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 September 30, 1997
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 November 11, 1997 - 7,020,000
- - Total number of pages filed including cover and under pages 18
- - Exhibit index is located on page 15
<PAGE>
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 September 30, 1997
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 November 11, 1997 - 7,020,000
<PAGE>
KAYE GROUP INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the three months
and nine months ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION 15
2
<PAGE>
Item 1. - Financial Statements
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(in thousands, except par value per share)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
(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 $15,861 and $23,879) $ 19,506 $ 24,789
Premiums and other receivables 35,985 56,255
Prepaid expenses and other assets 1,668 1,587
-------- --------
Total current assets 57,159 82,631
Fixed assets (net of accumulated depreciation of $8,423 and $7,646) 2,689 2,349
Expiration lists (net of accumulated amortization of $1,928 and $1,600) 4,834 2,092
Deferred income taxes 340 1,354
Other assets 141 237
-------- --------
Total assets - insurance brokerage companies 65,163 88,663
-------- --------
PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
Fixed maturities, at market value (amortized cost: 1997, $39,588;
1996, $39,216) 39,904 39,145
Equity securities, at market value (cost:1997, $2,146; 1996, $2,246) 2,231 2,316
Short term investments, at cost, which approximates market value 3,650 1,336
-------- --------
Total investments 45,785 42,797
Cash and cash equivalents 4,595 2,714
Accrued interest and dividends 860 969
Premiums receivable 2,183 4,079
Premiums receivable - insurance brokerage companies 240 2,904
Prepaid reinsurance premiums 240 283
Reinsurance recoverable on unpaid losses and loss expenses 2,214 882
Funds held under deposit contracts, at market value (amortized cost:
1997, $894; 1996, $3,844) 899 3,847
Deferred acquisition costs 2,960 4,073
Deferred income taxes 589 639
Other assets 2,176 2,266
Intercompany receivable 556
-------- --------
Total assets - property and casualty companies 62,741 66,009
-------- --------
CORPORATE
Cash and cash equivalents 334 456
Prepaid expenses and other assets 166 443
Investments available-for-sale:
Equity securities, at market value (cost:1997 and 1996, $557) 442 513
Fixed maturities, at market value (amortized cost :1996, $9) 9
Deferred income taxes 16 9
Intercompany receivable 4,713
-------- --------
Total assets - corporate 5,671 1,430
-------- --------
Total assets $133,575 $156,102
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(in thousands, except par value per share)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
LIABILITIES:
INSURANCE BROKERAGE COMPANIES
Current liabilities:
Premiums payable $ 42,593 $ 63,081
Premiums payable - property and casualty companies 240 2,904
Accounts payable and accrued liabilities 6,976 6,074
Notes payable 468 595
Deferred income taxes 1,122
Intercompany payable 4,270 344
-------- --------
Total current liabilities 54,547 74,120
Notes payable 726 537
Note payable - KILP 6,000
Other liabilities 1,640
-------- --------
Total liabilities-insurance brokerage companies 56,913 80,657
-------- --------
PROPERTY AND CASUALTY COMPANIES
Liabilities:
Unpaid losses and loss expenses 18,206 15,227
Unearned premium reserves 9,790 13,176
Deposit contracts 852 3,448
Accounts payable and accrued liabilities 6,078 4,991
Reinsurance payable 57 170
Intercompany payable 443
-------- --------
Total liabilities - property and casualty companies 35,426 37,012
-------- --------
CORPORATE
Current liabilities:
Accounts payable and accrued liabilities 715 704
Intercompany payable 212
Note payable 1,875 850
Income taxes payable 567 95
-------- --------
Total current liabilities 3,157 1,861
Note payable-long-term 5,156 6,250
-------- --------
Total liabilities-corporate 8,313 8,111
-------- --------
Total liabilities 100,652 125,780
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN EQUITY OF
KAYE HOLDING CORP. 5,796 5,338
-------- --------
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
Appreciation (depreciation) of investments available-for-sale, net of
deferred income tax provision (benefit) (1997, $71; 1996, ($16)) 139 (31)
Retained earnings 19,142 17,169
-------- --------
Total stockholders' equity 27,127 24,984
-------- --------
Total liabilities and stockholders' equity $133,575 $156,102
======== ========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months and nine months ended September 30, 1997 and 1996
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees- net $8,054 $8,673 $20,515 $21,042
Commissions and fees- net - Property and Casualty Companies 1,111 344 2,140 754
Investment income 560 390 1,282 834
-------- -------- -------- --------
Total revenues 9,725 9,407 23,937 22,630
-------- -------- -------- --------
Expenses:
Salaries and benefits 4,845 4,536 14,085 14,254
Other operating expenses 3,580 3,582 9,937 10,007
-------- -------- -------- --------
Total operating expenses 8,425 8,118 24,022 24,261
-------- -------- -------- --------
Interest expense 100 150 400 450
-------- -------- -------- --------
Income (loss) before income taxes-insurance brokerage companies 1,200 1,139 (485) (2,081)
-------- -------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 6,292 2,636 13,323 7,525
Change in unearned premiums (333) 2,569 3,343 6,228
-------- -------- -------- --------
Net premiums earned 5,959 5,205 16,666 13,753
Net investment income 673 548 2,027 1,816
Net realized gains on investments 10 (12) 16 82
Other income 62 31 181 385
-------- -------- -------- --------
Total revenues 6,704 5,772 18,890 16,036
-------- -------- -------- --------
Expenses:
Losses and loss expenses 2,561 2,210 6,655 5,161
Acquisition costs and general and administrative expenses 2,472 2,284 6,826 5,767
-------- -------- -------- --------
Total expenses 5,033 4,494 13,481 10,928
-------- -------- -------- --------
Income before income taxes-property and casualty companies 1,671 1,278 5,409 5,108
-------- -------- -------- --------
CORPORATE
Revenues:
Net investment income 37 27 51 73
Expenses:
Other operating expenses 93 172 254 307
Interest expense 133 115 388 380
-------- -------- -------- --------
Net expenses before income taxes-corporate (189) (260) (591) (614)
-------- -------- -------- --------
Income before income taxes and minority interest 2,682 2,157 4,333 2,413
-------- -------- -------- --------
Provision (benefit) for income taxes:
Current 1,041 510 1,472 200
Deferred (236) 136 (172) 524
-------- -------- -------- --------
Total provision for income taxes 805 646 1,300 724
-------- -------- -------- --------
Income before minority interest 1,877 1,511 3,033 1,689
Minority interest 330 265 534 297
-------- -------- -------- --------
NET INCOME $1,547 $1,246 $2,499 $1,392
======== ======== ======== ========
NET INCOME PER SHARE $0.22 $0.18 $0.36 $0.20
======== ======== ======== ========
Weighted average shares outstanding 7,020 7,020 7,020 7,020
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1997 and 1996
(in thousands)
UNAUDITED
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,499 $ 1,392
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs 1,113 2,062
Amortization of bond premium, net 483 575
Deferred income taxes (172) 524
Net realized gains on investments (16) (82)
Depreciation and amortization expense 1,205 1,546
Minority interest 534 299
Change in assets and liabilities:
Accrued interest and dividends 109 80
Premiums and other receivables 23,540 50,126
Prepaid expenses and other assets (2,230) (1,172)
Unpaid losses and loss expenses 2,979 1,734
Unearned premium reserves (3,386) (6,395)
Premiums payable (23,265) (47,211)
Income taxes payable 472 1,000
Accounts payable and accrued liabilities 3,640 (1,764)
-------- --------
Net cash provided by operating activities 7,505 2,714
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale:
Purchase of fixed maturities (10,014) (10,153)
Purchase of equity securities (500)
Purchase of short term investments (2,314)
Maturities of fixed maturities 4,127 2,451
Sales of fixed maturities 5,097 8,707
Sales of equity securities 600
Sales of short term investments 814
Funds held under deposit contracts
Purchase of fixed maturities (778) (469)
Maturities of fixed maturities 350 140
Sales of fixed maturities 905 1,535
Sales (purchases) of short term investments 2,467 (344)
Purchase of fixed assets (1,118) (229)
Purchase of expiration list (609)
-------- --------
Net cash provided by (used in) investing activities (1,787) 2,452
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under deposit contracts (2,596) (742)
Notes payable-repayment (6,619) (308)
Proceeds from borrowings 612
Payment of dividends (526) (526)
Payment of dividends to minority stockholders (113) (113)
-------- --------
Net cash used in financing activities (9,242) (1,689)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,524) 3,477
Cash and cash equivalents at beginning of period 27,959 13,864
-------- --------
Cash and cash equivalents at end of period $ 24,435 $ 17,341
======== ========
Supplemental cash flow disclosure:
Interest expense paid $788 $830
Income taxes paid (refunds) $1,000 ($800)
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
ITEM 1. - FINANCIAL STATEMENTS (continued)
KAYE GROUP INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1) General
The consolidated financial statements as of September 30, 1997 and for the three
months and nine months ended September 30, 1997 and 1996 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 nine months ended
September 30, 1997 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. 1996 Form 10-K. The December 31,
1996 consolidated balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
Certain prior year information has been reclassified to conform with the 1997
presentation.
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 10-K for the year ended December 31, 1996,
as previously filed with the Securities Exchange Commission.
3) Changes in Accounting Policies
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 Earnings per Share (the "Statement"). The
Statement becomes effective for financial statements issued for periods ending
after December 15, 1997. This Statement establishes standards for computing and
presenting earnings per share ("EPS"). This Statement simplifies the standards
for computing EPS previously found in APB Opinion No. 15, Earnings per Share,
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. This Statement requires
restatement of all prior-period EPS data presented. The Company anticipates
presenting its EPS in compliance with the dual presentation standards mandated
by this Statement at December 31, 1997.
The Company has calculated basic and diluted EPS as defined by this Statement
and interpreted by the Company based on information currently available, and has
determined that such amounts do not differ materially from primary EPS which is
reflected in the Company's Consolidated Statements of Income.
7
<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 $7,031,250, revolving line of credit (the "Loan") with a bank,
collateralized by the stock of the Insurance Companies, of which $7,031,250 has
been borrowed. 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. 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 to the extent of any unused balance. Among other covenants, the debt
agreement requires maintenance of minimum consolidated net worth, statutory
surplus, ratios of net premiums written to surplus and minimum interest
coverage. As of September 30, 1997, the Company is in compliance with the
covenants of the debt agreement.
The bank's commitment under the Loan has been renegotiated to decrease the
quarterly reduction commitment to $468,750 from $625,000 commencing September
30, 1997 and to extend the due date one year to June 30,2001. In addition, the
interest rate increased from 1.5% to 2.5% plus LIBOR. All other terms and
conditions remain unchanged. The revised available credit as of the end of each
respective year is $6,562,500 in 1997, $4,687,500 in 1998, $2,812,500 in 1999,
$937,500 in 2000, and none in 2001. The Company's required payments for the
respective years are $537,500 in 1997, $1,875,000 in 1998 through 2000 and
$937,500 in 2001. Interest expense under the Loan for the nine months ended
September 30, 1997 was approximately $388,000.
On August 29, 1997, the Company paid in full the note payable to KILP of
$6,000,000. This note was subject to repayment restrictions stipulated in the
Loan agreement. The due date of the note pursuant to the Loan agreement would
have been in 2001. The bank consented to the payment on August 25, 1997.
Interest expense for the nine months ended September 30, 1997 was $400,000.
6) 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.
7) Dividends
On September 19, 1997, the Board of Directors declared a quarterly dividend of
$.025 per share, payable October 20, 1997 to stockholders of record on September
30, 1997.
8
<PAGE>
8) 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 Retail 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 adverse
effect on the consolidated financial position of the Company.
9) Subsequent Event
The Company announced on October 28, 1997 the Merger of Kaye Holding Corp.
("Holding") into Kaye Group Inc. This will eliminate KILP's minority interest in
Holding of $5,796,000 at September 30, 1997 and increase Stockholders' Equity by
the same amount. KILP is Kaye Group Inc.'s largest shareholder. Such approval
followed a recommendation of a special committee of the board of directors of
the Company consisting of independent directors. The Merger is subject to, among
other things, the approval of Kaye Group Inc.'s stockholders. The proposed
Merger is expected to be accounted for as transfer and exchange between entities
under common control. Accordingly, Common Stock of Kaye Group Inc. to be issued
in exchange for the Holding shares will be accounted for using the closing
NASDAQ market price on October 24, 1997 ($7.00) (the Effective Date of the
Merger) by increasing Common Stock by the number of shares to be issued at the
par value per share. Paid-in capital will be increased by the difference between
the market value price per share and the par value per share multiplied by the
number of shares to be issued. Minority interest in Holding will be eliminated
as a result of the Merger and retained earnings of Kaye Group Inc. will be
reduced to account for the difference between the market value of the shares to
be issued, less the increase to Common Stock, and the book value of the minority
interest in Holding.
9
<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"), (collectively "Corporate"), which is the
primary asset of the Company. The Company's business is conducted principally
through the wholly owned subsidiaries of Holding.
The Company operates in two business segments - "Insurance Brokerage", which
includes the Retail Brokerage Business and the Program Brokerage Business (the
"Insurance Brokerage Companies") and "Property and Casualty Insurance", or
"Insurance" which comprises the Insurance Companies and Claims Administration
Corporation (the "Property and Casualty Companies").
Overview
The Insurance Brokerage Companies derive their revenue principally from
commissions and fees associated with the placement of insurance coverage for
clients. Commissions are paid by the insurance carriers, usually a fixed
percentage of the total premiums, and fees are paid by the insured. 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 Insurance Company ("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. RLI
writes various policies from 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.
Corporate operations include those expenses not directly related to the
Insurance Brokerage or Insurance businesses. These expenses are associated with
being a public company and interest expense on corporate debt.
10
<PAGE>
Three months ended September 30, 1997
compared with three months ended September 30, 1996
Insurance Brokerage Companies
Income before income taxes increased by $61,000 (5%) to $1,200,000 in 1997 from
$1,139,000 in 1996. The improved operating result was due to increased revenues
and the decrease in interest expense partially offset by increased salaries and
benefits, as discussed below.
Total revenues in 1997 were $9,725,000 compared with $9,407,000 in 1996, an
increase of $318,000 (3%). Commissions and fees-net grew by $148,000 (2%) as a
result of the introduction of two new programs, other new business and
enhancements to our California operations, including the asset acquisition of
Western Insurance Associates, Inc. ("Western"), partially offset by lost
business and billings in the second quarter of 1997 of certain renewal policies
billed during the third quarter of 1996 totaling $327,000 (4%). Investment
income increased in 1997 by $170,000 (44%) due to collection efficiencies
resulting from a longer holding period for fiduciary investments.
Salaries and benefits increased by $309,000 (7%) to $4,845,000 in 1997 compared
to $4,536,000 in 1996. This increase was primarily the result of the asset
acquisition of Western and accrued incentive compensation.
Other operating expenses decreased by $2,000 to $3,580,000 in 1997 compared with
$3,582,000 in 1996.
Interest expense decreased by $50,000 as a result of the full payment of the
note payable to KILP in August 1997.
Property and Casualty Companies
Income before income taxes increased by $393,000 (31%) to $1,671,000 in 1997
from $1,278,000 in 1996. The increase in operating results was due to increased
net premiums earned and investment income partially offset by an increase in
expenses, as discussed below.
Net premiums earned in 1997 increased by $754,000 (14%) to $5,959,000 from
$5,205,000 in 1996. The Company's efforts to broaden the distribution network of
the Programs and coverage types has contributed to growth in the Residential
Real Estate and Restaurant Programs.
Net investment income in 1997 increased by $125,000 (23%) to $673,000 from
$548,000 in 1996 as a result of the increase in invested assets.
Losses and loss expenses increased in 1997 by $351,000 (16%) to $2,561,000 from
$2,210,000 in 1996. The loss ratio for 1997 and 1996 was 43% and 42%,
respectively. The increase in absolute dollars was generally the result of
increased net premiums earned.
Acquisition costs and general and administrative expenses increased in 1997 by
$188,000 (8%) to $2,472,000 from $2,284,000 in 1996. The expense ratio
(acquisition costs and general and administrative expenses) for 1997 and 1996
was 41% and 44%, respectively. The decrease in expense ratio was the result of a
decrease in new program acquisition costs. The increase in absolute dollars was
generally the result of increased net premiums earned.
11
<PAGE>
Corporate
Net expenses before income taxes decreased in 1997 by $71,000 compared to 1996.
Nine months ended September 30, 1997
compared with nine months ended September 30, 1996
Insurance Brokerage Companies
Loss before income taxes decreased by $1,596,000 (77%) to $485,000 in 1997 from
$2,081,000 in 1996. The improved operating result was due to increased revenues
and the decrease in salaries and benefits, as discussed below.
Total revenues in 1997 were $23,937,000 compared with $22,630,000 in 1996, an
increase of $1,307,000 (6%). Commissions and fees-net grew by $859,000 (4%) as a
result of the introduction of two new programs, and the enhancement of our
California operations partially offset lost business and continued price
reductions exceeding new business. Investment income increased in 1997 by
$448,000 (54%) due to collection efficiencies resulting in a longer holding
period for fiduciary investments.
Salaries and benefits decreased by $169,000 (1%) to $14,085,000 in 1997 compared
to $14,254,000 in 1996. This decrease was the result of a modest reduction in
work force due to continued operating efficiencies, lower executive
compensation, and reduced costs for prior year acquisitions partially offset by
the enhancement of our California operations. The Company's board of directors'
compensation committee and executive management have reviewed and adjusted
executive and management compensation, respectively, to reflect a continued
movement toward performance based pay.
Other operating expenses decreased by $70,000 (1%) to $9,937,000 in 1997
compared with $10,007,000 in 1996.
Interest expense decreased by $50,000 as a result of the full payment of the
note payable to KILP in August 1997.
Property and Casualty Companies
Income before income taxes increased in 1997 by $301,000 (6%) to $5,409,000 from
$5,108,000 in 1996. The increase in operating results was due to increased net
premiums earned and investment income partially offset by an increase in the
combined ratio (loss ratio and expense ratio) to 81% from 80% and the decrease
in other income, as discussed below.
Net premiums earned for 1997 increased by $2,913,000 (21%) to $16,666,000 from
$13,753,000 in 1996 The Company's efforts to broaden the distribution network of
the Programs and coverage types has contributed to growth in the Residential
Real Estate and Restaurant Programs.
Net investment income in 1997 increased by $211,000 (12%) to $2,027,000 from
$1,816,000 in 1996 as a result of the increase in invested assets.
12
<PAGE>
Net realized gain on investment transactions for 1997 decreased by $66,000 to
$16,000 compared to $82,000 in 1996. The realization of investment gains and
losses is determined by market conditions, call features on certain securities
and management's decision regarding the holding period of the portfolio.
Other income for 1997 decreased by $204,000 to $181,000 from $385,000 in 1996.
This decrease is mainly due to the run-off of certain reinsurance contracts
during the first half of 1996.
Losses and loss expenses increased in 1997 by $1,494,000 (29%) to $6,655,000
from $5,161,000 in 1996. The loss ratio for 1997 and 1996 was 40% and 38%,
respectively. This increase was the result of growth in general liability
coverage in the Residential Real Estate Program, which generally experiences a
higher loss ratio than other coverages. The increase in absolute dollars was
generally the result of increased net premiums earned.
Acquisition costs and general and administrative expenses increased in 1997 by
$1,059,000 (18%) to $6,826,000 from $5,767,000 in 1996. The expense ratio
(acquisition costs and general and administrative expenses) for 1997 and 1996
was 41% and 42%, respectively. The increase in absolute dollars was due mainly
to additional acquisition costs related to increased net premiums earned and the
write-off of certain deferred acquisition costs resulting from the termination
of a deposit reinsurance contract.
Corporate
Net expenses before income taxes decreased in 1997 by $23,000 (4%) to $591,000
from $614,000 in 1996.
Financial Condition and Liquidity
Total assets decreased by $22,527,000 (14%) to $133,575,000 at September 30,
1997 from $156,102,000 at December 31, 1996. Total liabilities decreased by
$25,128,000 (20%) to $100,652,000 at September 30, 1997 from $125,780,000 at
December 31, 1996. Due to the cyclical nature of the business, premiums and
other receivables and premiums payable fluctuate significantly from quarter to
quarter. The collection of premiums and other receivables and the amortization
of acquisition costs, with the corresponding payments to underwriters and the
amortization of unearned premiums related to the renewal of the Residential Real
Estate Program, effective December 20, accounted for the major portion of this
decrease.
The Company in August 1997 paid in full the note payable to KILP of $6,000,000
from net cash provided by operating activities.
Stockholders' equity increased by $2,143,000 (9%) to $27,127,000 at September
30, 1997 from $24,984,000 at December 31, 1996. The increase in equity, which
resulted from net income of $2,499,000 and the change in unrealized depreciation
to unrealized appreciation of investments (net of deferred taxes) of $170,000,
was partially offset by dividends paid of $526,000.
The Company's cash and cash equivalents decreased by $3,524,000 for the nine
months ended September 30, 1997. Operating activities provided cash of
$7,505,000 as a result of net income from operations and a net decrease in total
receivables. Investing activities used cash of $1,787,000 for the purchase of
new computer software and the enhancement of our California
13
<PAGE>
operations through the asset acquisition of Western. Financing activities used
cash of $9,242,000 to pay dividends, notes payable on computer equipment, the
note payable to KILP and payments due under deposit reinsurance contracts,
offset by proceeds received to finance the Company's new computer software.
The Company maintains a substantial level of cash and liquid short term
investments which are used to meet anticipated payment obligations. As of
September 30, 1997, the Company had cash and short term investments of
$28,085,000. 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 $7,031,250 revolving line of credit with a bank, the
proceeds of which are available for general operating needs and acquisitions, of
which $7,031,250 is currently outstanding. 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.
14
<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 Insurance 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.
The Insurance Brokerage Companies 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.
As licensed brokers, the Insurance Brokerage Companies are or may become parties
to administrative inquiries and at times to administrative proceedings commenced
by state insurance regulatory bodies. Certain subsidiaries have been involved
since 1992 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. 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 Insurance Brokerage
Companies 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 - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
b) Reports on Form 8-K
On September 11, 1997 the Company filed Form 8-K announcing the
repayment of the $6 million KILP note earlier than expected.
15
<PAGE>
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-Q or any other written or oral
statements made by or on behalf of the Company may include forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain uncertainties and other factors that could cause actual results to
differ materially from such statements. These uncertainties and other factors
(which are described in more detail elsewhere in documents filed by the Company
with the Securities and Exchange Commission) include, but are not limited to,
uncertainties relating to government and regulatory policies, volatile and
unpredictable developments (including storms and catastrophes), the legal
environment, the uncertainties of the reserving process and the competitive
environment in which the Company operates. The words "believe", "anticipate",
"project", "plan", "expect" and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
16
<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
November 12, 1997 /s/ Bruce D. Guthart
----------------------------------
Bruce D. Guthart, President &
Chief Executive Officer
November 12, 1997 /s/ Michael P. Sabanos
----------------------------------
Michael P. Sabanos, Senior Vice
President & Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
KAYE GROUP INC. CONSOLIDATED FINANCIAL DATA SCHEDULE FOR NINE MONTHS ENDED
SEPTEMBER 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 40,753
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,673
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 47,076
<CASH> 24,435
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,960
<TOTAL-ASSETS> 133,575
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 9,790
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 852
<NOTES-PAYABLE> 8,225
0
0
<COMMON> 70
<OTHER-SE> 27,057
<TOTAL-LIABILITY-AND-EQUITY> 133,575
16,666
<INVESTMENT-INCOME> 3,360
<INVESTMENT-GAINS> 16
<OTHER-INCOME> 22,836
<BENEFITS> 6,655
<UNDERWRITING-AMORTIZATION> 6,826
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 4,333
<INCOME-TAX> 1,300
<INCOME-CONTINUING> 3,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,499
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<RESERVE-OPEN> 15,227
<PROVISION-CURRENT> 7,873
<PROVISION-PRIOR> 115
<PAYMENTS-CURRENT> 1,077
<PAYMENTS-PRIOR> 3,932
<RESERVE-CLOSE> 18,206
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
