid for, or purchase, the Common Stock at a price that exceeds the highest independent bid. In addition, the net daily purchases made by any passive market maker generally may not exceed 30% of its average daily trading volume in the Common Stock during a specified two month prior period, or 200 shares, whichever is greater. A passive market maker must identify passive market making bids as such on the Nasdaq electronic inter-dealer reporting system. Passive market making may stabilize or maintain the market price of the Common Stock above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. The Representatives have informed the Company that the Underwriters do not intend to confirm sales of shares of Common Stock offered hereby to accounts over which they exercise discretionary authority. 68 70 LEGAL MATTERS The validity of the shares of Common Stock offered hereby has been passed upon for the Company by Bryan Cave LLP, St. Louis, Missouri. Certain legal matters will be passed upon for the Company by Matthew P. McCauley, Esq., Secretary and General Counsel of the Company and Vice President and Associate General Counsel of General American Life Insurance Company, and for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York. The Honorable John C. Danforth, a partner of Bryan Cave LLP, is a director of General American Life Insurance Company, GenAmerica Corporation and General American Mutual Holding Company, and may purchase shares in the Company's directed share program. Bryan Cave LLP from time to time serves as legal counsel to General American and certain of its affiliates. EXPERTS The consolidated financial statements and schedule of the Company as of December 31, 1995 and 1996, and for each of the years in the three-year period ended December 31, 1996, and the consolidated financial statements of Conning, Inc. and subsidiaries as of, and for the six month period ended, June 30, 1995, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The Consolidated Financial Statements and related schedules of Conning, Inc. and subsidiaries for the year ended December 31, 1994, appearing in this Prospectus and elsewhere in the Registration Statement have been included herein and elsewhere in the Registration Statement have been audited by Price Waterhouse LLP, independent certified public accountants, as stated in their report appearing herein. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C. (the "Commission"), a Registration Statement (the "Registration Statement") on Form S-1 under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits and schedules thereto on file with the Commission pursuant to the Act and the rules and regulations of the Commission thereunder. The Registration Statement, including exhibits and schedules thereto, may be inspected at the principal offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices at Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and at Seven World Trade Center, Suite 1300, New York, New York 10048, and copies may be obtained at the prescribed rates from the Public Reference Section of the Commission at its principal office in Washington, D.C. The Commission maintains an Internet Web site (http://www.sec.gov.) that contains such documents filed electronically by the Company with the Commission through its Electronic Data Gathering, Analysis and Retrieval System (EDGAR) filing system. Statements contained in this Prospectus as to the contents of any contract, agreement or other document referred to herein are not necessarily complete and in each instance reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. 69 71 INDEX TO FINANCIAL STATEMENTS
PAGE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF CONNING CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited).............. F-2 Consolidated Statements of Income for the nine month periods ended September 30, 1996 and 1997 (unaudited)....................................................................................... F-3 Consolidated Statements of Common Shareholders' Equity for the nine month period ended September 30, 1997 (unaudited).................................................................... F-4 Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1996 and 1997 (unaudited)....................................................................................... F-5 Notes to Unaudited Consolidated Financial Statements................................................ F-6 CONSOLIDATED FINANCIAL STATEMENTS OF CONNING CORPORATION AND SUBSIDIARIES Independent Auditors' Report........................................................................ F-7 Consolidated Balance Sheets as of December 31, 1995 and 1996........................................ F-8 Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996.............. F-9 Consolidated Statements of Common Shareholder's Equity for the years ended December 31, 1994, 1995 and 1996..................................................................................... F-10 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.......... F-11 Notes to Consolidated Financial Statements.......................................................... F-12 SCHEDULE I--FINANCIAL STATEMENTS OF CONNING CORPORATION (PARENT COMPANY ONLY) Condensed Balance Sheets as of December 31, 1995 and 1996........................................... F-24 Condensed Statements of Income for the years ended December 31, 1995 and 1996....................... F-25 Condensed Statements of Cash Flows for the years ended December 31, 1995 and 1996................... F-26 Notes to Condensed Financial Statements............................................................. F-27 CONSOLIDATED FINANCIAL STATEMENTS OF CONNING INC. & SUBSIDIARIES Independent Auditors' Report........................................................................ F-28 Consolidated Balance Sheet as of June 30, 1995...................................................... F-29 Consolidated Statement of Income for the six month period ended June 30, 1995....................... F-30 Consolidated Statement of Common Shareholders' Equity for the six month period ended June 30, 1995.. F-31 Consolidated Statement of Cash Flows for the six month period ended June 30, 1995................... F-32 Notes to Consolidated Financial Statements.......................................................... F-33 CONSOLIDATED FINANCIAL STATEMENTS OF CONNING INC. & SUBSIDIARIES Report of Independent Accountants................................................................... F-39 Consolidated Statement of Financial Condition as of December 31, 1994............................... F-40 Consolidated Statement of Operations for the year ended December 31, 1994........................... F-41 Consolidated Statement of Shareholders' Equity for the year ended December 31, 1994................. F-42 Consolidated Statement of Cash Flows for the year ended December 31, 1994........................... F-43 Notes to Consolidated Financial Statements.......................................................... F-44 - -------- The 1994 Parent Company only Financial Statements are not required as 25% of the net assets of the Company were not in restricted subsidiaries.
F-1 72 CONNING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 1996 1997 ----------- ------------ ASSETS Current assets: Cash and cash equivalents.............................................. $ 9,816,568 $ 8,536,722 Short-term investments................................................. 7,901,637 10,729,558 Accounts receivable, net............................................... 5,297,660 8,533,730 Marketable equity securities........................................... 45,625 -- Income taxes receivable................................................ 11,447 1,854,305 Prepaid expenses and other current assets.............................. 162,622 323,710 ----------- ----------- Total current assets........................................... 23,235,559 29,978,025 Non-marketable investments at value........................................ 1,756,931 1,919,650 Equipment and leasehold improvements, at cost, less accumulated depreciation and amortization of $562,812 and $1,281,545................. 815,112 996,426 Deferred income taxes...................................................... 1,572,859 1,320,657 Goodwill................................................................... 18,825,870 18,066,085 Other assets............................................................... 3,813,608 2,365,278 ----------- ----------- Total assets................................................... $50,019,939 $54,646,121 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Compensation payable................................................... $ 8,422,199 $ 7,067,465 Deferred revenue....................................................... 1,533,290 1,504,213 Due to affiliates...................................................... 1,473,811 626,059 Accounts payable and other accrued expenses............................ 2,707,872 5,022,968 Preferred dividends payable............................................ 235,815 247,618 ----------- ----------- Total current liabilities...................................... 14,372,987 14,468,323 Accrued rent liability..................................................... 3,643,996 3,438,008 Long term debt payable to affiliate........................................ 2,000,000 -- Other payables............................................................. 853,521 520,000 ----------- ----------- Total liabilities.............................................. 20,870,504 18,426,331 ----------- ----------- Series A convertible preferred stock, $.01 par value, $5.33 liquidation value: 3,190,000 shares authorized, issued and outstanding............... 22,330,004 32,894,185 Series B convertible preferred stock, $.01 par value, $5.33 liquidation value: 600,000 shares authorized, 460,000 and 365,000 shares issued and outstanding.............................................................. 2,451,800 3,257,405 ----------- ----------- Total convertible preferred stock.............................. 24,781,804 36,151,590 ----------- ----------- Non-Voting Common Stock, $.01 par value: 20,000,000 shares authorized; 110,000 shares issued and outstanding.................................... -- 1,100 Common stock, $.01 par value: 20,000,000 and 50,000,000 shares authorized; 6,710,000 shares issued and outstanding.................................. 67,100 67,100 Additional paid in capital................................................. 2,944,647 -- Retained earnings.......................................................... 1,355,884 -- ----------- ----------- Total common shareholders' equity.............................. 4,367,631 68,200 ----------- ----------- Total liabilities and shareholders' equity..................... $50,019,939 $54,646,121 =========== =========== See accompanying notes to unaudited consolidated financial statements.
F-2 73 CONNING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1996 1997 Revenues: Asset management and related fees............................ $29,365,205 $36,018,354 Research services............................................ 9,582,015 10,277,378 Other income................................................. 791,767 629,142 ----------- ----------- Total revenues....................................... 39,738,987 46,924,874 ----------- ----------- Expenses: Employee compensation and benefits........................... 18,522,125 23,558,926 Occupancy and equipment costs................................ 1,816,693 2,509,470 Marketing and production costs............................... 3,985,613 3,998,660 Professional services........................................ 1,160,578 1,154,438 Amortization of goodwill and other........................... 2,061,870 1,953,119 Other operating costs........................................ 3,099,181 2,778,749 ----------- ----------- Total expenses....................................... 30,646,060 35,953,362 ----------- ----------- Operating income............................................. 9,092,927 10,971,512 Interest expense............................................. 591,605 232,760 ----------- ----------- Income before provision for income taxes..................... 8,501,322 10,738,752 Provision for income taxes................................... 3,762,192 4,316,334 ----------- ----------- Net income................................................... $ 4,739,130 $ 6,422,418 =========== =========== Preferred stock dividends.................................... 669,080 750,500 ----------- ----------- Net earnings available to common shareholder................. $ 4,070,050 $ 5,671,918 =========== =========== Pro forma weighted average common shares and equivalents outstanding................................................ -- 11,094,110 Pro forma earnings per common share and common share equivalents................................................ $ 0.58 See accompanying notes to unaudited consolidated financial statements.
F-3 74 CONNING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY FOR NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED)
NON- VOTING ADDITIONAL TOTAL COMMON COMMON COMMON PAID IN RETAINED SHAREHOLDERS' STOCK STOCK CAPITAL EARNINGS EQUITY Balance, December 31, 1996........................ $ $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 2)....... 1,134,785 1,134,785 Accretion on preferred stock...................... (4,848,332) (7,027,802) (11,876,134) Net income........................................ 6,422,418 6,422,418 Dividends on preferred stock...................... (750,500) (750,500) ------ ------- ----------- ----------- ------------ Balance, September 30, 1997....................... $1,100 $67,100 $ -- $ -- $ 68,200 ====== ======= =========== =========== ============ See accompanying notes to unaudited consolidated financial statements.
F-4 75 CONNING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1996 1997 Operating activities: Net income................................................... $ 4,739,130 $ 6,422,418 Adjustment for items not affecting cash: Depreciation and amortization............................ 545,897 674,186 Amortization of goodwill and other....................... 2,061,869 1,953,115 Deferred income tax provision............................ (2,400,596) 1,386,987 Net unrealized appreciation on non-marketable securities............................................. 33,118 -- Net sales of marketable securities....................... 10,375 45,625 Accretion of discounts on short-term investments......... (114,869) (177,764) Changes in: Accounts receivables................................. 4,397,775 (3,236,070) Prepaid expenses and other assets.................... 1,672,223 (161,088) Accounts payables and other accrued expenses......... (603,173) 2,113,379 Income taxes receivable.............................. 496,069 (1,842,858) Due to affiliates.................................... 231,168 (847,752) Deferred revenue..................................... 918,018 (29,077) Accrued rent liability............................... (200,611) (205,988) Compensation payable................................. (948,312) (1,354,734) ------------ ------------ Net cash provided by operating activities........ 10,838,081 4,740,379 ------------ ------------ Investing activities: Sale of marketable securities................................ 1,160,000 -- Purchases of non-marketable securities....................... (44,949) (162,719) Proceeds from non-marketable partnership investments......... 384,450 -- Purchases of equipment and other assets, net................. (1,285,944) (720,500) Purchases of short-term investments.......................... (23,383,662) (54,545,324) Maturities of short-term investments......................... 19,600,000 51,895,168 ------------ ------------ Net cash used in investing activities............ (3,570,105) (3,533,375) ------------ ------------ Financing activities: Repayments on long term debt................................. (5,000,000) (2,000,000) Repayments on short term debt................................ (500,000) -- Other payments............................................... -- -- Issuance of Series B preferred stock......................... -- 79,950 Conversion of Series B preferred stock....................... -- 183,700 Dividends on preferred stock................................. (669,080) (750,500) ------------ ------------ Net cash used in financing activities............ (6,169,080) (2,486,850) ------------ ------------ Net decrease in cash and cash equivalents........................ 1,098,896 (1,279,848) Cash and cash equivalents, beginning of year..................... 5,995,260 9,816,568 ------------ ------------ Cash and cash equivalents, end of period......................... $ 7,094,156 $ 8,536,722 ============ ============ See accompanying notes to unaudited consolidated financial statements.
F-5 76 CONNING CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 1996. In the opinion of management, the financial information reflects all adjustments which are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. NOTE 2--PREFERRED STOCK AND SHAREHOLDERS' EQUITY In January, 1997, the Company issued an additional 15,000 shares of Series B Preferred Stock at $5.33 per share. In April, 1997, certain shareholders converted 110,000 shares of Series B Preferred Stock to Non-Voting Common Stock. The resulting transaction increased additional paid in capital by $768,900 and increased common equity by $1,100. In June, 1997, General American, pursuant to a call right, purchased 1,594,995 shares of the Company's Series A Preferred Stock from existing shareholders for $11.25 per share. In connection with such purchase, certain restrictions were eliminated on the Series A Preferred Stock which generated an additional tax benefit to the Company of $1,134,785 recorded directly to additional paid in capital. In June, 1997, the authorized number of shares of Series A Voting Common Stock increased from 20,000,000 to 50,000,000. The authorized number of shares of Class B Non-Voting Common Stock remains at 20,000,000. The carrying value of the Convertible Preferred Stock is at original issue price plus accretion relating to any increase in the redemption value of the stock during the period. During the nine months ended September 30, 1996 and September 30, 1997, such accretion was $0 and $11,876,134, respectively. F-6 77 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, 1995 and 1996, and the related consolidated statements of income, common shareholder's equity, and cash flows for the three-year period ended December 31, 1996. In connection with our audits of the consolidated financial statements, we have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Conning Corporation and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth herein. /s/ KPMG Peat Marwick LLP St. Louis, Missouri March 21, 1997, except as to note 21 which is as of September 19, 1997 F-7 78 CONNING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------ 1995 1996 ASSETS Current assets: Cash and cash equivalents.............................................. $ 5,995,260 $ 9,816,568 Short-term investments................................................. 3,598,594 7,901,637 Accounts receivable, net (note 11)..................................... 6,382,572 5,297,660 Marketable equity securities........................................... 1,241,250 45,625 Income taxes receivable................................................ 507,498 11,447 Prepaid expenses and other current assets.............................. 133,955 162,622 ----------- ----------- Total current assets........................................... 17,859,129 23,235,559 Non-marketable investments at value........................................ 1,775,613 1,756,931 Equipment and leasehold improvements, at cost, less accumulated depreciation and amortization of $170,600 and $562,812................... 964,132 815,112 Deferred income taxes...................................................... 1,606,469 1,572,859 Goodwill................................................................... 19,838,917 18,825,870 Other assets............................................................... 4,133,194 3,813,608 ----------- ----------- Total assets................................................... $46,177,454 $50,019,939 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Short term debt........................................................ $ 500,000 $ -- Compensation payable................................................... 3,729,971 8,422,199 Deferred revenue....................................................... 2,401,527 1,533,290 Due to affiliates...................................................... 836,233 1,473,811 Accounts payable and other accrued expenses............................ 3,541,019 2,707,872 Preferred dividends payable............................................ 223,300 235,815 ----------- ----------- Total current liabilities...................................... 11,232,050 14,372,987 Accrued rent liability..................................................... 3,914,196 3,643,996 Long term debt payable to affiliates....................................... 9,000,000 2,000,000 Other payables............................................................. 405,789 853,521 ----------- ----------- Total liabilities.............................................. 24,552,035 20,870,504 ----------- ----------- Series A convertible preferred stock, $.01 par value, $5.33 liquidation value: 3,190,000 shares authorized, issued and outstanding............... 17,002,704 22,330,004 Series B convertible preferred stock, $.01 par value, $5.33 liquidation value: 600,000 shares authorized, 460,000 issued and outstanding......... -- 2,451,800 ----------- ----------- Total convertible preferred stock.............................. 17,002,704 24,781,804 ----------- ----------- Common stock, $.01 par value: 20,000,000 shares authorized; 6,710,000 shares issued and outstanding............................................ 67,100 67,100 Additional paid in capital................................................. 2,944,647 2,944,647 Retained earnings.......................................................... 1,376,668 1,355,884 Unrealized appreciation on investments, net of deferred income taxes....... 234,300 -- ----------- ----------- Total common shareholder's equity.............................. 4,622,715 4,367,631 ----------- ----------- Total liabilities and shareholder's equity..................... $46,177,454 $50,019,939 =========== =========== See accompanying notes to consolidated financial statements.
F-8 79 CONNING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 Revenues: Asset management and related fees (note 11).................. $3,484,115 $24,049,683 $40,456,343 Research services............................................ -- 4,089,571 12,148,164 Other income................................................. 57,277 663,767 1,061,855 ---------- ----------- ----------- Total revenues....................................... 3,541,392 28,803,021 53,666,362 ---------- ----------- ----------- Expenses: Employee compensation and benefits........................... -- 12,027,224 26,001,771 Occupancy and equipment costs................................ -- 1,498,641 2,584,544 Marketing and production costs............................... -- 2,393,281 5,281,667 Professional services........................................ 323,248 3,555,052 1,537,220 Amortization of goodwill and other........................... -- 1,288,911 2,720,969 Other operating expenses..................................... 1,106,147 1,748,349 3,747,838 ---------- ----------- ----------- Total expenses....................................... 1,429,395 22,511,458 41,874,009 ---------- ----------- ----------- Operating income............................................. 2,111,997 6,291,563 11,792,353 Interest expense............................................. -- 520,523 729,088 ---------- ----------- ----------- Income before provision for income taxes..................... 2,111,997 5,771,040 11,063,265 Provision for income taxes................................... 827,165 2,358,889 4,851,034 ---------- ----------- ----------- Net income................................................... $1,284,832 $ 3,412,151 $ 6,212,231 ========== =========== =========== Preferred stock dividends.................................... -- 350,900 905,715 ---------- ----------- ----------- Net earnings available to common shareholder................. $1,284,832 $ 3,061,251 $ 5,306,516 ========== =========== =========== Pro forma weighted average common shares and equivalents outstanding.................................... 10,871,936 Pro forma earnings per common share and common share equivalents................................................ $ 0.57 See accompanying notes to consolidated financial statements.
F-9 80 CONNING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
UNREALIZED APPRECIA- TION (DEPRECIA- ADDITIONAL TION) ON TOTAL COMMON COMMON PAID IN RETAINED INVESTMENTS, SHAREHOLDER'S STOCK CAPITAL EARNINGS NET EQUITY Balance, December 31, 1993........................ $ -- $ 55,000 $ 737,332 $ -- $ 792,332 Net income........................................ 1,284,832 1,284,832 Dividend on common stock.......................... (750,000) (750,000) ------- ---------- ----------- ---------- ---------- Balance, December 31, 1994........................ -- 55,000 1,272,164 -- 1,327,164 Issuance of 6,710,000 shares of common stock for contribution of GAIMCO.......................... 67,100 2,889,647 (2,956,747) -- Change in unrealized appreciation (depreciation) of investment, net of deferred income taxes..... 234,300 234,300 Net income........................................ 3,412,151 3,412,151 Dividends on preferred stock...................... (350,900) (350,900) ------- ---------- ----------- ---------- ----------- Balance, December 31, 1995........................ 67,100 2,944,647 1,376,668 234,300 4,622,715 Change in unrealized appreciation (depreciation) of investment, net of deferred income taxes..... (234,300) (234,300) Accretion on Series A preferred stock............. (5,327,300) (5,327,300) Net income........................................ 6,212,231 6,212,231 Dividends on preferred stock...................... (905,715) (905,715) ------- ---------- ----------- ---------- ----------- Balance, December 31, 1996........................ $67,100 $2,944,647 $ 1,355,884 $ -- $ 4,367,631 ======= ========== =========== ========== =========== See accompanying notes to consolidated financial statements.
F-10 81 CONNING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996 Operating activities: Net income................................................... $1,284,832 $ 3,412,151 $ 6,212,231 Adjustment for items not affecting cash: Depreciation and amortization............................ -- 170,600 817,422 Amortization of goodwill and other....................... -- 1,288,911 2,720,969 Allowance for doubtful accounts.......................... -- 50,000 (97,750) Deferred income tax provision............................ -- (1,053,875) (1,457,941) Net unrealized appreciation on non-marketable securities............................................. -- (191,426) (125,654) Net sales of securities held for market making........... -- 34,537 35,625 Gain on sale of marketable securities.................... -- -- (400,000) Accretion of discounts on short-term investments......... -- (70,161) (235,711) Changes in: Accounts receivable.................................. (214,040) 3,000,376 1,182,662 Prepaid expenses and other assets.................... 24,117 2,194,688 1,569,898 Accounts payable and other accrued expenses.......... -- 1,065,845 (833,147) Income taxes receivable.............................. (326,669) 734,930 496,051 Due to affiliates.................................... 60,135 (3,180,835) 637,578 Deferred revenue..................................... -- 2,093,952 (868,237) Accrued rent liability............................... -- (104,867) (270,200) Compensation payable................................. -- (2,839,348) 4,692,228 ---------- ----------- ----------- Net cash provided by operating activities....... 828,375 6,605,478 14,076,024 ---------- ----------- ----------- Investing activities: Sale of marketable securities................................ -- -- 1,160,000 Purchases of non-marketable securities....................... -- (242,415) (273,233) Proceeds from non-marketable partnership investments......... -- -- 417,568 Purchases of equipment and other assets, net................. -- (44,439) (1,238,050) Purchases of short-term investments.......................... -- (7,769,655) (46,567,333) Maturities of short-term investments......................... -- 6,900,000 42,500,000 Contribution of GAIMCO cash.................................. -- 5,077,492 -- Acquisition of Conning, net of cash acquired................. -- (12,207,581) -- ---------- ----------- ----------- Net cash used in investing activities........... -- (8,286,598) (4,001,048) ---------- ----------- ----------- Financing activities: Borrowings on long term debt................................. -- 13,000,000 -- Repayments on long term debt................................. -- (4,000,000) (7,000,000) Repayments on short term debt................................ -- (2,000,000) (500,000) Other payments............................................... -- (163,220) (312,268) Issuance of Series B preferred stock......................... -- -- 2,451,800 Dividends on common stock.................................... (750,000) -- -- Dividends on preferred stock................................. -- (127,600) (893,200) ---------- ----------- ----------- Net cash provided by (used in) financing activities.................................... (750,000) 6,709,180 (6,253,668) ---------- ----------- ----------- Net increase in cash and cash equivalents........................ 78,375 5,028,060 3,821,308 Cash and cash equivalents, beginning of year..................... 888,825 967,200 5,995,260 ---------- ----------- ----------- Cash and cash equivalents, end of year........................... $ 967,200 $ 5,995,260 $ 9,816,568 ========== =========== =========== Supplemental disclosure of cash flow information: Cash paid for: Interest..................................................... -- $ 391,921 $ 446,531 Income taxes................................................. $1,153,834 $ 1,761,076 $ 4,546,603 Supplemental disclosure of non-cash information: Preferred stock issued in Conning acquisition................ -- $17,002,704 -- Common stock issued in GAIMCO contribution................... -- $3,011,747 -- Accretion on Series A preferred stock........................ -- -- $5,327,300 See accompanying notes to consolidated financial statements.
F-11 82 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 the outstanding voting common stock of the Company is held by a wholly-owned holding company subsidiary of General American Life Insurance Company (together "General American"). If all of the outstanding convertible preferred stock (see Note 9) was converted on December 31, 1996, General American would own approximately 65% of the resulting outstanding common stock. 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. The accompanying consolidated financial statements include the accounts of Conning Corporation, Conning Inc. (the holding company parent of C&C), Conning & Company and Conning Asset Management Company. The historical financial statement includes the operations and financial position of GAIMCO through July 31, 1995, and consolidated operations thereafter, and consolidated financial position as of December 31, 1995 and 1996. F-12 83 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--PRO FORMA RESULTS (UNAUDITED) The table below contains unaudited pro forma summary financial information for the year ended December 31, 1995, and for comparative purposes, summary financial information condensed from the audited financial statements for the year ended December 31, 1996. 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. The pro forma information has been prepared assuming these transactions and arrangements were effected on January 1, 1995.
DECEMBER 31, DECEMBER 31, 1995 1996 ----------- ----------- PRO FORMA (UNAUDITED) ACTUAL Revenues: Asset management and related fees....................... $30,674,994 $40,456,343 Research services....................................... 9,480,364 12,148,164 Other income............................................ 995,605 1,061,855 ----------- ----------- Total revenues.................................. 41,150,963 53,666,362 ----------- ----------- Expenses: Employee compensation and benefits...................... 18,336,044 26,001,771 Amortization of goodwill and other...................... 2,911,384 2,720,969 Other operating expenses................................ 12,514,187 13,151,269 ----------- ----------- Operating income........................................ 7,389,348 11,792,353 Interest expense........................................ 1,364,547 729,088 ----------- ----------- Income before provision for income taxes................ 6,024,801 11,063,265 Provision for income taxes.............................. 2,738,954 4,851,034 ----------- ----------- Net income.............................................. $ 3,285,847 $ 6,212,231 =========== =========== Preferred stock dividends............................... 905,715 905,715 ----------- ----------- Net earnings available to common shareholder............ $ 2,380,132 $ 5,306,516 =========== =========== Pro forma earnings per common share and common share equivalents........................................... $ 0.30 $ 0.57
Pro forma earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents considered outstanding during the period after giving effect to all dilutive common stock and common stock equivalent shares issued within twelve months of the public offering of the Company's common stock. For the purpose of this calculation, outstanding shares of Series A and Series B Convertible Preferred Stock are considered common stock equivalent shares. F-13 84 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The table below contains unaudited pro forma summary financial information for the year ended December 31, 1994 and 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. The pro forma information has been prepared assuming these transactions and arrangements were effected on January 1, 1994.
DECEMBER 31, 1994 ----------- PRO FORMA (UNAUDITED) Revenues.......................................... $22,016,698 ----------- Expenses: Operating expenses............................ 16,689,461 Amortization of goodwill and other............ 2,911,384 ----------- Operating income.............................. 2,415,853 Interest expense.............................. 1,395,528 ----------- Income before provision for income taxes...... 1,020,325 Provision for income taxes.................... 919,014 ----------- Net income.................................... $ 101,311 =========== Preferred stock dividends..................... 905,715 ----------- Net loss attributable to common shareholders................................ $ (804,404) ===========
The pro forma information presented in the previous two tables is not necessarily indicative of the results that would have been obtained had the transactions and arrangements taken effect on the assumed date, nor is the information intended to be a projection for any future period. NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements of the Company have been prepared in conformity with generally accepted accounting principles. For accounting purposes the Strategic Merger was effective at the close of business July 31, 1995. The contribution of GAIMCO to the Company as a result of the Strategic Merger is treated as a combination of entities under common control, using historical cost basis accounting. Principles of Consolidation--The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany balances and transactions. Revenue Recognition--Asset management fees are determined based on contractual provisions and are earned at varying percentages of the assets under management. Such fees are accrued into income in the period in which the service is provided. Research fees, primarily in 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 is recognized at the closing of the mortgage commitment. F-14 85 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 $5,386,747 and $6,449,642 at December 31, 1995 and 1996, which were readily convertible to cash and earns interest at the short-term money market rates. For purposes of the financial statements, such funds are considered cash equivalents. Short-Term Investments--Short-term investments are comprised of U.S. Government Securities and investment grade commercial paper having a maturity of one year or less and are carried at amortized cost, which approximates fair value. Investments--Marketable equity securities classified as trading securities are presented at fair value with corresponding unrealized gains or losses included in current period income. Marketable equity securities classified as available-for-sale are presented at fair value with corresponding unrealized gains or losses included as a separate component of shareholder's equity, net of deferred income taxes. Non-marketable investments in various private equity funds are held by the Company's broker-dealer subsidiary in accordance with generally accepted accounting principles for broker-dealers. Such investments are recorded using the equity method basis of accounting (including unrealized gains and losses). The changes in fair values are included in the consolidated statements of income. Equipment and Leasehold Improvements--Equipment is stated at cost, less accumulated depreciation provided on an accelerated method over periods not exceeding eight years. Leasehold improvements are stated at cost less, accumulated amortization provided on a straight-line basis over the term of the lease. Income Taxes--Income tax expense is based on income reported in the financial statements. Deferred federal and state income taxes are provided based on an asset and liability approach which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The Company files consolidated federal income tax returns with its subsidiaries. Goodwill--Goodwill arising from the Strategic Merger is being amortized on a straight-line basis over a period of 20 years. Accumulated amortization was $422,105 and $1,435,152 as of December 31, 1995 and 1996, respectively. Goodwill is periodically reviewed to determine recoverability based on the discounted operating cash flows of the underlying business. At December 31, 1995 and 1996, no impairment was indicated. Other Assets--Included in other assets are costs associated with the purchase of a software license agreement (the "License Agreement") effective as of January 27, 1996. The total cost of the license is being amortized over the life of the License Agreement. As of December 31, 1996, $1,388,332 remains to be amortized over the four remaining years of the License Agreement. Total amortization of $311,667 is included in the consolidated statements of income for the year ended December 31, 1996. Also included in other assets is the unamortized cost of compensation relating to the Strategic Merger that is being amortized over a three year period ending August 11, 1998. Amortization of $866,806 and $1,707,918 is included in the consolidated statements of income for the years ended December 31, 1995 and 1996, respectively. The unamortized amount of $4,133,194 and $2,425,276 is included in other assets as of December 31, 1995 and 1996, 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 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. F-15 86 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Preferred Stock--The carrying value of the convertible preferred stock is at original issue price plus accretion relating to any increase in the redemption value of the stock during the period. During 1995 and 1996, such accretion was $0 and $5,327,300, respectively. Other Income--Other income is comprised of investment income and other miscellaneous revenues. Non-cash employee compensation--The Company uses the intrinsic value method to account for stock option plans as prescribed by the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under this method, compensation expense is recognized for awards of options to purchase shares of stock to employees under compensatory plans only if the fair market value of the stock at the option grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 permits companies to adopt a new fair value based method to account for stock option plans or to continue using the intrinsic value method. The Company intends to continue using the intrinsic value method and provides the pro forma disclosures in Note 12, as required by FAS 123. 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--Certain amounts have been reclassified in prior years to conform to 1996 presentation. NOTE 4--ACCOUNTS RECEIVABLE Accounts receivable include primarily amounts due for management fees, selling concessions due from underwriters and amounts due from other business activities of the Company. At December 31, 1995 and 1996, an allowance for doubtful accounts of $262,750 and $165,000 was applied as a reduction of accounts receivable, respectively. 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, 1995 and 1996, the estimated fair value of marketable and non-marketable investments were as follows:
1995 1996 Marketable equity securities--trading (cost $83,600 and $46,250)............................ $ 81,250 $ 45,625 Marketable equity securities--Available-for-sale (cost $760,000)................................. 1,160,000 -- ---------- ---------- Total marketable securities................... $1,241,250 $ 45,625 ========== ========== Non-marketable equity securities (cost $5,000).... $ 9,250 $ 10,945 Non-marketable partnership investments (cost $1,554,524 and $1,448,968)...................... 1,766,363 1,745,986 ---------- ---------- Total non-marketable investments.............. $1,775,613 $1,756,931 ========== ==========
The Company is a 1% general partner in various private equity funds. The value of the non-marketable partnership investments is accounted for using the equity method and updated periodically based upon changes in fair values and recorded in the consolidated statements of income. Additionally, the Company had no derivative investments during 1995 and 1996. F-16 87 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--EQUIPMENT AND LEASEHOLD IMPROVEMENTS At December 31, 1995 and 1996, equipment and leasehold improvements comprised the following:
1995 1996 Office equipment.................................. $ 436,519 $ 641,421 Computer equipment................................ 442,685 468,950 Leasehold improvements............................ 255,528 267,553 ---------- ---------- 1,134,732 1,377,924 Less accumulated depreciation and amortization.... 170,600 562,812 ---------- ---------- $ 964,132 $ 815,112 ========== ==========
Depreciation expense of $0, $170,600 and $447,070 on the above is included in the consolidated statements of income for the years ended December 31, 1994, 1995 and 1996, respectively. The Company owned no equipment or leasehold improvements during 1994. The Company occupies premises and rents certain office equipment under leases that are accounted for as operating leases and that have expiration dates through 2005. At December 31, 1996, the minimum net rental commitments of the Company for the periods indicated under the terms of these operating leases in excess of one year were approximately $6,342,000 as follows: $927,000 in 1997; $811,000 in 1998; $658,000 per year from 1999 to 2005. NOTE 7--INCOME TAXES Prior to the Strategic Merger, GAIMCO was included in the consolidated Federal income tax returns of General American and its provisions for income taxes have been computed as if GAIMCO had filed a separate return. The provision for Federal and state income tax for the years ended December 31, 1994, 1995 and 1996, is as follows:
1994 1995 1996 Current income tax provision............ $827,165 $1,755,497 $4,651,708 Deferred income tax provision........... -- 603,392 199,326 -------- ---------- ---------- Total income tax provision.............. $827,165 $2,358,889 $4,851,034 ======== ========== ==========
The differences between the expected United States Federal income tax provision at the statutory rate of 35% for 1994, 1995 and 1996 and the Company's actual Federal income tax rate are as follows:
1994 1995 1996 Income before income taxes.............. $2,111,997 $5,771,040 $11,063,265 Federal income taxes at statutory rate.................................. 739,198 2,019,864 3,872,143 Increases in income taxes resulting from: State tax, net of Federal........... 85,221 219,974 619,251 Amortization of goodwill............ -- 147,737 354,568 Other, net.......................... 2,746 (28,686) 5,072 ---------- ---------- ----------- Federal income tax provision............ $ 827,165 $2,358,889 $ 4,851,034 ========== ========== ===========
F-17 88 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The components of deferred income taxes for the years ended December 31, 1995 and 1996 are as follows:
1995 1996 Accrued rent liability.................. $ 43,441 $ 82,612 Employee costs.......................... 54,759 (706,227) Partnership investments................. 97,821 168,972 Accrued expense reserves................ 421,657 252,396 Other, net.............................. (14,286) 401,573 -------- --------- Total deferred income tax provision..... $603,392 $ 199,326 ======== =========
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, 1995 and 1996, the net deferred income tax asset is as follows:
1995 1996 Accrued rent liability.................. $1,621,496 $1,538,884 Employee costs.......................... 160,420 203,228 Other, net.............................. 641,531 389,135 ---------- ---------- Gross deferred income tax assets........ 2,423,447 2,131,247 Valuation allowance..................... -- -- ---------- ---------- Deferred income tax assets, net of valuation allowance................... 2,423,447 2,131,247 ---------- ---------- Depreciation............................ (152,162) (192,324) Unrealized appreciation on investments........................... (314,830) -- Employee costs.......................... (285,315) (132,421) Partnership investments................. (64,671) (233,643) ---------- ---------- Gross deferred income tax liabilities... (816,978) (558,388) ---------- ---------- Net deferred income tax assets.......... $1,606,469 $1,572,859 ========== ==========
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Management believes the deferred tax assets will be fully realized in the future based upon consideration of the reversal of existing temporary differences, anticipated future earnings, and all other available evidence. Accordingly, no valuation allowance is established. NOTE 8--DEBT Long term: On August 11, 1995, the Company borrowed $13,000,000 from General American to fund certain payments made in connection with the Strategic Merger. Interest is payable on January 1 and September 1 at an annual rate of 7.0%. Principal payments are due in three equal annual installments of $4,333,333 commencing September 1, 2003. The Company prepaid $4,000,000 and $7,000,000 of principal plus accrued interest of $323,750 and $412,805 in 1995 and 1996, respectively. Management estimates the carrying value of long term debt approximates fair value. On February 26, 1997, the Company paid the remaining $2,000,000 outstanding on its long term debt along with accrued interest expense of $27,222. Short term: On August 11, 1995, the Company borrowed $2,500,000 from General American to fund certain payments made in connection with the Strategic Merger. Interest is payable on January 1 and August 1 at an annual rate of 6.75%. F-18 89 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Principal is due on August 11, 1996. The Company prepaid $2,000,000 and $500,000 of principal plus accrued interest of $58,688 and $14,250 during 1995 and 1996, respectively, which is included in the consolidated statements of income. Lines of credit: At December 31, 1995 the Company had a line of credit with a commercial bank for $1,200,000. During 1996, the Company terminated the line of credit. There were no outstanding borrowings during 1995. At December 31, 1995 and 1996, the Company had a Revolving Subordinated Loan Agreement (the "Agreement") with a commercial bank for $2,000,000. The interest rate is agreed upon by the lender and the Company at the time of an advance. The Agreement expires on December 31, 1997. During 1996, the Company borrowed $2,000,000 for less than one week. There were no borrowings during 1995. NOTE 9--PREFERRED STOCK The preferred stock of the Company is subject to the Shareholders Agreement and consists of (i) Series A Convertible Preferred Stock, par value $.01 per share and (ii) Series B Convertible Preferred Stock, par value $.01 per share. At December 31, 1995 and 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 pays dividends quarterly based on the 90 day United States Treasury Bill rate in effect on the previous payment date. Such dividends are cumulative. The Company declared dividends on the Series A Preferred Stock of $0.11 and $0.28 for the years ended December 31, 1995 and 1996, respectively. Declared but unpaid dividends totaling $223,300 are included in the Preferred Dividends Payable on the consolidated balance sheet at December 31, 1995 and 1996. The Series A Preferred Stock carries no voting rights and was issued as part of the Strategic Merger. Each share of Series A Preferred Stock is convertible into one share of Non-Voting Common Stock at the holder's election, or Voting Common Stock upon an initial public offering (IPO). Pursuant to the Shareholders Agreement, if no IPO has occurred prior to August 11, 1998, the holders have a right to put their shares to General American at any time thereafter at fair value. On November 8, 1996, the Company commenced a private offering to certain employees and directors. This offering was for a new class of preferred stock designated Series B Convertible Preferred Stock (the "Series B Preferred Stock"). A total of 460,000 shares were sold at $5.33 per share adding $2,451,800 to preferred stock. In order to exercise the conversion, payment to the Company of an additional $1.67 per share is required. At December 31, 1996, 600,000 shares of Series B Preferred Stock were authorized and 460,000 shares were issued and outstanding. The Series B Preferred Stock pays dividends quarterly at a rate of 5% per annum and such dividends are cumulative. Declared but unpaid dividends totaling $12,515 are included in Preferred Dividends Payable on the consolidated balance sheet at December 31, 1996. The Series B Preferred Stock carries no voting rights. Each share of Series B Preferred Stock is 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. If no IPO has occurred prior to November 22, 2001, the holders of the Series B Preferred Stock have a right to put their shares to the Company at any time thereafter at fair value. NOTE 10--SHAREHOLDER'S EQUITY The board of directors of the Company is authorized to issue up to 20,000,000 shares each of Voting Common Stock and Non-Voting Common Stock, each with a par value of $.01 per share. F-19 90 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--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, 1994, 1995 and 1996 amounted to $2,618,635, $12,573,489 and $14,300,267 respectively. The total investment management fees receivable from these affiliated entities at December 31, 1995 and 1996 amounted to $825,924 and $1,042,294, respectively. Certain officers and directors of the Company are also officers of General American and officers and/or directors of other General American affiliates. The Company is directly or indirectly, through intermediary partnerships, the managing general partner of certain private equity funds with an equity ownership interest of 1% in each fund. In total, the Company managed zero, seven and five funds during 1994, 1995 and 1996, respectively. Fees for managing these funds were $0, $1,295,330 and $4,006,038 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company received underwriting fees and concessions in connection with the offering of shares of two companies which were partially owned by certain private equity funds managed by the Company. Such fees and concessions are included in research services and related fees and amounted to $0, $0 and $2,177,269 for the years ended December 31, 1994, 1995 and 1996. In connection with the November 8, 1996 private offering of Series B Preferred Stock, General American holds demand recourse notes from certain employees totaling $2,185,300. The notes bear interest of 6% which is payable semi-annually beginning July 1997. General American provides administrative services on request of the Company including disbursements, tax, facility management and other administrative support to the Company pursuant to an administrative services agreement. The following table list the expenses recorded by the Company for significant services provided by General American for the years ended December 31, 1995 and 1996:
1995 1996 Employee costs................ $ 6,341,164 $ 7,103,724 Administrative accounting fees.......................... 2,108,624 2,765,129 Marketing and production costs......................... 753,091 1,076,195 Professional services......... 802,221 1,002,482 Rent.......................... 624,414 612,822 Computer services............. 50,591 118,008 All other operating costs..... 1,627,998 1,932,861 ----------- ----------- $12,308,103 $14,611,221 =========== ===========
Costs for the year ended December 31, 1994 were not broken out in the components listed above, but rather were charged as one administrative fee in the amount of $871,221 and were included in other operating expenses. The above administrative costs are predominantly based on direct indentifiable 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. F-20 91 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--STOCK OPTIONS On August 11, 1995, the shareholders approved the Company's 1995 Flexible Stock Plan which provides for the grant of options to purchase up to 2,100,000 shares of the Company's Non-Voting Common Stock to officers and other key employees of the Company and its affiliates. Terms and conditions (including price, exercise date and number of shares) are determined by the Board of Directors, which administers the plan. In the event of an initial public offering the options become 100% vested. All options were granted at fair value. On November 8, 1996, the shareholders approved the Company's 1996 Flexible Stock 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.
WEIGHTED AVERAGE NUMBER OF SHARES EXERCISE PRICE ---------------------- ------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 31, 1995 1996 1995 1996 Outstanding, beginning of year.......... -- 1,000,000 $ -- $5.33 Granted................................. 1,000,000 230,000 5.33 7.00 Exercised............................... -- -- -- -- Canceled................................ -- -- -- -- --------- --------- ----- ----- Outstanding, end of year................ 1,000,000 1,230,000 $5.33 $5.64 ========= ========= ===== ===== Exercisable, end of year................ -- 200,000 $ -- $5.33 ========= ========= ===== =====
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25"), in accounting for both the 1996 and 1995 Flexible Stock Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. The weighted-average grant-date fair value of stock options granted during the year and the weighted-average significant assumptions used to determine those fair values, using a modified Black-Scholes option pricing model, and the pro forma effect on earnings of the fair value accounting for stock options under FAS 123 are as follows:
1995 1996 Grant-date fair value per share............................. $ 0.91 $ 1.13 Significant assumptions: Risk-free interest rate at grant date................... 6.05% 5.70% Expected dividend payout................................ $ 0 $ 0 Expected stock price volatility......................... n/a n/a Expected life to exercise (years)....................... 2.5 2.5 Net Income.............................. As reported....... $3,412,151 $6,212,231 Pro forma......... $3,336,484 $6,026,307 Pro forma earnings per common share..... As reported....... $ 0.57 Pro forma......... $ 0.55
NOTE 13--EMPLOYEE BENEFITS The Company has two retirement savings plans, a 401(k) Savings Plan (the "401(k) Plan") and the General American Life Insurance Company Progress Sharing Plan and Trust (the "Progress Sharing Plan"). The 401(k) Plan is available to substantially all Conning employees who were employed by Conning prior to the Strategic Merger. The Progress Sharing Plan is available to all employees employed by GAIMCO prior to the Strategic Merger and all employees employed subsequent to the Strategic Merger. The Company contributed $0, $286,170 and $547,127 on F-21 92 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) behalf of eligible employees for the years ended December 31, 1994, 1995 and 1996, respectively. Direct charges to the Company from General American for the Progress Sharing Plan were approximately $22,000, $359,000 and $310,000 for the years ended December 31, 1994, 1995 and 1996 which is included in the charges for administrative services from General American. One of the investment vehicles offered in the 401(k) Plan is managed by Conning. Pension Plan--Substantially all personnel who were employees of GAIMCO prior to the Strategic Merger were eligible for a defined benefit plan sponsored by General American through December 31, 1996. All costs are born and retained by General American. The plan is over funded as of December 31, 1995 and 1996. Therefore, no charges were made by General American to GAIMCO. NOTE 14--LITIGATION One legal claim has arisen against Conning & Company during the normal course of the Company's non-securities and non-investment advisory services businesses. Although the matter is subject to uncertainty, as it remains in the preliminary stages and discovery has not been completed, the Company believes that Conning & Company has meritorious defenses to all claims and that the probable outcome should not have a material adverse effect upon the Company, its liquidity or its operations. NOTE 15--COMMITMENTS AND CONTINGENCIES The Company through its subsidiary is, directly or through intermediary partnerships, a 1% general partner in certain private equity funds that the Company also manages. Capital contributions by the partners are called as needed for investments by the funds. At December 31, 1996, the Company's future commitment to fund such required capital contributions was approximately $273,000. 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 16--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, 1996, C&C had net capital, as defined by the Uniform Net Capital Rule, of $2,428,221 which was $1,824,367 in excess of the required net capital. CAM is also subject to minimum net capital requirements which are determined by state regulations in each of the states in which CAM is licensed to do business. As of December 31, 1996 and 1995, CAM was in compliance with all minimum state requirements. NOTE 17--CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentration of credit risk consist principally of trade account receivables and short term investments. Short term investments consist of investment grade commercial paper and approximate fair value because of the short maturity of these items. With the exception of trade receivables from General American and its affiliates, credit risk with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across geographical areas. Investment management fees receivable from General American and their affiliated entities at December 31, 1995 and 1996 amounted to $825,924 and $1,042,294 respectively. NOTE 18--PRO FORMA EARNINGS PER SHARE Pro forma earnings per share for the year ended December 31, 1996 is computed by dividing net income by the weighted average number of shares of common stock and dilutive common stock equivalents. For the purpose of this F-22 93 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) calculation, outstanding shares of Series A and Series B Convertible Preferred Stock and stock options are considered common stock equivalent shares for all periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all common and common equivalent shares issued during the twelve month period prior to the date of the initial filing of the Company's Registration Statement have been included in the calculation, using the treasury stock method, as if they were outstanding for all periods presented. Specifically such common and common equivalent shares are comprised of (i) 475,000 shares of Series B Convertible Preferred Stock issued during such period (see Note 9), (ii) 230,000 options granted in 1996 (see Note 11) and (iii) 7,500 options granted in January 1997. The assumed initial public offering price for the purposes of this calculation only was $13.50 per share. Given that only 1996 results include full consolidated operations (see Note 1), the Company believes that presentation of historical earnings per share prior to 1996 would not be meaningful. NOTE 19--INDUSTRY SEGMENT The Company is primarily engaged in a single line of business as a provider of investment management services, which comprises several types of services, such as discretionary asset management, investment accounting and reporting services, mortgage origination and servicing, private equity investments and institutional investment research. These activities constitute a single business segment. NOTE 20--NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 specifies 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. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision and (c) revising the contingent share provisions and the supplemental EPS data requirements. SFAS No. 128 also makes a number of changes to existing disclosure requirements. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company has not yet determined the impact of the implementation of SFAS No. 128. NOTE 21--SUBSEQUENT EVENTS In June, 1997, General American, pursuant to a call right, purchased 1,594,995 shares of the Company's Series A Preferred Stock from existing shareholders for $11.25 per share. In September, 1997, the Company filed a preliminary registration statement with the SEC to register 2,500,000 shares of Common Stock (excluding the over-allotment option) to be sold by the Company in an initial public offering. F-23 94 SCHEDULE I CONNING CORPORATION (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS
DECEMBER 31, --------------------------- 1995 1996 ASSETS Cash and cash equivalents.................................................. $ -- $ 424,263 Investments in subsidiaries................................................ 31,079,378 31,230,081 Due from affiliates........................................................ 30,150 -- Capitalized software, less accumulated depreciation of $0 and $311,667..... -- 1,388,333 Prepaid expenses and other assets.......................................... 94,400 4,418 ----------- ----------- Total assets................................................... $31,203,928 $33,047,095 =========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY Book overdraft............................................................. $ 349,959 $ -- Accrued expenses........................................................... 228,550 241,648 Due to affiliates.......................................................... -- 848,282 Long term debt............................................................. 9,000,000 2,000,000 Other payable.............................................................. -- 640,000 Deferred liabilities....................................................... -- 167,730 ----------- ----------- Total liabilities.............................................. 9,578,509 3,897,660 ----------- ----------- Series A convertible preferred stock, $.01 par value: 3,190,000 shares authorized, issued and outstanding....................................... 17,002,704 22,330,004 Series B convertible preferred stock, $.01 par value: 600,000 shares authorized, 460,000 issued and outstanding............................... -- 2,451,800 ----------- ----------- Total convertible preferred stock.............................. 17,002,704 24,781,804 ----------- ----------- Common stock, $.01 par value: 20,000,000 shares authorized; 6,710,000 shares issued and outstanding............................................ 67,100 67,100 Additional paid in capital................................................. 2,944,647 2,944,647 Retained earnings.......................................................... 1,376,668 1,355,884 Unrealized appreciation on investments, net of deferred income taxes....... 234,300 -- ----------- ----------- Total common shareholder's equity.............................. 4,622,715 4,367,631 ----------- ----------- Total liabilities and shareholder's equity..................... $31,203,928 $33,047,095 =========== =========== See accompanying notes to condensed financial statements.
F-24 95 CONNING CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996 Revenues: Dividend from subsidiary..................................... $4,546,667 $5,925,000 Management advisory fees..................................... -- 300,000 Other income................................................. 5,291 5,644 ---------- ---------- Total revenues....................................... 4,551,958 6,230,644 ---------- ---------- Expenses: Other expenses............................................... 18,317 67,899 Interest expense............................................. 329,000 413,389 ---------- ---------- Total expenses....................................... 347,317 481,288 ---------- ---------- Income before benefit from income taxes...................... 4,204,641 5,749,356 Benefit from income taxes.................................... 130,399 77,871 ---------- ---------- Income before equity in undistributed earnings of subsidiaries, net of taxes................................. 4,335,040 5,827,227 Equity in undistributed earnings (loss) of subsidiaries, net of taxes................................................... (922,889) 385,004 ---------- ---------- Net income................................................... 3,412,151 6,212,231 Preferred stock dividends.................................... 350,900 905,715 ---------- ---------- Net earnings available to common shareholders................ $3,061,251 $5,306,516 ========== ========== See accompanying notes to condensed financial statements.
F-25 96 CONNING CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996 Operating activities: Net income.................................... $ 3,412,151 $ 6,212,231 Adjustment for items not affecting cash: Amortization of capitalized software...... -- 311,667 Changes in: Investment in subsidiaries............ (4,854,296) (6,310,003) Due to/from affiliates................ (30,150) 878,432 Prepaid expenses and other assets..... (94,400) 89,982 Accrued expenses...................... 228,550 13,098 Deferred liabilities.................. -- 167,730 ------------ ------------ Net cash provided by (used in) operating activities........... (1,338,145) 1,363,137 ------------ ------------ Investing activities: Purchase of software.......................... -- (940,000) Dividends received from subsidiaries.......... 4,546,667 5,925,000 ------------ ------------ Net cash provided by investing activities..................... 4,546,667 4,985,000 ------------ ------------ Financing activities: Borrowings on long term debt.................. 13,000,000 -- Repayments on long term debt.................. (4,000,000) (7,000,000) Repayments on other payables.................. -- (120,000) Acquisition of Conning, net of cash acquired.................................... (12,207,581) -- Issuance of Series B preferred stock.......... -- 2,451,800 Dividends on preferred stock.................. (350,900) (905,715) ------------ ------------ Net cash provided by (used in) financing activities........... (3,558,481) (5,573,915) ------------ ------------ Net change in cash and cash equivalents........... (349,959) 774,222 Book overdraft, beginning of year................. -- (349,959) ------------ ------------ Cash and cash equivalents (book overdraft), end of year............................................ $ (349,959) $ 424,263 ============ ============ Supplemental disclosure of cash flow information: Cash paid for: Interest.................................. $ 323,750 $ 412,806 Income taxes.............................. -- -- Supplemental disclosure of non-cash information: Contribution of GAIMCO.................... $ 1,327,164 -- Accretion on Series A Preferred Stock..... -- $ 5,327,300 See accompanying notes to condensed financial statements.
F-26 97 CONNING CORPORATION (PARENT COMPANY ONLY) NOTES TO CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE 1--ORGANIZATION The condensed financial statements of Conning Corporation (the "Company") should be read in conjunction with the consolidated financial statements of Conning Corporation and Subsidiaries and the notes thereto. Investment in subsidiary is accounted for under the equity method. NOTE 2--RELATED PARTY TRANSACTIONS During 1996, the Company provided the use of its software to its subsidiaries through administrative services agreements. Charges were $312,000 during 1996 which approximated the amortization of the software during the period. The amount of cash dividends paid to the Company by consolidated subsidiaries of the Company amounted to approximately $4,547,000 and $5,925,000 for the years ended December 31, 1995 and 1996, respectively. There are no restrictions on the payment of dividends, except for those stipulated by certain regulatory authorities applicable to Conning & Company. Conning & Company's ability to pay dividends is limited to capital in excess of a defined minimum requirement as set forth in Securities and Exchange Commission Rule 15c3-1. NOTE 3--CAPITAL TRANSACTIONS The board of directors of the Company is authorized to issue up to 20,000,000 shares of Common Stock with a par value of $0.01 per share. There were 6,710,000 shares issued and outstanding at December 31, 1995 and 1996. The preferred stock of the Company consists of (i) Series A Convertible Preferred Stock, par value $0.01 per share and (ii) Series B Convertible Preferred Stock, par value $0.01 per share. At December 31, 1995, 3,190,000 shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") were authorized, issued and outstanding. The Series A Preferred Stock pays dividends quarterly based on the 90 day United States Treasury Bill rate in effect on the previous payment date. Such dividends are cumulative. The Company declared dividends on the Series A Preferred Stock of $0.11 and $0.28 per share for the years ended December 31, 1995 and 1996, respectively. On November 8, 1996, the Company commenced a private offering to certain employees and directors. This offering was for a new class of non-voting preferred stock designated Series B Convertible Preferred Stock (the "Series B Preferred Stock"). A total of 460,000 shares were sold at $5.33 per share adding $2,451,800 to preferred stock. 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 pays dividends quarterly at a rate of 5% per annum and such dividends are cumulative. The Series B Preferred Stock carries no voting rights and each share is convertible into one share of Non-Voting Common Stock at the holder's election and upon payment of an 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. The carrying value of the convertible preferred stock is at original issue price plus accretion relating to any increase in the redemption value of the stock during the period. During 1995 and 1996, such accretion was $0 and $5,327,300, respectively. F-27 98 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Conning, Inc.: We have audited the accompanying consolidated balance sheet of Conning, Inc. and subsidiaries as of June 30, 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for the six-month period ended June 30, 1995. 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 audit. We conducted our audit 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 audit provides 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, Inc. and subsidiaries as of June 30, 1995 and the results of their operations and their cash flows for the six-month period ended June 30, 1995, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP St. Louis, Missouri November 14, 1997 F-28 99 CONNING INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 1995 ASSETS Current assets: Cash and cash equivalents..................... $ 3,408,483 Short-term investments........................ 4,487,422 Accounts receivable, net...................... 3,270,269 Marketable equity securities.................. 1,043,290 Prepaid expenses and other current assets..... 422,752 ----------- Total current assets.................. 12,632,216 Non-marketable investments at value............... 1,341,771 Equipment and leasehold improvements, at cost, less accumulated depreciation and amortization of $2,330,448................................... 1,120,484 Deferred income taxes............................. 908,740 ----------- Total assets.......................... $16,003,211 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Compensation payable.......................... 1,436,526 Deferred revenue.............................. 288,959 Accounts payable and other accrued expenses... 2,948,303 Income taxes payable.......................... 39,153 ----------- Total current liabilities............. 4,712,941 Accrued rent liability............................ 2,214,525 ----------- Total liabilities..................... 6,927,466 ----------- 8% Cumulative senior preferred stock, $0.01 par value: 1,000,000 shares authorized; 160,000 issued and outstanding at stated value of $22.82 per share............................. 3,650,000 ----------- Total preferred stock................. 3,650,000 ----------- Non-voting common stock, $0.01 par value: 100,000 shares authorized; 24,350 shares issued and outstanding..................................... 244 Common stock, $.01 par value: 1,000,000 shares authorized; 83,204 shares issued and outstanding 832 Additional paid in capital........................ 1,428,796 Retained earnings................................. 4,954,707 Unrealized appreciation on investments, net of deferred income taxes........................... 158,020 Treasury stock, at cost (22,633 common shares).... (1,116,854) ----------- Total common shareholder's equity..... 5,425,745 ----------- Total liabilities and shareholder's equity............................... $16,003,211 =========== See accompanying notes to consolidated financial statements.
F-29 100 CONNING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1995 Revenues: Asset management and related fees............. $ 5,661,690 Research services............................. 4,563,802 Other income.................................. 275,122 ----------- Total revenues........................ 10,500,614 ----------- Expenses: Employee compensation and benefits............ 5,322,480 Occupancy and equipment costs................. 715,532 Marketing and production costs................ 1,176,887 Professional services......................... 548,325 Other operating expenses...................... 645,931 ----------- Total expenses........................ 8,409,155 ----------- Income before provision for income taxes...... 2,091,459 Provision for income taxes.................... 808,838 ----------- Net income.................................... $ 1,282,621 =========== Preferred stock dividends..................... 160,000 ----------- Net earnings available to common shareholders................................ $ 1,122,621 =========== See accompanying notes to consolidated financial statements.
F-30 101 CONNING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1995
UNREALIZED APPRECIATION TOTAL ADDITIONAL ON COMMON COMMON PAID IN RETAINED INVESTMENTS, TREASURY SHAREHOLDERS' STOCK CAPITAL EARNINGS NET STOCK EQUITY Balance, December 31, 1994..................... $1,065 $1,357,382 $3,832,086 $ 46,728 $(1,051,327) $4,185,934 Exercise of stock options for 1,100 common shares....................................... 11 71,414 71,425 Purchase of 1,735 common shares of treasury stock........................................ (65,527) (65,527) Change in unrealized appreciation of investment, net of deferred income taxes........................ 111,292 111,292 Dividend on Preferred Stock.................... (160,000) (160,000) Net income..................................... 1,282,621 1,282,621 ------ ---------- ---------- -------- ----------- ---------- Balance, June 30, 1995......................... $1,076 $1,428,796 $4,954,707 $158,020 $(1,116,854) $5,425,745 ====== ========== ========== ======== =========== ========== See accompanying notes to consolidated financial statements.
F-31 102 CONNING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1995 Operating activities: Net income.................................... $ 1,282,621 Adjustment for items not affecting cash: Depreciation.............................. 150,441 Net unrealized appreciation on non-marketable securities............... (2,672) Accretion of discounts on short-term investments............................. (130,886) Net appreciation on securities purchased held for market making.................. (247,040) Changes in: Accounts receivable................... (18,599) Prepaid expenses and other assets..... (632,510) Accounts payable and other accrued expenses............................ 1,049,004 Deferred revenue...................... 23,303 Accrued rent liability................ (49,012) Compensation payable.................. (488,297) ----------- Net cash provided by operating activities..................... 936,353 ----------- Investing activities: Purchases of non-marketable securities........ (28,283) Purchases of short-term investments........... (4,368,258) Maturities of short-term investments.......... 4,600,000 Purchases of equipment, net................... (285,309) ----------- Net cash used in investing activities..................... (81,850) ----------- Financing activities: Dividend on 8% Cumulative Senior Preferred Stock....................................... (160,000) Purchase of treasury stock.................... (65,527) Exercise of stock options..................... 71,425 ----------- Net cash used in financing activities..................... (154,102) ----------- Net increase in cash and cash equivalents......... 700,401 Cash and cash equivalents, beginning of period.... 2,708,082 ----------- Cash and cash equivalents, end of period.......... $ 3,408,483 =========== Supplemental disclosure of cash flow information: Cash paid for: Interest...................................... $ -- Income taxes.................................. 1,345,594 See accompanying notes to consolidated financial statements.
F-32 103 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1995 NOTE 1--ORGANIZATION Conning Inc. and subsidiaries (the "Corporation", formerly known as Conning Corporation), a Delaware corporation, is a holding company whose wholly-owned subsidiary, Conning & Company ("Conning"), is a registered investment adviser with the Securities and Exchange Commission under the Investment Advisers Act and is primarily an asset management and research company concentrating on the insurance industry. Conning is also a registered broker dealer and a member of the National Association of Securities Dealers, Inc. The Corporation also owns another inactive subsidiary having no operations or activity since 1992. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements of the Corporation have been prepared in conformity with generally accepted accounting principles. The significant accounting policies followed by the Corporation and its subsidiaries are summarized below: Principles of Consolidation--The consolidated financial statements include the accounts of the Corporation 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. Cash and Cash Equivalents--Cash and cash equivalents for purposes of the financial statements represent cash and highly liquid investments with original maturities of three months or less. Short-Term Investments--Short-term investments are comprised of U.S. Government Securities and investment grade commercial paper having a maturity of one year or less, and are carried at amortized cost, which approximates fair value. Investments--Marketable equity securities classified as trading securities are presented at fair value with corresponding unrealized gains or losses included in current period income. Marketable equity securities classified as available-for-sale are presented at fair value with corresponding unrealized gains or losses included as a separate component of shareholders' equity, net of deferred income taxes. Non-marketable investments in various private equity funds are held at fair value by the Company's broker-dealer in accordance with generally accepted accounting principles for broker-dealers. Such investments are recorded using the equity method basis of accounting (including unrealized gains and losses). The changes in fair values are included in the consolidated statements of income. Equipment and Leasehold Improvements--Equipment is stated at cost, less accumulated depreciation provided on an accelerated method over periods not exceeding eight years. Leasehold improvements are stated at cost, less accumulated amortization provided on a straight line basis over the term of the lease. Income Taxes--Income tax expense is based on income reported in the financial statements. Deferred federal and state income taxes are provided based on an asset and liability approach which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The Corporation files consolidated federal and combined state income tax returns with its subsidiaries. The Corporation records a valuation allowance against the deferred income tax asset for that portion of the asset that may not be realized. Rent Expense--The Corporation received financial incentives as well as a stepped rental rate structure regarding its lease at the Corporation's main premises. The Corporation is recording all incentives and rental rates in its results of operations as if they occurred evenly throughout the term of the lease. In connection with such incentives, the F-33 104 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Corporation issued a $350,000 letter of credit to the landlord in the event of default under the lease. The letter of credit was outstanding at June 30, 1995. Compensation Payable--Compensation payable represents amounts payable to employees as a result of the Company's incentive compensation programs during the normal course of business. Amounts are accrued in the period earned. Non-cash employee compensation--The Company uses the intrinsic value method to account for stock option plans as prescribed by the Accounting Principles Opinion Board 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 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. Other income--Other income is comprised of investment income and other miscellaneous revenues. 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. New Accounting Pronouncement--In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 permits companies to adopt a new fair value based method to account for stock option plans or to continue using the intrinsic method and provide pro forma disclosures. This statement is effective for periods beginning after December 15, 1995. The Company intends to continue using the intrinsic value method and will provide the pro forma disclosures in the notes to the consolidated financial statements. NOTE 3--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 Corporation. At June 30, 1995, an allowance for doubtful accounts of $212,750 was applied as a reduction of accounts receivable. NOTE 4--INVESTMENTS At June 30, 1995, the estimated fair value of marketable and non-marketable investments were as follows: Marketable Equity Securities--Trading (cost $285,921)........................................... $ 283,290 Marketable Equity Securities--Available-for-sale (cost $490,000)........................................... 760,000 ---------- Total marketable securities......................... $1,043,290 ---------- Non-marketable equity securities (cost $16,625)....... 18,933 Non-marketable partnership investments (cost $1,300,483)......................................... 1,322,838 ---------- Total non-marketable investments...................... $1,341,771 ==========
The Corporation is a 1% general partner in various private equity funds. The value of the non-marketable partnership investments is accounted for using the equity method and updated periodically based upon changes in fair values and recorded in the consolidated statements of income. Additionally, the Company had no derivative investments as of or during the six month period ended June 30, 1995. F-34 105 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements as of June 30, 1995 comprised the following: Office equipment...................................... $1,300,406 Data processing equipment............................. 1,704,284 Leasehold improvements................................ 446,242 ---------- 3,450,932 Less accumulated depreciation and amortization........ 2,330,448 ---------- $1,120,484 ==========
Depreciation expense for the six month period ended June 30, 1995, was $150,441 on the above and is included in other operating expenses in the consolidated statement of income. The Corporation occupies premises and rents certain office equipment under leases that are accounted for as operating leases and that have expiration dates through 2005. Rentals under these leases aggregated approximately $511,700 for the six month period ended June 30, 1995, after reduction for rent received from subleases of approximately $75,050 during the period. At June 30, 1995, the minimum net rental commitments of the Corporation for the periods indicated under the terms of these operating leases in excess of one year were approximately $7,353,000 as follows: $417,000 remaining in 1995, $829,000 in 1996, $777,000 in 1997, $743,000 in 1998; $734,000 per year from 1999-2004, and $183,000 in 2005. NOTE 6--INCOME TAXES The provision for federal and state income taxes for the six month period ended is as follows: Current income tax provision.......................... $1,607,599 Deferred income tax benefit........................... (798,761) ---------- Total income tax provision............................ $ 808,838 ==========
The differences between the expected United States Federal income tax provision at the statutory rate of 34% and the Corporation's actual Federal income tax rate for the six month period ended June 30, 1995 are as follows: Income before income taxes............................ $2,091,459 Federal income taxes at statutory rate................ 711,096 Changes in income taxes resulting from: State tax, net of federal......................... 159,407 Other, net........................................ (61,665) ---------- Federal income tax provision.......................... $ 808,838 ==========
The components of deferred income taxes for the six month period ended June 30, 1995, are as follows: Accrued rent liability................................ $ 24,037 Partnership investments............................... (719,167) Accrued expense reserves.............................. (14,441) Other, net............................................ (89,190) --------- Total deferred income tax benefit..................... $(798,761) =========
F-35 106 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Corporation'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 June 30, 1995, the net deferred income tax assets are as follows: Accrued rent liability................................ $ 917,369 Partnership investments............................... 710,637 Other, net............................................ 290,076 --------- Gross deferred income tax assets...................... 1,918,082 Valuation allowance................................... (701,251) --------- Deferred income tax assets, net of valuation allowance........................................... 1,216,831 --------- Depreciation.......................................... (158,961) Unrealized appreciation on investments................ (149,130) --------- Gross deferred income tax liabilities................. (308,091) --------- Net deferred income tax assets........................ $ 908,740 =========
NOTE 7--SHORT-TERM BORROWINGS At June 30, 1995, the Corporation had a line of credit with a commercial bank for $1,200,000. The interest rate is based on LIBOR plus 150 basis points. There were no outstanding borrowings during the six month period ended June 30, 1995. NOTE 8--PREFERRED STOCK AND SHAREHOLDERS' EQUITY The board of directors of the Corporation is authorized to issue up to 1,000,000 shares of common stock, 100,000 shares of non-voting common stock and 1,000,000 shares of preferred stock. All shares have a par value of $.01 per share. The board of directors is authorized to set the terms, limitations, preferences and series of preferred stock. On February 25, 1993, a non-affiliated financial services insurance holding company (Insurance Holding Company) purchased all of the then outstanding Corporation's Non-Voting Series A Preferred Stock, which was subject to mandatory redemption, from the previous shareholders. On the same date, the Corporation entered into an agreement with the Insurance Holding Company to exchange the shares of Non-Voting Series A Preferred Stock for 160,000 shares of 8% Cumulative Senior Preferred Stock ("Senior Preferred Stock") valued at $22.8125 per share ($3,650,000 aggregate), all of the 24,350 shares of non-voting common stock valued at $36.50 per share ($888,775 aggregate) and cash of $261,225. The Senior Preferred Stock was issued at a discount from a face value of $4,000,000. The holders of the Senior Preferred Stock have voting rights only with respect to certain matters, including an election of two members of the board of directors representing less than a majority of the board, and are entitled to receive cumulative dividends at the annual rate of $2.00 per share payable semi-annually. The Senior Preferred Stock, plus any accrued and unpaid dividends, may be redeemed by the Corporation on or after March 31, 1994 with the approval of the Corporation's Board of Directors. No redemptions occurred during the six month period ended June 30, 1995. The Preferred Stock was redeemable at $24.0625 per share ($3,850,000 aggregate) if redeemed between March 31, 1994 through March 30, 1997; and at $25.00 per share ($4,000,000 aggregate) if redeemed on or after March 31, 1997. In connection with the exchanges as described above, the Corporation has issued warrants to subsidiaries of the Insurance Holding Company to purchase 31% of the Corporation's fully diluted common shares, at a price determined by the common stock book value per share, if the Senior Preferred Stock was not fully redeemed by February 25, 1999. The voting shareholders of common stock are entitled to vote on all matters requiring shareholder action. All voting common shares issued by the Corporation are subject to a Shareholder's Agreement. Under this agreement, no transfer of shares is permitted except with the consent of the Corporation's Board of Directors. Upon termination of F-36 107 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) employment, or other event as described in the agreement, all voting common stock shares of the Corporation held must be sold back to the Corporation at a price determined in accordance with the agreement. The Corporation did not declare any dividends on common stock shares outstanding during the six month period ended June 30, 1995. The Corporation is also restricted as to the amount of dividends that can be declared since Conning is a registered broker-dealer who is required to maintain a minimum net capital balance of approximately $273,000 at June 30, 1995, pursuant to the Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1). NOTE 9--RELATED PARTY ACTIVITIES The Corporation is the holder of notes receivable for the principal sum of $200,000 bearing interest at the rate of 8.0% per annum from a non-public reinsurance broker of which the Corporation owns a nominal interest. Members of the board of directors of the Corporation, who are also members of senior management, serve as Board members of the reinsurance broker. The notes were due in installments of $125,000 and $75,000 on September 1, 1995 and August 1, 1997, respectively. Subsequently, the notes were paid in full in October, 1995. Interest is due semi-annually and interest income of $8,000 is included in the statement of income for the six month period ended June 30, 1995. The Corporation provided investment management services to the holder of the non-voting common stock. Investment management fees of approximately $346,000 were earned for the six month period ended June 30, 1995. The Corporation also is the general partner for six affiliated private equity funds with a 1% equity ownership interest in each fund. Fees for managing these funds were approximately $1,632,000 for the six month period ended June 30, 1995. NOTE 10--STOCK OPTIONS AND EMPLOYEE BENEFITS The Corporation has a Stock Option Plan (the "Plan") that allows the Board of Directors to grant incentive and/or non-qualified stock options to key employees and directors of the Corporation and its affiliates. The options are exercisable in equal installments over a period of two years from the date of grant and no later than ten years from the date of grant. A total of 83,876 shares of the Corporation's common stock have been reserved for issuance pursuant to the Plan. Transactions under the stock option plan as of June 30, 1995 are summarized as follows:
AVERAGE NUMBER EXERCISE OF SHARES PRICE --------- -------- Outstanding, beginning of period........................................ 34,535 $35.92 Granted................................................................. -- -- Exercised............................................................... 1,100 64.93 Canceled................................................................ 826 38.11 ------ ------ Outstanding, end of period.............................................. 32,609 $34.89 ====== ====== Exercisable, end of period.............................................. 25,369 $28.13 ====== ======
401(k) Savings Plan--Conning has a 401(k) savings plan ("the 401(k) Plan") for which substantially all employees are eligible. In addition to employee contributions, Conning accrued approximately $259,800 on behalf of the eligible employees for the six month period ended June 30, 1995. The 401(k) Plan offers six investment vehicles in addition to a self-directed option. One of the investment vehicles is managed by Conning. NOTE 11--NET CAPITAL REQUIREMENTS The Corporation's principal subsidiary, Conning, is subject to a requirement of the SEC's Uniform Net Capital Rule, requiring the maintenance of certain minimal capital levels. At June 30, 1995, Conning had net capital, as defined by the Uniform Net Capital Rule, of approximately $6,263,000, which was approximately $5,990,000 in excess of the required net capital. F-37 108 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--COMMITMENTS AND CONTINGENCIES Two legal claims have arisen during the normal course of business of the Corporation's non-securities and non-investment advisory services businesses. While the Corporation believes it has meritorious defenses against the suits, the ultimate resolution of the matters and the related impact on these financial statements is based upon estimates of the likely outcome. Management of the Corporation, after consultation with legal counsel, believes its aggregate accrual relating to litigation is adequate as of June 30, 1995. Subsequent to June 30, 1995, one of the two claims was resolved with no material impact to the financial statements. Conning is a 1% general partner in certain private equity funds that the subsidiary also manages. At June 30, 1995, Conning's future commitment to fund such required capital contributions was approximately $440,000. NOTE 13--SUBSEQUENT EVENTS On August 11, 1995 all of the outstanding common stock of the Corporation was acquired by Conning Corporation, formerly known as Conning Asset Management Company--name change effective July 31, 1996. Conning Corporation is owned by General American Holding Company, a wholly owned subsidiary of General American Life Insurance Company. As a result of the acquisition by Conning Corporation, the shareholders of Conning Inc. contributed all of their stock to Conning Corporation in a Section 351 merger transaction (the "Strategic Merger") in exchange for cash and convertible preferred stock of Conning Corporation. Additionally, all of the outstanding shares of the 8% Cumulative Senior Preferred Stock were redeemed and retired. In September 1997, Conning Corporation filed a preliminary registration statement with the Securities and Exchange Commission to register 2,500,000 shares of Common Stock (excluding the over-allotment option) to be sold by Conning Corporation in an initial public offering. F-38 109 REPORT OF INDEPENDENT ACCOUNTANTS February 21, 1995, except for Note 12, as to which the date is September 19, 1997 To the Board of Directors and Shareholders of Conning Inc. In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Conning Inc. & Subsidiaries (formerly known as Conning Corporation) at December 31, 1994, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 2 to the financial statements, the Company changed its method for accounting for equity investments in 1994. /s/ Price Waterhouse LLP F-39 110 CONNING INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 1994
ASSETS Cash and cash equivalents......................... $ 2,708,082 Short-term investments............................ 4,588,279 Underwriting fees and commissions receivable...... 657,130 Accounts receivable............................... 2,205,076 Affiliate receivables............................. 389,464 Investments....................................... 1,917,066 Equipment and leasehold improvements, at cost, less accumulated depreciation and amortization of $2,180,005................................... 985,616 Prepaid expenses and deferred charges............. 308,668 Other assets...................................... 469,021 ----------- Total assets.................................. $14,228,402 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Amounts and notes payable to former shareholders.................................... $ 569,009 Compensation payable.............................. 1,924,823 Deferred revenue.................................. 265,656 Accrued rent expense.............................. 2,263,537 Accounts payable and other accrued expenses....... 1,369,443 ----------- Total liabilities............................. 6,392,468 ----------- 8% Cumulative senior preferred stock, $.01 par value: 1,000,000 share authorized; 160,000 issued and outstanding at stated value of $22.82 per share................................ 3,650,000 ----------- Non voting common stock, $.01 par value: 100,000 shares authorized; 24,350 shares issued and outstanding..................................... 244 Common stock, $.01 par value: 1,000,000 shares authorized; 82,104 shares issued and outstanding..................................... 821 Capital in excess of par value.................... 1,357,382 Retained earnings................................. 3,832,086 Unrealized appreciation on investments, net of deferred income taxes........................... 46,728 Treasury stock, at cost (20,898 shares)........... (1,051,327) ----------- Total common shareholders' equity............. 4,185,934 ----------- Total shareholders' equity.................... 7,835,934 ----------- Total liabilities and shareholders' equity.... $14,228,402 =========== See accompanying notes to consolidated financial statements.
F-40 111 CONNING INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 Revenue Asset management and related fees............. $ 9,839,771 Research services............................. 8,164,765 Other......................................... 472,211 ----------- Total revenue............................. 18,476,747 ----------- Expenses Employee compensation and benefits............ 10,195,854 Occupancy and equipment costs................. 1,450,080 Marketing and production costs................ 2,029,390 Professional fees............................. 784,507 Other operating expenses...................... 1,265,603 ----------- Total expenses............................ 15,725,434 ----------- Income before provision for income taxes...... 2,751,313 Provision for income taxes.................... 1,243,822 ----------- Net income.................................... $ 1,507,491 =========== See accompanying notes to consolidated financial statements.
F-41 112 CONNING INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1994
COMMON SHAREHOLDERS' EQUITY --------------------------------------------------------------------- CAPITAL IN UNREALIZED PREFERRED COMMON EXCESS OF PAR RETAINED STOCK STOCK STOCK VALUE EARNINGS APPRECIATION TREASURY STOCK Balance, December 31, 1993................... $3,650,000 $ 927 $ 486,706 $2,644,595 $ (579,871) Issuance of 13,775 shares of common stock........ 138 870,676 Purchase of treasury stock, 7,830 shares.... (471,456) Unrealized appreciation of investments, net of deferred income taxes.................. $46,728 Dividend on 8% Cumulative Senior Preferred Stock.................. (320,000) Net Income............... 1,507,491 ---------- ------ ---------- ---------- ------- ----------- Balance, December 31, 1994................... $3,650,000 $1,065 $1,357,382 $3,832,086 $46,728 $(1,051,327) ========== ====== ========== ========== ======= =========== See accompanying notes to consolidated financial statements.
F-42 113 CONNING INC. & SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1994 Operating activities: Net income.................................... $ 1,507,491 Adjustment for items not affecting cash Depreciation and amortization............. 441,930 Deferred income tax provision............. 49,272 Net unrealized appreciation on non-marketable securities................ (39,639) Net purchases of securities held for market making............................ (23,000) Accretion of discounts on short-term investments.............................. (82,709) Changes in: Receivables........................... 572,924 Prepaid expenses, deferred charges and other assets......................... (3,780) Payables.............................. (613,395) Deferred revenue...................... (98,256) Accrued rent expense.................. (9,521) Compensation payable.................. 1,664,625 ----------- Net cash provided by operating activities...................... 3,365,942 ----------- Investing activities: Purchases of non-marketable securities.... (76,650) Distribution from non-marketable partnership investments.................. 127,431 Purchases of equipment, net............... (29,094) Purchases of short-term investments....... (6,005,570) Maturities of short-term investments...... 1,500,000 ----------- Net cash (used for) provided by investing activities............ (4,483,883) ----------- Financing activities: Dividend on 8% Cumulative Senior Preferred Stock.................................... (320,000) Issuance of common stock, net of issuance cost..................................... 870,814 Issuance of employee loans................ (324,081) Repayments of employee loans.............. 143,036 Payments to former shareholders........... (66,900) Purchase of treasury stock................ (26,845) ----------- Net cash provided by (used for) financing activities................. 276,024 ----------- Non-cash financing activities: Notes and amounts payable to former shareholders............................. 444,611 Purchase of treasury stock................ (444,611) ----------- Net non-cash financing activities................. -- ----------- Net change in cash and cash equivalents........... (841,917) Cash and cash equivalents, beginning of year...... 3,549,999 ----------- Cash and cash equivalents, end of year............ $ 2,708,082 =========== Cash paid for: Interest...................................... $ -- Income taxes.................................. $ 1,719,889 See accompanying notes to consolidated financial statements.
F-43 114 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--ORGANIZATION Conning Inc. (the "Corporation", formerly known as Conning Corporation), a Delaware corporation, is a holding company whose wholly-owned subsidiary, Conning & Company ("Conning"), is a registered investment adviser with the Securities and Exchange Commission under the Investment Advisers Act and is primarily an asset management and research company concentrating on the insurance industry. Conning is also a registered broker dealer and a member of the National Association of Securities Dealers, Inc. NOTE 2--SUMMARY OF ACCOUNTING POLICIES The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles. The significant accounting policies followed by the Corporation and its subsidiaries are summarized below. Accounting Changes--Effective January 1, 1994, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115) which requires that investments be classified in one of three categories: held-to-maturity, available-for-sale or trading. The Corporation classified equity investments held for market making activities as trading securities and all other marketable equity securities as available-for-sale. At January 1, 1994, there was no effect on the financial position of the Corporation upon implementation of FAS 115 as investments held for market making activities were previously carried at fair value with corresponding gains or losses recorded through income. No other marketable equity securities were held at January 1, 1994. Principles of Consolidation--The consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of intercompany balances and transactions. Revenue Recognition--Asset management fees, institutional research fees and financial advisory fees are recorded in income when services are provided. Consulting fees are recorded as income at the completion of the contract or at the time of receipt in the case of non-refundable fees earned. Fee income for industry research publications is recorded as income ratably over the subscription period, which is generally one year. Related expenses are recorded as incurred. Cash and Cash Equivalents--Cash and cash equivalents represent cash and highly liquid investments with original maturities of three months or less. Short-Term Investments--Short-term investments are comprised of U.S. Government Securities and are carried at amortized cost, which approximates fair value. Investments--Marketable equity securities classified as trading securities are presented at fair value with corresponding unrealized gains or losses included in current period income. Marketable equity securities classified as available-for-sale are presented at fair value with corresponding unrealized gains or losses included as a separate component of shareholders' equity, net of deferred income taxes. Non-marketable securities are valued at fair value as determined in good faith by the management of the Corporation. The changes in the resulting difference between cost and market (or fair value) are included in the consolidated statement of operations. Equipment and Leasehold Improvements--Equipment is stated at cost, less accumulated depreciation provided on an accelerated method over periods not exceeding eight years. Leasehold improvements are stated at cost, less accumulated amortization provided on a straight line basis over the term of the lease. Income Taxes--Income tax expense is based on income reported in the financial statements. Deferred federal and state income taxes are provided based on an asset and liability approach which requires the recognition of deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The Corporation files consolidated F-44 115 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) federal and combined state income tax returns with its subsidiaries. Net deferred income taxes are included in other assets. The Corporation records a valuation allowance against the deferred income tax asset for that portion of the asset that may not be realized. Deferred Charges--Deferred charges represent costs incurred to establish certain private equity funds. These costs are being amortized on a straight line method over an estimated useful life of eight years. Amortization of $81,386 was charged against revenue during 1994. Rent Expense--The Corporation received financial incentives as well as a stepped rental rate structure regarding its lease at the Corporation's main premises. The Corporation is recording all incentives and rental rates in its results of operations as if they occurred evenly throughout the term of the lease. In connection with such incentives, the Corporation issued a $350,000 letter of credit to the landlord in the event of default under the lease. The letter of credit was outstanding at December 31, 1994. Other revenue--Realized and unrealized gains on investments, interest income and other miscellaneous revenues are also included. NOTE 3--UNDERWRITINGS, COMMISSIONS AND ACCOUNTS RECEIVABLE Accounts receivable include amounts due for management fees, consulting engagements and other business activities of the Corporation. Underwriting fees and commissions receivable are amounts due from customers for securities transactions and selling concessions due from underwriters. At December 31, 1994, an allowance for doubtful accounts of $212,750 was applied as a reduction of accounts receivable. NOTE 4--INVESTMENTS At December 31, 1994 the estimated fair value of marketable and non-marketable investments were as follows: Marketable Equity Securities--Trading (cost $37,150)........................ $ 36,250 Marketable Equity Securities--Available-for-sale (cost $490,000)............................. 570,000 Non-marketable equity securities (cost $16,625)............................... 18,310 Non-marketable partnership investments (cost $1,272,200)...................... 1,292,506 ---------- Total................................... $1,917,066 ==========
The Corporation owns one security classified as available-for-sale with an original cost of $400,000 and a carrying value at the date of adopting FAS 115 of $490,000. The Corporation is directly, or indirectly through intermediary partnerships, the managing general partner for six private equity funds with an equity ownership interest of 1% in each fund. Fees for managing the six funds were $3,191,855 for the year ended December 31, 1994. The Corporation owns a 42.5% share in the joint venture. During 1994, the Corporation recorded $270,000 in revenue relating to this joint venture. NOTE 5--EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements comprised the following: Office equipment.............. $1,191,233 Data processing equipment..... 1,604,349 Leasehold improvements........ 370,039 ---------- 3,165,621 Less accumulated depreciation and amortization............ 2,180,005 ---------- $ 985,616 ==========
F-45 116 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Depreciation expense for the year ended December 31, 1994 was $360,544. The Corporation occupies premises and rents certain office equipment under leases that are accounted for as operating leases and that have expiration dates through 2005. Rentals under these leases aggregated $1,069,139 for the year ended December 31, 1994, after reduction for rent received from subleases of $150,041. At December 31, 1994, the minimum net rental commitments of the Corporation for the periods indicated under the terms of the operating leases in excess of one year were approximately $7,737,000 as follows: $834,000 in 1995; $819,000 in 1996; $769,000 in 1997; $740,000 in 1998; $732,000 per year from 1999 to 2004 and $183,000 in 2005. At December 31, 1994, the minimum due under a sublease agreement in excess of one year is approximately $100,000 as follows: $63,000 in 1995, and $37,000 in 1996. The commitments include future repayments of approximately $2,264,000 in rent expense accrued and rent incentives recorded at December 31, 1994. NOTE 6--INCOME TAXES The provision for federal and state income taxes for the year ended December 31, 1994 are as follows: Current income tax provision............ $1,194,550 Deferred income tax provision........... 49,272 ---------- Total income tax provision.............. $1,243,822 ==========
The components of deferred income taxes for the year ended December 31, 1994 are as follows: Accrued rent............................ $ 3,237 Realization of loss carryforwards....... 111,520 Change in valuation allowance........... 64,074 Accrued expense reserves................ (127,500) Other, net.............................. (2,059) --------- Total deferred income tax provisions.... $ 49,272 =========
Under the provisions of FAS 109, the Corporation'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, 1994 the net deferred income tax assets are as follows: Accrued rent............................ $ 769,603 State income tax, net................... 176,447 Other, net.............................. 231,479 ---------- Gross deferred income tax assets........ 1,177,529 ---------- Depreciation............................ (145,897) Unrealized appreciation on investments............................ (57,800) Investments in affiliates............... (6,973) ---------- Gross deferred income tax liabilities... (210,670) ---------- Net deferred income tax assets before valuation allowance................... 966,859 Valuation allowance..................... (778,172) ---------- Net deferred income tax assets.......... $ 188,687 ==========
F-46 117 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Corporation's effective federal income tax rate was 36.8% for the year ended December 31, 1994. The differences between the hypothetical United States federal income tax provision at the statutory rate of 34% and the Corporation's actual federal income tax rate are as follows: Income before income taxes.............. $2,751,313 State income tax provision.............. (364,510) ---------- Income before federal income taxes...... $2,386,803 ========== Federal income taxes at statutory rates.................................. 811,513 Changes in valuation allowance.......... 23,215 Other, net.............................. 44,584 ---------- Federal income tax provision............ $ 879,312 ==========
NOTE 7--SHORT-TERM BORROWINGS At December 31, 1994 the Corporation had a line of credit with a commercial bank for $1,650,000. The interest rate is based on LIBOR plus 150 basis points. The line of credit reduces to $1,200,000 on April 1, 1995, $650,000 on April 1, 1996 and expires on April 1, 1997. There were no outstanding borrowings at December 31, 1994. NOTE 8--SHAREHOLDERS' EQUITY The board of directors of the Corporation is authorized to issue up to 1,000,000 shares of common stock, 100,000 shares of non-voting common stock and 1,000,000 shares of preferred stock. All shares have a par value of $.01 per share. The board of directors is authorized to set the terms, limitations, preferences and series of preferred stock. On February 25, 1993, PennCorp Financial ("PennCorp") purchased all of the then outstanding Corporation's Non-Voting Series A Preferred Stock, which were subject to mandatory redemption, from the previous shareholders. On the same date, the Corporation entered into an agreement with PennCorp to exchange the shares of Non-Voting Series A Preferred Stock for 160,000 shares of 8% Cumulative Senior Preferred Stock ("Senior Preferred Stock") valued at $22.8125 per share ($3,650,000 aggregate), all of the 24,350 shares of non-voting common stock valued at $36.50 per share ($888,775 aggregate) and cash of $261,225. The Senior Preferred Stock was issued at a discount from a face value of $4,000,000. The holders of the Senior Preferred Stock have voting rights only with respect to certain matters, including an election of two members of the board of directors representing less than a majority of the board, and are entitled to receive cumulative dividends at the annual rate of $2.00 per share payable semi-annually. The Senior Preferred Stock, plus any accrued and unpaid dividends, may be redeemed by the Corporation on or after March 31, 1994 with the approval of the Corporation's Board of Directors. No redemptions occurred during 1994. The Preferred Stock is redeemable at $24.0625 per share ($3,850,000 aggregate) if redeemed between March 31, 1994 through March 30, 1997; and at $25.00 per share ($4,000,000 aggregate) if redeemed on or after March 31, 1997. In connection with the exchanges as described above, the Corporation has issued warrants to subsidiaries of PennCorp to purchase 31% of the Corporation's fully diluted common shares, at a price determined by the common stock book value per share, if the Senior Preferred Stock is not fully redeemed by February 25, 1999. The voting shares of common stock are entitled to vote on all matters requiring shareholder action. All voting common shares issued by the Corporation are subject to a Shareholder's Agreement. Under this agreement, no transfer of shares is permitted except with the consent of the Corporation's Board of Directors. Upon termination of employment, or other event as described in the agreement, all voting common stock shares of the Corporation held must be sold back to the Corporation at a price determined in accordance with the agreement. The Corporation did not declare any dividends on common stock shares outstanding during 1994 and it is anticipated that there will be no dividends declared in the near future. The Corporation is also restricted as to the amount of dividends that can be declared since Conning is a registered broker-dealer who is required to maintain a F-47 118 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) minimum net capital balance of approximately $225,572 at December 31, 1994 pursuant to the Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1). On September 13, 1994, the Corporation held a private offering to certain employees which closed on September 28, 1994. A total of 7,575 shares were sold at $65.85 per share adding $498,814 to shareholders' equity. As of December 31, 1994, the Corporation was owed $211,041 from certain employees for their purchases of common stock, and such amounts were repaid in January 1995. During 1994, the Corporation purchased 7,830 shares of common stock for treasury at a total cost of $471,456. NOTE 9--OTHER RELATED PARTY ACTIVITIES The Corporation is the holder of notes receivable for the principal sum of $200,000 bearing interest at the rate of 8.0% per annum from Tennant Risk Services, Inc. ("Tennant"), a Connecticut corporation of which the Corporation owns a nominal interest. Members of the board of directors of the Corporation who are also members of senior management serve as Board members of Tennant. The notes are due in installments of $125,000 and $75,000 on September 1, 1995 and August 1, 1997 respectively. Interest is due semi-annually and interest income of $16,000 is included in the statement of operations for the year ended December 31, 1994. The Corporation provided investment management services to PennCorp. Investment management fees of $638,142 were earned for the year ended December 31, 1994. NOTE 10--STOCK OPTIONS AND EMPLOYEE BENEFITS The Corporation has a Stock Option Plan (the "Plan") that allows the Board of Directors to grant incentive and/or non-qualified stock options to key employees and directors of the Corporation and its affiliates. The options are exercisable in equal installments over a period of two years from the date of grant and no later than ten years from the date of grant. A total of 83,876 shares of the Corporation's common stock have been reserved for issuance pursuant to the Plan. Transactions under the stock option plan are summarized as follows:
AVERAGE NUMBER OF EXERCISE SHARES PRICE Outstanding, beginning of year.......... 35,866 $24.32 Granted................................. 9,225 62.52 Exercised............................... -- -- Canceled................................ (10,556) 19.76 ------- ------ Outstanding, end of year................ 34,535 $35.92 ======= ====== Exercisable, end of year................ 24,136 $28.81 ======= ======
401(k) Savings Plan--Conning has a 401(k) savings plan ("the 401(k) Plan") for which substantially all employees are eligible. In addition to employee contributions, Conning contributed $351,286 on behalf of the eligible employees for the year ended December 31, 1994. The 401(k) Plan offers six investment vehicles in addition to a self-directed option. One of the investment vehicles is managed by Conning. NOTE 11--NET CAPITAL REQUIREMENTS The Corporation's principal subsidiary, Conning, is subject to a requirement of the SEC's Uniform Net Capital Rule, requiring the maintenance of certain minimal capital levels. At December 31, 1994, Conning had net capital, as defined by the Uniform Net Capital Rule, of $5,324,070 which was $5,098,498 in excess of the required net capital. F-48 119 CONNING INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12--SUBSEQUENT EVENTS On August 11, 1995, all of the outstanding common stock of the Corporation was acquired by Conning Corporation, formerly known as Conning Asset Management Company--name change effective July 31, 1996. Conning Corporation is owned by General American Holding Company, a wholly owned subsidiary of General American Life Insurance Company. In September 1997, Conning Corporation filed a preliminary registration statement with the Securities and Exchange Commission to register 2,500,000 shares of Common Stock (excluding the over-allotment option) to be sold by Conning Corporation in an initial public offering. F-49 120 GLOSSARY "ASSET" typically refers to anything having a commercial or exchange value that is owned by a business, institution or individual. In this context `asset' refers to the financial holdings of the Company's clients, primarily insurance companies. "ASSET BACKED SECURITIES" are bonds or notes typically backed by loan paper or accounts receivable originated by banks, credit card companies or other providers of credit. "ASSET LIABILITY MATCHING" refers to the quantitative analytic techniques applied to the estimation of the time frame in which a client's liabilities will become payable and the program designed to appropriately match the duration of the investment portfolio to that time frame. "ASSET MANAGEMENT" refers to the services offered by the Company which include the allocation of the clients funds to basic security classes and the active buying, trading and selling that accompanies the investment function. "CORPORATE BONDS" are debt instruments issued by a private corporation as distinct from a government agency or a municipality. "DISCRETIONARY ASSET MANAGEMENT" refers to the active management of an investment portfolio including the asset allocation and purchasing, trading and selling activities. "EQUITIES" are securities representing the ownership interest in a corporation. "GOVERNMENTS" are securities issued by the U.S. government, such as Treasury Bills, bonds, notes and savings bonds, as well as debt issues of federal agencies which are not directly backed by the U.S. government. "INDEXED EQUITIES" are pools of funds which are invested in a portfolio which seeks to match that of a broad-based securities index. This may include the Standard & Poor's 500 index, indexes of mid- and small-capitalization stocks, foreign stock indexes and bond indexes. "INVESTMENT ADVISORY SERVICES" are services which support the analysis and needs of clients and result in advice pertaining to the general structure of the client's portfolio, but do not include advice relative to specific investments. "MASTER SERVICER" is an entity which provides administrative services to securitized pools of mortgage-backed securities. "MORTGAGE LOANS" are debt instruments by which the borrower, either corporate or individual, grants the lender a lien on property as security for the repayment of the loan. "MUNICIPAL BONDS" are debt obligations of a state or local government entity. "NON-CAPTIVE INSURANCE COMPANY" refers to an insurance company that is not formed primarily for the purpose of providing insurance to its parent and affiliated entities. "PRIVATE EQUITY FUNDS" refer to the funds for which the Company has raised capital from institutional investors for the purpose of investing in privately held companies. "PRIVATE PLACEMENTS" refer to stocks, bonds or other investments which are sold directly to an institutional investor, and which are typically restricted as to resale. "REAL ESTATE" refers to a piece of land and all the physical property relating to it, and may include the air and subsurface rights. "RECURRING FEE BASED REVENUE" refers to the on going fees the Company collects, in the ordinary course of its business, from its clients on business including discretionary asset management, investment advisory, investment accounting & reporting, real estate, research, and private equity management. "SCHEDULE B" refers to the detail schedule of mortgages included in the standard insurance department regulatory statutory annual statement. "SCHEDULE D" refers to the detail schedule of investments included in the standard insurance department regulatory statutory annual statement. "SHORT-TERM OBLIGATIONS" typically refer to investments which have a maturity of one year or less. "SPECIAL SERVICER" means an entity which provides asset management and resolution services for non-performing or under-performing loans within a pool of performing loans or mortgages. G-1 121 ================================================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.............................................................. 3 Cautionary Statement Regarding Forward-Looking Statements....................... 9 Risk Factors.................................................................... 9 Use of Proceeds................................................................. 17 Dividend Policy................................................................. 18 Capitalization.................................................................. 18 Dilution........................................................................ 19 Business........................................................................ 20 Selected Consolidated Financial Data............................................ 33 Management's Discussion and Analysis of Financial Condition and Results of Operation..................................................................... 36 Regulation...................................................................... 40 Management...................................................................... 43 Certain Relationships and Related Transactions.................................. 52 Principal Shareholders.......................................................... 58 Shares Eligible for Future Sale................................................. 60 Description of Capital Stock.................................................... 62 Certain Charter and Bylaw Provisions............................................ 63 Underwriting.................................................................... 67 Legal Matters................................................................... 69 Experts......................................................................... 69 Additional Information.......................................................... 69 Index to Financial Statements................................................... F-1 Glossary........................................................................ G-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ================================================================================ ================================================================================ 2,500,000 SHARES [CONNING LOGO] CONNING CORPORATION COMMON STOCK ----------- PROSPECTUS --------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION A.G. EDWARDS & SONS, INC. ---------- --, 1997 ================================================================================ 122 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all expenses, other than underwriting discounts and commissions, all of which are payable by the Company, in connection with the issuance and distribution of the securities being registered. All amounts are estimates except the registration fee, NASD filing fee and Nasdaq National Market Listing Fee. SEC Registration Fee.............................. $ 13,069 NASD Filing Fee................................... 4,813 Nasdaq National Market Listing Fee................ 50,000 Printing and Engraving Expenses................... 175,000 Blue Sky Fees and Expenses........................ 7,500 Registrar and Transfer Agent Fees................. 3,000 Legal Fees and Expenses........................... 650,000 Accounting Fees and Expenses...................... 400,000 Miscellaneous..................................... 71,618 ---------- Total..................................... $1,375,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 351.355(1) of the Revised Statutes of Missouri provides that a corporation may indemnify a director, officer, employee or agent of the corporation in any action, suit or proceeding other than an action by or in the right of the corporation, against expenses (including attorney's fees), judgments, fines and settlement amounts actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action, had no reasonable cause to believe his conduct was unlawful. Section 351.355(2) provides that the corporation may indemnify any such person in any action or suit by or in the right of the corporation against expenses (including attorneys' fees) and settlement amounts actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, except that he may not be indemnified in respect of any matter in which he has been adjudged liable for negligence or misconduct in the performance of his duty to the corporation, unless authorized by the court. Section 351.355(3) provides that a corporation shall indemnify any such person against expenses (including attorney's fees) actually and reasonably incurred by him in connection with the action, suit or proceeding if he has been successful in defense of such action, suit or proceeding and if such action, suit or proceeding is one for which the corporation may indemnify him under Section 351.355(1) or (2). Section 351.355(7) provides that a corporation shall have the power to give any further indemnity to any such person, in addition to the indemnity otherwise authorized under Section 351.355, provided such further indemnity is either (i) authorized, directed or provided for in the articles of incorporation of the corporation or any duly adopted amendment thereof or (ii) is authorized, directed or provided for in any by-law or agreement of the corporation which has been adopted by a vote of the shareholders of the corporation, provided that no such indemnity shall indemnify any person from or on account of such person's conduct which was finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct. The Amended and Restated Articles of Incorporation of the Company filed as Exhibit 3.1 to this Registration Statement contain provisions indemnifying its directors and officers to the extent authorized specifically by Sections 351.355(1), (2), (3) and (7). Directors or officers of the Company who are directors or officers of General American may also be entitled to indemnification under the provisions of General American's Articles of Incorporation, which provide indemnification to them since they serve, at General American's request, as directors or officers of the Company. Such individuals are also covered by General American's director's and officer's liability insurance policy. II-1 123 The form of Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for the mutual indemnification of the Company and any Underwriters, their respective controlling persons, directors and certain of their officers, against certain liabilities, including liabilities under the Securities Act of 1933, as amended. General American Mutual Holding Company maintains a policy of insurance under which the directors and officers of the Company are insured, subject to the limits of the policy, against certain losses, as defined in the policy, arising from claims made against such directors and officers by reason of any wrongful acts, as defined in the policy, in their respective capacities as directors or officers of the Company. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In August 1995, the Company issued certain securities in connection with its formation (the "Strategic Merger"), as follows: (i) General American Holding Company contributed all of the issued and outstanding common stock of GAIMCO (now known as Conning Asset Management Company) to the Company in exchange for 6,710,000 shares of Company Common Stock; and (ii) each of the 21 shareholders and option holders of Conning, Inc., other than three non-employee directors and two institutional shareholders (the "Non-Contributing Shareholders"), contributed all of the common stock of Conning, Inc. then owned by such shareholders to the Company and canceled all of their options to purchase Conning, Inc. Common Stock in exchange for $4,505,002 in cash and 3,190,000 shares of the Company's Series A Convertible Preferred Stock. The shares of Conning, Inc. owned by the Non-Contributing Shareholders were acquired in exchange for cash payments. In connection with this transaction, the Company relied on the exemption from registration contained in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. In connection with the Strategic Merger, the Company awarded employee stock options exercisable for 1,000,000 shares of Class B Non-Voting Common Stock to 25 employees of the Company; none of the options have been exercised. In connection with this transaction, the Company relied on exemptions from registration contained in Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder and Rule 701 of the Securities Act. In November 1996 through June 1997, the Company issued 475,000 shares of Series B Convertible Preferred Stock and awarded employee stock options exercisable for 237,500 shares of Class B Non-Voting Common Stock to 29 employees and directors of the Company pursuant to a 1996 employee stock purchase and option grant program and amended and restated certain provisions of a shareholder's agreement; none of the options have been exercised. In April 1997, the Company issued 110,000 shares of Class B Non-Voting Common Stock to three executive officers or directors of the Company upon conversion of an equal number of shares of Series B Convertible Preferred Stock. In connection with these transactions, the Company relied on exemptions from registration contained in Section 4(2) and Regulation D promulgated thereunder and Rule 701 of the Securities Act. Concurrent with the closing of this offering, the 3,190,000 issued and outstanding shares of Series A Convertible Preferred Stock will be converted into an equal number of shares of Common Stock of the Company and outstanding stock options to purchase Class B Non-Voting Common Stock will become options to purchase Common Stock. In connection with this transaction, the Company intends to rely on the exemption from registration contained in Section 3(a)(9) of the Securities Act. Concurrent with or prior to the closing of this offering, the 365,000 issued and outstanding shares of Series B Convertible Preferred Stock will be converted into an equal number of shares of Common Stock of the Company at $1.67 per share. In connection with this transaction, the Company intends to rely on the exemption from registration contained in Section 4(2) of the Securities Act and Regulation D promulgated thereunder and Rule 701 of the Securities Act. II-2 124 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The exhibits and financial statement schedules filed as part of this Registration Statement are as follows: (a) Exhibits. See Index to Exhibits. (b) Financial Statement Schedules. See Index to Financial Statements for Schedule I. Other Financial Statement Schedules have been omitted for the reason that they are not required, are not applicable or that the equivalent information has been included in the consolidated financial statements, and notes thereto, or elsewhere herein. ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions of Item 14, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance on Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 125 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this amendment no. 3 to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Louis, State of Missouri, on this 11th day of December, 1997. CONNING CORPORATION By: /s/ LEONARD M. RUBENSTEIN ------------------------------------ Leonard M. Rubenstein Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this amendment no. 3 to registration statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE Director December 11, 1997 - ---------------------------- John A. Fibiger Director December 11, 1997 - ---------------------------- Richard A. Liddy /s/LEONARD M. RUBENSTEIN Chairman and Chief Executive December 11, 1997 - ---------------------------- Officer (Principal Executive Leonard M. Rubenstein Officer /s/FRED M. SCHPERO Senior Vice President and December 11, 1997 - ---------------------------- Chief Financial Officer Fred M. Schpero (Principal Financial and Accounting Officer) Director December 11, 1997 - ---------------------------- John C. Shaw /s/MAURICE W. SLAYTON President and Director December 11, 1997 - ---------------------------- Maurice W. Slayton By: /s/LEONARD M. RUBENSTEIN ---------------------------- Leonard M. Rubenstein Attorney-in-fact
II-4 126 CONNING CORPORATION EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 1.1 Form of Underwriting Agreement among Conning Corporation (the "Company") and Donaldson, Lufkin & Jenrette Securities Corporation and A.G. Edwards & Sons, Inc., as Representatives of the Several Underwriters 2.1 Contribution Agreement dated July 24, 1995 by and among the Company (formerly Conning Asset Management Company), General American Life Insurance Company ("General American"), General American Holding Company, Conning Asset Management Company (formerly General American Investment Management Company) ("CAM"), Conning & Company, Conning, Inc. (formerly Conning Corporation) and the Shareholders and Option Holders of the Company 3.1 Restated Articles of Incorporation of the Company 3.2 Form of Amendment to Restated Articles of Incorporation of the Company (to be filed subsequent to completion of this offering) 3.3 Bylaws of the Company 4.1 See Exhibits 3.1 and 3.2 4.2 See Exhibit 3.3 5.1 Opinion of Legal Counsel 10.1 Investment Advisory Agreement dated as of May 1, 1995 between General American and CAM relating to General American's general account 10.2 Investment Advisory Agreement dated as of July 2, 1990 between General American and CAM relating to General American's separate accounts 10.3 Investment Advisory Agreement dated as of July 23, 1997 between General American Capital Company and CAM 10.4 Lease Agreement dated as of July 31, 1996 between General American and CAM 10.5 Sublease effective as of July 19, 1995 between General American and CAM 10.6 Administrative Services Agreement effective as of August 11, 1995 between the Company and General American 10.7 Tax Sharing Agreement effective as of July 24, 1995 between the Company, CAM and General American 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 10.9 Registration Rights Agreement dated as of June 12, 1997 among the Company, General American and General American Holding Company 10.10 Tax Allocation and Tax Sharing Agreement dated as of June 12, 1997 between the Company, Conning, Inc., Conning & Company, CAM and General American Mutual Holding Company 10.11 Form of Employment Agreement dated August 11, 1995 between the Company (formerly Conning Asset Management Company), Conning & Company and Employee, including Messrs. Hansen and Schpero 10.12 Employment Agreement dated August 11, 1995 between the Company (as assignee) and Leonard M. Rubenstein II-5 127 EXHIBIT INDEX (CONTINUED) EXHIBIT NUMBER DESCRIPTION 10.13 Employment Agreement dated August 11, 1995 between the Company (formerly Conning Asset Management Company), Conning & Company and Maurice W. Slayton 10.14 Software License Agreement effective as of January 27, 1996 among CAM, General American and SS&C Technologies, Inc. (formerly Securities, Software & Consulting Inc.) 10.15 1995 Flexible Stock Plan 10.16 1996 Flexible Stock Plan 10.17 1997 Flexible Stock Plan 10.18 Form of Incentive Stock Option Award and Terms and Conditions under 1995 Flexible Stock Plan 10.19 Form of Incentive Stock Option Award and Terms and Conditions under 1996 Flexible Stock Plan 10.20 Form of Non-Qualified Stock Option Award and Terms and Conditions under 1997 Flexible Stock Plan 10.21 Office Lease dated August 22, 1989 among Hartford CityPlace L.L.C., Conning, Inc. and Conning & Company, as amended as of June 30, 1997 10.22 Venture Carried Interests Allocation Plan, as amended 10.23 Amended and Restated Limited Partnership Agreement of Conning Investment Partners Limited Partner- ship III, as amended 10.24 Limited Liability Company Agreement of Conning Connecticut Investors, L.L.C. 10.25 Limited Liability Company Agreement of Conning Investment Partners II, L.L.C. 10.26 Limited Liability Company Agreement of Conning Investment Partners V, L.L.C., dated as of October 31, 1997 11.1 Statement Re: Computation of Per Share Earnings 21.1 Subsidiaries of the Company 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Price Waterhouse LLP 23.3 Consent of Legal Counsel (included in Exhibit 5.1) 23.4 Consent of Eager & Associates 23.5 Consent of OneSource Information Services, Inc. 24.1 Power of Attorney 27.1 Financial Data Schedule 27.2 Financial Data Schedule - -------- Previously filed Schedules omitted pursuant to Regulation S-K, Item 601(b)(2) of the Commission. The registrant hereby undertakes to furnish such schedules to the Commission supplementally upon request. Incorporated by reference from Exhibit No. 10.15 to the Registration Statement on Form S-1 (No. 333-3094) filed by SS&C Technologies, Inc. Pursuant to Rule 406 under the Securities Act, confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions will be filed separately with the Commission.
II-6 128 APPENDIX Pages 23 and 27 contain bar graphs. The information contained in the graphs are presented in a tabular format that may be processed by the EDGAR system. EX-1.1 2 UNDERWRITING AGREEMENT 1 2,500,000 Shares CONNING CORPORATION Common Stock UNDERWRITING AGREEMENT ---------------------- December 15, 1997 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION A.G. EDWARDS & SONS, INC. As representatives of the several underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Ladies and Gentlemen: Conning Corporation, a Missouri corporation (the "Company"), proposes to issue and sell 2,500,000 shares of its Common Stock, par value $0.01 per share (the "Firm Shares"), to the several underwriters named in Schedule I hereto (the "Underwriters"). The Company also proposes to issue and sell to the several Underwriters not more than 375,000 additional shares of its Common Stock, par value $0.01 per share (the "Additional Shares"), if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares". The shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "Common Stock". 1. Registration Statement and Prospectus. The Company has ------------------------------------- prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively called the "Act"), a registration statement on Form S-1 (No. 333-35993) including a prospectus relating to the Shares, which may be amended. The registration statement as amended at the time that it becomes effective, including a registration statement (if any) filed pursuant to Rule 462(b) under the Act increasing the size of the offering registered under the Act and information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "Registration Statement"; and the prospectus in the form 2 first used to confirm sales of Shares is hereinafter referred to as the "Prospectus". 2. Agreements to Sell and Purchase. On the basis of the ------------------------------- representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell, and each Underwriter agrees, severally and not jointly, to purchase from the Company at a price per share of $------ (the "Purchase Price") the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to 375,000 Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof. The date specified in any such notice shall be a business day (i) no earlier than the Closing Date (as hereinafter defined), (ii) no later than ten business days after such notice has been given and (iii) no earlier than two business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. The Company hereby agrees and the Company shall, concurrently with the execution of this Agreement, deliver an agreement executed by (i) each of the directors and officers of the Company and (ii) each stockholder listed on Annex I hereto, pursuant to which each such person agrees not to offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of any common stock of the Company or any securities convertible into or exercisable or exchangeable for such common stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any such common stock, except to the Underwriters pursuant to this Agreement, for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the foregoing, during such 180-day period, (a) the Company may (i) issue shares of common stock of the Company or any securities convertible into or exercisable or exchangeable for such common stock in connection with acquisitions in which the acquiror or acquirors of such shares or options agree(s) to the transfer restrictions set forth in this paragraph, (ii) grant stock options or other stock-based awards or issue shares of common stock pursuant to the 1997 Flexible Stock Plan of the Company (as filed as an exhibit to the Registration Statement) or any other employee benefit plan of the Company and (iii) issue shares of its common stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and (b) shares of common stock of the Company may be (i) transferred to a trust for the benefit of the holder of such shares or for the benefit of the spouse or descendants of such holder or to the estate, heirs or devisees of the holder of such shares upon the death of such holder and (ii) pledged as security for obligations of the holders thereof. 3. Terms of Public Offering. The Company is advised by ------------------------ you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the effective date of the Registration Statement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. 4. Delivery and Payment. The Shares shall be represented -------------------- by definitive certificates and shall be issued in such authorized denominations and registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation shall request not later than two business days prior to the Closing Date or the applicable Option Closing Date (as defined below), as the case may be. The Company shall deliver the Shares, with any transfer taxes thereon duly paid by the Company, to Donaldson, Lufkin & Jenrette Securities Corporation through the facilities of The Depository Trust Company ("DTC"), for the respective accounts of the several Underwriters, against payment to the Company of the Purchase Price therefor by wire transfer of Federal or other funds immediately available in New 3 York City. The Certificates representing the Shares shall be made available for inspection not later than 9:30 A.M., New York City time, on the business day prior to the Closing Date or the applicable Option Closing Date, as the case may be, at the office of DTC or its designated custodian (the "Designated Office"). The time and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New York City time, on December 18, 1997 or such other time and date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing (the "Closing Date"). The time and date of delivery and payment for any Additional Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 or such other time and date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing (an "Option Closing Date"). The documents to be delivered on the Closing Date or any Option Closing Date on behalf of the parties hereto pursuant to Section 8 of this Agreement shall be delivered at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York 10017 and the Shares shall be delivered at the Designated Office, all on the Closing Date or such Option Closing Date, as the case may be. 5. Agreements of the Company. The Company agrees with ------------------------- you: (a) To use its reasonable best efforts to cause the Registration Statement to become effective at the earliest possible time after December 11, 1997. (b) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) when the Registration Statement has become effective and when any post-effective amendment to it becomes effective, (ii) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, and (iv) of the happening of any event during the period referred to in paragraph (e) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal or lifting of such order at the earliest possible time. (c) To furnish to you, without charge, three signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (d) Not to file any amendment or supplement to the Registration Statement, whether before or after the time when it becomes effective, or to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object; and to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its reasonable best efforts to cause the same to become promptly effective. (e) Promptly after the Registration Statement becomes effective, and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish to each Underwriter and dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. (f) If during the period specified in paragraph (e) any event shall occur as a result of which, in the 4 opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Prospectus to comply in all material respects with any law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with law, and to furnish to each Underwriter and to such dealers as you shall specify, such number of copies thereof as such Underwriter or dealers may reasonably request. (g) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided that the Company and its subsidiaries will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (h) To mail and make generally available to its stockholders as soon as reasonably practicable an earnings statement covering a period of at least twelve months after the effective date of the Registration Statement (but in no event commencing later than 90 days after such date) which shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (i) During the period of one year after the date of this Agreement, (i) to mail as soon as reasonably practicable after the end of each fiscal year to the record holders of its Common Stock a financial report of the Company and its subsidiaries on a consolidated basis (and a similar financial report of all unconsolidated subsidiaries, if any), all such financial reports to include a consolidated balance sheet, a consolidated statement of operations, a consolidated statement of cash flows and a consolidated statement of shareholders' equity as of the end of and for such fiscal year, together with comparable information as of the end of and for the preceding year, certified by independent certified public accountants, and (ii) to mail and make generally available as soon as practicable after the end of each quarterly period (except for the last quarterly period of each fiscal year) to such holders, an unaudited consolidated balance sheet and an unaudited consolidated statement of income (or alternatively, upon the consent of Donaldson, Lufkin & Jenrette Securities Corporation, a summary consolidated balance sheet and summary consolidated statement of income) (and similar financial reports of all unconsolidated subsidiaries, if any) as of the end of and for such period, and for the period from the beginning of such year to the close of such quarterly period, together with comparable information for the corresponding periods of the preceding year. (j) During the period referred to in paragraph (i), to furnish to you promptly upon your request a copy of each report or other publicly available information of the Company mailed to the holders of Common Stock or filed with the Commission. (k) To pay all costs, expenses, fees and taxes incident to (i) the preparation, printing, filing and distribution under the Act of the Registration Statement (including financial statements and exhibits), each preliminary prospectus and all amendments and supplements to any of them prior to or during the period specified in paragraph (e), (ii) the printing and delivery of the Prospectus and all amendments or supplements to it during the period specified in paragraph (e), (iii) the photocopying and delivery of this Agreement, the Preliminary and Supplemental Blue Sky Memoranda and all other agreements, memoranda, correspondence and other documents photocopied and delivered in connection with the offering of the Shares (including in each case any disbursements of counsel for the Underwriters relating to such photocopying and delivery), (iv) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states (including in each case the reasonable fees and disbursements of counsel for the Underwriters relating to such registration or qualification and memoranda relating thereto which shall not exceed $7,500), (v) filings and clearance with the National Association of Securities Dealers, Inc. (the 5 "NASD") in connection with the offering, (vi) the listing of the Shares on the Nasdaq National Market, (vii) furnishing such copies of the Registration Statement, the Prospectus and all amendments and supplements thereto as may be requested for use in connection with the offering or sale of the Shares by the Underwriters or by dealers to whom Shares may be sold and (viii) the performance by the Company of its other obligations under this Agreement; provided, that in no event shall the Company be responsible for the fees and expenses of your counsel, except as provided in the foregoing clauses (iii) and (iv). (l) On the date of this Agreement, its intent is to use its reasonable best efforts to maintain the inclusion of the Common Stock on the Nasdaq National Market (or on a national securities exchange) for a period of three years after the effective date of the Registration Statement. (m) To use its reasonable best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. 6. Representations and Warranties of the Company. The --------------------------------------------- Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the Company's knowledge, threatened by the Commission. (b) (i) Each part of the Registration Statement, when such part became effective, did not contain, and each such part, as amended or supplemented, if applicable, will not contain, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph (b) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, and each Registration Statement filed pursuant to Rule 462(b) under the Act, if any, complied when so filed in all material respects with the Act; and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph (c) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (d) Each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as it is currently being conducted and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (e) All of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, 6 and are owned by the Company, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature. (f) All the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights which have not been waived; and the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (g) The authorized capital stock of the Company, including the Common Stock, conforms as to legal matters in all material respects to the description thereof contained in the Prospectus. (h) Neither the Company nor any of its subsidiaries is (i) in violation of its respective charter or by-laws or (ii) in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument, in each case material to the conduct of the business of the Company or any of its subsidiaries, to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective properties are bound, except where such default in this clause (ii) would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (i) The execution, delivery and performance of this Agreement by the Company, compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby by the Company will not require any consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body (except as such has been obtained or may be required under the securities or Blue Sky laws of the various states) and will not (x) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any agreement, indenture or other instrument to which it or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective properties are bound, or (y) violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to the Company, any of its subsidiaries or their respective properties, except where such conflict, breach, default or violation would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (j) Except as otherwise set forth in the Prospectus, there are no material legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any of their respective properties are the subject, and, to the best of the Company's knowledge, no such proceedings are threatened or contemplated. No contract or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed as required. (k) Each of Conning & Company and Conning Asset Management Company ("CAMCO") is, and, upon consummation of this Agreement, will be, registered as an investment adviser with the Commission under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and each is duly registered, licensed or qualified as an investment adviser in each jurisdiction where the conduct of its respective business requires such registration and each is in compliance in all material respects with the Advisers Act and all other applicable United States federal and state laws requiring any such registration, licensing or qualification. Neither the Company nor any other subsidiary of the Company is required to be registered, licensed or qualified as an investment adviser under the laws of the United States or any state in which it or its subsidiaries conduct business. (l) Consummation of the transactions contemplated by this Agreement will not constitute an assignment, as defined in the Advisers Act or the Investment Company Act of 1940, as amended (the "1940 Act"), such that any investment advisory agreement of Conning & Company or CAMCO would be automatically terminated or would require client consent to continue in effect. 7 (m) Each of the investment advisory agreements and service agreements to which any of the Company's subsidiaries is a party is a legal and valid obligation of such subsidiaries, and none of the Company's subsidiaries is in breach or violation of or in default under any such agreement, except when such breach or violation would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (n) Neither the Company nor any of its subsidiaries is required to register with the Commission as an investment company under the 1940 Act. (o) Conning & Company is duly registered as a broker-dealer under the Exchange Act and under the securities laws of each United States jurisdiction where the conduct of its business requires such registration and has complied and is in compliance in all material respects with the Exchange Act, all applicable rules and regulations of the National Association of Securities Dealers, Inc. and all other United States federal and state laws requiring any such registration. Neither the Company nor any of its other subsidiaries is required to register, license or qualify as a broker-dealer with the Commission under the Exchange Act or under the laws requiring any such registration, licensing or qualification in any state in which it or, in the case of the Company, its subsidiaries conduct business. (p) Each of Conning & Company and CAMCO has adopted a written code of ethics and a written policy regarding insider trading. Such code of ethics complies in all material respects with Section 17(j) of the 1940 Act and Rule 17j-1 thereunder and such written policy complies in all material respects with Section 204A of the Advisers Act. The restrictions, internal procedures or disclosure practices used by each of Conning & Company and CAMCO with respect to conflicts of interest are as set forth in the most recent Form ADV thereof (or incorporated by reference therein), as amended. To the knowledge of the Company, there have been no material violations or allegations of material violations of such restrictions, internal policies or disclosure practices. (q) None of Conning & Company, CAMCO, their respective subsidiaries or, to the knowledge of the Company, any Fund which Conning & Company or CAMCO or their respective subsidiaries has sponsored or organized, and, to the knowledge of the Company, no person "associated" (as defined under the Advisers Act) with Conning & Company, CAMCO or their respective subsidiaries, has been convicted of any crime or is or has engaged in any conduct that would be a basis for denial, suspension or revocation of registration of an investment adviser under Section 203(e) of the Advisers Act or Rule 206(4)-4(b) thereunder or, with respect to Conning & Company, of a broker-dealer under Section 15 of the Exchange Act, or for disqualification as an investment adviser for any registered investment company (as defined in the 1940 Act) (an "Investment Company") pursuant to Section 9(a) of the 1940 Act, and to the knowledge of the Company, there is no basis for, or proceeding or investigation that is reasonably likely to become the basis for, any such disqualification, denial, suspension or revocation. For purposes of this Agreement, "Fund" means any Investment Company and any company that would be an Investment Company but for the exemption contained in Section 3(c)(1), the final clause of Section 3(c)(3) or Section 3(c)(11) of the 1940 Act, in each case to which as of the date of this Agreement Conning & Company or CAMCO provides investment management or investment advisory services. (r) Each of Conning & Company and CAMCO, in managing the account of each client (including any Fund) to which it provides investment management, investment advisory, administrative or distribution services as of the date of this Agreement (each such client, a "Client"), has complied and is in compliance in all material respects with such Client's objectives, guidelines and restrictions disclosed to Conning & Company or CAMCO, including, without limitation, any limitation set forth in the applicable prospectus (in the case of a Fund) or governing instruments for such Client, and including compliance in all material respects with any other offering, advertising and marketing materials of any Fund; and each of Conning & Company and CAMCO, in advising its Clients, has complied and is in compliance in all material respects with the 1940 Act. (s) Conning & Company or CAMCO, as the case may be, has managed the accounts of each 8 Client (other than a client that is a Client solely by reason of its investment in a Fund that is an Investment Company) that has represented to Conning & Company or CAMCO, as the case may be, that it is (i) an employee benefit plan, as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (unless the Client has represented to Conning & Company or CAMCO, as the case may be, that it is a governmental plan, church plan or otherwise not subject to Title I of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), or Conning & Company or CAMCO, as the case may be, reasonably believes that it is not subject to Title I of ERISA or Section 4975 of the Code), or (ii) a person acting on behalf of such a plan, in compliance in all material respects with the applicable requirements of ERISA, except where such lack of compliance or violation would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (t) Each Client that is a registered Investment Company has elected to be treated as a "regulated investment company" under Subchapter M of Chapter 1 of Subtitle A of the Code, has at all times since the end of the most recent taxable year of such Client that has been closed and for which the statute of limitations for assessments has expired qualified as a regulated investment company and, to the knowledge of the Company, each such Client has complied in all material respects with all applicable provisions of law necessary to preserve and retain such Client's election and status as a regulated investment company or has determined not to retain such status. (u) Each Client has operated and is currently operating in compliance in all material respects with the Act, the 1940 Act and the rules and regulations thereunder, to the extent the Company or any of its subsidiaries has legal responsibility for such compliance as a matter of law or due to its contractual relationship with such Client. (v) The operation of the business of each Fund which is not registered as an Investment Company under the 1940 Act, including without limitation the offering of interests therein, has been in compliance in all material respects with the 1940 Act or the relevant exemptions therefrom. (w) Neither the Company nor any of its subsidiaries has violated (x) any federal or state law relating to discrimination in the hiring, promotion or pay of employees nor any applicable federal or state wages and hours laws, nor any provisions of ERISA or the rules and regulations promulgated thereunder, nor (y) any state or local law or regulation relating to the mortgage origination and servicing activities of the Company and its subsidiaries described in the Prospectus, which in the case of each of clauses (x) and (y) might, individually or in the aggregate, result in any material adverse change in the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (x) Except where the failure to do so would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, the Company and each of its subsidiaries has such other permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own, lease and operate its respective properties and to conduct its business; the Company and each of its subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit; and, except as may be described in the Prospectus, such permits contain no restrictions that are materially burdensome to the Company or any of its subsidiaries. (y) Except as otherwise set forth in the Prospectus or such as are not material to the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, the Company and each of its subsidiaries have good and marketable title, free and clear of all liens, claims, encumbrances and restrictions except liens for taxes not yet due and payable, to all property and assets described in the Registration Statement as being owned by them. All material leases to which the Company or any of its subsidiaries is a party are valid and binding and no default has occurred or is continuing thereunder which might, individually or in the aggregate with any such other defaults, result in any material adverse change in the business, prospects, financial condition or results of operations of the 9 Company and its subsidiaries taken as a whole, and the Company and its subsidiaries enjoy peaceful and undisturbed possession under all such leases to which any of them is a party as lessee with such exceptions as do not materially interfere with the use made by the Company or such subsidiary. (z) The Company and each of its subsidiaries maintain insurance reasonably deemed adequate for their businesses. (aa) KPMG Peat Marwick LLP are independent public accountants with respect to the Company as required by the Act. (ab) The financial statements, together with related schedules and notes forming part of the Registration Statement and the Prospectus (and any amendment or supplement thereto), present fairly in all material respects the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) is, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (ac) No holder of any security of the Company has any right to require registration of shares of Common Stock or any other security of the Company, except as disclosed in the Registration Statement or Prospectus. (ad) The Company has filed a registration statement pursuant to Section 12(g) of the Exchange Act to register the Common Stock, has filed an application to list the Shares on the Nasdaq National Market, and has received notification that the listing has been approved, subject to notice of issuance of the Shares. (ae) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens related to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of, or other ownership interest in, the Company or any subsidiary thereof except as otherwise disclosed in the Registration Statement. (af) There is (i) no significant unfair labor practice complaint pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, before the National Labor Relations Board or any state or local labor relations board, and no significant grievance or more significant arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against any of them, and (ii) no significant strike, labor dispute, slowdown or stoppage pending against the Company or any of its subsidiaries or, to the best knowledge of the Company, threatened against it or any of its subsidiaries except for such actions specified in clause (i) or (ii) above, which, singly or in the aggregate, could not reasonably be expected to have a material adverse effect on the Company and its subsidiaries, taken as a whole. (ag) The Company and each of its subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 10 (ah) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all material taxes currently due and payable, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith or for which adequate reserves have been provided. 7. Indemnification. (a) The Company agrees to indemnify --------------- and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Company by such Underwriter through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter who failed to deliver a Prospectus (as then amended or supplemented, provided by the Company to the several Underwriters in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages and liabilities and judgments caused by any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in such Prospectus and the delivery of such Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company to such underwriter but only with reference to information relating to such Underwriter furnished in writing to the Company by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing (provided, however, that the failure to give such notice in a prompt manner shall not relieve any of the indemnifying parties of its obligations or liabilities except to the extent that such failure results in the loss of any material rights or defenses) and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume the defense of such action pursuant to this Section 7(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses 11 available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case of parties indemnified pursuant to Section 7(a), and by the Company, in the case of parties indemnified pursuant to Section 7(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than forty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability arising out of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 7 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 7(d)(i) above but also the relative fault of the Company on the one hand and the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (after deducting underwriting discounts and commissions, but before deducting expenses) received by the Company, and the total underwriting discounts and commissions received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any matter, including any action that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent 12 misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. (e) The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. 8. Conditions of Underwriters' Obligations. The several --------------------------------------- obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) The Registration Statement shall have become effective not later than 5:30 P.M. (and in the case of a Registration Statement filed under Rule 462(b) of the Act, not later than 9:00 A.M. the next business day), New York City time, on the date of this Agreement or at such later date and time as you may approve in writing, and at the Closing Date no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission. (c) (i) Since the date of the latest balance sheet included in the Registration Statement and the Prospectus, there shall not have been any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, affairs or business prospects, whether or not arising in the ordinary course of business, of the Company, (ii) since the date of the latest balance sheet included in the Registration Statement and the Prospectus, there shall not have been any material adverse change, or any development involving a prospective material adverse change, in the capital stock or in the long-term debt of the Company from that set forth in the Registration Statement and the Prospectus, (iii) the Company and its subsidiaries shall have no liability or obligation, direct or contingent, which is material to the Company and its subsidiaries, taken as a whole, other than those reflected in the Registration Statement and the Prospectus and (iv) on the Closing Date you shall have received a certificate dated the Closing Date, signed by the Chief Executive Officer and the President of the Company, solely in their capacities as such, in the name and on behalf of the Company confirming the matters set forth in paragraphs (a), (b) and (c) of this Section 8. (d) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Bryan Cave LLP, counsel for the Company, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority required to carry on its business in all material respects as it is currently being conducted and to own, lease and operate its properties; (ii) all of the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights which have not been waived; (iii) the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable and not subject to any preemptive or similar rights under Missouri law or the Company's charter which have not been waived; (iv) this Agreement has been duly authorized, executed and delivered by the 13 Company and is a valid and binding agreement of the Company enforceable in accordance with its terms (except as rights to indemnity and contribution hereunder may be limited by applicable law and except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, reorganization, receivership, moratorium, fraudulent transfer and other similar laws relating to or affecting the rights and remedies of creditors generally and by general principles of equity including, without limitation, concepts of reasonableness, materiality, good faith and fair dealing and the possible unavailability of specific performance, injunctive relief or other equitable remedies, regardless of whether enforceability is considered in a proceeding in equity or at law); (v) the authorized capital stock of the Company, including the Common Stock, conforms as to legal matters in all material respects to the description thereof contained in the Prospectus; (vi) the Registration Statement has become effective under the Act, and to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or threatened by the Commission; (vii) the statements set forth in the Prospectus under the headings "Certain Relationships and Related Transactions", "Description of Capital Stock" and "Certain Charter and Bylaw Provisions" and in Items 14 of Part II of the Registration Statement, insofar as such statements constitute a summary of legal matters or agreements referred to therein, fairly present in all material respects the information called for with respect to such legal matters or agreements; (viii) the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated by this Agreement will not require any consent, approval, authorization or other order of any federal or Missouri governmental body or agency (except as such may be required under the Act, under other securities or Blue Sky laws or by the NASD) and will not violate or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries, or any agreement, indenture or other instrument filed or incorporated by reference as an exhibit to the Registration Statement, or violate any federal or Missouri statute or any rule or regulation that has been issued pursuant to any federal or Missouri statute (which rule or regulation such counsel would, in its experience, recognize as directly applicable to the Company and its subsidiaries or any of their properties) or any order known to such counsel issued pursuant to any federal or Missouri statute by any court or governmental agency or body or court having jurisdiction over the Company or any of its subsidiaries or any of their properties (except for breaches or defaults which would not have a material adverse effect on the Company and its subsidiaries, taken as a whole); (ix) to such counsel's knowledge, there are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party, or to which any of their respective properties is subject, which is required to be described in the Registration Statement or the Prospectus and is not described, or of any contract or other document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed; (x) each of Conning & Company and CAMCO is duly registered as an investment adviser under the Advisers Act; (xi) consummation of the transactions contemplated by this Agreement will not constitute an assignment, as defined in the Advisers Act or the 1940 Act, such that, pursuant to either such act, any investment advisory agreement of Conning & Company or CAMCO would be automatically terminated or would require client consent to continue in effect; 14 (xii) the Company is not currently required and, giving effect to the application of the net proceeds from the sale of the Shares as described in the Registration Statement or Prospectus, is not required to register with the Commission as an investment company under the 1940 Act; (xiii) Conning & Company is duly registered as a broker-dealer under the Exchange Act; (xiv) to such counsel's knowledge, no holder of any security of the Company has any right to require registration of shares of Common Stock or other security of the Company, other than as described in the Registration Statement or Prospectus; and (xv) the Registration Statement and the Prospectus and any supplement or amendment thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations of the Commission thereunder, it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in any of the documents mentioned in this clause or as to the accuracy, completeness or fairness of the Prospectus or the Registration Statement, as amended or supplemented. In addition to the matters set forth above, such counsel shall state that during such counsel's participation in the preparation of the Registration Statement and the Prospectus, such counsel participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants of the Company, your representatives and your counsel at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed, reviewed and revised. Although such counsel is not passing upon, and does not assume responsibility for, the accuracy, completeness or fairness of the statements made or included in the Registration Statement and the Prospectus, both as amended or supplemented, no facts have come to such counsel's attention that cause such counsel to believe that the Registration Statement, as of its effective date and including any further amendment or supplement thereto made by the Company prior to the Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or that the Prospectus, as of the Closing Date, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). The opinion of Bryan Cave LLP described in this paragraph (d) shall be rendered to you at the request of the Company and shall so state therein. Such opinions may recite that no opinion is expressed with respect to, and that such counsel is not passing upon, and does not assume responsibility for any matters relating to insurance laws, statutes, rules, regulations or policies. In addition, such opinions may contain customary recitals, conditions and qualifications. (e) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Matthew P. McCauley, Esq., General Counsel and Secretary of the Company, to the effect that: (i) each of the Company and its subsidiaries is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the Company and its subsidiaries, taken as a whole; 15 (ii) each of the Company's subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority required to carry on its business in all material respects as it is currently being conducted and to own, lease and operate its properties; (iii) all of the outstanding shares of capital stock of, or other ownership interests in, each of the Company's subsidiaries have been duly and validly authorized and issued and are fully paid and non-assessable, and are owned of record by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien or other encumbrance; (iv) neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws and, to the best of such counsel's knowledge after due inquiry, neither the Company nor any of its subsidiaries is in default in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any other agreement, indenture or instrument material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective properties are bound; (v) the statements set forth in Item 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of legal matters or agreements referred to therein, fairly present in all material respects the information called for with respect to such legal matters or agreements; (vi) each of Conning & Company and CAMCO is duly registered as an investment adviser under the Advisers Act and is in compliance in all material respects with all United States Federal and state laws requiring any such registration; and neither the Company nor any of its other subsidiaries is required to register, license or qualify as an investment adviser under the Advisers Act; (vii) none of the Company's subsidiaries is currently required and, giving effect to the application of the net proceeds from the sale of the Shares as described in the Prospectus, is required to register with the Commission as an investment company under the 1940 Act; (viii) Conning & Company is duly registered as a broker-dealer under the Exchange Act and is in compliance in all material respects with all United States Federal and state laws requiring any such registration; and neither the Company nor any of its other subsidiaries is required to register, license or qualify as a broker-dealer under the Exchange Act; (ix) to such counsel's knowledge, each of the Company and its subsidiaries has such other permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits") as are necessary to own, lease and operate its respective properties and to conduct its business in all material respects in the manner described in the Prospectus; to such counsel's knowledge, each of the Company and its subsidiaries has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit, subject in each case to such qualification as may be set forth in the Prospectus; and, except as may be described in the Prospectus, such permits contain no restrictions that are materially burdensome to the Company or any of its subsidiaries; In addition to the matters set forth above, such counsel shall state that during such counsel's participation in the preparation of the Registration Statement and the Prospectus, such counsel or persons under such 16 counsel's direct supervision participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants of the Company, your representatives and your counsel at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed, reviewed and revised. Although such counsel is not passing upon, and does not assume responsibility for, the accuracy, completeness or fairness of the statements made or included in the Registration Statement and the Prospectus, both as amended or supplemented, no facts have come to such counsel's attention that cause such counsel to believe that the Registration Statement, as of its effective date and including any further amendment or supplement thereto made by the Company prior to the Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or that the Prospectus, as of the Closing Date, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). (f) You shall have received on the Closing Date an opinion, dated the Closing Date, of Simpson Thacher & Bartlett, counsel for the Underwriters, in form and substance reasonably satisfactory to you, covering such matters as are customarily covered in such an opinion. (g) You and the Board of Directors of the Company shall have received a letter on and as of the Closing Date, in form and substance reasonably satisfactory to you, from KPMG Peat Marwick LLP, independent public accountants, with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus and confirming as of such date the substance of the letter delivered to you and the Board of Directors of the Company by KPMG Peat Marwick LLP on the date of this Agreement. (h) The Company shall have delivered to you the agreements specified in the third paragraph of Section 2 hereof. (i) The Company shall not have failed at or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company at or prior to the Closing Date. The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares consistent with the foregoing. 9. Effective Date of Agreement and Termination. (a) This ------------------------------------------- Agreement shall become effective upon the later of (i) execution of this Agreement and (ii) when notification of the effectiveness of the Registration Statement has been released by the Commission. (a) This Agreement may be terminated at any time prior to the Closing Date by you by written notice to the Company if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or development involving a prospective material adverse change in the condition, financial or otherwise, of the Company and its subsidiaries, taken as a whole, or the earnings, affairs or business prospects of the Company and its subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, which would, in your judgment, make it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and would, in your judgment, make it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (iii) the suspension or material limitation of trading in securities on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market or material limitation on prices for securities on any such 17 exchange or national market system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business or operations of the Company or any of its subsidiaries, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. (b) If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase is not more than one-tenth of the total number of Shares to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the non-defaulting Underwriters, as the case may be, have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters, as the case may be, agreed but failed or refused to purchase on such date; provided that in no -------- event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date or on an Option Closing Date, as the case may be, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or Additional Shares, as the case may be, and the aggregate number of Firm Shares or Additional Shares, as the case may be, with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date by all Underwriters and arrangements satisfactory to you and the Company for purchase of such Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter and the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date or the applicable Option Closing Date, as the case may be, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. 10. Miscellaneous. Notices given pursuant to any provision ------------- of this Agreement shall be addressed as follows: (a) if to the Company, to Conning Corporation, 700 Market Street, St. Louis, Missouri 63101, Attention: Fred M. Schpero (with a copy to Bryan Cave LLP, One Metropolitan Square, 211 North Broadway, Suite 3600, St. Louis, Missouri 63102, Attention: R. Randall Wang); and (b) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, its officers and directors and of the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter or by or on behalf of the Company, the officers or directors of the Company or any controlling person thereof, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, the Company agrees to reimburse the several Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) reasonably incurred by them, provided that the Underwriters furnish reasonably satisfactory documentation thereof. The statements set forth in (i) the footnotes to the tables on the cover page of any Preliminary 18 Prospectus and the Prospectus, (ii) the last paragraph of the cover page of any Preliminary Prospectus and the Prospectus, (iii) the "stabilization legend" on page 2 of any Preliminary Prospectus and the Prospectus and (iv) the fifth, ninth, tenth and eleventh paragraphs and the third sentence of the third paragraph and the fourth sentence of the sixth paragraph under the caption "Underwriting" in any Preliminary Prospectus and the Prospectus constitute the only information furnished to the Company by the Underwriters for use in any Preliminary Prospectus and the Prospectus. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, any controlling persons referred to herein and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 19 Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters. Very truly yours, CONNING CORPORATION By: ------------------------------ Name: Title: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION A.G. EDWARDS & SONS, INC. Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By:----------------------------- Name: Title: 20 SCHEDULE I ----------
Number of Firm Shares Underwriters to be Purchased ------------ --------------------- Donaldson, Lufkin & Jenrette Securities Corporation [ ] A.G. Edwards & Sons, Inc. [ ] [ remainder to come ] --------- 2,500,000
21 ANNEX I ------- Required Stockholder Lock-up Agreements --------------------------------------- [ to come ] EX-3.1 3 RESTATED ARTICLES OF INCORPORATION 1 RESTATED ARTICLES OF INCORPORATION OF CONNING CORPORATION ARTICLE ONE - NAME The name of the corporation (hereinafter referred to as the "Corporation") is: Conning Corporation. ARTICLE TWO - REGISTERED OFFICE The address of the Corporation's registered office in the State of Missouri is 700 Market Street, St. Louis, Missouri 63101 and the name of its registered agent at such address is Matthew P. McCauley. ARTICLE THREE - AUTHORIZED SHARES The aggregate number, class and par value of shares which the Corporation shall have authority to issue is ninety-three million seven hundred ninety thousand (93,790,000) shares of stock, all of which shall have a par value of One Cent ($0.01) per share, divided into (a) fifty million (50,000,000) shares of Class A Voting Common Stock, (b) twenty million (20,000,000) shares of Class B Non-Voting Common Stock and (c) twenty-three million seven hundred ninety thousand (23,790,000) shares of Preferred Stock. The preferences, qualifications, limitations, restrictions, and the special or relative rights, including convertible rights, if any, in respect of the shares of each class are as follows: A. Preferred Stock. 1. Subject to the requirements of the General and Business Corporation Law of Missouri (the "GBCL") and the provisions of these Articles of Incorporation, the Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series. The description of shares of each series of Preferred Stock, including any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption shall be as set forth in these Articles of Incorporation or any amendment hereto or in a resolution or resolutions adopted by the Board of Directors and, to the extent set forth in any such resolution or resolutions, such information shall be certified to the Secretary of State of Missouri filed as required by law from time to time prior to the issuance of any shares of such series. 2. The Board of Directors is expressly authorized, prior to issuance, by adopting resolutions providing for the issuance of, or providing for a change in the number of, shares of any particular series of Preferred Stock and, if and to the extent from time to time required 1 2 by law, by filing certification thereto with the Secretary of State of Missouri, to set or change the number of shares to be included in each series of Preferred Stock and to set or change in any one or more respects the designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms and conditions of redemption relating to the shares of each such series. Notwithstanding the foregoing, the Board of Directors shall not be authorized to change the right of the Class A Voting Common Stock of the Corporation to vote one vote per share on all matters submitted for stockholder action. The authority of the Board of Directors with respect to each series of Preferred Stock shall include, but not be limited to, setting or changing the following: (a) the distinctive serial designation of such series and the number of shares constituting such series (provided that the aggregate number of shares constituting all series of Preferred Stock shall not exceed twenty-three million seven hundred ninety thousand (23,790,000) shares). (b) the annual dividend rate, if any, on shares of such series, whether and the extent to which dividends shall be cumulative or non-cumulative, the relative rights of priority, if any, of payment of any dividends, and the time at which, and the terms and conditions on which, any dividends shall be paid; (c) whether the shares of such series shall be redeemable or purchasable and, if so, the terms and conditions of such redemption or purchase, including the date or dates upon and after which such shares shall be redeemable or purchasable, and the amount per share payable in case of redemption or purchase, which amount may vary under different conditions and at different redemption or purchase dates; (d) the obligation, if any, of the Corporation to retire shares of such series pursuant to a sinking fund and the terms and conditions of any such sinking fund; (e) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (f) whether the shares of such series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (g) the rights of the holders of shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of such holders with respect thereto; and (h) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series. 2 3 3. The shares of Preferred Stock of any one series shall be identical with each other in all respects except as to the dates from and after which dividends thereon shall cumulate, if cumulative. B. Series A Convertible Preferred Stock. A total of 3,190,000 shares of the Company's Preferred Stock, par value One Cent ($.01) per share, designated as "Series A Convertible Preferred Stock" ("Series A Preferred Stock"), are hereby authorized for issuance with the voting powers, preferences and other special rights, and qualifications, limitations and restrictions thereof set forth below. 1. Designation and Amount. The number of shares of Series A ---------------------- Preferred Stock to be authorized for issuance shall be 3,190,000. 2. Dividends and Distributions. The holders of shares of --------------------------- Series A Preferred Stock shall be entitled to receive out of funds legally available for the purpose, quarterly dividends payable in cash on the first business day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the issuance of the Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the Applicable Dividend Rate multiplied by the Liquidation Value. The Applicable Dividend Rate shall be the ninety (90) day United States Treasury Bill rate (as published in The Wall Street Journal in the "Ask Yield" column) ----------------------- in effect on the previous Quarterly Dividend Payment Date. Such dividends shall be cumulative and shall accrue from the relevant date of issue whether or not there are any funds of the Company legally available for the payment of dividends. 3. Voting Rights. The Series A Preferred Stock shall carry no ------------- voting rights. 4. Conversion. ---------- a. Conversion Events. ----------------- (1) At any time and from time to time, any holder of Series A Preferred Stock may convert all or any portion of the Series A Preferred Stock (including any fraction of a share) held by such holder into the number of shares of the Company's non-voting common stock, par value $.01 per share (the "Non-Voting Common Stock"), computed by dividing the number of shares of Series A Preferred Stock to be converted by the Conversion Rate (as defined below) then in effect. (2) If during the three-year period ending on the third anniversary of the issuance of the Series A Preferred Stock, the Company sells any capital stock pursuant to an initial public offering (an "IPO") of any class of the Company's capital stock in which the common stock equivalent per share price at which such stock is sold is equal to or greater than the Liquidation Value multiplied by the Conversion Rate (a "Qualified IPO"), then each share of the Series A Preferred Stock shall, immediately prior 3 4 to the consummation of such Qualified IPO, automatically convert to a number (or fraction) of shares of the Company's voting common stock, par value $.01 per share (the "Voting Common Stock"), equal to one (1) divided by the Conversion Rate then in effect. b. Conversion Rate. The Conversion Rate shall equal one --------------- (1) divided by the number of shares of Non-Voting Common Stock or Voting Common Stock (the "Conversion Stock") into which each share of Series A Preferred Stock is convertible. The initial Conversion Rate shall be one (1), entitling a holder of Series A Preferred Stock to one share of Non-Voting Common Stock or Voting Common Stock, as the case may be, for each share of Series A Preferred Stock. In order to prevent certain types of dilution of the conversion rights granted under this Section 4, the Conversion Rate shall be subject to adjustment from time to time as follows: (1) In the event that there is any change in the number of shares of Conversion Stock outstanding by reason of an Extraordinary Conversion Stock Event (defined below), the Conversion Rate in effect immediately prior thereto shall be adjusted so that the holder of a share of Series A Preferred Stock surrendered for conversion after the record date fixing stockholders to be affected by such event shall be entitled to receive, upon conversion, the number of shares of Conversion Stock which such holder would have owned or have been entitled to receive after the happening of such event had such share of Series A Preferred Stock been converted immediately prior to the record or other effective date of such change in the Company's capitalization. An "Extraordinary Conversion Stock Event" shall mean (i) the issue of additional shares of Conversion Stock as a dividend or other non-cash distribution on outstanding shares of Conversion Stock, (ii) a subdivision of outstanding shares of Conversion Stock into a greater number of shares of Conversion Stock, or (iii) a combination or reverse stock split of outstanding shares of Conversion Stock into a smaller number of shares of Conversion Stock. (2) In the event of an issuance of Conversion Stock by the Company (whether such sale is in consideration for cash or securities) to General American Holding Company ("GAHC") or an affiliate of GAHC at a price per share less than the Liquidation Value multiplied by the Conversion Rate then in effect, unless approved by the holders of 75% of the Series A Preferred Stock outstanding, the Conversion Rate shall be adjusted so as to provide that each holder of Series A Preferred Stock will maintain, upon conversion of such Series A Preferred Stock, the same percentage equity interest in the Company on a fully diluted basis as such holder had prior to such issuance of Conversion Stock to GAHC or an affiliate of GAHC. (3) If the Conversion Stock shall be changed into the same or different number of shares of any class or classes of capital stock, whether by capital reorganization, recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for elsewhere in this Section 4(b)) or in the event of a merger or consolidation of the Company with or into another corporation or the sale of substantially all of the Company's assets to any other person, then and in each such event the holders of the Series A Preferred Stock shall have the right thereafter to 4 5 convert such shares into the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, recapitalization, reclassification, merger, consolidation, sale or other change by the holders of the number of shares of Conversion Stock into which such shares of Series A Preferred Stock might have been converted immediately prior to such reorganization, recapitalization, reclassification, merger, consolidation, sale or change. c. Conversion Procedure. -------------------- (1) Each optional conversion of Series A Preferred Stock shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series A Preferred Stock to be converted are surrendered at the principal office of the Company. At such time as such conversion has been effected, the rights of the holder of such Series A Preferred Stock as such holder with respect to such shares of Series A Preferred Stock shall cease and such holder shall be deemed to have become the holder of record of the shares of Conversion Stock represented thereby; provided, however, that if such holder is entitled to accrued dividends with respect to the shares of Series A Preferred Stock converted that have not been paid prior to such conversion, such holder's entitlement thereto shall not be affected by such conversion and the Company shall pay such dividends to the converting holder as soon thereafter as funds of the Company are legally available for such payment. (2) Upon the occurrence of the conversion event occasioned by the occurrence of a Qualified IPO, (i) the holders of the Series A Preferred Stock shall, upon notice from the Company, surrender the certificates representing such shares at the office of the Company or of its transfer agent. Thereupon, there shall be issued and delivered to such holder a certificate or certificates for the number of shares of Conversion Stock into which the shares of Series A Preferred Stock so surrendered were convertible on the date on which such conversion occurred. The Company shall not be obligated to issue such certificates unless certificates evidencing the shares of Series A Preferred Stock being converted are either delivered to the Company or any such transfer agent, or the holder notifies the Company that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. (3) As soon as possible after a conversion has been effected (but in any event within five business days after the surrender of the shares of Series A Preferred Stock to be converted), the Company shall deliver to the converting holder a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion. (4) The issuance of certificates for shares of Conversion Stock upon conversion of Series A Preferred Stock shall be made without charge to the holders of such Series A Preferred Stock for any issuance tax in respect thereof or other cost incurred by the Company in connection with such conversion and the related issuance of shares of 5 6 Conversion Stock. Upon conversion of each share of Series A Preferred Stock, the Company shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. 5. Preemptive Rights. ----------------- a. If the Company issues, sells, transfers or otherwise disposes of any shares of the capital stock of the Company of any class or series (collectively, the "Equity Securities") for cash in a transaction not described in Section 4(b)(2) (a "Third Party Sale"), each holder of Series A Preferred Stock (an "Eligible Investor") shall have an option to purchase, on the terms and conditions (including price) of the Third Party Sale, up to that amount of the Equity Securities sold in such Third Party Sale as would maintain such Eligible Investor's percentage equity interest in the Company on a fully diluted basis. b. No less than twenty (20) days prior to the consummation of a Third Party Sale, the Company shall notify each Eligible Investor of the Third Party Sale and the terms and conditions thereof. Within fifteen (15) days after receipt of such notice, each Eligible Investor shall notify the Company as to the amount of the Equity Securities such Eligible Investor desires to purchase. If an Eligible Investor gives the Company timely notice that the Eligible Investor desires to purchase any of the Equity Securities offered by the Company, then payment for the Equity Securities shall be by bank cashier's or certified check or wire transfer against delivery of the securities at the executive offices of the Company at the time of the scheduled closing therefor. Each Eligible Investor shall cooperate with the Company in taking such actions as may be necessary or desirable in order to ensure that the sale of Equity Securities to such Eligible Investor complies with all applicable federal and state securities laws. In no event will the Company be required to sell Equity Securities to an Eligible Investor if, in the Company's reasonable opinion, such sale would violate federal or state securities or any other applicable law, rule or regulation. 6. Certain Restrictions. -------------------- a. The Company shall not, without the prior written consent of the holders of a majority of the Series A Preferred Stock, increase the authorized number of shares of Series A Preferred Stock or issue any securities of the Company ranking on a parity with or senior in priority to the Series A Preferred Stock. b. Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Company shall not: (1) declare or pay dividends on or make any other distributions on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; or 6 7 (2) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled. c. In the event that in any given quarter the Board of Directors of the Company shall declare a dividend payable upon the then outstanding shares of stock ranking junior to the Series A Preferred Stock ("Junior Securities") (other than a stock dividend on the Conversion Stock distributed in the form of additional shares of Conversion Stock) in an amount which exceeds the amount per share on an as converted basis of dividends required pursuant to Section 2 hereof to be paid in such quarter with respect to the Preferred Stock (such amount being the "Excess Dividend"), each holder of shares of Series A Preferred Stock shall be entitled to participate in such Excess Dividend in an amount equal to the amount of dividends as would be declared payable on the largest number of whole shares of Conversion Stock into which the shares of Series A Preferred Stock held by such holder could be converted pursuant hereto, such number determined as of the record date for the determination of holders of stock ranking junior to the Series A Preferred Stock entitled to receive such Excess Dividend. d. The Company agrees not to enter, or permit any of its subsidiaries to enter, into any transaction, including, without limitation, any loan or extension of credit, guarantee, management contract or royalty agreement, deferred or contingent compensation agreement, consulting or other agreement with any affiliate except in the ordinary course of and pursuant to the reasonable requirements of the Company's or such subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such subsidiary than would obtain in a comparable arm's length transaction with a person not an affiliate. The promissory notes dated August 11, 1995 made payable to General American Life Insurance Company by the Company and Conning Corporation shall not be deemed to violate the provisions of this paragraph. e. The Company agrees at all times that it will not, by any amendment of the Company's articles of incorporation, or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, seek to avoid the observance or performance hereof, but will at all times take such actions as are necessary or appropriate in order to protect the rights of the holders of the Series A Preferred Stock hereunder against impairment. f. Nothing contained herein shall be deemed to prohibit the Company from issuing shares of its capital stock in exchange for non-cash consideration, and such issuance shall not trigger the preemptive rights provided in Section 5 hereof. 7. Reacquired Shares. Any shares of Series A Preferred Stock ----------------- purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of 7 8 Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 8. Liquidation, Dissolution, or Winding Up. Upon any --------------------------------------- liquidation, dissolution or winding up of the Company, each holder of Series A Preferred Stock shall be entitled to be paid per share of Series A Preferred Stock, before any distribution or payment is made upon any Junior Securities, $5.33 plus accrued but unpaid dividends (the "Liquidation Value"), and the holders of Series A Preferred Stock shall not be entitled to any further payment. If upon any such liquidation, dissolution or winding up of the Company, the Company's assets to be distributed among the holders of the Series A Preferred Stock are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid, then the entire assets to be distributed shall be distributed ratably among such holders based upon the aggregate Liquidation Value of the Series A Preferred Stock held by each such holder. Neither the consolidation or merger of the Company into or with any other entity or entities, nor the sale or transfer by the Company of all or any part of its assets, nor the reduction of the capital stock of the Company, shall be deemed to be a liquidation, dissolution or winding up of the Company within the meaning of this Section. 9. Registration of Transfer. The Company shall keep at its ------------------------ principal office a register for the registration of Series A Preferred Stock. Upon the surrender of any certificate representing Series A Preferred Stock at such place, the Company shall, at the request of the record holder of such certificate, execute and deliver (at the Company's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of shares of Series A Preferred Stock represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of shares of Series A Preferred Stock as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate, and dividends shall accrue on the Series A Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such Series A Preferred Stock represented by the surrendered certificate. 10. Replacement. ----------- Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing shares of Series A Preferred Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on the Series A Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. 8 9 C. Series B Convertible Preferred Stock. A total of 600,000 shares of the Company's Preferred Stock, par value One Cent ($.01) per share, designated as "Series B Convertible Preferred Stock" ("Series B Preferred Stock"), are hereby authorized for issuance with the voting powers, preferences and other special rights, and qualifications, limitations and restrictions thereof set forth below. 1. Designation; Amount and Rank. ---------------------------- a. The number of shares of Series B Preferred Stock to be authorized for issuance shall be 600,000. b. The Series B Preferred Stock, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, shall rank senior to the Company's non-voting common stock, par value $.01 per share (the "Non-Voting Common Stock") and the Company's voting common stock, par value $.01 per share (the "Voting Common Stock"), and to all other classes and series of equity securities of the Company, except for the Series A Convertible Preferred Stock, par value $.01 per share ("Series A Preferred Stock"), with which the Series B Preferred Stock shall be of equal rank. 2. Dividends and Distributions. The holders of shares of --------------------------- Series B Preferred Stock shall be entitled to receive out of funds legally available for the purpose, quarterly dividends payable in cash on the first business day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the issuance of the Series B Preferred Stock, in an amount per share (rounded to the nearest cent) equal to five percent (5%) per annum multiplied by the Liquidation Value. Such dividends shall be cumulative and shall accrue from the relevant date of issue whether or not there are any funds of the Company legally available for the payment of dividends. 3. Voting Rights. The Series B Preferred Stock shall carry no ------------- voting rights. 4. Conversion. ---------- a. Conversion Right. At any time and from time to time, ---------------- any holder of Series B Preferred Stock may convert all or any portion of the Series B Preferred Stock (including any fraction of a share) held by such holder into a number of shares of the Company's Non-Voting Common Stock computed by dividing the number of shares of Series B Preferred Stock to be converted by the Conversion Rate (as defined below) then in effect. To convert shares of Series B Preferred Stock pursuant to this Section 4(a), the holder of such shares shall pay the Company an amount equal to the applicable Conversion Price (as defined below) multiplied by the number of shares of Series B Preferred Stock to be converted. b. Conversion Rate. The Conversion Rate shall equal one --------------- (1) divided by the number of shares of Non-Voting Common Stock (the "Conversion Stock") into which each 9 10 share of Series B Preferred Stock is convertible. The initial Conversion Rate shall be one (1), entitling a holder of Series B Preferred Stock to one share of Non-Voting Common Stock for each share of Series B Preferred Stock. In order to prevent certain types of dilution of the conversion rights granted under this Section 4, the Conversion Rate shall be subject to adjustment from time to time as follows: (1) In the event that there is any change in the number of shares of Conversion Stock outstanding by reason of an Extraordinary Conversion Stock Event (defined below), the Conversion Rate in effect immediately prior thereto shall be adjusted so that the holder of a share of Series B Preferred Stock surrendered for conversion after the record date fixing stockholders to be affected by such event shall be entitled to receive, upon conversion, the number of shares of Conversion Stock which such holder would have owned or have been entitled to receive after the happening of such event had such share of Series B Preferred Stock been converted immediately prior to the record or other effective date of such change in the Company's capitalization. An "Extraordinary Conversion Stock Event" shall mean (i) the issue of additional shares of Conversion Stock as a dividend or other non-cash distribution on outstanding shares of Conversion Stock, (ii) a subdivision of outstanding shares of Conversion Stock into a greater number of shares of Conversion Stock, or (iii) a combination or reverse stock split of outstanding shares of Conversion Stock into a smaller number of shares of Conversion Stock. (2) If the Conversion Stock shall be changed into the same or different number of shares of any class or classes of capital stock, whether by capital reorganization, recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for elsewhere in this Section 4(b)) or in the event of a merger or consolidation of the Company with or into another corporation or the sale of substantially all of the Company's assets to any other person, then and in each such event the holders of the Series B Preferred Stock shall have the right thereafter to convert such shares into the kind and amount of shares of capital stock and other securities and property receivable upon such reorganization, recapitalization, reclassification, merger, consolidation, sale or other change by the holders of the number of shares of Conversion Stock into which such shares of Series B Preferred Stock might have been converted immediately prior to such reorganization, recapitalization, reclassification, merger, consolidation, sale or change. c. Conversion Procedure. -------------------- (1) Each conversion of Series B Preferred Stock shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Series B Preferred Stock to be converted are surrendered at the principal office of the Company, together with payment of the Conversion Price therefor. At such time as such conversion has been effected, the rights of the holder of such Series B Preferred Stock as such holder with respect to such shares of Series B Preferred Stock shall cease and such holder shall be deemed to have become the holder of record of the shares of Conversion Stock represented thereby; provided, however, that if such holder is entitled to 10 11 accrued dividends with respect to the shares of Series B Preferred Stock converted that have not been paid prior to such conversion, such holder's entitlement thereto shall not be affected by such conversion and the Company shall pay such dividends to the converting holder as soon thereafter as funds of the Company are legally available for such payment. (2) As soon as possible after a conversion has been effected (but in any event within five business days after the surrender of the shares of Series B Preferred Stock to be converted and payment of the Conversion Price therefor), the Company shall deliver to the converting holder a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion. (3) The issuance of certificates for shares of Conversion Stock upon conversion of Series B Preferred Stock shall be made without charge to the holders of such Series B Preferred Stock for any issuance tax in respect thereof or other cost incurred by the Company in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each share of Series B Preferred Stock, the Company shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable. d. Conversion Price. The Conversion Price shall be ---------------- $1.67 per share of Series B Preferred Stock; provided, however, that in the event of an initial public offering of any class of the Company's capital stock (an "IPO"), if the price per share (less underwriting discounts and commissions) at which the Company stock is sold in the IPO (the "IPO Price") is less than $7.00 per share, then the Conversion Price shall equal the IPO Price less $5.33. In the event the Conversion Rate is adjusted pursuant to Section 4(b), the Conversion Price and this Section 4(d) shall also be adjusted accordingly. 5. Certain Restrictions. -------------------- e. The Company shall not, without the prior written consent of the holders of a majority of the Series B Preferred Stock, increase the authorized number of shares of Series B Preferred Stock or issue any securities of the Company ranking on a parity with or senior in priority to the Series B Preferred Stock. f. Whenever quarterly dividends or other dividends or distributions payable on the Series B Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series B Preferred Stock outstanding shall have been paid in full, the Company shall not: (1) declare or pay dividends on or make any other distributions on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Preferred Stock; or 11 12 (2) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Preferred Stock, except dividends paid ratably on the Series B Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled. g. In the event that in any given quarter the Board of Directors of the Company shall declare a dividend payable upon the then outstanding shares of stock ranking junior to the Series B Preferred Stock ("Junior Securities") (other than a stock dividend on the Conversion Stock distributed in the form of additional shares of Conversion Stock) in an amount which exceeds the amount per share on an as converted basis of dividends required pursuant to Section 2 hereof to be paid in such quarter with respect to the Series B Preferred Stock (such amount being the "Excess Dividend"), each holder of shares of Series B Preferred Stock shall be entitled to participate in such Excess Dividend in an amount equal to the amount of dividends as would be declared payable on the largest number of whole shares of Conversion Stock into which the shares of Series B Preferred Stock held by such holder could be converted pursuant hereto, such number determined as of the record date for the determination of holders of stock ranking junior to the Series B Preferred Stock entitled to receive such Excess Dividend. h. The Company agrees not to enter, or permit any of its subsidiaries to enter, into any transaction, including, without limitation, any loan or extension of credit, guarantee, management contract or royalty agreement, deferred or contingent compensation agreement, consulting or other agreement with any affiliate except in the ordinary course of and pursuant to the reasonable requirements of the Company's or such subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such subsidiary than would obtain in a comparable arm's length transaction with a person not an affiliate. i. The Company agrees at all times that it will not, by any amendment of the Company's articles of incorporation, or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, seek to avoid the observance or performance hereof, but will at all times take such actions as are necessary or appropriate in order to protect the rights of the holders of the Series B Preferred Stock hereunder against impairment. j. Nothing contained herein shall be deemed to prohibit the Company from issuing shares of its capital stock in exchange for non-cash consideration. 6. Reacquired Shares. Any shares of Series B Preferred Stock ----------------- purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 12 13 7. Liquidation, Dissolution, or Winding Up. Upon any --------------------------------------- liquidation, dissolution or winding up of the Company, each holder of Series B Preferred Stock shall be entitled to be paid per share of Series B Preferred Stock, before any distribution or payment is made upon any Junior Securities, $5.33 plus accrued but unpaid dividends (the "Liquidation Value"), and the holders of Series B Preferred Stock shall not be entitled to any further payment. If upon any such liquidation, dissolution or winding up of the Company, the Company's assets to be distributed among the holders of the Company's Series A Preferred Stock and the Series B Preferred Stock are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid, then the entire assets to be distributed shall be distributed ratably among such holders in accordance with the respective amounts which they are entitled to be paid. Neither the consolidation or merger of the Company into or with any other entity or entities, nor the sale or transfer by the Company of all or any part of its assets, nor the reduction of the capital stock of the Company, shall be deemed to be a liquidation, dissolution or winding up of the Company within the meaning of this Section. 8. Registration of Transfer. The Company shall keep at its ------------------------ principal office a register for the registration of Series B Preferred Stock. Upon the surrender of any certificate representing Series B Preferred Stock at such place, the Company shall, at the request of the record holder of such certificate, execute and deliver (at the Company's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of shares of Series B Preferred Stock represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of shares of Series B Preferred Stock as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate, and dividends shall accrue on the Series B Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such Series B Preferred Stock represented by the surrendered certificate. 9. Replacement. Upon receipt of evidence reasonably ----------- satisfactory to the Company (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing shares of Series B Preferred Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on the Series B Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. D. Common Stock. 1. Subject to Article Four hereof or as otherwise provided by the GBCL, each holder of the Class A Voting Common Stock shall be entitled to one vote per share of Class A Voting Common Stock on all matters to be voted on by the shareholders. The Class A Voting Common Stock and the Class B Non-Voting Common Stock shall be identical in all respects except that the holders of Class B Non-Voting Common Stock shall have no voting power for any purpose whatsoever unless and until (a) the occurrence of a Qualified IPO (as such term is defined 13 14 pursuant to the terms of the Corporation's Series A Convertible Preferred Stock), in which event each of the then outstanding shares of the Class B Non-Voting Common Stock shall become one share of Class A Voting Common Stock, or (b) a holder of Class B Non-Voting Common Stock chooses to sell such holder's shares of Class B Non-Voting Common Stock and the Corporation elects not to purchase such shares pursuant to a right of first refusal granted the Corporation in any then-existing agreement among the shareholders of the Corporation, in which event each of the shares proposed to be sold by such holder that is actually sold shall become one share of Class A Voting Common Stock. 2. Except as specifically provided herein, all preemptive rights of shareholders are hereby denied, so that no stock or other security of the Corporation shall carry with it and no holder or owner of any share or shares of stock or other security or securities of the Corporation shall have any preferential or preemptive right to acquire additional shares of stock or of any other security of the Corporation. 3. All cumulative voting rights are hereby denied, so that no stock or other security of the Corporation shall carry with it and no holder or owner of any share or shares of such stock or security shall have any right to cumulative voting in the election of directors or for any other purpose. 4. The foregoing provisions are not intended to modify or prohibit any provisions of any voting trust or agreement between or among holders or owners of shares of stock or other securities of the Corporation. ARTICLE FOUR - RESTRICTIONS ON VOTING STOCK The following restrictions apply to the Voting Stock (as such term is defined below) of the Corporation: A. Certain Definitions. For purposes of this Section, the following words have the meanings indicated: 1. "Affiliate" means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, such Person. The term "control" (including the terms "controlling," "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. 2. "Associate" means, with respect to any Person, (i) any other Person (other than the Corporation or a Subsidiary of which a majority of each class of equity securities is owned by the Corporation) of which such Person is an officer, director, trustee or partner or is directly or indirectly the beneficial owner of ten percent (10%) or more of any class of equity securities; (ii) any trust or other estate in which such Person serves as a trustee or in a similar fiduciary capacity; 14 15 (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person; or (iv) any investment company registered under the Investment Company Act of 1940, as amended, for which such Person or any Affiliate of such Person serves as investment adviser. 3. A Person shall be deemed to "own" any shares of Voting Stock: (i) that such Person beneficially owns directly or indirectly, whether or not of record; or (ii) that such Person has the right to acquire pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or options or otherwise, whether or not conditional; or (iii) that are beneficially owned, directly or indirectly (including shares deemed to be owned through application of clause (ii) above), whether or not of record, by an Affiliate or Associate of such Person; or (iv) that are beneficially owned, directly or indirectly, whether or not of record, by any other Person (including any shares which such other Person has the right to acquire pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or options or otherwise, whether or not conditional) with whom such Person has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of Voting Stock; provided, however, that (A) directors, -------- ------- officers and employees of the Corporation shall not be deemed to have any such agreement, arrangement or understanding solely on the basis of their status, or actions taken in their capacities, as directors, officers or employees of the Corporation or any Affiliates of the Corporation, and (B) a Person shall not be deemed the owner of or to own any shares of Voting Stock solely because (x) such shares of Voting Stock have been tendered pursuant to a tender or exchange offer made by such Person or any of such Person's Affiliates or Associates until such tendered shares of Voting Stock are accepted for payment or exchange or (y) such Person or any of such Person's Affiliates or Associates has or shares the power to vote or direct the voting of such shares of Voting Stock pursuant to a revocable proxy given in response to a public proxy or consent solicitation made to more than ten (10) holders of shares of Voting Stock and pursuant to, and in accordance with, applicable rules and regulations under the Exchange Act, except if such power (or arrangements relating thereto) is then reportable under Item 6 of Schedule 13D under the Exchange Act (or any similar provision of a comparable or successor report). The outstanding shares of capital stock of the Corporation shall include those shares deemed owned through the application of clauses (ii) and (iii) above, but shall not include any other shares that may be issuable pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants, options or otherwise, whether or not conditional. 15 16 For all purposes hereof "beneficial" ownership, with respect to any securities, shall include, without limitation, (i) the power to vote, or direct the voting of, such securities or (ii) the power to exercise investment discretion over such securities, including the power to dispose, or to direct the disposition, of such securities. Furthermore, a Person shall be deemed to own "beneficially" any securities that such Person owns beneficially for purposes of Sections 13(d) of the Exchange Act or any rules and regulations promulgated thereunder, as in effect from time to time (or any similar successor provisions of law). 4. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute thereto. 5. "Group", with respect to any Person, shall include: (i) such Person; (ii) any Affiliates and Associates of such Person; and (iii) those additional Persons that, together with such Person, jointly file a statement of beneficial ownership with respect to securities of the Corporation pursuant to Section 13(d) of the Exchange Act or any successor provision, irrespective of any disclaimers of beneficial ownership. 6. "Person" means any individual, corporation, association, partnership, joint venture, trust, organization, business, government or any government agency or political subdivision thereof or any other entity. 7. "Voting Stock" means all outstanding shares of capital stock of the Corporation entitled to vote in the election of directors; and each reference to a portion of shares of Voting Stock shall refer to such proportion of the votes entitled to be cast by such shares. 8. "Subsidiary" means any Person of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of Section D of this -------- ------- Article Four, the term "Subsidiary" shall mean only a Person of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. B. Limitation on Entitlement to Vote Applicable to Certain Shareholders. With respect to any matter submitted to a vote of the holders of the Voting Stock at any meeting of such holders or any matter upon which the holders of Voting Stock propose or purport to take action by written consent without a meeting: (i) no Person that owns Voting Stock may vote that number of such shares that constitutes the Excludable Shares, if any, owned by such Person (provided, however, that if such Person is a member of a Group, such -------- ------- Person shall be subject to clause (ii) below rather than to this clause (i)); (ii) no Person that is a member of a Group of Persons owning Voting Stock may vote that number of shares owned by such Person that constitutes the Allocable Excludable Shares, if any, owned by such Person; and (iii) that number of 16 17 shares having the status of Excludable Shares (adjusted as necessary to give effect to the provisos to the definition set forth below of Allocable Excludable Shares) shall be excluded and deducted from the total number of shares of Voting Stock deemed to be outstanding for purposes of determining the number of shares of Voting Stock necessary to constitute a quorum at any such meeting or to approve a matter submitted for shareholder approval at any such meeting or by means of any such written consent. For purposes of this Article Four: (a) the term "Excludable Shares" means, with respect to any Person or Group, that number of shares of Voting Stock owned by such Person or Group, as the case may be, that would result in such Person or Group, as the case may be, owning more than twenty percent (20%) of the combined voting power of the outstanding shares of Voting Stock (with the determination of the voting power of each Person and Group owning Voting Stock being calculated and recalculated for this purpose as often as is necessary to give effect to the exclusion from voting and the determination of shares deemed to be outstanding for purposes related thereto of Excludable Shares held by other Persons or Groups); and (b) the term "Allocable Excludable Shares" means, with respect to each Person that is a member of a Group which owns Excludable Shares, a number of shares owned by such Person equal to such Person's pro rata share (based upon the number of shares of Voting Stock owned by such Person) within such Group of the total amount of Excludable Shares owned by such Group; provided, however, that shares that are deemed owned by two or -------- ------- more Persons who are members of such Group as a result of attributions in accordance with Section A.3. of this Article Four hereof shall for this purpose be deemed to be owned by such one of such Persons which most directly owns such shares; and provided, further, that, with respect to any Person -------- ------- that is a member of more than one such Group, "Allocable Excludable Shares" means the greatest number of Excludable Shares so allocated with respect to such Person with respect to any single Group. C. Right of Inquiry of the Corporation. The Corporation shall have the right but not the obligation to inquire of any Person whom the Corporation believes may own Voting Stock or any other Person who purports to exercise voting rights with respect to any Voting Stock, and each such Person shall have the obligation to provide such information to the Corporation as the Corporation may reasonably request, with respect to any matters pertinent to the operation or implementation of this Article Four, including, without limitation, (i) the number of shares owned by such Person, (ii) whether shares owned of record by such Person are owned by other Persons and the identity of such other Persons and the nature of their ownership interest, (iii) whether any Affiliates or Associates of such Person own any Voting Stock, (iv) whether such Person is a member of a Group of Persons owning Voting Stock, or (v) whether such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding with any other Person with respect to any Voting Stock. D. Persons to Whom This Article Does Not Apply. 17 18 The provisions of Section B of this Article Four shall not apply to (i) General American Mutual Holding Company, a Missouri mutual company ("GAMHC"), General American Life Insurance Company, a Missouri corporation ("General American"), General American Holding Company, a Missouri corporation ("Holding Company"), any Affiliate of GAMHC, General American or Holding Company, or any Subsidiary, (ii) any savings, profit-sharing, stock bonus or employee stock ownership plan or plans established by the Corporation or a Subsidiary and qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, or any successor provision, which holds shares of Voting Stock on behalf of participating employees and their beneficiaries with the right to instruct the trustee how to vote such shares of Voting Stock with respect to all matters submitted to shareholders for voting, or (iii) participating employees and beneficiaries under the plans referred to in the immediately preceding clause (ii) because of their participation in such savings, profit-sharing, stock bonus or employee ownership plans. In addition, the provisions of Section B of this Article Four shall not be applicable with respect to any Person or Group if the conditions specified in either Section D.1. or D.2 below are met: 1. Approval in Advance by the Board of Directors. The board of directors of the Corporation (the "Board of Directors") (i) has expressly approved in advance either (A) the acquisition of outstanding shares of Voting Stock by such Person or Group that caused such Person or Group to become the owner of Excludable Shares, or (B) the issue or sale by the Corporation of shares of Voting Stock to such Person or Group that caused such effect, and (ii) in advance of such acquisition or issue or sale have expressly determined that such provisions shall not be applicable to such Person or Group. 2. Approval by Board of Directors. The Board of Directors has determined that such provision shall not apply to such Person or Group. E. Powers of the Board of Directors. The Board of Directors shall have the power, but not the obligation, to determine, for the purposes of this Article Four, on the basis of information actually known to it or, in its discretion, after reasonable inquiry, all facts necessary to determine compliance with or implementation of this Article Four, including, without limitation, (i) the number of shares of Voting Stock owned by any Person or Group or a member of any Group (including, without limitation, in accordance with the first proviso to the definitions of Excludable Shares and Allocable Excludable Shares set forth in Section B of this Article Four), (ii) whether two or more Persons constitute a Group, (iii) whether a Person is an Affiliate or Associate of another Person or a member of any Group, (iv) whether a Person has an agreement, arrangement or understanding with another Person, (v) the calculation (including the manner of calculation) of the amount of Excludable Shares held by any Person or Group or the Allocable Excludable Shares held by any Person (including, without limitation, in accordance with the first proviso to the definitions of Excludable Shares and Allocable Excludable Shares set forth in Section B of this Article Four hereof), and (vi) any other facts which the Board of Directors determines to be relevant. Any determinations made by the Board of Directors pursuant to this Article Four in good faith and on the basis of such information as was actually known by the Board of Directors and advice as was then actually provided to the Board of Directors for such purpose shall be conclusive and binding upon the Corporation and its shareholders. 18 19 ARTICLE FIVE - INCORPORATOR The name and place of residence of the incorporator of the Corporation is: Name Address ---- ------- Connie B. Walsh 454 Tree Top Lane St. Louis, MO 63122 ARTICLE SIX - DIRECTORS A. Number and Classification. The number of Directors to constitute the Board of Directors is five. Hereafter, the number of Directors shall be fixed by or in the manner provided in the Bylaws of the Corporation, but in no event shall there be fewer than three (3) Directors. The Directors shall be divided into three classes, as nearly equal in number as reasonably possible, with the mode of such classification to be provided for in the Bylaws of the Corporation. Directors other than certain Directors constituting the existing Board of Directors at the time of the adoption of this provision shall be elected to hold office for a term of three years, with the term of office of one class expiring each year. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of stock of the Corporation, other than shares of Common Stock, shall have the right, voting separately by class or series, to elect Directors, the election, term of office, filling of vacancies and other features of such directorship shall be governed by the terms of the Articles of Incorporation of the Corporation or any Certificate of Designation thereunder applicable thereto; and such directors so elected shall not be divided into classes pursuant to this Article Six unless expressly provided by such terms. As used in these Articles of Incorporation, the term "entire Board of Directors" or the "entire Board" means the total number of Directors fixed by, or in accordance with, these Articles of Incorporation and the Bylaws of the Corporation. B. Removal of Directors. Subject to the rights, if any, of the holders of any class of capital stock of the Corporation (other than the Common Stock) then outstanding or any limitation imposed by law, (1) any Director, or the entire Board of Directors, may be removed from office at any time prior to the expiration of his, her or their term of office only for cause and only by the affirmative vote of the holders of record of outstanding shares representing at least 85% of all of the then outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of Directors, voting together as a single class at a special meeting of shareholders called expressly for that purpose (such vote being in addition to any required class or other vote); and (2) any Director may be removed from office by the affirmative vote of a majority of the entire Board of Directors at any time prior to the expiration of his or her term of office, as provided by law, in the event that the Director fails to meet any qualifications stated in the Bylaws for election as a Director or in the 19 20 event that the Director is in breach of any agreement between the Director and the Corporation relating to the Director's service as a Director or employee of the Corporation. C. Vacancies. Subject to the rights, if any, of the holders of any class of capital stock of the Corporation (other than the Common Stock) then outstanding, any vacancies in the Board of Directors which occur for any reason prior to the expiration of the respective term of office of the class in which the vacancy occurs, including vacancies which occur by reason of an increase in the number of Directors or the removal of a Director, shall be filled only by the Board of Directors, acting by the affirmative vote of a majority of the remaining Directors then in office (although less than a quorum). ARTICLE SEVEN - DURATION The duration of the Corporation is perpetual. ARTICLE EIGHT - PURPOSES The Corporation is formed to engage in any lawful act or activity for which a corporation now or hereafter may be organized under the laws of the State of Missouri. ARTICLE NINE - AMENDMENT OF BYLAWS The Bylaws of the Corporation may be amended, altered, changed or repealed, and a provision or provisions inconsistent with the provisions of the Bylaws as they may exist from time to time may be adopted, only by a majority of the entire Board of Directors. ARTICLE TEN - INDEMNIFICATION A. Actions Involving Directors and Officers. The Corporation shall indemnify each person (other than a party plaintiff suing on his or her own behalf or in the right of the Corporation) who at any time is serving or has served as a Director or officer of the Corporation against any claim, liability or expense incurred as a result of such service, or as a result of any other service on behalf of the Corporation, or service at the request of the Corporation as a director, officer, employee, member, or agent of another corporation, partnership, joint venture, trust, trade or industry association, or other enterprise (whether incorporated or unincorporated, for-profit or not-for-profit), to the maximum extent permitted by law. Without limiting the generality of the foregoing, the Corporation shall indemnify any such person who was or is a party (other than a party plaintiff suing on his or her behalf or in the right of the Corporation), or is threatened to be made a party, to any threatened, pending or 20 21 completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, but not limited to, an action by or in the right of the Corporation) by reason of such service against expenses (including, without limitation, attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding. B. Actions Involving Employees or Agents. 1. Permissive Indemnification. The Corporation may, if it deems appropriate and as may be permitted by this Article Ten, indemnify any person (other than a party plaintiff suing on his or her own behalf or in the right of the Corporation) who at any time is serving or has served as an employee or agent of the Corporation against any claim, liability or expense incurred as a result of such service, or as a result of any other service on behalf of the Corporation, or service at the request of the Corporation as a director, officer, employee, member, or agent of another corporation, partnership, joint venture, trust, trade or industry association, or other enterprise (whether incorporated or unincorporated, for-profit or not-for- profit), to the maximum extent permitted by law or to such lesser extent as the Corporation, in its discretion, may deem appropriate. Without limiting the generality of the foregoing, the Corporation may indemnify any such person who was or is a party (other than a party plaintiff suing on his or her own behalf or in the right of the Corporation), or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, but not limited to, an action by or in the right of the Corporation) by reason of such service, against expenses (including, without limitation, attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding. 2. Mandatory Indemnification. To the extent that an employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section B.1 of this Article Ten, or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with the action, suit or preceding. C. Determination of Right to Indemnification in Certain Circumstances. Any indemnification required under Section A of this Article Ten or authorized by the Corporation in a specific case pursuant to Section B of this Article Ten (unless ordered by a court) shall be made by the Corporation unless a determination is made reasonably and promptly that indemnification of the Director, officer, employee or agent is not proper under the circumstances because he or she has not met the applicable standard of conduct set forth in or established pursuant to this Article Ten. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or even if obtainable a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (3) by majority vote of the shareholders; provided that no such determination shall preclude an action brought in an appropriate court to challenge such determination. 21 22 D. Advance Payment of Expenses. Expenses incurred by a person who is or was a Director or officer of the Corporation in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of an action, suit or proceeding, and expenses incurred by a person who is or was an employee or agent of the Corporation in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors, in either case upon receipt of an undertaking by or on behalf of the Director, officer, employee or agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in or pursuant to this Article Ten. E. Article Ten Provisions Not Exclusive Right. The indemnification provided by this Article Ten shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled, whether under the Bylaws of the Corporation or any statute, agreement, vote of shareholders or disinterested Directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. F. Indemnification Agreements Authorized. Without limiting the other provisions of this Article Ten, the Corporation is authorized from time to time, without further action by the shareholders of the Corporation, to enter into agreements with any Director, officer, employee or agent of the Corporation providing such rights of indemnification as the Corporation may deem appropriate, up to the maximum extent permitted by law. Any agreement entered into by the Corporation with a Director may be authorized by the other Directors, and such authorization shall not be invalid on the basis that different or similar agreements may have been or may thereafter be entered into with other Directors. G. Standard of Conduct. Except as may otherwise be permitted by law, no person shall be indemnified pursuant to this Article Ten (including without limitation pursuant to any agreement entered into pursuant to Section F of this Article Ten) from or on account of such person's conduct which is finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct. The Corporation may (but need not) adopt a more restrictive standard of conduct with respect to the indemnification of any employee or agent of the Corporation. H. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or who is or was otherwise serving on behalf or at the request of the Corporation in any capacity against any claim, liability or 22 23 expense asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article Ten. I. Certain Definitions. For the purposes of this Article Ten: 1. Service in Representative Capacity. Any Director or officer of the Corporation who shall serve as a director, officer or employee of any other corporation, partnership, joint venture, trust or other enterprise of which the Corporation, directly or indirectly, is or was the owner of 20% or more of either the outstanding equity interests or the outstanding voting stock (or comparable interests), shall be deemed to be so serving at the request of the Corporation, unless the Board of Directors of the Corporation shall determine otherwise. In all other instances where any person shall serve as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise of which the Corporation is or was a stockholder or creditor, or in which it is or was otherwise interested, if it is not otherwise established that such person is or was serving as a director, officer, employee or agent at the request of the Corporation, the Board of Directors of the Corporation may determine whether such service is or was at the request of the Corporation, and it shall not be necessary to show any actual or prior request for such service. 2. Predecessor Corporations. References to a corporation include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of a constituent corporation or is or was serving at the request of a constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article Ten with respect to the resulting or surviving corporation as he or she would if he or she had served the resulting or surviving corporation in the same capacity. 3. Service for Employee Benefit Plan. The term "other enterprise" shall include, without limitation, employee benefit plans and voting or taking action with respect to stock or other assets therein; the term "serving at the request of the Corporation" shall include, without limitation, any service as a director, officer, employee or agent of a corporation which imposes duties on, or involves services by, a director, officer, employee or agent with respect to any employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have satisfied any standard of care required by or pursuant to this Article Ten in connection with such plan; the term "fines" shall include, without limitation, any excise taxes assessed on a person with respect to an employee benefit plan and shall also include any damages (including treble damages) and any other civil penalties. 23 24 J. Survival. Any indemnification rights provided pursuant to this Article Ten shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Notwithstanding any other provisions in these Articles of Incorporation, any indemnification rights arising under or granted pursuant to this Article Ten shall survive amendment or repeal of this Article Ten with respect to any acts or omissions occurring prior to the effective time of such amendment or repeal and persons to whom such indemnification rights are given shall be entitled to rely upon such indemnification rights with respect to such acts or omissions as a binding contract with the Corporation. K. Liability of the Directors. It is the intention of the Corporation to limit the personal liability of the Directors of the Corporation, in their capacity as such, whether to the Corporation, its shareholders or otherwise, to the fullest extent permitted by law. Consequently, should the GBCL or any other applicable law be amended or adopted hereafter so as to permit the elimination or limitation of such liability, the liability of the Directors of the Corporation shall be so eliminated or limited without the need for amendment of these Articles or further action on the part of the shareholders of the Corporation. ARTICLE ELEVEN - AMENDMENT OF ARTICLES OF INCORPORATION The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on the shareholders, Directors and officers of the Corporation are subject to this reserved power; provided, that (in addition to any required class or other vote) the affirmative vote of the holders of record of outstanding shares representing at least 85% of all of the outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of Directors, voting together as a single class, shall be required to amend, alter, change or repeal, or adopt any provision or provisions inconsistent with, Articles Four, Six, Nine, Ten, Twelve, Thirteen or this Article Eleven of these Articles of Incorporation. ARTICLE TWELVE - BUSINESS COMBINATIONS The Corporation hereby subjects itself to and accepts the provisions of Section 351.459 of the GBCL, provided that General American or Holding Company or any Affiliate of General American or Holding Company or any Subsidiary (as each of such terms is defined in Article Four hereof) shall not be deemed to constitute "interested shareholders" for purposes of Section 351.459. ARTICLE THIRTEEN - CONTROL SHARE ACQUISITIONS Section 351.407 of the GBCL shall not apply to control share acquisitions (as defined therein) of shares of the Corporation. 24 EX-5.1 4 OPINION OF LEGAL COUNSEL 1 [letterhead of Bryan Cave LLP] December 11, 1997 Board of Directors Conning Corporation 700 Market Street St. Louis, MO 63101 To the Board of Directors of Conning Corporation: We have acted as special counsel for Conning Corporation, a Missouri corporation (the "Company"), in connection with various legal matters relating to the filing of a Registration Statement on Form S-1, No. 333-35993 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), covering the offering and sale of up to 2,875,000 shares (including 375,000 shares subject to the Underwriters' over-allotment option) of the Company's Common Stock, par value $.01 per share (the "Shares"). In connection therewith, we have examined and relied without investigation as to matters of fact upon the Registration Statement, certificates of public officials, statements and certificates of officers of the Company, and originals or copies certified to our satisfaction of the Restated Articles of Incorporation and Bylaws of the Company, as amended, proceedings of the Board of Directors of the Company and such other corporate records, documents, certificates and instruments as we have deemed necessary or appropriate in order to enable us to render the opinion expressed below. In rendering this opinion, we have assumed the genuineness of all signatures on all documents examined by us, the authenticity of all documents submitted to us as originals and the conformity to authentic originals of all documents submitted to us as certified or photostatted copies. We have also assumed the due authorization, execution and delivery of all documents. Based on the foregoing and in reliance thereon, we are of the opinion that the Shares of the Company, if sold in accordance with the terms set forth in the Registration Statement, will be legally issued, fully paid and non-assessable. This opinion is not rendered with respect to any laws other than The General and Business Corporation Law of Missouri. 2 The Board of Directors of Conning Corporation December 11, 1997 Page 2 We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus filed as a part thereof. We also consent to your filing copies of this opinion as an exhibit to the Registration Statement with agencies of such states as you deem necessary in the course of complying with the laws of such states regarding the offering and sale of the Shares. In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission. Very truly yours, /s/ Bryan Cave LLP BRYAN CAVE LLP EX-10.5 5 SUBLEASE 1 SUBLEASE -------- THIS SUBLEASE (the "Sublease") is effective as of July 19, 1995 (the "Effective Date"), between General American Life Insurance Company, a Missouri corporation ("Sublessor"), and General American Investment Management Company ("GAIMCO"), a Missouri corporation ("Sublessee"). RECITALS -------- A. Pursuant to certain leases (individually a "Master Lease" and collectively the "Master Leases"), various landlords (each a "Master Lessor" and collectively the "Master Lessors") leased to Sublessor certain spaces (each a "Master Lease Space" and collectively the "Master Lease Spaces"). B. Sublessee desires to sublease from Sublessor, and Sublessor desires to sublet to Sublessee certain spaces (each a "Space" and collectively the "Spaces") which constitute the Master Lease Spaces. The Spaces are described on Exhibit A attached hereto. --------- IN CONSIDERATION OF THE ABOVE, Sublessor and Sublessee agree as follows: 1. Demise. Sublessor hereby subleases and demises to ------ Sublessee and Sublessee hereby takes and hires from Sublessor the Spaces, subject to the provisions hereinafter set forth. 2. Term. The initial term of this Sublease (the "Initial ---- Term") shall commence on the Effective Date, and shall expire, with respect to each particular Space listed on Exhibit A, at midnight on the day prior --------- to the expiration date of the current term of the Master Lease, unless such Master Lease is earlier terminated. This Sublease may be terminated with respect to one or more Spaces at any time by 90 days advance written notice by the Sublessee to the Sublessor at the address for notices provided herein. Upon expiration of the Initial Term of this Sublease and any extension or renewal thereof (the "Expiration Date"), Sublessor and Sublessee shall be released from all liabilities and obligations hereunder except as may be expressly provided herein. 3. Condition and Use of Spaces. Sublessee accepts the --------------------------- Spaces from Sublessor in their present condition and acknowledges that Sublessor shall not be required to make any improvements or alterations to the Spaces. Sublessor represents and warrants that it has asserted no claim of default on the part of any Master Lessor 1 2 under any Master Lease and that, to the best of its knowledge, no default has occurred and is continuing on the part of any Master Lessor under any Master Lease. Sublessor further represents and warrants that it has received no notice alleging default by it from any Master Lessor and that it has performed all of its obligations to be performed by Sublessor under each Master Lease. Sublessor agrees that as between itself and Sublessee, Sublessee shall have the benefit of all claims and warranties inuring to the benefit of Sublessor in respect of the Spaces, if any. 4. Rent and Other Charges. During the Initial Term of this ---------------------- Sublease, Sublessee shall pay rent ("Rent") and all other amounts in accordance with the terms of the Master Leases to Sublessor, at the address for notices provided herein, in lawful money of the United States, in monthly payments in advance on or before the first day of each month, as specified in the Master Leases with respect to each Space listed on Exhibit A. --------- 5. Surrender of Spaces. Upon the Expiration Date or earlier ------------------- termination of this Sublease, Sublessee shall (a) surrender the Spaces to Sublessor in good condition and repair, broom-clean, ordinary wear and tear and casualty loss or loss by condemnation excepted and otherwise in the condition required by the Master Lease, and (b) to the extent required of Sublessor or Sublessee under corresponding Master Leases, repair any damage to the Spaces occasioned by the removal of Sublessee's trade fixtures, furnishings, equipment and personal property which Sublessee may remove under the terms of such Master Leases. 6. Subordination. Subject to the provisions of Paragraph 25 ------------- hereof, this Sublease is subject and subordinate to each Master Lease and to all matters to which such Master Leases are subject and subordinate. 7. Indemnification. Sublessor shall defend, indemnify and --------------- hold Sublessee harmless from and against any and all losses, liabilities, claims, causes of action, damages, costs and expenses (including attorneys' fees and expert witnesses' fees) arising or resulting from (i) any intentional or negligent act or omission of Sublessor or Sublessor's officers, agents, employees, contractors, invitees or licensees (collectively "Sublessor's Agents"), occurring or accruing during the term of this Sublease and/or (ii) any breach occurring or accruing on or after the Effective Date by Sublessor or Sublessor's Agents of any term, condition or covenant under this Sublease or any breach of any term, condition or covenant under the Master Leases occurring or accruing during the term of this Sublease, except to the extent incorporated herein as an obligation of Sublessee. In case any action or proceeding is brought against Sublessee by reason of any such claim, Sublessor, upon written notice from Sublessee, shall, at Sublessor's expense, resist or defend such action or proceeding by counsel reasonably approved by Sublessee. Sublessee shall defend, 2 3 indemnify and hold Sublessor harmless from and against any and all losses, liabilities, claims, causes of action, damages, costs and expenses (including attorneys' fees and expert witnesses' fees) arising or resulting from (i) any intentional or negligent act or omission of Sublessee or Sublessee's officers, agents, employees, contractors, invitees or licensees (collectively "Sublessee's Agents"), occurring or accruing during the term of this Sublease, and/or (ii) any breach occurring or accruing on or after the Effective Date by Sublessee or Sublessee's Agents of any term, condition or covenant under this Sublease or under the Master Leases to the extent incorporated herein as applying to Sublessee, and/or (iii) any intentional or negligent act or omission of Sublessee or Sublessee's Agents which constitutes a breach or creates an obligation for reimbursement or indemnification on Sublessor's part to one or more Master Lessors under the terms of the Master Leases. In case any action or proceeding is brought against Sublessor by reason of any such claim, Sublessee, upon written notice from Sublessor, shall, at Sublessee's expense, resist or defend such action or proceeding by counsel reasonably approved by Sublessor. The foregoing indemnities in this Paragraph 7 shall survive the expiration, cancellation or termination of this Sublease. 8. Insurance. The Sublessee shall maintain at its expense --------- throughout the term of this Sublease, insurance against loss or liability in connection with bodily injury, death, property damage or destruction, occurring within the Spaces or arising out of the use thereof by the Sublessee or its agents, employees, officers, invitees, visitors and guests, under one or more policies of general public liability insurance affording Sublessor protection in an amount not less than the amount of such insurance maintained by Sublessor pursuant to the terms of the Master Leases. Each such policy shall (a) name as the insureds thereunder, as their interests may appear, the Sublessor and the Sublessee, (b) by its terms, be cancelable or materially altered only on at least thirty (30) days' prior written notice to Sublessor, and (c) be issued by an insurer of recognized responsibility licensed to issue such policy in the state in which the Spaces are located, and rated at least A by Best's Key Rating Guide for Property Liability or otherwise as may be acceptable to Sublessor. To the extent Master Lessor under the Master Lease may require Sublessee separately to provide any evidence of insurance benefiting or naming Master Lessor as a named or additional insured, Sublessee shall promptly upon request of Sublessor cause such evidence of insurance to be issued and delivered to Master Lessor. Any waiver of subrogation rights provided in the Master Lease shall not apply between the parties hereto. Notwithstanding anything to the contrary contained in this Paragraph 8, Sublessee shall not be required to carry any insurance in excess of the amount of insurance coverage required to be maintained by Sublessor under the Master Leases. Sublessee and Sublessor each hereby relieve the other, and waive their entire right of recovery against the other for loss or damage arising out of or incident to the perils insured against by either party to the extent of insurance proceeds actually 3 4 received, which perils occur in, on or about the Spaces or the Master Lease Spaces, whether due to the negligence of Sublessor or Sublessee or their agents, employees, contractors and/or invitees. Sublessee and Sublessor shall give notice to their insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Sublease. 9. Other Provisions. Except for the paragraphs of the ---------------- Master Lease which relate to (i) the payment of rent, (ii) the term of the Lease, (iii) any options to purchase the Master Lease Spaces, renew any Master Lease or expand the Master Lease Spaces, (iv) any rights to assignment and subletting, and (v) personal property or public liability insurance to be carried by Sublessor covering the Master Lease Spaces, and to the extent not otherwise consistent with the agreements and understandings expressed elsewhere in this Sublease or applicable only to the original parties to the Master Leases, the provisions of the Master Leases are hereby incorporated herein by reference on the following understandings: (a) The term "premises" (or other word of similar import) as used therein shall refer to the Spaces. (b) The terms "tenant" or "lessee" (or other word of similar import) as used therein shall refer to Sublessee. (c) The terms "lessor", "landlord" or "owner" (or other word of similar import) as used therein shall refer to Sublessor. (d) Sublessee acknowledges that the applicable Master Lessors and not Sublessor shall be responsible for any work, services, repairs, utilities, common areas, repainting and restoration or the performance of other obligations required of or imposed upon Master Lessor under each Master Lease. Sublessor agrees to deliver to such Master Lessor any request relating to such services if requested to do so by Sublessee, or Sublessee may make such requests directly of such Master Lessor if Sublessee so elects. Sublessee shall perform such maintenance and repairs with respect to the Spaces as required to be performed by Sublessor under applicable Master Leases. To the extent that each Master Lease permits any right of self help, Sublessee may exercise such right of self-help with respect to the corresponding Space. (e) Except as otherwise provided in this Paragraph 9, Sublessor and Sublessee shall perform and comply with the provisions of the Master Leases incorporated herein with respect to the Spaces to be performed by, respectively, the "landlord" and "tenant" (or like words of similar import) thereunder. Accordingly, Sublessee hereby assumes and agrees to perform all of the obligations of the "tenant" 4 5 under the Master Leases accruing or arising during the term of this Sublease in the manner and within the time required under the Master Leases as if the Spaces were the only space demised under the Master Leases. Sublessee and Sublessor each further covenant that it will neither commit, nor permit to be committed by any third party, any act or omission which would violate any material term or condition of the Master Leases to be performed by it or on its behalf, nor be cause for termination of any Master Lease by a Master Lessor. Sublessee's obligations hereunder are to Sublessor and Sublessee shall have no duties or obligations to any Master Lessors under the Master Leases, except as may otherwise be agreed to between Sublessee and a Master Lessor or as specifically provided in the Master Leases. (f) In the event of a default by a Master Lessor under a Master Lease, Sublessor agrees that Sublessee may at Sublessee's option institute an action for enforcement of Sublessor's rights under such Master Lease in the name, place and stead of Sublessor. 10. Sublessee's Sign. If any Master Lease contains ---------------- limitations on the number of signs that may be placed on the corresponding Master Lease Space, such right shall be allocated between the parties on a proportionate basis with respect to each party's relative square footage of use. Notwithstanding the above, Sublessee's rights to install and maintain a sign on the any Space shall be limited to the provisions of the corresponding Master Lease and shall otherwise be conditioned upon receipt of prior written consent of the applicable Master Lessor if so required under the terms of the Master Lease. 11. Assignment and Subletting. Subject to obtaining any ------------------------- consents required under the Master Leases, Sublessee shall obtain Sublessor's prior written consent to any assignment or subletting, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, Sublessee shall not have the right to assign this Sublease or sublet all or any portion of a Space without first obtaining the prior written consent of the applicable Master Lessor where such consent is required under the terms of the Master Lease. No assignment of this Sublease (whether or not Sublessor's consent is required) shall relieve Sublessee of its obligations hereunder. Each assignee of this Sublease shall assume all obligations of Sublessee under this Sublease and shall be and remain liable jointly and severally with Sublessee for the payment of Rent, and for the performance of all the terms, covenants, conditions and agreements herein contained on Sublessee's part to be performed. No assignment shall be binding on Sublessor unless the assignee or Sublessee shall deliver to Sublessor a counterpart of the assignment and an instrument in recordable form that contains a covenant of assumption by the assignee reasonably satisfactory in substance and form to Sublessor, consistent with the requirements of this paragraph, 5 6 but the failure or refusal of the assignee to execute such instrument of assumption shall not release or discharge the assignee from its liability as set forth above. 12. Options to Renew. Sublessor shall have no obligation, ---------------- and Sublessee shall have no right or power, to exercise any option to renew or extend the term of the Master Lease. 13. Notices. Any notice, demand, consent or approval, ------- request or other communication or document to be provided pursuant to this Sublease shall be in writing and shall be sent by registered or certified United States mail, return receipt requested, or by personal delivery during normal business hours with evidence of delivery requested, with all postage and fees prepaid, to Sublessor or Sublessee, respectively, at the following addresses, or at such other address as such party shall designate by written notice to the other party. Such addresses are: SUBLESSOR: General American Life Insurance Company 700 Market Street St. Louis, MO 63101 Attn: Real Estate Department SUBLESSEE: General American Investment Management Company (at the address of the Space or at such other place as Sublessee may from time to time designate by notice to Sublessor) Such notices shall be deemed to have been received and to be effective for all purposes upon receipt or refusal to accept delivery at such address as indicated on the return receipt or other record of delivery. 14. No Oral Agreements. There are no oral agreements or ------------------ understandings between the parties hereto affecting this Sublease. This Sublease cannot be changed or terminated orally but only by an agreement in writing signed by the party against whom enforcement or any waiver, change, modification or discharge is sought. 6 7 15. Governing Law. This Sublease shall be governed and ------------- construed, as to each of the respective Spaces, in accordance with the laws of the state in which each such Space is located. 16. Incorporation of Exhibit(s). The Exhibit(s) attached --------------------------- hereto is (are) incorporated herein by this reference. 17. Consent. When consent or approval of either Sublessor or ------- Sublessee is required by any provision of this Sublease or of the Master Lease to the extent incorporated herein, such consent or approval shall not be unreasonably withheld or delayed (unless otherwise expressly provided in this Sublease or in the Master Leases as incorporated herein). Neither Sublessor nor Sublessee shall take or omit to take any action requiring a Master Lessor's consent under a Master Lease without first obtaining such consent in accordance with the terms of the Master Lease. Upon request of Sublessee, Sublessor will request a Master Lessor's consent to any action or omission of Sublessee for which such consent is required. 18. Parties Not Relieved of Liability. No assignment of this --------------------------------- Sublease or subletting of the Spaces, in whole or in part, as provided in this Sublease, shall relieve either Sublessor or Sublessee of its obligations under this Sublease. 19. Severability. If any provision of this Sublease is ------------ determined to be unenforceable for any reason, it shall be modified rather than voided, if possible, in order to achieve the intent of Sublessor and Sublessee to the extent possible. In any event, the remaining provisions shall be deemed valid and enforceable to the maximum extent possible. 20. Notice of Default. Sublessor and Sublessee shall, ----------------- respectively, promptly give written notice to the other of any notice of default they may receive from the Master Lessor under any Master Lease. 21. Attorney's Fees. In the event of any legal action or --------------- proceeding to enforce the terms of this Sublease, the prevailing party shall be entitled to recover its reasonable attorney's fees, costs and expenses. 22. No Third Party Beneficiary. This Sublease is intended to -------------------------- confer benefits on Sublessee, Sublessor and their respective successors and permitted assigns only, and is not intended to result in any rights or benefits to any third party, including without limitation, any Master Lessor. Nothing contained in this Sublease shall be construed to create privity of estate or of contract between Sublessee and any Master Lessor. 7 8 23. Effectiveness. This Sublease shall be binding against ------------- Sublessor and Sublessee effective as of the Effective Date hereof. Sublessor agrees to seek the consent of the Master Lessors to this Sublease were required to do so by the terms of particular Master Leases. In the event that subsequent to the Effective Date Sublessor delivers written notice to Sublessee that Sublessor has been unable to obtain the consent of one or more Master Lessors to this Sublease, this Sublease shall be null and void as to the corresponding Spaces, and neither party shall have any obligation to the other hereunder with respect to such Spaces, except that Sublessee shall vacate and surrender such Spaces to Sublessor in the same condition delivered to Sublessee, ordinary wear and tear excepted. Notwithstanding the foregoing, Sublessor shall permit Sublessee to negotiate with any Master Lessor regarding any changes to the form of consent agreement required by such Master Lessor, provided such provisions do not modify or impair any rights or duties of Sublessor under the applicable Master Lease or this Sublease. The effectiveness of this Sublease shall be further conditioned, at Sublessee's option, on Sublessee's receipt from each Master Lessor, concurrently with such Master Lessor's consent to this Sublease, of (i) an estoppel letter verifying that the Lease provided separately by Sublessor to Sublessee and identified by Sublessor as the Master Lease in effect with respect to such Master Lessor is a true and complete copy of the applicable Master Lease, and that no default has occurred and is continuing on the part of Sublessor thereunder. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the day and year first above written. SUBLESSOR: GENERAL AMERICAN LIFE INSURANCE COMPANY By: /s/ Matthew P. McCauley ---------------------------------------------- Name: Matthew P. McCauley -------------------------------------------- Title: Vice President ------------------------------------------- SUBLESSEE: GENERAL AMERICAN INVESTMENT MANAGEMENT COMPANY By: /s/ Leonard M. Rubenstein ---------------------------------------------- Name: Leonard M. Rubenstein -------------------------------------------- Title: Chief Executive Officer ------------------------------------------- 8 9 EXHIBIT A TO SUBLEASE CONNING ASSET MANAGEMENT COMPANY REAL ESTATE FIELD OFFICE LEASE SUMMARY SUB-LEASES
FIELD OFFICE ANNUAL RENT SQUARE FEET LEASE EXPIRATION - ---------------------------------------- ----------- ----------- ---------------- ATLANTA INVESTMENT OFFICE $25,688 1,352 Feb. 28, 2002 The Day Building, Suite 185 4725 Peachtree Corners Circle Norcross, GA 30092 CHICAGO INVESTMENT OFFICE $20,200 1,437 March 31, 1999 300 Park Blvd., Suite 290 Itasca, IL 60143 DALLAS REAL ESTATE OFFICE $25,568 1,598 Oct. 31, 2000 One Lincoln Centre, Suite 945 5400 LBJ Freeway Dallas, TX 75240 NORTHERN PACIFIC INVESTMENT $24,402 1,162 Sept. 14, 2000 3000 Executive Parkway, Sutie 212 San Ramon, CA 94583 ORLANDO INVESTMENT OFFICE $27,602 1,492 Dec. 31, 1998 Landmark Center I, Station 275 315 East Robinson Street Orlando, FL 32801 SOUTHERN CALIFORNIA (CBC) (IP-519) $17,102 1,296 Month-to-Month Corporate Business Center (IP-531) $8,640 1,440 (storage) M-T-M 25884 Business Center Dr., Suite A Redlands, CA 92374 WASHINGTON D.C. INVESTMENT $22,915 1,540 Sept. 30, 1999 950 Herndon Parkway, Suite 240 Herndon, VA 20170-5531
EX-10.9 6 REGISTRATION RIGHTS AGREEMENT 1 REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT dated as of June 12, 1997, among CONNING CORPORATION, a Missouri corporation (the "Company"), GENERAL AMERICAN LIFE INSURANCE COMPANY, a Missouri life insurance corporation ("General American"), and GENERAL AMERICAN HOLDING COMPANY, a Missouri corporation and a wholly owned subsidiary of General American ("Holding Company"). RECITALS 1. General American is the beneficial owner and Holding Company is the record owner of 6,710,000 shares of Common Stock of the Company and on the Closing Date (as defined below), General American will beneficially own more than 60% of the outstanding Common Stock as of such date. 2. General American, through Holding Company, may desire, in the future, to sell to the public some or all of such shares of Common Stock. 3. The Company, General American and Holding Company therefore deem it to be in their respective best interests to set forth the rights of General American and Holding Company and certain other holders of such shares of Common Stock of the Company in connection with public offerings and sales of such shares. NOW, THEREFORE, in consideration of the premises and mutual covenants and obligations hereinafter set forth, and intending to be legally bound hereby, the Company, General American and Holding Company hereby agree as follows: 1. Definitions. For purposes of this Agreement: ----------- (a) "Common Stock" shall mean the common stock, par value $.01 per share, of the Company and any other securities into which or for which such common stock has been converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets, or otherwise. (b) "Closing Date" shall mean the date on which the initial public offering of the Company's Common Stock closes. (c) "Effective Date" shall mean the date on which the SEC declares the Company's Registration Statement on Form S-1 relating to the initial public offering of shares of the Common Stock effective. (d) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (e) "Form S-3" means such form of registration statement under the Securities Act on the date hereof or any registration form under the Securities Act 2 subsequently adopted by the SEC that permits the inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (f) "Holder" means General American or Holding Company, so long as it holds any Registrable Securities, and any direct or indirect subsidiary of General American or Holding Company, any direct or indirect parent corporation of General American or Holding Company, or any direct or indirect subsidiary of any such parent corporation owning Registrable Securities who is a permitted assignee of rights under Section 12 of this Agreement. (g) The terms "register," "registered," and "registration," refer to a registration effected by the preparation and filing of a Registration Statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such Registration Statement by the SEC. (h) "Registrable Securities" shall mean the 6,710,000 shares of Common Stock beneficially owned by General American prior to the Closing Date or owned by any subsequent Holder or Holders, and, in each case, all shares of Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, in exchange for, or in replacement of such shares of Common Stock. The term "Registrable Securities" excludes, however, any security (i) the sale of which had been effectively registered under the Securities Act and which had been disposed of in accordance with a Registration Statement, (ii) that has been sold by a Holder in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof (including, without limitation, transactions pursuant to Rules 144 and 144A) such that the further disposition of such securities by the transferee or assignee is not restricted under the Securities Act, (iii) that have been sold by a Holder in a transaction in which such Holder's rights under this Agreement are not, or cannot be, assigned, or (iv) for which the registration rights provided under this Agreement have expired pursuant to Section 16 of this Agreement. (i) "Registration Expenses" shall mean (i) registration, qualification and filing fees; (ii) fees and expenses of compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualification of any Registrable Securities being registered); (iii) printing expenses; (iv) internal expenses (including, without limitation, all salaries and expenses of officers and employees performing legal or accounting duties); (v) fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of comfort letters customarily requested by underwriters); (vi) fees and expenses of listing any Registrable Securities on any securities exchange on which the Common Stock is then listed; and (vii) fees and disbursements of underwriters customarily paid by issuers or 2 3 sellers of securities, but excluding any underwriting fees, discounts or commissions attributable to the sale of any Registrable Securities and any fees and expenses of underwriters' counsel (other than as provided in clause (ii) above). (j) "Registration Statement" shall mean any registration statement or similar document that covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the prospectus or preliminary prospectus included therein, all amendments and supplements to such Registrable Statement, including post-effective amendments, all exhibits to such Registration Statement, and all material incorporated by reference in such Registration Statement. (k) "Rule 144" shall mean Rule 144 promulgated under the Securities Act or any successor rule thereto. (l) "Rule 144A" shall mean Rule 144A promulgated under the Securities Act or any successor rule thereto. (m) "SEC" shall mean the Securities and Exchange Commission. (n) "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 2. Demand Registration. ------------------- (a) If the Company shall receive at any time on or after the first anniversary of the Effective Date, a written request, in the manner provided in Section 19, from the Holders of Registrable Securities representing at least ten percent (10%) of the Common Stock then outstanding that the Company file a registration statement under the Securities Act covering the registration of any or all of such Holders' Registrable Securities, then the Company shall (i) within 10 days of the receipt thereof, give written notice, in the manner provided in Section 19, of such request to all Holders of outstanding Registrable Securities known to the Company, and (ii) subject to the limitations contained in this Section 2, use its reasonable best efforts to effect, as soon as practicable and in any event within 120 days of the receipt of such request, the registration under the Securities Act of all Registrable Securities for which the Company receives a request from the Holders thereof in the manner provided in Section 19, within 20 days of the mailing of such notice by the Company. The Company, however, shall not be required to effect a registration pursuant to this Section 2 unless the aggregate number of shares requested to be registered represents at least ten percent (10%) of the Common Stock then outstanding. (b) If the Holder(s) initiating the registration request hereunder (collectively, the "Initiating Holder") intends to distribute the Registrable Securities covered by its request by means of an underwriting, it shall so advise the Company as a part of its request made pursuant to Section 2(a) and the Company shall include such information in the written notice to the Holders referred to in Section 2(a). In such event, 3 4 the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to sell securities through such underwriting (together with the Company as provided in Section 5(g) of this Agreement and any other holder of shares of Common Stock permitted to participate in such registration pursuant to this Section 2(b)) shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Initiating Holder (provided the same are underwriters of recognized national standing reasonably acceptable to the Company), upon the terms and conditions agreed upon between the Company and such underwriter(s). Notwithstanding any other provisions of this Section 2, if the underwriter(s) advise the Initiating Holder in writing that marketing or other factors require a limitation of the number of Registrable Securities to be underwritten, then the Company shall so advise Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, and the number of Registrable Securities that may be included in the underwriting shall be allocated among all Holders thereof, including the Initiating Holder, in proportion (as nearly as practicable) to the number of Registrable Securities which each Holder requested be included in such registration. If the number of Registrable Securities to be underwritten has not been so limited, the Company may include shares of Common Stock for its own account (or for the account of other shareholders) in such registration if the underwriter(s) so agree and to the extent that, in the opinion of such underwriter(s), the inclusion of such additional shares will not adversely affect the offering of the Registrable Securities included in such registration. (c) The Company shall not be obligated to effect a total of more than two registrations pursuant to this Section 2, Section 4 and Section 3 (provided, with respect to registrations under Section 3, that the Holder was able to dispose of at least 80% of the Registrable Securities it requested be registered) and shall not be obligated to effect more than one registration in any twelve-month period pursuant to this Section 2 or Section 4. (d) A registration effected pursuant to this Section 2, if effected by the Company on Form S-3, shall be counted as a Form S-3 registration effected pursuant to Section 4. 3. Incidental Registration. ----------------------- (a) After the Effective Date, if (but without any obligation to do so) the Company proposes to register (excluding a registration effected by the Company for shareholders other than the Holders, except in the case of a firm commitment underwriting) any shares of Common Stock under the Securities Act in connection with the public offering of such shares solely for cash on any form of Registration Statement in which the inclusion of Registrable Securities is appropriate (other than a registration (i) 4 5 relating solely to the sale of securities to participants in a Company stock plan, (ii) pursuant to a Registration Statement on Form S-4 or Form S-8 (or any successor forms) or any form that does not include substantially the same information, other than information relating to the selling shareholders or their plan of distribution, as would be required to be included in a registration statement covering the sale of Registrable Securities, (iii) in connection with any dividend reinvestment or similar plan, or (iv) for the sole purpose of offering securities to another entity or its securityholders in connection with the acquisition of assets or securities of such entity or any similar transaction), the Company shall promptly give each Holder written notice of such registration in the manner provided in Section 19 at least 20 days before the anticipated filing date of any such Registration Statement. Upon the written request of any Holder given in the manner provided in Section 19 within 10 days after the mailing of such notice by the Company, the Company shall, subject to the provisions of Section 8 hereof, cause to be registered under the Securities Act all of the Registrable Securities that such Holder has so requested to be registered. The Company shall not be required to proceed with, or maintain the effectiveness of, any registration of its securities after giving the notice herein provided, and the right of any Holder to have Registrable Securities included in such Registration Statement shall be conditioned upon participation in any underwriting to the extent provided herein. The Company shall not be required to include any Registrable Securities in such underwriting unless the Holders thereof enter into an underwriting agreement in customary form, and upon terms and conditions agreed upon between the Company and the underwriter(s) (except as to monetary obligations of the Holders not contemplated by Section 7 of this Agreement), with the underwriter(s) selected by the Company. In the event that the underwriter(s) shall advise the Company that marketing or other factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto. The underwriter(s) may exclude some or all of the Registrable Securities from such underwriting and the number of Registrable Securities, if any, that may be included in the underwriting shall be allocated among all Holders thereof in proportion (as nearly as practicable) to the number of Registrable Securities which each Holder requested be included in such registration. Nothing in this Section 3 is intended to diminish the number of securities to be included by the Company in such underwriting. The Company and the underwriter(s) selected by the Company shall make all determinations with respect to the timing, pricing, and other matters related to the offering. (b) A registration effected pursuant to this Section 3 shall be counted as a Form S-3 registration under Section 4 if the Holder was able to dispose of at least 80% of the Registrable Securities it requested be registered. 4. Form S-3 Registration. --------------------- (a) In case, after the first anniversary of the Effective Date, the Company shall receive from any Holder(s) of Registrable Securities representing at least ten percent (10%) of the Common Stock then outstanding a written request or requests 5 6 that the Company effect a registration on Form S-3 and any related qualifications or compliance with respect to any or all such Registrable Securities owned by such Holder(s), the Company shall (i) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities in the manner provided in Section 19, and (ii) as soon as practicable, and, subject to the further provisions of this Section 4, in any event within 90 days of the initial request, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all of the Registrable Securities specified in such request, together with all of the Registrable Securities of any other Holder or Holders as are specified in a request given in the manner provided in Section 19 within 15 days after mailing of such notice by the Company. (b) The Company shall not be obligated to effect any registration, qualification or compliance pursuant to this Section 4 if (i) Form S-3 is not available for such offering by the requesting Holder(s) or (ii) the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities, if any, at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $5,000,000. (c) The Company shall not be obligated to effect more than a total of two registrations pursuant to this Section 4 and shall not be obligated to effect more than one registration in any twelve-month period pursuant to this Section 4, Section 2 and Section 3 (provided, with respect to registrations under Section 3, that the Holder was able to dispose of at least 80% of the Registrable Securities it requested be registered). (d) A registration effected pursuant to this Section 4 shall be counted as a demand registration effected pursuant to Section 2. 5. Registration Procedure. Whenever required under this ---------------------- Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonable practicable: (a) Prepare and file with the SEC a new Registration Statement with respect to such Registrable Securities and use its reasonable best efforts to cause such registration statement to become effective, and keep such Registration Statement effective for up to 90 days or such shorter period as shall be required to sell all of the Registrable Securities covered by such Registration Statement (except as provided in Section 3); provided, however, that if such Registration Statement is on Form S-3 and related to a distribution by the Holders on a delayed or continuous basis other than by means of an underwriting, the Company shall keep such Registration Statement effective for one year following the initial date of effectiveness thereof; provided further that no Registration Statement need remain in effect after all Registrable Securities covered thereby have been sold. 6 7 (b) Prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement. (c) Furnish to the Holders of Registrable Securities to be registered, without charge, such number of copies of a prospectus, including a preliminary prospectus, and any amendment or supplement thereto as they may reasonably request and a reasonable number of copies of the then-effective Registration Statement and any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference). (d) Promptly after the filing of any document that is to be incorporated by reference into a Registration Statement or prospectus, provide copies of such document to the Holders of Registrable Securities covered thereby and any underwriter. (e) Use its reasonable best efforts to register and qualify the securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided, however, that the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions where it would not otherwise be required to so qualify to do business or consent to service of process or subject itself to taxation in any such jurisdiction. (f) Cooperate with the Holders of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (g) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering, with such terms and conditions as the Company and the underwriter(s) may agree. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (h) Notify each Holder of Registrable Securities covered by such Registration Statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 7 8 (i) Cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange or automated quotation system on which shares of the Company's Common Stock are then listed. If any of such shares are not so listed, the Company shall cause such shares to be listed on such securities exchange or automated quotation system as may be reasonably requested by the Holders of a majority of the Registrable Securities being registered. (j) In the case of an underwritten public offering, furnish, at the request of any Holder requesting registration pursuant to this Agreement, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Agreement, (A) an opinion of counsel representing the Company for the purposes of such registration, and (B) a letter from independent certified public accountants of the Company, in each case to be dated such date and to be in form and substance as is customarily given by counsel or independent certified public accountants, as the case may be, to underwriters in an underwritten public offering, addressed to the underwriters. (k) Permit a representative of any Holder of Registrable Securities, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by such Holder or underwriter, to participate, at each person's own expense, in the preparation of the Registration Statement, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with such registration; provided, however, that, if requested by the Company, such representatives, underwriters, attorneys or accountants enter into a confidentiality agreement, in form and substance reasonably satisfactory to the Company, prior to the release or disclosure of any such information. Notwithstanding the foregoing, the Company may delay, suspend or withdraw any registration or qualification of Registrable Securities required pursuant to this Agreement for a period not exceeding 120 days if the Company shall in good faith determine that any such registration would adversely affect a public or private offering or contemplated offering of any securities of the Company or any other anticipated or contemplated material corporate event. In addition, the Company shall not be required to register Registrable Securities within twelve months after the effective date of a Registration Statement referred to in Section 3 pursuant to which the Holders were afforded the opportunity to register Registrable Securities. 6. Holder's Obligation to Furnish Information. It shall be a ------------------------------------------ condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to any Registrable Securities that the Holder of such securities furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 8 9 Each Holder agrees that, upon receipt of any notice from the Company, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to the then current prospectus until (i) such Holder is advised in writing by the Company that a new Registration Statement covering the reoffer of Registrable Securities has become effective under the Securities Act or (ii) such Holder receives copies of a supplemental or amended prospectus contemplated by Section 5 hereof, or until such Holder is advised in writing by the Company that the use of the prospectus may be resumed. The Company shall use its reasonable best efforts to limit the duration of any discontinuance of disposition of Registrable Securities pursuant to this paragraph. 7. Registration Expenses. --------------------- (a) In the case of any demand registration pursuant to Section 2 and any registration on Form S-3 pursuant to Section 4, the Company shall pay all Registration Expenses; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2 or Section 4 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses), unless the Holders of a majority of Registrable Securities to be registered agree to forfeit their right to one demand registration pursuant to Section 2 or Section 4, as the case may be; provided further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 2 or Section 4, as the case may be. (b) In the case of any incidental registration pursuant to Section 3, the requesting Holders shall bear any incremental Registration Expenses, including, without limitation, incremental registration and qualification fees and expenses (including underwriter's fees, discounts and commissions), and any incremental costs and disbursements (including legal fees and expenses) that result from the inclusion of the Registrable Securities included in such registration, with such incremental expenses being borne by the requesting Holders on a pro rata basis. 8. Effectiveness of Registration. A registration requested ----------------------------- pursuant to Section 2 or Section 4 will not be deemed to have been effected if (i) the registration statement has not been kept effective for the period required under Section 5(a) of this Agreement, (ii) the offering of Registrable Securities pursuant to such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court, or (iii) the conditions to the closing of any such registration that is underwritten are not satisfied. 9. Delay of Registration. No Holder shall have any right to --------------------- obtain or seek an injunction restraining or otherwise delaying any registration of the Company's securities as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. 9 10 10. Indemnification and Contribution. In the event any -------------------------------- Registrable Securities are included in a Registration Statement pursuant to this Agreement: (a) The Company will indemnify and hold harmless each Holder, its directors, officers and employees and each person, if any, who "controls" such Holder (within the meaning of the Securities Act) against all losses, claims, damages, or liabilities, joint or several, or actions in respect thereof to which such Holder or other person entitled to indemnification hereunder may become subject under the Securities Act, or otherwise, insofar as such loss, claims, damages, liabilities or actions in respect thereof arise out of, or are based upon, any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement, any related preliminary prospectus, or any related prospectus or any amendment or supplement thereto, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse such Holder or other person entitled to indemnification hereunder for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be so liable to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, an untrue statement or alleged untrue statement of a material fact or an omission or alleged omission to state a material fact in such Registration Statement, such preliminary prospectus, or such prospectus, or any such amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of a Holder or an underwriter specifically for use therein; and provided further that the Company will not be liable, and this indemnification agreement shall not apply, in any such case to the extent that any such loss, claim, damage, liability or action is solely attributable to the failure of such Holder (or underwriter or agent acting on its behalf) to deliver a final prospectus (or amendment or supplement thereto) that corrects a material misstatement or omission contained in the preliminary prospectus (or final prospectus). The Company will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each person who "controls" such persons (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Holders, if so requested, except with respect to information furnished in writing specifically for use in any prospectus or Registration Statement by any selling Holders or any such underwriters. (b) With respect to written information furnished to the Company by or on behalf of a Holder specifically for use in a Registration Statement, any related preliminary prospectus, or any related prospectus or any supplement or amendment thereto, such Holder will severally indemnify and hold harmless the Company, and its directors, officers and employees and each person, if any, who "controls" the Company (within the meaning of the Securities Act) against any losses, claims, damages or liabilities, joint or several, or actions in respect thereof, to which the Company or such other person entitled to indemnification hereunder may become subject under the Securities Act, or otherwise, insofar as such losses, claims, damages, liabilities or actions 10 11 in respect thereof arise out of, or are based upon, any untrue statement or alleged untrue statement of any material fact contained in such Registration Statement, such preliminary prospectus, or such prospectus, or any such amendment or supplement thereto, or arise out of, or are based upon, the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and such Holder will reimburse the Company and such other persons for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, in each case to the extent, but only to the extent, that the same arises out of, or is based upon, an untrue statement or alleged untrue statement of a material fact or an omission or alleged omission to state a material fact in such Registration Statement, such preliminary prospectus, or such prospectus or any such amendment or supplement thereto in reliance upon, and in conformity with, such written information. The Company shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to the information so furnished in writing by such persons specifically for inclusion in any prospectus or Registration Statement. The Holder will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers and directors and each person who "controls" such persons (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Company, if so requested. (c) Promptly after receipt by an indemnified party of notice of any claim or the commencement of any action, the indemnified party will, if a claim in respect thereof is to be made against the indemnifying party, notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party will not relieve it from any liability that it may have to the indemnified party except to the extent it was actually damaged or suffered any loss or incurred any additional expense as a result thereof. If any such claim or action is brought against an indemnified party, and it notified the indemnifying party thereof, the indemnifying party will be entitled to assume the defense thereof with counsel selected by the indemnifying party and reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, (i) the indemnifying party will not be liable to the indemnified party for any legal or other expense subsequently incurred by the indemnified party in connection with the defense thereof, (ii) the indemnifying party will not be liable for the costs and expenses of any settlement of such claim or action unless such settlement was effected with the written consent of the indemnifying party or the indemnified party waived any rights to indemnification hereunder in writing, in which case the indemnified party may effect a settlement without such consent, and (iii) the indemnified party will be obligated to cooperate with the indemnifying party in the investigation of such claim or action; provided, however, that the Holders and their respective controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by such Holders against the Company may employ their own counsel if they have been advised by counsel in writing that, in the 11 12 reasonable judgment of such counsel, it is advisable for such Holders and their controlling persons to be represented by separate counsel due to the presence of conflicts of interest, and in that event the fees and expenses of such separate counsel will also be paid by the Company; provided that the Company shall not be liable for the reasonable fees and expenses of more than one separate counsel at any time for all such indemnified parties. An indemnifying party shall not, without the prior written consent of the indemnified parties, settle, compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes a release of such indemnified party reasonably acceptable to such indemnified party from all liability arising out of such claim, action, suit or proceeding or unless the indemnifying party shall confirm in a written agreement reasonably acceptable to such indemnified party, that notwithstanding any federal, state or common law, such settlement, compromise or consent shall not adversely affect the right of any indemnified party to indemnification or contribution as provided in this Agreement. (d) If for any reason the indemnification provided for in Sections 10(a) or (b) is unavailable to an indemnified party or is insufficient to hold it harmless as contemplated therein, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnifying and the indemnified party, but also the relative fault of the indemnifying party and the indemnified party, as well as any other relevant equitable considerations. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) The obligations under this Section 10 shall survive the completion of any offering of Registrable Securities in a Registration Statement pursuant to this Agreement, and otherwise. 11. Reports Under Exchange Act. With a view to making available -------------------------- to the Holders the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to registration on Form S-3, the Company agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144, at all times after 90 days after the Effective Date; (b) Take such action, including the voluntary registration of its Common Stock under Section 4 of the Exchange Act, as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities, such action to be taken as soon as practicable after the end of the fiscal year in which the first Registration 12 13 Statement filed by the Company for the offering of its securities to the general public is declared effective; (c) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (d) Furnish to any Holder, so long as the Holder owns any Registrable Securities, upon request (i) a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time after 90 days after the Effective Date), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or as to its qualification that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 12. Assignment of Registration Rights. --------------------------------- (a) The rights to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned by General American or Holding Company to a direct or indirect subsidiary of General American or Holding Company or any direct or indirect parent of General American or Holding Company or any other direct or indirect subsidiary of any such parent entity (each, a "Permitted Assign"); provided, however, that (i) the Company is, promptly upon such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned, (ii) the transfer of such securities may be effected in accordance with all applicable securities law, (iii) immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act, and (iv) the transferee executes and agrees to be bound by this Agreement, an executed counterpart of which shall be furnished to the Company. (b) Except in connection with a transfer permitted under Section 12(a) above, in no event may the rights of Holders hereunder be transferred or assigned, it being intended that the rights of General American and Holding Company under this Agreement may be exercised only by General American or Holding Company or a Permitted Assign, subject to the provisions and restrictions of Section 12(a) above. 13. Limitations on Subsequent Registration Rights. From and --------------------------------------------- after the date of this Agreement, except as otherwise contemplated by the Series A Purchase Notice dated May 12, 1997 and the Series B Call Notice dated March 23, 1997, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable 13 14 Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder to (i) include such securities in any registration filed under Section 2, 3 or 4 hereof, or (ii) require the Company to effect a registration, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such holder's securities will not reduce the amount of the Registrable Securities included in such registration and such agreement includes the equivalent of Section 15 as a term. 14. Amendment of Registration Rights. Any provision of this -------------------------------- Agreement may be amended or the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section shall be binding upon each Holder of any Registrable Securities, each future Holder of such securities and the Company. 15. "Market Stand-Off" Agreement. Any Holder, if requested by ---------------------------- the Company or an underwriter of an underwritten public offering, agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise transfer or dispose of any Common Stock held by such Holder (other than Registrable Securities included in the registration) without the prior written consent of the Company or such underwriter(s), as the case may be, during a period of up to seven days prior to and 180 days following the effective date of any underwritten registration of the Company's securities effected pursuant to Section 2, 3 or 4 hereof. Such agreement shall be in writing in form satisfactory to the Company and such underwriter, and may be included in the underwriting agreement. The Company may impose stop-transfer instructions with respect to the securities subject to the foregoing restriction until the end of the required stand-off period. 16. Termination of Registration Rights. If the number of shares ---------------------------------- of Registrable Securities owned by a Holder represents less than one percent (1%) of the total number of shares of Common Stock then outstanding, then such Holder's registration rights under this Agreement relating to such Registrable Securities shall terminate on the date such Holder is able to dispose of all of its shares of Registrable Securities in any 90-day period pursuant of Rule 144. All registration rights (except for rights previously exercised in connection with an underwritten public offering pursuant to Section 3) of a Holder under this Agreement shall terminate on the date on which all of such Holder's shares of Registrable Securities can be sold pursuant to Rule 144(k). 17. Effective Date of Agreement. This Agreement shall become --------------------------- effective June 12, 1997. 18. Information Confidential. No Holder may use any confidential ------------------------ information received by it pursuant to this Agreement in violation of the Exchange Act or reproduce, disclose, or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information and its attorneys), except to the extent reasonably related to the exercise of rights under this Agreement, unless such 14 15 information has been made available to the public generally (other than by such recipient in violation of this Section 18) or such recipient is required to disclose such information by a governmental body or regulatory agency or by law in connection with a transaction that is not otherwise prohibited hereby. 19. Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, or air-courier guaranteeing overnight delivery: (a) If to a Holder of Registrable Securities, initially one copy each to the Chief Executive Officer and General Counsel at 700 Market Street, St. Louis, Missouri 63101, Attention: Matthew P. McCauley (facsimile: (314) 444-0510), and thereafter at such other address as may be designated from time to time by notice given in the manner provided in this Section 19. (b) If to the Company, initially at 700 Market Street, St. Louis, Missouri 63101, Attention: Fred M. Schpero (facsimile: (314) 444-0676), and thereafter at such other address as may be designated from time to time by notice given in the manner provided in this Section 19. (c) All such notices and other communications shall be deemed to have been delivered and received (i) in the case of personal delivery, telex, telecopier or telegram, on the date of such delivery, (ii) in the case of air courier, on the business day after the date when sent and (iii) in the case of mailing, on the third business day following such mailing. (d) From time to time as the Company may request, each Holder shall provide to the Company such evidence or documentation reasonably satisfactory to the Company, in its sole discretion, certified by an appropriate officer of such Holder, regarding the number of shares of Common Stock beneficially owned by such Holder and its status as an "affiliate" under the Securities Act. 20. Successors and Assigns. Subject to the provisions of Section ---------------------- 12 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties. 21. Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 22. Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. 23. Governing Law. This Agreement shall be governed by and ------------- constructed in accordance with the internal laws of the State of Missouri. 15 16 24. Severability. In the event that any one or more of the ------------ provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 25. Entire Agreement. This Agreement is intended by the parties as ---------------- a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 16 17 IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the date first written above. CONNING CORPORATION By: /s/ Leonard M. Rubenstein --------------------------------------- Name: Leonard M. Rubenstein Title: Chairman and Chief Executive Officer GENERAL AMERICAN LIFE INSURANCE COMPANY By: /s/ Richard A. Liddy --------------------------------------- Name: Richard A. Liddy Title: Chairman, President and Chief Executive Officer GENERAL AMERICAN HOLDING COMPANY By: /s/ Richard A. Liddy --------------------------------------- Name: Richard A. Liddy Title: President 17 EX-10.12 7 EMPLOYMENT AGREEMENT 1 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is made and entered into as of August 11, 1995 by and between General American Life Insurance Company, a Missouri mutual life insurance company (the "Company"), and Leonard M. Rubenstein ("Employee"). WHEREAS, the Company indirectly controls Conning Asset Management Company, a Missouri corporation ("CAM"), which in turn controls General American Investment Management Company, a Missouri corporation ("GAIMCO"), Conning Corp., a Delaware corporation ("Conning Corp."), and Conning & Company, a Connecticut corporation ("Conning"). WHEREAS, Employee possesses skills and experience which Company believes are of value to the success of Company's and its Affiliates' (as hereinafter defined) business operations; WHEREAS, Company wishes to employ Employee subject to the terms and conditions of this Agreement, and Employee wishes to accept such employment subject to the terms and conditions of this Agreement; WHEREAS, the Company and its Affiliates are in the business of rendering investment advice, with a special expertise in advising insurance companies in the United States, and have accumulated valuable, confidential information including trade secrets and know-how relating to portfolio construction and management, technology, formulas, marketing plans, business strategies, and other business records; and WHEREAS, the giving of the covenants contained herein is a condition precedent to the employment of Employee, and Employee acknowledges that the execution of this Agreement and the entering into of these covenants is an express condition of his or her employment and that said covenants are given in consideration for such employment and the other benefits conferred upon him by this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants, and agreements herein set forth, the parties hereto agree as follows: 1. Employment and Duties. Company hereby agrees to --------------------- employ Employee to provide services to GAIMCO, CAM and Conning and Employee agrees to enter the employ of the Company for the Term herein specified. During the Term, Employee shall serve as and shall be employed as the Chairman and CEO of CAM and as the President of GAIMCO and shall perform such duties as the Board of Directors or officers of Company may reasonably assign to Employee, and shall devote his or her full time, attention, and effort to the business and affairs of GAIMCO, CAM and Conning. 2 2. Term. The term of this Agreement shall be for the ---- period commencing on date hereof and ending three years after the date hereof (the "Term"), unless terminated prior thereto as provided in Section 4. 3. Compensation and Benefits. ------------------------- a. In consideration of his or her services, Employee shall receive during the Term hereof a base salary at the rate of not less than $257,500 per year ("Annual Base Salary"), payable in substantially equal installments in accordance with Company's usual paying practices, but not less frequently than monthly. Employee shall be eligible to receive increases in Employee's Annual Base Salary pursuant to periodic salary reviews consistent with the Company's corporate policies, it being understood such increases are not guaranteed, but are subject to evaluation of Employee's job performance. In addition to the foregoing compensation, Employee will be eligible, in the sole discretion of the Board of Directors of the Company, to participate in the Company's Bonus Plan as in effect from time to time. b. As further consideration for the covenants contained herein, the Company will provide Employee with such insurance, welfare, sick leave, and other benefits as may be established by the Company from time to time with respect to its employees and will reimburse Employee for authorized business expenses in accordance with policies established by the Company from time to time. Employee shall be entitled to vacation in accordance with the Company's vacation policies, as in effect from time to time. 4. Termination. ----------- a. Termination Without Cause. Employee's ------------------------- employment may be terminated without cause: (1) At any time upon the mutual written agreement of the parties hereto; (2) Immediately upon Employee's Total Disability (as defined in Section 4(f)); (3) Upon not less than 30 days' advance written notice from Employee of Employee's desire to terminate this Agreement, provided, however, that, following such notice, the Company shall have the right to terminate Employee's employment immediately, provided that the Company pays Employee the compensation due him or her as if the Termination Date occurred 30 days from the date of such notice; or 2 3 (4) Upon not less than 30 days' advance written notice from the Company of the Company's desire to terminate this Agreement. b. Termination For Cause. Employee's employment --------------------- may be terminated by the Company upon written notice to Employee at any time for any of the following reasons, each of which shall constitute "termination for cause": (1) Any material breach of this Agreement by Employee which is not cured within 20 days after written notice by the Company; (2) Employee's fraud, embezzlement, dishonesty, or unlawful acts in connection with the business of the Company or its Affiliates; (3) Employee's conviction for any felony; or (4) Employee's substantial and continuing willful failure to perform, or grossly negligent performance of, the duties of Employee's position. c. Termination Date. Employee's last day of ---------------- employment with the Company (if such date occurs prior to the third anniversary of this Agreement) shall be referred to in this Agreement as the "Termination Date" and shall constitute the end of the Term of this Agreement. d. Effect of Termination. --------------------- (1) Upon any termination of the employment pursuant to this Section 4, this Agreement shall terminate and the Company shall have no obligation of any kind whatsoever to Employee except to pay Employee the compensation due him or her through the Termination Date, the amount of such compensation due Employee under Section 3(a) hereof being apportioned for the portion of the fiscal period Employee was actually employed, and any deferred compensation then due to Employee hereunder. The obligations under Section 6 and 7 shall survive the end of the Term of this Agreement according to their terms. (2) In addition, upon termination pursuant to Section 4(a)(4), the Company shall (i) pay Employee an amount equal to 150% of the Annual Base Salary for each year (or portion thereof, pro rated) through the balance of the Term and (ii) provide all benefits described in Section 3(b) through the balance of the Term. Payment pursuant to this Section 4(d)(2) shall not apply to any termination other than one pursuant to Section 4(a)(4). 3 4 e. Release. In the event Employee becomes ------- entitled to payments pursuant to Section 4(d)(2) hereof, Employee shall, as a condition to such payments being made, execute and deliver to the Company, and any Affiliates of the Company designated by the Company, a release of all Employee's claims for employment, employment-related compensation or employee benefits or any form of damages as a result of termination of employment in such form as is reasonably satisfactory to the Company, which document shall include a covenant not to bring any claim, action or suit with respect to the matters which are the subject of such release. f. Definition of Total Disability. "Total ------------------------------ Disability" means having a physical or mental condition which renders Employee permanently incapable of performing his duties and responsibilities with the Company. Determination of Total Disability will be made by a physician selected by the Company. If the determination of such physician differs from the opinion as to disability of the Employee's physician, the two physicians shall select a third physician, whose determination shall be binding on both parties. 5. Company Policies. Employee agrees to abide by the ---------------- policies, rules, regulations, and usages applicable to Employee as they are established by the Company from time to time, and to perform the duties assigned to him faithfully and loyally. 6. Non-Disclosure. Employee agrees that he will -------------- never disclose, directly or indirectly, to any other firm or person any of Company's or Company's Affiliates' confidential or proprietary information including customer lists, trade secrets, and know-how relating to its or their business. Confidential or proprietary information shall not include any information which is or hereafter comes in the public domain or is or becomes generally known or available in the industry through no act of Employee prohibited by this Agreement. 7. Non-Compete Agreement. --------------------- a. Covenant. Employee recognizes that (i) the -------- Company and CAM, GAIMCO, Conning Corp. and Conning (the "Controlled Subsidiaries") have spent substantial money, time and effort over the years in developing and solidifying their relationships with their customers and in developing their confidential information; (ii) long-term customer relationships often can be difficult to develop and require a significant investment of time, effort, and expense; (iii) the Company pays its employees to, among other things, develop and preserve business information, customer goodwill and customer loyalty for and on behalf of the Company and the Controlled Subsidiaries; and (iv) the Company is hereby agreeing to employ and pay Employee based upon Employee's assurances and promises contained herein not to divert the Company's and the Controlled Subsidiaries' 4 5 customers' goodwill and not to put himself or herself in a position during or following Employee's employment with the Company in which the confidentiality of the Company's and the Controlled Subsidiaries' proprietary information might be compromised. Accordingly, Employee covenants and agrees that for a period of three years following the date hereof, regardless of whether Employee remains employed by the Company and regardless of whether Employee's termination, if any, is with or without cause, neither Employee nor any entity controlling, controlled by or under common control with Employee shall (i) engage in, or have any direct or indirect interest in any other person, firm, corporation, or other entity engaged in any business activities competitive with the business activities of the Controlled Subsidiaries, or (ii) become an employee, director, advisor, consultant, independent contractor, or agent of any such person, firm, corporation, or other entity, except with the Company's prior written consent. b. Acknowledgement Regarding Restrictions. -------------------------------------- Employee recognizes and agrees that the restraints contained in Section 7(a) are reasonable and enforceable in view of the legitimate interests of the Controlled Subsidiaries in protecting their confidential information and customer goodwill, and that the limitations contained therein on the duration and geographic scope of, and activities prohibited by, such restraints are reasonable and binding upon Employee. c. Enforceability. -------------- (1) The covenants contained in this Section 7 shall be deemed to be a series of separate covenants, one for each aspect of the Controlled Subsidiaries' businesses and locations. Each separate covenant shall hereinafter be referred to as a "Separate Covenant." (2) If any court or tribunal of competent jurisdiction shall refuse to enforce one or more of the Separate Covenants because the time limit applicable thereto is deemed unreasonable, it is expressly understood and agreed that such Separate Covenant or Separate Covenants shall not be void but that for the purpose of such proceedings such time limitation shall be deemed to be reduced to the extent necessary to permit the enforcement of such Separate Covenant or Separate Covenants. (3) If any court or tribunal of competent jurisdiction shall refuse to enforce any or all of the Separate Covenants because, taken together, they are more extensive (whether as to geographic area, scope of business, or otherwise) than is deemed to be reasonable, it is expressly understood and agreed between the parties that such Separate Covenant or Separate Covenants shall not be void but that for the purpose of such proceedings the restrictions contained therein (whether as to geographic area, scope of business, or otherwise) shall be 5 6 deemed to be reduced to the extent necessary to permit the enforcement of such Separate Covenant or Separate Covenants. d. Ownership of Securities. Nothing contained ----------------------- herein shall restrict Employee from owning 2% or less of the corporate securities of any entity in competition with the Controlled Subsidiaries' businesses, which securities are listed on any national securities exchange or authorized for listing on the Nasdaq National Market, if Employee has no other connection or relationship, direct or indirect, with the issuer of such securities. 8. Non-Waiver of Rights. The Company's failure to -------------------- enforce at any time any of the provisions of this Agreement or to require at any time performance by Employee of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement, or any part hereof, or the right of Company thereafter to enforce each and every provision in accordance with the terms of this Agreement. 9. The Company's Right to Injunctive Relief. In the ---------------------------------------- event of a breach or threatened breach of any of Employee's duties and obligations under the terms and provisions of Sections 6 or 7 hereof, the Company shall be entitled, in addition to any other legal or equitable remedies it may have (including any right to damages that it may suffer), to temporary, preliminary, and permanent injunctive relief restraining such breach or threatened breach. Employee hereby expressly acknowledges that the harm which might result to the Company's business as a result of any noncompliance by Employee with any of the provisions of Sections 6 or 7 would be largely irreparable. Employee specifically agrees that if there is a question as to the enforceability of any of the provisions of Sections 6 or 7 hereof, Employee will not engage in any conduct inconsistent with or contrary to such Sections until after the question has been resolved by a final judgment of a court of competent jurisdiction. 10. Employee Representations. Employee represents ------------------------ that the execution and delivery of this Agreement and Employee's employment with the Company do not violate any previous employment agreement or other contractual obligation of Employee. Employee also represents and agrees that Employee has not disclosed, and will not disclose, to the Company any information, whether confidential, proprietary, or otherwise, which Employee has in Employee's possession and which Employee is not legally free to disclose. 11. The Company's Right to Recover Costs and Fees. --------------------------------------------- Employee and the Company each undertakes and agrees that if such party breaches this Agreement, such party shall be liable for any 6 7 attorneys' fees and costs incurred by the other party in enforcing its rights hereunder. 12. Definition of Affiliate. "Affiliate" shall for ----------------------- purposes of this Agreement mean any person or entity (the "Specified Person") (a) who directly or indirectly controls, is controlled by, or is under common control with the Company, (b) who owns or controls thirty percent (30%) or more of the Company's outstanding voting securities or percentage interests; (c) in whom the Company owns or controls thirty percent (30%) or more of the outstanding voting securities or percentage interests; (d) who is a director, partner, manager, executive officer or trustee of the Company; (e) in whom the Company is a partner; or (f) who has any relationship with the Specified Person by blood, marriage or adoption, not more remote than first cousin, and shall include, without limitation, the Controlled Subsidiaries. 13. Miscellaneous. Neither this Agreement nor any ------------- rights hereunder shall be assignable by either party hereto. This agreement contains the entire agreement between the parties with respect to the terms of Employee's employment by Company, free of any other representation, promise, or understanding. This Agreement may be modified or amended only by a written agreement executed by both parties to this Agreement. This Agreement may be assigned by the Company at any time, without Employee's consent, to CAM or GAIMCO. Employee may not assign this Agreement. Nothing in this Agreement shall be construed as creating a joint venture or partnership between Employee and the Company or any of its Affiliates. Section headings are provided in this Agreement for convenience only and shall not be deemed to alter the content of such sections. 7 8 PLEASE NOTE: BY SIGNING THIS EMPLOYMENT AGREEMENT, EMPLOYEE IS - ----------- HEREBY CERTIFYING THAT EMPLOYEE (A) HAS RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW AND STUDY BEFORE EXECUTING IT; (B) HAS READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT; (C) HAS HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THE AGREEMENT TO ASK ANY QUESTIONS EMPLOYEE HAS ABOUT THE AGREEMENT AND HAS RECEIVED SATISFACTORY ANSWERS TO ALL SUCH QUESTIONS; AND (D) UNDERSTANDS EMPLOYEE'S RIGHTS AND OBLIGATIONS UNDER THE AGREEMENT. This Agreement shall be construed and interpreted under the laws of Missouri. IN WITNESS WHEREOF, the parties have executed this agreement on the date first set out above. GENERAL AMERICAN LIFE INSURANCE COMPANY By: /s/ Richard A. Liddy ------------------------------- Name: Richard A. Liddy Title: President EMPLOYEE /s/ Leonard M. Rubenstein ------------------------------- Name: Leonard M. Rubenstein Address: 105 Bon Chateau St. Louis, MO 63141 8 EX-10.17 8 1997 FLEXIBLE STOCK PLAN 1 CONNING CORPORATION 1997 FLEXIBLE STOCK PLAN 2 CONNING CORPORATION 1997 FLEXIBLE STOCK PLAN
TABLE OF CONTENTS Page ---- ARTICLE 1 - NAME AND PURPOSE 1 1.1 Name 1 1.2 Purpose 1 ARTICLE II - DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION 1 2.1 General Definitions 1 (a) Agreement 1 (b) Benefit 1 (c) Board 1 (d) Cash Award 1 (e) Change in Control 1 (f) Code 2 (g) Committee 2 (h) Common Stock 2 (i) Company 2 (j) Effective Date 2 (k) Employee 2 (l) Employer 2 (m) Exchange Act 2 (n) Executive Compensation Committee 2 (o) Executive Officer 2 (p) Fair Market Value 2 (q) Fiscal Year 2 (r) General Compensation Committee 2 (s) ISO 3 (t) Non-Employee Director 3 (u) NQSO 3 (v) Option 3 (w) Other Stock Based Award 3 (x) Participant 3 (y) Performance-Based Compensation 3 (z) Performance Share 4 (aa) Plan 4 (bb) Reload Option 4 (cc) Restricted Stock 4 (dd) Rule 16b-3 4 (ee) SEC 4 (ff) Section 162(m) 4 (gg) Share 4 (hh) SAR 4 (ii) Subsidiary 4 2.2 Other Definitions 4 2.3 Conflicts 4 1 3 ARTICLE III - COMMON STOCK 5 3.1 Number of Shares 5 3.2 Reusage 5 3.3 Adjustments 5 ARTICLE IV - ELIGIBILITY 5 4.1 Determined by Committee 5 ARTICLE V - ADMINISTRATION 6 5.1 Committee 6 5.2 Authority 6 5.3 Delegation 7 5.4 Adjudication of Claims 7 ARTICLE VI - AMENDMENT 7 6.1 Power of Board 7 6.2 Limitations 7 ARTICLE VII - TERM AND TERMINATION 8 7.1 Term 8 7.2 Termination 8 ARTICLE VIII - MODIFICATION OR TERMINATION OF BENEFITS 8 8.1 General 8 8.2 Committee's Right 8 ARTICLE IX - CHANGE IN CONTROL 8 9.1 Right of Committee 8 ARTICLE X - AGREEMENTS AND CERTAIN BENEFITS 9 10.1 Grant Evidenced by Agreement 9 10.2 Provisions of Agreement 9 10.3 Transferability 9 ARTICLE XI - REPLACEMENT AND TANDEM AWARDS 10 11.1 Replacement 10 11.2 Tandem Awards 10 ARTICLE XII - PAYMENT, DIVIDENDS, DEFERRAL AND WITHHOLDING 10 12.1 Payment 10 12.2 Dividend Equivalents 10 12.3 Deferral 10 12.4 Withholding 11 2 4 ARTICLE XIII - OPTIONS 11 13.1 Types of Options 11 13.2 Shares for ISOs 11 13.3 Grant of ISOs and Option Price 11 13.4 Other Requirements for ISOs 11 13.5 NQSOs 11 13.6 Determination by Committee 11 ARTICLE XIV - SARS 11 14.1 Grant and Payment 11 14.2 Grant of Tandem Award 11 14.3 ISO Tandem Award 12 14.4 Payment of Award 12 ARTICLE XV - ANNUAL LIMITATIONS 12 15.1 Limitation on Options and SARs 12 15.2 Computations 12 ARTICLE XVI - RESTRICTED STOCK AND PERFORMANCE SHARES 12 16.1 Restricted Stock 12 16.2 Cost of Restricted Stock 12 16.3 Non-Transferability 12 16.4 Performance Shares 12 16.5 Grant 13 ARTICLE XVII - CASH AWARDS 13 17.1 Grant 13 17.2 Restrictions 13 ARTICLE XVIII - OTHER STOCK BASED AWARDS AND OTHER BENEFITS 13 18.1 Other Stock Based Awards 13 18.2 Other Benefits 13 ARTICLE XIX - MISCELLANEOUS PROVISIONS 13 19.1 Underscored References 13 19.2 Number and Gender 13 19.3 Unfunded Status of Plan 14 19.4 Termination of Participant Status 14 19.5 Designation of Beneficiary 14 19.6 Governing Law 14 19.7 Purchase for Investment 14 19.8 No Employment Contract 14 19.9 No Effect on Other Benefits 15
3 5 CONNING CORPORATION 1997 FLEXIBLE STOCK PLAN ARTICLE I --------- NAME AND PURPOSE ---------------- 1.1 Name. The name of this Plan is the "Conning Corporation 1997 ---- Flexible Stock Plan." 1.2 Purpose. The Company has established this Plan to attract, ------- retain, motivate and reward Employees and other individuals, to encourage ownership of the Company's Common Stock by Employees and other individuals, and to promote and further the best interests of the Company by granting cash and other awards. ARTICLE II ---------- DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION ---------------------------------------------- 2.1 General Definitions. The following words and phrases, when used ------------------- in the Plan, unless otherwise specifically defined or unless the context clearly otherwise requires, shall have the following respective meanings: (a) (a) Agreement. The document which evidences the grant of any --------- Benefit under the Plan and which sets forth the Benefit and the terms, conditions and provisions of, and restrictions relating to, such Benefit. (b) Benefit. Any benefit granted to a Participant under the Plan. ------- (c) Board. The Board of Directors of the Company. ----- (d) Cash Award. A Benefit payable in the form of cash. ---------- (e) Change in Control. (i) The acquisition, without the approval of the ----------------- Board, by any "person" or "group" (as that term is used in Section 13(d) and 14(d)(2) of the Exchange Act), other than the Company or a Related Entity (as defined below), of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of outstanding voting securities of the Company carrying more than 20% of the combined voting power in the election of directors through a tender offer, exchange offer or otherwise; (ii) the liquidation or dissolution of the Company following a sale or other disposition of all or substantially all of its assets; (iii) a merger or consolidation involving the Company as a result of which persons who were shareholders of the Company immediately prior to the effective date of the merger or consolidation shall have beneficial ownership of less than 50% of the combined voting power in the election of directors of the surviving corporation following 1 6 the effective date of such merger or consolidation; or (iv) a change in the majority of the members of the Board (other than as a result of death or disability) during any period of two years or less unless the election or nomination for election of such members was approved by at least two-thirds of (x) the then remaining members of the Board who were members at the beginning of such period plus (y) the then remaining members whose election or nomination for election was approved by at least two-thirds of the members of the Board who were members at the start of the two-year period). A "Related Entity" is (a) General American Mutual Holding Company and its direct and indirect subsidiaries, (b) the Company, (iii) a Subsidiary, or (iv) any employee benefit plan (including a trust forming a part of such a plan) maintained by any of the foregoing. (f) Code. The Internal Revenue Code of 1986, as amended. Any ---- reference to the Code includes the regulations promulgated pursuant to the Code. (g) Committee. The entity described in Section 5.1. --------- (h) Common Stock. The Company's common stock which presently has a par ------------ value of $.01 per Share. (i) Company. Conning Corporation, a Missouri corporation. ------- (j) Effective Date. The date that the Plan is approved by the -------------- shareholders of the Company, which must occur within one year before or after approval by the Board. Any grants of Benefits prior to the approval by the shareholders of the Company shall be void if such approval is not obtained. (k) Employee. Any person employed by an Employer. -------- (l) Employer. The Company and all Subsidiaries. -------- (m) Exchange Act. The Securities Exchange Act of 1934, as amended. ------------ (n) Executive Compensation Committee. The Executive Compensation -------------------------------- Committee of the Board, or any successor committee established by the Board, which committee shall at all times consist solely of two or more members of the Board, each of whom is a "non-employee" director as defined in Rule 16b-3 and an "outside director" as defined in Section 162(m). (o) Executive Officer. An Employee or officer of the Company who is ----------------- subject to Section 16 of the Exchange Act. (p) Fair Market Value. The closing price of Shares on The Nasdaq ----------------- National Market on a given date, or, in the absence of sales on a given date, the closing price on The Nasdaq National Market on the last day on which a sale occurred prior to such date, provided that, 2 7 in the case of NQSOs granted as of the closing date of the Company's initial public offering, Fair Market Value shall mean the initial public offering price. (q) Fiscal Year. The taxable year of the Company, which is the ----------- calendar year. (r) General Compensation Committee. The General Compensation Committee ------------------------------ of the Board, or any successor committee established by the Board. (s) ISO. An Incentive Stock Option as defined in Section 422 of the --- Code. (t) Non-Employee Director. A member of the Board who is not an --------------------- Employee. (u) NQSO. A Non-Qualified Stock Option, which is an Option that does ---- not qualify as an ISO. (v) Option. An option to purchase Shares granted under the Plan. ------ (w) Other Stock Based Award. An award under ARTICLE XVIII that is ----------------------- valued in whole or in part by reference to, or is otherwise based on, Common Stock. (x) Participant. An individual who is granted a Benefit under the ----------- Plan. Benefits may be granted only to (i) Employees, (ii) Non-Employee Directors, (iii) employees and owners of entities which are not Affiliates but which have a direct or indirect ownership interest in an Employer or in which an Employer has a direct or indirect ownership interest, (iv) individuals who, and employees and owners of entities which, are customers and suppliers of an Employer, (v) individuals who, and employees and owners of entities which, render services to an Employer, and (vi) individuals who, and employees and owners of entities which, have ownership or business affiliations with any individual or entity described in any of clauses (i) through (v). (y) Performance-Based Compensation. Compensation which meets the ------------------------------ requirements of Section 162(m)(4)(C) of the Code. The maximum annual award that can be granted to any Participant for any Fiscal Year is $1,000,000. Awards which constitute Performance-Based Compensation are based upon attainment of pre-established goals relating to Company, division or individual performance or in comparison with peer group performance. Company and division goals consist of revenues, operating income (whether excluding or including unusual or non-recurrring items), income before provision for income taxes (whether excluding or including unusual or non-recurrring items), net income, EBITDA (operating income plus amortization of goodwill and other plus depreciation and amortization), earnings per share, stock price performance, stock price/earnings ratio, cash flow, return on equity, net assets, return on net assets, return on assets, return on capital, return on revenues, and book value; and individual goals consist of product development, client development and revenues, as well as, in certain cases, intangible items such as leadership. To the extent that the attainment of any non-objective goal or the occurrence of any non- objective factor (such as termination of employment, change of position or salary 3 8 or leadership) may be considered in the determination of a Participant's award for a Fiscal Year under the terms of the Plan, the Participant will initially be deemed to have earned the maximum award payable based on such goal or factor, but the Committee shall have the authority to reduce such compensation in whole or in part in its sole discretion. No award will be payable unless and until the Committee certifies that the performance gals and any other material terms have been met. (z) Performance Share. A Share awarded to a Participant under ARTICLE ----------------- XVI of the Plan. (aa) Plan. The Conning Corporation 1997 Flexible Stock Plan and all ---- amendments and supplements to it. (bb) Reload Option. An Option to purchase the number of Shares used by ------------- a Participant to exercise an Option and to satisfy any withholding requirement incident to the exercise of such Option. (cc) Restricted Stock. Shares issued under ARTICLE XV of the Plan. ---------------- (dd) Rule 16b-3. Rule 16b-3 promulgated by the SEC, as amended, or any ---------- successor rule in effect from time to time. (ee) SEC. The Securities and Exchange Commission. --- (ff) Section 162(m). Section 162(m) of the Code or any successor -------------- section in effect from time to time. (gg) Share. A share of Common Stock. ----- (hh) SAR. A stock appreciation right, which is the right to receive an --- amount equal to the appreciation, if any, in the Fair Market Value of a Share from the date of the grant of the right to the date of its payment. (ii) Subsidiary. Any corporation, other than the Company, in an ---------- unbroken chain of corporations beginning with the Company if, at the time of grant of an Option or other Benefit, each of the corporations, other than the last corporation in the unbroken chain, owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.2 Other Definitions. In addition to the above definitions, certain ----------------- words and phrases used in the Plan and any Agreement may be defined in other portions of the Plan or in such Agreement. 2.3 Conflicts. In the case of any conflict in the terms of the Plan --------- relating to a Benefit, the provisions in the ARTICLE of the Plan which specifically grants such Benefit shall control 4 9 those in a different ARTICLE. In the case of any conflict between the terms of the Plan relating to a Benefit and the terms of an Agreement relating to a Benefit, the terms of the Plan shall control. ARTICLE III ----------- COMMON STOCK ------------ 3.1 Number of Shares. The number of Shares which may be issued or ---------------- sold or for which Options, SARs or Performance Shares may be granted under the Plan shall be 2,200,000 Shares. 3.2 Reusage. If an Option or SAR expires or is terminated, ------- surrendered, or canceled without having been fully exercised, if Restricted Shares or Performance Shares are forfeited, or if any other grant results in any Shares not being issued, the Shares covered by such Option or SAR, grant of Restricted Shares, Performance Shares or other grant, as the case may be, shall again be available for use under the Plan. Any Shares which are used as full or partial payment to the Company upon exercise of an Option or for any other Benefit that requires a payment to the Company shall be available for purposes of the Plan. 3.3 Adjustments. If there is any change in the Common Stock of the ----------- Company by reason of any stock dividend, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, the number of SARs and number, kind and class of shares available for Options and grants of Restricted Stock, Performance Shares and Other Stock Based Awards and the number, kind or class of Shares subject to outstanding Options, SARs, grants of Restricted Stock and Performance Shares, and Other Stock Based Awards, and the price thereof, as applicable, shall be appropriately adjusted by the Committee. The issuance of Shares for consideration and the issuance of Share rights shall not be considered a change in the Company's capital structure. No adjustment provided for in this section shall require the issuance of any fractional shares. ARTICLE IV ---------- ELIGIBILITY ----------- 4.1 Determined by Committee. The Participants and the Benefits they ----------------------- receive under the Plan shall be determined solely (i) with respect to Participants who are Executive Officers, by the Executive Compensation Committee of the Board (unless the Benefit is a Cash Award that is not Performance-Based Compensation, in which case the determination may be made either by the General Compensation Committee or the Executive Compensation Committee), (ii) with respect to Non-Employee Directors, by the full Board of Directors, and (iii) with respect to all other Participants, by the General Compensation Committee of the Board. For purposes of this Plan and any Agreement, references to "the Committee" shall refer to the General Compensation Committee, the Executive Compensation Committee or the full Board, as appropriate. In making its determinations, the Committee shall consider past, present and expected future contributions of Participants and potential Participants to the Employer, including, without limitation, the performance of, or the refraining from the performance of, services. Unless specifically provided otherwise herein, all determinations of the Committee in connection with the Plan or an Agreement shall be made in its sole discretion. 5 10 ARTICLE V --------- ADMINISTRATION -------------- 5.1 Committee. The Plan shall be administered by the Committee. The --------- members of the Committee shall be appointed by and shall serve at the pleasure of the Board, which may from time to time appoint members in substitution for members previously appointed and fill vacancies, however caused, in the Committee, subject to the above restrictions. The Committee may select one of its members as its Chairman and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by a majority of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. 5.2 Authority. Subject to the terms of the Plan, the Committee shall --------- have discretionary authority to: (a) determine the individuals to whom Benefits are granted, the type and amounts of Benefits to be granted and the date of issuance and duration of all such grants; (b) determine the terms, conditions and provisions of, and restrictions relating to, each Benefit granted; (c) interpret and construe the Plan and all Agreements; (d) prescribe, amend and rescind rules and regulations relating to the Plan; (e) determine the content and form of all Agreements; (f) determine all questions relating to Benefits under the Plan; (g) maintain accounts, records and ledgers relating to Benefits; (h) maintain records concerning its decisions and proceedings; (i) employ agents, attorneys, accountants or other persons for such purposes as the Committee considers necessary or desirable; (j) take, at any time, any action permitted by Section 9.1 irrespective of whether any Change in Control has occurred or is imminent; (k) to determine, except to the extent otherwise provided in the Plan, whether and the extent to which Benefits under the Plan will be structured to conform to the requirements applicable to Performance- Based Compensation, and to take such action, establish such procedures, and impose such restrictions at the time such Benefits are granted as the Committee determines to be necessary or appropriate to conform to such requirements; and 6 11 (l) do and perform all acts which it may deem necessary or appropriate for the administration of the Plan and carry out the purposes of the Plan. 5.3 Delegation. Except as required by Rule 16b-3 or, with respect to ---------- awards made to Executive Officers (other than Cash Awards that are not Performance-Based Compensation) as required by Section 162(m), or as required by other applicable law, the Committee may delegate all or any part of its authority under the Plan to any Employee, Employees, committee or sub-committee. 5.4 Adjudication of Claims. The Committee shall have discretionary ---------------------- authority to make all determinations as to the right to Benefits under the Plan. In the event that a Participant believes he has not received the Benefits to which he is entitled under the Plan, a claim shall be made in writing to the Committee. The claim shall be reviewed by the Committee. If the claim is approved or denied, in full or in part, the Committee shall provide a written notice of approval or denial within 90 days with, in the case of a denial, the specific reasons for the denial and specific reference to the provisions of the Plan and/or Agreement upon which the denial is based. A claim shall be deemed denied if the Committee does not take any action within the aforesaid 90 day period. If a claim is denied or deemed denied and a review is desired, the Participant shall notify the Committee in writing within 60 days of the receipt of notice of denial or the date on which the claim is deemed to be denied, as the case may be. In requesting a review, the Participant may review the Plan or any document relating to it and submit any written issues and comments he may deem appropriate. The Committee shall then review the claim and provide a written decision within 60 days. This decision, if adverse to the Participant, shall state the specific reasons for the decision and shall include reference to specific provisions of the Plan and/or Agreement on which the decision is based. The Committee's decision on review shall be final and binding on all persons. ARTICLE VI ---------- AMENDMENT --------- 6.1 Power of Board. Except as hereinafter provided, the Board shall -------------- have the sole right and power to amend the Plan at any time and from time to time. 6.2 Limitations. ----------- (a) The Board may not amend the Plan, without approval of the shareholders of the Company: (i) in a manner which would cause Options which are intended to qualify as ISOs to fail to qualify; (ii) in a manner which would cause the Plan to fail to meet the requirements of Rule 16b-3; or 7 12 (iii) in a manner which would violate applicable law. (b) No Board member may participate in any decision regarding an award to such member under the Plan or which otherwise involves a determination of such member's rights or obligations under the Plan or under an Agreement. ARTICLE VII ----------- TERM AND TERMINATION -------------------- 7.1 Term. The Plan shall commence as of the Effective Date and, ---- subject to the terms of the Plan, including those requiring approval by the shareholders of the Company and those limiting the period over which ISOs or any other Benefits may be granted, shall continue in full force and effect until terminated. 7.2 Termination. The Plan may be terminated at any time by the ----------- Board. ARTICLE VIII ------------ MODIFICATION OR TERMINATION OF BENEFITS --------------------------------------- 8.1 General. Subject to the provisions of Section 8.2, the amendment ------- or termination of the Plan shall not adversely affect a Participant's right to any Benefit granted prior to such amendment or termination. 8.2 Committee's Right. Subject to the provisions of Section 6.2, any ----------------- Benefit granted may be converted, modified, forfeited or canceled, in whole or in part, by the Committee if and to the extent permitted in the Plan or applicable Agreement or with the consent of the Participant to whom such Benefit was granted. Except as may be provided in an Agreement, the Committee may, in its sole discretion, in whole or in part, waive any restrictions or conditions applicable to, or accelerate the vesting of, any Benefit. ARTICLE IX ---------- CHANGE IN CONTROL ----------------- 9.1 Right of Committee. In order to maintain a Participant's rights ------------------ in the event of a Change in Control, the Committee, in its sole discretion, may, in any Agreement evidencing a Benefit, or at any time prior to, or simultaneously with or after a Change in Control, provide such protection as it may deem necessary. Without, in any way, limiting the generality of the foregoing sentence or requiring any specific protection, the Committee may, without the approval or consent of the Participant: 8 13 (a) provide for the acceleration of any time periods relating to the exercise or realization of such Benefit so that such Benefit may be exercised or realized in full on or before a date fixed by the Committee; (b) provide for the purchase of such Benefit, upon the Participant's request, for an amount of cash equal to the amount which could have been attained upon the exercise or realization of such Benefit had such Benefit been currently exercisable or payable; (c) make such adjustment to the Benefits then outstanding as the Committee deems appropriate to reflect such transaction or change; and/or (d) cause the Benefits then outstanding to be assumed, or new Benefits substituted therefor, by the surviving corporation in such change. ARTICLE X --------- AGREEMENTS AND CERTAIN BENEFITS ------------------------------- 10.1 Grant Evidenced by Agreement. The grant of any Benefit under the ---------------------------- Plan may be evidenced by an Agreement which shall describe the specific Benefit granted and the terms and conditions of the Benefit. The granting of any Benefit shall be subject to, and conditioned upon, the recipient's execution of any Agreement required by the Committee. Except as otherwise provided in an Agreement, all capitalized terms used in the Agreement shall have the same meaning as in the Plan, and the Agreement shall be subject to all of the terms of the Plan. 10.2 Provisions of Agreement. Each Agreement shall contain such ----------------------- provisions that the Committee shall determine to be necessary, desirable and appropriate for the Benefit granted which may include, but not necessarily be limited to, the following with respect to any Benefit: description of the type of Benefit; the Benefit's duration; its transferability; if an Option, the exercise price, the exercise period and the person or persons who may exercise the Option; the effect upon such Benefit of the Participant's death, disability, changes of duties or termination of employment; the Benefit's conditions; when, if, and how any Benefit may be forfeited, converted into another Benefit, modified, exchanged for another Benefit, or replaced; and the restrictions on any Shares purchased or granted under the Plan. 10.3 Transferability. Unless otherwise specified in an Agreement or --------------- permitted by the Committee, each Benefit granted shall be not transferable other than by will or the laws of descent and distribution and shall be exercisable during his lifetime only by him, his guardian or his legal representative. 9 14 ARTICLE XI ---------- REPLACEMENT AND TANDEM AWARDS ----------------------------- 11.1 Replacement. The Committee may permit a Participant to elect to ----------- surrender a Benefit in exchange for a new Benefit. 11.2 Tandem Awards. Awards may be granted by the Committee in tandem. ------------- However, no Benefit may be granted in tandem with an ISO except SARs. ARTICLE XII ----------- PAYMENT, DIVIDENDS, DEFERRAL AND WITHHOLDING -------------------------------------------- 12.1 Payment. Upon the exercise of an Option or in the case of any ------- other Benefit that requires a payment by a Participant to the Company, the amount due the Company is to be paid: (a) in cash, including by means of a so-called "cashless exercise" of an Option; (b) by the surrender of all or part of a Benefit (including the Benefit being exercised); (c) by the tender to the Company of Shares owned by the Participant and registered in his name having a Fair Market Value equal to the amount due to the Company; (d) in other property, rights and credits deemed acceptable by the Committee, including the Participant's promissory note if permitted under applicable law; (e) by any combination of the payment methods specified in paragraphs (a) through (d) above. Notwithstanding, the foregoing, any method of payment other than as described in paragraph (a) may be used only with the consent of the Committee or if and to the extent so provided in an Agreement. The proceeds of the sale of Shares purchased pursuant to an Option and any payment to the Company for other Benefits shall be added to the general funds of the Company or to the Shares held in treasury, as the case may be, and used for the corporate purposes of the Company as the Board shall determine. 12.2 Dividend Equivalents. Grants of Benefits in Shares or Share -------------------- equivalents may include dividend equivalent payments or dividend credit rights. 12.3 Deferral. The right to receive any Benefit under the Plan may, -------- at the request of the Participant, be deferred for such period and upon such terms as the Committee shall determine, which may include crediting of interest on deferrals of cash and crediting of dividends on deferrals denominated in Shares. 10 15 12.4 Withholding. The Company may, at the time any distribution is ----------- made under the Plan, whether in cash or in Shares, or at the time any Option is exercised, withhold from such distribution or Shares issuable upon the exercise of an Option, any amount necessary to satisfy federal, state and local income and/or other tax withholding requirements with respect to such distribution or exercise of such Options. The Committee or the Company may require a participant to tender to the Company cash and/or Shares in the amount necessary to comply with any such withholding requirements. ARTICLE XIII ------------ OPTIONS ------- 13.1 Types of Options. It is intended that both ISOs and NQSOs, which ---------------- may be Reload Options, may be granted by the Committee under the Plan. 13.2 Shares for ISOs. The number of Shares for which ISOs may be --------------- granted on or after the Effective Date shall not exceed 1,000,000 Shares. 13.3 Grant of ISOs and Option Price. Each ISO must be granted to an ------------------------------ Employee and granted within ten years from the earlier of the date of adoption by the Board or the Effective Date. The purchase price for Shares under any ISO shall be no less than the Fair Market Value of the Shares at the time the Option is granted. 13.4 Other Requirements for ISOs. The terms of each Option which is --------------------------- intended to qualify as an ISO shall meet all requirements of Section 422 of the Code. 13.5 NQSOs. The terms of each NQSO shall provide that such Option ----- will not be treated as an ISO. The purchase price for Shares under any NQSO shall be no less than the Fair Market Value of the Shares at the time the Option is granted. 13.6 Determination by Committee. Except as otherwise provided in -------------------------- Sections 13.2 through 13.5, the terms of all Options shall be determined by the Committee. ARTICLE XIV ----------- SARS ---- 14.1 Grant and Payment. The Committee may grant SARs. Upon electing ----------------- to receive payment of a SAR, a Participant shall receive payment in cash, in Shares, or in any combination of cash and Shares, as the Committee shall determine. 14.2 Grant of Tandem Award. The Committee may grant SARs in tandem --------------------- with an Option, in which case: the exercise of the Option shall cause a correlative reduction in SARs standing to a Participant's credit which were granted in tandem with the Option; and the payment of SARs shall cause a correlative reduction of the Shares under such Option. 11 16 14.3 ISO Tandem Award. When SARs are granted in tandem with an ISO, ---------------- the SARs shall have such terms and conditions as shall be required for the ISO to qualify as an ISO. 14.4 Payment of Award. SARs shall be paid by the Company to a ---------------- Participant, to the extent payment is elected by the Participant (and is otherwise due and payable), as soon as practicable after the date on which such election is made. ARTICLE XV ---------- ANNUAL LIMITATIONS ------------------ 15.1 Limitation on Options and SARs. The maximum number of (a) Shares ------------------------------ with respect to which (i) ISOs plus (ii) NQSOs and (b) SARs which may be granted to any Participant in any one year period shall not exceed 500,000. 15.2 Computations. For purposes of Section 15.1: Shares covered by ------------ an Option that is canceled shall count against the maximum, and, if the exercise price under an Option is reduced, the transaction shall be treated as a cancellation of the Option and a grant of a new Option; and SARs covered by a grant of SARs that is canceled shall count against the maximum, and, if the Fair Market Value of a Share on which the appreciation under a grant of SARs will be calculated is reduced, the transaction will be treated as a cancellation of the SARs and the grant of a new grant of SARs. ARTICLE XVI ----------- RESTRICTED STOCK AND PERFORMANCE SHARES --------------------------------------- 16.1 Restricted Stock. The Committee may grant Benefits in Shares ---------------- available under ARTICLE III of the Plan as Restricted Stock. Shares of Restricted Stock shall be issued and delivered at the time of the grant or as otherwise determined by the Committee, but shall be subject to forfeiture until provided otherwise in the applicable Agreement or the Plan. Each certificate representing Shares of Restricted Stock shall bear a legend referring to the Plan and the risk of forfeiture of the Shares and stating that such Shares are nontransferable until all restrictions have been satisfied and the legend has been removed. At the discretion of the Committee, the grantee may or may not be entitled to full voting and dividend rights with respect to all shares of Restricted Stock from the date of grant. 16.2 Cost of Restricted Stock. Unless otherwise determined by the ------------------------ Committee, grants of Shares of Restricted Stock shall be made at a per Share cost to the Participant equal to par value. 16.3 Non-Transferability. Shares of Restricted Stock shall not be ------------------- transferable until after the removal of the legend with respect to such Shares. 16.4 Performance Shares. Performance Shares are the right of an ------------------ individual to whom a grant of such Shares is made to receive Shares or cash equal to the Fair Market Value of such 12 17 Shares at a future date in accordance with the terms and conditions of such grant. The terms and conditions shall be determined by the Committee, in its sole discretion, but generally are expected to be based substantially upon the attainment of targeted profit and/or performance objectives. 16.5 Grant. The Committee may grant an award of Performance Shares. ----- The number of Performance Shares and the terms and conditions of the grant shall be set forth in the applicable Agreement. ARTICLE XVII ------------ CASH AWARDS ----------- 17.1 Grant. The Committee may grant Cash Awards at such times and in ----- such amounts as it deems appropriate. 17.2 Restrictions. Cash Awards may be subject or not subject to ------------ conditions (such as an investment requirement), restricted or nonrestricted, vested or subject to forfeiture and may be payable currently or in the future or both. ARTICLE XVIII ------------- OTHER STOCK BASED AWARDS AND OTHER BENEFITS ------------------------------------------- 18.1 Other Stock Based Awards. The Committee shall have the right to ------------------------ grant Other Stock Based Awards which may include, without limitation, the grant of Shares based on certain conditions, the payment of cash based on the performance of the Common Stock, and the grant of securities convertible into Shares. 18.2 Other Benefits. The Committee shall have the right to provide -------------- types of Benefits under the Plan in addition to those specifically listed, if the Committee believes that such Benefits would further the purposes for which the Plan was established. ARTICLE XIX ----------- MISCELLANEOUS PROVISIONS ------------------------ 19.1 Underscored References. The underscored references contained in ---------------------- the Plan are included only for convenience, and they shall not be construed as a part of the Plan or in any respect affecting or modifying its provisions. 19.2 Number and Gender. The masculine and neuter, wherever used in ----------------- the Plan, shall refer to either the masculine, neuter or feminine; and, unless the context otherwise requires, the singular shall include the plural and the plural the singular. 13 18 19.3 Unfunded Status of Plan. The Plan is intended to constitute an ----------------------- "unfunded" plan for incentive and deferred compensation. With respect to any payments or deliveries of Shares not yet made to a Participant by the Company, nothing contained herein shall give any rights that are greater than those of a general creditor of the Company. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Shares or payments hereunder consistent with the foregoing. 19.4 Termination of Participant Status. If a person who has been --------------------------------- awarded Benefits ceases to be a Participant (as defined in Section 2.1) for any reason, except as otherwise provided in an Agreement, all unexercised, deferred, and unpaid Benefits may be exercisable or paid only in accordance with rules established by the Committee. These rules may provide, as the Committee may deem appropriate, for the expiration, forfeiture, continuation, or acceleration of the vesting of all or part of the Benefits. 19.5 Designation of Beneficiary. A Participant may file with the -------------------------- Committee a written designation of a beneficiary or beneficiaries (subject to such limitations as to the classes and number of beneficiaries and contingent beneficiaries as the Committee may from time to time prescribe) to exercise, in the event of the death of the Participant, an Option, or to receive, in such event, any Benefits. The Committee reserves the right to review and approve beneficiary designations. A Participant may from time to time revoke or change any such designation of beneficiary and any designation of beneficiary under the Plan shall be controlling over any other disposition, testamentary or otherwise; provided, however, that if the Committee shall be in doubt as to the right of any such beneficiary to exercise any Option or to receive any Benefit, the Committee may determine to recognize only an exercise by the legal representative of the recipient, in which case the Company, the Committee and the members thereof shall not be under any further liability to anyone. 19.6 Governing Law. This Plan shall be construed and administered in ------------- accordance with the laws of the State of Missouri. 19.7 Purchase for Investment. The Committee may require each person ----------------------- purchasing Shares pursuant to a Benefit to represent to and agree with the Company in writing that such person is acquiring the Shares for investment and without a view to distribution or resale. The certificates for such Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for Shares delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under all applicable laws, rules and regulations, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate references to such restrictions. 19.8 No Employment Contract. Neither the adoption of the Plan nor any ---------------------- Benefit granted hereunder shall confer upon any Employee any right to continued employment nor shall the Plan or any Benefit interfere in any way with the right of the Employer to terminate the employment of any of its Employees at any time. 14 19 19.9 No Effect on Other Benefits. The receipt of Benefits under the --------------------------- Plan shall have no effect on any benefits to which a Participant may be entitled from the Employer, under another plan or otherwise, or preclude a Participant from receiving any such benefits. 15 EX-10.20 9 NON-QUALIFIED STOCK OPTION AWARD 1 CONNING CORPORATION NON-QUALIFIED STOCK OPTION AWARD Name of Option Recipient: [Name] On December --, 1997, the Company awarded you a stock option. You were granted an option to buy 1,000 shares of the Company's Common Stock, par value $.01 per share, at the price of $----- per share. You may purchase shares under the option as follows: CUMULATIVE NUMBER OF MAY BE PURCHASED SHARES NOT BEFORE NOT AFTER ------ ---------- --------- 66.67 December --, 1998 December --, 2007 200 December --, 1999 December --, 2007 400 December --, 2000 December --, 2007 800 December --, 2001 December --, 2007 1,000 December --, 2002 December --, 2007 This option is not, and will not be treated as, an Incentive Stock Option under Section 422 of the Code. The award of this Option is subject to the closing of the Company's initial public offering ("IPO") on or before December --, 1997. If the IPO does not close by such date, this Option shall be null and void and the Participant shall have no rights hereunder effective December --, 1997. IMPORTANT: By signing below, you agree to be bound by, and acknowledge receipt of, the attached Terms and Conditions of this stock option. Read and agreed CONNING CORPORATION to this ----- day of December 1997. - ------------------------ By:--------------------------- Name: 2 TERMS AND CONDITIONS -------------------- NON-QUALIFIED STOCK OPTION AWARD GRANTED UNDER ---------------------------------------------- CONNING CORPORATION ------------------- 1997 FLEXIBLE STOCK PLAN ------------------------ 1. Definitions ----------- (a) Option The option granted by the Option Award (b) Option Award The Non-Qualified Stock Option Award to which the Terms and Conditions are attached together with, except where the context requires otherwise, these Terms and Conditions. (c) Plan The Conning Corporation 1997 Flexible Stock Plan, as amended from time to time. All capitalized terms not otherwise defined herein shall have the meanings given to such terms by the Plan. 2. Evidence of Option Grant and incentive Stock Option --------------------------------------------------- The Option Award evidences a grant to the Participant of an Option to purchase that number of shares ("Optioned Shares") of Common Stock, par value $.01 per share, of the Company ("Stock") set forth on the Option Award. The Participant may exercise the Option as shown on the Option Award. in no event shall the Option or any part of the Option be exercisable after December ---, 1997 (the "Option Expiration Date"). The Option is a Non-Qualified Stock Option and is not intended to constitute an "Incentive Stock Option" as defined in Section 422 of the Code. 3. Exercise of Option ------------------ The Option shall be exercised by the Participant delivering a written notice of exercise to the Company's Secretary or Chief Financial Officer. This notice shall specify the number of Optioned Shares the Participant then desires to purchase. 4. Payment of Option Price ----------------------- Payment for the Shares purchased under the Option shall be made to the Company either: (a) in cash (including cashier's check, bank draft or money order); or 3 (b) by the tender to the Company of shares owned by the Participant and registered in his or her name having a Fair Market Value equal to the amount due to the Company; or (c) in cash, but by means of a so-called "cashless exercise"; or (d) by any combination of the payment methods specified in paragraphs (a) through (c) above. In addition to the foregoing methods of payment, payment of the Option price may, at the discretion of the Committee, be made in whole or in part in other property, rights and credits, including, to the extent permitted by applicable law, the Participant's promissory note. 5. Form of Notice of Exercise -------------------------- The Participant's notice as required by Section 3 shall be signed by the Participant and shall be in substantially the following form with appropriate adjustments depending on how the Option price is paid: "I hereby exercise my Option to purchase ---------- Shares in accordance with my Option Award dated ------------, 19--, granted under the Company's 1997 Flexible Stock Plan. The aggregate Option price of the Shares I am purchasing is $---------. I hereby tender in payment of such price the following: (a) my cashier's check, bank draft or money order made payable to the Company in the amount of $----------------; and/or (b) ------- Shares having a Fair Market Value of $----------. I have forwarded to you under separate cover a stock power (with signature guaranteed) authorizing you to transfer my ------- Shares as per the requirements of this letter and my Option Award. I hereby represent to the Company that I own the --------- Shares delivered herewith free and clear of all liens and encumbrances and that I have the full and lawful right to transfer such Shares to the Company. If the Shares purchased have not been registered under the Securities Act of 1933, I hereby further represent to the Company that I am acquiring the -------- Shares that I am purchasing solely for investment and solely for my own account and that I have no present intention of selling or offering for sale any of such Shares to any other person or persons." 4 6. Stock Certificates ------------------ Upon the exercise of the Option solely for cash or cash and property (other than Shares), rights and/or credits specifically permitted by the Committee, the Participant shall be entitled to one stock certificate evidencing the Shares acquired upon exercise. However, if the Participant delivers Shares of the Company when exercising the Option, then the Participant shall be entitled to two or three certificates. If the number of Shares tendered is less than or equal to the number required to pay for all of the Shares purchased, then the Participant shall be entitled to receive two certificates. One certificate shall represent a number of Shares equal to the number of Shares delivered by the Participant. The second certificate shall represent the additional Shares acquired by the Participant upon the exercise of the Option. If the number of Shares tendered is more than the number required to pay for all of the Shares purchased, then the Participant shall be entitled to receive three certificates, one for the portion of the number of Shares purchased which is equal to the number of tendered Shares applied to exercise the Option, a second for the remainder of the number of Shares purchased upon exercise of the Option, and a third for the number of Shares tendered which were not applied to purchase the Shares pursuant to the Option. 7. Legends on Certificates ----------------------- The certificate or certificates to be issued under Section 6 shall be issued as soon as practicable. Such certificate or certificates shall contain thereon a legend in substantially the following form if the Shares evidenced by such certificate have not been registered under the Securities Act of 1933, as amended: "The shares represented by this certificate have not been registered under the Securities Act of 1933 or any applicable state law. They may not be offered for sale, sold, transferred or pledged without (1) registration under the Securities Act of 1933 and any applicable state law, or (2) at holder's expense, an opinion (satisfactory to the Company) that registration is not required." The certificates shall also contain such other legends as may be appropriate or required by law. 5 8. Termination of Employment; Nonassignability ------------------------------------------- 8.1 Termination for Cause or Voluntary Quit. If, on or --------------------------------------- after the date that the Option shall have first become exercisable, the Participant's employment shall be terminated for any reason other than as described in Section 8.3, the Participant shall have the right, within 3 months after such termination (but not later than the Option Expiration Date), to exercise such Option to the extent that such Option or any installment thereof shall have accrued at the date of such termination and shall not have been exercised. In the event of the Participant's death during such 3-month (or shorter) period, the provisions of Section 8.4 shall apply. For purposes of this Section, termination of a Participant's employment shall mean the later of the termination of the Participant's employment with an Employer or the Participant's ceasing to serve as a director of the Company. 8.2 Disability. If, on or after the date that the Option ---------- shall first have become exercisable, the Participant's employment shall be terminated for disability (as such term is defined at Section 422(c)(6) of the Code), the Participant shall have the right, within 1 year after such termination (but not later than the Option Expiration Date), to exercise such Option to the extent that such Option or any installment thereof shall have accrued at the date of such termination of employment and shall not have been exercised. In the event of Participant's death during such 1-year (or shorter) period, the provisions of Section 8.4 shall apply. For purposes of this Section, termination of a Participant's employment shall mean the later of the termination of the Participant's employment with an Employer or the Participant's ceasing to serve as a director of the Company. 8.3 Retirement. If the Participant's employment shall be ---------- terminated by the Participant on or after (x) the Participant attains age 65 or (y) the Participant attains age 55 and has at least 10 years of service with an Employer, then all installments of the Option granted hereunder shall become immediately exercisable (if not already exercisable), and the Participant shall have the right, within 3 months after such termination (but not later than the Option Expiration Date), to exercise such Option to the extent that such Option or any installment thereof shall not have been exercised. In the event of the Participant's death during such 3-month (or shorter) period, the provisions of Section 8.4 shall apply. For purposes of this Section, termination of a Participant's employment shall mean the later of the termination of the Participant's employment with an Employer or the Participant's ceasing to serve as a director of the Company. 8.4 Death. If a Participant shall die within the 3-month ----- (or shorter) period referred to in Section 8.1 or Section 8.3, the 1-year (or shorter) period referred to in Section 8.2, or while serving as an employee of an Employer or a director of the Company on or after the date that the Option shall have first become exercisable, the beneficiary designed pursuant to Section 8.6 hereof, or, if no such 6 designation is in effect, the personal representative of the estate of the decedent or the person or persons to whom the Option shall have been validly transferred by such personal representative pursuant to will or the laws of descent and distribution, shall have the right, within 1 year from the date of the Participant's death (but no later than the Option Expiration Date), to exercise the Participant's Option to the extent that such Option or any installment thereof shall have accrued at the date of death and shall not have been exercised. No transfer of the Option shall be effective to bind the Company unless the Company shall have been furnished with written notice of such transfer and a copy of the will and/or such other evidence as the Committee may deem necessary to establish the validity of the transfer. No transfer shall be effective without the acceptance by the transferee of the terms and conditions of such Option. 8.5 Option Not Vested. Except as provided in Section 8.3, ----------------- if the Participant's employment shall terminate before the Option shall have first become exercisable, or before any installment or installments are exercisable, then the Participant's full interest in the Option or such installment or installments, as the case may be, shall terminate and all rights thereunder shall cease. For purposes of this Section, termination of a Participant's employment shall mean the later of the termination of the Participant's employment with an Employer or the Participant's ceasing to serve as a director of the Company. 8.6 Non-Transferability of Rights; Designation of --------------------------------------------- Beneficiaries. The Option shall not be transferable by the Participant - ------------- otherwise than by will or the laws of descent and distribution or as provided in this Section 8.6. During the lifetime of the Participant the Option shall be exercisable only by the Participant. The Participant, however, may file with the Company a written designation of a beneficiary or beneficiaries to exercise, in the event of the Participant's death, the Option granted hereunder, subject to all of the provisions of the Option Award and these Terms and Conditions, including this Section 8. A Participant may from time to time revoke or change any such designation of beneficiary and any designation of beneficiary under the Plan shall be controlling over any other disposition, testamentary or otherwise; provided, however, that if the Committee shall be in doubt as to the right of any such beneficiary to exercise the Option, the Committee may determine to recognize only an exercise by the personal representative of the estate of the Participant, in which case the Company, the Committee and the members thereof shall not be under any further liability to anyone. 8.7 Limitation on Extensions. Certain provisions hereof ------------------------ extend the date by which the Option must otherwise be exercised under the provisions of Section 1 and the Option Award. 7 Notwithstanding those provisions herein which otherwise extend the time period in which the Option must be exercised, no extension may extend the Option later than the Option Expiration Date. 9. Withholding ----------- The Company or any Subsidiary shall have the right to deduct any sums that federal, state or local tax law requires to be withheld with respect to the exercise of the Option, or as otherwise may be required by law. The Company or any such Subsidiary may require as a condition to issuing Shares upon the exercise of the Option that the Participant or other person exercising the Option pay any sum that federal, state or local tax law requires to be withheld with respect to such exercise. In the alternative, the Participant or other person exercising the Option, may elect to pay such sums to the Company or the Subsidiary by delivering written notice of that election to the Company's Secretary or Chief Financial Officer prior to or concurrently with exercise. There is no obligation that the Participant be advised of the existence of the tax or the amount which the Company or a Subsidiary will be so required to withhold. 10. Changes in Capital Structure ---------------------------- If there is any change in the Common Stock of the Company by reason of any stock dividend, spin-off, split-up, spin-out, recapitalization, merger, consolidation, reorganization, combination or exchange of shares, the number of SARs and number, kind and class of shares available for Options and grants of Restricted Stock, Performance Shares and Other Stock Based Awards and the number, kind or class of Shares subject to outstanding Options, SARs, grants of Restricted Stock and Performance Shares, and Other Stock Based Awards, and the price thereof, as applicable, shall be appropriately adjusted by the Committee. The issuance of Shares for consideration and the issuance of Share rights shall not be considered a change in the Company's capital structure. No adjustment provided for in this section shall require the issuance of any fractional shares. 11. Plan Controls ------------- The Option Award and these Terms and Conditions are subject to all terms and provisions of the Plan, which terms and provisions are incorporated herein by reference. In the event of any conflict, the Plan shall control over the Option Award and these Terms and Conditions. EX-10.23 10 AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT 1 ================================================================================ CONNING INVESTMENT PARTNERS LIMITED PARTNERSHIP III (A Delaware Limited Partnership Organized to Serve as General Partner of Conning Insurance Capital Limited Partnership III and Investment General Partner of Conning Insurance Capital International Partners III) AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT ----------------------------- Dated as of March 18, 1994 ================================================================================ THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM AND WITH THE APPROVAL OF THE GENERAL PARTNER. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. 2 CONNING INVESTMENT PARTNERS LIMITED PARTNERSHIP III Amended and Restated Limited Partnership Agreement
Table of Contents ----------------- Page ---- I. DEFINITIONS 1 1.1 Definitions 1 II. ORGANIZATION 1 2.1 Continuation of Limited Partnership 1 2.2 Name 1 2.3 Address 1 2.4 Purpose 2 2.5 Powers 2 III. GENERAL PARTNER 2 3.1 Name, Address and Subscription 2 3.2 Management and Control of the Partnership 2 3.3 Powers 2 3.4 Certificate of Limited Partnership 3 3.5 Duty of Care 3 3.6 No Salary 4 3.7 Tax Matters Partner 5 IV. LIMITED PARTNERS 5 4.1 Names, Addresses and Subscriptions 5 4.2 Limited Liability 6 4.3 No Control of Partnership 6 4.4 Bankruptcy, etc. 6 V. ADMISSION OF ADDITIONAL LIMITED PARTNERS 6 5.1 Admission of Additional Limited Partners 6 5.2 Capital Contribution 6 5.3 Accession to Agreement 7 VI. CAPITAL OF THE PARTNERSHIP 7 6.1 Capita1 Contributions 7 6.2 No Interest or Withdrawals 7 - i - 3 VII. ACCOUNTS 7 7.1 Capital Accounts 7 7.2 Accounting for Distributions in Kind 7 7.3 Compliance With Treasury Regulations 8 VIII. ALLOCATIONS 8 8.1 General 8 8.2 Net Gain or Loss 8 8.3 Timing of Allocations on Distributions in Kind 8 8.4 Regulatory Allocations 9 8.5 Adjustments to Reflect Chance in Interests 11 8.6 Tax Allocations 11 8.7 Timing of Allocations 12 IX. DISTRIBUTIONS 12 9.1 Timing of Distributions 12 9.2 Tax Distributions 12 9.3 Additional Distributions 13 9.4 Operational Rules 13 9.5 Tax Withholding 14 9.6 Certain Distributions Prohibited 14 9.7 Consent to Distributions 14 X. VALUATION OF PARTNERSHIP ASSETS 15 10.1 Valuation by General Partner 15 10.2 Goodwill 15 XI. DURATION OF PARTNERSHIP 15 11.1 Term of Partnership 15 11.2 Dissolution Upon Withdrawal of General Partner 15 11.3 No Dissolution on Events Affecting Limited Partners 15 11.4 Extension of Term 15 XII. LIQUIDATION OF PARTNERSHIP INTERESTS 15 12.1 General Provisions 15 12.2 Liquidating Distributions 16 12.3 Expenses of Liquidator(s) 16 12.4 Duration of Liquidation 16 12.5 Duty of Care 16 12.6 No Liability for Return of Capital 17 - ii - 4 XIII. LIMITATION ON TRANSFER OF INTERESTS OF LIMITED PARTNERS OR RETIRED PARTNERS 17 13.1 Consent of General Partner to Transfers 17 13.2 Opinion of Counsel 17 13.3 Expenses 17 13.4 Substitution of Limited Partners or Retired Partners 18 13.5 Covenants of Limited Partners and Retired Partners 18 XIV. WITHDRAWAL OF PARTNERSHIP INTERESTS 19 14.1 Withdrawals Generally Prohibited 19 14.2 Withdrawal upon Death, Disability, Bankruptcy or Termination of Employment 19 XV. RETIRED LIMITED PARTNERS 19 15.1 General 19 15.2 Adjustments to Reflect Retirement 19 15.3 Retired Partner Participation 20 XVI. LIMITATION ON TRANSFER OF INTEREST OF THE GENERAL PARTNER 20 XVII. INDEMNIFICATION 20 17.1 General Provisions 20 17.2 Advance Payment of Expenses 21 17.3 Insurance 22 17.4 Limitation or Expansion by Law 22 XVIII. ACCOUNTING, RECORDS AND REPORTS 22 18.1 Fiscal Year 22 18.2 Keeping of Accounts and Records 23 18.3 Inspection Rights 23 18.4 Annual Financial Statements 23 18.5 Accounting Method 24 XIX. WAIVER AND AMENDMENT 24 XX. GENERAL PROVISIONS 24 20.1 Notices 24 20.2 Power of Attorney 24 20.3 Waiver of Partition 26 20.4 Additional Documents 26 20.5 Binding on Successors 26 20.6 Counterparts 26 20.7 Voting 26 20.8 Governing Law 26 - iii - 5 20.9 Securities Act Matters 26 20.10 Authority of General Partner 27 20.11 Contract Construction 27 20.12 Section Headings 27 Names, Addresses, Subscriptions and Percentage Interests of Partners Schedule A Vesting Schedules Schedule B General Partner's Intention to Reduce Percentage Interest Schedule C Table of Definitions Appendix A
- iv - 6 CONNING INVESTMENT PARTNERS LIMITED PARTNERSHIP III Amended and Restated Limited Partnership Agreement ----------------------------- AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT, dated as of this 18th day of March, 1994 by and among Conning & Company, a Connecticut corporation, as general partner (the "General Partner") and any individuals, firms, corporations, and other entities who are admitted to the limited partnership formed hereby on or after the effective date of this Agreement who are listed on Schedule A hereto and who execute a counterpart of this ---------- Agreement as limited partners (such limited partners being referred to herein as the "Limited Partners"). The General Partner and the Limited Partners are sometimes referred to herein collectively as the "Partners". The General Partner and John B. Clinton formed the Partnership by executing the Limited Partnership Agreement of Conning Investment Partners Limited Partnership III, dated as of December 28, 1993 (the "Partnership Agreement") and by filing with the Secretary of State of Delaware a Certificate of Limited Partnership on December 28, 1993. The Partnerships of the Partnership desire to amend and restate the Partnership Agreement as hereinafter provided, and in consideration of the premises and the agreements herein contained and intending to be legally bound hereby agree that the Partnership Agreement shall be amended and restated in whole to read as follows: ARTICLE I - DEFINITIONS. ----------------------- 1.1 DEFINITIONS. Capitalized terms used herein without definitions ----------- shall have the meanings assigned to them in Appendix A hereto. ---------- ARTICLE II - ORGANIZATION. ------------------------- 2.1 CONTINUATION OF LIMITED PARTNERSHIP. The Partners agree to carry ----------------------------------- on a limited partnership (the "Partnership") subject to the terms of this Agreement in accordance with the provisions of the Delaware Revised Uniform Limited Partnership Act, as amended (the "Delaware Act"). 2.2 NAME. The name of the Partnership is "Conning Investment ---- Partners Limited Partnership III" The General Partner may change the name of the Partnership to such other name as the General Partner may determine at any time, upon written notice to all Partners indicating such new name. - 1 - 7 2.3 ADDRESS. The initial address of the Partnership's registered ------- office in Delaware is 32 Loockerman Square, Suite L-130, Dover, County of Kent, and its initial registered agent at such address for service of process is The Prentice-Hall Corporation System, Inc. The initial principal office of the Partnership shall be located at CityPlace II, 185 Asylum Street, Hartford, Connecticut 06103-4105. The General Partner may change the location of the principal office of the Partnership to such other location within the United States as the General Partner may determine at any time, upon written notice to all the Partners indicating the new location of such principal office. The General Partner may cause the Partnership to open such additional offices at such other locations as the General Partner in its sole discretion may determine. 2.4 PURPOSE. The principal purpose of the Partnership is to organize ------- and act as the general partner of Conning Insurance Capital Limited Partnership III (the "Domestic Fund"), a Delaware limited partnership, and as Investment General Partner of Conning Insurance Capital International Partners III, a Cayman Islands limited partnership (the "Offshore Fund"); the Domestic Fund and the Offshore Fund are each referred to as a "Fund" and collectively referred to as the "Funds") and in furtherance thereof to engage in any lawful act or activity for which limited partnerships may be organized under the laws of the State of Delaware. 2.5 POWERS. Subject to all of the terms and provisions hereof, the ------ Partnership shall have all the powers available to it as a limited partnership under the laws of the State of Delaware. ARTICLE III - GENERAL PARTNER. ----------------------------- 3.1 NAME, ADDRESS AND SUBSCRIPTION. The name and address of the ------------------------------ General Partner, its Subscription and its percentage interest in certain Partnership allocations to be made hereunder ("Percentage Interest") are set forth in Schedule A. Schedule A shall be amended from time to time, without ---------- ---------- the consent of any Partner, to reflect any changes in the Subscription of the General Partner occurring pursuant to the provisions of this Agreement. 3.2 MANAGEMENT AND CONTROL OF THE PARTNERSHIP. Subject to the ----------------------------------------- provisions of this Agreement, the management, policies and control of the Partnership shall be vested exclusively in the General Partner. Limited Partners may, to the extent expressly provided in this Agreement, possess or exercise any of the powers, or have or act in any of the capacities, permitted under Section 17-303(b) of the Delaware Act for limited partners who are deemed thereby not to participate in the control of the affairs of a limited partnership. - 2 - 8 3.3 POWERS. Subject to the provisions of this Agreement, the General ------ Partner shall have the power on behalf and in the name of the Partnership to carry out and implement any and all of the purposes of the Partnership set forth in Section 2.4 and to exercise any of the powers of the Partnership set forth in Section 2.5, including, without limitation, the power to: (a) open, maintain and close accounts with brokers and give instructions or directions in connection therewith; (b) open, maintain and close bank accounts and draw checks or other orders for the payment of money; (c) receive, receipt for and dispose of and deal in all securities, checks, money and other assets or liabilities of the Partnership; (d) hire employees or retain investment bankers, attorneys, accountants, consultants, custodians, contractors and other agents, and pay them compensation; (e) execute on behalf of the Partnership, as general partner of the Fund, any agreement between the Partnership and the Fund or any amendment or termination thereof; (f) enter into, make and perform such contracts, agreements and other undertakings, and do any and all such other acts required of the Partnership or the Fund with respect to the Partnership's or the Fund's interest in any corporation, partnership, limited partnership, trust, association or other entity or activity, including but not limited to entering into agreements with respect to such interests, which agreements may contain such terms, conditions and provisions as the General Partner in its sole discretion shall approve; (g) make all elections for the Partnership that are permitted under tax or other applicable laws, including, without limitation, an election under Section 754 of the Code; and (h) maintain one or more offices within or without the State of Connecticut and in connection therewith rent or acquire office space and do such other acts as may be advisable in connection with the maintenance of such offices; provided, however, that maintaining such offices, renting or acquiring office space and doing any such other acts shall not affect the limited liability of the Limited Partners as set forth in Section 4.2 hereof. 3.4 CERTIFICATE OF LIMITED PARTNERSHIP. The General Partner shall ---------------------------------- file for record with the appropriate public authorities and, if required, publish the Certificate of Limited Partnership of the Partnership and any amendments thereto, and - 3 - 9 shall take all such other action as may be required to preserve the limited liability of the Limited Partners in any jurisdiction in which the Partnership shall conduct its activities. 3.5 DUTY OF CARE. The General Partner shall exercise its best ------------ judgment in conducting the Partnership's operations and in performing its other duties hereunder. The General Partner shall not incur any liability to the Partnership, any Partner or any other Person for any loss suffered by the Partnership or such other Partner or Person which arises out of any action or omission of the General Partner or any Affiliate of the General Partner assisting the General Partner, at the General Partner's request, in performing the General Partner's duties hereunder, provided that (a) the General Partner or such Affiliate of the General Partner acted in good faith and in a manner such Person reasonably believed to be in, or not opposed to, the best interests of the Partnership and, with respect to any criminal action or proceeding, had no reasonable cause to believe such Person's conduct was unlawful, and (b) such course of conduct did not constitute gross negligence or willful misconduct of the General Partner or such Affiliate of the General Partner. No Affiliate of the General Partner shall incur any liability to the Partnership, any Partner or any other Person for any loss suffered by the Partnership or such other Partner or Person which arises out of any action or omission of the General Partner, or out of any action or omission of such Affiliate of the General Partner taken or suffered by such Affiliate of the General Partner in the course of providing assistance to the General Partner at the General Partner's request, provided that (1) such Affiliate of the General Partner acted in good faith and in a manner such Affiliate of the General Partner reasonably believed to be in, or not opposed to, the best interests of the Partnership and, with respect to any criminal action or proceeding, had no reasonable cause to believe such Person's conduct was unlawful, and (2) such course of conduct did not constitute gross negligence or willful misconduct of such Affiliate of the General Partner. No Affiliate of the General Partner shall be liable for any action taken or omitted by any other Affiliate of the General Partner unless such action or omission was taken or suffered by such other Affiliate of the General Partner while acting as an agent of such Affiliate of the General Partner and, with respect to such action or omission, such other Affiliate of the General Partner did not satisfy the requirements of clauses (1) and (2) of the preceding sentence. Neither the General Partner nor any Affiliate of the General Partner shall be liable for the negligence, whether of omission or commission, dishonesty or bad faith of any employee, broker or other agent of the Partnership selected by the General Partner with reasonable care. The General Partner and each Affiliate of the General Partner shall be fully protected and justified with respect to any action or omission taken or suffered by any of them in good faith if such action or omission is taken or suffered in reliance upon and in accordance with the opinion or -4 - 10 advice as to matters of law of legal counsel, or as to matters of accounting of accountants, selected by any of them with reasonable care. In addition, the General Partner and each of its Affiliates shall be entitled to indemnification by the Partnership to the extent provided in Article XVII hereof. 3.6 NO SALARY. The General Partner shall receive no salary or other --------- compensation from the Partnership, but shall be entitled to its share of allocations and distributions made by the Partnership determined in the manner set forth herein. 3.7 TAX MATTERS PARTNER. The tax matters partner, as defined in ------------------- Section 6231 of the Code, of the Partnership shall be the General Partner (the "Tax Matters Partner"). The Tax Matters Partner shall not resign as Tax Matters Partner unless, on the effective date of such resignation, the Partnership has designated another general partner as Tax Matters Partner and that general partner has given its consent in writing to its appointment as Tax Matters Partner. The Tax Matters Partner shall receive no additional compensation from the Partnership for its services in that capacity, but all expenses incurred by the Tax Matters Partner in such capacity shall be borne by the Partnership. The Tax Matters Partner is authorized to employ such accountants, attorneys and agents as it, in its sole discretion, determines are necessary to or useful in the performance of its duties. Any Person who serves as Tax Matters Partner shall not be liable to the Partnership or to any Partner for any action it takes or fails to take as Tax Matters Partner with respect to any administrative or judicial proceeding involving "partnership items" (as defined in Section 6231 of the Code) of the Partnership, unless such action or failure to act constitutes a violation of the General Partner's duty of care set forth in Section 3.5. ARTICLE IV - LIMITED PARTNERS. ----------------------------- 4.1 NAMES, ADDRESSES AND SUBSCRIPTIONS. The names and addresses of ---------------------------------- the Limited Partners and their respective Subscriptions and Percentage Interests are set forth in the supplements referred to on Schedule A. ---------- Schedule A and the supplements shall be amended from time to time, without - ---------- the consent of any Partner, to reflect any changes in the identity, Subscriptions or Percentage Interests of the Limited Partners occurring pursuant to the terms of this Agreement. The General Partner may, without the consent of any Partner, at any time or from time to time increase the Percentage Interest of any Limited Partner by reduction of the General Partner's Percentage Interest. In addition, on one or more occasions on or before January 25, 1998, in connection with the admission of any new Limited Partner(s), the General Partner may reduce the Percentage Interest of any Limited Partner or Retired Partner (which reductions shall be done on a pro rata basis as to all Limited Partners and Retired Partners on each occasion, subject to a - 5 - 11 lesser reduction in the case of a particular Limited Partner due to the limitation set forth below on the maximum amount by which any Limited Partner's or Retired Partner's Percentage Interest may be reduced) and reallocate such reduction amounts to such new Limited Partner(s), with the maximum reduction for any Limited Partner or Retired Partner being ten percent (10%) of the total maximum Percentage Interest held by such Limited Partner or Retired Partner at such time, after reducing such ten percent (10%) amount by all previous reductions pursuant to this provision. It is the intent of the General Partner to reduce its Percentage Interest (and to correspondingly increase the Percentage Interest of the Limited Partners in the aggregate) to 40% by January 31, 1997, according to Schedule C. 4.2 LIMITED LIABILITY. The liability of each of the Limited Partners ----------------- to the Partnership shall be limited to the sum of (1) any unpaid capital contributions which it agreed to make to the Partnership, to the extent provided in Section 17-502(b) of the Delaware Act; and (2) any distribution which such Limited Partner is required to return to the Partnership pursuant to Section 17-607(b) of the Delaware Act. 4.3 NO CONTROL OF PARTNERSHIP. No Limited Partner, in his capacity ------------------------- as such, shall take any part in the control of the affairs of the Partnership, or undertake any activities on behalf of the Partnership, or have any power to sign for or to bind the Partnership. 4.4 BANKRUPTCY, ETC. The bankruptcy, liquidation, dissolution, death ---------------- or incompetency of a Limited Partner shall not result in the termination of the Partnership, but the rights of such Limited Partner under this Agreement shall accrue to such Limited Partner's successor or estate. ARTICLE V - ADMISSION OF ADDITIONAL LIMITED PARTNERS. ---------------------------------------------------- 5.1 ADMISSION OF ADDITIONAL LIMITED PARTNERS. ---------------------------------------- (a) The General Partner may admit to the Partnership one or more additional Limited Partners. (b) Upon the admission of an additional Limited Partner, the General Partner shall (1) determine the Percentage Interest and Subscription of such additional Limited Partner and (2) cause the General Partner's Percentage Interest to be reduced to reflect the Percentage Interest allocated to the additional Limited Partner or make such other adjustments to the Percentage Interests of the Partners as the General Partner, with the consent of each affected Limited Partner, shall determine. 5.2 CAPITAL CONTRIBUTION. Upon the admission of any new Limited -------------------- Partner, such new Limited Partner shall make a capital contribution to the Partnership in the amount equal to its Subscription. - 6 - 12 5.3 ACCESSION TO AGREEMENT. Each Person who is to be admitted as an ---------------------- additional Limited Partner shall accede to this Agreement by executing, together with the General Partner, an amendment to this Agreement providing for such admission. In addition, the General Partner shall execute, file and, where necessary, record any required amendments to the Partnership's Certificate of Limited Partnership. The admission of additional Limited Partners to the Partnership shall be effective upon the execution of the necessary amendment to this Agreement or such later effective date as is set forth in such amendment. ARTICLE VI - CAPITAL OF THE PARTNERSHIP. --------------------------------------- 6.1 CAPITAL CONTRIBUTIONS. The General Partner shall make capital --------------------- contributions to the Partnership as and when required to permit the Partnership to satisfy its obligations as General Partner or Investment General Partner of the Domestic Fund and Offshore Fund, respectively. Each Limited Partner shall make capital contributions equal in amount to its Subscription upon his, her or its admission to the Partnership. 6.2 NO INTEREST OR WITHDRAWALS. No interest shall accrue on any -------------------------- capital contribution made by a Partner, and no Partner shall have the right to withdraw or to be repaid any of his capital contributions so made, except as specifically provided in this Agreement. ARTICLE VII - ACCOUNTS. ---------------------- 7.1 CAPITAL ACCOUNTS. There shall be established on the books of the ---------------- Partnership a capital account ("Capital Account") for each Partner that shall consist of such Partner's initial capital contribution to the Partnership, (a) increased by (i) any additional capital contributions made by such Partner to the Partnership and (ii) any amounts from time to time added to the Capital Account of such Partner pursuant to Article VIII; and (b) decreased by (i) any distributions made to such Partner and (ii) any amounts from time to time subtracted from the Capital Account of such Partner pursuant to Article VIII. 7.2 ACCOUNTING FOR DISTRIBUTIONS IN KIND. For purposes of ------------------------------------ maintaining Capital Accounts when Partnership property is distributed in kind, (a) the Partnership shall treat such property as if it had been sold for its fair market value on the date of distribution as determined in accordance with Article X hereof; (b) any difference between the fair market value of such property as so determined and the Cost of such property shall constitute Net Gain or Loss and shall be allocated to the Capital Accounts of the Partners pursuant to Section 8.3(a), and (c) all property distributed in kind by the Partnership to a Partner shall be debited to that Partner's Capital Account at the fair market value of such property on the date of distribution (net of any liabilities secured by such distributed property that such - 7 - 13 Partner is considered to assume or take subject to under Section 752 of the Code). 7.3 COMPLIANCE WITH TREASURY REGULATIONS. The foregoing provisions ------------------------------------ and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Section 704(b) of the Code and Treasury Regulations Section 1.704-l(b), and shall be interpreted and applied in a manner consistent with such regulations. If the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with such regulations, the General Partner may make such modification, provided the General Partner reasonably determines such modification is not likely to have a material effect on the amounts distributable to any Partner pursuant to Articles IX or XII hereof. ARTICLE VIII - ALLOCATIONS. -------------------------- 8.1 GENERAL. Partnership income, gain, loss, deductions and expenses ------- shall be allocated to the Capital Accounts of the Partners in accordance with this Article VIII. 8.2 NET GAIN OR LOSS. (a) As of the end of each year of the ---------------- Partnership, and after giving effect to the allocations set forth in Sections 8.3, 8.4 and 8.6(b), the Net Gain or Loss of the Partnership for such fiscal period shall be allocated as follows: (a) All Net Gain or Loss attributable to allocations made by the Fund to the Partnership in its capacity as general partner of the Fund: (i) which are made with respect to the capital contribution of the Partnership to the Fund shall be allocated to the General Partner; and (ii) which are made other than with respect to the capital contribution of the Partnership to the Fund (e.g., the Partnership's "carried interest" in the profits or losses or net profits or losses of the Fund) shall be allocated among the Partners in proportion to their respective Percentage Interests. (b) All Short-Term Income shall be allocated to the General Partner. (c) All other Net Gain or Loss of the Partnership shall be allocated to all Partners in proportion to their respective Percentage Interests. 8.3 TIMING OF ALLOCATIONS ON DISTRIBUTIONS IN KIND. Any Net Gain or ---------------------------------------------- Loss of the Partnership that is attributable to a - 8 - 14 distribution of property in kind by the Partnership or the Fund shall be allocated as follows (subject to the remainder of this Article VIII): (a) Net Gain or Loss of the Partnership attributable to amounts allocated by the Fund to the Partnership in its capacity as the general partner of the Fund as a result of distributions in kind of Fund property shall be allocated to all Partners, at the time such allocations are made by the Fund, on the same basis that an equivalent amount of Net Gain or Loss attributable to Fund allocations would be allocated by the Partnership for a hypothetical fiscal year ending immediately prior to the distribution in kind by the Fund that gave rise to such Net Gain or Loss. (b) Net Gain or Loss resulting pursuant to Section 7.2 from the distribution by the Partnership of its property in kind shall be allocated to all Partners, immediately prior to the time such distribution is made, on the same basis that an equivalent amount of Net Gain or Loss not attributable to Fund allocations would be allocated for a hypothetical fiscal year ending immediately prior to the distribution in kind that gave rise to such Net Gain or Loss. (c) For purposes of applying the loss allocation limitations of Section 8.4 in the case of an allocation of Net Gain or Loss pursuant to subsections (a) or (b) above for a hypothetical fiscal year, the actual balances in the Partners' Capital Accounts shall be adjusted to reflect prior distributions in kind made during such hypothetical fiscal year by the Fund or the Partnership, but not any realized gains or losses of the Partnership for such hypothetical fiscal year. 8.4 REGULATORY ALLOCATIONS. The following provisions are included in ---------------------- order to comply with tax rules set forth in the Code and to permit the Partnership to obtain the benefits of a "safe harbor" provided by Treasury Regulation Section 1.704--1(b)(2)(ii)(d). - (a) If and to the extent that any allocation of Net Loss, Issuance Items or other items of loss, expense (or portion thereof) to any Partner would cause such Partner's Capital Account to be negative by an amount which exceeds such Partner's Restoration Amount or would further reduce a balance in such Partner's Capital Account that is already negative by an amount which exceeds such Partner's Restoration Amount, then such loss, expense or charge (or portion thereof) shall be allocated first to the Capital Accounts of the other Partners in proportion to the positive balances in their respective Capital Accounts until all such Capital Accounts are reduced to zero, then to the Capital Accounts of Partners with Restoration Amounts, in proportion to their respective Restoration Amounts, until each such Partner's Capital Account is negative by an amount equal to - 9 - 15 such Partner's Restoration Amount, and then to the Capital Account of the General Partner; provided that an allocation pursuant to this Section 8.4(a) shall be made only if and to the extent that such Partner would have an Capital Account that is negative by an amount which exceeds such Partner's Restoration Amount after all allocations provided for in this Article VIII have been made tentatively as if this Section 8.4 were not included in this Agreement. (b) If any Partner unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-l(b)(2)(ii)(d)(4), (5) or (6), and such adjustment, allocation or - - - - distribution causes such Partner to have a deficit balance in such Partner's Capital Account, there shall be allocated to such Partner items of income and gain (consisting of a pro rata portion of each item of Partnership income, --- ---- including gross income, and gain for such fiscal period) in an amount and manner sufficient to eliminate such Partner's deficit Capital Account balance, to the extent required by Treasury Regulation Section 1.704-1(b)(2)(ii)(d), as quickly as possible, provided that an allocation - pursuant to this Section 8.4(b) shall be made only if and to the extent that such Partner would have a negative Capital Account after all allocations provided for in this Section 8.4 have been made tentatively as if this Section 8.4(b) were not included in this Agreement. The foregoing sentence is intended to constitute a "qualified income offset" provision as described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d), and shall be interpreted and applied in - all respects in accordance with that Section. (c) In the event that any Partner has a negative Capital Account at the end of any Partnership fiscal year which is in excess of such Partner's Restoration Amount, there shall be allocated to such Partner items of Partnership income (including gross income) and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 8.4(c) shall be made only if and to the extent that the deficit in such Partner's Capital Account would exceed such Partner's Restoration Amount after all allocations provided for in this Article VIII have been made tentatively as if Section 8.4(b) hereof and this Section 8.4(c) were not included in this Agreement. (d) To the extent that an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 743(b) of the Code is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken - into account is determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. - 10 - 16 (e) The allocations set forth in Sections 8.4(a), 8.4(b), 8.4(c) and 8.4(d) hereof (the "Regulatory Allocations") are intended to comply with certain requirements of Treasury Regulation Section 1.704-l(b). Notwithstanding any other provisions of this Article VIII (other than the Regulatory Allocations), the Regulatory Allocations shall be taken into account in allocating subsequent Net Gain, Net Loss, Issuance Items and items of income, gain, loss and deduction among the Partners so that, to the extent possible, the net amount of such allocations of subsequent Net Gain, Net Loss, Issuance Items and other items and the Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each such Partner pursuant to the provisions of this Article VIII if the Regulatory Allocations had not occurred. For purposes of applying the foregoing sentence, allocations pursuant to this Section 8.4(e) shall be made with respect to allocations pursuant to Section 8.4(d) only to the extent the General Partner reasonably determines that such allocations will otherwise be inconsistent with the economic agreement among the Partners. (f) If the Partnership, in its capacity as general partner of the Fund, receives any special allocations from the Fund pursuant to certain provisions of the Fund Partnership Agreements dealing with certain "extraordinary allocations", the General Partner, after consulting with the Partnership's accountants and other advisors, shall allocate such amounts among the Partners in a manner consistent with the economic arrangements among the Partners and the purpose of such provisions. 8.5 ADJUSTMENTS TO REFLECT CHANGE IN INTERESTS. Notwithstanding the ------------------------------------------ foregoing, with respect to any fiscal period during which any Partner's interest in the Partnership changes, whether by reason of the admission of a Partner, the withdrawal of a Partner, a non-pro rata contribution of capital --- ---- to the Partnership or any other event described in Section 706(d)(1) of the Code and regulations issued thereunder, allocations of Net Gain or Loss shall be adjusted appropriately to take into account the varying interests of the Partners during such period. The General Partner shall consult with the Partnership's accountants and other advisors and shall select the method of making such adjustments, which method shall be used consistently thereafter. 8.6 TAX ALLOCATIONS. --------------- (a) For federal, state and local income tax purposes, Partnership income, gain, loss, deduction or credit (or any item thereof) for each fiscal year shall be allocated to and among the Partners in order to reflect the allocations made pursuant to the provisions of this Article VIII for such fiscal year (other than allocations of items which are not deductible or - 11 - 17 are excluded from taxable income), taking into account any variation between the adjusted tax basis and book value of Partnership property in accordance with the principles of Section 704(c) of the Code. (b) Any income, gain, loss or deduction realized as a direct or indirect result of the issuance of a Partnership interest by the Partnership to a Partner, the issuance to the Partnership of an interest in the Fund or changes during the term of the Partnership in any Partner's Percentage Interest or Subscription ("Issuance Items") shall be allocated among the Partners so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Partner, shall be equal to the net amount that would have been allocated to each such Partner if the Issuance Items had not been realized. Issuance Items allocated to any Partner shall be added to such Partner's Capital Account if such items constitute income or gain, and shall be subtracted from that Capital Account if such items constitute losses or expenses. 8.7 TIMING OF ALLOCATIONS. The General Partner, in its sole --------------------- discretion, may cause the Partnership to make the allocations described in this Article VIII (other than allocations for tax purposes pursuant to Section 8.6) as of a time other than the end of a fiscal quarter on the basis of an interim closing of the Partnership's books at such time, but only if a Fund makes such interim allocations. In such event, each short fiscal period attributable to any such interim closing shall constitute a fiscal quarter for purposes of this Article VIII. ARTICLE IX - DISTRIBUTIONS. -------------------------- 9.1 TIMING OF DISTRIBUTIONS. The Partnership intends to distribute ----------------------- promptly to the Partners all cash and other property it receives in distributions from the Fund or any other source; provided, however, that the -------- ------- General Partner may defer any such distribution to provide for liabilities or obligations of the Partnership or to establish appropriate reserves. 9.2 TAX DISTRIBUTIONS. ----------------- (a) The Partnership intends to distribute to the Partners, as it is received, the amount ("Tax Distribution") of any distribution received from the Funds as a tax distribution. Such distribution shall be made to the Partners in amounts which would enable the Partners to satisfy their respective tax liabilities, assuming for this purpose that all Partners are subject to the highest rate of tax that may be applicable to any Partner, as determined by the General Partner in consultation with accountants to the Partnership. - 12 - 18 (b) Notwithstanding the foregoing, (i) amounts otherwise distributable to any Partner as Tax Distributions with respect to any taxable year shall be reduced (but not below zero) by any other distributions made by the Partnership to such Partner during such fiscal year; and (ii) the aggregate amount of distributions that otherwise would be made pursuant to this Section 9.2 with respect to any taxable year shall be reduced or eliminated to the extent determined by the General Partner pursuant to the proviso to Section 9.1. - ------- (c) To the extent the Partnership receives from the Funds any amounts which are treated under the Fund Partnership Agreements as an advance against tax distributions to permit the Partners of the Partnership to make estimated tax payments, such amounts, when received by the Partners, shall similarly be treated as advances against Tax Distributions, and shall be subject to return by the Partners to the Partnership to the extent such advances are determined by the General Partner to have been excessive upon calculation at the end of the fiscal year of the correct amount of tax distributions to be made by the Funds to the Partnership and Tax Distributions to be made by the Partnership to its Partners. 9.3 ADDITIONAL DISTRIBUTIONS. All additional distributions, other ------------------------ than Liquidating Distributions, shall be made as follows: (a) As long as any Partner has a positive balance in his Capital Account, all cash or property received during the fiscal year by the Partnership which is attributable to cumulative Net Gain (e.g., in excess of prior Net Loss) or Short-Term Income that have been allocated in accordance with Article VIII shall be distributed to the extent possible to the Partners in proportion to the respective allocations of each such item under Article VIII. Cash or property received which is not attributable to Net Gain or Short-Term Income shall be distributed to the Partners in proportion to their respective Capital Accounts. (b) If no Partner has a positive balance in his Capital Account, distributions shall be made to all Partners in proportion to their respective Percentage Interests. 9.4 OPERATIONAL RULES. ----------------- (a) For purposes of Section 9.3, the Capital Account balances of the Partners shall be adjusted, prior to determining the amount of any distribution provided for therein, to reflect all prior Partnership distributions and all distributions made contemporaneously with the distributions provided for in Section 9.3, as well as all Partnership Net Gain or Net Loss attributable to any distributions previously or contemporaneously made in kind. - 13 - 19 (b) The valuation of securities distributed in kind shall be made in the manner provided in Article X. Each class of securities to be distributed in kind shall be distributed to the Partners in proportion to their respective shares of the entire amount to be distributed (determined as provided in Section 9.3 or, with respect to Liquidating Distributions, Section 12.2), except to the extent that a disproportionate distribution of such securities is necessary in order to avoid distributing fractional shares. For purposes of the preceding sentence, each lot of stock or other securities having a separately identifiable tax basis or holding period shall be treated as a separate class of securities. 9.5 TAX WITHHOLDING. If the Partnership incurs a tax withholding --------------- obligation with respect to any Partner, any amount required to be withheld by the Partnership with respect to such Partner shall be treated for all purposes of this Agreement as if it had been transferred to such Partner by the Partnership as an interest-free advance. Amounts treated as advanced to any Partner pursuant to this Section 9.5 shall be repaid by such Partner to the Partnership within thirty (30) days after the Partnership delivers a written request to such Partner for such repayment; provided, however, that -------- ------- if any such repayment is not made, the Partnership shall collect such unpaid amounts from any Partnership distributions that otherwise would be made to such Partner. Any part of such withheld amount not collected by the Partnership from such distributions shall be charged to such Partner's Capital Account at such time as the General Partner in its sole discretion shall determine, but in no event later than the time immediately preceding the Partnership's final Liquidating Distribution to such Partner. 9.6 CERTAIN DISTRIBUTIONS PROHIBITED. Anything in this Article IX to -------------------------------- the contrary notwithstanding, all Partnership distributions shall be subject to the following limitations: (a) No distribution shall be made to any Partner if, and to the extent that, such distribution would not be permitted under Section 17-607(a) of the Delaware Act. (b) No distribution other than a Tax Distribution shall be made to any Partner to the extent that such distribution, if made, would cause the deficit balance, if any, in the Capital Account of such Partner (determined without regard to any allocations made pursuant to Section 8.4(c)) to exceed such Partner's Restoration Amount. 9.7 CONSENT TO DISTRIBUTIONS. Each Partner, by becoming a Partner, ------------------------ consents to any such distribution hereafter made or omitted to be made to the Partners or any of them in accordance with this Article IX. - 14 - 20 ARTICLE X - VALUATION OF PARTNERSHIP ASSETS. ------------------------------------------- 10.1 VALUATION BY GENERAL PARTNER. Whenever valuation of Partnership ---------------------------- assets or net assets is required by this Agreement, the fair market value of such assets shall be determined by the General Partner in good faith. 10.2 GOODWILL. The Partnership's name and goodwill shall, as among -------- the Partners, be deemed to have no value and shall belong to the Partnership or any successor thereof, and no Partner shall have any right or claim individually to the use thereof. Upon termination of the Partnership, all rights to the name of the Partnership and any goodwill associated with that name shall be assigned to the General Partner. ARTICLE XI - DURATION OF PARTNERSHIP. ------------------------------------ 11.1 TERM OF PARTNERSHIP. The Partnership shall continue until ------------------- December 31, 2003, unless extended as provided in Section 11.4, or unless sooner dissolved as provided in Sections 11.2 or 11.3 or by operation of law. 11.2 DISSOLUTION UPON WITHDRAWAL OF GENERAL PARTNER. The Partnership ---------------------------------------------- shall be dissolved upon the occurrence with respect to a General Partner of any of the "events of withdrawal" described in Section 17-402 of the Delaware Act, provided, that the Partnership shall not be dissolved and the business of the Partnership shall continue to be carried on if there is at least one remaining general partner, and, provided, further, that the Partnership shall not be dissolved if all the Limited Partners agree in writing to continue the business of the Partnership and appoint one or more Persons to be the general partner in accordance with Section 17-801 of the Delaware Act. 11.3 NO DISSOLUTION ON EVENTS AFFECTING LIMITED PARTNERS. The --------------------------------------------------- Partnership shall not be dissolved in the event of the dissolution, death, bankruptcy, substitution or admission of any Limited Partner. 11.4 EXTENSION OF TERM. It is contemplated by the Partners that the ----------------- term of the Partnership shall terminate on December 31, 2003, unless sooner terminated pursuant to Section 11.2 or by operation of law. Notwithstanding the foregoing, the term of the Partnership shall be extended for up to two additional one-year periods if the term of either Fund is similarly extended pursuant to its Fund Partnership Agreement. ARTICLE XII - LIQUIDATION OF PARTNERSHIP INTERESTS. -------------------------------------------------- 12.1 GENERAL PROVISIONS. At dissolution, the Partnership shall be ------------------ liquidated in an orderly manner. The General Partner shall be the liquidator to wind up the affairs of the Partnership pursuant to this Agreement; provided that, if - 15 - 21 there shall be no remaining general partner at that time, 66-2/3% in interest of the Limited Partners may designate one or more other persons to act as the liquidator(s). Any such liquidator, other than the General Partner, shall be a "liquidating trustee" within the meaning of Section 17-101(8) of the Delaware Act. 12.2 LIQUIDATING DISTRIBUTIONS. The liquidator(s) shall satisfy or ------------------------- provide for the satisfaction of the Partnership's liabilities and obligations to creditors. Any Net Gain or Loss realized in connection with the liquidation of the Partnership shall be allocated among the Partners pursuant to Article VIII, and the remaining assets of the Partnership shall then be distributed to the Partners in proportion to the positive balances in their respective Capital Accounts (and, if a distribution in kind is to be made, after allocating any Net Gain or Loss attributable to such distribution). In performing their duties, the liquidator(s) are authorized to sell, exchange or otherwise dispose of the assets of the Partnership in such reasonable manner as the liquidator(s) shall determine to be in the best interest of the Partners. During the liquidation of the Partnership, the liquidators(s) shall furnish to the Partners the financial statements and other information specified in Article XVIII. 12.3 EXPENSES OF LIQUIDATOR(S). The expenses incurred by the ------------------------- liquidator(s) in connection with winding up the Partnership, all other losses or liabilities of the Partnership incurred in accordance with the terms of this Agreement, and reasonable compensation for the services of the liquidator(s) shall be borne by the Partnership. 12.4 DURATION OF LIQUIDATION. A reasonable time shall be allowed for ----------------------- the winding up of the affairs of the Partnership in order to minimize any losses otherwise attendant upon such a winding up, provided that the liquidator(s) shall use their best efforts to carry out the liquidation in conformity with the timing requirements of Treasury Regulation Section 1.704-l(b)(2)(ii)(g). - 12.5 DUTY OF CARE. The liquidator(s) shall not be liable to any ------------ Partner for any loss attributable to any act or omission of the liquidator(s) taken in good faith in connection with the liquidation of the Partnership and distribution of its assets. The liquidator(s) may consult with counsel and accountants with respect to liquidating the Partnership and distributing its assets and shall be justified in acting or omitting to act in accordance with the advice or opinion of such counsel or accountants, provided they shall have been selected with reasonable care. - 16 - 22 12.6 NO LIABILITY FOR RETURN OF CAPITAL. ---------------------------------- (a) The liquidator(s), the General Partner and their respective officers, directors, agents, partners and Affiliates shall not be personally liable for the return of the capital contributions of any Partner. (b) If, after the Partnership has made its final Liquidating Distribution, the General Partner's Capital Account is negative, then, notwithstanding the foregoing, the General Partner shall return to the Partnership part or all of of the distributions received by it pursuant to Article IX or this Article XII in an aggregate amount equal to such deficit but not in excess of such Partner's Restoration Amount. Returns made by a Partner pursuant to this Section 12.6 shall be made in cash. The Partners shall use best efforts to make any such returns promptly and in any event in conformity with the timing requirements of Treasury Regulation Section 1.704-l(b)(2)(ii)(g). Amounts repaid by the Partners pursuant to this - Section 12.6 shall be paid to a Fund in satisfaction of the Partnership's obligation to restore a deficit in its capital account as maintained by such Fund, paid to other creditors of the Partnership or distributed to Partners with positive balances in their Capital Accounts in proportion to such balances. ARTICLE XIII - LIMITATION ON TRANSFER OF ---------------------------------------- INTERESTS OF LIMITED PARTNERS OR RETIRED PARTNERS. ------------------------------------------------- 13.1 CONSENT OF GENERAL PARTNER TO TRANSFERS. The prior written --------------------------------------- consent of the General Partner, which consent may be granted or withheld in the General Partner's absolute discretion, shall be required for any Transfer of part or all of any Limited Partner's or Retired Partner's interest in the Partnership. 13.2 OPINION OF COUNSEL. Any Transfer shall be made only upon receipt ------------------ by the Partnership of a written opinion of counsel for the Partnership or of other counsel reasonably satisfactory to the Partnership (which opinion shall be obtained at the expense of the transferor) that such Transfer will not result in (a) the Partnership or the General Partner being subjected to any additional regulatory requirements, (b) a violation of applicable law or this Agreement, (c) the Partnership being classified as an association taxable as a corporation, (d) the Partnership becoming subject to tax as a corporation pursuant to Section 7704 of the Code, or (e) the Partnership being deemed terminated pursuant to Section 708 of the Code. 13.3 EXPENSES. The transferor of any interest in the Partnership -------- hereby agrees to reimburse the Partnership, at the request of the General Partner, for any expenses reasonably incurred by the Partnership in the course of consummating such Transfer. - 17 - 23 13.4 SUBSTITUTION OF LIMITED PARTNERS OR RETIRED PARTNERS. Without ---------------------------------------------------- the consent of the General Partner and the aforesaid written opinion of counsel, no transferee of a Partnership interest shall be admitted as a substituted Limited Partner or Retired Partner. Any transferee of a Partnership interest transferred in accordance with the provisions of this Article XIII shall be admitted as a substituted Limited Partner or Retired Partner upon the later of the execution of the required amendment to this Agreement or the effective date set forth in such amendment, and such transferee shall succeed to the rights and liabilities of the transferor Limited Partner or Retired Partner, and the Capital Account and Percentage Interest of the transferor shall become the Capital Account and Percentage Interest, respectively, of the transferee, to the extent of the interest transferred. 13.5 COVENANTS OF LIMITED PARTNERS AND RETIRED PARTNERS. -------------------------------------------------- (a) Except in accordance with the provisions of this Article XIII, each Limited Partner and Retired Partner agrees with all other Partners that it shall not make any Transfer of all or any part of its interest in the Partnership. (b) Each Limited Partner and Retired Partner, by its execution of this Agreement, thereby agrees and consents to the admission of any substituted Limited Partner or Retired Partner pursuant to the terms of this Article XIII. Any transferee of a Partnership interest shall execute a power-of-attorney as provided in Section 20.2 and such other documents as the General Partner may reasonably request to effect such substitution, including an assumption of all obligations of the transferor Limited Partner or Retired Partner under this Agreement. (c) Any attempted Transfer of a Limited Partner's or Retired Partner's interest without compliance with this Agreement shall be void. In the event of any transfer which shall result in multiple ownership of any Limited Partner's or Retired Partner's interest in the Partnership, the General Partner may require one or more trustees or nominees to be designated as representing a portion of or the entire interest transferred for the purpose of receiving all notices which may be given, and all payments which may be made, under this Agreement and for the purpose of exercising all rights which the transferor as a Limited Partner or Retired Partner has pursuant to the provisions of this Agreement. Every Transfer shall be subject to all of the terms, conditions, restrictions and obligations of this Agreement. - 18 - 24 ARTICLE XIV - WITHDRAWAL OF PARTNERSHIP INTERESTS. ------------------------------------------------- 14.1 WITHDRAWALS GENERALLY PROHIBITED. Except as otherwise -------------------------------- specifically provided for in this Agreement, no Partner shall have the right to withdraw its capital and profits from the Partnership. 14.2 WITHDRAWAL UPON DEATH, DISABILITY, BANKRUPTCY OR TERMINATION OF --------------------------------------------------------------- EMPLOYMENT. In the event of (i) the occurrence with respect to any Limited - ---------- Partner of an event described in Section 17-402(4) or (6) of the Delaware Act as in effect on the date hereof, (ii) if any Limited Partner shall become disabled, or (iii) if such Limited Partner shall no longer be an employee, consultant or member of the Board of Directors of the General Partner or any Affiliate thereof, such Limited Partner shall thereupon for purposes of this Agreement be deemed to have withdrawn as of the date thereof, and in such event such Limited Partner's interest in the Partnership as a Limited Partner shall automatically be converted into a Retired Partner's interest in accordance with the provisions of Article XV. For purposes of this Agreement, a Limited Partner shall be deemed to be disabled if he is unable to perform his or her business obligations for any 180 days out of any 365-day period. ARTICLE XV - RETIRED LIMITED PARTNERS. ------------------------------------- 15.1 GENERAL. A Limited Partner who withdraws, or the personal ------- representative or estate of a Limited Partner who shall be deemed to have withdrawn, shall retain an interest in the Partnership as a Retired Partner; such former Limited Partner's interest in the Partnership as a Limited Partner shall be automatically converted into a Retired Partner's Interest; and such Person shall be considered a Retired Partner for all purposes under the terms of this Agreement, provided, however, that a Retired Partner shall -------- ------- retain only the portion of his or her Percentage Interest indicated on Schedule B, depending on whether such withdrawal is due to (i) death or - ---------- disability ("Category A"), or (ii) withdrawal for any other reason (Category B"). Notwithstanding the foregoing, the General Partner may accelerate the vesting schedule described above for any Retired Partner who is deemed to have withdrawn from the Partnership, but shall be under no obligation to do so, and may in its discretion do so for one or more Retired Partners and not for all Retired Partners. The table set forth above may not be altered with respect to any particular Limited Partner without such Partner's prior written consent. 15.2 ADJUSTMENTS TO REFLECT RETIREMENT. --------------------------------- (a) The portion of the Percentage Interest of a Limited Partner which is not retained under subsection 15.1 shall - 19 - 25 be allocated to the General Partner, unless the General Partner in its sole discretion decides to allocate such portion of Percentage Interest to one or more Partners in some other manner. (b) In connection with any such adjustment of Percentage Interests, the General Partner in its discretion may cause subsequent allocations to be made in the manner described in Section 8.5. 15.3 RETIRED PARTNER PARTICIPATION. A Retired Partner shall take no ----------------------------- part in the management, policy or control of the Partnership and shall have no power or authority to undertake any activities on behalf of the Partnership or to sign for or to bind the Partnership. Any Retired Partner shall be bound by the terms of this Agreement and by all action taken by the General Partners or the Limited Partners. No Retired Partner, or trust for the benefit of a Retired Partner or the children of a Retired Partner, shall participate in any consent of the Limited Partners for any purpose hereunder. ARTICLE XVI - LIMITATION ON TRANSFER OF --------------------------------------- INTEREST OF THE GENERAL PARTNER. ------------------------------- The General Partner may transfer its entire interest to a successor General Partner which is an Affiliate of the General Partner, provided, -------- further, that any such transfer shall be made only if it results in no - ------- material adverse tax consequences to the Partnership, its Partners or the Funds or their partners. The General Partner shall not otherwise assign, pledge, mortgage, hypothecate, sell or otherwise dispose of or encumber all or any part of its general partnership interest. Any attempted transfer of the General Partner's interest in violation of this Article XVI shall be void. ARTICLE XVII - INDEMNIFICATION. ------------------------------ 17.1 GENERAL PROVISIONS. The General Partner, each Limited Partner ------------------ and Retired Partner and each officer, director, employee and agent of the General Partner (each an "Indemnified Party" and collectively, the "Indemnified Parties") shall be indemnified by the Partnership (only out of Partnership assets, including the proceeds of liability insurance) against any claim, demand, controversy, dispute, cost, loss, damage, expense (including reasonable attorneys' fees), judgment and/or liability incurred by or imposed upon such Indemnified Party in connection with any action, suit or proceeding (including any proceeding before any administrative or legislative body or agency), to which such Indemnified Party may be made a party or otherwise involved or with which such Indemnified Party shall be threatened, by reason of such Indemnified Party's being at the time the cause of action arose or thereafter, the General Partner (including without limitation the General Partner acting as Tax Matters Partner) or a current or former director, officer, - 20 - 26 employee or agent of the General Partner (provided, with respect to any Indemnified Party other than the General Partner, that in such capacity such Indemnified Party was performing services on behalf of the Partnership or the Fund), a Limited Partner performing services for the Partnership at the request of the General Partner, or a director, officer, partner or employee of any other organization in which the Partnership or the Fund owns an interest (or has owned an interest at any time during the full calendar year preceding the date on which the acts or omissions giving rise to such Indemnified Party's claim for indemnity hereunder first occurred) or of which the Partnership or the Fund is a creditor (to the extent such Indemnified Party has not been indemnified by such other organization), which other organization such Indemnified Party serves or has served as director, officer, partner or employee at the request of the Partnership or the Fund (whether or not such Indemnified Party continues to be a director, officer, employee or agent of the General Partner or an officer, director, partner or employee of such other organization at the time such action, suit or proceeding is brought or threatened), except with respect to matters as to which such Indemnified Party shall have been finally adjudicated in any such action, suit or proceeding not to have acted in good faith or to have acted with gross negligence or a willful disregard of such Indemnified Party's duties, or in breach of such Indemnified Party's fiduciary obligations, or, with respect to any criminal action or proceeding, to have had reasonable cause to believe such Indemnified Party's conduct was unlawful. In the event of settlement of any action, suit or proceeding brought or threatened, such indemnification shall apply to all matters covered by the settlement except for matters as to which the Partnership is advised by independent counsel (who may be counsel to the Partnership) that the Person seeking indemnification, in the opinion of counsel, did not act in good faith or acted with gross negligence or a willful disregard of such Person's duties, or in breach of such Person's fiduciary obligations, or, with respect to any criminal action or proceeding, that the Person seeking indemnification had reasonable cause to believe such Person's conduct was unlawful. The foregoing right of indemnification shall be in addition to any rights to which an Indemnified Party may otherwise be entitled and shall inure to the benefit of the executors, administrators, personal representatives, successors or assigns of each such Indemnified Party. Notwithstanding the foregoing, no payments shall be made with respect to a claim for indemnification hereunder unless the Indemnified Party has made reasonable efforts to reduce the amount of an indemnified loss by seeking contribution from other sources. 17.2 ADVANCE PAYMENT OF EXPENSES. The Partnership shall pay the --------------------------- expenses incurred by an Indemnified Party in defending a civil or criminal action, suit or proceeding, or in opposing any claim arising in connection with any potential or threatened civil or criminal action, suit or proceeding, in - 21 - 27 advance of the final disposition of such action, suit or proceeding, provided that the Indemnified Party provides a legally enforceable undertaking to repay such payment if such Indemnified Party shall be determined not to be entitled thereto as provided herein. 17.3 INSURANCE. The General Partner, on behalf of the Partnership, --------- may cause the Partnership to purchase and maintain insurance, at the expense of the Partnership and to the extent available, for the protection of any Indemnified Party against any liability incurred by such Person, whether or not the Partnership has the power to indemnify such Person against such liability. 17.4 LIMITATION OR EXPANSION BY LAW. If the General Partner or the ------------------------------ Partnership is subject to any federal or state law, rule or regulation which restricts the extent to which any Person may be exonerated or indemnified by the Partnership, then the indemnification provisions set forth in this Article XVII and the exoneration provisions set forth in Section 3.5 shall be deemed to be amended, automatically and without further action by the General Partner or the Limited Partners, to conform to such restrictions on exoneration or indemnification as set forth in such applicable federal or state law, rule or regulation. If any law, statute, rule or regulation of any jurisdiction by which the Partnership may be governed is amended in the future to enlarge the scope of indemnification or eliminate or reduce the liability of any Indemnified Party, then this Article XVII and Section 3.5 may be amended and modified at the sole discretion of the General Partner without any further action by the Limited Partners to broaden correspondingly the exoneration or indemnification provided hereunder. The rights to indemnification and advance payment of expenses conferred by this Article XVII shall not be exclusive of any other right which any Indemnified Party may have or hereafter acquire under any law, statute, rule, regulation, charter document, by-law, contract or agreement. ARTICLE XVIII - ACCOUNTING, RECORDS AND REPORTS. ----------------------------------------------- 18.1 FISCAL YEAR. The fiscal year of the Partnership shall be the ----------- period ending on December 31. 18.2 KEEPING OF ACCOUNTS AND RECORDS. At all times the General ------------------------------- Partner shall cause to be kept proper and complete books of account, in which shall be entered fully and accurately the transactions of the Partnership. Such books of account (which shall be kept on the accrual method of accounting), together with (a) an executed copy of this Agreement (and any amendments hereto), (b) the Certificate of Limited Partnership of the Partnership (and any amendments thereto); (c) executed copies of any powers of attorney pursuant to which any certificate has been executed by the Partnership; (d) a current list of the full name, taxpayer identification number and last known address of each - 22 - 28 Partner set forth in alphabetical order; (e) copies of all federal, state and local tax returns, if any, filed by the Partnership for each of the prior three years; and (f) all financial statements of the Partnership for each of the prior three years, shall at all times be maintained at the principal office of the Partnership and shall be open to inspection by the Partners or their duly authorized representatives. 18.3 INSPECTION RIGHTS. At any time while the Partnership continues ----------------- and until its complete liquidation (but only during reasonable business hours), each Limited Partner and Retired Partner (or the designee thereof) may fully examine and audit the Partnership's books, records, accounts and assets, including bank balances, and may make, or cause to be made, any examination or audit at such Partner's expense. Each Limited Partner and Retired Partner (or the designee thereof) may, during normal business hours, examine, or request that the General Partner furnish, such additional information as is reasonably necessary to enable the requesting Partner (or the designee thereof) to review the state of the affairs of the Partnership. Notwithstanding the foregoing, the management of the affairs of the Partnership shall be in the complete control of the General Partner and the General Partner shall have the benefit of the confidential information provisions of Section 17-305(b) of the Delaware Act, and provided, further, -------- ------- that no Limited Partner shall be entitled to inspect any matter which the General Partner considers confidential concerning another Limited Partner, including but not limited to the supplements referred to on Schedule A. 18.4 ANNUAL FINANCIAL STATEMENTS. The General Partner shall transmit --------------------------- to each Partner, as soon as practicable and in any event within one hundred and twenty (120) days after the close of each fiscal year, the financial statements of the Partnership for such fiscal year. Such financial statements shall include balance sheets of the Partnership as of the end of such fiscal year and of the preceding fiscal year, statements of income and loss of the Partnership for such fiscal year and for the preceding fiscal year, all prepared in accordance with tax accounting principles consistently applied in accordance with the terms of this Agreement. A separate schedule of changes in each particular Partner's Capital Account shall also be provided to each such Partner. The General Partner shall also transmit to each Partner, as soon as practicable after the close of each fiscal year and in any event by April 15, such Partner's Schedule K-1 (Form 1065) or an equivalent report indicating such Partner's share of all items of income or gain, expense, loss or other deduction and tax credit of the Partnership for such year for federal income tax purposes, as well as the status of his Capital Account as of the end of such year, and such additional information as he reasonably may request to enable him to complete his tax returns or to fulfill any other reporting requirements. - 23 - 29 18.5 ACCOUNTING METHOD. The Partnership may use the the accrual ----------------- method of accounting (or, subject to Section 448 of the Code, the cash method of accounting) for federal income tax purposes. ARTICLE XIX - WAIVER AND AMENDMENT. ---------------------------------- Except as otherwise provided in this Agreement, the terms and provisions of this Agreement may be waived, modified or amended only with the written consent of the General Partner and of at Limited Partners holding at least fifty-one percent (51%) of the Percentage Interests held by all Limited Partners. No amendment shall, however, (a) enlarge the obligations of any Partner under this Agreement without the written consent of such Partner, (b) dilute the relative interest of any Partner in the profits or capital of the Partnership or in Partnership allocations and distributions attributable to the interest owned by such Partner without the written consent of such Partner (except such dilution as may result from additional Subscriptions from the Partners or the admission of additional Limited Partners in accordance with the terms hereof), or (c) alter or waive the terms of this Article XIX without the consent of any Partner who would be adversely affected thereby. The General Partner shall promptly furnish copies of any amendments to this Agreement to all Partners. ARTICLE XX - GENERAL PROVISIONS. ------------------------------- 20.1 NOTICES. Except where otherwise specifically provided in this ------- Agreement, all notices, requests, consents, approvals and statements shall be in writing and shall be deemed to have been properly given by personal delivery or if mailed from within the United States by first class U.S. mail, postage prepaid, or if sent by prepaid courier service, prepaid telegram, telex or electronic facsimile transmission, addressed in each case, if to the Partnership, at CityPlace II, 185 Asylum Street, Hartford, Connecticut 06103-4105, fax number (203) 520-1299, and if to any Partner, to the address of such Partner as set forth in Schedule A or in the instrument pursuant to ---------- which it became a Partner or, in each case, to such other address or addresses as the addressee may have specified by written notice as aforesaid to the other parties. 20.2 POWER OF ATTORNEY. ----------------- (a) Each of the Partners hereby constitutes and appoints the General Partner as its true and lawful attorney-in-fact, in its name, place and stead to make, execute, sign, acknowledge and file (1) a Certificate of Limited Partnership under the laws of the State of Delaware or any other jurisdiction, any amendment or restatement to any such Certificate of Limited Partnership and any other document, - 24 - 30 instrument or certificate which may from time to time be required by law to effectuate, implement and continue the valid and subsisting existence of the Partnership, or any other instrument, certificate or document required from time to time to admit a Partner, to effect its substitution as a Partner, to effect the substitution of the Partner's assignee as a Partner, or to reflect any action of the Partners provided for in this Agreement; and (2) any other instrument, certificate or document as may be required or appropriate under the laws, regulations or procedures of the United States, any state or any governmental entity in any jurisdiction in which the Partnership is conducting or intends to conduct its activities, provided all such instruments, certificates and other documents referred to in clauses (1) and (2) above are in accordance with the terms of this Agreement as then in effect. Copies of all such instruments, certificates and other documents shall be sent to all Partners. (b) Each of the Partners is aware that the terms of this Agreement permit certain amendments to the Certificate of Limited Partnership and this Agreement to be effected and certain other actions to be taken by or with respect to the Partnership, in each case with the approval or by the vote of less than all the Partners. If, as and when (1) an amendment of the Certificate of Limited Partnership or this Agreement is proposed or an action is proposed to be taken by or with respect to the Partnership which does not require, under the terms of this Agreement, the approval of all of the Partners, (2) Partners holding the interest in the Partnership specified in this Agreement as being required for such amendment or action have approved such amendment or action in the manner contemplated by this Agreement and (3) a Partner has failed or refused to approve such amendment or action (hereinafter referred to as a non-consenting Partner), each non-consenting Partner agrees that the special attorney specified above, with full power of substitution, is hereby authorized and empowered to execute, acknowledge, make, swear to, verify, deliver, record, file and/or publish, for and on behalf of such non-consenting Partner, and in its name, place and stead, any and all instruments and documents which may be necessary or appropriate to permit such amendment to be lawfully made or action lawfully taken. Each Partner is fully aware that it and each other Partner has executed this special power of attorney, and that each Partner will rely on the effectiveness of such powers with a view to the orderly administration of the Partnership's affairs. (c) The foregoing grant of authority (1) is a special power of attorney coupled with an interest in favor of the General Partner and as such shall be irrevocable and shall survive the death or disability of a Partner that is a natural person and the merger, dissolution or other termination of the existence of a Partner that is a corporation, association, partnership or trust, and (2) shall survive the assignment by the - 25 - 31 Partner of the whole or any portion of its interest, except that where the assignee of the whole thereof has furnished a power of attorney, this power of attorney shall survive such assignment for the sole purpose of enabling the General Partner to execute, acknowledge and file any instrument necessary to effect any permitted substitution of the assignee for the assignor as a Partner and shall thereafter terminate. (d) The General Partner shall require a similar power of attorney to be executed by a transferee of a Partner as a condition of its admission as a substituted Partner. 20.3 WAIVER OF PARTITION. Each Partner hereby irrevocably waives any ------------------- and all rights that it may have to maintain an action for partition of any of the Partnership's property. 20.4 ADDITIONAL DOCUMENTS. Each Partner hereby agrees to execute all -------------------- certificates, counterparts, amendments, instruments or documents that may be required by laws of the various states or other jurisdictions in which the Partnership conducts its activities, to conform with the laws of such states or other jurisdictions governing limited partnerships. 20.5 BINDING ON SUCCESSORS. This Agreement shall be binding upon and --------------------- it shall inure to the benefit of the respective heirs, successors, assigns and legal representatives of the parties hereto. 20.6 COUNTERPARTS. This Agreement or any amendment hereto may be ------------ signed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one agreement (or amendment, as the case may be). 20.7 VOTING. Any vote or other action required or permitted to be ------ taken by this Agreement may be taken by written consent signed by not less than the requisite number of parties required or permitted to take such vote or other action. 20.8 GOVERNING LAW. This Agreement shall be governed by and construed ------------- in accordance with the internal laws of the State of Delaware. 20.9 SECURITIES ACT MATTERS. Each Partner understands that in ---------------------- addition to the restrictions on transfer contained in this Agreement, it must bear the economic risks of its investment for an indefinite period because the Partnership interests have not been registered under the Securities Act and, therefore, may not be sold or otherwise transferred unless they are registered under the Securities Act or an exemption from such registration is available. Each Partner agrees with all other Partners that it will not sell or otherwise transfer its interest in the Partnership unless such interest has been so registered or in the - 26 - 32 opinion of counsel for the Partnership, or of other counsel reasonably satisfactory to the Partnership, such an exemption is available. 20.10 AUTHORITY OF GENERAL PARTNER. No Person dealing with the ---------------------------- General Partner shall be required to determine its authority to make any commitment or undertaking on behalf of the Partnership or to determine any fact or circumstance bearing upon the existence of its authority and, notwithstanding anything to the contrary contained herein, the acts of the General Partner in carrying on the activities of the Partnership as authorized herein shall bind the Partnership. 20.11 CONTRACT CONSTRUCTION. Whenever the content of this Agreement --------------------- permits, the masculine gender shall include the feminine and neuter genders, and reference to singular or plural shall be interchangeable with the other. The invalidity or unenforceability of any one or more provisions of this Agreement shall not affect the other provisions, and the Agreement shall be construed in all respects as if any such invalid or unenforceable provision(s) were omitted. References in this Agreement to particular sections of the Code or the Delaware Act shall be deemed to refer to such sections as they may be amended after the date of this Agreement. 20.12 SECTION HEADINGS. Captions in this Agreement are for convenience ---------------- only and do not define or limit any term of this Agreement. [Remainder of this page intentionally left blank.] - 27 - 33 IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated Limited Partnership Agreement as of the day, month and year first above written. GENERAL PARTNER: CONNING & COMPANY By: /s/ John B. Clinton ----------------------------- Title: Senior Vice President LIMITED PARTNERS: /s/ James T. Bagley -------------------------------- James T. Bagley /s/ Thomas A. Byrne -------------------------------- Thomas A. Byrne /s/ Stephan L. Christiansen -------------------------------- Stephan L. Christiansen /s/ John B. Clinton -------------------------------- John B. Clinton /s/ John A. Corroon, Jr. -------------------------------- John A. Corroon, Jr. /s/ Walter M. Fiederowicz -------------------------------- Walter M. Fiederowicz /s/ Mark E. Hansen -------------------------------- Mark E. Hansen /s/ Donald L. McDonald -------------------------------- Donald L. McDonald - 28 - 34 /s/ Gordon G. Pratt -------------------------------- Gordon G. Pratt /s/ Gary K. Ransom -------------------------------- Gary K. Ransom /s/ David N. Reid -------------------------------- David N. Reid /s/ Harold Sandstrom -------------------------------- Harold Sandstrom /s/ Joseph D. Sargent -------------------------------- Joseph D. Sargent /s/ Thomas D. Sargent -------------------------------- Thomas D. Sargent /s/ Fred M. Schpero -------------------------------- Fred M. Schpero /s/ William C. Shenton -------------------------------- William C. Shenton /s/ Maurice W. Slayton -------------------------------- Maurice W. Slayton /s/ Gerard Vecchio -------------------------------- Gerard Vecchio * * * Schedule for the general partner and for each limited partner, listing the name, address, total subscription amount and percentage interest of such general or limited partner. - 29 - 35 Schedule B ----------
Period After Receipt of Portion of Percentage Interest Category A - Category B - During Which If Withdrawal is Due to If Withdrawal is Retired Partner Death or Disability - For Any Other Reason - is Deemed to Have Portion of Percentage Portion of Percentage Withdrawn. Interest Retained Interested Retained - -------------------- ----------------------- ---------------------- Before three years 0% 0% On or after three years and before four years 30% 15% On or after four years an additional an additional and before five years 30% 15% On or after five years an additional an additional and before six years 30% 15% On or after six years an additional and before seven years 100% 15% On or after seven years 100% 100% To the extent a Retired Partner received portions of his or her Percentage Interest on more than one date, such percentages retained above shall be separately applied to each portion based on its date of receipt, to produce a total retained Percentage Interest. In any event, and notwithstanding the foregoing schedules, Percentage Interests shall be 100% vested on December 28, 2003.
- 33 - 36 Schedule C ----------
General Partner's Percentage Allocation Period Allocation Date Interest Reduced To: - ----------------- --------------- ---------------------------- Inception By April 30, 1994 88% First Year By January 31, 1995 76% Second Year By January 31, 1996 64% Third Year By January 31, 1997 52% Fourth Year By January 31, 1998 40%
- 34 - 37 APPENDIX A ---------- TABLE OF DEFINITIONS -------------------- "AFFILIATE" shall mean, with respect to the Person to which it refers, --------- a Person that directly or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such subject Person; provided, however, that all partners of the Partnership and all -------- ------- officers, directors and employees of the General Partner shall be deemed to be Affiliates of the Partnership. "CAPITAL ACCOUNT" shall have the meaning set forth in Section 7.1. --------------- "CODE" shall mean the Internal Revenue Code of 1986 and the rules and ---- regulations promulgated thereunder, as amended from time to time. "COST" shall mean, with respect to Partnership assets and unless the ---- context otherwise requires, the Partnership's adjusted tax basis of such assets for federal income tax purposes, provided that (i) if the Partnership has made an election under Section 754 of the Code, such tax basis shall be determined after giving effect to adjustments made under Section 734 of the Code but without regard to adjustments made under Section 743 of the Code; and (ii) the Cost of any securities or other property received by the Partnership in distributions made by the Fund shall be deemed to equal the fair market value of such property, as determined pursuant to the Fund Partnership Agreement, as of the date such property is distributed by the Fund. "DELAWARE ACT" shall mean the Delaware Revised Uniform Limited ------------ Partnership Act, as amended from time to time. "DOMESTIC FUND" shall mean Conning Insurance Capital Limited ------------- Partnership III, a Delaware limited partnership. "FUND(S)" shall mean either or both of the Domestic Funds and the ------- Offshore Fund. "FUND PARTNERSHIP AGREEMENT(S)" shall mean one or more of the limited ----------------------------- partnership agreements of the Domestic Fund and the Offshore Fund. "GENERAL PARTNER" shall mean Conning & Company, a Connecticut --------------- corporation, that serves as the sole general partner of the Partnership, and any successor or thereto pursuant to the provisions of Article XVI. "INDEMNIFIED PARTIES" shall have the meaning set forth in Section 17.1. ------------------- -i- 38 "ISSUANCE ITEMS" shall have the meaning set forth in Section 8.6(b). -------------- "LIMITED PARTNERS" shall mean those Persons listed in Schedule A hereto ---------------- ---------- as limited partners, together with any additional or substituted limited partners admitted to the Partnership after the date hereof. Whether a majority in interest (or any other specified percentage in interest) consents to any action permitted or required of the Limited Partners under this Agreement shall be determined as provided in Section 20.7. "LIQUIDATING DISTRIBUTION" shall mean any distribution made by the ------------------------ Partnership after the latest to occur of (a) the Partnership's dissolution, determined pursuant to Article XIII, and (b) the date on which the Partnership has received its final distribution from the Fund. "NET GAIN OR LOSS" shall mean, with respect to any fiscal period, the ---------------- sum of (a) all amounts allocated for such fiscal period to the Partnership pursuant to the Fund Partnership Agreement to the Partnership in its capacity as the general partner of the Fund, (b) net gain or loss from the sale or exchange of the Partnership's capital assets during such fiscal period, (c) gain or loss deemed to have been realized by the Partnership, pursuant to Section 7.2, on a distribution in kind of its assets during such fiscal period, and (d) other items of income, gain, loss, deduction and expense of the Partnership for such fiscal period that are not included in (a), (b) or (c), including any income which is exempt from federal income tax, all Partnership losses and all expenses properly chargeable to the Partnership, whether deductible or non-deductible and whether described in Section 705(a)(2)(B) of the Code, treated as so described pursuant to Treasury Regulation Section 1.704-l(b)(2)(iv)(i), or otherwise except for Issuance ------ --- Items. Net Gain or Loss shall be determined in accordance with tax accounting principles rather than generally accepted accounting principles. "OFFSHORE FUND" shall mean Conning Insurance Capital International ------------- Partners III, a Cayman Islands limited partnership. "PARTNERS" shall mean the General Partner and the Limited Partners. -------- "PARTNERSHIP" shall mean Conning Investment Partners Limited ----------- Partnership III. "PERSON" shall mean any individual, partnership, corporation, trust or ------ other entity. "PERCENTAGE INTEREST" shall mean, with respect to any Partner and at ------------------- any time, the amount set forth at such time opposite such Partner's name in Schedule A under the heading "Percentage Interest." - ---------- -ii- 39 "RESTORATION AMOUNT" shall mean, with respect to any Partner and at any ------------------ time, (a) any amount of such Partner's Subscription that such Partner has not contributed in cash to the Partnership as of such time; and (b) in the case of the General Partner only, any amounts the General Partner is required to restore to the Funds pursuant to Section 12.6. "RETIRED PARTNER" shall have the meaning set forth in Section 15.1. --------------- "SECURITIES ACT" shall mean the Securities Act of 1933, as amended from -------------- time to time. "SHORT-TERM INCOME" shall mean interest and dividend income earned on ----------------- temporary investment of capital contributions or distributions received from the Fund(s) which are held by the Partnership pending investment in the Fund(s), disbursement for expenses or distribution to the Partners. "SUBSCRIPTION" shall mean, with respect to any Partner, the total ------------ amount which such Partner has agreed to contribute to the Partnership as reflected on Schedule A hereto. ---------- "TAX MATTERS PARTNER" shall have the meaning set forth in Section 3.7. ------------------- "TRANSFER" shall mean any transfer, sale, assignment, gift, pledge, -------- hypothecation or other disposition of an interest in the Partnership. 40 CONNING INVESTMENT PARTNERS LIMITED PARTNERSHIP III AMENDMENT NO. 1 TO THE AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT AGREEMENT OF AMENDMENT, dated as of the 18th day of March, 1994, by and among Conning & Company, the undersigned general partner (the "General Partner"), and the undersigned limited partners, together with any other persons or entities subsequently admitted as limited partners (the "Limited Partners"). The General Partner and the Limited Partners are referred to collectively as the "Partners." WHEREAS, by executing the limited partnership agreement of Conning Investment Partners Limited Partnership III, a Delaware limited partnership (the "Partnership") dated as of December 28, 1993, (the "Initial Partnership Agreement"), the Partners formed the Partnership pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act; WHEREAS, the Partners caused the Initial Partnership Agreement to be amended and restated in its entirety by adopting the Amended and Restated Limited Partnership Agreement of the Partnership dated March 18, 1994 (the "Restated Agreement"); and WHEREAS, the Partners desire to amend the Restated Agreement in the manner set forth below; NOW THEREFORE, in consideration of the premises and the agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Section 15.2(b) of the Restated Agreement is hereby deleted in its entirety and replaced with the following new Sections 15.2(b), 15.2(c) and 15.2(d). "(b) If any Partner withdraws, or is deemed to have withdrawn, from the Partnership at any time before any part of such Partner's Percentage Interest has vested, the Partnership may, but shall not be obligated to, elect to purchase such Partner's interest in the Partnership for an amount equal to the balance in such Partner's Capital Account at the time of such withdrawal. Any such election shall be made by delivery of written notice to that effect signed by the General Partner and delivered to the withdrawing Partner within 120 days after the date of such Partner's withdrawal. If the Partnership elects to purchase the withdrawing Partner's interest in the Partnership, payment to the withdrawing Partner for such Partner's interest shall be made, in cash, within 180 days after the date of such withdrawal." 41 - 2 - "(c) After the withdrawal or deemed withdrawal of any Partner before any part of such Partner's Percentage Interest has vested, if the Partnership does not elect to purchase such former Partner's interest in the Partnership as provided in Section 15.2(b): (1) the balance in such former Partner's Capital Account shall be frozen at an amount equal to the balance in such account as of the date of such former Partner's withdrawal or deemed withdrawal; (2) such former Partner shall receive no allocations from the Partnership for any fiscal period after that withdrawal date; and (3) such former Partner shall receive no distributions from the Partnership other than such former Partner's proportionate share, based on the relative Capital Account balances of such former Partner, the General Partner, the Limited Partners and any Retired Partners (determined at the time of distribution), of each distribution made pursuant to Section 12.2 to all Partners in proportion to the positive balances in their respective Capital Accounts." "(d) Notwithstanding any other provision of this Agreement, no Partner who has withdrawn or is deemed to have withdrawn from the Partnership before any part of such Partner's Percentage Interest has vested shall be entitled, after the date of such withdrawal, to inspect the Partnership's books or records or to receive any reports or other information from the Partnership except such former Partner's Schedule K-1 to the Partnership's Internal Revenue Service Form 1065 and any equivalent state tax schedules or forms required to enable such former Partner to complete his or her tax returns for any fiscal period during which such former Partner is treated as a partner of the Partnership for tax purposes. Any such former Partner hereby agrees that he or she shall continue to be treated as a partner of the Partnership, solely for tax purposes, until either (1) such former Partner has received the payment for his or her interest in the Partnership provided for under Section 15.2(b) (if the Partnership has elected to purchase such former Partner's interest in the Partnership pursuant to Section 15.2(b)) or (2) such former Partner has received liquidating distributions from the Partnership in aggregate amounts equal to the positive balance in such former Partner's Capital Account (if the Partnership has not so elected)." 2. Section 8.7 of the Restated Agreement is hereby amended by deleting the word "quarter" in the two instances in which it appears, and replacing that word with the word "year". 3. Section 14.2 of the Restated Agreement is hereby amended by deleting the reference therein to "Section 17-402(4) or (6)" and replacing that reference with "Section 17-402(a)(4) or (6)". 42 - 3 - 4. Section 15.1 of the Restated Agreement is hereby amended (a) by adding, at the beginning of the first sentence thereof, the phrase "Subject to Section 15.2"; and (b) by deleting, from the last sentence thereof, the phrase "set forth above" and replacing that phrase with the phrase "set forth in Schedule B". ---------- 5. This Agreement of Amendment may be signed in counterparts, each of which shall constitute an original, but all of which taken together shall constitute one Agreement of Amendment. 6. The amendments set forth in the preceding sections of this Agreement of Amendment shall be effective as of March 18, 1994. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 43 - 4 - IN WITNESS WHEREOF, the undersigned have executed this Agreement of Amendment as of the day and year first above written. GENERAL PARTNER: CONNING & COMPANY By: /s/ John B. Clinton ----------------------------- Title: Sr. Vice President LIMITED PARTNERS: /s/ James T. Bagley -------------------------------- James T. Bagley /s/ Thomas A. Byrne -------------------------------- Thomas A. Byrne /s/ Stephan L. Christiansen -------------------------------- Stephan L. Christiansen /s/ John B. Clinton -------------------------------- John B. Clinton /s/ John A. Corroon, Jr. -------------------------------- John A. Corroon, Jr. /s/ Walter M. Fiederowicz -------------------------------- Walter M. Fiederowicz /s/ Mark E. Hansen -------------------------------- Mark E. Hansen /s/ Donald L. McDonald -------------------------------- Donald L. McDonald /s/ Gordon G. Pratt -------------------------------- Gordon G. Pratt 44 - 5 - LIMITED PARTNERS /s/ Gary K. Ransom -------------------------------- Gary K. Ransom /s/ David N. Reid -------------------------------- David N. Reid /s/ Harold Sandstrom -------------------------------- Harold Sandstrom /s/ Joseph D. Sargent -------------------------------- Joseph D. Sargent /s/ Thomas D. Sargent -------------------------------- Thomas D. Sargent /s/ Fred M. Schpero -------------------------------- Fred M. Schpero /s/ William C. Shenton -------------------------------- William C. Shenton /s/ M. W. Slayton -------------------------------- Maurice W. Slayton /s/ Gerard Vecchio -------------------------------- Gerard Vecchio 45 CONNING INVESTMENT PARTNERS LIMITED PARTNERSHIP III AMENDMENT NO. 2 TO THE AMENDED AND RESTATED LIMITED PARRTNERSHIP AGREEMENT WHEREAS, Paul S. Goulekas ("Goulekas") and Steven F. Piaker ("Piaker") desire to be admitted as limited partners to the Conning Investment Partners Limited Partnership III Amended and Restated as of March 18, 1994 and as subsequently amended through but not including the date hereof (the "Partnership"); WHEREAS, Conning & Company, the undersigned general partner (the "General Partner") desires to have Goulekas and Piaker be admitted as limited partners to the Partnership; WHEREAS, the General Partner desires, in accordance with Section 4.1 of the Amended and Restated Limited Partnership Agreement of the Partnership dated March 18, 1994 and as subsequently amended through but not including the date hereof (the "Restated Agreement"), to reduce the General Partner's Percentage Interest and increase the Percentage Interests of certain of the Limited Partners; NOW THEREFORE, in consideration of the premises and the agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Goulekas and Piaker agree to be admitted as limited partners to the Partnership, subject to the terms and conditions of the Restated Agreement, and each of them agrees to contribute to the Partnership his subscription amount as set forth in Schedule A to the Restated Agreement. 2. Schedule A to the Restated Agreement is hereby amended by deleting it in its entirety and replacing it with the attached Schedule A. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 46 IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 2 to the Restated Agreement as of the 17th of April, 1995. GENERAL PARTNER: CONNING & COMPANY By: /s/ Fred M. Schpero ----------------------------- Title: Vice President, Secretary and CFO LIMITED PARTNERS: /s/ Paul S. Goulekas -------------------------------- Paul S. Goulekas /s/ Steven F. Piaker -------------------------------- Steven F. Piaker * * * Schedule for the general partner and for each limited partner, listing the name, address, total subscription amount and percentage interest of such general or limited partner. 47 CONNING INVESTMENT PARTNERS LIMITED PARTNERSHIP III AMENDMENT NO. 3 TO THE AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT WHEREAS, Frank D. Campbell ("Campbell"), Scott E. Daniels ("Daniels"), Claude A. Fongemie ("Fongemie"), Seth C. Miller ("Miller"), Allen A. Mossein ("Mossein"), Stephen R. Pivacek ("Pivacek"), William E. Rotatori ("Rotatori") and Paul J. Sellier ("Sellier") desire to be admitted as limited partners to the Conning Investment Partners Limited Partnership III Amended and Restated as of March 18, 1994 and as subsequently amended through but not including the date hereof (the "Partnership"); WHEREAS, Conning & Company, the undersigned general partner (the "General Partner") desires to have Campbell, Daniels, Fongemie, Miller, Mossein, Pivacek, Rotatori and Sellier be admitted as limited partners to the Partnership; WHEREAS, the General Partner desires, in accordance with Section 4.1 of the Amended and Restated Limited Partnership Agreement of the Partnership dated March 18, 1994 and as subsequently amended through but not including the date hereof (the "Restated Agreement"), to reduce the General Partner's Percentage Interest and increase the Percentage Interests of certain of the Limited Partners; NOW THEREFORE, in consideration of the premises and the agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Campbell, Daniels, Fongemie, Miller, Mossein, Pivacek, Rotatori and Sellier agree to be admitted as limited partners to the Partnership, subject to the terms and conditions of the Restated Agreement, and each of them agrees to contribute to the Partnership his subscription amount as set forth in Schedule A to the Restated Agreement. 2. Schedule A to the Restated Agreement is hereby amended by deleting it in its entirety and replacing it with the attached Schedule A. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 48 IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 3 to the Restated Agreement as of the 15th of December, 1995. GENERAL PARTNER: CONNING & COMPANY By: /s/ Fred M. Schpero ------------------------------ Title: Vice President, Secretary & Chief Financial Officer LIMITED PARTNERS: /s/ Frank D. Campbell --------------------------------- Frank D. Campbell /s/ Scott Daniels --------------------------------- Scott E. Daniels /s/ Claude A. Fongemie --------------------------------- Claude A. Fongemie /s/ Seth C. Miller --------------------------------- Seth C. Miller /s/ Allen A. Mossein --------------------------------- Allen A. Mossein /s/ Stephen R. Pivacek --------------------------------- Stephen R. Pivacek /s/ William E. Rotatori --------------------------------- William E. Rotatori /s/ Paul J. Sellier --------------------------------- Paul J. Sellier * * * Schedule for the general partner and for each limited partner, listing the name, address, total subscription amount and percentage interest of such general or limited partner. 49 CONNING INVESTMENT PARTNERS LIMITED PARTNERSHIP III AMENDMENT NO. 4 TO THE AMENDED AND RESTATED LIMITED PARRTNERSHIP AGREEMENT WHEREAS, Sabra R. Brinkmann ("Brinkmann"), Douglas R. Koester ("Koester"), Daniel J. Mainolfi ("Mainolfi"), Michael D. McLellan ("McLellan"), Leonard M. Rubenstein ("Rubenstein") and J. Terri Tanaka ("Tankaka") desire to be admitted as limited parners to the Conning Investment Partners Limited Partnership III Amended and Restated as of March 18, 1994 and as subsequently amended through but not including the date hereof (the "Partnership"); WHEREAS, Conning & Company, the undersigned general partner (the "General Partner") desires to have Brinkmann, Koester, Mainolfi, McLellan, Rubenstein and Tanaka be admitted as limited partners to the Partnership; WHEREAS, the General Partner desires, in accordance with Section 4.1 of the Amended and Restated Limited Patnership Agreement of the Partnership dated March 18, 1994 and as subsequently amended through but not including the date hereof (the "Restated Agreement"), to reduce the General Partner's Percentage Interest and increase the Percentage Interests of certain of the Limited Partners; NOW THEREFORE, in consideration of the premises and the agreements contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Brinkmann, Koester, Mainolfi, McLellan, Rubenstein and Tanaka agree to be admitted as limited partners to the Partnership, subject to the terms and conditions of the Restated Agreement, and each of them agrees to contribute to the Partnership his or her subscription amount as set forth in Schedule A to the Restated Agreement. 2. Schedule A to the Restated Agreement is hereby amended by deleting it in its entirety and replacing it with the attached Schedule A. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 50 IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 4 to the Restated Agreement as of the 18th of December, 1996. GENERAL PARTNER: CONNING & COMPANY By: /s/ M. W. Slayton ---------------------------------- Title: President LIMITED PARTNERS: /s/ Sabra R. Brinkmann ------------------------------------- Sabra R. Brinkmann /s/ D. Koester ------------------------------------- Douglas R. Koester /s/ Daniel J. Mainolfi ------------------------------------- Daniel J. Mainolfi /s/ Michael D. McLellan ------------------------------------- Michael D. McLellan /s/ Leonard M. Rubenstein ------------------------------------- Leonard M. Rubenstein /s/ J. Terri Tanaka ------------------------------------- J. Terri Tanaka EX-23.1 11 CONSENT OF EXPERT 1 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Shareholders Conning Corporation: We consent to the use of our reports included herein and to the references to our firm under the headings, "Selected Consolidated Financial Data" and "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP St. Louis, Missouri December 11, 1997 EX-23.2 12 CONSENT OF EXPERT 1 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated February 21, 1995, except for Note 12, as to which the date is September 19, 1997, relating to the financial statements of Conning, Inc. & Subsidiaries, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Price Waterhouse LLP Hartford, Connecticut December 11, 1997 -----END PRIVACY-ENHANCED MESSAGE-----