-----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, RQbuP+U2IRRId+BjecaR5HwRYeDX30o2YFhodtYPKQO2MkSUen6VdTshLLgmdxTD 37N0YBpGy9gvY2+v7v2U9Q== 0001068800-99-000356.txt : 19990816 0001068800-99-000356.hdr.sgml : 19990816 ACCESSION NUMBER: 0001068800-99-000356 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99689270 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 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 JUNE 30, 1999 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 JULY 31, 1999: 13,612,508 SHARES CONNING CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I - FINANCIAL INFORMATION ------------------------------ 1 Financial Statements 1 Condensed Consolidated Balance Sheets (Unaudited) June 30, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income (Unaudited) Three month periods ended June 30, 1999 and 1998 2 Condensed Consolidated Statements of Income (Unaudited) Six month periods ended June 30, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows (Unaudited) Six month periods ended June 30, 1999 and 1998 4 Notes to Condensed Consolidated Financial Statements (Unaudited) 5-9 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-15 PART II - OTHER INFORMATION --------------------------- 1 Legal Proceedings 16 4 Submission of Matters to a Vote of Security Holders 16 5 Other Information 16 6 Exhibits and Reports on Form 8-K 17 Signatures 18 Index to Exhibits 19
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. CONNING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND DECEMBER 31, 1998 (Unaudited)
ASSETS 1999 1998 ------------- ------------- Current assets: Cash and cash equivalents $ 33,940,049 $ 31,343,314 Short-term investments 20,549,817 28,288,155 Accounts receivable, net 11,924,959 11,165,200 Marketable equity securities, at fair value 660,793 278,222 Prepaid expenses and other current assets 680,249 481,455 ------------- ------------- Total current assets 67,755,867 71,556,346 Non-marketable investments at value 5,336,430 2,737,147 Equipment and leasehold improvements, at cost, net of accumulated depreciation 1,754,699 1,451,653 Deferred income taxes 2,736,591 3,199,812 Goodwill 42,558,499 40,706,020 Other assets 4,791,504 2,827,145 ------------- ------------- Total assets $ 124,933,590 $ 122,478,123 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Compensation payable $ 6,328,250 $ 12,794,850 Deferred revenue 4,206,512 3,792,762 Due to affiliates 4,519,638 2,338,918 income taxes payable 17,081 284,441 Accounts payable and other accrued expenses 17,133,895 19,554,667 ------------- ------------- Total current liabilities 32,205,376 38,765,638 Accrued rent 3,057,982 3,215,897 Other payables 240,000 320,000 ------------- ------------- Total liabilities 35,503,358 42,301,535 ------------- ------------- Common stock 138,536 135,714 Additional paid-in capital 77,881,646 74,975,681 Retained earnings 17,807,538 11,462,681 Treasury stock (6,397,488) (6,397,488) ------------- ------------- Total shareholders' equity 89,430,232 80,176,588 ------------- ------------- Total liabilities and shareholders' equity $ 124,933,590 $ 122,478,123 ============= ============= See accompanying notes to condensed consolidated financial statements.
1 CONNING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (Unaudited)
1999 1998 ------------ ------------ REVENUES: Asset management and related fees $ 19,675,436 $ 15,349,592 Research services 3,886,849 4,338,444 Other income 394,271 869,831 ------------ ------------ Total revenues 23,956,556 20,557,867 ------------ ------------ EXPENSES: Employee compensation and benefits 11,184,294 9,544,971 Occupancy and equipment costs 1,563,661 1,120,037 Marketing and production costs 1,983,684 1,811,022 Professional services 671,845 589,714 Amortization of goodwill and other 654,454 707,848 Other operating expenses 1,287,781 1,151,432 ------------ ------------ Total expenses 17,345,719 14,925,024 ------------ ------------ Operating income 6,610,837 5,632,843 Interest expense 57,863 64,416 ------------ ------------ Income before provision for income taxes 6,552,974 5,568,427 Provision for income taxes 2,628,659 2,371,718 ------------ ------------ Net income $ 3,924,315 $ 3,196,709 ============ ============ Weighted average diluted shares outstanding 14,115,803 14,263,873 Earnings per share: Basic $ 0.29 $ 0.24 Diluted $ 0.28 $ 0.22 See accompanying notes to condensed consolidated financial statements.
2 CONNING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (Unaudited)
1999 1998 ------------ ------------ REVENUES: Asset management and related fees $ 37,849,307 $ 30,034,956 Research services 8,288,703 8,506,131 Other income 864,896 1,697,233 ------------ ------------ Total revenues 47,002,906 40,238,320 ------------ ------------ EXPENSES: Employee compensation and benefits 21,801,513 19,176,694 Occupancy and equipment costs 3,084,169 2,265,269 Marketing and production costs 3,828,382 3,369,173 Professional services 1,341,940 1,141,302 Amortization of goodwill and other 1,303,342 1,415,695 Other operating expenses 2,632,443 2,219,142 ------------ ------------ Total expenses 33,991,789 29,587,275 ------------ ------------ Operating income 13,011,117 10,651,045 Interest expense 117,415 130,391 ------------ ------------ Income before provision for income taxes 12,893,702 10,520,654 Provision for income taxes 5,203,571 4,492,008 ------------ ------------ Net income $ 7,690,131 $ 6,028,646 ============ ============ Weighted average diluted shares outstanding 14,074,135 14,209,630 Earnings per share: Basic $ 0.58 $ 0.45 Diluted $ 0.55 $ 0.42 See accompanying notes to condensed consolidated financial statements.
3 CONNING CORPORATION & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 (Unaudited)
1999 1998 ------------- ------------- OPERATING ACTIVITIES: Net income $ 7,690,131 $ 6,028,646 Adjustment for items not affecting cash: Depreciation 257,455 362,422 Amortization of goodwill and other 1,303,342 1,415,695 Net unrealized appreciation on non-marketable investments (1,795,050) (335,358) Net change in marketable equity securities (382,571) 75,082 Accretion of discounts on short-term investments (516,480) (335,849) Changes in: Accounts receivable (759,759) 2,052,598 Prepaid expenses and other assets (2,333,155) (70,300) Accounts payable and other accrued expenses (2,500,770) 5,414,668 Income taxes payable 296,665 1,147,569 Due to affiliates 2,180,720 3,891,199 Deferred tax asset 463,221 (177,060) Deferred revenue 413,750 1,587,568 Accrued rent (157,915) (129,651) Compensation payable (6,466,600) (4,477,103) ------------- ------------- Net cash provided by (used in) operating activities (2,307,016) 16,450,126 ------------- ------------- INVESTING ACTIVITIES: Purchases of non-marketable investments (1,440,520) (879,138) Distribution from non-marketable investments 636,287 94,933 Purchases of equipment and other assets, net (560,501) (246,124) Purchases of short-term investments (44,645,344) (49,023,672) Maturities of short-term investments 52,900,162 34,840,698 Acquisition of TCW insurance operations (2,985,821) - ------------- ------------- Net cash provided by (used in) investing activities 3,904,263 (15,213,303) ------------- ------------- FINANCING ACTIVITIES: Issuance of common stock 2,344,762 26,650 Dividends on common stock (1,345,274) (1,060,000) ------------- ------------- Net cash provided by (used in) financing activities 999,488 (1,033,350) ------------- ------------- Net change in cash and cash equivalents 2,596,735 203,473 Cash and cash equivalents, beginning of period 31,343,314 43,085,406 ------------- ------------- Cash and cash equivalents, end of period $ 33,940,049 $ 43,288,879 ============= ============= See accompanying notes to condensed consolidated financial statements.
4 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited, condensed consolidated financial statements of Conning Corporation and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the financial information reflects adjustment, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position of the Company and its subsidiaries as of June 30, 1999 and their results of operations for the three and six month periods ended June 30, 1999 and 1998, and their cash flows for the six month periods ended June 30, 1999 and 1998. Operating results for the three and six month periods ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1998. NOTE 2 - DIVIDENDS The Company has paid cash dividends of $0.10 per share totaling $1,345,274 on its common stock through June 30, 1999 compared to $0.08 per share totaling $1,060,000 for the same period during 1998. During July, 1999 the Company declared a $0.05 per share quarterly cash dividend on the Company's common stock, payable on September 10, 1999 to shareholders of record on August 20, 1999. NOTE 3 - MORTGAGE SERVICING OPERATIONS The Company performs certain mortgage servicing functions for its clients which include acting as an agent in the collection and processing of principal and interest loan payments and escrow items. As of June 30, 1999 and December 31, 1998, the Company maintained approximately $12.3 million and $14.1 million, respectively, in escrow balances off-balance sheet as the amounts were not considered to be owned or operated by the Company. NOTE 4 - INDUSTRY SEGMENT In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and 5 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) requires that those enterprises report selected information about operating segments in interim financial statements issued to shareholders. Segment information on the Company for the three and six month periods ended June 30, 1999 and 1998 are as follows, dollars in thousands:
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------------- -------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- ASSET MANAGEMENT Revenues $ 12,731 $ 10,114 $ 24,580 $ 20,046 Pre-tax income $ 3,493 $ 2,774 $ 6,572 $ 5,283 Revenue from Major Customer $ 4,093 $ 3,648 $ 8,060 $ 6,984 MORTGAGE LOAN & REAL ESTATE Revenues $ 7,051 $ 5,236 $ 13,376 $ 9,989 Pre-tax income $ 2,380 $ 1,613 $ 4,527 $ 2,966 Revenue from Major Customer $ 4,051 $ 3,165 $ 7,596 $ 5,660 RESEARCH Revenues $ 3,887 $ 4,338 $ 8,289 $ 8,506 Pre-tax income $ 680 $ 1,181 $ 1,795 $ 2,272 Revenue from Major Customer $ - $ 530 $ - $ 530 COMBINED OPERATING SEGMENTS Revenues $ 23,669 $ 19,688 $ 46,245 $ 38,541 Pre-tax income $ 6,553 $ 5,568 $ 12,894 $ 10,521 Revenue from Major Customer $ 8,144 $ 7,343 $ 15,656 $ 13,174 RECONCILIATION OF COMBINED OPERATING SEGMENT REVENUES TO CONSOLIDATED REVENUES Combined operating segment revenue $ 23,669 $ 19,688 $ 46,245 $ 38,541 Other income 288 870 758 1,697 -------- -------- -------- -------- Consolidated revenue $ 23,957 $ 20,558 $ 47,003 $ 40,238 ======== ======== ======== ========
As of June 30, 1999, there are no differences in the basis of measuring segment profit as compared to the Company's Annual Report for the year ended December 31, 1998. In addition to the disclosures above, SFAS 131 requires certain disclosures pertaining to assets by segments if those measures are used by management to make operating decisions, assess performance and allocated resources. Management does not consider these items by operating segment when making operating decisions, assessing performance or allocating resources. 6 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 5 - EARNINGS PER SHARE The following table represents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations: FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1999:
Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- BASIC EPS: Net income $ 3,924,315 13,485,344 $ 0.29 ----------- ======= EFFECT OF DILUTIVE SECURITIES: Stock options 630,459 ---------- DILUTED EPS: Net income $ 3,924,315 14,115,803 $ 0.28 =========== ========== =======
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1998:
Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- BASIC EPS: Net income $ 3,196,709 13,250,722 $ 0.24 ----------- ======= EFFECT OF DILUTIVE SECURITIES: Stock options 1,013,151 ---------- DILUTED EPS: Net income $ 3,196,709 14,263,873 $ 0.22 =========== ========== =======
7 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999:
Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- BASIC EPS: Net income $ 7,690,131 13,374,094 $ 0.58 ----------- ======= EFFECT OF DILUTIVE SECURITIES: Stock options 700,041 ---------- DILUTED EPS: Net income $ 7,690,131 14,074,135 $ 0.55 =========== ========== =======
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998:
Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- BASIC EPS: Net income $ 6,028,646 13,250,342 $ 0.45 ----------- ======= EFFECT OF DILUTIVE SECURITIES: Stock options 959,288 ---------- DILUTED EPS: Net income $ 6,028,646 14,209,630 $ 0.42 =========== ========== =======
NOTE 6 - SUBSEQUENT EVENT On August 10, 1999, General American Life Insurance Company ("General American"), a significant client and the majority shareholder of the Company, became subject to an order of administrative supervision from the Missouri Department of Insurance. General American stated in a press release that it was unable to meet substantial demands for surrenders associated with its funding agreements business, also known as stable value products. General American stated that the stable value withdrawal activity stems from recent developments resulting from a reinsurance and marketing relationship formed in 1993 between General American and ARM Financial ("ARM"). General American's press release indicated that in June, 1999, ARM put itself up for sale, announcing that it was de-emphasizing its involvement in the stable value business. This led General American to recapture ARM's portion of the business, approximately $3.4 billion in assets and related liabilities. Moody's Investors Service reviewed these events and lowered General American's financial strength rating from A2 to A3. A significant number of stable value investors reacted to Moody's downgrade of General American by requesting redemption of their funds. Moody's further downgraded General American on August 9, 1999, to Ba1, and, on 8 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) August 12, 1999, to B1. General American also has reported that it is in discussion with several potential strategic partners and continues to pursue these discussions and other options. The Company is the asset manager for General American but is not regulated by the Missouri Department of Insurance. General American continues to be a significant client of the Company and its direct ownership of the Company has not changed as a result of these developments. 9 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 $32.4 billion as of June 30, 1999, an increase of $4.2 billion from $28.2 billion under management at June 30, 1998. The net increase in assets during the twelve-month period is due to an increase in assets from new and existing clients. Total assets serviced increased $3.8 billion since June 30, 1998 to $90.8 billion at June 30, 1999. New client activity in discretionary assets under management and recent company acquisitions were the primary sources of this increase. On August 10, 1999, General American Life Insurance Company ("General American") a significant client and the majority shareholder of the Company became subject to an order of administrative supervision from the Missouri Department of Insurance. General American stated in a press release that it was unable to meet substantial demands for surrenders associated with its funding agreements business, also known as stable value products. General American stated that the stable value withdrawal activity stems from recent developments resulting from a reinsurance and marketing relationship formed in 1993 between General American and ARM Financial ("ARM"). 10 General American's press release explained that in June, ARM put itself up for sale, announcing that it was de-emphasizing its involvement in the stable value business. This led General American to recapture ARM's portion of the business, approximately $3.4 billion in assets and related liabilities. Moody's Investors Service reviewed these events and lowered General American's financial strength rating from A2 to A3. A significant number of stable value investors reacted to Moody's downgrade of General American by requesting redemption of their funds. Moody's further downgraded General American on August 9, 1999, to Ba1, and, on August 12, 1999, to B1. General American also has reported that it is in discussion with several potential strategic partners and continues to pursue these discussions and other options. The Company is the asset manager for General American but is not regulated by the Missouri Department of Insurance. These developments will directly result in the reduction of up to $3.5 billion in affiliated assets under management for the Company during the third quarter of 1999. General American continues to be a significant client of the Company and its direct ownership of the Company has not changed as a result of these developments. RESULTS OF OPERATIONS - --------------------- Statement of income for the three months ended June 30, 1999 compared to the three months ended June 30, 1998 Total revenues increased 17% to $24.0 million for the three months ended June 30, 1999 versus $20.6 million for the same period in 1998. This increase was primarily attributable to the increase in asset management and related fees resulting from the growth in assets managed for existing clients and net additions of new clients. Approximately 30% of the increase stems from increased mortgage origination activity which is largely a function of the timing of loan closings. Though core research service revenues increased 9% to $3.6 million from $3.3 million for the same period in 1998, continued insurance industry declines in underwriting offset that increase, producing a 10% decrease in research service fees for the three months ended June 30, 1999 as compared to the three months ended June 30, 1998. Other income for the three months ended June 30, 1999 decreased approximately $476,000, compared to the same period for 1998 primarily due to utilization of cash positions identified for acquisitions during the latter portion of 1998. Total expenses increased 16% to $17.3 million for the three months ended June 30, 1999 from $14.9 million for the same period in 1998, due primarily to increased employee compensation and benefits expenses as well as an increase in occupancy and equipment, marketing and production and certain other expenses associated with the growth in revenues. Total compensation and benefits increased 17% to $11.1 million from $9.5 million for the three months ended June 30, 1999 and 1998, respectively, and represents approximately 68% of the total increase in expenses for the period. The increase is due primarily to staffing increases for Company growth. The ratio of employee compensation and benefits to total revenue remained consistent in the second quarter of 1998 compared to the second quarter of 1999 reflecting the Company's ability to leverage its resources as the Company grows. Occupancy and equipment costs increased 40% from $1.1 million for the three months ended June 30, 1998 to $1.6 million 11 for the three months ended June 30, 1999 due to the addition of office space associated with 1999 acquisitions and more technology expenses associated with the Company's growth. Provision for income taxes increased by approximately 11% to $2.6 million for the three month period ended June 30, 1999 from $2.4 million for the three month period ended June 30, 1998 as a result of higher taxable income. The effective tax rate has decreased from 43% during 1998 to 41% during 1999 reflecting a decrease in certain state income tax rates. As a result of all of the above, net income increased 23% to $3.9 million during the three month period ended June 30, 1999 compared to $3.2 million for the same period in 1998. Statement of income for the six months ended June 30, 1999 compared to the six months ended June 30, 1998 Total revenues increased 17% to $47.0 million for the six months ended June 30, 1999 versus $40.2 million for the same period in 1998. This increase was primarily attributable to the increase in asset management and related fees resulting from the growth in assets managed for existing clients and net additions of new clients. Approximately 29% of the increase stems from increased mortgage origination activity which is largely a function of the timing of loan closings. Research service revenues decreased slightly to $8.3 million for the six months ended June 30, 1999 from $8.5 million for the same period in 1998 as a result of continued strong core research fees offset by a decrease in underwriting fees. Underwriting fees, included in research service revenues, decreased by approximately 83% from $1.7 million for the six months ended June 30, 1998 to $289,000 for the same period in 1999, which was offset by the 17% increase in core research fees for the comparable periods. Other income for the six months ended June 30, 1999 decreased approximately $832,000, compared to the same period for 1998 primarily due to utilization of cash positions identified for acquisitions during the latter portion of 1998. Total expenses increased 15% to $34.0 million for the six months ended June 30, 1999 from $29.6 million for the same period in 1998, due primarily to increased employee compensation and benefits expenses as well as an increase in occupancy and equipment, marketing and production and certain other expenses associated with the growth in revenues. Total compensation and benefits increased 14% to $21.8 million from $19.2 million for the six months ended June 30, 1999 and 1998, respectively, and represents approximately 60% of the total increase in expenses for the period. The increase is due primarily to staffing increases for Company growth. The ratio of employee compensation and benefits to total revenue decreased from 47.7% in the first six months of 1998 to 46.4% during the first six months of 1999 reflecting the Company's ability to leverage its resources as the Company grows. Occupancy and equipment costs increased 36% from $2.3 million for the six months ended June 30, 1998 to $3.0 million for the six months ended June 30, 1999 due to the addition of office space associated with 1998 acquisitions and more technology expenses associated with the Company's growth. Provision for income taxes increased by approximately 16% to $5.2 million for the six month period ended June 30, 1999 from $4.5 million for the six month period ended June 30, 1998 as a 12 result of higher taxable income. The effective tax rate has decreased from 43% during 1998 to 40% during 1999 reflecting a decrease in certain state income tax rates. As a result of all of the above, net income increased 28% to $7.7 million during the six month period ended June 30, 1999 compared to $6.0 million for the same period in 1998. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's business is not capital-intensive. Historically, working capital requirements for the Company have been provided almost exclusively by operating cash flow. Management believes that the Company's existing capital, together with operating cash flow, will provide the Company with sufficient resources to meet its present and foreseeable future cash needs. On June 3, 1999, the Company completed the previously announced acquisition of the insurance company high-grade fixed income management business from The TCW Group, Inc. The purchase consisted of an initial cash payment of approximately $3.0 million. Additional contingent consideration of up to $2.3 million may be payable over the next two years, subject to the successful retention of acquired client relationships and meeting certain revenue targets on the acquired business. The Company utilized approximately $2.3 million in cash flow from operations during the six months ended June 30, 1999. The Company uses its cash flow for existing operations, working capital, to pay dividends to shareholders, and for general corporate purposes. The Company invests excess cash in deposits with major financial institutions and short-term securities. The Company had no outstanding debt as of June 30, 1999 or December 31, 1998. The Company's subsidiary, Conning & Company, is subject to the net capital requirement imposed on registered broker-dealers under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). At June 30, 1999, Conning & Company had net capital of approximately $12.7 million, which was approximately $11.8 million in excess of the regulatory minimum. The Company has a revolving subordinated loan agreement with a commercial bank for $2.0 million that expires on December 31, 1999. Subject to certain financial criteria and approval by the National Association of Securities Dealers regional office, borrowings qualify as capital for purposes of the Exchange Act's net capital rules. During the six months ended June 30, 1999, the Company exceeded all 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. 13 IMPACT OF INFLATION - ------------------- The Company does not believe that inflation has had a significant impact on the Company's consolidated operations. MARKET RISK - ----------- In the normal course of business, the financial position of the Company is routinely subjected to a variety of risks, including market risk associated with interest rate fluctuations. The Company may be exposed to fluctuations in interest rates primarily in its cash, cash equivalent, commercial paper and other investment transactions. The Company does not use derivative financial investments to manage interest rate risk. Based on the above, the Company does not believe that the effect of reasonably possible near-term changes in interest rates on the Company's investing activities would be material to the Company's financial position, results of operations or cash flow taken as a whole. Changes in economic and market conditions may adversely affect the profitability and performance of and demand for the Company's services. A significant portion of the Company's revenues is derived from asset management fees, which are generally based on the market value of assets under management. Consequently, the total value and composition of assets under management and related cash inflows and outflows, and changes in the investment patterns, policies and regulations of the Company's clients may affect materially the amount of assets under management and thus the Company's revenues and profitability. YEAR 2000 - --------- Many of the world's computer systems currently record years in a two- digit format. If not addressed, such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions in the U.S. and internationally (the "Year 2000" or "Y2K" issue). The potential costs and uncertainties associated with the Year 2000 issue will depend on a number of factors, including software, hardware and the nature of the industry in which a company operates. Additionally, companies must coordinate with other entities with which they electronically interact. The Company has established a Year 2000 Compliance Team, with a charter to plan and execute a Y2K compliance effort. The Team is made up of an existing staff of skilled and experienced associates along with external consultants. The Company has progressed through its awareness 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 completed remediation for internally supported systems, which primarily involved enhancing software code. 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 14 from system vendors and significant external business partners. Upgraded and replacement systems are being tested along with remediated systems. As of March 31, 1999, all compliance testing for mission critical systems had been completed. The Company is also communicating with most of its external business partners, suppliers and vendors in an effort to determine their Y2K readiness. There is no known method to completely determine compliance of external systems, but every reasonable effort is being made to assure compliance of these external systems. The Y2K external readiness evaluation was completed as scheduled by June 30, 1999. There are many companies that produce the products and services that are supplied to the Company by these external sources. In the event a particular supplier, vendor or business partner is unable to provide products or services to the Company due to a Year 2000 failure, the Company believes it has adequate alternate sources for such products or services. There can be no guarantee, however, that similar or identical products or services would be available on the same terms and conditions or that the Company would not experience some adverse effect as a result of switching to such alternate sources. The failure to correct a material Y2K problem could result in an interruption in, or a failure of, certain normal business activities and operations. Such failures could adversely affect the Company's results of operations, liquidity and financial condition, particularly as a result of the uncertainty of the Y2K readiness of third-party suppliers and clients. The Company believes that, with the completion of the compliance effort, the possibility of significant interruptions of normal operations will be significantly reduced. The Company has implemented control procedures so that once compliance is established, non-compliant system changes or the introduction of non- compliant new systems will not impact the Company's compliance status. Another important part of the Company's Y2K compliance effort is contingency planning. Reasonable and appropriate plans have been formulated so that any disruption caused by the Year 2000 issue does not materially affect the Company's business or results of operations. The contingency plans were formulated in conjunction with the compliance testing process and will continue to be updated throughout 1999. The Company estimates the total cost to the Company for its Y2K compliance effort, including external and internal expenditures will be approximately $400,000. The Company incurred actual costs of approximately $125,000 in 1998 with the remaining estimated $275,000 to be incurred in 1999. Based on the activities described above, the Company does not believe that the Year 2000 issue will have a material adverse effect on the Company's business or results of operations. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS - --------------------------------------------------------- Certain statements contained in this report are or may constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995, including, without limitation, statements relating to the Company's financial position, plans to increase revenues, competitive strengths, business objectives or strategies, insurance industry trends, expectations regarding GenAmerica's assets or activities, and the effect of the administrative supervision to which General American is subject. 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. 15 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. To the best of management's knowledge, there are no material legal proceedings pending or threatened against the Company or its related wholly-owned subsidiary. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company's Annual Meeting of Shareholders was held on May 11, 1999 (b) At the Annual Meeting, the following proposals were voted upon by the shareholders as indiated below: 1. To elect two directors to serve terms ending in 2002. Directors Voted For Withheld ------------------- ------------ ---------- Richard A. Liddy 12,285,617 22,154 John C. Shaw 12,281,924 25,847 2. To ratify the appointment of KPMG LLP as the Company's independent accountants for the fiscal year ended December 31, 1999. Voted Voted For Against Abstained No Vote ------------ --------- ----------- --------- 12,299,410 400 0 0 ITEM 5. OTHER INFORMATION. Shareholder proposals submitted under processes prescribed by the Securities and Exchange Commission (in Rule 14a-8 of the Securities Exchange Act) for presentation at the 2000 Annual Meeting must be received by the Company by December 6, 1999 for inclusion in the Company's proxy statement and proxy relating to that meeting. Upon receipt of any such proposal, the Company will determine whether or not to include such proposal in the proxy statement and proxy in accordance with regulations governing the solicitation of proxies. Shareholder proposals submitted outside the process of Rule 14a-8 must be submitted to the Company by March 10, 2000. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) See Index to Exhibits. (b) On April 5, 1999, the Company filed a Form 8-K related to an Asset Purchase Agreement to purchase all the rights, title and interest in and to certain Investment Advisory Agreements of TCW Advisors, Inc. 17 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, President and Chief Executive Officer (Principal Executive Officer) /s/ Fred M. Schpero ------------------- Fred M. Schpero Senior Vice President and Chief Financial Officer 18 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 19 EX-27 2 FINANCIAL DATA SCHEDULE
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 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 54,489,866 660,793 12,061,544 136,585 0 67,755,867 3,915,447 2,160,748 124,933,590 32,205,376 0 138,536 0 0 89,291,696 124,933,590 46,138,010 47,002,906 32,688,447 33,991,789 0 0 117,415 12,893,702 5,203,571 7,690,131 0 0 0 7,690,131 .58 .55
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