UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________________
Commission file number 0-21988
KAYE GROUP INC.
(Exact name of registrant as specified in charter)
Delaware 13-3719772
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
122 East 42nd Street, New York, N.Y. 10168
(Address of principal executive office)
(Zip code)
212-338-2100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __x__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 12, 1996 - 7,020,000
- - - Total number of pages filed including cover and under pages 19
- - - Exhibit index is located on page 17
<PAGE>
KAYE GROUP INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the three months
and six months ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
six months ended June 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II OTHER INFORMATION 16
2
<PAGE>
Item 1. - Financial Statements
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
(in thousands, except par value per share)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
INSURANCE BROKERAGE COMPANIES
Current Assets:
Cash and cash equivalents
(including short term investments and funds held in a fiduciary
capacity of $11,428 and $7,528) $ 12,527 $ 10,054
Premiums receivable (net of allowance of $226 and $202) 46,852 76,732
Prepaid expenses and other assets 1,912 2,089
Intercompany receivable 3,039 7,817
-------- --------
Total current assets 64,330 96,692
Fixed assets ( net of accumulated depreciation of $ 7,065 and $6,622) 2,240 2,565
Expiration lists ( net of accumulated amortization of $1,415 and $1,231) 2,277 2,462
Deferred income taxes 823 2,580
Other assets 473 842
-------- --------
Total assets-insurance brokerage companies 70,143 105,141
-------- --------
PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
Fixed maturities, at market value (amortized cost 1996, $36,018
1995, $37,558) 35,480 38,002
Equity securities, at market value (cost: 1996 & 1995, $1,421) 1,476 1,506
Short term investments, at cost, which approximates market value 2,100 3,150
-------- --------
Total investments 39,056 42,658
Cash and cash equivalents 3,259 1,712
Accrued interest and dividends 962 991
Premium balances receivable 2,758 3,506
Premium balances receivable -Insurance Brokerage Companies 3,099
Prepaid reinsurance premiums 760 383
Funds held under deposit contracts, at market value (amortized cost
1996, $5,628; 1995, $5,590) 5,619 5,622
Deferred acquisition costs 2,467 3,703
Deferred income taxes 954 358
Intercompany receivable 303
Other assets 2,509 2,551
-------- --------
Total assets-property & casualty companies 58,647 64,583
-------- --------
CORPORATE
Cash and cash equivalents 1,467 2,098
Prepaid income taxes 772 1,261
Prepaid and other assets 311 432
Investments available-for-sale:
Fixed maturities, at market value (amortized cost 1996, $9; 1995, $8) 9 8
Equity securities, at market value (cost:1996 & 1995, $557) 512 436
Deferred income taxes 1 41
-------- --------
Total assets-corporate 3,072 4,276
-------- --------
Total assets $131,862 $174,000
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
(in thousands, except par value per share)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
INSURANCE BROKERAGE COMPANIES
Current liabilities:
Premiums payable $ 51,524 $ 77,636
Premiums payable-Property and Casualty Companies 763 3,099
Accounts payable and accrued liabilities 4,271 6,256
Notes payable 357 415
Deferred income taxes 0 1,178
Due to affiliates 142 138
-------- --------
Total current liabilities 57,057 88,722
Notes payable 435 579
Notes payable-KILP 6,000 6,000
-------- --------
Total liabilities-insurance brokerage companies 63,492 95,301
-------- --------
PROPERTY AND CASUALTY COMPANIES
Liabilities:
Unpaid losses and loss expenses 13,455 12,671
Unearned premium reserves 8,168 11,914
Deposit contracts 5,094 5,001
Accounts payable and accrued liabilities 3,950 2,918
Reinsurance payable 151 285
Intercompany payable 0 84
-------- --------
Total liabilities-property and casualty companies 30,818 32,873
-------- --------
CORPORATE
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 233 3,222
Intercompany payable 3,342 7,734
-------- --------
Total current liabilities 3,575 10,956
Notes payable-long-term 7,100 7,100
-------- --------
Total liabilities-corporate 10,675 18,056
-------- --------
Total liabilities 104,985 146,230
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN EQUITY OF
KAYE HOLDING CORPORATION 4,730 4,888
-------- --------
STOCKHOLDERS' EQUITY:
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares authorized; none issued or outstanding
Common stock, $.01 par value; 20,000 shares authorized; 7,020 shares issued and outstanding 70 70
Paid - in capital 7,776 7,776
Unrealized appreciation/(depreciation) of investments available-for-sale,
net of deferred income tax (benefit), (1996, ($152); 1995, $121) (295) 236
Retained earnings 14,596 14,800
-------- --------
Total stockholders' equity 22,147 22,882
-------- --------
Total liabilities and stockholders' equity $131,862 $174,000
======== ========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the three months and six months ended June 30, 1996 and 1995
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees, net $ 5,980 $ 5,871 $ 12,369 $ 13,146
Commissions and fees, net - Property and Casualty Companies 397 85 410 95
Net investment income 170 214 444 581
-------- -------- -------- --------
Total revenues 6,547 6,170 13,223 13,822
-------- -------- -------- --------
Expenses:
Salaries and benefits 4,698 5,221 9,718 10,893
Other operating expenses 3,186 3,333 6,425 6,630
-------- -------- -------- --------
Total operating expenses 7,884 8,554 16,143 17,523
-------- -------- -------- --------
Interest expense 150 150 300 300
-------- -------- -------- --------
Loss before income taxes-insurance brokerage companies (1,487) (2,534) (3,220) (4,001)
-------- -------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 4,674 (287) 4,889 1,175
Change in unearned premiums (264) 4,488 3,659 7,652
-------- -------- -------- --------
Net premiums earned 4,410 4,201 8,548 8,827
Net investment income 598 750 1,268 1,416
Net realized gains on investments 5 22 94 18
Other income 207 252 354 424
-------- -------- -------- --------
Total revenues 5,220 5,225 10,264 10,685
-------- -------- -------- --------
Expenses:
Losses and loss expenses 1,519 912 2,952 2,455
Acquisition costs and general and administrative expenses 1,714 1,460 3,483 3,093
-------- -------- -------- --------
Total expenses 3,233 2,372 6,435 5,548
-------- -------- -------- --------
Income before income taxes-property and casualty companies 1,987 2,853 3,829 5,137
-------- -------- -------- --------
CORPORATE
Revenues:
Net investment income (loss) 13 (25) 46 (11)
Expenses:
Operating expenses 78 9 135 47
Interest expense 132 263 265 418
-------- -------- -------- --------
Loss before income taxes-corporate ($ 197) ($ 297) ($ 354) ($ 476)
-------- -------- -------- --------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the three months and six months ended June 30, 1996 and 1995
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income before income taxes and minority interest $ 303 $ 22 $ 255 $ 660
-------- -------- -------- --------
Provision (benefit) for income taxes:
Current (599) 684 (311) 1,283
Deferred 690 (171) 388 (186)
-------- -------- -------- --------
Total income taxes 91 513 77 1,097
-------- -------- -------- --------
Income (loss) before minority interest 212 (491) 178 (437)
Minority interest 37 (87) 31 (77)
-------- -------- -------- --------
NET INCOME (LOSS) $ 175 ($ 404) $ 147 ($ 360)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE $ 0.02 ($ 0.06) $ 0.02 ($ 0.05)
======== ======== ======== ========
PRO FORMA NET INCOME (Note 6)
Income before charge in lieu of income taxes and
minority interest $ 303 $ 22 $ 255 $ 660
Charge in lieu of income taxes 91 6 77 185
-------- -------- -------- --------
Income before minority interest 212 16 178 475
Minority interest 37 3 31 84
-------- -------- -------- --------
PRO FORMA NET INCOME $ 175 $ 13 $ 147 $ 391
======== ======== ======== ========
PRO FORMA NET INCOME PER SHARE $ 0.02 $ 0.00 $ 0.02 $ 0.06
======== ======== ======== ========
Weighted average shares outstanding 7,020 7,020 7,020 7,020
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1996 and 1995
(in thousands)
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 147 ($ 360)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Deferred acquisition costs 1,236 2,432
Amortization of bond premium, net 337 202
Deferred income taxes 354 (165)
Net realized (gains) losses on investments (94) 31
Net realized loss on sale of fixed assets 19 0
Depreciation and amortization expense 985 843
Minority interest 31 (77)
Change in assets and liabilities:
Accrued interest and dividends 29 (130)
Premium balances receivable 33,350 49,883
Prepaid and other assets 286 (12)
Unpaid losses and loss expenses 784 (123)
Unearned premiums (3,746) (6,869)
Premiums payable (28,448) (19,754)
Due to affiliated companies 4 (265)
Income taxes payable 489 (929)
Accounts payable and accrued liabilities (4,076) (2,092)
-------- --------
Net cash provided by operating activities 1,687 22,615
-------- --------
Cash flows from investing activities:
Investments available - for - sale :
Purchase of fixed maturities (8,664) (4,344)
Purchase of equity securities (45)
Purchase of short term investments (1,800)
Maturities of fixed maturities 1,302 2,117
Sales of fixed maturities 8,707 5,146
Sales of short term investments 1,050
Funds held under deposit contracts:
Purchase of fixed maturities (469) (1,043)
Purchase/sales of short term investments (270) 1,338
Sales of fixed maturities 526 1,537
Maturities of fixed maturities 140 150
Purchase of fixed assets (159) (197)
-------- --------
Net cash provided by investing activities 2,163 2,859
-------- --------
Cash flows from financing activities:
Receipts (payments) under deposit contracts 93 (2,061)
Notes payable-repayment (203) (7,327)
Proceeds from borrowings 7,268
Increase in net advances from KILP 194
Payment of dividends (351) (351)
-------- --------
Net cash used in financing activities (461) (2,277)
-------- --------
Net change in cash and cash equivalents 3,389 23,197
Cash and cash equivalents at beginning of period 13,864 16,756
-------- --------
Cash and cash equivalents at end of period $ 17,253 39,953
======== ======
Supplemental cash flow disclosure:
Interest expense paid $ 565 $ 915
Income taxes paid (refunds) ($ 800) $ 2,212
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
ITEM 1. - FINANCIAL STATEMENTS (continued)
KAYE GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1) General
The consolidated financial statements as of June 30, 1996 and for the three
months and six months ended June 30, 1996 and 1995 are unaudited, and have been
prepared in accordance with generally accepted accounting principles and, in the
opinion of management, reflect all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of the results for such periods.
The results of operations for the three months and six months ended June 30,
1996 are not necessarily indicative of results for the full year.
These financial statements should be read in conjunction with the financial
statements and related notes in Kaye Group Inc's 1995 Form 10K. The December 31,
1995 consolidated balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
2) Organization
Effective October 2, 1995 Old Lyme Holding Corporation ("Old Lyme") combined its
operations with the insurance brokerage operations (the "Brokerage Business") of
Kaye International, L.P. ("KILP") and changed its name to Kaye Group Inc. (the
"Company"). For further details of the combination, reference is hereby made to
the Company's Annual Report on Form 10K for the year ended December 31, 1995, as
previously filed with the Commission.
3) Changes in Accounting Policies
In October 1995 the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". This statement establishes new financial accounting and reporting
standards for stock-based employee compensation plans, including stock option
and stock purchase plans. Compensation resulting from the award of stock-based
compensation must be determined based on the fair value of consideration
received or fair value of the equity instrument issued, whichever is more
reliably measurable. Such compensation expense, net of income taxes, may be
recognized in the Statement of Income over the service period of the employee
(generally the vesting period). In lieu of recording such compensation expense,
entities are permitted to disclose its pro forma impact, net of income taxes, on
reported net income and earnings per share. Entities choosing such disclosure
will continue to measure compensation expense from stock-based compensation in
the Statement of Income based on the intrinsic value method prescribed in
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees".
Management is evaluating the effect of the new pronouncement on its stock option
plans and has not determined which option for implementation will be utilized.
8
<PAGE>
4) Funds Held In Fiduciary Capacity
Premiums collected by the Insurance Brokerage Companies but not yet remitted to
insurance carriers, are restricted as to use by law in certain states in which
the Insurance Brokerage Companies operate. These balances are held in cash and
cash equivalents or short-term investments. The offsetting obligation is
recorded in premiums payable.
5) Notes Payable
The Company has a $10,000,000, revolving line of credit with a bank,
collateralized by the stock of the Insurance Companies. Currently $7,100,000 has
been borrowed under this revolving line of credit. The proceeds are available
for general corporate purposes, which may include acquisitions by the Company or
a subsidiary and the making of a loan to an affiliate. Any borrowings will bear
interest at the bank's equivalent of the prime rate of interest as maintained
from time to time or at the Company's option, a LIBOR based rate. A commitment
fee is assessed in the amount of 1/4% per annum on the unused balance. Among
other covenants, the agreement requires maintenance of minimum consolidated net
worth, statutory surplus, ratios of net premiums written to surplus and minimum
interest coverage. As of June 30, 1996, the Company is in compliance with the
covenants of the debt agreement.
The bank's commitment under the revolving line of credit is scheduled to be
reduced commencing September 30, 1996 by $625,000 each quarter. Available credit
as of the end of each respective year is $8,750,000 in 1996, $6,250,000 in 1997,
$3,750,000 in 1998, $1,250,000 in 1999 and none in 2000. The Company's required
payments under the revolving line of credit for the respective years are $0 in
1996, $850,000 in 1997, $2,500,000 in 1998, $2,500,000 in 1999 and $1,250,000 in
2000. Interest accrued under the revolving credit line for the six months ended
June 30, 1996 was approximately $265,000.
6) Income Taxes
The provision for income taxes, as reported in the historical financial
statements, does not provide for any income taxes on certain subsidiaries of the
Company prior to the combination on October 2, 1995 and the public offering on
August 17, 1993. Prior to August 17, 1993, only one subsidiary (the domestic
Insurance Company), was liable for Federal income taxes, while income taxes on
Old Lyme Bermuda, Claims Administration, and Program Brokerage were paid by the
shareholders or partners of these subsidiaries, and not by the Company. Prior to
the Transactions on October 2, 1995, the Brokerage Partnerships and Brokerage
Corporations were either limited partnerships or S Corporations under the
Internal Revenue Code, and therefore, the individual partners or shareholders,
rather than the companies, were liable for income taxes.
The data reflecting a charge in lieu of income taxes is presented on a pro forma
basis in the accompanying consolidated statements of income as if the income or
loss, prior to the Transactions and the Restructuring, of various partnerships
and S corporations, were taxed to those entities rather than to their partners
or shareholders. For further details of the Transaction and Restructuring,
reference is hereby made to the Company's Annual Report on Form 10K for the year
ended December 31, 1995, as previously filed with the Commission.
9
<PAGE>
7) Net Income Per Share
Net income per share is based on the weighted average number of common shares
outstanding. Common stock equivalents (originating in 1993) are not dilutive.
8) Dividends
On June 20, 1996, the Board of Directors declared a quarterly dividend of $.025
per share, payable July 19, 1996 to stockholders of record on June 28, 1996.
9) Contingent Liabilities
In the ordinary course of business, the Company and its subsidiaries are subject
to various claims and lawsuits consisting primarily of alleged errors and
omissions in connection with the placement of insurance. Subject to specified
limits, the shareholders of predecessors to the Brokerage Business are
responsible for any costs arising from those claims which were asserted prior to
November 1, 1991, the date on which KILP was formed. In the opinion of
management, the ultimate resolution of all asserted and potential claims both
prior and subsequent to the formation of KILP, will not have a material effect
on the consolidated financial position of the Company.
The Company settled the lawsuits involving a former employee relating to such
employee's termination and subsequent activities. The settlement did not have a
material adverse effect on the financial position of the Company.
As licensed brokers, certain subsidiaries of the Company are or may become
parties to administrative inquiries and at times to administrative proceedings
commenced by state insurance regulatory bodies. Certain subsidiaries are
presently involved in an administrative investigation by the New York Insurance
Department ("Department") relating to how property insurance policies were
issued for the Residential Real Estate Program. As a result, the manner in which
policies are structured for certain clients in this Program has been altered,
which has not had a material adverse effect on this Program. Whereas the Company
is in discussions with the Department regarding settlement of such
investigation, if such discussions are not successful, the Department could
institute formal proceedings against the subsidiaries seeking fines or license
revocations. KILP has agreed to indemnify Holding, the Company and its
subsidiaries for any fines or settlement payments in excess of $300,000,
relating to such investigation. Management does not believe the resolution of
such issues will have a material adverse effect on the Company.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Kaye Group Inc. (the "Company") owns 82.4% of the issued and outstanding stock
of Kaye Holding Corp ("Holding") or ("Corporate") , which is the primary asset
of the Company. The Company's business is conducted principally through the
wholly owned subsidiaries of Holding.
Following the Transactions, the Company operates in two business segments: (1)
"Insurance Brokerage", which comprises the Brokerage Business and Program
Brokerage (the "Insurance Brokerage Companies") and (2) "Property and Casualty
Insurance", or "Insurance" which comprises the Insurance Companies and Claims
Administration (the "Property and Casualty Companies").
Historically, the commission income of Program Brokerage was recorded as a
reduction of acquisition costs in the consolidated statements of income of Old
Lyme. As a result of the Transactions, management includes the commission income
and the other revenues and operating costs of Program Brokerage in the Insurance
Brokerage segment for all periods presented. Accordingly, the revenues and
expenses of the Property and Casualty Insurance segment will not be comparable
to the amounts reported previously by Old Lyme.
Overview
The Insurance Brokerage business derives its revenue principally from
commissions associated with the placement of insurance coverage for corporate
clients. These commissions are paid by the insurance carriers and are usually a
fixed percentage of the total premiums. There is normally a lag between receipt
of funds from the insured and payment to the insurance company. Investment of
these funds over this period generates additional revenue in the form of
interest income.
The Insurance business underwrites property and casualty risks for insureds in
the United States and is sold principally through specially designed Programs
covering various types of businesses and properties which have similar risk
characteristics. The Insurance business generally underwrites the first layer of
insurance under the Programs and unaffiliated Program insurers provide coverage
for losses above the first layer of risk. Substantially all of the Insurance
business revenues are derived from premiums on this business, plus the
investment income generated by the investment portfolio of the Insurance
business.
Insurance coverage under the Programs is provided through a variety of
underwriting structures, including reinsurance arrangements where direct
coverage may not be possible. RLI Corp. ("RLI"), an unaffiliated company, has
had reinsurance agreements with the Property and Casualty Companies since 1982
to provide direct coverage in certain of such circumstances. For policies
written by RLI subsequent to January 1, 1992, RLI writes the first layer of risk
under the Programs and cedes to the Property and Casualty Companies a certain
percentage of premiums to purchase a stop loss policy in the event RLI's losses
exceed a fixed percentage of net premiums written. In the event losses are less
than the fixed percentage, the Insurance Brokerage business will receive a
contingent commission equal to such amount (net of fees paid to RLI). Only the
premiums ceded to the Property and Casualty Companies for the stop loss policy
are included in the net premiums written and earned for the Insurance business.
For policies written by RLI prior
11
<PAGE>
to 1992, RLI ceded to the Property and Casualty Companies, on a quota share
basis, substantially all of the premiums received by RLI on such policies.
Corporate operations include those revenues and expenses not directly related to
the Insurance Brokerage or Insurance businesses. The expenses primarily are
associated with being a public company and interest expense on corporate debt.
A comprehensive analysis of the results of operations of the Company would not
be meaningful without consideration of the following:
The provision for income taxes, as reported in the historical
financial statements, does not provide for any income taxes on certain
subsidiaries of the Company prior to the combination on October 2,
1995 and the public offering on August 17, 1993. Prior to August 17,
1993, only one subsidiary (the domestic Insurance Company), was liable
for Federal income taxes, while income taxes on Old Lyme Bermuda,
Claims Administration, and Program Brokerage were paid by the
shareholders or partners of these subsidiaries, and not by the
Company. Prior to the Transactions on October 2, 1995, the Brokerage
Partnerships and Brokerage Corporations were either limited
partnerships or S Corporations under the Internal Revenue Code, and
therefore, the individual partners or shareholders, rather than the
companies, were liable for income taxes. Accordingly, the Company has
presented a calculation of Pro Forma Income for the three months and
six months ended June 30 1995 which reflects a charge in lieu of
income taxes, as if all subsidiaries were included in the Company's
consolidated Federal income tax return for all periods presented.
Management believes this presentation will better present current and
future comparisons of the effective tax rate and Federal and state
income tax expense of the Company.
Results of Operations
Three months ended June 30, 1996 compared
with three months ended June 30, 1995
Insurance Brokerage Operations
Total revenues in 1996 were $6,547,000 compared with $6,170,000 in 1995, an
increase of $377,000 (6%). The largest component of revenues, net commissions
and fees, was up $421,000 (7%) due to increased commissions on the Residential
Real Estate program and an increase in contingent income earned from
non-affiliated carriers partially offset by lost business exceeding new
business. Investment income decreased in 1996 by $44,000 primarily as a result
of decreased funds available for investment and slightly lower interest rates.
Salaries and benefits decreased by $523,000 (10%) to $4,698,000 in 1996 compared
to $5,221,000 in 1995. This decrease is the result of the lower compensation
earned under incentive contracts, discontinuance of the Company's defined
benefit pension plan, refunds received on group medical insurance and the
consolidating of responsibilities.
12
<PAGE>
Other operating expenses (including depreciation) decreased by $147,000 (4%) to
$3,186,000 in 1996 compared with $3,333,000 in 1995. The effect of consolidating
responsibilities has resulted in savings in certain operating expenses.
Loss before income taxes decreased by $1,047,000 (41%) to $1,487,000 in 1996
from $2,534,000 in 1995. The improved operating result was due to increased
revenues and the decrease in salaries and benefits, as discussed above.
Property and Casualty Insurance Operations
Net premiums earned for 1996 increased $209,000 (5%), to $4,410,000 from
$4,201,000 in 1995. This increase was primarily attributable to growth in the
Residential Real Estate Program, partially offset by the Company's decision to
insure a greater portion of the risks with unaffiliated insurers in the
Restaurant Program.
Net investment income for 1996 decreased $152,000 (20%) to $598,000 from
$750,000 in 1995 as a result of a decline in investments caused by the
redemption of Old Lyme Bermuda's preferred stock.
The loss ratios for 1996 and 1995 were 35% and 22%, respectively. The increase
in the loss ratio is the result of an increase in the mix of business from
property and umbrella coverage to general liability coverage, which
traditionally experiences a higher loss ratio.
The expense ratios (acquisition costs and general and administrative expenses)
for 1996 and 1995 were 39% and 35%, respectively. The increase in the expense
ratio is due primarily to additional professional fees for accounting, legal and
actuarial services.
Income before income taxes for the Insurance Companies was $1,987,000 in 1996
compared to $2,853,000, a decrease of $866,000 (30%). The decrease in operations
was the result of reduced investment income and the increase in the combined
ratio (loss ratio and expense ratio) of 17%, as discussed above.
Corporate
The loss before income taxes, which includes those expenses not related to
brokerage or insurance operations and interest expense on corporate debt,
decreased by $100,000 (34%) to $197,000 in 1996 compared to $297,000 in 1995.
This decrease was the result of costs incurred in the restructuring of debt to a
lower interest rate during the second quarter of 1995.
Pro forma Net Income (See Note 6)
The pro forma presentation for 1995 includes the effect of a tax benefit from
the brokerage operations which were not combined into the Company until October
2, 1995.
13
<PAGE>
Six months ended June 30, 1996 compared
with six months ended June 30, 1995
Insurance Brokerage Operations
Total revenues in 1996 were $13,223,000 compared with $13,822,000 in 1995, a
decrease of $599,000 (4%). The largest component of revenues, net commissions
and fees, was down $462,000 (3%) as a result of lost business exceeding new
business partially offset by an increase in contingent income earned from
non-affiliated carriers. Investment income decreased in 1996 by $137,000 (24%)
primarily as a result of decreased funds available for investment and slightly
lower interest rates.
Salaries and benefits decreased by $1,175,000 (11%) to $9,718,000 in 1996
compared to $10,893,000 in 1995. This decrease is the result of lower
compensation earned under incentive contracts, discontinuance of the Company's
defined benefit pension plan, refunds received on group medical insurance and
the consolidating of certain responsibilities.
Other operating expenses (including depreciation) decreased by $205,000 (3%) to
$6,425,000 in 1996 compared with $6,630,000 in 1995. The effect of consolidating
responsibilities has resulted in savings in certain operating expenses.
Loss before income taxes decreased by $781,000 (20%) to $3,220,000 in 1996 from
$4,001,000 in 1995. The benefit of significant decreases in salaries and
benefits resulting from restructuring efforts was offset by decreased revenues,
as discussed above.
Property and Casualty Insurance Operations
Net premiums earned for 1996 decreased $279,000 (3%), to $8,548,000 from
$8,827,000 in 1995. This decrease was attributable to the Company's decision to
insure a greater portion of the risks with unaffiliated insurers in the
Restaurant Program partially offset by growth in the Real Estate Program during
the second quarter 1996.
Net realized gains on investments were $94,000 for 1996 compared to $18,000 in
1995. The realization of investment gains and losses is determined by market
conditions, call features on certain securities and management's decision
regarding the duration of maturity of the portfolio.
The loss ratios for 1996 and 1995 were 35% and 28%, respectively. The increase
in the loss ratio is the result of an increase in the mix of business from
property and umbrella coverage to general liability coverage, which
traditionally experiences a higher loss ratio.
The expense ratio (acquisition costs and general and administrative expenses)
for 1996 and 1995 were 41% and 35%, respectively. The increase in the expense
ratio is primarily due additional professional fees for accounting, legal and
actuarial services.
Income before income taxes was $3,829,000 in 1996 compared to $5,137,000, a
decrease of $1,308,000 (25%). The decrease in operations was the result of lower
investment income and the increase in combined ratio (loss ratio and expense
ratio) of 13%, as discussed above.
14
<PAGE>
Corporate
The loss before income taxes, which includes those expenses not related to
brokerage or insurance operations and interest expense on corporate debt,
decreased by $122,000 (26%) to $354,000 in 1996 compared to $476,000 in 1995.
This decrease was the result of costs incurred in the restructuring of debt to a
lower interest rate during the second quarter of 1995.
Pro forma Net Income (See Note 6)
The pro forma presentation for 1995 includes the effect of a tax benefit from
the brokerage operations which were not combined into the Company until October
2, 1995.
Financial Condition and Liquidity
Total assets and liabilities decreased by approximately $42,138,000 and
$41,245,000, respectively. Due to the cyclical nature of the business, premiums
receivable and payable fluctuate significantly from quarter to quarter. The
collection of premiums receivable and the accrete of acquisition costs, with the
corresponding payments to underwriters and the amortization of unearned premiums
related to the renewal of the Residential Real Estate Programs, effective
December 20 and June 20, accounted for the major portion of this decrease.
Stockholders' equity decreased by $735,000 to $22,147,000 at June 30, 1996 from
$22,882,000 at December 31, 1995. This decrease in equity resulted primarily
from unrealized depreciation of investments (net of deferred taxes) of $531,000
and dividends paid of $351,000, offset by net income of $147,000.
The Company maintains a substantial level of cash and liquid short term
investments which are used to meet anticipated payment obligations. As of June
30, 1996, the Company had cash and short term investments of $19,353,000. Of the
Company's total invested assets, certain amounts are pledged or deposited into
trust funds to collateralize the Company's obligations under reinsurance
agreements.
The Company has available a $10,000,000 revolving line of credit with a bank,
the proceeds of which are available for general operating needs and
acquisitions. At June 30, 1996, $7,100,000 is outstanding under the revolving
line of credit. The loan is collateralized by the stock of the Insurance company
subsidiaries.
Management believes that the Company's operating cash flow, along with the cash
equivalents and short term investments will provide sufficient sources of
liquidity and capital to meet the Company's anticipated needs during the next
twelve months and the foreseeable future. The Company has no capital commitments
that are material individually or in the aggregate.
15
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits arising in the normal course of business.
Virtually all pending lawsuits in which the Property and Casualty Companies are
a party, involve claims under policies underwritten or reinsured by such
Companies. Management believes these lawsuits have been adequately provided for
in its established loss and loss expense reserves and that the resolution of
these lawsuits will not have a material adverse effect on the Company's
financial condition or results of operations.
As licensed brokers, the Brokerage Businesses are subject to various claims and
lawsuits from both private and governmental parties, which include claims and
lawsuits in the ordinary course of business. The majority of pending lawsuits
involve insurance claims, errors and omissions, employment claims, and breaches
of contract. The Company believes that the resolution of these lawsuits will not
have a material adverse effect on the Company's financial condition or results
of operations.
The Company settled the lawsuits involving a former employee relating to such
employee's termination and subsequent activities. The settlement did not have a
material adverse effect on the financial position of the Company.
As licensed brokers, the Brokerage Businesses are or may become parties to
administrative inquiries and at times to administrative proceedings commenced by
state insurance regulatory bodies. Certain subsidiaries are presently involved
in an administrative investigation by the New York Insurance Department relating
to how property insurance policies were issued for the Residential Real Estate
Program. As a result, the manner in which policies are structured for certain
clients in this Program has been altered, which has not had a material adverse
effect on this Program. Whereas the Company is in discussions with the
Department regarding settlement of such investigation, if such discussions are
not successful, the Department could institute formal proceedings against the
subsidiaries seeking fines or license revocation. KILP has agreed to indemnify
Holding, the Company and the Brokerage Business for any fines or settlement
payments in excess of $300,000 relating to such investigation. Management does
not believe the resolution of such issue will have a material adverse effect on
the Company.
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of the Stockholders of the Company was held May 15, 1996 (the
"Meeting"). At the Meeting, the following eight directors were nominated for and
elected to serve as members of the Board of Directors of the Company until the
Company's next Annual Meeting or until their successors are duly elected and
qualified:
16
<PAGE>
Nominee Votes for Votes Against
- - ------- --------- -------------
Howard Kaye 6,245,965 17,400
Lawrence Greenfield 6,245,965 17,400
Bruce D. Guthart 6,245,965 17,400
Ned L. Sherwood 6,245,965 17,400
Henrik Falktoft 6,245,965 17,400
David Ezekiel 6,245,965 17,400
Richard B. Butler 6,245,965 17,400
Robert L. Barbanell 6,245,965 17,400
In addition, the adoption of the Supplemental Stock Option Plan was voted on at
the Annual Meeting and the results were as follows:
Votes For: 6,195,965
Votes Against: 64,700
Abstain 3,425
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8K
a) Exhibits:
Exhibit
Number Description
- - ------ -----------
27 Financial Data Schedule
b) Reports on Form 8K
There were no reports on Form 8K filed for the period April 1, 1996 to
June 30, 1996.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KAYE GROUP INC.
-------------------------------------------
Registrant
August 12, 1996 /s/ Bruce D. Guthart
-------------------------------------------
Bruce D. Guthart, President &
Chief Executive Officer
August 12, 1996 /s/ Michael P. Sabanos
-------------------------------------------
Michael P. Sabanos, Senior Vice President &
Chief Financial Officer
18
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
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0
0
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<RESERVE-OPEN> 12,671
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