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, 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 OCTOBER 31, 1999: 13,605,360 SHARES CONNING CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS ITEM PAGE - ---- ---- PART I - FINANCIAL INFORMATION ------------------------------ 1 Financial Statements 1 Condensed Consolidated Balance Sheets (Unaudited) September 30, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income (Unaudited) Three month periods ended September 30, 1999 and 1998 2 Condensed Consolidated Statements of Income (Unaudited) Nine month periods ended September 30, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows (Unaudited) Nine month periods ended September 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 10-16 PART II - OTHER INFORMATION --------------------------- 1 Legal Proceedings 17 5 Other Information 17 6 Exhibits and Reports on Form 8-K 18 Signatures 19 Index to Exhibits 20 PART I FINANCIAL INFORMATION Item 1. Financial Statements. CONNING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (Unaudited) 1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 38,235,107 $ 31,343,314 Short-term investments 22,249,649 28,288,155 Accounts receivable, net 11,954,656 11,165,200 Marketable equity securities, at fair value 262,314 278,222 Prepaid expenses and other current assets 449,381 481,455 ------------ ------------ Total current assets 73,151,107 71,556,346 Non-marketable investments at value 5,965,297 2,737,147 Equipment and leasehold improvements, at cost, net of accumulated depreciation 2,664,554 1,451,653 Deferred income taxes 3,154,314 3,199,812 Goodwill 41,964,163 40,706,020 Other assets 4,772,225 2,827,145 ------------ ------------ Total assets $131,671,660 $122,478,123 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Compensation payable $ 8,536,392 $ 12,794,850 Deferred revenue 4,111,341 3,792,762 Due to affiliates 3,652,673 2,338,918 Income taxes payable 150,748 284,441 Accounts payable and other accrued expenses 19,699,019 19,554,667 ------------ ------------ Total current liabilities 36,150,173 38,765,638 Accrued rent 2,976,113 3,215,897 Other payables 200,000 320,000 ------------ ------------ Total liabilities 39,326,286 42,301,535 ------------ ------------ Common stock 139,307 135,714 Additional paid-in capital 78,912,599 74,975,681 Retained earnings 19,690,956 11,462,681 Treasury stock (6,397,488) (6,397,488) ------------ ------------ Total shareholders' equity 92,345,374 80,176,588 ------------ ------------ Total liabilities and shareholders' equity $131,671,660 $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 SEPTEMBER 30, 1999 AND 1998 (Unaudited) 1999 1998 ----------- ----------- REVENUES: Asset management and related fees $18,152,819 $16,207,425 Research services 3,030,685 4,310,369 Other income 299,775 184,985 ----------- ----------- Total revenues 21,483,279 20,702,779 ----------- ----------- EXPENSES: Employee compensation and benefits 10,171,607 9,296,434 Occupancy and equipment costs 1,648,286 1,184,370 Marketing and production costs 1,585,647 1,908,063 Professional services 1,869,076 577,798 Amortization of goodwill and other 679,336 592,708 Other operating expenses 1,162,803 1,025,474 ----------- ----------- Total expenses 17,116,755 14,584,847 ----------- ----------- Operating income 4,366,524 6,117,932 Interest expense 56,143 62,827 ----------- ----------- Income before provision for income taxes 4,310,381 6,055,105 Provision for income taxes 1,746,338 2,557,692 ----------- ----------- Net income $ 2,564,043 $ 3,497,413 =========== =========== Weighted average diluted shares outstanding 14,026,803 13,912,815 Earnings per share: Basic $ 0.19 $ 0.27 Diluted $ 0.18 $ 0.25 See accompanying notes to condensed consolidated financial statements. 2 CONNING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited) 1999 1998 ----------- ----------- REVENUES: Asset management and related fees $56,002,126 $46,242,381 Research services 11,319,388 12,816,500 Other income 1,164,671 1,882,218 ----------- ----------- Total revenues 68,486,185 60,941,099 ----------- ----------- EXPENSES: Employee compensation and benefits 31,973,120 28,473,128 Occupancy and equipment costs 4,732,455 3,449,639 Marketing and production costs 5,414,029 5,277,236 Professional services 3,211,016 1,719,100 Amortization of goodwill and other 1,982,678 2,008,403 Other operating expenses 3,795,246 3,244,616 ----------- ----------- Total expenses 51,108,544 44,172,122 ----------- ----------- Operating income 17,377,641 16,768,977 Interest expense 173,558 193,218 ----------- ----------- Income before provision for income taxes 17,204,083 16,575,759 Provision for income taxes 6,949,909 7,049,700 ----------- ----------- Net income $10,254,174 $ 9,526,059 =========== =========== Weighted average diluted shares outstanding 14,059,745 14,124,559 Earnings per share: Basic $ 0.76 $ 0.72 Diluted $ 0.73 $ 0.67 See accompanying notes to condensed consolidated financial statements. 3 CONNING CORPORATION & SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited) 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net income $ 10,254,174 $ 9,526,059 Adjustment for items not affecting cash: Depreciation 395,662 545,498 Amortization of goodwill and other 1,982,678 2,008,403 Net unrealized appreciation on non-marketable investments (2,114,317) (527,869) Net change in marketable equity securities 15,908 349,272 Accretion of discounts on short-term investments (678,889) (733,052) Changes in: Accounts receivable (789,456) 1,538,176 Prepaid expenses and other assets (2,168,008) (89,453) Accounts payable and other accrued expenses 24,354 8,264,340 Income taxes payable 781,783 3,017,224 Due to affiliates 1,313,755 2,771,571 Deferred income taxes 45,498 (1,489,217) Deferred revenue 318,579 210,625 Accrued rent (239,784) (205,796) Compensation payable (4,258,458) (1,532,485) ------------ ------------ Net cash provided by operating activities 4,883,479 23,653,296 ------------ ------------ INVESTING ACTIVITIES: Purchases of non-marketable investments (1,750,120) (1,144,245) Distribution from non-marketable investments 636,287 94,933 Purchases of equipment and other assets, net (1,608,563) (436,394) Purchases of short-term investments (59,827,767) (65,450,785) Maturities of short-term investments 66,545,162 59,429,307 Acquisition of Schroder Mortgage Associates - (21,000,000) Acquisition of TCW Insurance Operations (2,985,821) - ------------ ------------ Net cash provided by (used in) investing activities 1,009,178 (28,507,184) ------------ ------------ FINANCING ACTIVITIES: Issuance of common stock 3,025,035 31,901 Purchase of common stock for treasury - (6,397,488) Dividends on common stock (2,025,899) (1,577,502) ------------ ------------ Net cash provided by (used in) financing activities 999,136 (7,943,089) ------------ ------------ Net change in cash and cash equivalents 6,891,793 (12,796,977) Cash and cash equivalents, beginning of period 31,343,314 43,085,406 ------------ ------------ Cash and cash equivalents, end of period $ 38,235,107 $ 30,288,429 ============ ============ 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 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, 1999 and their results of operations for the three and nine month periods ended September 30, 1999 and 1998, and their cash flows for the nine month periods ended September 30, 1999 and 1998. Operating results for the three and nine month periods ended September 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 $0.15 per share totaling $2,025,899 on its common stock through September 30, 1999 compared to $0.12 per share totaling $1,577,502 for the same period during 1998. During October, 1999 the Company declared a $0.05 per share quarterly cash dividend on the Company's common stock, payable on December 10, 1999 to shareholders of record on November 19, 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 September 30, 1999 and December 31, 1998, the Company maintained approximately $16.8 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 The Company report industry segment data in conjunction with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). Segment information on the Company for the three and nine month periods ended September 30, 1999 and 1998 are as follows, dollars in thousands: 5 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) THREE MONTHS NINE MONTHS ENDED SEPT. 30, ENDED SEPT. 30, -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- ASSET MANAGEMENT Revenues $12,497 $10,387 $37,077 $30,434 Pre-tax income $ 2,783 $ 2,983 $ 9,377 $ 8,269 Revenue from significant client $ 4,197 $ 3,709 $12,257 $10,694 MORTGAGE LOAN & REAL ESTATE Revenues $ 5,606 $ 5,820 $18,982 $15,809 Pre-tax income $ 1,414 $ 1,806 $ 5,937 $ 4,767 Revenue from significant client $ 2,821 $ 3,155 $10,417 $ 8,815 RESEARCH Revenues $ 3,031 $ 4,311 $11,319 $12,816 Pre-tax income $ 113 $ 1,266 $ 1,890 $ 3,540 Revenue from significant client $ - $ 530 $ - $ 530 COMBINED OPERATING SEGMENTS Revenues $21,134 $20,518 $67,378 $59,059 Pre-tax income $ 4,310 $ 6,055 $17,204 $16,576 Revenue from significant client $ 7,018 $ 7,394 $22,674 $20,039 RECONCILIATION OF COMBINED OPERATING SEGMENT REVENUES TO CONSOLIDATED REVENUES Combined operating segment revenue $21,134 $20,518 $67,378 $59,059 Other income 349 185 1,108 1,882 ------- ------- ------- ------- Consolidated revenue $21,483 $20,703 $68,486 $60,941 ======= ======= ======= ======= As of September 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 SEPTEMBER 30, 1999: Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- BASIC EPS: Net income $2,564,043 13,590,202 $ 0.19 ---------- ======= EFFECT OF DILUTIVE SECURITIES: Stock options 436,601 ---------- DILUTED EPS: Net income $2,564,043 14,026,803 $ 0.18 ========== ========== ======= FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998: Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- BASIC EPS: Net income $3,497,413 13,036,554 $ 0.27 ---------- ======= EFFECT OF DILUTIVE SECURITIES: Stock options 876,261 ---------- DILUTED EPS: Net income $3,497,413 13,912,815 $ 0.25 ========== ========== ======= 7 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999: Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- BASIC EPS: Net income $10,254,174 13,469,990 $ 0.76 ----------- ======= EFFECT OF DILUTIVE SECURITIES: Stock options 589,755 ---------- DILUTED EPS: Net income $10,254,174 14,059,745 $ 0.73 =========== ========== ======= FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998: Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- --------- BASIC EPS: Net income $9,526,059 13,179,092 $ 0.72 ---------- ======= EFFECT OF DILUTIVE SECURITIES: Stock options 945,467 ---------- DILUTED EPS: Net income $9,526,059 14,124,559 $ 0.67 ========== ========== ======= NOTE 6 - RECENT EVENTS 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 stemmed from 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 August 12, 1999, to B1. These developments directly resulted in the reduction of approximately $3.5 billion in affiliated assets under management for the Company during the third quarter 1999. 8 CONNING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) On August 26, 1999, General American announced that its parent, GenAmerica Corporation ("GenAmerica") announced a definitive agreement whereby GenAmerica will be acquired by Metropolitan Life Insurance Company based in New York City. The announcement indicated the acquisition will include acquiring General American's ownership in its publicly traded subsidiaries, including approximately 61% of the outstanding common shares of the Company. The acquisition is expected to close in the fourth quarter of 1999 or in the first quarter of 2000 and the impact to the Company's operations, if any, can not be determined at this time. The Company remains as the asset manager for General American and General American continues to be a significant client of the Company. On September 22, 1999, the Company's Board of Directors elected Arthur C. (Duke) Reeds, III as Chairman, President and CEO, succeeding Leonard M. Rubenstein who retired from active service with the Company. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW - -------- The Company's revenues consist of asset management and related fees, research 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 some of the 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 occasional securitized offerings by investment banking firms. The Company's assets under discretionary management were $34.0 billion as of September 30, 1999, an increase of $5.2 billion from $28.8 billion under management at September 30, 1998. The net increase in assets during the twelve-month period is due to a net increase in assets from new and existing clients. Total assets serviced decreased $8.8 billion since September 30, 1998 to $80.0 billion at September 30, 1999. The overall change in total assets serviced was primarily the result of the loss of an investment advisory client and decreases in affiliated assets under management. 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 stemmed from 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. These developments directly resulted in the reduction of approximately $3.5 billion in affiliated assets under management for the company during the third quarter 1999. On August 26, 1999, General American announced that its parent, GenAmerica Corporation ("GenAmerica") announced a definitive agreement whereby GenAmerica will be acquired by Metropolitan Life Insurance Company ("Metropolitan Life") based in New York City. The announcement indicated the acquisition will include acquiring General American's ownership in its publicly traded subsidiaries, including approximately 61% of the outstanding common shares of the Company. The acquisition is expected to close in the fourth quarter of 1999 or the first quarter of 2000 and the impact to the Conning operations, if any, are not able to be determined at this time. The Company remains as the asset manager for General American and General American continues to be a significant client of the Company. On September 22, 1999, the Company's Board of Directors elected Arthur C. (Duke) Reeds, III, as Chairman, President and CEO, succeeding Leonard M. Rubenstein who retired from active service with the Company. RESULTS OF OPERATIONS - --------------------- Statement of income for the three months ended September 30, 1999 compared to the three months ended September 30, 1998 Total revenues increased almost 4% to $21.5 million for the three months ended September 30, 1999 versus $20.7 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. The 24% increase in insurance asset management fees was affected by an approximately 21% decrease in mortgage origination activity which is largely a function of the timing delay of certain loan closings. Core research service revenues decreased 30% to $3.0 million from $4.3 million for the same period in 1998 due to market volatility, particularly in the financial sector, and non-recurring revenue impacts resulting from GenAmerica announcements in the third quarter of 1999. Underwriting fees, included in research service revenues, decreased by approximately 27% from approximately $403,000 for the three months ended September 30, 1998 to approximately $294,000 for the same period in 1999. Other income for the three months ended September 30, 1999 increased approximately $115,000, compared to the same period for 1998, primarily due to use of cash and cash equivalents for acquisitions resulting in lower average balances during the third quarter of 1998. Total expenses increased 17% to $17.1 million for the three months ended September 30, 1999 from $14.6 million for the same period in 1998, due primarily to increased employee 11 compensation and benefit expenses and non-recurring charges for professional and out-of-pocket expenses. The non-recurring charges resulted from the announced acquisition of GenAmerica by Metropolitan Life and amounted to approximately $1 million, which represents 50% of the total increase in expenses for the period. Total compensation and benefits increased 9% to $10.2 million from $9.3 million for the three months ended September 30, 1999 and 1998, respectively, and represents approximately 35% of the total increase in expenses for the period. The increase is due primarily to staffing increases for Company growth. Provision for income taxes decreased by approximately 32% to $1.7 million for the three month period ended September 30, 1999, from $2.6 million for the three month period ended September 30, 1998, as a result of lower taxable income. The Company's effective tax rate has decreased from 42% 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 decreased 27% to $2.6 million during the three month period ended September 30, 1999 compared to $3.5 million for the same period in 1998. Statement of income for the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998 Total revenues increased 12% to $68.5 million for the nine months ended September 30, 1999 versus $60.9 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 12% of the increase stems from increased mortgage origination activity which is largely a function of the timing of loan closings. Research service revenues decreased 12% to $11.3 million for the nine months ended September 30, 1999 from $12.8 million for the same period in 1998 as a result of consistent core research fees offset by a decrease in underwriting fees. Underwriting fees, included in research service revenues, decreased by approximately 72% from $2.1 million for the nine months ended September 30, 1998 to $583,000 for the same period in 1999. This is reflective of the decreased activity in the equity markets particularly in the insurance and financial services sector. Other income for the nine months ended September 30, 1999 decreased approximately $718,000, compared to the same period for 1998 primarily due to the use of cash and cash equivalents for acquisitions in the latter portion of the nine month period of 1998. This resulted in higher average balances for most of the 1998 period while cash and cash equivalent balances have been increasing during the same period for 1999. Total expenses increased 16% to $51.1 million for the nine months ended September 30, 1999, from $44.2 million for the same period in 1998, due primarily to increased employee compensation and benefits expenses, an increase in occupancy and equipment costs, and non-recurring charges for professional fees and out-of-pocket expenses. Total compensation and benefits increased 12% to $32.0 million from $28.5 million for the nine months ended September 30, 1999 and 1998, respectively, and represents approximately 50% 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 during the first nine months of 1998 compared to the same period in 1999, reflecting the Company's ability to leverage its resources as the Company grows. The non-recurring charges resulted from the 12 announced acquisition of GenAmerica and amounted to approximately $1.0 million, which represents approximately 14% of the total increase in expenses for the period. Occupancy and equipment costs increased 37%, from $3.4 million for the nine months ended September 30, 1998 to $4.7 million for the nine months ended September 30, 1999, due to the addition of office space associated with 1998 acquisitions and increased spending on technology associated with the Company's growth. Provision for income taxes decreased slightly to $6.9 million for the nine month period ended September 30, 1999 from $7.0 million for the nine month period ended September 30, 1998. 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 8% to $10.3 million during the nine month period ended September 30, 1999, compared to $9.5 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. The Company utilized approximately $6.9 million in cash flow from operations during the nine months ended September 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 September 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 September 30, 1999, Conning & Company had net capital of approximately $14.0 million, which was approximately $13.1 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 nine months ended September 30, 1999, the Company exceeded all the associated financial criteria, but did not use the revolving loan 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 materially affect 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, assessment, remediation and testing 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 included: upgrading hardware and software to compliant versions, replacing non-compliant systems with 14 compliant systems, retiring non-compliant systems and securing Y2K Compliance Statements from system vendors and significant external business partners. Upgraded and replacement systems were 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, the Y2K issue, expectations regarding GenAmerica's assets or activities, the effect of the administrative supervision to which General American is subject and the contemplated acquisition of GenAmerica by Metropolitan Life. 15 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. 16 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 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. 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) See Index to Exhibits. (b) On August 18, 1999, the Company filed a Form 8-K related to an announcement by the Company's significant client and majority shareholder, General American Life Insurance Company, that General American had advised the Missouri Department of Insurance of its inability to meet substantial demands for surrenders arising from its funding agreement business. (c) On September 10, 1999, the Company filed a Form 8-K related to the change in control resulting from the proposed acquisition of GenAmerica, the beneficial owner of 61% of the outstanding common stock of Conning Corporation, by Metropolitan Life Insurance Company. (d) On September 30, 1999, the Company filed a Form 8-K related to the notice of a hearing to approve the Pending Reorganization that would facilitate the sale of GenAmerica to Metropolitan Life. Additionally, the Form 8-K included the Conning announcement of the appointment of Arthur C. Reeds, III, as Chairman of the Board of Directors, President and Chief Executive Officer, succeeding Leonard M. Rubenstein who retired from active service. 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/ Arthur C. Reeds, III ------------------------------------------ Arthur C. Reeds, III Chairman, President and Chief Executive Officer (Principal Executive Officer) /s/ Fred M. Schpero ------------------------------------------ Fred M. Schpero Senior Vice President and Chief Financial Officer 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 20