SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): August 18, 1998 --------------- Conning Corporation (Exact name of registrant as specified in its charter) Missouri (State or other jurisdiction of incorporation) 0-23183 43-1719355 (Commission File Number) (I.R.S. Employer Identification No.) 700 Market Street, St. Louis, Missouri, 63101 (Address of principal executive offices) (zip code) (314) 444-0498 (Registrant's telephone number, including area code) (Former name or former address, if changed since last report) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On August 18, 1998, the Registrant's indirect wholly owned subsidiary, Conning Asset Management Company ("CAM"), completed the acquisition of substantially all of the assets of Schroder Mortgage Associates, L.P. ("SMA") from SMA pursuant to an Asset Purchase Agreement by and among CAM, SMA, Schroder Real Estate Associates, L. P., Norman L. Peck, Mark Peskin, M. Leanne Lachman and Gregory A. White (the "Purchase Agreement"). The assets acquired consisted principally of contracts with investment advisory clients and other intangible assets. SMA is engaged in the business of managing, originating and securitizing commercial mortgage loans and commercial mortgage-backed securities on behalf of institutional clients. The purchase price was approximately $21,000,000 in cash (including acquisition expenses), with additional contingent consideration in the amount of up to $4,000,000 in cash payable over the three year period after the closing, based on meeting certain financial targets. The purchase price was paid from CAM's available cash. The Registrant intends to continue to use the assets acquired for generally the same purposes as such assets were used by SMA prior to the acquisition. The purchase price was determined on the basis of arms-length negotiation between CAM and SMA based on a variety of factors, including, but not limited to, comparable transactions, historical and projected operating results, and cash flow valuation models. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Financial statements of the business acquired. 2 The following audited financial statements of Schroder Mortgage Associates, L.P. are submitted herewith: Page Report of Independent Accountants 4 Balance Sheet at December 31, 1997 5 Statement of Operations for the Year ended December 31, 1997 6 Statement of Partnership Deficit for the Year ended December 31, 1997 7 Statement of Cash Flows for the year ended December 31, 1997 8 Notes to Financial Statements 9 The following unaudited financial statements of Schroder Mortgage Associates, L.P. are submitted herewith: Condensed Balance Sheet at June 30, 1998 11 Condensed Statement of Operations for the Six Months Ended June 30, 1998 12 Condensed Statement of Partnership Capital for the Six Months Ended June 30, 1998 13 Condensed Statement of Cash Flows for the Six Months ended June 30, 1998 14 Notes to Unaudited Condensed Financial Statements 15 (b) Pro Forma financial information. Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1998 (unaudited) 16 Pro Forma Condensed Consolidated Statement of Income for the Year ended December 31, 1997 (unaudited) 17 Pro Forma Condensed Consolidated Statement of Income for the Six Months ended June 30, 1998 (unaudited) 18 Notes to Pro Forma Condensed Consolidated Financial Statements 19 (c) Exhibits. 2.1 Asset Purchase Agreement, dated July 1, 1998, by and among Conning Asset Management Company, Schroder Mortgage Associates, L. P., Schroder Real Estate Associates, L. P., Norman L. Peck, Mark Peskin, M. Leanne Lachman and Gregory A. White (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated July 1, 1998). 23.1 Consent of PricewaterhouseCoopers LLP 3 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Schroder Mortgage Associates, L.P.: We have audited the balance sheet of SCHRODER MORTGAGE ASSOCIATES, L.P. as of December 31, 1997, and the related statements of operations, partnership deficit and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Schroder Mortgage Associates, L.P. at December 31, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. New York, New York March 27, 1998 4 (a) Financial statements of the business acquired. SCHRODER MORTGAGE ASSOCIATES, L.P. Balance Sheet December 31, 1997 ASSETS: Current Assets: Cash and cash equivalents $ 19,405 Fees receivable 126,180 Prepaid expenses and other assets 3,898 -------- Total current assets 149,483 Fixed Assets, at cost: Leasehold improvements 6,225 Less: Accumulated depreciation and amortization (4,088) -------- Total assets $151,620 ======== LIABILITIES and PARTNERSHIP DEFICIT: Current Liabilities: Accounts payable and accrued expenses $ 54,154 Accrued taxes payable 19,040 Due to parent 236,172 -------- Total liabilities 309,366 Partnership deficit (157,746) -------- Total liabilities and partnership deficit $151,620 ======== The accompanying notes are an integral part of the financial statements. 5 SCHRODER MORTGAGE ASSOCIATES, L.P. Statement of Operations For the year ended December 31, 1997 Income: Fee income $1,679,813 Interest and other income 152,791 -------- 1,832,604 -------- Operating expenses: Salaries 529,750 Employee fringe benefits 128,630 Professional fees 25,485 Marketing expenses 110,465 Other employee expenses 23,561 Interest expense - parent 68,714 General expense 70,235 Office expense 3,883 Amortization 1,115 -------- 961,838 -------- Income before income taxes 870,766 Provision for income taxes 77,040 -------- Net income $793,726 ======== The accompanying notes are an integral part of the financial statements. 6 SCHRODER MORTGAGE ASSOCIATES, L.P. Statement of Partnership Deficit For the year ended December 31, 1997 Partnership deficit, beginning of year $(374,472) Net income for the year 793,726 Distributions (577,000) -------- Partnership deficit, end of year $(157,746) ======== The accompanying notes are an integral part of the financial statements. 7 SCHRODER MORTGAGE ASSOCIATES, L.P. Statement of Cash Flows For the year ended December 31, 1997 Cash flows from operating activities: Net income $793,726 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 1,115 Increase in accounts receivable, net (59,849) Decrease in prepaid expenses and other assets 3,535 Increase in accounts payable, accrued expenses and income taxes payable 29,529 -------- Net cash provided by operating activities 768,056 Cash flows from financing activities: Decrease in due to parent (173,019) Partnership distributions (577,000) -------- Net cash used in financing activities (750,019) -------- Net increase in cash and cash equivalents 18,037 Cash and cash equivalents, beginning of year 1,368 -------- Cash and cash equivalents, end of year $19,405 ======== Supplemental disclosures: Income taxes paid $67,500 The accompanying notes are an integral part of the financial statements. 8 SCHRODER MORTGAGE ASSOCIATES, L.P. Notes to Financial Statements 1. Business and Organization: In June 1992, Schroder Real Estate Associates, L.P. ("SREA") formed Schroder Mortgage Associates, L.P., ("SMA" or the "Partnership"), a limited partnership, for the purpose of managing real estate mortgages funded by institutional investors such as pension funds. SREA held a 49% limited partnership interest in SMA until June 30, 1997 when one of the other limited partners acquired an additional 10% partnership interest in SMA from SREA, thus reducing SREA's partnership interest in SMA to 39%. SREA also holds a 1% general partnership interest through Schroder Mortgage Company, Inc. ("SMCI"), which is wholly owned by SREA. The remaining 60% limited partnership interest, (50% until June 30, 1997) is owned by the managing directors of SMA, some of whom are also managing directors of SREA. Under the terms of the Partnership Agreement, the limited partners are not required to make additional capital contributions to the Partnership. The term of the Partnership expires on October 1, 2004, or an earlier date in accordance with the terms of the Partnership Agreement. Upon liquidation, assets shall be distributed first to satisfy liabilities of the Partnership, then to each partner with a positive balance, then to each partner pro rata among those partners with a positive balance, and then the balance to partners in accordance with their percentage interests. 2. Significant Accounting Policies: Allocation of Net Income and Cash Flow: Net profits and losses and distributions of cash flows are allocated to the partners on the basis of their respective percentage interests. Cash and Cash Equivalents: For purposes of the statement of cash flows, the Partnership considers all investments with original maturities of three months or less from date of purchase to be cash equivalents. Substantially all cash and cash equivalents are on deposit with one financial institution. The Partnership believes it mitigates its risks by investing in or through a major financial institution. Revenue Recognition: SMA records fee income on an accrual basis as earned, computed in accordance with the terms of its real estate investment advisory contracts. Fee income consists principally of advisory and loan origination fees. 9 Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Amortization: Amortization of leasehold improvements is computed by the straight-line method over the lesser of the estimated useful lives or terms of the lease. Income Taxes: SMA is a partnership for income tax purposes; accordingly, such entity is not subject to Federal income taxes, and the partners recognize their proportionate share of the partnership income or loss in their income tax returns. However, SMA is subject to unincorporated business tax in New York City. Principal differences between the effective and statutory tax rates are due to SMA's being treated as a partnership for federal and state purposes, but being subject to New York City taxes. 3. Agreements and Transactions with Related Parties: Certain partners and employees of SREA are limited partners of SMA. SREA has agreed to fund SMA's start up costs. The funding is treated as an intercompany loan pursuant to a promissory note with an interest rate of 6%. SMA was indebted to SREA for $236,172 at December 31, 1997. Certain expenses, including salaries and benefits and office expenses, totaling approximately $68,714 are allocated from SREA in 1997. 4. Major Clients: Fees from two clients accounted for approximately 77% of total fee income for the year ended December 31, 1997. 10 SCHRODER MORTGAGE ASSOCIATES, L.P. Condensed Balance Sheet June 30, 1998 (unaudited) ASSETS: Current Assets: Cash and cash equivalents $ 67,633 Fees receivable 167,545 Prepaid expenses and other assets 30,723 Total current assets 265,901 							 -------- Fixed Assets, at cost: Leasehold improvements 14,475 Less: Accumulated depreciation and amortization (6,026) -------- Total assets $274,350 ======== LIABILITIES AND PARTNERSHIP CAPITAL: Current Liabilities: Accounts payable and accrued expenses $ 51,887 Accrued taxes payable 37,959 Due to parent 47,758 -------- Total liabilities 137,604 Partnership capital 136,746 -------- Total liabilities and partnership capital $274,350 ======== The accompanying notes are an integral part of the condensed financial statements. 11 SCHRODER MORTGAGE ASSOCIATES, L.P. Condensed Statement of Operations For the Six Months ended June 30, 1998 (unaudited) Income: Fee income $2,990,301 Interest and other income 5,772 ---------- 2,996,073 ---------- Operating expenses: Salaries 278,649 Employee fringe benefits 114,552 Professional fees 8,751 Marketing expenses 126,923 Other employee expenses 11,900 Interest expense - parent 54,874 General expense 42,683 Office expense 2,112 Amortization 1,937 ---------- 642,381 ---------- Income before income taxes 2,353,692 Provision for income taxes 101,700 ---------- $2,251,992 ========== The accompanying notes are an integral part of the condensed financial statements. 12 SCHRODER MORTGAGE ASSOCIATES, L.P. Condensed Statement of Partnership Capital For the Six Months ended June 30, 1998 				 (unaudited) Partnership deficit, beginning of period $ (157,746) Net income for the period 2,251,992 Distributions (1,957,500) ----------- Partnership capital, end of period $ 136,746 =========== The accompanying notes are an integral part of the condensed financial statements. 13 SCHRODER MORTGAGE ASSOCIATES, L.P. Condensed Statement of Cash Flows For the Six Months ended June 30, 1998 (unaudited) Cash flows from operating activities: Net income $2,251,992 Adjustments to reconcile net income to net cash provided by operating activities: Amortization 1,937 Increase in fees receivable, net (41,365) Increase in prepaid expenses and other assets (26,825) Decrease in accounts payable, accrued expenses and income taxes payable (16,651) ----------- Net cash provided by operating activities 2,202,390 ----------- Cash flows from investing activities: Purchase of equipment and other assets (8,250) ----------- Net cash used in investing activities (8,250) ----------- Cash flows from financing activities: Decrease in due to parent (188,412) Partnership distributions (1,957,500) 							 ----------- Net cash used in financing activities (2,145,912) ----------- Net increase in cash and cash equivalents 48,228 Cash and cash equivalents, beginning of period 19,405 ----------- Cash and cash equivalents, end of period $ 67,633 =========== Supplemental disclosures: Income taxes paid $ 60,000 The accompanying notes are an integral part of the condensed financial statements. 14 Notes to Unaudited Condensed Financial Statements Note 1 - Basis of Presentation The accompanying unaudited financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 1997. In the opinion of management, the financial information reflects all adjustments which are of a normal recurrng nature and are necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim period. The results of operations for the interim period are not necessarily indicative of the results to be expected for the entire year. Note 2 - Client transactions During March 1998, the Company securitized mortgage assets which included certain assets managed from major clients of the Company. Fees earned from the securitization were approximately 45% of the total fee income for the six month period ended June 30, 1998. 15 (b) Pro Forma financial information. The following unaudited pro forma condensed financial information gives effect to the purchase of the assets of SMA as if the transaction took place at the beginning of each of the year ended December 31, 1997 and the six months ended June 30, 1998 for statement of income data and on June 30, 1998 for the balance sheet data. Conning Corporation and Subsidiaries Pro Forma Condensed Consolidated Balance Sheet As of June 30, 1998 (unaudited) Pro Forma Pro Forma Condensed Adjusting Consolidated ASSETS Conning SMA Entries Conning Current assets: Cash & cash equivalents $ 43,288,879 $ 67,633 $(21,692,383) [F1,2,3] $ 21,664,129 Short term investments 30,856,185 30,856,185 Accounts receivable, net 8,731,638 167,545 (167,545) [F4] 8,731,638 Marketable equity securities 525,580 525,580 Income taxes receivable 208,404 (208,404) [F1,4] -- Prepaid expenses and other current assets 322,082 30,723 (30,723) [F1] 322,082 ------------ --------- ------------- ------------ Total current assets 83,932,768 265,901 (22,099,055) 62,099,614 Non-marketable investments at value 3,469,241 3,469,241 Equipment and leasehold improvements, net 1,409,138 8,449 (8,449) [F1] 1,409,138 Deferred income taxes 1,913,473 1,913,473 Goodwill 17,306,296 20,475,000 [F2,4] 37,781,296 Other assets 3,108,413 3,108,413 ------------ --------- ------------- ------------ Total assets $111,139,329 $ 274,350 $ (1,632,504) $109,781,175 ============ ========= ============= ============ LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities: Compensation payable $ 6,671,897 $ $ $ 6,671,897 Deferred revenue 4,788,904 4,788,904 Due to affiliates 5,270,387 47,758 (47,758) [F1] 5,270,387 Income taxes payable -- 37,959 185,959 223,918 Accounts payable and other accrued expenses 12,061,409 51,887 (51,887) [F1,2] 12,061,409 ------------ --------- ------------- ------------ Total current liabilities 28,792,597 137,604 86,314 29,016,515 Accrued rent liability 3,245,814 3,245,814 Other payables 400,000 400,000 ------------ --------- ------------- ------------ Total liabilities 32,438,411 137,604 86,314 32,662,329 ------------ --------- ------------- ------------ Common Stock, $.01 par value 132,550 132,550 Additional Paid in Capital 73,152,602 73,152,602 Retained earnings 5,415,766 136,746 (1,718,818) [F1,3,4] 3,833,694 ------------ --------- ------------- ------------ Total common shareholders' equity 78,700,918 136,746 (1,718,818) 77,118,846 ------------ --------- ------------- ------------ Total liabilities and shareholders' equity $111,139,329 $ 274,350 $ (1,632,504) $109,781,175 ============ ========= ============== ============ See notes to pro forma condensed consolidated financial statements. 16 Conning Corporation and Subsidiaries Pro Forma Condensed Consolidated Statement of Income For the year ended December 31, 1997 (unaudited) Pro Forma Pro Forma Condensed Adjusting Consolidated Conning SMA Entries Conning Revenues: Asset management and related fees $49,502,655 $ 1,679,813 $ $ 51,182,468 Research services 15,478,709 - 15,478,709 Other income 1,634,143 152,791 (1,249,500) [F3] 537,434 ----------- --------- ------------- ------------ Total revenues 66,615,507 1,832,604 (1,249,500) 67,198,611 ----------- --------- ------------- ------------ Expenses: Employee compensation and benefits 33,632,314 681,941 34,314,255 Occupancy and equipment costs 3,552,179 1,115 3,553,294 Marketing and production costs 5,674,545 114,348 5,788,893 Professional services 1,992,032 25,485 2,017,517 Amortization of goodwill and other 2,968,964 - 1,050,000 [F2] 4,018,964 Other operating expenses 3,352,641 70,235 3,422,876 ----------- --------- ------------- ------------ Total expenses 51,172,675 893,124 1,050,000 53,115,799 ----------- --------- ------------- ------------ Operating income 15,442,832 939,480 (2,299,500) 14,082,812 Interest expense 300,261 68,714 368,975 ----------- --------- ------------- ------------ Income before provision for income taxes 15,142,571 870,766 (2,299,500) 13,713,837 Provision for income taxes 6,226,242 77,040 (466,430) [F4] 5,836,852 ----------- --------- ------------- ------------ Net income $ 8,916,329 $ 793,726 $ (1,833,070) $ 7,876,985 =========== ========= ============= ============ Preferred stock dividends 963,127 - 963,127 ----------- --------- ------------- ------------ Net earnings available to common shareholders $ 7,953,202 $ 793,726 $ (1,833,070) $ 6,913,858 =========== ========= ============= ============ Earnings per share: Basic $ 1.13 $ 0.98 ============ ============= Fully diluted $ 0.80 $ 0.71 ============ ============= See notes to pro forma condensed consolidated financial statements. 17 Conning Corporation and Subsidiaries Pro Forma Condensed Consolidated Statement of Income For the six month period ended June 30, 1998 (unaudited) Pro Forma Pro Forma Condensed Adjusting Consolidated Conning SMA Entries Conning Revenues: Asset management and related fees $30,034,956 $ 2,990,301 $ $ 33,025,257 Research services 8,506,131 8,506,131 Other income 1,697,233 5,772 (624,750) [F3] 1,078,255 ------------ --------- ------------- ------------ Total revenues 40,238,320 2,996,073 (624,750) 42,609,643 ------------ --------- ------------- ------------ Expenses: Employee compensation and benefits 19,176,694 405,101 19,581,795 Occupancy and equipment costs 2,265,269 1,937 2,267,206 Marketing and production costs 3,369,173 129,035 3,498,208 Professional services 1,141,302 8,751 1,150,053 Amortization of goodwill & other 1,415,695 525,000 [F2] 1,940,695 Other operating expenses 2,219,142 42,683 2,261,825 ------------ --------- ------------- ------------ Total expenses 29,587,275 587,507 525,000 30,699,782 ------------ --------- ------------- ------------ Operating income 10,651,045 2,408,566 (1,149,750) 11,909,861 Interest expense 130,391 54,874 185,265 ------------ --------- ------------- ------------ Income before provision for income taxes 10,520,654 2,353,692 (1,149,750) 11,724,596 Provision for income taxes 4,492,008 101,700 432,322 [F4] 5,026,030 ------------ --------- ------------- ------------ Net income $ 6,028,646 $ 2,251,992 $ (1,582,072) $ 6,698,566 ============ ========= ============= ============ Preferred Stock dividends -- -- -- -- ------------ --------- ------------- ------------ Net earnings available to common stockholders $ 6,028,646 $ 2,251,992 $ (1,582,072) $ 6,698,566 ============ ========= ============= ============ Earnings per share: Basic $ 0.45 $ 0.50 ============ ============ Fully diluted $ 0.42 $ 0.47 ============ ============ See notes to pro forma condensed consolidated financial statements. 18 Conning Corporation and Subsidiaries Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited) These pro forma condensed consolidated financial statements should be read in conjunction with Conning Corporation and subsidiaries audited financial statements filed with the Securities and Exchange Commission (SEC) filed on Form 10-K in March, 1998 and the unaudited condensed consolidated financial statements for the six month period ended June 30, 1998 filed with the SEC on Form 10-Q in July 1998. F1 The acquisition of SMA will be accounted for as a purchase transaction. As of the date of closing SMA had virtually no balance sheet assets. Conning primarily acquired the operations, employees, and investment contracts of the organization. Included herein represents adjustments for the elimination of various assets and liabilities not transferred at the date of closing. F2 As a result of the purchase, the pro forma excess cost over fair value of net assets acquired was approximately $21.0 million for SMA as of August 18, 1998. The annual amount of goodwill amortization is $1.05 million, based on a 20-year amortization period. The goodwill is considered deductible for federal income tax purposes. F3 Represents the impact of investment income lost related to the cash consideration paid for SMA for the six month period ended June 30, 1998. F4 The income tax benefit associated with the net taxable income statements is computed at an effective rate of 42%. Prior to the acquisition, SMA's legal structure was a partnership and therefore incurred no Federal or state income tax. SMA incurred local unincorporated business taxes at a rate of approximately 4%. 19 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. Date: September 2, 1998 CONNING CORPORATION By: /s/ Leonard M. Rubenstein Name: Leonard M. Rubenstein Title: Chairman and Chief Executive Officer 20