-----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, AyZAr/Auy3U9wmUTtXdQ1y06F+Dx6vCoNZCj4tLkURpbK/NgaFj9Do6ea8mqHRJE Hpm7bBSNpU8VpKc2IbBp/g== 0000950114-98-000429.txt : 19981116 0000950114-98-000429.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950114-98-000429 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-23183 FILM NUMBER: 98746020 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 10-Q 1 CONNING CORPORATION FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------- COMMISSION FILE NUMBER 0-023183 CONNING CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MISSOURI 43-1719355 (STATE OR OTHER JURISDICTION (IRS EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 700 MARKET STREET ST. LOUIS, MISSOURI 63101 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (314) 444-0498 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ------ COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF OCTOBER 30, 1998: 12,938,562 SHARES 2 CONNING CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I - FINANCIAL INFORMATION ------------------------------ 1 Financial Statements 1 Condensed Consolidated Balance Sheets (Unaudited) September 30, 1998 and December 31, 1997 1 Condensed Consolidated Statements of Income (Unaudited) Three month periods ended September 30, 1998 and September 30, 1997 2 Condensed Consolidated Statements of Income (Unaudited) Nine month periods ended September 30, 1998 and September 30, 1997 3 Condensed Consolidated Statements of Cash Flows (Unaudited) Nine month periods ended September 30, 1998 and September 30, 1997 4 Notes to Condensed Consolidated Financial Statements (Unaudited) 5-8 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 PART II - OTHER INFORMATION --------------------------- 1 Legal Proceedings 15 5 Other Information 15 6 Exhibits and Reports on Form 8-K 15 Signatures 16 Index to Exhibits 17
3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. CONNING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (Unaudited)
ASSETS 1998 1997 ------------ ----------- Current assets: Cash and cash equivalents $ 30,288,429 $43,085,406 Short-term investments 23,091,892 16,337,362 Accounts receivable, net 9,246,060 10,784,236 Marketable equity securities 251,390 600,662 Income taxes receivable -- 1,355,973 Prepaid expenses and other current assets 506,504 358,669 ------------ ----------- Total current assets 63,384,275 72,522,308 Non-marketable investments at value 3,926,859 2,349,678 Equipment and leasehold improvements, at cost, net of accumulated depreciation 1,416,332 1,525,436 Deferred income taxes 3,225,630 1,736,413 Goodwill 37,921,783 17,812,822 Other assets 2,734,950 3,910,696 ------------ ----------- Total assets $112,609,829 $99,857,353 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Compensation payable $ 9,616,515 $11,149,000 Deferred revenue 3,411,961 3,201,336 Due to affiliates 4,150,759 1,379,188 Income taxes payable 1,661,251 -- Accounts payable and other accrued expenses 14,951,082 6,566,742 ------------ ----------- Total current liabilities 33,791,568 22,296,266 Accrued rent liability 3,169,669 3,375,465 Other payables 360,000 480,000 ------------ ----------- Total liabilities 37,321,237 26,151,731 ------------ ----------- Common stock 132,558 132,500 Additional paid-in capital 73,157,845 73,126,002 Retained earnings 8,395,677 447,120 Treasury stock (6,397,488) -- ------------ ----------- Total shareholders' equity 75,288,592 73,705,622 ------------ ----------- Total liabilities and shareholders' equity $112,609,829 $99,857,353 ============ =========== See accompanying notes to interim condensed consolidated financial statements.
1 4 CONNING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited)
1998 1997 ----------- ----------- REVENUES: Asset management and related fees $16,207,425 $11,939,742 Research services 4,310,369 3,812,092 Other income 184,985 251,415 ----------- ----------- Total revenues 20,702,779 16,003,249 ----------- ----------- EXPENSES: Employee compensation and benefits 9,296,434 8,304,293 Occupancy and equipment costs 1,184,370 879,126 Marketing and production costs 1,908,063 1,273,688 Professional services 577,798 460,962 Amortization of goodwill and other 592,708 733,179 Other operating expenses 1,025,474 761,066 ----------- ----------- Total expenses 14,584,847 12,412,314 ----------- ----------- Operating income 6,117,932 3,590,935 Interest expense 62,827 68,999 ----------- ----------- Income before provision for income taxes 6,055,105 3,521,936 Provision for income taxes 2,557,692 1,197,415 ----------- ----------- Net income $ 3,497,413 $ 2,324,521 =========== =========== Preferred stock dividends -- 247,620 ----------- ----------- Net earnings available to common shareholders $ 3,497,413 $ 2,076,901 =========== =========== Weighted average diluted shares outstanding 13,912,815 11,086,929 Earnings per share: Basic $ 0.27 $ 0.30 Diluted $ 0.25 $ 0.21 See accompanying notes to interim condensed consolidated financial statements.
2 5 CONNING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited)
1998 1997 ----------- ----------- REVENUES: Asset management and related fees $46,242,381 $36,018,354 Research services 12,816,500 10,277,378 Other income 1,882,218 629,142 ----------- ----------- Total revenues 60,941,099 46,924,874 ----------- ----------- EXPENSES: Employee compensation and benefits 28,473,128 23,558,926 Occupancy and equipment costs 3,449,639 2,509,470 Marketing and production costs 5,277,236 3,998,660 Professional services 1,719,100 1,147,238 Amortization of goodwill and other 2,008,403 2,247,869 Other operating expenses 3,244,616 2,491,199 ----------- ----------- Total expenses 44,172,122 35,953,362 ----------- ----------- Operating income 16,768,977 10,971,512 Interest expense 193,218 232,760 ----------- ----------- Income before provision for income taxes 16,575,759 10,738,752 Provision for income taxes 7,049,700 4,316,334 ----------- ----------- Net income $ 9,526,059 $ 6,422,418 =========== =========== Preferred stock dividends -- 750,500 ----------- ----------- Net earnings available to common shareholders $ 9,526,059 $ 5,671,918 =========== =========== Weighted average diluted shares outstanding 14,124,559 11,094,110 Earnings per share: Basic $ 0.72 $ 0.83 Diluted $ 0.67 $ 0.58 See accompanying notes to interim condensed consolidated financial statements.
3 6 CONNING CORPORATION & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited)
1998 1997 ------------ ----------- OPERATING ACTIVITIES: Net income $ 9,526,059 $ 6,422,418 Adjustment for items not affecting cash: Depreciation 545,498 674,186 Amortization of goodwill and other 2,008,403 1,953,115 Deferred income tax provision (1,489,217) 1,386,987 Net unrealized appreciation on non-marketable investments (527,869) -- Net change in securities held for market making 349,272 45,625 Accretion of discounts on short-term investments (733,052) (177,764) Changes in: Accounts receivable 1,538,176 (3,236,070) Prepaid expenses and other assets (89,453) (161,088) Accounts payable and other accrued expenses 8,264,340 2,113,379 Income taxes receivable 3,017,224 (1,842,858) Due to affiliates 2,771,571 (847,752) Deferred revenue 210,625 (29,077) Accrued rent liability (205,796) (205,988) Compensation payable (1,532,485) (1,354,734) ------------ ----------- Net cash provided by operating activities 23,653,296 4,740,379 ------------ ----------- INVESTING ACTIVITIES: Purchases of non-marketable partnership investments (1,144,245) (162,719) Distribution from non-marketable partnership investments 94,933 -- Purchases of equipment and other assets, net (436,394) (720,500) Purchases of short-term investments (65,450,785) (54,545,324) Maturities of short-term investments 59,429,307 51,895,168 Acquisition of Schroder Mortgage Associates (21,000,000) -- ------------ ----------- Net cash used in investing activities (28,507,184) (3,533,375) ------------ ----------- FINANCING ACTIVITIES: Repayment of long term debt -- (2,000,000) Issuance of Series B preferred stock -- 79,950 Conversion of Series B preferred stock -- 183,700 Issuance of common stock 31,901 -- Purchase of common stock for treasury (6,397,488) -- Dividends on common stock (1,577,502) -- Dividends on preferred stock -- (750,500) ------------ ----------- Net cash used in financing activities (7,943,089) (2,486,850) ------------ ----------- Net change in cash and cash equivalents (12,796,977) (1,279,846) Cash and cash equivalents, beginning of period 43,085,406 9,816,568 ------------ ----------- Cash and cash equivalents, end of period $ 30,288,429 $ 8,536,722 ------------ ----------- See accompanying notes to interim condensed consolidated financial statements.
4 7 CONNING CORPORATION & SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 -- BASIS OF PRESENTATION The accompanying unaudited, interim condensed consolidated financial statements of Conning Corporation and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position of the Company and its subsidiaries as of September 30, 1998 and their results of operations for the three and nine month periods ended September 30, 1998 and 1997 and their cash flows for the nine month periods ended September 30, 1998 and 1997. Operating results for the three and nine month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. These unaudited financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1997. NOTE 2 -- DIVIDENDS The Company has paid cash dividends of $0.12 per share on its common stock through September 30, 1998. During October, 1998 the Company declared a $0.04 per share quarterly cash dividend on the Company's common stock, payable on December 4, 1998 to shareholders of record on November 13, 1998. NOTE 3 -- MORTGAGE SERVICING OPERATIONS During January, 1998, the Company assumed certain mortgage servicing functions for its clients which include acting as an agent in the collection and processing of principal and interest loan payments and escrow items. As of September 30, 1998, the Company maintained approximately $11.9 million in escrow balances off-balance sheet as the amounts were not considered to be owned or operated by the Company. 5 8 NOTE 4 -- EARNINGS PER SHARE The following table represents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations: FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998:
Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- BASIC EPS: Net earnings available to common shareholders $3,497,413 13,036,554 $0.27 ---------- ===== EFFECT OF DILUTIVE SECURITIES: Stock options 876,261 ---------- DILUTED EPS: Net earnings available to common shareholders and assumed full conversions $3,497,413 13,912,815 $0.25 ========== ========== ===== FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1997: Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net income $2,324,521 Less: preferred stock dividends (247,620) ---------- BASIC EPS: Net earnings available to common shareholders 2,076,901 6,820,000 $0.30 ===== EFFECT OF DILUTIVE SECURITIES: Preferred stock dividends 247,620 ---------- Conversion of preferred stock 3,665,000 Stock options 601,929 ---------- DILUTED EPS: Net earnings available to common shareholders and assumed full conversions $2,324,521 11,086,929 $0.21 ========== ========== ===== 6 9 FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998: Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- BASIC EPS: Net earnings available to common shareholders $9,526,059 13,179,092 $0.72 ---------- ===== EFFECT OF DILUTIVE SECURITIES: Stock options 945,467 ---------- DILUTED EPS: Net earnings available to common shareholders and assumed full conversions $9,526,059 14,124,559 $0.67 ========== ========== ===== FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997: Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net income $6,422,418 Less: preferred stock dividends (750,500) ---------- BASIC EPS: Net earnings available to common shareholders 5,671,918 6,780,074 $0.83 ===== EFFECT OF DILUTIVE SECURITIES: Preferred stock dividends 750,500 ---------- Conversion of preferred stock 3,664,167 Stock options 649,869 ---------- DILUTED EPS: Net earnings available to common shareholders and assumed full conversions $6,422,418 11,094,110 $0.58 ========== ========== =====
NOTE 5 -- ACQUISITION OF SCHRODER MORTGAGE ASSOCIATES, LP On August 18, 1998, the Company completed the acquisition of the assets and operations of Schroder Mortgage Associates LP (SMA), a specialty asset manager providing mortgage products and servicing to institutional buyers of commercial mortgages and mortgage-back securities. The transaction was accounted for as a purchase and, accordingly, the revenues and operating results of SMA since the acquisition date are included in the consolidated statements of operations for the three and nine months ended September 30, 1998. The operations of SMA were not material to the consolidated financial results of the Company for the three and nine month periods ended September 30, 1998. 7 10 The purchase price consisted of an initial cash payment of approximately $21.0 million, including acquisition expenses, and may include additional contingent consideration payments of up to $4.0 million over the next three years, subject to meeting certain financial targets. The acquisition resulted in goodwill of approximately $21.0 million, which will be amortized over 20 years. The following unaudited pro forma financial information has been prepared assuming that the acquisition of SMA has occurred at the beginning of the periods presented after including the impact of certain adjustments including amortization of goodwill, loss of investment income from the use of working capital and the related income tax effects.
Nine Months Ended September 30, ------------------------- 1998 1997 ------- ------- Statement of income data: Revenues $63,428 $48,262 Expenses 45,674 37,371 ------- ------- Operating income 17,754 10,891 Interest expense 267 279 ------- ------- Earnings before income taxes 17,487 10,612 Provision for income taxes 7,446 4,515 ------- ------- Net income $10,041 $ 6,097 ======= ======= Earnings per share data: Basic $ 0.76 $ 0.79 Diluted $ 0.71 $ 0.55
NOTE 6 -- SUBSEQUENT EVENT On October 15, 1998, the Company announced it entered into a definitive agreement to acquire Noddings & Associates and Noddings Investment Group (collectively "Noddings"). The acquisition will be treated as a purchase, having an initial purchase price of $4.5 million, including acquisition expenses, and may include additional contingent consideration payments up to a maximum of approximately $27 million in the aggregate over the next three years, subject to meeting certain financial growth targets. The transaction is expected to close during the fourth quarter. 8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW - -------- Conning Corporation revenues consist of asset management and related fees, research services, and other income. The Company's asset management and related revenues are derived from three sources: asset management fees, private equity fund management fees, and fees related to the Company's mortgage and real estate activities. Asset management fees primarily reflect fees for discretionary asset management services provided to insurance company clients, including GenAmerica Corporation ("GenAmerica"), its subsidiaries and its affiliates. Asset management fees are generally a function of the overall fee rate charged to each account and the level of assets under management. A portion of these revenues is generated when the Company provides investment advisory services as well as when the Company provides investment accounting and reporting services on a stand-alone basis. Assets under management can be affected by the addition of new client accounts or client contributions to existing accounts, withdrawals of assets from or terminations of client accounts, and investment performance which may depend on general market conditions. The Company's private equity fund management revenues represent annual management fees based on a percentage of committed capital and a participation in certain specified net gains of the funds. The Company's commercial mortgage fees primarily reflect fees associated with loan originations, which approximate .75-1.0% of the loan balance, as well as fees associated with ongoing servicing and management fees with respect to loans originated in portfolios managed by the Company. In addition to loans for GenAmerica subsidiaries and affiliates, the Company originates mortgage loans for unaffiliated insurance and pension clients and for securitized offerings by investment banking firms from time to time. Conning's assets under discretionary management were $28.8 billion as of September 30, 1998, an increase of $2.8 billion from $26.0 billion under management at December 31, 1997. The net increase in assets during the nine-month period is due to an increase in assets from existing clients and net additions of new clients since year-end. Total assets serviced increased $8.7 billion since year-end to $88.8 billion at September 30, 1998. New client activity in investment advisory assets serviced was the key cause of this increase, accompanied by stable growth in the Company's core assets under discretionary management. 9 12 RESULTS OF OPERATIONS - --------------------- Statement of income for the three months ended September 30, 1998 compared to the three months ended September 30, 1997 Total revenues increased 29% to $20.7 million for the three months ended September 30, 1998 versus $16.0 million for the same period in 1997. This increase was primarily attributable to the increase in asset management and related fees resulting from the growth in assets managed for existing clients and net additions of new clients. Approximately 23% of the increase stems from increased mortgage origination activity which is largely a function of the timing of loan closings. Research service revenues increased 13% to $4.3 million for the three months ended September 30, 1998 from $3.8 million for the same period in 1997 as a result of continued strong core research fees. Underwriting fees, included in research service revenues, decreased by approximately 70% from $1.3 million for the three months ended September 30, 1997 to $0.4 million for the same period in 1998, which was offset by the 59% increase in core research fees for the comparable periods. Other income for the three months ended September 30, 1998 decreased approximately $66,000, primarily due to unrealized losses on equity investments reflective of the stock market performance during the period. Total expenses increased 18% to $14.6 million for the three months ended September 30, 1998 from $12.4 million for the same period in 1997, due primarily to increased employee compensation and benefits expenses as well as an increase in marketing and production, occupancy and equipment and certain other expenses associated with the growth in revenues. Total compensation and benefits increased 12% to $9.3 million from $8.3 million for the three months ended September 30, 1998 and 1997, respectively, and represents over 45% of the total increase in expenses for the period. The increase is due to moderate staffing increases for Company growth and additional incentive compensation accruals as a result of growth in operating income. The Company's incentive compensation practice continues to be based on the level of growth in the Company's operating profits. Marketing and production costs increased 50% from $1.3 million for the three months ended September 30, 1997 to $1.9 million for the three months ended September 30, 1998 due to the increased marketing support for the Company's products and variable costs associated with the increased core research revenues. Provision for income taxes increased by approximately $1.4 million to $2.6 million for the three month period ended September 30, 1998 from $1.2 million for the same period in 1997 as a result of higher taxable income. The effective tax rate has remained relatively consistent during 1998 at approximately 42%. The significant increase in the effective tax rate in 1998 compared to 1997 of approximately 34% was attributable to the Company utilizing state net operating loss carryforwards during the third quarter of 1997. As a result of all of the above, net income increased 50% to $3.5 million during the three month period ended September 30, 1998 compared to $2.3 million for the same period in 1997. 10 13 Statement of income for the nine months ended September 30, 1998 compared to the nine months ended September 30, 1997 Total revenues increased 30% to $60.9 million for the nine months ended September 30, 1998 versus $46.9 million for the same period in 1997. This increase was primarily attributable to the increase in asset management and related fees resulting from the growth in assets managed for existing clients and net additions of new clients. Approximately 24% of the increase stems from the increased mortgage origination activity which is largely a function of the timing of loan closings. Research service revenues increased 25% to $12.8 million for the nine months ended September 30, 1998 from $10.3 million for the same period in 1997 as a result of continued strong core research fees and stable underwriting revenues. Other income for the nine months ended September 30, 1998 increased over $1.3 million, primarily due to investment income earned on the proceeds from the Company's initial public offering of common stock. Total expenses increased 23% to $44.2 million for the nine months ended September 30, 1998 from $36.0 million for the same period in 1997, due to increased employee compensation and benefits expenses, and an increase in marketing and production, occupancy and equipment and certain other expenses associated with the growth in revenues. Total compensation and benefits increased 21% to $28.5 million from $23.6 million for the nine months ended September 30, 1998 and 1997, respectively, primarily due to additional staffing necessary for the Company's growth and additional incentive compensation accruals as a result of growth in operating income. The Company's incentive compensation practice continues to be based on the level of growth in the Company's operating profits. Provision for income taxes increased by 63% to $7.0 million for the nine month period ended September 30, 1998 from $4.3 million for the same period in 1997 as a result of higher taxable income. The effective tax rate has remained relatively consistent during 1998 at approximately 42%. The slight increase in the effective rate in 1998 compared to 1997 of approximately 40% was attributable to the Company utilizing state net operating loss carryforwards during the third quarter of 1997. As a result of all of the above, net income increased 48% to $9.5 million during the nine month period ended September 30, 1998 compared to $6.4 million for the same period in 1997. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's business is not capital-intensive. Historically, working capital requirements for the Company have been provided almost exclusively by operating cash flow. Management believes that the Company's existing capital, together with operating cash flow, will provide the Company with sufficient resources to meet its present and foreseeable future cash needs. In December 1997, the Company received approximately $34.5 million in net proceeds from its initial public offering of common stock that will be used for general corporate purposes, including potential strategic alliances and acquisitions. As of September 30, 1998, the Company has continued to invest the net proceeds from the offering in short-term, investment-grade, interest-bearing securities. 11 14 On August 18, 1998, the Company completed the previously announced acquisition of the assets and operations of Schroder Mortgage Associates LP, a specialty asset manager providing mortgage products and servicing to institutional buyers of commercial mortgages and mortgage-backed securities. This purchase consisted of an initial cash payment of approximately $21.0 million including acquisition expenses, and may include additional contingent consideration payments of up to $4 million over the next three years subject to meeting certain financial targets. On October 15, 1998, the Company announced that it had entered into a definitive agreement to acquire Noddings & Associates and Noddings Investment Group (collectively "Noddings"), a privately held Chicago-based specialty asset manager having expertise in managing convertible securities portfolios and providing convertible investment strategies for large institutional and high net worth individuals. The transaction has an initial cash purchase price of approximately $4.5 million and an additional $27 million in the aggregate may be paid over the next three years subject to meeting certain financial growth targets. The acquisition is expected to close during the fourth quarter. The Company generated approximately $23.7 million in cash flow from operations during the nine months ended September 30, 1998. The Company uses its cash flow for existing operations, working capital, to pay dividends to shareholders, and for general corporate purposes. During the third quarter, the Company used approximately $6.4 million in working capital to purchase non-registered common shares into treasury from a Company officer. The Company invests excess cash in deposits with major financial institutions and short-term securities. The Company had no outstanding debt as of September 30, 1998 or December 31, 1997. The Company's subsidiary, Conning & Company, is subject to the net capital requirement imposed on registered broker-dealers under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). At September 30, 1998, Conning & Company had net capital of approximately $11.9 million, which was approximately $10.9 million in excess of the regulatory minimum. The Company has a revolving subordinated loan agreement with a commercial bank for $2.0 million that expires on December 31, 1998. Subject to certain financial criteria and approval by the National Association of Securities Dealers regional office, borrowings qualify as capital for purposes of the Exchange Act's net capital rules. During the nine months ended September 30, 1998, the Company exceeded the associated financial criteria but did not utilize the revolving agreement. The Company or a subsidiary acts as a general partner of certain private equity funds and maintains a 1% general partner's capital interest in such funds. The Company may also invest as a limited partner in future funds it may organize. Interests in such private equity funds are generally illiquid. 12 15 IMPACT OF INFLATION - ------------------- The Company does not believe that inflation has had a significant impact on the Company's consolidated operations. YEAR 2000 - --------- Many of the world's computer systems currently record years in a two-digit format. If not addressed, such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions in the U.S. and internationally (the "Year 2000" or "Y2K" issue). The potential costs and uncertainties associated with the Year 2000 issue will depend on a number of factors, including software, hardware and the nature of the industry in which a company operates. Additionally, companies must coordinate with other entities with which they electronically interact. The Company has established a Year 2000 Compliance Team, with a charter to plan and execute a Y2K compliance effort. The team is made up of an existing staff of skilled and experienced associates. The Company has progressed through its awareness and assessment stages. In addition to internal systems, the Company relies on external systems and has included in the assessment and inventory those systems of significant external parties such as vendors, banks, and broker-dealers. Once the inventory was complete, the Compliance team conducted a thorough risk analysis, which covered both internal and external systems. This analysis was submitted to Company management and formed the foundation of the Y2K Compliance Plan. The Company has substantially completed remediation for internally supported systems, which primarily involved enhancing software code. The Company anticipates completing this phase by December 31, 1998. In addition to remediation, compliance strategies include: upgrading hardware and software to compliant versions, replacing non-compliant systems with compliant systems, retiring non-compliant systems and securing Y2K Compliance Statements from system vendors and significant external business partners. Upgraded and replacement systems are being tested along with remediated systems. Compliance testing is well under way and currently on target. The plan for testing is scheduled to be completed by March 31, 1999. The Compliance Test Team is testing each system in order of risk, as established in the risk assessment. The Company is also communicating with most of its external business partners, suppliers and vendors in an effort to determine their Y2K readiness. There is no known method to completely determine compliance of external systems, but every reasonable effort is being made to assure compliance of these external systems. The Y2K external readiness evaluation is progressing on target and is scheduled to be complete June 30, 1999. There are many companies that produce the products and services that are supplied to the Company by these external sources. In the event a particular supplier, vendor or business partner is unable to provide products or services to the Company due to a Year 2000 failure, the Company believes it has adequate alternate sources for such products or services. There can be no guarantee, however, that similar or identical products or services would be available on the same terms and conditions or that the Company would not experience some adverse effect as a result of switching to such alternate sources. 13 16 The failure to correct a material Y2K problem could result in an interruption in, or a failure of, certain normal business activities and operations. Such failures could adversely affect the Company's results of operations, liquidity and financial condition, particularly as a result of the uncertainty of the Y2K readiness of third-party suppliers and clients. The Company believes that, with the completion of the Compliance effort, the possibility of significant interruptions of normal operations will be significantly reduced. The Company has implemented control procedures so that once compliance is established, non-compliant system changes or the introduction of non-compliant new systems will not impact the Company's compliance status. Another important part of the Company's Y2K compliance effort is contingency planning. Reasonable and appropriate plans are being formulated so that any disruption caused by the Year 2000 issue does not materially affect the Company's business or results of operations. The contingency plans are being formulated in conjunction with the compliance testing process. The plans are scheduled to be complete by December 31, 1998. The Company estimates the total cost to the Company for its Y2K compliance effort, including external and internal expenditures will be approximately $400,000, almost all of which the Company believes will be incurred during 1998 and 1999. Based on the activities described above, the Company does not believe that the Year 2000 issue will have a material adverse effect on the Company's business or results of operations. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS - --------------------------------------------------------- Certain statements contained in this filing 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 GenAmerica's assets or activities. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements or from historical results. The Company's business entails a variety of additional risks, including Year 2000 issues as discussed herein, which are set forth in documents the Company has filed or will file from time to time with the SEC. Investors are cautioned not to place undue reliance on such statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 14 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On July 8, 1997, a consolidated amended class-action complaint was filed against SS&C Technologies, Inc. ("SS&C") in the United States District Court, District of Connecticut, styled Marc A. Feiner, M.D., et al. v. SS&C Technologies, Inc., et al. (Civil Action No. 397CV00656(JBA) consolidated with Civil Action No. 397CV01077). There have been no material developments since the Company first reported this matter in the Form 10-Q (File No. 0-023183) for the fiscal quarter ended June 30, 1998, filed July 30, 1998. ITEM 5. OTHER INFORMATION. Securities Exchange Act Rule 14a-8 permits shareholders to submit proposals to be included in the Company's proxy statement for the annual meeting of the shareholders. The Company must consider including a proposal in the proxy statement if the Company receives notice of the proposal at least 120 days prior to the corresponding date of the Company's proxy statement for the previous year's annual meeting. Shareholder proposals submitted outside the processes of Rule 14a-8 must be submitted to the Company by February 22, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) See Index to Exhibits. (b) On July 7, 1998, the Company filed a Form 8-K relating to the definitive agreement to acquire substantially all of the assets and operations of Schroder Mortgage Associates, LP. On September 2, 1998, the Company filed a Form 8-K relating to the filing of the required financial statements, pro forma financial information and exhibits relating to the Schroder Mortgage Associates, LP acquisition. On October 16, 1998, the Company filed a Form 8-K relating to the definitive agreement to acquire Noddings & Associates and Noddings Investment Group. 15 18 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONNING CORPORATION By: /s/ Leonard M. Rubenstein -------------------------------------- Leonard M. Rubenstein Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Fred M. Schpero -------------------------------------- Fred M. Schpero Senior Vice President and Chief Financial Officer 16 19 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 3.1 Restated Articles of Incorporation of the Company, as amended, incorporated by reference to Exhibit 3.1 to Form 10-K (File No. 0-023183) for the fiscal year ended December 31, 1997 filed March 23, 1998 3.2 Bylaws of the Company incorporated by reference to Exhibit 3.3 to Registration Statement on Form S-1 (No. 333-35993) filed September 19, 1997 27 Financial Data Schedule
17 EX-27 2 ARTICLE 5 FDS FOR 10Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 53,380,321 251,390 9,411,123 165,063 0 63,384,275 2,625,835 1,209,503 112,609,829 33,791,568 0 132,550 0 0 75,156,034 112,609,829 59,058,881 60,941,099 42,163,719 44,172,122 0 0 193,218 16,575,759 7,049,700 9,526,059 0 0 0 9,526,059 .72 .67
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