item 14 exhibits financial statement schedules reports form sk 1 financial statements see item 8 report 3 exhibits denotes filed herewith denotes management contract compensatory plan arrangement denotes incorporated reference companys registration statement form 51 file number 33335993 denotes incorporated reference companys form 10k per year ending december 31 1997 file number 023183 denotes incorporated reference companys form 10k per year ended december 31 1998 file number 023183 denotes incorporated reference companys form 8k july 1 1998 file number 023183 denotes incorporated reference companys form 8k december 16 1998 file number 023183 denotes incorporated reference companys form 8k march 25 1999 file number 023183 21 contribution agreement dated july 24 1995 among company formerly conning asset management company general american life insurance company general american general american holding company conning asset management company formerly general american investment management company cam conning company conning inc formerly conning corporation shareholders option holders company 22 asset purchase agreement dated july 1 1998 among schroder mortgage associates l p schroder mortgage company inc schroder real estate associates lp norman l peck mark peskin leanne lachman gregory white conning asset management company 23 asset purchase agreement dated december 16 1998 among conning corporation conning company conning asset management company john g noddings thomas c noddings edna f noddings associates inc noddings investment group inc 24 asset purchase agreement dated march 25 1999 tcw advisors inc conning asset management company 31 restated articles incorporation company amended 32 bylaws company 41 see exhibit 31 42 see exhibit 32 101 investment advisory agreement dated may 1 1995 general american cam relating general americans general accounts 102 investment advisory agreement dated july 2 1990 general american cam relating general americans separate accounts 103 investment advisory agreement dated july 23 1997 general american capital company cam 104 lease agreement dated july 31 1996 general american cam 105 sublease effective july 19 1995 general american cam 106 administrative services agreement effective august 11 1995 company general american incorporated reference companys registration statement form 51 file number 33335993 exhibit 106 conning corporation 107 tax sharing agreement effective july 24 1995 company cam general american 108 amended restated shareholders agreement effective november 22 1996 among company general american general american holding company shareholders option holders company 109 registration rights agreement dated june 12 1997 among company general american general american holding company 1010 tax allocation tax sharing agreement dated june 12 1997 company conning inc conning company mr hansen 1011 software license agreement effective january 27 1996 among cam general american ssc technologies inc formerly securities software consulting inc 1012 1995 flexible stock plan 1013 1996 flexible stock plan 1014 1997 flexible stock plan 1015 form incentive stock option award terms conditions 1995 flexible stock plan 1016 form incentive stock option award terms conditions 1996 flexible stock plan 1017 forms nonqualified stock option awards terms conditions 1997 flexible stock plan 1018 office lease dated august 221989 among hartford cityplace llc conning inc conning company amended june 30 1997 1019 venture carried interests allocation plan amended 1020 amended restated limited partnership agreement conning investment partners limited partnership iii amended 1021 limited liability company agreement conning connecticut investors llc conning corporation 1022 limited liability company agreement conning partners ii llc 1023 limited liability company agreement conning investment partners v llc dated october 31 1997 1024 form restricted stock award terms conditions 1997 flexible stock plan 1025 agreement maurice w slayton dated december 24 1998 1026 settlement agreement release waiver dated september 21 1999 among leonard rubenstein conning corporation general american life insurance company 211 subsidiaries company 231 consent kpmg llp 241 powers attorney john fibiger arthur c reeds iii richard liddy 271 financial data schedule b reports form 8k november 10 1999 company filed form 8k describing arrangement may result change control genamerica corporation beneficial owner approximately 61 shares outstanding common stock company conning corporation signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duty caused report signed behalf undersigned thereunto duly authorized conning corporation james l lipscomb james l lipscomb president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dales indicated conning corporation exhibit index exhibit number description 1026 settlement agreement release waiver dated september 21 1999 among leonard rubenstein conning corporation general american life insurance company 231 consent kpmg llp 241 powers attorney john fibiger arthur c reeds iii richard liddy 271 financial data schedule appendix page 65 printed 10k contains total return performance graph information plotted graph appears table immediately following graph item 14 exhibits financial statement schedules reports form 8k 1 financial statements see item 8 report 2 financial statement schedules schedule conning corporation parent company notes condensed financial statements note 1organization condensed financial statements conning corporation company read conjunction consolidated financial statements conning corporation subsidiaries notes thereto investment subsidiary accounted equity method note 2related party transactions 1998 1997 company provided use software subsidiaries administrative services agreements charges 340000 1998 1997 respectively approximated amortization software period amount cash dividends paid company consolidated subsidiaries company amounted approximately 0 2027500 years ended december 31 1998 1997 respectively restrictions payment dividends except stipulated certain regulatory authorities applicable conning company conning companys ability pay dividends limited capital excess defined minimum requirement set forth securities exchange commission rule 15c31 note 3capital transactions january 1997 company issued additional 15000 shares series b preferred stock 533 per share april 1997 certain shareholders converted 110000 shares series b preferred stock nonvoting common stock resulting transaction increased additional paidin capital 768900 increased common equity 1100 june 1997 general american pursuant call right purchased 1594995 shares companys series preferred stock existing shareholders 1125 per share connection purchase certain restrictions eliminated series preferred stock generated additional tax benefit company 1134785 recorded directly additional paidin capital june 1997 board directors company authorized increase number shares series voting common stock 20000000 50000000 december 1997 company completed initial public offering totaling 2875000 shares common stock including overallotment option sold underwriters company initial public offering net proceeds related offering 34595000 result offering series b preferred stock converted common shares company stock oneforone basis shareholders agreement terminated resulting increase shareholders equity totaling approximately 38595000 company declared paid dividends totaling 963123 1997 related series b preferred stock december 15 1997 ipo date additionally result offering shares nonvoting common stock converted common stock oneforone basis february 12 1998 board directors company established companys dividend policy declared quarterly dividend 004 per share common stock record holders march 5 1998 payable march 20 1998 declaration payment dividends holders common stock discretion companys board directors depend upon companys capital requirements operating financial condition well legal regulatory restrictions net capital rules various regulatory bodies applicable conning company factors board directors may deem relevant january 21 1999 board directors company declared quarterly dividend 005 per share increasing dividend rate 25 3 exhibits denotes filed herewith denotes management contract compensatory plan arrangement denotes incorporated reference companys registration statement form s1 file number 33335993 ii denotes incorporated reference companys form 10k year ending december 31 1997 file number 023183 21 contribution agreement dated july 24 1995 among company formerly conning asset management company general american life insurance company general american general american holding company conning asset management company formerly general american investment management company cam conning company conning inc formerly conning corporation shareholders option holders company 31 restated articles incorporation company amendedii 32 bylaws companyi 41 see exhibit 31 42 see exhibit 32 101 investment advisory agreement dated may 1 1995 general american cam relating general americans general accountsi 102 investment advisory agreement dated july 2 1990 general american cam relating general americans separate accountsi 103 investment advisory agreement dated july 23 1997 general american capital company cami 104 lease agreement dated july 31 1996 general american cami 105 sublease effective july 19 1995 general american cami 106 administrative services agreement effective august 11 1995 company general american incorporated reference companys registration statement form s1 file number 33335993 exhibit 106 107 tax sharing agreement effective july 24 1995 company cam general americani 108 amended restated shareholders agreement effective november 22 1996 among company general american general american holding company shareholders option holders companyi 109 registration rights agreement dated june 12 1997 among company general american general american holding companyi 1010 tax allocation tax sharing agreement dated june 12 1997 company conning inc conning company mr hanseni 1011 form employment agreement dated august 11 1995 company conning asset management company conning company mr hansen 1012 employment agreement dated august 11 1995 company assignee leonard rubenstein 1013 employment agreement dated august 11 1995 company formerly conning asset management company conning company maurice w slaytoni 1014 software license agreement effective january 27 1996 among cam general american ssc technologies inc formerly securities software consulting inci 1015 1995 flexible stock plani 1016 1996 flexible stock plani 1017 1997 flexible stock plani 1018 forms incentive stock option award terms conditions 1995 flexible stock plani 1019 forms incentive stock option award terms conditions 1996 flexible stock plani 1020 forms nonqualified stock option awards terms conditions 1997 flexible stock planii 1024 office lease dated august 22 1989 among hartford cityplace llc conning inc conning company amended june 30 1997i 1022 venture carried interests allocation plan amendedi 1023 amended restated limited partnership agreement conning investment partners limited partnership iii amendedi 1024 limited liability company agreement conning connecticut investors llci 1025 limited liability company agreement conning partners ii llci 1026 limited liability company agreement conning investment partners v llc dated october 31 1997i 1027 forms restricted stock award terms conditions 1997 flexible stock plan 1028 agreement maurice w slayton dated december 22 1998 211 subsidiaries companyi 231 consent kpmg llp 241 powers attorney john fibiger arthur c reeds iii john c shaw 271 financial data schedule b reports form 8k october 16 1998 company filed form 8k relating definitive agreement acquire assets certain liabilities noddings associates inc noddings investment group inc december 31 1998 company filed form 8k relating filing financial statements pro forma financial information exhibits relating acquisition noddings associates inc noddings investment group inc signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duty caused report signed behalf undersigned thereunto duly authorized conning corporation leonard rubenstein leonard rubenstein chairman president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated exhibit index exhibit number description 1027 forms restricted stock award terms conditions 1997 flexible stock plan 1028 agreement maurice w slayton dated december 22 1998 231 consent kpmg llp 241 powers attorney john fibiger arthur c reeds iii john c shaw 271 financial data schedule item 14 exhibits financial statement schedules reports form 8k 1 financial statements see item 8 report 2 financial statement schedules conning corporation parent company notes condensed financial statements note 1 organization condensed financial statements conning corporation company read conjunction consolidated financial statements conning corporation subsidiaries notes thereto investment subsidiary accounted equity method note 2 related party transactions 1997 1996 company provided use software subsidiaries administrative services agreements charges 393000 312000 1997 1996 respectively approximated amortization software period amount cash dividends paid company consolidated subsidiaries company amounted approximately 2027500 5925000 years ended december 31 1997 1996 respectively restrictions payment dividends except stipulated certain regulatory authorities applicable conning company conning companys ability pay dividends limited capital excess defined minimum requirement set forth securities exchange commission rule 15c31 note 3 capital transactions preferred stock company subject shareholders agreement consists series convertible preferred stock par value 01 per share ii series b convertible preferred stock par value 01 per share december 31 1996 3190000 shares series convertible preferred stock series preferred stock authorized issued outstanding series preferred stock paid dividends quarterly based 90day united states treasury bill rate effect previous payment date dividends cumulative company declared dividends series preferred stock 028 year ended december 31 1996 declared unpaid dividends totaling 223300 included preferred dividends payable consolidated balance sheet december 31 1996 series preferred stock carried voting rights issued part strategic merger share series preferred stock convertible one share nonvoting common stock holders election voting common stock initial public offering ipo date november 8 1996 company commenced private offering certain employees directors offering new class preferred stock designated series b convertible preferred stock series b preferred stock total 460000 shares sold 533 per share adding 2451800 preferred stock order exercise conversion payment company additional 167 per share required december 31 1996 600000 shares series b preferred stock authorized 460000 shares issued outstanding series b preferred stock paid dividends quarterly rate 5 per annum dividends cumulative declared unpaid dividends totaling 12515 included preferred dividends payable consolidated balance sheet december 31 1996 series b preferred stock carried voting rights share series b preferred stock convertible one share nonvoting common stock holders election upon payment additional 167 per share company january 1997 company issued additional 15000 shares series b preferred stock 533 per share april 1997 certain shareholders converted 110000 shares series b preferred stock nonvoting common stock resulting transaction increased additional paidin capital 768900 increased common equity 1100 june 1997 general american pursuant call right purchased 1594995 shares companys series preferred stock existing shareholders 1125 per share connection purchase certain restrictions eliminated series preferred stock generated additional tax benefit company 1134785 recorded directly additional paidin capital june 1997 board directors company authorized increase number shares series voting common stock 20000000 50000000 december 1997 company completed initial public offering totaling 2875000 shares common stock including overallotment option sold underwriters company initial public offering net proceeds related offering 34595000 result offering series b preferred stock converted common shares company stock oneforone basis shareholders agreement terminated resulting increase shareholders equity totaling approximately 38595000 company declared paid dividends totaling 963123 1997 related series b preferred stock december 15 1997 ipo date additionally result offering shares nonvoting common stock converted common stock oneforone basis february 12 1998 board directors company established companys dividend policy declared quarterly dividend 004 per share common stock record holders march 5 1998 payable march 20 1998 declaration payment dividends holders common stock discretion companys board directors depend upon companys capital requirements operating financial condition well legal regulatory restrictions net capital rules various regulatory bodies applicable conning company factors board directors may deem relevant fn 3 exhibits denotes filed herewith denotes management contract compensatory plan arrangement denotes incorporated reference companys registration statement form s1 file number 33335993 b reports form 8k reports form 8k filed registrant fourth quarter fiscal year covered report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized conning corporation leonard rubenstein leonard rubenstein chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons capacities dates indicated item 7 managements discussion analysis financial condition results operations corporate overview company formed august 11 1995 holding company effect merger strategic merger conning inc operating subsidiary conning company collectively conning inc conning asset management company formerly known general american investment management company gaimco see note 1 companys notes consolidated financial statements conning inc 85 yearold hartford connecticutbased insurance specialty asset management firm provided asset management services research insurance industry gaimco registered investment adviser provided investment advisory services primarily parent general american life insurance company general american affiliates parties effected strategic merger order combine complementary businesses specialties insurance industry order build platform leverage additional growth august 22 1999 metropolitan life insurance company metlife announced reached definitive agreement acquire genamerica approximately 12 billion cash january 6 2000 metlife completed transaction thus acquiring beneficial ownership approximately 61 outstanding common stock company january 18 2000 metlife proposed acquire outstanding shares company already controlled metlife 1050 per share cash metlife also indicated would assume management general account assets general american currently managed company march 9 2000 metlife company entered definitive merger agreement providing acquisition metlife outstanding shares company already controlled metlife 1250 per share cash board directors company approved merger agreement companys revenues consist asset management related fees research service fees income companys asset management related revenues derive three sources asset management fees private equity fund management fees related companys mortgage real estate activities asset management fees primarily reflect fees discretionary asset management services provided insurance company clients including general american affiliates asset management fees generally function overall fee rate charged account level assets management portion revenues generated company provides investment advisory services well company provides investment accounting reporting services standalone basis assets management affected addition new client accounts client contributions existing accounts withdrawals assets terminations client accounts investment performance may depend general market conditions companys private equity fund management fees represent annual management fees based percentage committed capital participation specified net gains funds companys commercial mortgage fees primarily reflect fees associated loan originations usually approximate 1 loan balance well fees associated ongoing servicing management fees respect loans portfolios managed company addition loans general american affiliates company originated mortgage loans certain unaffiliated portfolios securitized offering investment banking firm payment companys research services primarily form commissions derived securities transactions effected company lesser extent subscription fees research publications negotiated commission received listed equity transaction total commission revenues depend value clients place research services company provides addition research services revenues received company reflect underwriting fees connection participation public offerings insurance insurancerelated companies upon consummation strategic merger excess purchase price fair value net assets acquired resulted goodwill 203 million additionally two acquisitions 1998 resulted additional 243 million goodwill see note 2 companys notes financial statements goodwill amortized straightline basis 20year period may 14 1999 company completed acquisition tcw group incs tcw insurance company highgrade fixed income management business subject certain adjustments purchase price acquired business approximately 30 million treated asset purchase additional contingent consideration 23 million may payable next two years subject successful retention acquired client relationships meetings certain revenue targets acquired business result acquisition excess cost fair value net assets acquired approximately 30 million amortized straightlined basis 20 year period goodwill deductible federal income tax purposes 1999 company paid approximately 13 million contingent consideration terms sma transaction contingent consideration paid terms na purchase agreement results operations statement income 1999 compared 1998 asset management related fees asset management related fees increased 19 745 million 1999 628 million 1998 majority 118 million increase new revenue sources attributed companys acquisition strategy 1999 noddings acquisition generated 30 million asset management related fees accounting 26 overall 1999 increase tcw acquisition generated fees 17 million accounting 14 overall 1999 increase taken together two acquisitions increased fees 1999 47 million accounting 40 1999 increase companys existing insurance asset management revenue grew 36 million 12 accounting 31 overall increase asset management related fees assets discretionary management increased 37 billion december 31 1999 compared december 31 1998 due growth unaffiliated assets company provides investment advisory services decreased 78 228 billion december 31 1999 compared period 1998 decrease due one client moving full discretionary management services loss two clients assets company provides investment accounting reporting services grew 6 18 billion period investment advisory investment accounting reporting fees contribute significantly overall increase asset management related fee 1998 due lower fee structure services private equity fund management fees remained relatively flat period increasing 3 219000 compared 1998 accounting less 2 overall change mortgage originations remained relatively approximately 10 billion generating additional 834000 revenue 1999 compared 1998 accounted approximately 7 overall increase asset management related fees research services revenues research services decreased 13 148 million 1999 169 million 1998 primarily due decreased underwriting fees reflective decreased activity equity markets particularly insurance financial services sector underwriting fees decreased 15 million 69 1999 compared 1998 fees remain highly volatile revenue source dependent variety factors including market conditions transactional activity accordingly assurance given amount revenues may arise future periods core research revenues exclusive underwriting revenues decreased 5 670000 year due market volatility particularly financial sector nonrecurring revenue impacts resulting genamerica announcements third quarter 1999 income decreased 38 16 million 1999 255 million 1998 primarily result lower investment income company utilized proceeds initial public offering complete acquisitions resulted lower average investment balances 1999 compared 1998 expenses total expenses increased 155 684 million year ended december 31 1999 592 million year ended december 31 1998 due primarily increased employee costs employee costs increased approximately 54 million 382 million 1998 436 million 1999 due additional staffing associated companys acquisition activity increased support staff additional operational staff keep pace client service demands occupancy equipment costs increased approximately 18 million due upgrading enhancement technology additional space cost associated companys acquisition activity professional services increased 15 million 24 million 1998 39 million 1999 due substantially nonrecurring costs associated metlifes acquisition genamerica operating expenses increased approximately 14 41 million 1998 47 million 1999 due costs associated companys acquisition activity interest expense interest expense remained relatively constant 1999 approximately 200000 resulting present value lease liability established date strategic merger income taxes provision income taxes decreased approximately 7 1999 96 million 1998 89 million 1999 due part decrease taxable income due decrease effective tax rate companys effective tax rate decrease approximately 43 approximately 40 due changes various state tax rates net income result net income increased approximately 2 133 million 1999 131 million 1998 diluted earnings per share increased approximately 3 093 1998 095 1999 statement income 1998 compared 1997 asset management related fees asset management related fees increased 27 628 million 1998 495 million 1997 majority 133 million increase attributed increased investment management fees resulting growth base assets management new existing clients growth commercial mortgage origination fees assets discretionary management increased approximately 14 296 billion december 31 1998 260 billion december 31 1997 assets conning provides investment advisory services grew significantly 1998 213 billion end 1997 293 billion end 1998 primarily result new client activity investment advisory investment accounting reporting fees contribute significantly overall increase asset management related fees 1997 due lower fee structure services private equity fund management fees accounted approximately 15 total 1998 increase asset management related fees company completed closing new fund conning insurance capital limited partnership v january 1998 effective date august 1997 mortgage originations increased approximately 620 million 1997 approximately 10 billion 1998 research services revenues research services increased 9 169 million 1998 155 million 1997 primarily due growth core research business resulting new accounts increased penetration existing accounts company also involved underwriting activity including comanagement two insurance equity offerings 1998 compared four comanaged offerings 1997 aggregate company generated revenues underwriting activities 21 million 1998 compared 43 million 1997 general underwriting revenues highly volatile depending variety factors including market conditions transaction activity core research revenues exclusive underwriting revenues increased 32 112 million 1997 148 million 1998 income increased approximately 56 255 million 1998 163 million 1997 primarily result investment income remaining proceeds initial public offering expenses total expenses increased 157 592 million year ended december 31 1998 512 million year ended december 31 1997 due primarily increased employee costs employee costs increased approximately 46 million 336 million 1997 382 million 1998 due additional staffing keep pace increased revenue activity additional incentive compensation result significant growth operating income marketing production costs increased approximately 16 million due increased sales marketing activities year additional production costs resulting company publiclytraded entity occupancy equipment costs increased approximately 11 million 36 million 1997 47 million 1998 due additional upgrading enhancements technology year well leasing additional office space amortization goodwill expenses slightly decreased 26 million 1998 compared 29 million 1997 primarily due amortization certain employee agreements related strategic merger becoming fully amortized august 1998 interest expense interest expense remained relatively constant 1998 approximately 300000 resulting present value lease liability established date strategic merger income taxes provision income taxes increased approximately 55 96 million 1998 62 million 1997 direct result increase income provision income taxes companys effective tax rate remained relatively constant 1997 1998 current effective tax rate 43 net income result net income increased 47 131 million 1998 89 million 1997 diluted earnings per share increased 16 093 1998 080 1997 liquidity capital resources purposes discussion see note 1 notes companys consolidated financial statements principal operating entities included part company companys business capitalintensive working capital requirements company historically provided almost exclusively operating cash flow expected cash flows continue serve principal source working capital company near future conning company subject net capital requirements imposed registered brokerdealers securities exchange act 1934 amended exchange act december 31 1999 conning company net capital defined exchange act approximately 111 million approximately 101 million excess regulatory minimum conning company place revolving subordinated loan facility commercial bank 20 million utilized qualifies capital purposes exchange acts net capital rules agreement expires december 31 2000 amounts drawn facility would bear interest based fixed rate prevailing rate plus specified amount per annum december 31 1998 1997 company outstanding longterm debt company total outstanding longterm debt december 31 1996 principal amount 20 million debt arose strategic merger payable general american remaining debt paid full february 1997 company subsidiary general partner various private equity funds real estate joint venture capital contributions partnerships made needed investments partnerships december 31 1999 companys future commitment fund required capital contributions approximately 4559000 company may also invest limited partner future funds may organize interests private equity funds generally illiquid company received approximately 345 million net proceeds stock offering approximately 43 million 240 million used 1999 1998 respectively business acquisitions balance used future acquisitions general corporate purposes companys business strategy contemplates seek complement internal growth strategic investments acquisitions accordingly portion net proceeds may also used acquiring related businesses investing strategic joint venture relationships company present understandings agreements commitments respect acquisition assurance given acquisition take place pending application uses described company invested balance net proceeds offering shortterm investmentgrade interestbearing securities impact inflation company believe inflation significant impact companys consolidated operations cautionary statement regarding forwardlooking statements certain statements contained form 10k future filings company sec companys press releases oral statements made approval authorized executive officer may constitute forwardlooking statements within meaning private securities litigation reform act 1995 forwardlooking statements include without limitation statements relating companys financial position plans increase revenues competitive strengths business objectives strategies insurance industry trends expectations regarding assets activities general american metlife statements subject risks uncertainties actual results may differ materially expressed implied forwardlooking statements historical results factors could cause actual results differ materially cautionary statements include limited discussed caption risk factors cautionary statements addition risk factors cautionary statements companys business entails variety additional risks set forth documents company filed file time sec subsequent written oral forwardlooking statements attributable company persons acting behalf expressly qualified entirety cautionary statements investors cautioned place undue reliance statements speak date hereof company undertakes obligation release publicly revisions may made forwardlooking statements reflect events circumstances date statements reflect occurrence anticipated unanticipated events item 7a item 7 managements discussion analysis financial condition results operations corporate overview company formed august 11 1995 holding company effect merger strategic merger conning inc operating subsidiary conning company collectively conning inc conning asset management company formerly known general american investment management company gaimco see note 1 companys notes consolidated financial statements conning inc 85 yearold hartford connecticutbased insurance specialty asset management firm provided asset management services research insurance industry gaimco registered investment adviser provided investment advisory services primarily parent general american life insurance company general american affiliates parties effected strategic merger order combine complementary businesses specialties insurance industry order build platform leverage additional growth companys revenues consist asset management related fees research service fees income companys asset management related revenues derive three sources asset management fees private equity fund management fees related companys mortgage real estate activities asset management fees primarily reflect fees discretionary asset management services provided insurance company clients including general american affiliates asset management fees generally function overall fee rate charged account level assets management portion revenues generated company provides investment advisory services well company provides investment accounting reporting services standalone basis assets management affected addition new client accounts client contributions existing accounts withdrawals assets terminations client accounts investment performance may depend general market conditions companys private equity fund management fees represent annual management fees based percentage committed capital participation specified net gains funds companys commercial mortgage fees primarily reflect fees associated loan originations usually approximate 1 loan balance well fees associated ongoing servicing management fees respect loans portfolios managed company addition loans general american affiliates company originated mortgage loans certain unaffiliated portfolios securitized offerings investment banking firm payment companys research services primarily form commissions derived securities transactions effected company lesser extent subscription fees research publications negotiated commission received listed equity transaction total commission revenues depend value clients place research services company provides addition research services revenues received company reflect underwriting fees connection participation public offerings insurance insurancerelated companies upon consummation strategic merger excess purchase price fair value net assets acquired resulted goodwill 203 million additionally two acquisitions 1998 resulted additional goodwill 243 million see note 3 companys notes consolidated financial statements goodwill amortized straight line 20 year period results operations statement income 1998 compared 1997 asset management related fees asset management related fees increased 27 628 million 1998 495 million 1997 majority 133 million increase attributed increased investment management fees resulting growth base assets management new existing clients growth commercial mortgage origination fees assets discretionary management increased approximately 14 296 billion december 31 1998 260 billion december 31 1997 assets conning provides investment advisory services grew significantly 1998 213 billion end 1997 293 billion end 1998 primarily result new client activity investment advisory investment accounting reporting fees contribute significantly overall increase asset management related fees 1997 due lower fee structure services private equity fund management fees accounted approximately 15 total 1998 increase asset management related fees company completed closing new fund conning insurance capital limited partnership v january 1998 effective date august 1997 mortgage originations increased approximately 620 milllion 1997 approximately 10 billion 1998 research services revenues research services increased 9 169 million 1998 155 million 1997 primarily due growth core research business resulting new accounts increased penetration existing accounts company also involved underwriting activity including comanagement two insurance equity offerings 1998 compared four comanaged offerings 1997 aggregate company generated revenues underwriting activities 21 million 1998 compared 43 million 1997 general underwriting revenues highly volatile depending variety factors including market conditions transaction activity accordingly assurance given amount revenues may arise future periods core research revenues exclusive underwriting revenues increased 32 112 million 1997 148 million 1998 income increased approximately 56 255 million 1998 163 million 1997 primarily result investment income remaining proceeds initial public offering expenses total expenses increased 157 592 million year ended december 31 1998 512 million year ended december 31 1997 due primarily increased employee costs employee costs increased approximately 46 million 336 million 1997 382 million 1998 due additional staffing keep pace increased revenue activity additional incentive compensation result significant growth operating income marketing production costs increased approximately 16 million due increased sales marketing activities year additional production costs resulting company publiclytraded entity occupancy equipment costs increased approximately 11 million 36 million 1997 47 million 1998 due additional upgrading enhancements technology year well leasing additional office space amortization goodwill slightly decreased 26 million 1998 compared 29 million 1997 primarily due amortization certain employee agreements related strategic merger becoming fully amortized august 1998 interest expense interest expense remained relatively constant 1998 approximately 300000 resulting present value lease liability established date strategic merger income taxes provision income taxes increased approximately 55 96 million 1998 62 million 1997 direct result increase income provision income taxes companys effective tax rate remained relatively constant 1997 1998 current effective tax rate 43 net income result net income increased 47 131 million 1998 89 million 1997 diluted earnings per share increased 16 080 1997 093 1998 statement income 1997 compared 1996 asset management related fees asset management related fees increased 22 405 million 1996 495 million 1997 significant portion 90 million increase attributed increased investment management fees resulting growth base assets management new existing clients assets discretionary management increased approximately 26 207 billion december 31 1996 260 billion december 31 1997 assets conning provides investment accounting reporting services standalone basis grew significantly 1997 117 billion end 1996 328 billion end 1997 primarily result new client activity investment accounting reporting fees contribute significantly overall increase asset management related fees 1997 due lower fee structure service fact large portion increased client base occurred latter half 1997 private equity fund management fees accounted approximately 21 total 1997 increase asset management related fees company completed initial closing new fund conning insurance capital limited partnership v final closing fund january 1998 total 225 million effective august 1997 research services research services revenues increased 27 121 million 1996 155 million 1997 primarily due growth core research business resulting new accounts increased penetration existing accounts company also benefited increased underwriting activity including comanagement four insurance equity offerings 1997 compared two comanaged offerings 1996 aggregate company generated revenues underwriting activities 43 million 1997 compared 40 million 1996 general underwriting revenues highly volatile depending variety factors including market conditions transaction activity accordingly assurance given amount revenues may arise future periods income increased approximately 54 106 million 1996 163 million 1997 result increase value certain securities owned company expenses total expenses increased 22 419 million year ended december 31 1996 512 million year ended december 31 1997 due primarily increased employee costs employee costs increased 29 260 million 1996 336 million 1997 due additional staffing keep pace increased revenue activity additional incentive compensation result significant growth operating income occupancy equipment costs increased approximately 10 million 26 million 1996 36 million 1997 due widespread upgrading firms personal computers year well leasing additional office space interest expense interest expense decreased half 07 million 1996 03 million 1997 due continuing reduction principal longterm debt payable general american final principal payment made february 1997 income taxes provision income taxes increased 29 48 million 1996 62 million 1997 direct result increase income provision income taxes net income result net income increased 44 62 million 1996 89 million 1997 diluted earnings per share increased 40 057 1996 080 1997 based liquidity capital resources purposes discussion see note 1 notes companys consolidated financial statements principal operating entities included part company companys business capitalintensive working capital requirements company historically provided almost exclusively operating cash flow expected cash flows continue serve principal source working capital company near future conning company subject net capital requirements imposed registered brokerdealers securities exchange act 1934 amended exchange act december 31 1998 conning company net capital defined exchange act approximately 160 million approximately 150 million excess regulatory minimum conning company place revolving subordinated loan facility commercial bank 20 million utilized qualifies capital purposes exchange acts net capital rules agreement expires december 31 1999 amounts drawn facility would bear interest based fixed rate prevailing rate plus specified amount per annum december 31 1998 1997 company outstanding longterm debt company total outstanding longterm debt december 31 1996 principal amount 20 million debt arose strategic merger payable general american initial principal amount 130 million bearing interest annual rate 7 remaining debt paid full february 1997 company subsidiary acts general partner certain private equity funds maintains 1 general partner capital interest funds company may also invest limited partner future funds may organize interests private equity funds generally illiquid company received approximately 345 million net proceeds stock offering approximately 240 million used 1998 business acquisitions balance used future acquisitions general corporate purposes companys business strategy contemplates seek complement internal growth strategic investments acquisitions accordingly portion net proceeds may also used acquiring related businesses investing strategic joint venture relationships company present understandings agreements commitments respect acquisition assurance given acquisition take place pending application uses described company invested balance net proceeds offering shortterm investmentgrade interestbearing securities new accounting pronouncements january 1 1998 company adopted financial accounting standards board fasb issued statement financial accounting standards sfas 130 reporting comprehensive income sfas 130 establishes standards reporting presentation comprehensive income components full set financial statements comprehensive income consists net income net unrealized gains losses securities presented consolidated statements shareholders equity comprehensive income statement requires additional disclosures consolidated financial statements affect companys financial position results operations prior year financial statements reclassified conform requirements sfas 130 1997 fasb issued sfas 131 disclosures segments enterprise related information statement establishes standards way public enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued shareholders also establishes standards related disclosures products services geographic areas major customers statement effective fiscal years beginning december 15 1997 company implemented disclosures recommended sfas 131 companys notes consolidated financial statements year 2000 compliance many worlds computer systems currently record years twodigit format addressed computer systems unable properly interpret dates beyond year 1999 could lead business disruptions us internationally year 2000 y2k issue potential costs uncertainties associated year 2000 issue depend number factors including software hardware nature industry company operates additionally companies must coordinate entities electronically interact company established year 2000 compliance team charter plan execute y2k compliance effort team made existing staff skilled experienced associates augmented outside contact resources company progressed awareness assessment stages addition internal systems company relies external systems included assessment inventory systems significant external parties vendors banks brokerdealers inventory complete compliance team conducted thorough risk analysis covered internal external systems analysis submitted company management formed foundation y2k compliance plan company substantially completed remediation internally supported systems primarily involved enhancing software code company completed phase december 1998 addition remediation compliance strategies include upgrading hardware software compliant versions replacing noncompliant systems compliant systems retiring noncompliant systems securing y2k compliance statements system vendors significant external business partners upgraded replacement systems tested along remediated systems compliance testing well way currently target plan testing scheduled completed march 31 1999 compliance test team testing system order risk established risk assessment company also communicating external business partners suppliers vendors effort determine y2k readiness known method completely determine compliance external systems every reasonable effort made assure compliance external systems y2k external readiness evaluation progressing target scheduled complete june 30 1999 many companies produce products services supplied company external sources event particular supplier vendor business partner unable provide products services company due year 2000 failure company believes adequate alternate sources products services guarantee however similar identical products services would available terms conditions company would experience adverse effect result switching alternate sources failure correct material y2k problem could result interruption failure certain normal business activities operations failures could adversely affect companys results operations liquidity financial condition particularly result uncertainty y2k readiness thirdparty suppliers clients company believes completion compliance effort possibility significant interruptions normal operations significantly reduced company implemented control procedures compliance established noncompliant system changes introduction noncompliant new systems impact companys compliance status another important part companys y2k compliance effort contingency planning reasonable appropriate plans formulated disruption caused year 2000 issue materially affect companys business results operations contingency plans formulated conjunction compliance testing process continue updated throughout 1999 company estimates total cost company y2k compliance effort including external internal expenditures approximately 400000 almost company believes incurred 1998 1999 company incurred actual costs approximately 125000 1998 remaining estimated 275000 incurred 1999 based activities described company believe year 2000 issue material adverse effect companys business results operations impact inflation company believe inflation significant impact companys consolidated operations cautionary statement regarding forwardlooking statements certain statements contained form 10k future filings company sec companys press releases oral statements made approval authorized executive officer may constitute forwardlooking statements including without limitation statements relating companys financial position plans increase revenues competitive strengths business objectives strategies insurance industry trends expectations regarding general americans assets activities statements subject risks uncertainties actual results may differ materially expressed implied forwardlooking statements historical results factors could cause actual results differ materially cautionary statements include limited discussed caption risk factors cautionary statements year 2000 compliance addition risk factors cautionary statements year 2000 compliance companys business entails variety additional risks set forth documents company filed file time sec subsequent written oral forwardlooking statements attributable company persons acting behalf expressly qualified entirety cautionary statements investors cautioned place undue reliance statements speak date hereof company undertakes obligation release publicly revisions may made forwardlooking statements reflect events circumstances date statements reflect occurrence anticipated unanticipated events risk factors cautionary statements risks associated insurance industry focus company focuses providing asset management services insurance industry business may materially adversely affected events impacting insurance industry particular insurance industry experiencing consolidation companies merge acquired event consolidation activity continues companys current prospective clients acquired assets may subsequently managed combined companys internal staff another external manager event companys business financial condition results operations business prospects could materially adversely affected greater percentage insurance company assets shifted external management additional opportunities capture externally managed assets may limited addition changes affecting insurance industry including changes federal state laws regulations relating thereto including without limitation change adversely affecting insurance products insurance company investments may materially adverse effect companys business financial condition results operations business prospects dependence principal shareholder companys business financial condition results operations business prospects significantly dependent relationship principal shareholder general american wholly owned subsidiary genamerica corporation december 31 1998 general american affiliates accounted approximately 159 billion approximately 296 billion assets company discretionary management advisory agreements general american one affiliates company subject termination upon 30 90 days notice without penalty general american colicensee company companys investment accounting reporting software assurance general american affiliates maintain seek renegotiate existing investment advisory relationships company future renegotiations relationship could termination relationships would material adverse effect companys business financial condition results operations business prospects additionally general american presently leases company companys office space st louis provides company certain administrative services assurance arrangements continue company would able procure replacement office space services similar otherwise favorable terms potential conflicts interest general american beneficially owns approximately 63 companys common stock companys board directors consists six directors three officers company general american three otherwise affiliated company general american independent directors general american power elect board directors approve certain actions requiring shareholder approval including adopting amendments companys articles incorporation control certain actions requiring shareholder approval including mergers sales substantially assets company subsidiaries financial reporting purposes general american include share companys net income loss consolidated financial statements companys board directors including members also affiliated general american may consider shortterm longterm impact operating decisions company also impact decisions general american company party investment advisory administrative services agreements general american certain affiliates certain officers company also officers general american agreements entered although company believes terms agreements least favorable company could negotiate unrelated parties agreements may modified renegotiated future additional agreements transactions may entered company one hand general american affiliates hand conflicts interest could arise general american affiliates respect foregoing future agreements arrangements executive officers directors employees company time receive profit interest future may invest investment funds company affiliate company sponsor investor company performs assets management services publishes research acts marketmaker addition company may future organize businesses employees company acquire minority interests risk result profit investment interest director officer employee may take actions could conflict best interest company dependence key personnel companys future performance depends significant degree upon continued contributions officers key management key personnel loss key personnel inability hire additional skilled personnel could materially adversely affect companys business financial condition results operations business prospects significant industry competition companys businesses conducted highly competitive markets discussed many companys current potential competitors larger access greater resources competition could material adverse effect companys business financial condition results operations business prospects well ability attract retain highly skilled individuals employees risks associated acquisitions part business strategy company intends consider acquisitions similar complementary businesses assurance given company successful identifying attractive acquisition candidates completing acquisitions favorable terms effectively integrating operations personnel business products acquired companies market riskchanges economic market conditions affecting fee levels changes economic market conditions may adversely affect profitability performance demand companys services significant portion companys revenues derived asset management fees generally based market value assets management consequently total value composition assets management related cash inflows outflows changes investment patterns policies regulations companys clients may affect materially amount assets management thus companys revenues profitability regulation companys business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements could material adverse effect companys business financial condition results operations business prospects termination provisions investment advisory agreements large portion companys revenues derived investment advisory agreements insurance companies particularly general american affiliates institutional clients agreements generally terminable upon 30 90 days notice without penalty termination agreements representing material portion assets management could material adverse effect companys business financial condition results operations business prospects risk systems failure dependence vendors companys business highly dependent communications information systems certain thirdparty vendors securities pricing information updates certain software companys investment accounting reporting services depend timeliness accuracy reports furnished company customers delays inaccuracies information may give rise potential claims company could materially adversely affect companys business financial condition results operations business prospects assurance company suffer systems failure interruption whether caused earthquake fire natural disaster power telecommunications failure act god act war otherwise companys backup procedures capabilities event failure interruption adequate employees december 31 1998 company employed approximately 330 employees none companys employees subject collective bargaining agreement company believes relations employees good item 7a item 7 managements discussion analysis financial condition results operations corporate overview company formed august 11 1995 holding company effect merger strategic merger conning inc operating subsidiary conning company collectively conning inc conning asset management company formerly known general american investment management company gaimco see note 1 companys notes consolidated financial statements conning inc 85yearold hartford connecticutbased insurance specialty asset management firm provided asset management services research insurance industry gaimco registered investment adviser provided investment advisory services primarily parent general american life insurance company general american affiliates parties effected strategic merger order combine complementary businesses specialties insurance industry order build platform leverage additional growth companys revenues consist asset management related fees research service fees income companys asset management related revenues derive three sources asset management fees private equity fund management fees related companys mortgage real estate activities asset management fees primarily reflect fees discretionary asset management services provided insurance company clients including general american affiliates asset management fees generally function overall fee rate charged account level assets management portion revenues generated company provides investment advisory services well company provides investment accounting reporting services standalone basis assets management affected addition new client accounts client contributions existing accounts withdrawals assets terminations client accounts investment performance may depend general market conditions companys private equity fund management fees represent annual management fees based percentage committed capital participation specified net gains funds companys commercial mortgage fees primarily reflect fees associated loan originations usually approximate 1 loan balance well fees associated ongoing servicing management fees respect loans portfolios managed company addition loans general american affiliates company originated mortgage loans certain unaffiliated portfolios securitized offering investment banking firm payment companys research services primarily form commissions derived securities transactions effected company lesser extent subscription fees research publications negotiated commission received listed equity transaction total commission revenues depend value clients place research services company provides addition research services revenues received company reflect underwriting fees connection participation public offerings insurance insurancerelated companies upon consummation strategic merger general american owned 100 outstanding common stock company outstanding shares convertible preferred stock converted date strategic merger general american would owned approximately 65 outstanding common stock without giving effect outstanding stock options generally accepted accounting principles gaimco contribution recorded historical book value combination entities common control conning company contribution recorded utilizing purchase accounting method historical financial statements include operations gaimco july 31 1995 consolidated operations thereafter excess purchase price fair value net assets acquired resulted goodwill 203 million result required accounting presentation inherent difficulties analyzing historical financial statements periods prior 1996 comparing subsequent results company included financial information 1995 pro forma basis strategic merger occurred january 1 1995 following discussion begins comparison historical financial statements follows discussion results based pro forma financial information found note 2 companys notes consolidated financial statements see also selected consolidated financial data results operations historical financial statements statement income 1997 compared 1996 asset management related fees asset management related fees increased 22 405 million 1996 495 million 1997 significant portion 90 million increase attributed increased investment management fees resulting growth base assets management new existing clients assets discretionary management increased approximately 26 207 billion december 31 1996 260 billion december 31 1997 assets conning provides investment accounting reporting services standalone basis grew significantly 1997 117 billion end 1996 328 billion end 1997 primarily result new client activity investment accounting reporting fees contribute significantly overall increase asset management related fees 1997 due lower fee structure service fact large portion increased client base occurred latter half 1997 private equity fund management fees accounted approximately 21 total 1997 increase asset management related fees company completed initial closing new fund conning insurance capital limited partnership v final closing fund january 1998 total 225 million effective august 1997 research services research services revenues increased 27 121 million 1996 155 million 1997 primarily due growth core research business resulting new accounts increased penetration existing accounts company also benefited increased underwriting activity including comanagement four insurance equity offerings 1997 compared two comanaged offerings 1996 aggregate company generated revenues underwriting activities 43 million 1997 compared 40 million 1996 general underwriting revenues highly volatile depending variety factors including market conditions transaction activity accordingly assurance given amount revenues may arise future periods income increased approximately 54 106 million 1996 163 million 1997 result increase value certain securities owned company expenses total expenses increased 22 419 million year ended december 31 1996 512 million year ended december 31 1997 due primarily increased employee costs employee costs increased 29 260 million 1996 336 million 1997 due additional staffing keep pace increased revenue activity additional incentive compensation result significant growth operating income occupancy equipment costs increased approximately 10 million 26 million 1996 36 million 1997 due widespread upgrading firms personal computers year well leasing additional office space interest expense interest expense decreased half 07 million 1996 03 million 1997 due continuing reduction principal longterm debt payable general american final principal payment made february 1997 income taxes provision income taxes increased 29 48 million 1996 62 million 1997 direct result increase income provision income taxes net income result net income increased 44 62 million 1996 89 million 1997 statement income 1996 compared 1995 consolidated revenue expense categories greater 1996 1995 consolidated revenue expense category includes full years results conning inc 1996 five months conning inc results 1995 effective federal state tax rate increased 409 1995 438 1996 higher state tax rate conning incs operations included full year 1996 five months 1995 goodwill arising strategic merger amount 203 million amortized straightline basis 20 years resulted amortization expense 04 million 1995 10 million 1996 pro forma financial information statement income 1996 compared pro forma 1995 asset management related fees asset management related fees increased 32 307 million 1995 405 million 1996 primarily due addition new clients growth assets existing clients lesser extent result resurgence real estate market growth mortgage assets new existing clients assets discretionary management increased 18 176 billion december 31 1995 207 billion december 31 1996 6 additions new clients 12 growth assets existing clients private equity fund management related fees increased 21 39 million 1995 47 million 1996 due primarily march 1996 completion conning insurance capital limited partnership iv committed capital 40 million research services research services revenues increased 28 95 million 1995 121 million 1996 due primarily increased capital markets activity insurance industry increase core research revenues 1996 conning often member underwriting syndicates insurance company offerings twice 1996 acted comanager secondary offering aggregate company generated revenues underwriting activities 40 million 1996 compared 12 million 1995 general underwriting revenues highly volatile depending variety factors including market conditions transaction activity accordingly assurance given amount revenues may arise future periods income remained virtually unchanged 11 million primarily reflecting miscellaneous nonrecurring revenues expenses employee compensation benefits increased 42 183 million 1995 260 million 1996 primarily due higher incentive compensation result large increase operating results 1995 1996 well additions staff 1996 companys incentive compensation practice based level growth companys operating profits operating expenses increased 2 125 million 1995 128 million 1996 reflecting additional ancillary costs increased hiring increased marketing expenses goodwill 203 million resulting strategic merger amortized straightline basis 20 years amortization goodwill charges totaling 29 million 1995 31 million 1996 noncash expenses affect cash available operating capital needs interest expense interest expense decreased 47 14 million 1995 07 million 1996 due primarily prepayments debt 1996 debt outstanding 90 million 20 million december 31 1995 1996 respectively debt arose strategic merger payable general american income taxes provision income taxes increased 21 million 27 million 1995 48 million 1996 due increase pretax earnings company net income result net income increased 29 million 33 million 1995 62 million 1996 liquidity capital resources purposes discussion see note 1 notes companys consolidated financial statements principal operating entities included part company companys business capitalintensive working capital requirements company historically provided almost exclusively operating cash flow expected cash flows continue serve principal source working capital company near future conning company subject net capital requirements imposed registered brokerdealers securities exchange act 1934 amended exchange act december 31 1997 conning company net capital defined exchange act approximately 47 million approximately 41 million excess regulatory minimum conning company place revolving subordinated loan facility commercial bank 20 million utilized qualifies capital purposes exchange acts net capital rules agreement expires july 8 1998 amounts drawn facility would bear interest based fixed rate prevailing rate plus specified amount per annum december 31 1997 company outstanding longterm debt company total outstanding longterm debt december 31 1996 principal amount 20 million debt arose strategic merger payable general american initial principal amount 130 million bearing interest annual rate 70 remaining debt paid full february 1997 company subsidiary acts general partner certain private equity funds maintains 1 general partner capital interest funds company may also invest limited partner future funds may organize interests private equity funds generally illiquid company received approximately 345 million net proceeds stock offering used general corporate purposes companys business strategy contemplates seek complement internal growth strategic investments acquisitions accordingly portion net proceeds may also used acquiring related businesses investing strategic joint venture relationships company present understandings agreements commitments respect acquisition assurance given acquisition take place pending application uses described company invested net proceeds offering shortterm investmentgrade interestbearing securities new accounting pronouncements 1997 financial accounting standards board fasb issued statement financial accounting standards sfas 130 reporting comprehensive income statement establishes standards reporting displaying income components revenues gains losses full set general purpose financial statements statement requires items required recognized accounting standards components comprehensive income reported financial statement displayed prominence financial statements although statement effective fiscal years beginning december 15 1997 company believe sfas 130 material impact companys financial statements addition fasb issued sfas 131 disclosures segments enterprise related information statement establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued shareholders additionally statement establishes standards related disclosures products services geographic areas major customers superseding sfas 14 financial reporting segments business enterprise company currently evaluating statement whether additional information would required included companys financial statements beginning 1998 year 2000 compliance year 2000 approaches critical business issue emerged regarding existing application software programs operating systems accommodate date value brief many existing application software products marketplace designed accommodate twodigit date position represents year eg 95 stored system represents year 1995 result year 1999 ie 99 could maximum date value systems able accurately process course business company utilizes information thirdparty sources security pricing vendors custodians management process working software vendors assure company prepared year 2000 however company direct control year 2000 compliance positions sources company also process analyzing systems requirements based information currently available management anticipate company incur significant operating expenses required invest heavily computer system improvements year 2000 compliant extent companys systems fully year 2000 compliant assurance potential systems interruptions cost necessary update software would material adverse effect companys business financial condition results operations business prospects impact inflation company believe inflation significant impact companys consolidated operations cautionary statement regarding forwardlooking statements certain statements contained form 10k future filings company sec companys press releases oral statements made approval authorized executive officer may constitute forwardlooking statements including without limitation statements relating companys financial position plans increase revenues competitive strengths business objectives strategies insurance industry trends expectations regarding general americans assets activities statements subject risks uncertainties actual results may differ materially expressed implied forwardlooking statements historical results factors could cause actual results differ materially cautionary statements include limited discussed caption risk factors cautionary statements addition risk factors cautionary statements companys business entails variety additional risks set forth documents company filed file time sec subsequent written oral forwardlooking statements attributable company persons acting behalf expressly qualified entirety cautionary statements investors cautioned place undue reliance statements speak date hereof company undertakes obligation release publicly revisions may made forwardlooking statements reflect events circumstances date statements reflect occurrence anticipated unanticipated events risk factors cautionary statements risks associated insurance industry focus company focuses providing asset management services insurance industry business may materially adversely affected events impacting insurance industry particular insurance industry experiencing consolidation companies merge acquired event consolidation activity continues companys current prospective clients acquired assets may subsequently managed combined companys internal staff another external manager event companys business financial condition results operations business prospects could materially adversely affected greater percentage insurance company assets shifted external management additional opportunities capture externally managed assets may limited addition changes affecting insurance industry including changes federal state laws regulations relating thereto including without limitation change adversely affecting insurance products insurance company investments may materially adverse effect companys business financial condition results operations business prospects dependence principal shareholder companys business financial condition results operations business prospects significantly dependent relationship principal shareholder general american whollyowned subsidiary genamerica corporation december 31 1997 general american affiliates accounted approximately 141 billion approximately 260 billion assets company discretionary management advisory agreements general american one affiliates company subject termination upon 30 90 days notice without penalty general american colicensee company companys investment accounting reporting software assurance general american affiliates maintain seek renegotiate existing investment advisory relationships company future renegotiation relationships could termination relationships would material adverse effect companys business financial condition results operations business prospects additionally general american presently leases company companys office space st louis provides company certain administrative services assurance arrangements continue company would able procure replacement office space services similar otherwise favorable terms potential conflicts interest general american beneficially owns approximately 63 common stock companys board directors consists five directors three officers company general american two otherwise affiliated company general american independent directors general american power elect board directors approve certain actions requiring shareholder approval including adopting amendments companys articles incorporation control certain actions requiring shareholder approval including mergers sales substantially assets company subsidiaries financial reporting purposes general american include share companys net income loss consolidated financial statements companys board directors including members also affiliated general american may consider shortterm longterm impact operating decisions company also impact decisions general american company party investment advisory administrative services agreements general american certain affiliates certain officers company also officers general american agreements entered although company believes terms agreements least favorable company could negotiate unrelated parties agreements may modified renegotiated future additional agreements transactions may entered company one hand general american affiliates hand conflicts interest could arise general american affiliates respect foregoing future agreements arrangements executive officers directors employees company time receive profit interest future may invest investment funds company affiliate company sponsor investor company performs asset management services publishes research acts marketmaker addition company may future organize businesses employees company acquire minority interests risk result profit investment interest director officer employee may take actions could conflict best interests company dependence key personnel companys future performance depends significant degree upon continued contributions officers key management key personnel loss key personnel inability hire additional skilled personnel could materially adversely affect companys business financial condition results operations business prospects significant industry competition companys businesses conducted highly competitive markets discussed many companys current potential competitors larger access greater resources competition could material adverse effect companys business financial condition results operations business prospects well ability attract retain highly skilled individuals employees risks associated acquisitions part business strategy company intends consider acquisitions similar complementary businesses assurance given company successful identifying attractive acquisition candidates completing acquisitions favorable terms effectively integrating operations personnel business products acquired companies changes economic market conditions affecting fee levels changes economic market conditions may adversely affect profitability performance demand companys services significant portion companys revenues derived asset management fees generally based market value assets management consequently total value composition assets management related cash inflows outflows changes investment patterns policies regulations companys clients may affect materially amount assets management thus companys revenues profitability regulation companys business also subject substantial governmental regulation changes legal regulatory accounting tax compliance requirements could material adverse effect companys business financial condition results operations business prospects termination provisions investment advisory agreements large portion companys revenues derived investment advisory agreements insurance companies particularly general american affiliates institutional clients agreements generally terminable upon 30 90 days notice without penalty termination agreements representing material portion assets management could material adverse effect companys business financial condition results operations business prospects risk systems failure dependence vendors companys business highly dependent communications information systems certain thirdparty vendors securities pricing information updates certain software companys investment accounting reporting services depend timeliness accuracy reports furnished company customers delays inaccuracies information may give rise potential claims company could materially adversely affect companys business financial condition results operations business prospects assurance company suffer systems failure interruption whether caused earthquake fire natural disaster power telecommunications failure act god act war otherwise companys backup procedures capabilities event failure interruption adequate item 7a item 7a quantitative qualitative disclosures market risk normal course business financial position company routinely subjected variety risks including market risk associated interest rate fluctuations company may exposed fluctuations interest rates primarily cash equivalent commercial paper investment transactions company use derivative financial investments manage interest rate risk based company believe effect reasonably possible nearterm changes interest rates would material companys financial position results operations cash flow taken whole item 8 item 7a quantitative qualitative disclosures market risk normal course business financial position company routinely subjected variety risks including market risk associated interest rate fluctuations company may exposed fluctuations interest rates primarily cash equivalent commercial paper investment transactions company use derivative financial investments manage interest rate risk based company believe effect reasonably possible nearterm changes interest rates would material companys financial position results operations cash flow taken whole item 8 item 7a quantitative qualitative disclosures market risk applicable item 8 item 8 financial statements supplementary data conning corporation subsidiaries notes consolidated financial statements note 1 organization conning corporation company formed 1995 missouri corporation holding company organized hold operating subsidiaries conning group conning asset management company cam formerly known general american investment management company gaimco conning company cc company provides asset management research services focused upon insurance industry cam cc registered investment advisers securities exchange commission sec investment advisers act 1940 outstanding voting common stock company held wholly owned holding company subsidiary general american life insurance company together general american december 1997 whose parent genamerica corporation genamerica december 1997 company issued additional 2875000 shares registered initial public offering conversion outstanding convertible preferred stock common stock 1997 additional options issued resulting acquisitions normal compensation arrangements 1999 1998 purchase treasury shares 1998 see note 9 general american owns approximately 61 outstanding common stock august 26 1999 metropolitan life insurance company metlife announced reached definitive agreement acquire genamerica approximately 12 billion cash january 6 2000 metlife completed transaction thus acquiring beneficial ownership approximately 61 outstanding common stock company january 18 2000 metlife proposed acquire outstanding shares company already controlled metlife 1050 per share cash metlife also indicated would assume management general account assets general american march 9 2000 metlife company entered definitive merger agreement providing acquisition metlife outstanding shares company already controlled metlife 1250 per share cash board directors company approved merger agreement accompanying consolidated financial statements include accounts conning corporation conning inc holding company parent cc conning company conning asset management company note 2 summary significant accounting policies accompanying consolidated financial statements company prepared conformity generally accepted accounting principles conning corporation subsidiaries notes consolidated financial statements principles consolidation consolidated financial statements include accounts company subsidiaries elimination intercompany balances transactions revenue recognition asset management fees determined based contractual provisions earned varying percentages assets management fees accrued income period service provided research fees primarily form commissions derived securities transactions effected company lesser extent subscription fees research publications recorded income services provided earned mortgage loan fee income included asset management related fees earned origination mortgage loans general american affiliates outside parties fees earned based agreements borrowers recognized closing mortgage commitment deferred mortgage loan origination fees represent moneys received loan commitments earned upon loan funding included deferred revenue consolidated balance sheet fair value financial instruments fair value estimates made specific point time based relevant market information financial instrument substantially companys financial assets liabilities carried fair value amounts shortterm nature approximate current fair value cash equivalents cash equivalents represent cash highly liquid investments original maturities three months less company funds deposit general american amounting 333288 2833439 december 31 1999 1998 respectively readily convertible cash earn interest shortterm money market rates purposes financial statements funds considered cash equivalents shortterm investments shortterm investments comprised us government securities investment grade commercial paper maturity one year less carried amortized cost approximates fair value investments marketable equity securities held classified trading securities presented fair value corresponding unrealized gains losses included current period income non marketable investments various private equity funds held companys brokerdealer subsidiary accounted accordance generally accepted accounting principles brokerdealers investments recorded using equity method basis accounting including unrealized gains losses changes fair values included consolidated statements income equipment leasehold improvements equipment stated cost less accumulated depreciation provided accelerated method periods exceeding eight years conning corporation subsidiaries notes consolidated financial statements leasehold improvements stated cost less accumulated amortization provided straightline basis term lease income taxes income tax expense based income reported financial statements deferred federal state income taxes provided based asset liability approach requires recognition deferred income tax assets liabilities expected future tax consequences temporary differences financial statement carrying amounts tax basis assets liabilities company files consolidated federal income tax returns subsidiaries goodwill august 11 1995 shareholders holding company cc contributed common stock conning corporation section 351 merger transaction strategic merger exchange cash convertible preferred stock company general american contributed outstanding common stock gaimco part strategic merger exchange common shares company gaimco contribution recorded historical book value conning portion strategic merger accounted using purchase method purchase price consisting cash 120 million 170 million series convertible preferred stock allocated assets acquired based estimated fair values excess purchase price fair value net assets acquired resulted 203 million goodwill amortized straight line basis 20 years goodwill arising 1998 1999 acquisitions schroder noddings group tcw insurance operations amortized straightline basis period 20 years see note 3 accumulated amortization 6191734 3855003 december 31 1999 1998 respectively goodwill periodically reviewed determine recoverability based undiscounted operating cash flows underlying business december 31 1999 1998 impairment indicated assets included assets costs associated purchase 17 million software license agreement license agreement effective january 27 1996 total cost license amortized life license agreement december 31 1999 368333 remains amortized remaining year license agreement total amortization 340000 included consolidated statements income years ended december 31 1999 1998 1997 respectively assets included unamortized cost compensation relating strategic merger amortized threeyear period ending august 11 1998 amortization 862361 1562915 included consolidated statements income years ended december 31 1998 1997 respectively unamortized amount 862361 included assets december 31 1997 also included assets cash surrender value corporateowned life insurance policies key executives purchased 1997 connection conning corporation subsidiaries notes consolidated financial statements deferred savings plan certain employees december 31 1999 1998 cash value amounted approximately 7200000 2100000 respectively compensation payable compensation payable represents amounts payable employees result companys incentive compensation programs normal course operations amounts accrued period earned accrued rent liability company recorded liability present value difference market rate lease contract rate lease portion companys office space hartford connecticut part fair value adjustments relating strategic merger difference amortized reduction rent expense remaining lease period preferred stock carrying value convertible preferred stock recorded original issue price plus accretion relating increase redemption value stock period 1997 accretion 13710298 preferred stock converted 3555000 shares common stock 1997 income comprised investment income miscellaneous revenues noncash employee compensation company uses intrinsic value method account stock option plans prescribed accounting principles board opinion no25 accounting stock issued employees apb 25 method compensation expense recognized awards options purchase shares stock employees compensatory plans fair market value stock option grant date measurement date later greater amount employee must pay acquire stock october 1995 financial accounting standards board fasb issued statement financial accounting standards 123 accounting stockbased compensation sfas 123 sfas 123 permits companies adopt new fair value based method account stock option plans continue using intrinsic value method company intends continue using intrinsic value method provides pro forma disclosures note 11 required sfas 123 earnings per share company adopted sfas no128 earnings per share issued fasb february 1997 sfas 128 specified new standards designed improve earnings per share eps information provided financial statements simplifying existing computational guidelines reviewing disclosure requirements increasing comparability eps data international basis earnings per share amounts calculations presentations reflective requirements statement weighted average common shares equivalents outstanding december 31 1999 1998 1997 conning corporation subsidiaries notes consolidated financial statements 13512431 13146558 7055889 respectively basic earnings per common share 13968161 14036973 11100732 respectively diluted earnings per common share use estimates management company made number estimates assumptions relating reporting assets liabilities preparation financial statements actual results could differ estimates reclassifications company reclassified presentation certain prior period information conform 1999 presentation note 3 acquisitions august 18 1998 company cc cam acquired substantially assets operations schroder mortgage associates lp sma transaction accounted purchase transaction purchase price 210 million including acquisition expenses additional contingent consideration may paid amount 26 million next two years subject meeting certain financial targets 1999 contingent consideration approximately 13 million paid pertaining transaction reflected increase goodwill result transaction excess cost fair value net assets acquired approximately 210 million amortized 20year period goodwill deductible federal income tax purposes december 16 1998 company completed acquisition substantially assets certain liabilities noddings investment group inc nig noddings associates inc na nig na respectively transaction accounted purchase agreement assets acquired consisted principally contracts investment advisory clients working capital business intangible assets purchase price 43 million cash including acquisition expenses additional contingent consideration may paid amount 27 million cash payable three year period closing subject meeting certain financial targets result purchase agreement excess cost fair value net assets acquired approximately 33 million amortized 20year period goodwill deductible federal income tax purposes may 14 1999 company completed acquisition tcw group incs tcw insurance company highgrade fixed income management business transaction accounted purchase tcw transaction subject certain adjustments purchase price acquired business approximately 30 million additional 23 million payable next two years subject successful retention acquired client relationships meeting certain revenue targets acquired business result tcw transaction excess cost fair value net assets acquired approximately 30 conning corporation subsidiaries notes consolidated financial statements million amortized 20year period goodwill deductible federal income tax purposes note 4 accounts receivable accounts receivable include primarily amounts due management fees selling concessions due underwriters amounts due business activities company december 31 1999 1998 allowance doubtful accounts 36585 140563 respectively applied reduction accounts receivable change allowance current period result managements assessment collectibility underlying receivables note 5 investments december 31 1999 1998 estimated fair value marketable nonmarketable investments follows company invests various nonmarketable partnerships 1 general partner several private equity funds value nonmarketable partnership investments accounted using equity method updated periodically based upon changes fair values recorded consolidated statements income conning corporation subsidiaries notes consolidated financial statements note 6 equipment leasehold improvements december 31 1999 1998 equipment leasehold improvements comprised following depreciation expense 513883 757578 564508 included consolidated statements income years ended december 31 1999 1998 1997 respectively company occupies premises rents certain office equipment leases accounted operating leases expiration dates 2005 total rental expense 1999 1998 1997 2365761 1603500 1219069 respectively december 31 1999 minimum net rental commitments company periods indicated terms operating leases excess one year approximately 7614000 follows 1751000 2000 1489000 2001 1313000 2002 1274000 2003 1147000 2004 640000 thereafter note 7 income taxes provision federal state income tax years ended december 31 1999 1998 1997 follows difference expected federal income tax provision statutory rate 35 1999 1998 1997 companys actual federal income tax rate follows companys net deferred income tax assets represent estimated future tax effects attributable future taxable deductible temporary difference amounts recognized financial statements income tax returns december 31 1999 1998 net deferred income tax assets follows valuation allowance provided likely portion deferred tax assets realized management believes deferred tax assets fully realized future based upon consideration reversal existing temporary differences anticipated future earnings available evidence accordingly valuation allowance established conning corporation subsidiaries notes consolidated financial statements note 8 outstanding debt december 31 1999 1998 company revolving subordinated loan agreement commercial bank 2000000 interest rate agreed upon lender company time advance current agreement expires december 31 2000 borrowings line credit 1999 1998 note 9 preferred stock common shareholders equity preferred stock company outstanding prior initial public offering subject shareholders agreement consisted series convertible preferred stock par value 01 per share ii series b convertible preferred stock par value 01 per share december 31 1996 3190000 shares series convertible preferred stock series preferred stock authorized issued outstanding series preferred stock paid dividends quarterly based 90day united states treasury bill rate effect previous payment date dividends cumulative company declared dividends series preferred stock 028 years ended december 31 1996 series preferred stock carried voting rights issued part strategic merger share series preferred stock convertible one share nonvoting common stock holders election voting common stock initial public offering ipo date november 8 1996 company commenced private offering certain employees directors offering new class preferred stock designated series b convertible preferred stock series b preferred stock total 460000 shares sold 533 per share total 2451800 order exercise conversion payment company additional 167 per share required december 31 1996 600000 shares series b preferred stock authorized 460000 shares issued outstanding series b preferred stock paid dividends quarterly rate 5 per annum dividends cumulative series b preferred stock carried voting rights share series b preferred stock convertible one share nonvoting common stock holders election upon payment additional 167 per share company january 1997 company issued additional 15000 shares series b preferred stock 533 per share april 1997 certain shareholders converted 110000 shares series b preferred stock non voting common stock resulting transaction increased additional paidin capital 768900 increased common equity 1100 june 1997 conning corporation subsidiaries notes consolidated financial statements general american pursuant call right purchased 1594995 shares companys series preferred stock existing shareholders 1125 per share connection purchase certain restrictions eliminated series preferred stock generated additional tax benefit company 1134785 recorded directly additional paidin capital june 1997 board directors company authorized increase number shares series voting common stock 20000000 50000000 december 1997 company completed initial public offering totaling 2875000 shares common stock including overallotment option sold underwriters company initial public offering net proceeds related offering 34595000 result offering series b preferred stock converted common shares company stock oneforone basis shareholders agreement terminated resulting increase shareholders equity totaling approximately 38595000 company declared paid dividends totaling 963127 1997 related series b preferred stock december 15 1997 ipo pricing date additionally result offering shares nonvoting common stock converted common stock oneforone basis february 12 1998 board directors company established companys dividend policy declared quarterly dividend 004 per share common stock record holders march 5 1998 declaration payment dividends holders common stock discretion companys board directors depend upon companys capital requirements operating financial condition well legal regulatory restrictions net capital rules various regulatory bodies applicable conning company factors board directors may deem relevant 1998 company paid approximately 21 million dividends outstanding shareholders representing 016 per share 1999 company paid approximately 27 million dividends outstanding shareholders representing 020 per share july 28 1998 pursuant board directors authorization company purchased 318188 shares common stock treasury shares held director company total consideration 6397488 based upon average closing price per share companys common stock five trading days preceding date purchase note 10 related party activities cam acts investment adviser general separate accounts general american insurance subsidiaries well general american capital company family funds investment management fees earned affiliated entities years ended december 31 1999 1998 1997 amounted 20872658 19802311 17227994 respectively total investment management fees receivable affiliated entities december 31 1999 1998 amounted 2992338 2025053 respectively conning corporation subsidiaries notes consolidated financial statements certain officers directors company also officers general american officers andor directors general american affiliates company directly indirectly intermediary partnerships managing general partner certain private equity funds equity ownership interest 1 fund total company managed six seven six funds 1999 1998 1997 respectively fees managing funds 6646768 8001836 5491704 years ended december 31 1999 1998 1997 respectively company received underwriting fees concessions connection offering shares one company 1998 considered related party fees concessions included research services amount 529739 year ended december 31 1998 fees earned secondary offering common stock whollyowned subsidiary parent connection november 1996 private offering series b preferred stock general american holds demand recourse notes certain employees totaling 1438100 2185300 december 31 1998 1997 respectively notes bear interest 6 payable semiannually beginning july 1997 notes paid full july 31 1999 general american provides administrative services request company including disbursements tax facility management administrative support company pursuant administrative services agreement following table lists expenses recorded company significant services provided general american years ended december 31 1999 1998 1997 administrative costs predominantly based direct identifiable costs incurred general american behalf company companys request charged back company general americans cost costs represent result allocations based customary methodology square footage rent number employees payroll processing company believes allocation methodologies reasonable resulting expenses incurred materially different would incurred standalone basis conning corporation subsidiaries notes consolidated financial statements servicing agent company processes principal interest payments pertaining certain mortgages originated genamerica affiliates december 31 1999 1998 32512073 8976934 respectively escrowed funds pertaining activities reflected consolidated balance sheet company note 11 stock option plans august 1995 shareholders approved companys 1995 flexible stock plan 1995 plan provides grant options purchase 2100000 shares companys nonvoting common stock officers key employees company affiliates terms conditions including price exercise date number shares determined board directors administers plan upon initial public offering options became 100 vested options granted fair value total options issued outstanding 1995 plan 475000 824000 december 31 1999 1998 respectively fully vested upon completion companys initial public offering december 1997 additional options granted 1995 plan november 8 1996 shareholders approved companys 1996 flexible stock plan 1996 plan provides grant options purchase 2100000 shares companys nonvoting common stock officers key employees company affiliates terms conditions including price exercise date number shares determined board directors administers plan options granted fair value total options issued outstanding 1996 plan 199250 233750 december 31 1999 1998 respectively additional options granted 1996 plan december 1997 shareholders approved companys 1997 flexible stock plan 1997 plan provides grant options purchase 2200000 shares companys common stock officers directors key employees company affiliates terms conditions including price exercise date number shares determined board directors administers plan options granted fair value total options issued outstanding 1997 plan 1559147 1892706 december 31 1999 1998 respectively conning corporation subsidiaries notes consolidated financial statements weightedaverage remaining contractual vesting period december 31 1999 approximately three years following table summarizes stock options outstanding december 31 1999 december 1998 companys compensation committee granted 134653 shares restricted stock price 1600 per share 1997 flexible stock plan 1998 restricted stock awards vest future periods reflected compensation expense future periods totaling approximately 13 million remaining four years company incurred 870000 reflected compensation benefits relating plan 1999 cost incurred 1998 company applies apb opinion no25 accounting stock issued employees apb 25 accounting 1998 1997 1996 flexible stock plans accordingly compensation cost recognized stock options financial statements weighted average grantdate fair value stock options granted year weightedaverage significant assumptions used determine fair values using modified blackscholes option pricing model pro forma effect earnings fair value accounting stock options sfas 123 follows conning corporation subsidiaries notes consolidated financial statements december 31 1999 companys closing stock price 825 december 31 1999 approximately 126000 shares restricted stock issued employees company programs conjunction merger agreement see note 20 subsequent events unvested restricted stock owned employees employed time closing would eligible tendered metlife outstanding share company additionally company approximately 22 million options outstanding issued various company stock option programs merger agreement indicates outstanding options vested immediately upon closing holders owning options intrinsic value ability receive intrinsic value closing holders owning options intrinsic value ability participate replacement program announced prior closing tender offer note 12 employee benefits december 31 1999 company one retirement savings plan conning corporation profit sharing 401k savings plan consolidated 401k plan january 1 1999 consolidated 401k plan replaced two retirement plans place december 31 1998 consolidated 401k plan available substantially conning company employees company contributed 1201615 behalf eligible employees year ended december 31 1999 december 31 1998 1997 company two retirement savings plans 401k savings plan 401k plan general american life insurance company progress sharing plan trust progress sharing plan 401k plan available conning corporation subsidiaries notes consolidated financial statements substantially conning company employees employed conning company prior august 11 1995 progress sharing plan available certain employees employed prior august 11 1995 employees company employed subsequent august 10 1995 company contributed 892618 1019327 401k plan behalf eligible employees years ended december 31 1998 1997 respectively direct charges company general american progress sharing plan 566251 407074 years ended december 31 1998 1997 respectively addition qualified retirement plans company also offered certain senior employees participation executive deferred savings plan edsp plan edsp plan nonqualified deferred compensation plan available eligible employees elect defer portion compensation edsp plan subject certain limitations company invests corporate owned life insurance coli products used match employee contributions coli product invests mutual funds investment strategies similar employee fund options december 31 1999 1998 1997 company carried liability 6462809 4047968 1554157 representing employee deferrals investment credits deferrals december 31 1999 1998 1997 cash surrender value coli investments 7201397 2098898 2000000 respectively note 13 commitments contingencies company general partner certain private equity funds company also manages partner real estate joint venture capital contributions partnerships made needed investments partnerships december 31 1999 companys future commitment fund required capital contributions approximately 4559000 company subsidiary committed conning connecticut investors llc limited liability company general partner managing member approximately 4040000 purposes capitalizing general partner amount payable event insolvency part llc note 14 net capital requirements cc registered brokerdealer member national association securities dealers inc therefore subject requirement secs uniform net capital rule requiring maintenance certain minimal capital levels december 31 1999 cc net capital defined uniform net capital rule approximately 11144000 10119000 excess required net capital cam also subject minimum net capital requirements determined state regulations certain states cam conning corporation subsidiaries notes consolidated financial statements licensed business december 31 1999 1998 cam compliance minimum state requirements note 15 concentration credit risk financial instruments potentially subject company concentration credit risk consist principally trade account receivables shortterm investments shortterm investments consist investment grade commercial paper approximate fair value short maturity items exception trade receivables general american affiliates credit risk respect trade accounts receivable limited due large number customers dispersion across geographical areas investment management fees receivable general american affiliated entities december 3l 1999 1998 amounted approximately 2992338 2025053 respectively note 16 industry segment june 1997 financial accounting standards board fasb issued sfas 131 disclosures segments enterprise related information sfas 131 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued shareholders additionally sfas 131 establishes standards related disclosures products services geographic areas major customers superseding sfas 14 financial reporting segments business enterprise underlying principle sfas 131 management approach information disclosed management approach based way management organizes companys segments within enterprise making operating decisions assessing performance fasb believes information based approach useful user since information management uses make decisions enterprise fasb think separate measures segment performance developed solely purpose disclosure approach allows managements decisions topics allocations remain unchanged even conform generally accept accounting principles employing reasonableness sufficient test segment information company years ended december 31 1999 1998 1997 follows conning corporation subsidiaries notes consolidated financial statements revenue combined operating segment revenues reported include income considered component corporate operations rather single segment year ended december 31 1999 1998 1997 income approximately 1588000 2553000 1634000 respectively pretax income companys segment pretax income reflects two step allocation indirect charges net income first step allocation indirect charges corporate overhead includes various support functions senior management finance personnel facilities management corporate overhead allocated operating segment based operating segments proportionate share direct expenses combined operating segment direct expenses second step allocation indirect charges includes depreciation amortization interest expense certain compensation charges indirect charges allocated operating segments based operating segments proportionate share combined operating segment income operations net corporate overhead allocations reconciling items combined operating segment pretax income reported pretax income reported consolidated statement income major customer company one customer significant shareholder company provides 10 consolidated revenue addition disclosures sfas 131 requires financial disclosures measures used management make operating decisions assess performance allocate resources specifically total assets interest revenue interest expense depreciation amortization expense unusual items extraordinary items equity net income loss investees accounted equity method income tax provision benefit significant noncash items required disclosed segment management conning corporation subsidiaries notes consolidated financial statements consider items operating segment making operating decisions assessing segment performance allocating resources note 17 earnings per share following table represents reconciliation numerators denominators basic diluted earnings per share computations conning corporation subsidiaries notes consolidated financial statements 1999 1998 619641 146329 options respectively considered antidilutive included earnings per share calculations note 18 quarterly results operations unaudited following table summarizes quarterly results operations two years ended december 31 1999 1998 conning corporation subsidiaries notes consolidated financial statements note 19 parent company financial statements following condensed balance sheets december 31 1999 1998 condensed statements income cash flows periods ended december 31 1999 1998 1997 conning corporation parent company conning corporation subsidiaries notes consolidated financial statements conning corporation subsidiaries notes consolidated financial statements conning corporation subsidiaries notes consolidated financial statements note 20 subsequent event january 18 2000 metlife proposed acquire companys outstanding shares common stock already controlled metlife 1050 per share cash metlife acquired beneficial interest approximately 61 company result january 6 2000 acquisition genamerica addition metlife assume asset management contract genamericas general account assets currently managed cam december 31 1999 cam managed approximately 58 billion genamerica general account january 31 2000 conning served complaint purporting shareholder class action filed supreme court state new york naming company metlife codefendants complaint filed january 19 2000 named plaintiff ralph shive complaint alleges metlifes proposal acquire outstanding shares common stock conning already controlled metlife proposed transaction fails offer fair price connings shareholders lacks adequate procedural protections additionally complaint alleges defendants engaged acts selfdealing breaches fiduciary duty connection proposed transaction suit seeks action declared proper class action injunctive relief consummation proposed transaction proposed transaction consummated rescission transaction rescissionary monetary damages reimbursement fees costs january 31 2000 law firm filed shive complaint filed second suit jurisdiction allegations seeking relief sought shive action second complaint names carl hamann plaintiff february 10 2000 company served complaint purporting shareholder class action filed circuit court city st louis missouri naming company several current former directors metlife defendants complaint filed february 2 2000 named plaintiff jeffrey r moritz complaint alleges consideration proposed paid metlife pursuant proposed transaction unfair inadequate additionally complaint alleges defendants individually part common plan breached fiduciary duties connection proposed transaction suit seeks action declared proper class action assurances conflicts interest exist among defendants injunctive relief consummation proposed transaction reimbursement fees costs march 9 2000 metlife company entered definitive merger agreement providing acquisition metlife outstanding shares company already controlled metlife 1250 per share cash board directors company approved merger agreement transaction expected close second quarter 2000 independent auditors report board directors shareholders conning corporation audited accompanying consolidated balance sheets conning corporation subsidiaries december 31 1999 1998 related consolidated statements income common shareholders equity cash flows years threeyear period ended december 31 1999 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position conning corporation subsidiaries december 31 1999 1998 results operations cash flows years threeyear period ended december 31 1999 conformity generally accepted accounting principles kpmg llp st louis missouri march 9 2000 item 9 item 8 financial statements supplementary data conning corporation subsidiaries notes consolidated financial statements note 1organization conning corporation company formed 1995 missouri corporation holding company organized hold operating subsidiaries conning group conning asset management company cam formerly known general american investment management company gaimco conning company cc company provides asset management research services focused upon insurance industry cam cc registered investment advisers securities exchange commission sec investment advisers act 1940 outstanding voting common stock company held wholly owned holding company subsidiary general american life insurance company together general american december 1997 whose parent genamerica corporation genamerica december 1997 company issued additional 2875000 shares registered initial public offering conversion outstanding convertible preferred stock common stock 1997 additional shares issued exercise options purchase treasury shares 1998 note 9 general american owns approximately 63 outstanding common stock accompanying consolidated financial statements include accounts conning corporation conning inc holding company parent cc conning company conning asset management company note 2summary significant accounting policies accompanying consolidated financial statements company prepared conformity generally accepted accounting principles consolidationthe consolidated financial statements include accounts company subsidiaries elimination intercompany balances transactions revenue recognitionasset management fees determined based contractual provisions earned varying percentages assets management fees accrued income period service provided research fees primarily form commissions derived securities transactions effected company lesser extent subscription fees research publications recorded income services provided earned mortgage loan fee income included asset management related fees earned origination mortgage loans general american affiliates outside parties fees earned based agreements borrowers recognized closing mortgage commitment deferred mortgage loan origination fees represent moneys received loan commitments earned upon loan funding included deferred revenue consolidated balance sheet fair value financial instrumentsfair value estimates made specific point time based relevant market information financial instrument substantially companys financial assets liabilities carried market value amounts shortterm nature approximate current fair value cash equivalentscash cash equivalents represent cash highly liquid investments original maturities three months less company funds deposit general american amounting 2833439 10505557 december 31 1998 1997 readily convertible cash earn interest shortterm money market rates purposes financial statements funds considered cash equivalents shortterm investmentsshortterm investments comprised us government securities investment grade commercial paper maturity one year less carried amortized cost approximates fair value conning corporation subsidiaries notes consolidated financial statements continued investmentsall marketable equity securities held classified trading securities presented fair value corresponding unrealized gains losses included current period income nonmarketable investments various private equity funds held companys brokerdealer subsidiary accounted accordance generally accepted accounting principles brokerdealers investments recorded using equity method basis accounting including unrealized gains losses changes fair values included consolidated statements income equipment leasehold improvementsequipment stated cost less accumulated depreciation provided accelerated method periods exceeding eight years leasehold improvements stated cost less accumulated amortization provided straightline basis term lease income taxesincome tax expense based income reported financial statements deferred federal state income taxes provided based asset liability approach requires recognition deferred income tax assets liabilities expected future tax consequences temporary differences financial statement carrying amounts tax basis assets liabilities company files consolidated federal income tax returns subsidiaries goodwillon august 11 1995 shareholders holding company cc contributed common stock conning corporation section 351 merger transaction strategic merger exchange cash convertible preferred stock company general american contributed outstanding common stock gaimco part strategic merger exchange common shares company gaimco contribution recorded historical book value conning portion strategic merger accounted using purchase method purchase price consisting cash 120 million 170 million series convertible preferred stock allocated assets acquired based estimated fair values excess purchase price fair value net assets acquired resulted 203 million goodwill amortized straight line basis 20 years goodwill arising strategic merger 1998 acquisitions note 3 amortized straightline basis period 20 years accumulated amortization 3855003 2448202 december 31 1998 1997 respectively goodwill periodically reviewed determine recoverability based undiscounted operating cash flows underlying business december 31 1998 1997 impairment indicated assetsincluded assets costs associated purchase 17 million software license agreement license agreement effective january 27 1996 total cost license amortized life license agreement december 31 1998 708333 remains amortized two remaining years license agreement total amortization 340000 311667 included consolidated statements income years ended december 31 1998 1997 1996 respectively assets include unamortized cost compensation relating strategic merger amortized threeyear period ending august 11 1998 amortization 862361 1562915 1707918 included consolidated statements income years ended december 31 1998 1997 1996 respectively unamortized amount 862361 included assets december 31 1997 also included assets cash surrender value corporateowned life insurance policies key executives purchased 1997 connection deferred savings plan certain employees december 31 1998 1997 cash value amounted approximately 2100000 2000000 respectively compensation payablecompensation payable represents amounts payable employees result companys incentive compensation programs normal course operations amounts accrued period earned accrued rent liabilitythe company recorded liability present value difference market rate lease contract rate lease portion companys office space conning corporation subsidiaries notes consolidated financial statements continued hartford connecticut part fair value adjustments relating strategic merger difference amortized reduction rent expense remaining lease period preferred stockthe carrying value convertible preferred stock recorded original issue price plus accretion relating increase redemption value stock period 1997 1996 accretion 13710298 5327300 respectively incomeother income comprised investment income miscellaneous revenues noncash employee compensationthe company uses intrinsic value method account stock option plans prescribed accounting principles board opinion 25 accounting stock issued employees apb 25 method compensation expense recognized awards options purchase shares stock employees compensatory plans fair market value stock option grant date measurement date later greater amount employee must pay acquire stock october 1995 financial accounting standards board fasb issued statement financial accounting standards 123 accounting stockbased compensation sfas 123 sfas 123 permits companies adopt new fair value based method account stock option plans continue using intrinsic value method company intends continue using intrinsic value method provides pro forma disclosures note 11 required sfas 123 earnings per sharethe company adopted sfas 128 earnings per share issued fasb february 1997 sfas 128 specified new standards designed improve earnings per share eps information provided financial statements simplifying existing computational guidelines reviewing disclosure requirements increasing comparability eps data international basis earnings per share amounts calculations presentations reflective requirements statement weighted average common shares equivalents outstanding december 31 1998 1997 1996 13146558 7055889 6710000 respectively basic earnings per common share 14036973 11100732 10871936 respectively diluted earnings per common share use estimatesmanagement company made number estimates assumptions relating reporting assets liabilities preparation financial statements actual results could differ estimates reclassificationsthe company reclassified presentation certain prior period information conform 1998 presentation note 3acquisitions august 18 1998 company cc cam acquired substantially assets operations schroder mortgage associates lp sma transaction accounted purchase transaction purchase price 210 million including acquisition expenses additional contingent consideration may paid amount 4 million next three years subject meeting certain financial targets result transaction excess cost fair value net assets acquired approximately 210 million amortized 20year period goodwill considered deductible federal income tax purposes december 16 1998 company completed acquisition substantially assets certain liabilities noddings investment group inc nig noddings associates inc na nig na respectively transaction accounted purchase agreement assets acquired consisted principally contracts investment advisory clients working capital business intangible assets purchase price 43 million cash including acquisition expenses additional contingent consideration may paid amount 27 million cash payable threeyear period closing subject meeting certain financial targets result purchase agreement excess cost fair value net assets acquired approximately 33 million amortized 20year period goodwill considered deductible federal income tax purposes conning corporation subsidiaries notes consolidated financial statements continued following unaudited pro forma combined consolidated financial information gives effect acquisitions sma august 18 1998 noddings group december 16 1998 acquisition consummated january 1 1997 note 4accounts receivable accounts receivable include primarily amounts due management fees selling concessions due underwriters amounts due business activities company december 31 1998 1997 allowance doubtful accounts 140563 170000 respectively applied reduction accounts receivable change allowance current period result managements assessment collectibility underlying receivables note 5lnvestments december 31 1998 1997 estimated fair value marketable nonmarketable investments follows company 1 general partner various private equity funds value nonmarketable partnership investments accounted using equity method updated periodically based upon changes fair values recorded consolidated statements income additionally company derivative investments 1998 1997 note 6equipment leasehold improvements december 31 1998 1997 equipment leasehold improvements comprised following depreciation expense 757578 564508 457172 included consolidated statements income years ended december 31 1998 1997 1996 respectively conning corporation subsidiaries notes consolidated financial statements continued company occupies premises rents certain office equipment leases accounted operating leases expiration dates 2005 total rental expense 1998 1997 1996 1603500 1219069 836212 respectively december 31 1998 minimum net rental commitments company periods indicated terms operating leases excess one year approximately 8443000 follows 1569000 1999 1421000 2000 1248000 2001 1218000 2002 1215000 2003 1772000 thereafter note 7income taxes provision federal state income tax years ended december 31 1998 1997 1996 follows difference expected federal income tax provision statutory rate 35 1998 1997 1996 companys actual federal income tax rate follows total income taxes allocated follows conning corporation subsidiaries notes consolidated financial statements continued companys net deferred income tax assets represent estimated future tax effects attributable future taxable deductible temporary difference amounts recognized financial statements income tax returns december 31 1998 1997 net deferred income tax assets follows valuation allowance provided likely portion deferred tax assets realized management believes deferred tax assets fully realized future based upon consideration reversal existing temporary differences anticipated future earnings available evidence accordingly valuation allowance established note 8outstanding debt longterm august 11 1995 company borrowed 13000000 general american fund certain payments made connection strategic merger interest payable january 1 september 1 annual rate 70 principal payments due three equal annual installments 4333333 commencing september 1 2003 company prepaid 2000000 7000000 principal plus accrued interest 27222 412805 1997 1996 respectively debt outstanding december 31 1998 1997 lines credit december 31 1998 1997 company revolving subordinated loan agreement commercial bank 2000000 interest rate agreed upon lender company time advance current agreement expires december 31 1999 1996 company borrowed 2000000 less one week borrowings line credit 1998 1997 note 9preferred stock common shareholders equity preferred stock company outstanding prior initial public offering subject shareholders agreement consisted series convertible preferred stock par value 01 per share ii series b convertible preferred stock par value 01 per share december 31 1996 3190000 shares series convertible preferred stock series preferred stock authorized issued outstanding series preferred stock paid dividends quarterly based 90day united states treasury bill rate effect previous payment date dividends cumulative company declared dividends series preferred stock 028 years ended december 31 1996 declared unpaid dividends totaling 223300 included preferred dividends conning corporation subsidiaries notes consolidated financial statements continued payable consolidated balance sheet december 31 1996 series preferred stock carried voting rights issued part strategic merger share series preferred stock convertible one share nonvoting common stock holders election voting common stock initial public offering ipo date november 8 1996 company commenced private offering certain employees directors offering new class preferred stock designated series b convertible preferred stock series b preferred stock total 460000 shares sold 533 per share total 2451800 order exercise conversion payment company additional 167 per share required december 31 1996 600000 shares series b preferred stock authorized 460000 shares issued outstanding series b preferred stock paid dividends quarterly rate 5 per annum dividends cumulative declared unpaid dividends totaling 12515 included preferred dividends payable consolidated balance sheet december 31 1996 series b preferred stock carried voting rights share series b preferred stock convertible one share nonvoting common stock holders election upon payment additional 167 per share company january 1997 company issued additional 15000 shares series b preferred stock 533 per share april 1997 certain shareholders converted 110000 shares series b preferred stock nonvoting common stock resulting transaction increased additional paidin capital 768900 increased common equity 1100 june 1997 general american pursuant call right purchased 1594995 shares companys series preferred stock existing shareholders 1125 per share connection purchase certain restrictions eliminated series preferred stock generated additional tax benefit company 1134785 recorded directly additional paidin capital june 1997 board directors company authorized increase number shares series voting common stock 20000000 50000000 december 1997 company completed initial public offering totaling 2875000 shares common stock including overallotment option sold underwriters company net proceeds related offering 34595000 result offering series b preferred stock converted common shares company stock oneforone basis shareholders agreement terminated resulting increase shareholders equity totaling approximately 38595000 company declared paid dividends totaling 963123 1997 related series b preferred stock december 15 1997 ipo pricing date additionally result offering shares nonvoting common stock converted common stock oneforone basis february 12 1998 board directors company established companys dividend policy declared quarterly dividend 004 per share common stock record holders march 1998 declaration payment dividends holders common stock discretion companys board directors depend upon companys capital requirements operating financial condition well legal regulatory restrictions net capital rules various regulatory bodies applicable conning company factors board directors may deem relevant 1998 company paid approximately 21 million dividends outstanding shareholders representing 016 per share july 28 1998 pursuant board directors authorization company purchased 318188 shares common stock treasury shares held director company total consideration 6397488 based upon average closing price per share companys common stock five trading days preceeding date purchase company believed transaction represented opportunity obtain treasury stock attractive terms intends use shares acquisitions employee stock plans related corporate purposes january 1 1998 fasb issued sfas 130 reporting comprehensive income sfas 130 establishes standards reporting presentation comprehensive income components full conning corporation subsidiaries notes consolidated financial statements continued set financial statements comprehensive income consists net income net unrealized gains losses securities presented consolidated statements shareholders equity comprehensive income statement requires additional disclosures consolidated financial statements affect companys financial position results operations prior year financial statements reclassified conform requirements sfas 130 january 21 1999 board directors company declared quarterly dividend 005 per share common stock payable march 1999 note 10other related party activities cam acts investment adviser general separate accounts general american insurance subsidiaries well general american capital company family funds investment management fees earned affiliated entities years ended december 31 1998 1997 1996 amounted 19802311 17227994 14300267 respectively total investment management fees receivable affiliated entities december 31 1998 1997 amounted 2025053 1507206 respectively certain officers directors company also officers general american officers andor directors general american affiliates company directly indirectly intermediary partnerships managing general partner certain private equity funds equity ownership interest 1 fund total company managed seven six funds 1998 1997 1996 respectively fees managing funds 8001836 5491704 4006038 years ended december 31 1998 1997 1996 respectively company received underwriting fees concessions connection offering shares one company 1998 1997 considered related parties fees concessions included research services amount 529739 760638 0 years ended december 31 1998 1997 1996 respectively fees 1998 earned secondary offering common stock majorityowned subsidiary parent fees 1997 earned initial public offering company partially owned certain private equity funds managed company connection november 1996 private offering series b preferred stock general american holds demand recourse notes certain employees totaling 1438100 2185300 december 31 1998 1997 respectively notes bear interest 6 payable semiannually beginning july 1997 general american provides administrative services request company including disbursements tax facility management administrative support company pursuant administrative services agreement following table lists expenses recorded company significant services provided general american years ended december 31 1998 1997 1996 conning corporation subsidiaries notes consolidated financial statements continued administrative costs predominantly based direct identifiable costs incurred general american behalf company companys request charged back company general americans cost costs represent result allocations based customary methodology square footage rent number employees payroll processing company believes allocation methodologies reasonable resulting expenses incurred materially different would incurred standalone basis servicing agent company processes principal interest payments pertaining certain mortgages originated genamerica affiliates december 31 1998 1997 8976934 692492 respectively escrowed funds pertaining activities included accounts payable note 11stock stock option plans august 1995 shareholders approved companys 1995 flexible stock plan 1995 plan provides grant options purchase 2100000 shares companys nonvoting common stock officers key employees company affiliates terms conditions including price exercise date number shares determined board directors administers plan upon initial public offering options became 100 vested options granted fair value total options issued outstanding 1995 plan 824000 1000000 december 31 1998 1997 respectively fully vested upon completion companys initial public offering december 1997 additional options granted 1995 plan november 8 1996 shareholders approved companys 1996 flexible stock plan 1996 plan provides grant options purchase 2100000 shares companys nonvoting common stock officers key employees company affiliates terms conditions including price exercise date number shares determined board directors administers plan options granted fair value total options issued outstanding 1996 plan 233750 237500 december 31 1998 1997 respectively additional options granted 1996 plan december 1997 shareholders approved companys 1997 flexible stock plan 1997 plan provides grant options purchase 2200000 shares companys common stock officers directors key employees company affiliates terms conditions including price exercise date number shares determined board directors administers plan options granted fair value total options issued outstanding 1997 plan 1892706 1285189 december 31 1998 1997 respectively weightedaverage remaining contractual vesting period december 31 1998 approximately four years conning corporation subsidiaries notes consolidated financial statements continued following table summarizes stock options outstanding december 31 1998 december 1998 companys compensation committee granted 134653 shares restricted stock price 1600 per share 1997 flexible stock plan 1998 restricted stock vest future periods reflected compensation expense future periods totaling approximately 900000 per year next five years company applies apb 25 accounting 1997 1996 1995 flexible stock plans accordingly compensation cost recognized stock options financial statements weightedaverage grantdate fair value stock options granted year weightedaverage significant assumptions used determine fair values using modified blackscholes option pricing model pro forma effect earnings fair value accounting stock options sfas 123 follows december 31 1998 companys closing stock price 2075 conning corporation subsidiaries notes consolidated financial statements continued note 12employee benefits company two retirement savings plans 401k savings plan 401k plan general american life insurance company progress sharing plan trust progress sharing plan 401k plan available substantially conning employees employed conning prior strategic merger progress sharing plan available employees employed gaimco prior strategic merger employees employed company subsequent strategic merger company contributed 892618 1019327 547127 behalf eligible employees years ended december 31 1998 1997 1996 respectively direct charges company general american progress sharing plan approximately 566251 407074 310000 years ended december 31 1998 1997 1996 respectively included charges administrative services general american one investment vehicles offered 401k plan managed conning pension plansubstantially personnel employees gaimco prior strategic merger eligible defined benefit plan sponsored general american december 31 1996 costs borne retained general american plan overfunded december 31 1998 1997 therefore charges made general american gaimco note 13litigation one legal claim arisen cc normal course businesses although matters subject uncertainty remain preliminary stages discovery completed company believes cc meritorious defenses claims probable outcomes material adverse effect upon company liquidity operations note 14commitments contingencies company subsidiary directly intermediary partnerships 1 general partner certain private equity funds company also manages capital contributions partners called needed investments funds december 31 1998 companys future commitment fund required capital contributions approximately 1677000 company subsidiary committed conning connecticut investors llc limited liability company general partner managing member approximately 4040000 purposes capitalizing general partner amount payable event insolvency part llc note 15net capital requirements cc registered brokerdealer member national association securities dealers inc therefore subject requirement secs uniform net capital rule requiring maintenance certain minimal capital levels december 31 1998 cc net capital defined uniform net capital rule approximately 15980000 14960000 excess required net capital cam also subject minimum net capital requirements determined state regulations certain states cam licensed business december 31 1998 1997 cam compliance minimum state requirements note 16concentration credit risk financial instruments potentially subject company concentration credit risk consist principally trade account receivables shortterm investments shortterm investments consist investment grade commercial paper approximate fair value short maturity items exception trade receivables general american affiliates credit risk respect trade accounts receivable limited due large number customers dispersion across geographical conning corporation subsidiaries notes consolidated financial statements continued areas investment management fees receivable general american affiliated entities december 3l 1998 1997 amounted approximately 2025053 1507206 respectively note 17industry segment june 1997 fasb issued sfas 131 disclosures segments enterprise related information sfas 131 sfas 131 establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued shareholders additionally sfas 131 establishes standards related disclosures products services geographic areas major customers superseding sfas 14 financial reporting segments business enterprise underlying principle sfas 131 management approach information disclosed management approach based way management organizes companys segments within enterprise making operating decisions assessing performance fasb believes information based approach useful user since information management uses make decisions enterprise fasb think separate measures segment performance developed solely purpose disclosure approach allows managements decisions topics allocations remain unchanged even conform generally accept accounting principles employing reasonableness sufficient test segment information company years ended december 31 1998 1997 1996 follows conning corporation subsidiaries notes consolidated financial statements continued revenuecombined operating segment revenues reported include income considered component corporate operations rather single segment year ended december 31 1998 1997 1996 income approximately 2553000 1634000 1062000 respectively pretax incomethe companys segment pretax income reflects two step allocation indirect charges net income first step allocation indirect charges corporate overhead includes various support functions senior management finance personnel facilities management corporate overhead allocated operating segment based operating segments proportionate share direct expenses combined operating segment direct expenses second step allocation indirect charges includes depreciation amortization interest expense certain compensation charges indirect charges allocated operating segments based operating segments proportionate share combined operating segment income operations net corporate overhead allocations reconciling items combined operating segment pretax income reported pretax income reported consolidated statement income major customerthe company one customer significant shareholder company provides 10 consolidated revenue addition disclosures sfas 131 requires financial disclosures measures used management make operating decisions assess performance allocate resources specifically total assets interest revenue interest expense depreciation amortization expense unusual items extraordinary items equity net income loss investees accounted equity method income tax provision benefit significant noncash items required disclosed segment management consider items operating segment making operating decisions assessing segment performance allocating resources conning corporation subsidiaries notes consolidated financial statements continued note 18earnings per share following table represents reconciliation numerators denominators basic diluted earnings per share computations 1998 146329 shares considered antidilutive included earnings per share calculations conning corporation subsidiaries notes consolidated financial statements continued note 19quarterly results operations unaudited following table summarizes quarterly results operations two years ended december 31 1998 1997 independent auditors report board directors shareholders conning corporation audited accompanying consolidated balance sheets conning corporation subsidiaries december 31 1998 1997 related consolidated statements income common shareholders equity cash flows years threeyear period ended december 31 1998 connection audits consolidated financial statements audited accompanying financial statement schedule consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position conning corporation subsidiaries december 31 1998 1997 results operations cash flows years threeyear period ended december 31 1998 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg llp st louis missouri january 21 1999 item 9 item 8 financial statements supplementary data index consolidated financial statements page consolidated financial statements consolidated balance sheets december 31 1997 1996 34 consolidated statements income years ended december 31 1997 1996 1995 35 consolidated statements common shareholders equity years ended december 31 1997 1996 1995 36 consolidated statements cash flows years ended december 31 1997 1996 1995 37 notes consolidated financial statements 38 independent auditors report 55 conning corporation subsidiaries notes consolidated financial statements note 1organization conning corporation company formed 1995 missouri corporation holding company organized hold operating subsidiaries conning group conning asset management company cam formerly known general american investment management company gaimco conning company cc company provides asset management research services focused upon insurance industry cam cc registered investment advisers securities exchange commission sec investment advisers act 1940 august 11 1995 shareholders holding company cc contributed common stock conning corporation section 351 merger transaction strategic merger exchange cash convertible preferred stock company general american contributed outstanding common stock gaimco part strategic merger exchange common shares company gaimco contribution recorded historical book value conning portion strategic merger accounted using purchase method purchase price consisting cash 120 million 170 million series convertible preferred stock allocated assets acquired based estimated fair values excess purchase price fair value net assets acquired resulted 203 million goodwill amortized straight line basis 20 years outstanding voting common stock company held wholly owned holding company subsidiary general american life insurance company together general american december 1997 whose parent genamerica corporation genamerica december 1997 company issued additional 2875000 shares registered initial public offering conversion outstanding convertible preferred stock see note 9 common stock general american owns approximately 63 outstanding common stock accompanying consolidated financial statements include accounts conning corporation conning inc holding company parent cc conning company conning asset management company historical financial statements include operations gaimco july 31 1995 consolidated operations thereafter note 2pro forma results table contains unaudited pro forma summary financial information year ended december 31 1995 pro forma 1995 information derived historical financial statements conning corporation gaimco conning inc gives effect strategic merger ii issuance 130 million debt company interest rate 7 per annum purpose providing 120 million cash portion purchase price payments 10 million representing employment bonuses certain employees iii issuance 170 million series convertible preferred stock iv shortterm borrowing 25 million general american interest rate 675 per annum conning inc effective prior anticipation strategic merger purpose redeeming retiring 8 cumulative senior preferred stock pro forma information prepared assuming transactions arrangements effected january 1 1995 note 3summary significant accounting policies accompanying consolidated financial statements company prepared conformity generally accepted accounting principles accounting purposes strategic merger effective close business july 31 1995 contribution gaimco company result strategic merger treated combination entities common control using historical cost basis accounting principles consolidation consolidated financial statements include accounts company subsidiaries elimination intercompany balances transactions revenue recognition asset management fees determined based contractual provisions earned varying percentages assets management fees accrued income period service provided research fees primarily form commissions derived securities transactions effected company lesser extent subscription fees research publications recorded income services provided earned mortgage loan fee income included asset management related fees earned origination mortgage loans general american affiliates outside parties fees earned based agreements borrowers recognized closing mortgage commitment deferred mortgage loan origination fees represent moneys received loan commitments earned upon loan funding included deferred revenue consolidated balance sheet fair value financial instruments fair value estimates made specific point time based relevant market information financial instrument substantially companys financial assets liabilities carried market value amounts shortterm nature approximate current fair value cash equivalents cash equivalents represent cash highly liquid investments original maturities three months less company funds deposit general american amounting 10505557 6449642 december 31 1997 1996 readily convertible cash earn interest shortterm money market rates purposes financial statements funds considered cash equivalents shortterm investments shortterm investments comprised us government securities investment grade commercial paper maturity one year less carried amortized cost approximates fair value investments marketable equity securities classified trading securities presented fair value corresponding unrealized gains losses included current period income marketable equity securities classified availableforsale presented fair value corresponding unrealized gains losses included separate component shareholders equity net deferred income taxes nonmarketable investments various private equity funds held companys brokerdealer subsidiary accordance generally accepted accounting principles brokerdealers investments recorded using equity method basis accounting including unrealized gains losses changes fair values included consolidated statements income equipment leasehold improvements equipment stated cost less accumulated depreciation provided accelerated method periods exceeding eight years leasehold improvements stated cost less accumulated amortization provided straightline basis term lease income taxes income tax expense based income reported financial statements deferred federal state income taxes provided based asset liability approach requires recognition deferred income tax assets liabilities expected future tax consequences temporary differences financial statement carrying amounts tax basis assets liabilities company files consolidated federal income tax returns subsidiaries goodwill arising strategic merger amortized straightline basis period 20 years accumulated amortization 2448202 1435152 december 31 1997 1996 respectively goodwill periodically reviewed determine recoverability based discounted operating cash flows underlying business december 31 1997 1996 impairment indicated assets included assets costs associated purchase software license agreement license agreement effective january 27 1996 total cost license amortized life license agreement december 31 1997 1048333 remains amortized three remaining years license agreement total amortization 340000 311667 included consolidated statements income years ended december 31 1997 1996 respectively assets include unamortized cost compensation relating strategic merger amortized threeyear period ending august 11 1998 amortization 1562915 1707918 included consolidated statements income years ended december 31 1997 1996 respectively unamortized amount 862361 2425276 included assets december 31 1997 1996 respectively also included assets cash surrender value corporateowned life insurance policies key executives purchased 1997 connection deferred savings plan certain employees december 31 1997 cash value amounted 2000000 compensation payable compensation payable represents amounts payable employees result companys incentive compensation programs normal course operations amounts accrued period earned accrued rent liability company recorded liability present value difference market rate lease contract rate lease portion companys office space hartford connecticut part fair value adjustments relating strategic merger difference amortized reduction rent expense remaining lease period preferred stock carrying value convertible preferred stock original issue price plus accretion relating increase redemption value stock period 1997 1996 1995 accretion 13710298 5327300 0 respectively income comprised investment income miscellaneous revenues noncash employee compensation company uses intrinsic value method account stock option plans prescribed accounting principles board opinion 25 accounting stock issued employees apb 25 method compensation expense recognized awards options purchase shares stock employees compensatory plans fair market value stock option grant date measurement date later greater amount employee must pay acquire stock october 1995 financial accounting standards board fasb issued statement financial accounting standards 123 accounting stockbased compensation fas 123 fas 123 permits companies adopt new fair value based method account stock option plans continue using intrinsic value method company intends continue using intrinsic value method provides pro forma disclosures note 11 required fas 123 earnings per share company adopted sfas 128 earnings per share issued fasb february 1997 sfas 128 specified new standards designed improve earnings per share eps information provided financial statements simplifying existing computational guidelines reviewing disclosure requirements increasing comparability eps data international basis 1997 1996 earnings per share amounts calculations presentations reflective requirements statement weighted average common shares equivalents outstanding december 31 1997 1996 7055889 6710000 respectively basic earnings per common share 11100732 10871936 respectively diluted earnings per common share given 1997 1996 results include full consolidated operations see note 1 company believes presentation historical earnings per share prior 1996 would meaningful use estimates management company made number estimates assumptions relating reporting assets liabilities preparation financial statements actual results could differ estimates reclassifications company reclassified presentation certain prior period information conform 1997 presentation note 4accounts receivable accounts receivable include primarily amounts due management fees selling concessions due underwriters amounts due business activities company december 31 1997 1996 allowance doubtful accounts 170000 165000 respectively applied reduction accounts receivable change allowance current period result managements assessment collectibility underlying receivables note 5investments december 31 1997 1996 estimated fair value marketable nonmarketable investments follows company 1 general partner various private equity funds value nonmarketable partnership investments accounted using equity method updated periodically based upon changes fair values recorded consolidated statements income additionally company derivative investments 1997 1996 note 6equipment leasehold improvements december 31 1997 1996 equipment leasehold improvements comprised following depreciation expense 564508 447070 170600 included consolidated statements income years ended december 31 1997 1996 1995 respectively company occupies premises rents certain office equipment leases accounted operating leases expiration dates 2005 december 31 1997 minimum net rental commitments company periods indicated terms operating leases excess one year approximately 6988000 follows 1183000 1998 1094000 1999 944000 2000 886000 per year 2001 2004 223000 2005 note 7income taxes prior strategic merger gaimco included consolidated federal income tax returns general american provisions income taxes computed gaimco filed separate return provision federal state income tax years ended december 31 1997 1996 1995 follows companys net deferred income tax assets represent estimated future tax effects attributable future taxable deductible temporary difference amounts recognized financial statements income tax returns december 31 1997 1996 net deferred income tax asset follows companys net deferred income tax assets represent estimated future tax effects attributable future taxable deductible temporary difference amounts recognized financial statements income tax returns december 31 1997 1996 net deferred income tax assets follows valuation allowance provided likely portion deferred tax assets realized management believes deferred tax assets fully realized future based upon consideration reversal existing temporary differences anticipated future earnings available evidence accordingly valuation allowance established note 8debt long term august 11 1995 company borrowed 13000000 general american fund certain payments made connection strategic merger interest payable january 1 september 1 annual rate 70 principal payments due three equal annual installments 4333333 commencing september 1 2003 company prepaid 2000000 7000000 40000000 principal plus accrued interest 27222 412805 323750 1997 1996 1995 respectively short term august 11 1995 company borrowed 2500000 general american fund certain payments made connection strategic merger interest payable january 1 august 1 annual rate 675 principal due august 11 1996 company prepaid 500000 2000000 principal plus accrued interest 14250 58688 1996 1995 respectively included consolidated statements income company shortterm debt 1997 lines credit december 31 1997 1996 company revolving subordinated loan agreement commercial bank 2000000 interest rate agreed upon lender company time advance agreement expires july 7 1998 1996 company borrowed 2000000 less one week borrowings 1997 note 9preferred stock shareholders equity preferred stock company outstanding prior initial public offering subject shareholders agreement consisted series convertible preferred stock par value 01 per share ii series b convertible preferred stock par value 01 per share december 31 1996 1995 3190000 shares series convertible preferred stock series preferred stock authorized issued outstanding series preferred stock paid dividends quarterly based 90day united states treasury bill rate effect previous payment date dividends cumulative company declared dividends series preferred stock 011 028 years ended december 31 1995 1996 respectively declared unpaid dividends totaling 223300 included preferred dividends payable consolidated balance sheet december 31 1996 series preferred stock carried voting rights issued part strategic merger share series preferred stock convertible one share nonvoting common stock holders election voting common stock initial public offering ipo date november 8 1996 company commenced private offering certain employees directors offering new class preferred stock designated series b convertible preferred stock series b preferred stock total 460000 shares sold 533 per share adding 2451800 preferred stock order exercise conversion payment company additional 167 per share required december 31 1996 600000 shares series b preferred stock authorized 460000 shares issued outstanding series b preferred stock paid dividends quarterly rate 5 per annum dividends cumulative declared unpaid dividends totaling 12515 included preferred dividends payable consolidated balance sheet december 31 1996 series b preferred stock carried voting rights share series b preferred stock convertible one share nonvoting common stock holders election upon payment additional 167 per share company january 1997 company issued additional 15000 shares series b preferred stock 533 per share april 1997 certain shareholders converted 110000 shares series b preferred stock nonvoting common stock resulting transaction increased additional paidin capital 768900 increased common equity 1100 june 1997 general american pursuant call right purchased 1594995 shares companys series preferred stock existing shareholders 1125 per share connection purchase certain restrictions eliminated series preferred stock generated additional tax benefit company 1134785 recorded directly additional paidin capital june 1997 board directors company authorized increase number shares series voting common stock 20000000 50000000 december 1997 company completed initial public offering totaling 2875000 shares common stock including overallotment option sold underwriters company initial public offering net proceeds related offering 34595000 result offering series b preferred stock converted common shares company stock oneforone basis shareholders agreement terminated resulting increase shareholders equity totaling approximately 38595000 company declared paid dividends totaling 963123 1997 related series b preferred stock december 15 1997 ipo pricing date additionally result offering shares nonvoting common stock converted common stock oneforone basis february 12 1998 board directors company established companys dividend policy declared quarterly dividend 004 per share common stock record holders march 5 1998 payable march 20 1998 declaration payment dividends holders common stock discretion companys board directors depend upon companys capital requirements operating financial condition well legal regulatory restrictions net capital rules various regulatory bodies applicable conning company factors board directors may deem relevant note 10other related party activities cam acts investment adviser general separate accounts general american insurance subsidiaries well general american capital company family funds investment management fees earned affiliated entities years ended december 31 1997 1996 1995 amounted 17227994 14300267 12573489 respectively total investment management fees receivable affiliated entities december 31 1997 1996 amounted 1507203 1042294 respectively certain officers directors company also officers general american officers andor directors general american affiliates company directly indirectly intermediary partnerships managing general partner certain private equity funds equity ownership interest 1 fund total company managed seven six funds 1997 1996 1995 respectively fees managing funds 5491704 4006038 1295330 years ended december 31 1997 1996 1995 respectively company received underwriting fees concessions connection offering shares companies partially owned certain private equity funds managed company fees concessions included research services related fees amounted 760638 2177269 0 years ended december 31 1997 1996 1995 connection november 1996 private offering series b preferred stock general american holds demand recourse notes certain employees totaling 2185300 2650750 december 31 1997 1996 respectively notes bear interest 6 payable semiannually beginning july 1997 general american provides administrative services request company including disbursements tax facility management administrative support company pursuant administrative services agreement following table lists expenses recorded company significant services provided general american years ended december 31 1997 1996 1995 administrative costs predominantly based direct identifiable costs incurred general american behalf company companys request charged back company general americans cost costs represent result allocations based customary methodology square footage rent number employees payroll processing company believes allocation methodologies reasonable resulting expenses incurred materially different would incurred standalone basis note 11stock options august 1995 shareholders approved companys 1995 flexible stock plan 1995 plan provides grant options purchase 2100000 shares companys nonvoting common stock officers key employees company affiliates terms conditions including price exercise date number shares determined board directors administers plan event initial public offering options become 100 vested options granted fair value total options issued outstanding 1995 plan 1000000 december 31 1996 1997 fully vested upon completion companys initial public offering december 1997 options granted 1995 plan november 8 1996 shareholders approved companys 1996 flexible stock plan 1996 plan provides grant options purchase 2100000 shares companys nonvoting common stock officers key employees company affiliates terms conditions including price exercise date number shares determined board directors administers plan options granted fair value total options issued outstanding 1996 plan 237500 230000 december 31 1997 1996 respectively options granted 1996 plan december 1997 shareholders approved companys 1997 flexible stock plan 1997 plan provides grant options purchase 2200000 shares companys common stock officers directors key employees company affiliates terms conditions including price exercise date number shares determined board directors administers plan options granted fair value total options issued outstanding 1997 plan 1285189 december 31 1997 range exercise prices december 31 1997 533 1350 weightedaverage remaining contractual vesting period approximately four years company applies apb opinion 25 accounting stock issued employees apb 25 accounting 1997 1996 1995 flexible stock plans accordingly compensation cost recognized stock options financial statements weightedaverage grantdate fair value stock options granted year weightedaverage significant assumptions used determine fair values using modified blackscholes option pricing model pro forma effect earnings fair value accounting stock options fas 123 follows note 12employee benefits company two retirement savings plans 401k savings plan 401k plan general american life insurance company progress sharing plan trust progress sharing plan 401k plan available substantially conning employees employed conning prior strategic merger progress sharing plan available employees employed gaimco prior strategic merger employees employed company subsequent strategic merger company contributed 1019327 547127 286170 behalf eligible employees years ended december 31 1997 1996 1995 respectively direct charges company general american progress sharing plan approximately 407074 310000 359000 years ended december 31 1997 1996 1995 respectively included charges administrative services general american one investment vehicles offered 401k plan managed conning pension plansubstantially personnel employees gaimco prior strategic merger eligible defined benefit plan sponsored general american december 31 1996 costs borne retained general american plan overfunded december 31 1997 1996 therefore charges made general american gaimco note 13litigation two legal claims arisen cc normal course businesses although matters subject uncertainty remain preliminary stages discovery completed company believes cc meritorious defenses claims probable outcomes material adverse effect upon company liquidity operations note 14commitments contingencies company subsidiary directly intermediary partnerships 1 general partner certain private equity funds company also manages capital contributions partners called needed investments funds december 31 1997 companys future commitment fund required capital contributions approximately 2161200 company subsidiary committed conning connecticut investors llc limited liability company general partner managing member approximately 4040000 purposes capitalizing general partner amount payable event insolvency part llc note 15net capital requirements cc registered brokerdealer member national association securities dealers inc therefore subject requirement secs uniform net capital rule requiring maintenance certain minimal capital levels december 31 1997 cc net capital defined uniform net capital rule approximately 4694000 4065000 excess required net capital cam also subject minimum net capital requirements determined state regulations certain states cam licensed business december 31 1997 1996 cam compliance minimum state requirements note 16concentration credit risk financial instruments potentially subject company concentration credit risk consist principally trade account receivables shortterm investments shortterm investments consist investment grade commercial paper approximate fair value short maturity items exception trade receivables general american affiliates credit risk respect trade accounts receivable limited due large number customers dispersion across geographical areas investment management fees receivable general american affiliated entities december 31 1997 1996 amounted 1507203 1042294 respectively note 17industry segment company primarily engaged single line business provider investment management services comprises several types services discretionary asset management investment accounting reporting services mortgage origination servicing private equity investments institutional investment research activities constitute single business segment note 18earnings per share following table represents reconciliation numerators denominators basic diluted earnings per share computations note 19quarterly results operations unaudited following table summarizes quarterly results operations two years ended december 31 1997 1996 note 20new accounting pronouncements 1997 financial accounting standards board fasb issued statement financial accounting standards sfas 130 reporting comprehensive income statement establishes standards reporting displaying income components revenues gains losses full set general purpose financial statements statement requires items required recognized accounting standards components comprehensive income reported financial statement displayed prominence financial statements although statement effective fiscal years beginning december 15 1997 company believe sfas material impact companys financial statements addition fasb issued sfas 131 disclosures segments enterprise related information statement establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued shareholders additionally statement establishes standards related disclosures products services geographic areas major customers superseding sfas 14 financial reporting segments business enterprise company currently evaluating statement whether additional information would required included companys financial statements beginning 1998 independent auditors report board directors shareholders conning corporation audited accompanying consolidated balance sheets conning corporation subsidiaries december 31 1997 1996 related consolidated statements income common shareholders equity cash flows years threeyear period ended december 31 1997 connection audits consolidated financial statements audited accompanying financial statement schedule consolidated financial statements financial statement schedule responsibility companys management responsibility express opinion consolidated financial statements financial statement schedule based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position conning corporation subsidiaries december 31 1997 1996 results operations cash flows years threeyear period ended december 31 1997 conformity generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg peat marwick llp st louis missouri february 12 1998 item 9 