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, 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 August 7, 1997 - 7,020,000
- - Total number of pages filed including cover and under pages 19
- - Exhibit index is located on page 16
<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 June 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 August 7, 1997 - 7,020,000
<PAGE>
KAYE GROUP INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the three months
and six months ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the
six months ended June 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
June 30, 1997 and December 31, 1996
(in thousands, except par value per share)
<TABLE>
<CAPTION>
June 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 $19,640 and $23,879) $ 21,667 $ 24,789
Premiums and other receivables 54,857 56,255
Prepaid expenses and other assets 1,417 1,587
Intercompany receivable 1,107
-------- --------
Total current assets 79,048 82,631
Fixed assets ( net of accumulated depreciation of $8,163 and $7,646) 2,686 2,349
Expiration lists ( net of accumulated amortization of $1,784 and $1,600) 1,908 2,092
Deferred income taxes 234 1,354
Other assets 159 237
-------- --------
Total assets - insurance brokerage companies 84,035 88,663
-------- --------
PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
Fixed maturities, at market value (amortized cost: 1997, $39,957;
1996, $39,216) 39,966 39,145
Equity securities, at market value (cost:1997, $2,546; 1996, $2,246) 2,621 2,316
Short term investments, at cost, which approximates market value 3,000 1,336
-------- --------
Total investments 45,587 42,797
Cash and cash equivalents 4,942 2,714
Accrued interest and dividends 926 969
Premiums receivable 1,936 4,079
Premiums receivable - insurance brokerage companies 1,528 2,904
Prepaid reinsurance premiums 300 283
Reinsurance recoverable on unpaid losses and loss expenses 1,982 882
Funds held under deposit contracts, at market value (amortized cost:
1997, $1,228; 1996, $3,844) 1,230 3,847
Deferred acquisition costs 2,948 4,073
Deferred income taxes 561 639
Other assets 1,017 2,266
Intercompany receivable 556
-------- --------
Total assets - property and casualty companies 62,957 66,009
-------- --------
CORPORATE
Cash and cash equivalents 1,549 456
Prepaid expenses and other assets 234 443
Prepaid income tax 474
Investments available-for-sale:
Equity securities, at market value (cost:1997 and 1996, $557) 487 513
Fixed maturities, at market value (amortized cost :1996, $9) 9
Deferred income taxes 7 9
-------- --------
Total assets - corporate 2,751 1,430
-------- --------
Total assets $149,743 $156,102
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
(in thousands, except par value per share)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
LIABILITIES:
INSURANCE BROKERAGE COMPANIES
Current liabilities:
Premiums payable $ 62,683 $ 63,081
Premiums payable - property and casualty companies 1,528 2,904
Accounts payable and accrued liabilities 5,091 6,074
Notes payable 551 595
Deferred income taxes 1,122
Intercompany payable 344
--------- ---------
Total current liabilities 69,853 74,120
Notes payable 874 537
Note payable - KILP 6,000 6,000
--------- ---------
Total liabilities-insurance brokerage companies 76,727 80,657
--------- ---------
PROPERTY AND CASUALTY COMPANIES
Liabilities:
Unpaid losses and loss expenses 16,738 15,227
Unearned premium reserves 9,517 13,176
Deposit contracts 1,176 3,448
Accounts payable and accrued liabilities 5,644 4,991
Reinsurance payable 101 170
Intercompany payable 154
--------- ---------
Total liabilities - property and casualty companies 33,330 37,012
--------- ---------
CORPORATE
Current liabilities:
Accounts payable and accrued liabilities 555 704
Intercompany payable 953 212
Note payable 1,420 850
Income taxes payable 95
--------- ---------
Total current liabilities 2,928 1,861
Note payable-long-term 5,680 6,250
--------- ---------
Total liabilities-corporate 8,608 8,111
--------- ---------
Total liabilities 118,665 125,780
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN EQUITY OF
KAYE HOLDING CORP 5,470 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
Depreciation of investments available-for-sale, net of
deferred income tax benefit, ( 1997, $4; 1996, $16) (8) (31)
Retained earnings 17,770 17,169
--------- ---------
Total stockholders' equity 25,608 24,984
--------- ---------
Total liabilities and stockholders' equity $ 149,743 $ 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 six months ended June 30, 1997 and 1996
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
======================= =======================
1997 1996 1997 1996
======== ======== ======== ========
<S> <C> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees, net $ 6,270 $ 5,980 $ 12,475 $ 12,369
Commissions and fees, net - Property and Casualty Companies 793 397 1,015 410
Investment income 237 170 722 444
-------- -------- -------- --------
Total revenues 7,300 6,547 14,212 13,223
-------- -------- -------- --------
Expenses:
Salaries and benefits 4,393 4,698 9,240 9,718
Other operating expenses 3,174 3,186 6,357 6,425
-------- -------- -------- --------
Total operating expenses 7,567 7,884 15,597 16,143
-------- -------- -------- --------
Interest expense 150 150 300 300
-------- -------- -------- --------
Loss before income taxes-insurance brokerage companies (417) (1,487) (1,685) (3,220)
-------- -------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 5,238 4,674 7,031 4,889
Change in unearned premiums 241 (264) 3,676 3,659
-------- -------- -------- --------
Net premiums earned 5,479 4,410 10,707 8,548
Net investment income 688 598 1,354 1,268
Net realized gains on investments 6 5 6 94
Other income 61 207 118 354
-------- -------- -------- --------
Total revenues 6,234 5,220 12,185 10,264
-------- -------- -------- --------
Expenses:
Losses and loss expenses 2,086 1,519 4,094 2,952
Acquisition costs and general and administrative expenses 2,282 1,714 4,354 3,483
-------- -------- -------- --------
Total expenses 4,368 3,233 8,448 6,435
-------- -------- -------- --------
Income before income taxes-property and casualty companies 1,866 1,987 3,737 3,829
-------- -------- -------- --------
CORPORATE
Revenues:
Net investment income 11 13 14 46
Expenses:
Other operating expenses 75 78 161 135
Interest expense 131 132 255 265
-------- -------- -------- --------
Net expenses before income taxes-corporate (195) (197) (402) (354)
-------- -------- -------- --------
Income before income taxes and minority interest 1,254 303 1,650 255
-------- -------- -------- --------
Provision (benefit) for income taxes:
Current (70) (599) 431 (311)
Deferred 446 690 64 388
-------- -------- -------- --------
Total provision for income taxes 376 91 495 77
-------- -------- -------- --------
Income before minority interest 878 212 1,155 178
Minority interest 154 37 203 31
-------- -------- -------- --------
NET INCOME $ 724 $ 175 $ 952 $ 147
======== ======== ======== ========
NET INCOME PER SHARE $ 0.10 $ 0.02 $ 0.13 $ 0.02
======== ======== ======== ========
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 six months ended June 30, 1997 and 1996
(in thousands)
UNAUDITED
<TABLE>
<CAPTION>
1997 1996
======== ========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 952 $ 147
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs 1,125 1,236
Amortization of bond premium, net 343 337
Deferred income taxes 64 354
Depreciation and amortization 748 985
Minority interest 203 31
Net realized gains on investments (6) (94)
Net realized loss on sale of fixed assets 19
Change in assets and liabilities:
Accrued interest and dividends 43 29
Premiums and other receivables 3,800 33,350
Prepaid expenses and other assets 1,651 365
Unpaid losses and loss expenses 1,511 784
Unearned premium reserves (3,659) (3,746)
Premiums payable (1,843) (28,448)
Income taxes payable (568) 489
Accounts payable and accrued liabilities (485) (4,076)
-------- --------
Net cash provided by operating activities 3,879 1,762
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale :
Purchase of fixed maturities (5,057) (8,664)
Purchase of equity securities (600)
Purchase of short term investments (1,664)
Maturities of fixed maturities 2,345 1,302
Sales of fixed maturities 1,639 8,707
Sales of equity securities 300
Sales of short term investments 1,050
Funds held under deposit contracts:
Purchase of fixed maturities (469)
Maturities of fixed maturities 350 140
Sales (purchases) of short term investments 1,465 (270)
Sales of fixed maturities 802 526
Purchase of fixed assets (855) (159)
-------- --------
Net cash provided by (used in) investing activities (1,275) 2,163
-------- --------
CASH FLOWS FOR FINANCING ACTIVITIES:
Receipts (payments) under deposit contracts (2,272) 93
Notes payable-repayment (319) (203)
Proceeds from borrowings 612
Payment of dividends (351) (351)
Payment of dividends to minority stockholders (75) (75)
-------- --------
Net cash used in financing activities (2,405) (536)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 199 3,389
Cash and cash equivalents at beginning of period 27,959 13,864
-------- --------
Cash and cash equivalents at end of period $ 28,158 $ 17,253
======== ========
Supplemental cash flow disclosure:
Interest expense paid $ 555 $ 565
Income taxes paid (refunded) $ 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 June 30, 1997 and for the three
months and six months ended June 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 six months ended June 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 $7,500,000, 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, 1997, the Company is in compliance with the
covenants of the debt agreement.
The bank's commitment under the revolving line of credit has been renegotiated
to reduce the quarterly reduction commitment to $355,000 from $625,000
commencing September 30, 1997. All other terms and conditions remain unchanged.
The revised available credit as of the end of each respective years is
$6,390,000 in 1997, $4,970,000 in 1998, $3,550,000 in 1999, $2,130,000 in 2000,
$710,000 in 2001 and none in 2002. The Company's required payments for the
respective years are $710,000 in 1997, $1,420,000 in 1998 through 2001 and
$710,000 in 2002. Interest accrued under the revolving credit line for the six
months ended June 30, 1997 was approximately $255,000.
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 June 20, 1997, the Board of Directors declared a quarterly dividend of $.025
per share, payable July 21, 1997 to stockholders of record on June 30, 1997.
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.
8
<PAGE>
9) Subsequent Events
The Company, through its brokerage subsidiary, Kaye Insurance Services of
California, Inc., purchased the assets, including customer lists, and certain
liabilities of Western Insurance Associates, Inc. for $2,900,000 in cash,
effective July 1, 1997. The purchase price is contingent on future billings
related to the acquired customer list.
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 client. 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 June 30, 1997
compared with three months ended June 30, 1996
Insurance Brokerage Companies
Loss before income taxes decreased by $1,070,000 (72%) to $417,000 in 1997 from
$1,487,000 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 $7,300,000 compared with $6,547,000 in 1996, an
increase of $753,000 (12%). Gross commissions and fees grew by $686,000 (10%) as
a result of new business exceeding lost business, the introduction of two new
programs and the billing in 1997 of certain renewal policies billed during the
third quarter of 1996 totaling $327,000 (5%) partially offset by an increase in
the rate of commission expense incurred to produce new and renewal business from
17% to 18%. Investment income increased in 1997 by $67,000 (39%) primarily due
to collection efficiencies resulting from a longer holding period for fiduciary
investments.
Salaries and benefits decreased by $305,000 (6%) to $4,393,000 in 1997 compared
to $4,698,000 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. The Company's
compensation committee has reviewed and adjusted executive compensation to
reflect a continued movement toward performance based pay.
Other operating expenses decreased by $12,000 to $3,174,000 in 1997 compared
with $3,186,000 in 1996. This decrease was the result of the completion of
organization cost amortization in 1996 partially offset by increased
depreciation expense relating to computer system upgrades and costs related to
new business.
Property and Casualty Companies
Income before income taxes decreased by $121,000 (6%) to $1,866,000 in 1997 from
$1,987,000 in 1996. The decrease in operating results was due to increased net
premiums earned offset by an increase in the combined ratio (loss ratio and
expense ratio) to 80 % from 73% and the decrease in other income, as discussed
below.
Net premiums earned in 1997 increased by $1,069,000 (24%) to $5,479,000 from
$4,410,000 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.
Other income for 1997 decreased by $146,000 (71%) to $61,000 from $207,000 in
1996. This decrease is mainly due to the run-off of certain reinsurance
contracts.
Losses and loss expenses increased in 1997 by $567,000 (37%) to $2,086,000 from
$1,519,000 in 1996. The loss ratio for 1997 and 1996 was 38% and 34%,
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.
11
<PAGE>
Acquisition costs and general and administrative expenses increased in 1997 by
$568,000 (33%) to $2,282,000 from $1,714,000 in 1996. The expense ratio
(acquisition costs and general and administrative expenses) for 1997 and 1996
was 42 % and 39%, respectively. This increase was due mainly to the write-off of
certain deferred acquisition costs resulting from the termination of a
reinsurance contract.
Corporate
Net expenses before income taxes decreased in 1997 by $2,000 compared to 1996.
Six months ended June 30, 1997
compared with six months ended June 30, 1996
Insurance Brokerage Companies
Loss before income taxes decreased by $1,535,000 (48%) to $1,685,000 in 1997
from $3,220,000 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 $14,212,000 compared with $13,223,000 in 1996, an
increase of $989,000 (7%). Gross commissions and fees grew by $1,214,000 (9%) as
a result of new business exceeding lost business and continued price reductions
and the introduction of two new programs offset by an increase in the rate of
commission expense incurred to produce new and renewal business from 14% to 16%.
Investment income increased in 1997 by $278,000 (63%) primarily due to
collection efficiencies resulting in a longer holding period for fiduciary
investments.
Salaries and benefits decreased by $478,000 (5%) to $9,240,000 in 1997 compared
to $9,718,000 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. The Company's
compensation committee has reviewed and adjusted executive compensation to
reflect a continued movement toward performance based pay.
Other operating expenses decreased by $68,000 (1%) to $6,357,000 in 1997
compared with $6,425,000 in 1996. This decrease was the result of the completion
of organization cost amortization in 1996 partially offset by increased
depreciation expense relating to computer system upgrades, costs related to new
business and additional finance charges related to premium finance agreements.
Property and Casualty Companies
Income before income taxes decreased in 1997 by $92,000 (2%) to $3,737,000 from
$3,829,000 in 1996. The decrease in operating results was due to increased net
premiums earned offset by an increase in the combined ratio (loss ratio and
expense ratio) to 79% from 75% and the decrease in other income, as discussed
below.
12
<PAGE>
Net premiums earned for 1997 increased by $2,159,000 (25%) to $10,707,000 from
$8,548,000 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 realized gain on investment transactions for 1997 decreased by $88,000 to
$6,000 compared to $94,000 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 $236,000 to $118,000 from $354,000 in 1996.
This decrease is mainly due to the run-off of certain reinsurance contracts.
Losses and loss expenses increased in 1997 by $1,142,000 (39%) to $4,094,000
from $2,952,000 in 1996. The loss ratio for 1997 and 1996 was 38% and 35%,
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.
Acquisition costs and general and administrative expenses increased in 1997 by
$871,000 (25%) to $4,354,000 from $3,483,000 in 1996. The expense ratio
(acquisition costs and general and administrative expenses) for 1997 and 1996
was 41%. 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 increased in 1997 by $48,000 (14%) to $402,000
from $354,000 in 1996. This increase was the result of lower investment income
and additional costs incurred for acquisition activities.
Financial Condition and Liquidity
Total assets decreased by $6,359,000 (4%) to $149,743,000 at June 30, 1997 from
$156,102,000 at December 31, 1996. Total liabilities decreased by $7,115,000
(6%) to $118,665,000 at June 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.
Stockholders' equity increased by $624,000 (2%) to $25,608,000 at June 30, 1997
from $24,984,000 at December 31, 1996. The increase in equity resulted from net
income of $952,000 and the decrease in unrealized depreciation of investments
(net of deferred taxes) of $23,000 partially offset by dividends paid of
$351,000. All amounts are net of the effects of the minority interest in Kaye
Holding Corp.
13
<PAGE>
The Company's cash and cash equivalents increased by $199,000 for six months
ended June 30, 1997. Operating activities provided cash of $3,879,000 as a
result of net income from operations and the collection of receivables exceeding
the payment of premiums payable. Investing activities used cash of $1,275,000 to
purchase new computer software, and premiums receivable collections within the
Insurance Companies were invested in fixed maturities and short term
investments. Financing activities used cash of $2,405,000 to pay dividends,
notes payable on computer equipment and payments due under deposit reinsurance
contracts partially 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 June
30, 1997, the Company had cash and short term investments of $31,158,000. 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 $7,500,000 revolving line of credit with a bank, the
proceeds of which are available for general operating needs and acquisitions. At
June 30, 1997, $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.
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
The Annual Meeting of the Stockholders of the Company was held May 12, 1997 (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:
Nominee Votes for
- ------- ---------
Howard Kaye 6,991,765
Lawrence Greenfield 6,991,765
Bruce D. Guthart 6,991,765
Ned L. Sherwood 6,991,765
Henrik Falktoft 6,991,765
David Ezekiel 6,991,765
Richard B. Butler 6,991,765
Robert L. Barbanell 6,991,765
15
<PAGE>
In addition, the approval of the Amendment to the Company's Stock Option Plan
and the Supplemental Stock Option Plan was voted on at the Annual Meeting and
the results were as follows:
Votes For: 6,970,424
Votes Against: 11,050
Abstain 4,500
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
There were no reports on Form 8-K filed for the
period April 1, 1997 to June 30, 1997.
16
<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.
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 7, 1997 /s/ Bruce D. Guthart
--------------------
Bruce D. Guthart, President &
Chief Executive Officer
August 7, 1997 /s/ Michael P. Sabanos
-----------------------
Michael P. Sabanos, Senior Vice President &
Chief Financial Officer
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