SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT - 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number 0-21988
Kaye Group Inc.
(exact name of registrant as specified in its charter)
Delaware 13-3719772
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
122 East 42nd Street, New York, NY 10168
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number: (212) 338-2100
Securities Registered Under Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange
------------------- ----------------
Common Stock $.01 par value NASDAQ National Market
Securities Registered Under Section 12(g) of the Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. _X_
<PAGE>
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 13, 1998 was approximately
$16,331,392.
Number of shares of the registrant's common stock outstanding as of March
13, 1998: 8,474,435.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997
(incorporated by reference under Part III).
Total number of pages including cover and under pages 85.
Index to Exhibits is on page 37.
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KAYE GROUP INC.
TABLE OF CONTENTS
Part I
Item 1. Business 4
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 23
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 36
Part III
Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain
Beneficial Owners and Management 36
Item 13. Certain Relationships and Related Transactions 36
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 37
Financial Statements F-1
3
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Item 1. Business
Business Segments
Kaye Group Inc. (the "Company") a Delaware corporation, formerly Old Lyme
Holding Corporation ("Holding"), is a holding company which, through its
subsidiaries, is engaged in a broad range of insurance brokerage, underwriting
and related activities. The Company operates in two insurance business segments
- - the Insurance Brokerage Companies Operations ("Brokerage Operations"),
comprised of the Retail Brokerage Business and the Program Brokerage Business,
and the Property and Casualty Companies Operations.
In addition, Corporate Operations include those activities that benefit the
Company in its entirety and cannot be specifically identified to either the
Brokerage Operations or the Property and Casualty Companies Operations. Such
activities include debt servicing and public company expenses, including
investor relations costs.
The Company's activities are conducted in New York City, and in offices
located in the states of California, Connecticut and Rhode Island.
Insurance Brokerage Companies Operations
The Retail Brokerage Business operates insurance brokerage businesses
through four subsidiaries of the Company, the "Retail Brokerage Companies". It
offers commercial clients a full range of insurance brokerage services including
procurement of property/casualty insurance, risk management consulting, bonding,
insurance coverage loss prevention engineering, and group employee benefit
consulting services. In addition, personal lines and life and health insurance
coverage are placed on behalf of individual clients.
The Retail Brokerage Business' primary strategy is to service middle market
companies and organizations just below the Fortune 500 level for which other
national brokers intensely compete. Within this middle market, the Retail
Brokerage Business has developed particular expertise and knowledge of the risks
facing a number of industry sectors including health care, real estate, retail,
manufacturing, churches, law firms, homes for the aged and fine arts.
During 1997, the Retail Brokerage Business serviced approximately 10,000
insureds. The Retail Brokerage Business is compensated for its services
primarily in the form of commissions paid by insurance companies. The commission
is usually a percentage of the premium paid by the insured. Commission rates
depend upon the type of insurance, the particular insurance company, and the
role in which the Retail Brokerage Business acts. In some cases a commission is
shared with other agents or brokers who have acted jointly with the Retail
Brokerage Business in connection with the transaction. The Retail Brokerage
Business may also receive from an insurance company a contingent
4
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commission that is generally based on the profitability and volume of business
placed with it by the Retail Brokerage Business over a given period of time. The
Retail Brokerage Business may also receive fees in connection with consulting
services relating to the marketing of insurance.
Program Brokerage Corporation or "PBC" (the "Program Brokerage Business")
is a subsidiary of the Company and operates a wholesale insurance brokerage
business which offers retail insurance agents and brokers innovative solutions
to the twin insurance problems of price and availability of coverage. It
accomplishes this by organizing pools of similar risks into specially designed
Alternative Risk Transfer ("A.R.T.") programs for affinity groups (the
"Programs").
The Program Brokerage Business is one of the leaders in the application of
purchasing groups in the commercial insurance market. Approximately two-thirds
of PBC's premium volume is generated by approximately 400 unrelated retail
insurance agents and brokers serving approximately 4,300 insureds during 1997.
The remaining one-third is derived from the Retail Brokerage Business.
Approximately one-half of PBC's premium volume is directly or indirectly placed
with two affiliates, Old Lyme Insurance Company of Rhode Island, Inc. ("OLRI")
and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB").
Property and Casualty Companies Operations
The Company conducts its property and casualty underwriting business
through two insurance company subsidiaries (the "Insurance Companies"), OLRI and
OLB. OLRI is a property and casualty insurance company licensed in Rhode Island
and eligible as a surplus lines insurer in New York and New Jersey. OLB is a
property and casualty insurance company organized and licensed under the laws of
Bermuda. In states where the Insurance Companies are not admitted insurers or
surplus lines insurers, the Insurance Companies underwrite risks through various
reinsurance agreements.
The Insurance Companies underwrite property risks (loss or physical damage
to property) and OLRI underwrites casualty risks (legal liability for personal
injury or damaged property of others) for insureds in the United States.
Insurance is sold principally through the Programs marketed by PBC which insure
various types of businesses and properties that have similar risk
characteristics, such as apartments, condominiums, cooperatives, restaurants,
building maintenance companies, retail stores, funeral homes and pharmacies,
among others.
The Insurance Companies' strategy is to underwrite only the first "layer"
of the property and casualty insurance provided under the Programs. Exposure to
individual insureds on individual losses is thereby generally limited to between
$1,000 and $25,000 per claim (inclusive of allocated loss expenses), depending
on the Program. Under the Programs, the Insurance Companies' policies are sold
in conjunction with policies issued by unaffiliated Program insurers that
provide coverage for losses above the first layer of
5
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risk underwritten by the Insurance Companies. In addition, the Insurance
Companies have issued policies on a selected basis with limits up to $1,000,000,
retaining the first $50,000 of exposure and reinsuring the remaining limits with
an unaffiliated reinsurer, National Reinsurance Corporation (A.M. Best Company
("A.M.Best"), a major rating agency for insurers, rating of A+).
The Property and Casualty Companies Operations includes Claims
Administration Corporation ("CAC") a subsidiary of the Company which is
responsible for the administration of a large majority of the claims submitted
to the Insurance Companies. The administration of claims includes investigation,
engagement of legal counsel, approval of settlements and the making of payments
to, or on behalf of insureds. CAC also provide claims administration service to
the unaffiliated Program insurers for a fee.
CAC is party to an agreement with an unaffiliated company, whereby it
agrees to acquire certain retail service warranty contract obligations for a
fee. CAC earns approximately 17% of its revenue pursuant to this agreement.
History of the Company
1952 to 1993
Prior to the initial public offering ("IPO") of Holding's common stock in
August 1993, the Retail Brokerage Companies, PBC, the Insurance Companies and
CAC were part of a single combined insurance and brokerage business owned by
Kaye International L.P. ("KILP") and certain individuals. KILP, via several
stock and asset acquisitions and mergers, traces its origins back to 1952. Prior
to the IPO, KILP developed the concept of the "deductible" primary "layer" of
insurance coverage administered through Programs. This business was conducted
through the Insurance Companies. In August 1993, after years of successful
growth, the Insurance Companies, PBC and CAC were organized under Holding, of
which approximately 33% was sold to the public.
At the time of the IPO, management of Holding believed that its historical
marketing efforts and ability to expand its business were hampered by its small
capital base and its lack of a letter rating from A.M. Best. Approximately
$13,000,000 of the proceeds of the IPO were contributed to OLRI to increase its
capital and surplus to permit it to (i) increase its underwriting capabilities,
(ii) obtain a letter rating from A.M. Best, and (iii) enable OLRI to meet
certain regulatory capital and surplus requirements. As a result of the proceeds
being contributed, OLRI significantly increased its underwriting capacity. This
enabled it to ultimately obtain an A.M. Best rating of A-(Excellent) (which it
currently maintains) and meet all regulatory capital and surplus requirements.
The business of OLRI however depends on the creation of new Programs and
the addition of insureds into existing Programs. OLRI relies on PBC to develop
new Programs. PBC is also OLRI's most important and significant producing
broker, historically producing almost all of the Insurance Companies' net
premiums earned.
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1994
In 1994, the Retail Brokerage Business completed the integration of its
1992 acquisition of Amalgamated Programs Corporation and related entities
("Amalgamated") and continued to downsize to adjust to the continuing "soft
market" in property and casualty premium rates. At the time, the officers of the
general partners of KILP (which included members of Holding's Board of
Directors) concluded that the combination of Holding and the Retail Brokerage
Business would be advantageous for both OLRI and KILP. This conclusion was based
on three factors: (a) improved operating results derived from the Amalgamated
integration and "soft market" downsizing, (b) the improved outlook for the
Retail Brokerage Business and (c) the fact that the Retail Brokerage Business
accounted for approximately one-half of PBC's premium volume.
In evaluating the combination, Holding's Board of Directors also considered
the fact that the market for Holding's common stock following the IPO was
relatively illiquid. The Board believed that the combination of the Retail
Brokerage Business with Holding would increase the size of Holding, make it a
more financially diverse company and potentially attract a broader spectrum of
investors.
1995
The combination ("Transaction") was effective October 2, 1995 and was
accounted for as a transfer and exchange between companies under common control.
Accordingly, the assets and liabilities of the Retail Brokerage Business were
combined with those of Holding at their historical cost in a manner similar to a
"pooling of interests", (See Note 2 to the consolidated financial statements of
the Company). The combination was accomplished as follows:
1. Holding transferred to then recently formed Kaye Holding Corp. ("KHC")
all of the outstanding stock of the Insurance Companies and its two other
subsidiaries, PBC and CAC and its other assets in exchange for (i) 82,400 shares
of KHC common stock, representing 82.4% of the total outstanding KHC common
stock, and (ii) the assumption by KHC of certain of Holding's liabilities.
2. KILP transferred all of its interest in the limited partnerships
conducting the Retail Brokerage Business (the "Retail Partnerships") and certain
related assets to KHC in exchange for (i) 17,200 shares of KHC common stock,
representing 17.2% of the total outstanding KHC common stock, and (ii) the
assumption by KHC of certain KILP liabilities.
3. Certain individuals transferred to KHC all of their interests in the
corporate general partners of the Retail Partnerships (the "Retail Brokerage
Companies") in exchange for 400 shares of KHC common stock, representing 0.4% of
the total outstanding KHC common stock.
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4. KHC contributed its interests in the Retail Partnerships to the Retail
Brokerage Companies thereby causing the dissolution of the Retail Partnerships.
As a result, the Retail Brokerage Companies, as a group, own all of the assets
and are subject to all of the liabilities, of the Retail Brokerage Business.
1997
On December 30, 1997, stockholders of the Company approved a restructuring
that merged KHC into the Company. This eliminated the minority interest in KHC
held by KILP and simplified the corporate structure and reporting of the
Company.
The chart below reflects the current structure of the Company:
- --------------- ----------------
KILP,
related entity Public
and
individuals
- --------------- ----------------
72.9% 27.1%
---------------
KAYE GROUP INC.
---------------
100.0% 100.0%
- --------------------------------- --------------------------------------
Insurance Brokerage Companies: Property and Casualty Companies:
Kaye Insurance Associates, Inc. Old Lyme Insurance Company of Rhode
Kaye Corporation of Connecticut Island, Inc.
Kaye-Western Insurance & Risk Old Lyme Insurance Company, Ltd. and
Services, Inc. Park Brokerage, Ltd.
Kaye Services Corp. Claims Administration Corporation
Program Brokerage Corporation
- --------------------------------- --------------------------------------
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Affinity Group Marketing
Affinity group marketing (including A.R.T. programs) contributes 67% of the
Company's 1997 consolidated revenues, excluding investment income.
Retail Brokerage Operations
The Retail Brokerage Business generally services middle market entities
just below the Fortune 500 level. Within this market, it has developed
particular expertise and knowledge of the risks facing a number of industry
sectors. Based on this expertise and knowledge, the Retail Brokerage Business
has established programs for hospitals and physicians, churches, law firms,
mental health practitioners, homes for the aged and fine arts, among others.
Approximately 38% of the Retail Brokerage Business' 1997 revenues relate to
such affinity groups. Of this 38%, approximately 90% of the related premium
volume is placed with unrelated insurance markets. The remaining 10% is placed
with PBC. (This 10% represents approximately one-third of PBC's premium volume.)
No premiums are placed with the Insurance Companies directly by the Retail
Brokerage Business.
PBC and Insurance Companies Operations
PBC designs A.R.T. programs for affinity groups and markets via a network
of retail insurance brokers, including the Retail Brokerage Companies. PBC's
distribution network includes approximately 400 unrelated retail agents and
brokers. These unrelated agents and brokers account for two-thirds of PBC's
premium volume. The Insurance Companies underwrite a portion of the Programs and
only underwrite programs designed by PBC.
During the past five years the original 1:2 ratio of insurance premiums
produced by unrelated retail brokers to insurance premiums produced by the
Retail Brokerage Companies (the "Production Ratio"), respectively, has reversed.
But production from both sources has grown. PBC's total premium volume for 1997
of $54,100,000 has increased 28% since 1995. It is expected that the Production
Ratio will approach 3:1 during 1998, consistent with PBC's strategy of growing
the unrelated retail agents and broker distribution network.
Once PBC establishes an A.R.T. program, it acts as the placing broker with
respect to insurance under the Programs. In such a role, PBC is a party to
agreements with various unaffiliated insurers as well as the Insurance
Companies.
PBC receives commissions from the Insurance Companies and the unaffiliated
Program insurers. Pursuant to subbrokerage agreements, PBC pays commissions to
retail brokers based upon all business produced by such agents and brokers
(including business placed by PBC with the unaffiliated Program insurers).
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The Insurance Companies' strategy in most cases is to underwrite only the
first "layer" per claim (the deductible range) (inclusive of allocated loss
expenses) of the property and casualty insurance provided under the programs
developed by PBC. This limits its exposure to individual insureds on individual
losses to the deductible range depending on the Program. Under the Programs, the
Insurance Companies' policies are sold in conjunction with policies issued by
unaffiliated insurers that provide coverage for losses above the first "layer"
of risk underwritten by the Insurance Companies. The Insurance Companies believe
that their rates for the first "layer" of risk, when combined with the rates of
such other unrelated insurers for the coverage above such layer, are generally
competitive with the rates that other insurance companies would charge to
provide comparable insurance coverage.
The Insurance Companies currently participate in 14 A.R.T programs. The
three major programs are as follows:
1. The Residential Real Estate Program, started in 1990, provides property
and casualty insurance for residential real estate including rental apartments,
cooperatives, and condominiums. Policies protect the owner from property losses
and casualty claims, such as claims brought by a tenant or member of the public
injured on the premises. This program is offered principally in the New York
City area and has approximately 1,000 insureds.
2. The Restaurant Program, started in 1985, insures restaurants against
casualty claims (most typically brought by an injured restaurant patron) and
property losses. Many of the restaurants that participate in this Program are
"white tablecloth" restaurants. The Restaurant Program has approximately 900
insureds.
3. The Real Estate Umbrella Program insures residential and commercial real
estate owners against certain types of casualty losses. Insureds are provided
with an extra level of protection in conjunction with a standard umbrella
policy. Coverage is provided for losses that are included within the broad terms
of the policy, but are excluded under the general casualty policy. This Program
also provides high umbrella casualty limits primarily provided by unrelated
Program insurance companies to individual real estate owners. OLRI has a maximum
exposure of $10,000 per claim. The Real Estate Umbrella Program has
approximately 1,400 insureds.
The other Programs include the Comprehensive Office Program, the Retail
Stores Liability Program, the Catalog Showroom Property Program, the Building
Maintenance Contractors Program, the Contractors Umbrella Program, the Drug
Store Program, the Funeral Directors Program, the Bars, Restaurants and Taverns
Program, the New England Restaurant Program, the Waste Haulers Program, and the
Home Owner Program. The other Programs have approximately 1,000 insureds.
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The Home Owner Program provides various types of property insurance to a
group of affiliated home owners. Limits for certain coverage offered by OLRI
under this program are as high as $100,000. This program accounted for
approximately 2% of net premiums earned in 1997.
The Restaurant Program, Residential Real Estate Program and Real Estate
Umbrella Program accounted for approximately 87% of the net premiums earned by
the Insurance Companies in 1997. The following table sets forth the percentage
of net premiums earned attributable to the programs and all other business
during the years ended December 31, 1997, 1996 and 1995.
Net Premiums Earned
Years Ended December 31,
1997 1996 1995
---- ---- ----
Residential Real Estate .................... 46% 49% 40%
Restaurant Program ......................... 25% 24% 32%
Real Estate Umbrella Program ............... 16% 14% 15%
Other ...................................... 13% 13% 13%
--- --- ---
100% 100% 100%
=== === ===
Acquisitions
During 1997, the Company acquired certain assets and liabilities of Western
Insurance Associates, Inc. ("Western"). This acquisition was accounted for as a
purchase and achieved critical mass for the brokerage operations located in
Pasadena, California. In addition, this acquisition was synergistic as Western's
competitive advantage is in the production of business from affinity groups,
including churches and homes for the aged.
The Company believes that the effect of past, present and future
acquisitions will be to expand its insurance program services to affinity
groups, thus providing earnings to all operations.
The Company is considering and intends to consider from time to time
additional acquisitions and divestitures on terms it deems consistent with its
strategies. The Company at this time is engaged in preliminary discussions with
a number of candidates for possible future acquisitions but has not signed
contracts or agreements in principle to make additional acquisitions. No
assurances can be given that any additional acquisitions or divestitures will be
completed, or if completed, will be advantageous to the Company.
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Seasonality
The Brokerage Operations' revenues vary significantly from quarter to
quarter as a result of the timing of policy renewals and their related billings.
This is due to the revenue recognition method for brokerage commissions which
requires that a full year's commissions be recognized immediately upon the
billing date of the business. However, premium revenues of the Insurance
Companies are recognized ratably over the term of the related policies. As a
result, there is little variation from quarter to quarter in the Property and
Casualty Companies Operations revenues.
Consolidated revenues by quarter for 1997, 1996 and 1995 were earned as
follows. Amounts shown represent a percentage of the related full year
consolidated revenues.
1997 1996 1995
---- ---- ----
First Quarter 22% 22% 23%
Second Quarter 23% 22% 21%
Third Quarter 28% 28% 25%
Fourth Quarter 27% 28% 31%
Competition
The Company is the 17th largest insurance broker in the United States
according to "Business Insurance", a leading insurance industry publication. It
operates in a highly competitive industry and faces competition from regional
brokers, regional offices of worldwide brokers and insurers.
The insurance brokerage business is highly competitive. The Company
believes that it is well positioned to compete within its designated market
because of the expertise and knowledge it has developed in servicing middle
market companies, the Programs it has developed and the proprietary database of
affinity group underwriting and claims information it has developed.
Many insurance companies which compete with OLRI have a higher A.M. Best
- -rating (OLRI is rated A-(Excellent)), and are larger and have greater
financial, marketing and management resources than the Insurance Companies.
Competition is based on many factors, including perceived overall financial
strength of the insurer, premiums charged, policy terms and conditions, services
offered, reputation and experience. Due to its size, management and operational
flexibility, the Company can respond quickly to, and take advantage of, changing
circumstances encountered in the marketplace.
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In the event that admitted insurers (including the unaffiliated Program
insurers) begin to offer the coverage in New York which the Company offers as a
surplus lines insurer, it is possible that OLRI may be unable to receive
placements on a surplus lines basis, because brokers are generally required
first to obtain three "declinations" from admitted carriers before they can
offer the business to a surplus lines underwriter. In addition, in soft
insurance markets, other insurance companies may be more willing to offer low
deductibles which cover the first layer of risk at prices competitive with or
lower than those under the Programs.
Ceded Reinsurance
OLRI has from time to time obtained reinsurance for portions of, or
specific risks under, the first layer of risks underwritten by OLRI. Such
reinsurance is not and has not been material to OLRI. Reinsurance has been
placed with National Reinsurance Corporation, Transatlantic Reinsurance Company
and USF Reinsurance Company, which are rated A or better by A.M. Best . However,
if reinsurance should become more widely available at economical prices, OLRI
may increase the amount of reinsurance it purchases (see Note 13 to the
consolidated financial statements of the Company).
Losses and Loss Expenses
The Insurance Companies are directly liable for losses and loss expense
payments under the terms of insurance policies that they write, and under the
reinsurance agreements to which they are party. In many cases, several years may
elapse between the occurrence of an insured loss, the reporting of the loss to
the Insurance Companies and the Insurance Companies payment of that loss. The
Insurance Companies reflect their liability for the ultimate payment of all
incurred losses and loss expenses by establishing loss and loss expense
reserves, which are balance sheet liabilities representing estimates of future
amounts needed to pay claims and related expenses with respect to insured events
that have occurred.
When a claim involving a probable loss is reported, the Insurance Companies
establish a loss reserve for the estimated amount of the Insurance Companies'
ultimate loss and loss expense payments. The estimate reflects an informed
judgment based on established reserving practices and the experience and
knowledge of CAC's claims examiners regarding the nature and value of the claim,
as well as the estimated expense of settling the claim, including legal and
other fees, and general expenses of administering the claims adjustment process.
The Insurance Companies also establish reserves on an aggregate basis to provide
for losses incurred but not reported ("IBNR reserves"), as well as future
developments on losses reported to the Insurance Companies. The amount of an
insurer's incurred losses in a given period is determined by adding losses and
loss expenses paid during the period to case loss and loss expense reserves and
IBNR reserves (collectively "loss reserves") at the end of the period, and then
subtracting loss reserves existing at the beginning of the period.
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As part of the reserving process, historical data is reviewed and
consideration is given to the anticipated effect of various factors, including
anticipated legal developments, changes in social attitudes, inflation and
economic conditions. Reserve amounts are necessarily based on Management's
estimates, and as other data becomes available and is reviewed, these estimates
are revised, resulting in increases or decreases to existing reserves.
OLRI receives claims related to lead paint exposures it insures under
various Residential Real Estate Programs. There are uncertainties in estimating
the amount of reserves due to factors including: difficulty in properly
allocating responsibility and/or liability for the lead paint exposure; changes
in the underlying laws and the judicial interpretation of those laws; questions
regarding the interpretation and application of insurance and reinsurance
coverage. OLRI has reserves established for these claims on a case basis and an
incurred but not reported basis. The reserves provided are established based on
Management's estimate of ultimate liabilities. However, due to the nature of the
exposures, such reserves cannot be, and are not established using standard
actuarial techniques.
To further review the adequacy of the reserves, the Insurance Companies
engage independent actuarial consultants to perform annual case and ultimate
loss reserve analysis.
The following table sets forth a reconciliation of the change in the
reserves for outstanding losses and loss expenses, including paid losses and
loss expenses, for each year in the three year period ended December 31, 1997.
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Balance at January 1, $ 15,227 $ 12,671 $ 14,118
Less reinsurance recoverables (882)
-------- -------- --------
Net balance 14,345 12,671 14,118
-------- -------- --------
Incurred related to:
Current year 8,824 6,621 4,986
Prior year (108) 415 (136)
-------- -------- --------
Total incurred 8,716 7,036 4,850
-------- -------- --------
Paid related to:
Current year 1,802 1,832 2,138
Prior year 4,944 3,530 4,159
-------- -------- --------
Total paid 6,746 5,362 6,297
-------- -------- --------
Net balance at December 31, 16,315 14,345 12,671
Plus reinsurance recoverables 2,811 882
-------- -------- --------
Balance $ 19,126 $ 15,227 $ 12,671
======== ======== ========
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The following table presents the development of unpaid losses and loss
expense reserves for the past ten years for the Insurance Companies. During the
ten year period covered by this table, OLB changed its fiscal year-end from July
31 to April 30 and then to December 31 for the year ended December 31, 1990. In
addition, Bermuda domiciled insurance companies, unlike U.S. domiciled insurers,
are not required to file calendar year loss development information with
regulatory authorities. Accordingly, the loss development information included
in the following table with respect to OLB prior to 1992, reflects development
data converted from the policy year loss development data maintained by OLB
through the use of mathematical models. The top line of the table shows the
estimated reserve for unpaid losses and loss expenses at the balance sheet date
for each of the indicated years. These figures represent the estimated amount of
unpaid losses and loss expenses for claims arising in the current and all prior
years that were unpaid at the balance sheet date, including losses that had been
incurred but not yet reported. The table also shows the re-estimated amount of
the previously recorded reserve based on experience as of the end of each
succeeding year. The estimate changes as more information becomes available,
principally about the frequency of claims for individual years. The table is
presented net of reinsurance which is immaterial for all years presented except
for 1997. The reinsurance recoverable on unpaid losses at December 31, 1997 is
$2,811,000.
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KAYE GROUP INC.
LOSS DEVELOPMENT SCHEDULE
(In thousands)
<TABLE>
<CAPTION>
Year Ended 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for outstanding
losses and loss expenses
on December 31, $4,360 $6,866 $8,418 $12,555 $16,244 $18,444 $17,929 $14,118 $12,672 $15,227 $19,126
Cumulative amount paid as of:
One year later $1,251 $2,018 $2,505 $4,374 $5,569 $6,379 $6,965 $4,161 $3,697 $4,943
Two years later 2,351 3,513 5,266 7,545 9,258 11,704 10,002 6,802 6,882
Three years later 2,907 5,208 7,041 9,245 12,695 13,833 12,278 9,455
Four years later 3,662 6,113 7,600 11,378 13,813 14,973 14,120
Five years later 4,090 6,269 8,539 11,705 14,146 15,784
Six years later 4,112 6,881 8,660 11,768 14,385
Seven years later 4,204 6,892 8,681 11,877
Eight years later 4,204 6,895 8,701
Nine years later 4,204 6,903
Ten years later 4,204
Re-estimated liability as of:
One year later $3,875 $6,891 $9,127 $13,665 $16,117 $18,140 $17,856 $14,254 $12,257 $15,494
Two years later 4,483 6,692 9,767 13,003 15,182 18,511 18,184 13,487 $12,454
Three years later 4,726 7,343 9,288 11,850 15,609 18,636 16,552 13,990
Four years later 4,850 7,228 9,002 12,410 15,462 18,177 18,157
Five years later 4,703 7,120 9,060 12,468 15,312 18,252
Six years later 4,507 7,140 8,973 12,224 14,982
Seven years later 4,357 7,063 8,893 12,121
Eight years later 4,312 6,964 8,847
Nine years later 4,204 7,012
Ten years later 4,204
Cumulative
Redundancy (Deficiency): $156 ($146) ($429) $434 $1,262 $192 ($228) $128 $218 ($267)
- ------------------------
</TABLE>
16
<PAGE>
Regulation
The Company is subject to a substantial degree of regulation that is
designed to protect the interests of insurance policyholders. As a Rhode Island
property and casualty insurance company, OLRI is subject to the primary
regulatory oversight of the Rhode Island Department of Business Regulation
through its Insurance Division. On March 28, 1996, the Division advised the
Company that it is reviewing the treatment of certain reinsurance arrangements
between OLRI and OLB in OLRI's 1995 Statutory Annual Statement filed with the
Division. The Company believes that it treated this arrangement appropriately in
its annual statement and it does not believe that there will be any material
modifications to OLRI's surplus at December 31, 1995.
As a Bermuda property and casualty insurance company, OLB is subject to
regulation of the primary regulatory body of Bermuda. Such regulation relates
to, among other things, authorized lines of business, capital and surplus
requirements and general standards of solvency, the filing of annual and other
financial reports prepared on the basis of statutory accounting practices, the
filing and form of actuarial reports, the establishment and maintenance of
reserves for unearned premiums, losses and loss expenses, underwriting
limitations, investment parameters, transactions with affiliates, dividend
limitations, changes in control and a variety of other financial and
non-financial matters.
The National Association of Insurance Commissioners has developed
risk-based capital formulas to be applied to all domestic insurance companies.
These formulas calculate a minimum required statutory net worth, based on the
underwriting, investment and other business risks inherent in an insurance
company's operations. Any insurance company that does not meet threshold
risk-based capital levels ultimately will be subject to statutory receivership
proceedings. The statutory net worth of OLRI is adequate in light of its current
and anticipated future business and has met its risk-based capital and surplus
requirements at December 31, 1997. The minimum risk-based capital requirement
for OLRI, as of December 31, 1997 was $6,804,698 and the Company exceeded that
threshold by $16,857,689.
Employees
As of December 31, 1997, the Company had 347 employees. The Company is not
unionized. The Company believes that its employee relationships are
satisfactory.
17
<PAGE>
Item 2. Properties
The Company owns approximately 7,500 square feet of space in an office
condominium building in Warwick, Rhode Island which is utilized by employees of
PBC and OLRI. The Company also leases space located in New York, New York;
Pasadena, California, and Westport, Connecticut. The Company's total leased
space at each location is 84,398 sq. ft., 9,443 sq. ft., and 10,370 sq. ft.,
respectively. The Company's current space leases are suitable for its current
needs.
Item 3. 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
party 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. While the Company
has had 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 the Company 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.
18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On December 30, 1997, the Company held a special meeting of stockholders to
consider and act upon the following matters:
1. Approval of the Merger Agreement and the merger of Kaye Holding Corp.,
a Delaware corporation ("KHC"), with and in to Kaye Group Inc.
("Kaye"), with Kaye being the survivor (the "Merger") (Proposal No.
1), whereby on the effective date of the Merger, each share of KHC's
Common Stock, par value $.01 per share ("KHC Common Stock"), issued
and outstanding immediately prior to the effective date, other than
shares held by Kaye, will be converted into 82.63835 shares of Kaye
Common Stock, par value $.01 per share ("Kaye Common Stock"); and
2. Approval of a Stock Performance Plan (the "Plan") (Proposal No. 2).
The votes cast for the Merger and the Plan proposed were:
MERGER PLAN
------ ----
For 6,636,840 6,603,123
Against 3,021 375,621
Abstain 0 500
Broker Non-votes 339,403 20
19
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
In August 1993, in connection with the consummation of the IPO, the
Company's Common Stock was listed on the NASDAQ National Market System under the
symbol "OLHC". On October 2, 1995, in connection with the combination of the
Retail Brokerage Business of Kaye with Holding, Holding changed its name to Kaye
Group Inc. and is now listed under its new symbol "KAYE". The following table
sets forth the high and low prices for the Common Stock as reported on NASDAQ
for the indicated periods and the dividends paid per share during such periods.
Price Range Dividends
------------------------ Paid
High Low Per Share
---- --- ---------
1997:
First Quarter $5 3/8 $4 1/2 $ .025 cash
Second Quarter 5 1/8 4 3/8 $ .025 cash
Third Quarter 9 5 1/8 $ .025 cash
Fourth Quarter 9 6 3/8 $ .025 cash
1996:
First Quarter $8 $7 $ .025 cash
Second Quarter 7 1/2 5 5/8 $ .025 cash
Third Quarter 7 4 5/8 $ .025 cash
Fourth Quarter 6 1/2 4 5/8 $ .025 cash
The approximate number of holders of record of the Company's Common Stock
as of March 10, 1998 was 45. The approximate number of beneficial holders as of
March 10, 1998 was 500.
See "Item 7 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Dividends" for a discussion of dividends paid by
the Company.
20
<PAGE>
Item 6. Selected Financial Data
The following table should be read in conjunction with, and is supplemented in
its entirety by, the consolidated financial statements and the notes thereto.
Financial data has been restated to take into effect the Transactions effective
October 2, 1995. The financial data for the years 1993 through 1997 has been
derived from the audited consolidated financial statements of the Company.
<TABLE>
<CAPTION>
Years ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Operating revenues $54,216 $50,341 $51,582 $52,906 $54,598
Net investment income 4,312 3,576 3,912 3,455 2,752
Net realized gains (losses) on investments 21 72 (47) (50) 611
-------- -------- -------- -------- --------
Total revenues 58,549 53,989 55,447 56,311 57,961
-------- -------- -------- -------- --------
Net income $4,357 $3,071 $5,181 $4,347 $1,186
- --------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $0.62 $0.44 $0.74 $0.62 $0.20
Diluted $0.62 $0.44 $0.74 $0.62 $0.20
- --------------------------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME
Income before minority interest, income taxes and
cumulative effect of change in accounting principles $7,555 $5,211 $6,309 $6,516 $2,476
Provision for income taxes 2,267 1,484 1,995(1) 1,861(1) 699(1)
-------- -------- -------- -------- --------
Income before minority interest and
cumulative effect of change in accounting principles 5,288 3,727 4,314 4,655 1,777
Minority interest (931) (656) (759) (1,011) (313)
Cumulative effect of change in accounting principles,
net of charge in lieu of income taxes (2) 1,090
-------- -------- -------- -------- --------
Pro forma net income $4,357 $3,071 $3,555 $4,734 $1,464
- --------------------------------------------------------------------------------------------------------------------------------
PRO FORMA EARNINGS PER SHARE
Income before cumulative effect of change in
accounting principles $0.62 $0.44 $0.51 $0.52 $0.25
Cumulative effect of change in accounting principles,
net of charge in lieu of income taxes 0.15
-------- -------- -------- -------- --------
Pro forma earnings per share (8) $0.62 $0.44 $0.51 $0.67 $0.25
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average of shares outstanding - basic 7,024 7,020 7,020 7,020 5,924
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average of shares and
share equivalents outstanding - diluted 7,083 7,021 7,023 7,035 5,924
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Item 6. Selected Financial Data (Continued)
<TABLE>
<CAPTION>
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data and ratios)
Balance Sheet data:
<S> <C> <C> <C> <C> <C>
Total assets $141,025 $156,102 $174,000 $185,976 $206,153
Long -term debt (3) 5,810 12,787 13,679 11,618 13,995
Stockholders' equity 35,168 24,984 22,882 16,676 13,688
Net book value per share (4) 4.15 3.56 3.26 2.38 1.95
Cash dividend per share (5) 0.10 0.10 0.10 0.10 0.03
GAAP operating data:
Loss ratio 38.2% 36.4% 28.8% 31.8% 42.9%
Expense ratio 41.0% 42.5% 41.1% 32.9% 32.9%
Combined ratio 79.2% 78.9% 69.9% 64.7% 75.8%
Statutory operating data (6):
Net underwriting gain $5,890 $4,455 $7,104 $7,105 $2,599(7)
Policyholders' surplus 25,566 25,485 26,231 22,274 21,528
Loss ratio 36.6% 34.1% 24.4% 30.2% 40.8%
Expense ratio 38.6% 40.0% 37.1% 35.5% 33.7%
Combined ratio 75.2% 74.1% 61.5% 65.7% 74.5%
</TABLE>
(1) Charge in lieu of income taxes, see note 3 (l) to the Consolidated
Financial Statements of the Company.
(2) Commission income, together with the related accounts receivable from
clients and premiums payable to insurance carriers, is recorded principally
as of the billing date. Beginning in 1994, commission income related to
installment billing arrangements is recorded in total at the date of the
initial billing. This change was made because in the opinion of management,
it results in a better matching of revenues with the related costs. Prior
to this change, commissions were recorded as each installment was billed.
As a result of this change, additional commissions of $1,471,000 were
recorded in 1994 that would have been recorded under the old policy in
1995. The Company was unable to determine the effects of this change in
years prior to 1994 and, therefore, pro forma disclosure of this change in
prior years cannot be made. Accordingly, the effect of the change in
accounting on prior years of $ 1,652,000 was treated as a cumulative effect
adjustment on the 1994 consolidated statement of income.
(3) Excludes that portion of long-term debt maturing in less than one year.
(4) Based upon 8,474,435 shares outstanding at December 31, 1997 and 7,020,000
outstanding at December 31, 1996, 1995, 1994, and 1993.
(5) Dividends paid and declared since the date of the IPO of August 17, 1993.
(6) Based upon statutory accounting practices and derived from the statutory
financial statements of the Insurance Companies, which excludes the effects
of CAC.
(7) As a result of a substantial amount of new business written with effective
dates in the latter half of 1993, net underwriting gain for 1993 was
significantly affected by the statutory accounting practices of charging
commission expense to income immediately while premiums are earned over the
term of the underlying policies.
(8) Earnings per share for basic and diluted are the same based on the weighted
average shares outstanding, including share equivalents outstanding.
22
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Kaye Group Inc. (the "Company"), a Delaware corporation, formerly Old Lyme
Holding Corporation ("Holding"), is a holding company which, through its
subsidiaries, is engaged in a broad range of insurance brokerage, underwriting
and related activities. The Company operates in two insurance business segments
- - the Insurance Brokerage Companies Operations comprised of the Retail Brokerage
Business and the Program Brokerage Business, and the Property and Casualty
Companies Operations ("Property and Casualty Companies" or "Insurance"), which
comprises the Insurance Companies and Claims Administration (see Note 1 to the
consolidated financial statements of the Company).
The revenues and expenses of the Property and Casualty Companies segment
will not be comparable to the amounts reported previously by Holding.
Historically, the commission income of the Program Brokerage Business was
recorded as a reduction of acquisition costs in the consolidated statements of
income of Holding. As a result of the combination (see Note 2 to the
consolidated financial statements of the Company), management includes the
commission income and the other revenues and operating costs of the Program
Brokerage Business in the Insurance Brokerage Companies segment for all periods
presented.
Overview
The Insurance Brokerage Companies derive their 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. Certain of these commissions are
contingent upon the level of volume and profitability of the related coverage to
the insurance companies. 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.
23
<PAGE>
Corporate Operations include those activities that benefit the Company in
its entirety and cannot be specifically identified to either the Insurance
Brokerage Companies or the Property and Casualty Companies. Such activities
include debt servicing and public company expenses, including investor relations
costs.
The Company has foreign operations in Bermuda. For further discussion see
Note 23 to the consolidated financial statements of the Company.
A comprehensive analysis of the results of operations of the Company would
not be meaningful without consideration of the charge in lieu of 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. Prior to the combination on October
2, 1995, the Retail Partnerships and the Retail Brokerage Companies 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 net income for the year ended December 31, 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 years presented
(see Note 2 of the consolidated financial statements of the Company). Management
believes this presentation will better present current and future comparisons of
the effective tax rate and income tax expense of the Company.
24
<PAGE>
Results of Operations
Year ended December 31, 1997 compared
with year ended December 31, 1996
Insurance Brokerage Companies
Income before income taxes increased by $1,962,000 to $767,000 in 1997 from
a loss of $1,195,000 in 1996. The improved operating result was due to increased
revenues, a significant decrease in other operating expenses and lower interest
expense partially offset by a modest increase in salaries and benefits, as
discussed below.
Total revenues in 1997 were $32,689,000 compared with $31,595,000 in 1996,
or an increase of $1,094,000 (3%). The largest component of revenues,
commissions and fees-net, was up by $555,000 (2%). Commissions and fees-net
increased due to new business of $5,948,000 and the acquisition of Western (see
Note 17 to the consolidated financial statements of the Company) which
contributed $992,000. Decreases in commissions and fees-net was the result of
attrition of $4,421,000, increased commission expense of $896,000 primarily due
to additional new business acquired, and a reduction in wholesale contingency
commissions of $1,068,000. Attrition includes lost accounts, reduction of
service to existing accounts, and lower premiums and commission rates. The
attrition in business was equivalent to approximately 13% of the Company's 1996
volume which results in a business retention of approximately 87%. This is well
within normal industry expectations given the usual attrition in a highly
competitive environment. Investment income increased in 1997 by $539,000 (52%)
due to collection efficiencies resulting in a longer holding period for
fiduciary investments.
Salaries and benefits increased by $299,000 (2%) to $18,868,000 in 1997
compared to $18,569,000 in 1996. This increase was the result of the acquisition
of Western partially offset by a modest reduction in work force due to continued
operating efficiencies, lower executive compensation and reduced costs for prior
years' acquisitions. 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 $967,000 (7%) to $12,654,000 in 1997
compared with $13,621,000 in 1996. This decrease was mainly due to reduced
account servicing expenses, the completion of amortization of organization costs
in the latter part of 1996, expiration of certain management service contracts
in 1996 and the third quarter of 1997, and reduced insurance cost.
Interest expense decreased by $200,000 as a result of the early payment of
the $6,000,000 note payable to KILP in August 1997.
25
<PAGE>
Property and Casualty Companies
Income before income taxes increased in 1997 by $668,000 (9%) to $7,719,000
from $7,051,000 in 1996. The increase in operating results was due to increased
net premiums earned (net of related expenses) and investment income partially
offset by a decrease in other income, as discussed below.
Net premiums earned for 1997 increased by $3,520,000 (18%) to $22,847,000
from $19,327,000 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 and the formation of several new
programs.
Net investment income in 1997 increased by $231,000 (9%) to $2,692,000 from
$2,461,000 in 1996 as a result of the increase in invested assets.
Net realized gain on investment transactions for 1997 decreased by $51,000
to $21,000 compared to $72,000 in 1996. The realization of investment gains and
losses is determined by market conditions and management's decision regarding
the holding period of the portfolio.
Other income for 1997 decreased by $200,000 to $245,000 from $445,000 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 $1,680,000 (24%) to
$8,716,000 from $7,036,000 in 1996. The loss ratio for 1997 and 1996 was 38% and
36%, respectively. This increase was the result of growth in general liability
coverage and reserve strengthening. 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 $1,152,000 (14%) to $9,370,000 from $8,218,000 in 1996. The expense ratio
(acquisition costs and general and administrative expenses) for 1997 and 1996
was 41% and 43%, respectively. This decrease was due to a modest decrease in
general and administrative expenses in 1997. 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. General and administrative
expenses had a modest decrease as a result of lower professional fees.
Corporate
Net expenses before income taxes increased in 1997 by $286,000 (44%) to
$931,000 from $645,000 in 1996. This increase was the result of costs incurred
for acquisition activities and investor relations.
26
<PAGE>
Year ended December 31, 1996
compared with year ended December 31, 1995
Insurance Brokerage Operations
Loss before income taxes increased by $489,000 to $1,195,000 in 1996 from
$706,000 in 1995. The benefit of decreased salaries and related taxes and
fringes was offset by lower revenues as discussed below.
Total revenues in 1996 were $31,595,000 compared with $34,970,000 in 1995,
or a reduction of $3,375,000 (10%). The largest component of revenues,
commission and fees-net, was down $3,373,000 (10%) due in part to nonrecurring
items in 1995 of $1,102,000 which consisted of $605,000 relating to the sale of
expiration lists of Kaye Administrators, the Home Owners Program was extended by
an additional six months for commissions of $305,000, and a special contingent
commission of $192,000. The remaining reduction in commissions was mainly due to
lost business of approximately $3,200,000 in commercial lines, group and life,
personal lines and fees earned from public adjusters partially offset by new
business of $1,600,000. This loss in business, equivalent to approximately 9% of
the Company's 1995 volume, results in a business retention of approximately 91%.
This is well within normal industry expectations given the usual attrition in a
highly competitive environment.
Salaries and benefits decreased by $2,556,000 (12%) to $18,569,000 in 1996
compared to $21,125,000 in 1995. The decrease is a result of a reductions in
work force, lower compensation earned under incentive contracts, termination of
the Company's defined benefit pension plan, refunds received on group medical
insurance, utilization of forfeitures in the 401K plan and the one time
incentive payment in 1995 relating to the sale of Kaye Administrators.
Other operating expenses (including depreciation) decreased by $330,000
(2%) to $13,621,000 in 1996 compared with $13,951,000 in 1995. The decrease was
primarily due to lower professional fees as a result of the settlement of a
former employee lawsuit partially offset by additional depreciation costs
related to the capital leasing of new computers, and outside rating service fees
related to the Residential Real Estate Program, general insurance and employment
agency fees.
Property and Casualty Insurance Operations
Income before income taxes decreased in 1996 by $1,631,000 to $7,051,000
from $8,682,000 in 1995. This decrease was the result of reduced investment
income and the increase in the combined ratio in 1996 to 79% from 70% in 1995
partially offset by an increase in net premiums earned, as discussed below.
27
<PAGE>
Net premiums earned for 1996 increased by $2,482,000 (15%) to $19,327,000
from $16,845,000 in 1995. This increase was primarily attributable to growth in
the Residential Real Estate Program partially offset by lost business due to
increased competition in the Restaurant Program.
Net investment income decreased by $358,000 (13%) to $2,461,000 in 1996
from $2,819,000 in 1995 as a result of additional bond amortization for those
bonds which had early call features.
Losses and loss expenses increased in 1996 by $2,186,000 to $7,036,000 from
$4,850,000 in 1995. The loss ratio for 1996 was 36% compared to 29% in 1995. The
increase in loss ratio is due to the change in the mix of business during 1996
from property and umbrella coverages to other general liability coverage,
including exposure to lead paint, which experiences a higher loss ratio.
Acquisition costs and general and administrative expenses increased in 1996
by $1,290,000 to $8,218,000 from $6,928,000 in 1995. The expense ratio for 1996
and 1995 were 43% and 41%, respectively. The increase in expense ratio was
mainly due to professional fees.
Corporate
Net expenses before income taxes decreased in 1996 by $1,022,000 to
$645,000 from $1,667,000 in 1995. The decrease in expenses was the result of
nonrecurring reorganization costs incurred in 1995.
Effective Tax Rate (See Note 8)
The pro forma presentation for 1995 includes the effect of a tax benefit
from the Retail Brokerage Business which was not combined into the Company until
October 2, 1995, resulting in an effective tax rate of 32% for 1995. The
effective tax rate for 1997 and 1996 was 30% and 29%, respectively. The
difference between the statutory tax rate and the effective tax rate in 1997 and
1996 was primarily related to tax exempt interest. The rate increase for 1997
was primarily due to additional state and local taxes while the decrease in 1996
was primarily due to a one time charge for reorganization costs in 1995 of
$863,000 most of which are not deductible for income tax purposes.
Financial Condition and Liquidity
Management believes the Company's operating cash flow, cash equivalents and
short term investments will provide sufficient sources of liquidity and capital
to meet the Company's anticipated needs in the next twelve months and the
foreseeable future. The Company has no material capital commitments.
28
<PAGE>
Total assets decreased by $15,077,000 (10%) to $141,025,000 at December 31,
1997 from $156,102,000 at December 31, 1996. Total liabilities decreased by
$19,923,000 (16%) to $105,857,000 at December 31, 1997 from $125,780,000 at
December 31, 1996. Premiums and other receivables and premiums payable declined
in the brokerage segment due to the timing of certain premium billings.
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 $10,184,000 (41%) to $35,168,000 at
December 31, 1997 from $24,984,000 at December 31, 1996. The increase in equity,
which resulted from net income of $4,357,000, the change in unrealized
appreciation of investments (net of deferred taxes) of $338,000 and the effect
of the merger (discussed below) resulting in the elimination of minority
interest of $6,191,000, was partially offset by dividends paid of $702,000.
On December 30, 1997 the stockholders of the Company approved a
restructuring that merged Kaye Holding Corp. ("KHC") into the Company. This
eliminated KILP's minority interest in KHC of $6,191,000 at December 31, 1997
and increased stockholders' equity of the Company by the same amount. KILP is
the Company largest shareholder. The merger was accounted for as a transfer and
exchange between entities under common control. Accordingly, common stock of
Kaye Group Inc. issued in exchange for the KHC shares was accounted for by using
the closing NASDAQ market price on October 24, 1997 ($7.00) (the effective date
of the merger). This increased the number of shares of common stock by 1,454,435
at the par value $.01 per share or $14,544. Paid-in capital was increased by
$10,166,000 which was the difference between the market value price per share
and the par value per share. Minority interest in KHC was eliminated as a result
of the merger and retained earnings of Kaye Group Inc. was reduced to account
for the difference between the market value of the shares issued and the book
value of the minority interest in KHC.
The Company's cash and cash equivalents increased by $3,348,000 for the
year ended December 31, 1997. Operating activities provided cash of $15,845,000,
primarily as a result of net income from operations and a net increase in
accrued liabilities. Investing activities used cash of $2,204,000 for the
purchase of new computer software and the enhancement of our California
operations through the asset acquisition of Western. Financing activities used
cash of $10,293,000 to pay dividends, notes payable on computer equipment, the
early payment of the note to KILP and payments made under deposit reinsurance
contracts, offset by proceeds received to finance the Company's new computer
software.
The Company has calculated risk-based capital and the result is that the
statutory net worth of Old Lyme Rhode Island is adequate in light of the current
requirements.
29
<PAGE>
The Company is subject to a substantial degree of regulation, which is
designed to protect the interests of insurance policyholders. As a Rhode Island
property and casualty insurance company, OLRI is subject to the primary
regulatory oversight of the Rhode Island Department of Business Regulation
through its Insurance Division. On March 28, 1996, the Division advised the
Company that it is reviewing the treatment of certain reinsurance arrangements
between OLRI and OLB in OLRI's 1995 Statutory Annual Statement filed with the
Division. The Company believes that it treated this arrangement appropriately in
its annual statement and it does not believe that there will be any material
modifications to OLRI's surplus at December 31, 1995.
The Company's primary source of cash is derived from insurance premiums,
insurance brokerage commissions and fees, proceeds from the sale of investments,
and investment income. The Company's principal uses of cash are payments of
insurance premiums, commissions to brokers who produce the business, losses and
loss expenses and operating expenses, and purchases of investments and fixed
assets.
The Company has minimized its investment risk by investing in high quality
tax exempt municipal bonds, U.S. Government and government agency securities and
corporate bonds rated A or better by an accredited rating agency and by
maintaining an average duration of approximately four years, taking into account
the effects of certain early call features. The Company currently intends to
continue these investment strategies.
The table below sets forth the composition of the Company's portfolio of
fixed maturity investments by rating as of December 31, 1997 (in thousands):
Market Value as Percentage of
Amortized Reflected on Total at Market
Rating (a) Cost Balance Sheet Value
---------- ---- ------------- -----
AAA(b) $26,959 $27,297 66.1%
AA 5,480 5,587 13.5%
AA- 2,058 2,091 5.1%
A+ 2,369 2,376 5.7%
A 3,905 3,962 9.6%
------- ------- -----
$40,771 $41,313 100.0%
======= ======= =====
(a) Ratings are assigned primarily by Standard & Poors Corporation with the
remaining ratings assigned by Moody's Investors Services, Inc. and
converted to the equivalent Standard & Poors ratings.
(b) Includes U.S. Government Obligations.
30
<PAGE>
The amortized cost and estimated market value of fixed maturities at
December 31, 1997, by contractual maturity date, are listed below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without penalties.
Investments Available
for Sale
---------------------------------
Amortized Aggregate Fair
Cost Value
--------- --------------
Due in one year or less $3,602 $3,585
Due after one year through five years 15,341 15,594
Due after five years through ten years 19,255 19,520
Due after ten years 2,573 2,614
------- -------
Total $40,771 $41,313
======= =======
The Company maintains a substantial level of cash and liquid short term
investments which are used to meet anticipated payment obligations. At December
31, 1997 and 1996, the Company had cash and short term investments of
$34,737,000 and $29,295,000, respectively of which $22,322,000 and $23,879,000
represents premiums collected and held in a fiduciary capacity which are
generally not available for operating needs of the Company. 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.
Investment results of the Company for each of the three years in the period
ended December 31, 1997 are shown in the following table (in thousands):
At or for the
years ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Average cash and cash equivalents
and invested assets (1) $ 76,534 $ 68,692 $ 64,261
Investment income $ 4,312 $ 3,576 $ 3,912
Average yield on total investments 5.6% 5.2% 6.1%
Net realized investment gains (losses) $ 21 $ 72 $ (47)
(1) Based upon the average of the beginning and end of the period amortized
cost for fixed maturities and cost for equity securities.
31
<PAGE>
The Company has a $7,031,250 revolving line of credit with a bank,
collateralized by the stock of the Insurance Companies. The proceeds are
available for general operating needs and acquisitions. As of December 31, 1997,
there was no unused portion of the revolving line of credit.
Under the terms of the revolving line of credit, principal payments
commenced during 1997 with $68,750 paid during the year and $468,750 due per
quarter, through June 30, 2001.
The Company's insurance subsidiaries require capital to support premium
writing. The guidelines set forth by the NAIC suggest that a property and
casualty insurer's ratio of annual statutory net premiums written to
policyholders' surplus should not exceed 3 to 1. At December 31, 1997, the
Insurance Companies, with a combined statutory surplus of $25,566,000, had a
ratio of combined annual statutory net premiums written to their combined
statutory surplus of approximately .87 to 1.
Dividends
On December 19, 1997, the Board of Directors declared a quarterly dividend
of $.025 per share, payable January 20, 1998 to stockholders of record on
December 31, 1997. The Company is largely dependent upon dividends from its
subsidiary to pay dividends to the stockholders. The Company's insurance
subsidiaries are subject to regulations that restrict their ability to pay
dividends.
Under Rhode Island Insurance law, OLRI may pay cash dividends only from
earned surplus determined on a statutory basis, subject to the maintenance of
minimum capital and surplus of $3,000,000. Further, OLRI is restricted (on the
basis of the lesser of 10% of OLRI's statutory surplus at the end of the
preceding twelve-month period or 100% of OLRI's net income, excluding realized
capital gains, for the preceding twelve-month period) as to the amount of
dividends it may declare or pay in any twelve-month period without prior
approval of the Department of Business Regulation of Rhode Island. Without
special permission, at December 31, 1997, $2,366,000 was available for
distribution.
OLB is required to maintain a minimum statutory capital and surplus based
upon the higher of $1,000,000 or an amount derived by applying a variable rate
to its current premium volume or outstanding losses at December 31, 1997. At
December 31, 1997, $904,000 was available for distribution from OLB and its
subsidiary, Park Brokerage Ltd.
The continued payment and the amount of any cash dividends will depend
upon, among other factors, the Company's operating results, overall financial
condition, capital requirements and general business conditions.
32
<PAGE>
Other
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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 ("APB") No. 25, "Accounting for Stock Issued to
Employees".
In 1996, the Company adopted the disclosure provision of stock-based
compensation in accordance with SFAS No. 123. The adoption of this statement
does not have an impact on the Company's financial position or results of
operations.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. The
statement establishes a new standard for computing and presenting earnings per
share data. The statement is effective for financial statements issued for both
interim and annual periods ending after December 15, 1997. This statement
supersedes APB Opinion No. 15, Earnings Per Share, and requires dual
presentation of basic and diluted earnings per share on the face of the income
statement. Basic earnings per share exclude dilution and are computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share include
the effect of all potentially dilutive securities. All prior period earnings per
share presented were restated.
Also in February 1997, the Securities and Exchange Commission ("SEC")
issued Financial Reporting Release No. 48, Disclosure of Accounting Policies for
Derivative Financial Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about Market Risk
Inherent in Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments ("FRR No. 48").
FRR No. 48 amends rules and forms for registrants and requires
clarification and expansion of existing disclosures for derivative financial
instruments, other financial instruments and derivative commodity instruments,
as defined therein. The amendments require enhanced disclosure with respect to
these derivative instruments in the notes to financial statements. As of
December 31, 1997, the Company has no derivative financial instruments.
33
<PAGE>
Additionally, the amendments expand existing disclosure requirements to
include quantitative and qualitative discussions with respect to market risk
inherent in market risk sensitive instruments such as equity and fixed maturity
securities, as well as derivative instruments which investors can use to better
understand and evaluate market risk exposures of registrants. These disclosures
will be effective in 1998.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for the reporting and display of
comprehensive income and its components in the consolidated financial
statements. The purpose of reporting comprehensive income is to report the
change in equity of a business enterprise for the period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. These items include currency translation adjustments
and unrealized appreciation of investments, which are currently reported as
separate components of equity in the balance sheet. The statement is effective
in 1998 and will change the presentation of information in the financial
statements but will not have any effect on the financial position or results
from operations of the Company.
Also in June 1997, the FASB issues SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information. This statement requires that companies
report certain information about their operating segments in the financial
statements including, information about the products and services from which
revenues are derived, the geographic areas of operations, and information about
major customers. Operating segments are determined by the way management decides
how to allocate resources and how it assesses performance. Descriptive
information about the method used to identify the reportable operating segments
must also be disclosed. The statement also requires a reconciliation of
revenues, net income, and assets and other amounts disclosed for the segments to
the corresponding amounts in the consolidated financial statements. The
statement is effective for year end 1998 and is not expected to change the
Company's current segmentation of its business. The financial position and
operating results of the Company will not be affected by this statement.
Year 2000 Issue
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Many computer
programs have date-sensitive computer software that may not recognize the date
with the year 2000. This could result in system failures or miscalculations
causing disruptions of operations.
The Company has determined that it will be required to modify or replace
significant portions of software it uses so that the affected software will
properly recognize dates beyond December 31, 1999. The Company presently
believes that with modifications to existing software and conversions to new
software, the year 2000 issue will be mitigated. However, if such modifications
and conversions are not made, or are
34
<PAGE>
not completed in a timely manner, the year 2000 issue may have a material impact
on the operations of the Company. The Company has assessed the problem, has an
action plan in place with resources dedicated to resolution and the work is in
progress.
The Company will utilize both internal and external resources, reprogram,
or replace, and test the software for year 2000 modifications. The Company has
purchased and will be implementing new operational and accounting software which
is year 2000 compliant. Certain other software that was developed internally is
being reprogrammed. Other software purchased such as word-processing and
spreadsheet programs are guaranteed to be year 2000 compliant by the
manufacturers. We will test this software accordingly.
While the cost for the new operational and accounting software is material,
only a small portion of such cost is related to year 2000 programming. Other
costs to the Company related to year 2000 compliance will not be material.
Management has concluded that year 2000 procedures will be completed in a timely
fashion. It is not anticipated that the year 2000 issue will have a material
affect on future financial results.
The Company will initiate formal communications with all of its significant
insurance markets to determine the extent to which the Company is vulnerable to
those third parties' year 2000 concerns. It should be noted, however, that there
can be no guarantee that the systems of other companies will be timely
converted, or that their conversion will be comparable with information included
in the Company's systems, without having a material adverse effect on the
Company.
Safe Harbor Disclosure
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This SEC Form 10-K 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 general economic
conditions and cyclical industry conditions, 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", "expect", "anticipate", "project", "plan", 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.
35
<PAGE>
Item 8. Financial Statements and Supplementary Data
See page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.
Item 11. Executive Compensation
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.
36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial statements and schedules.
1. Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule II -- Condensed Financial Information of Registrant:
Balance Sheets at December 31, 1997 and 1996
Statements of Income for the years ended December 31, 1997, 1996,
and 1995
Statements of Cash Flows for the years ended December 31, 1997,
1996, and 1995
Notes to Condensed Financial Statements
Schedule IV -- Reinsurance for the years ended December 31, 1997,
1996, and 1995
Schedule VI -- Supplemental Information Concerning Property and
Casualty Insurance Operations for the years ended December 31, 1997,
1996, and 1995
37
<PAGE>
The information for Schedule I is contained in the Notes to the
Consolidated Financial Statements. The information for Schedule III is included
in Schedule VI. The information required for Schedule V is not applicable.
3. Exhibits:
Exhibit
Number Description
2 Acquisition Agreement, dated as of August 3, 1995, among Kaye Group
Inc. (formerly known as Old Lyme Holding Corporation), Kaye
International, L.P., certain individuals and Kaye Holding Corp.,( a
copy of which was filed with the Commission on March 31, 1995
(Registration No. 33-64664), and which is incorporated herein by
this reference).
3(i) Certificate of Incorporation of Kaye Group Inc. (formerly known as
Old Lyme Holding Corporation) (a copy of which was filed with the
Commission on June 17, 1993 as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-64664), and
which is incorporated herein by this reference).
3(ii) By-laws of Kaye Group Inc. (formerly known as Old Lyme Holding
Corporation) (a copy of which was filed with the Commission on June
17, 1993 as Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (Registration No. 33-64664), and which is incorporated
herein by this reference).
4.1 Form of certificate representing shares of Common Stock of the
Company (a copy of which was filed with the Commission on March 31,
1995 (Registration No. 33-64664), and which is incorporated herein
by this reference).
10.1 Kaye Group Inc. (formerly known as Old Lyme Holding Corporation)
1993 Stock Option Plan (a copy of which was filed with the
Commission on August 17, 1993 as Exhibit 10.6 to Amendment No. 3 to
the Company's Registration Statement on Form S-1 (Registration No.
33-64664), and which is incorporated herein by this reference).
10.1(i) Kaye Group Inc. Supplemental Stock Option Plan (a copy of which was
filed with the Commissioner on March 31, 1997) (Registration No.33-
64664), as Exhibit 10.1(i) to the Company's Form 10-K, and which is
incorporated herein by this reference).
38
<PAGE>
10.2 Registration Agreement among Kaye Group Inc. (formerly known as Old
Lyme Holding Corporation), Kaye International, L.P. and Old Lyme
Holdings of Rhode Island, Inc. (a copy of which was filed with the
Commission on August 17, 1993 as Exhibit 10.7 to Amendment No. 3 to
the Company's Registration Statement on Form S-1 (Registration No.
33- 64664), and which is incorporated herein by this reference).
10.11 Credit Agreement among Fleet National Bank ( formerly known as
Shawmut Bank Connecticut, N.A.) and Kaye Group Inc. (formerly known
as Old Lyme Holding Corporation) dated June 30, 1994 (a copy of
which was filed with the Commission on March 31, 1995 (Registration
No.33- 64664), as Exhibit 10.16 to the Company's Form 10-Q, and
which is incorporated herein by this reference).
10.12 First Amendment to the Credit Agreement, dated March 15, 1995 (a
copy of which was filed with the Commission on March 31, 1995 as
Exhibit 10.17 to the Company's Form 10-Q, and which is incorporated
herein by this reference).
10.13 Second Amendment to the Credit Agreement, dated May 19, 1995 (a copy
of which was filed with the Commission on June 30, 1995 as Exhibit
10.19 to the Company's Form 10-Q, and which is incorporated herein
by this reference).
10.14 Loan Agreement between Kaye International L.P. and Kaye Group Inc.
(formerly known as Old Lyme Holding Corporation, dated May 24, 1995
(a copy of which was filed with the Commission on June 30, 1995, as
Exhibit 10.18 to the Company's Form 10-Q, and which is incorporated
herein by this reference).
10.15 Credit Agreement between Kaye Holding Corp. and Fleet National Bank
(formerly known as Shawmut Bank Connecticut, N.A., dated October 2,
1995 (a copy of which was filed with the Commission on March 31,
1995, (Registration No.33-64664), as Exhibit 10.15 to the Company's
Form 10-K, and which is incorporated herein by this reference).
10.15(i) First Amendment to Credit Agreement between Kaye Holding Corp. and
Fleet National Bank (formerly known as Shawmut Bank Connecticut,
N.A., dated March 31, 1996 (a copy of which was filed with the
Commission on May 13, 1996, (Registration No.33-64664), as Exhibit
10.22 to the Company's Form 10-Q, and which is incorporated herein
by this reference).
39
<PAGE>
10.15(ii) Second Amendment to Credit Agreement between Kaye Holding Corp. and
Fleet National Bank (formerly known as Shawmut Bank Connecticut,
N.A.) (a copy of which was filed with the Commission on March 31,
1997, (Registration No.33-64664), as Exhibit 10.15(ii) to the
Company's Form 10-K, and which is incorporated herein by this
reference).
10.15(iii) Third amendment to Credit Agreement between Kaye Holding Corp. and
Fleet National Bank, dated September 30, 1997.
10.16 Stockholders Agreement among Kaye Holding Corp., Kaye International,
L.P., Kaye Group Inc., Howard Kaye, Lawrence Greenfield, Walter
Kaye, Stanley Feinberg, Bruce D. Guthart, Edward Berliner, Michel
Zaleski, Ned Sherwood and Marc N. Silverman, dated October 2, 1995,
(a copy of which was filed with the Commission on March 31, 1995,
(Registration No.33-64664), as Exhibit 10.16 to the Company's Form
10-K, and which is incorporated herein by this reference).
*10.17 Executive Employment Agreement between Kaye Group Inc. and Bruce D.
Guthart, dated as of January 2, 1997 (a copy of which was filed with
the Commission on March 31, 1997, (Registration No.33-64664), as
Exhibit 10.17 to the Company's Form 10-K, and which is incorporated
herein by this reference).
*10.18 Employment Agreement between Kaye Group Inc. and Michael P. Sabanos,
dated as of May 15, 1996 (a copy of which was filed with the
Commission on March 31, 1997, (Registration No.33-64664), as Exhibit
10.18 to the Company's Form 10-K, and which is incorporated herein
by this reference).
*10.20 Executive Employment Agreement between Kaye Insurance Associates,
Inc. and Richard Bass, dated as of October 31, 1991 (a copy of which
was filed with the Commission on March 31, 1997, (Registration
No.33- 64664), as Exhibit 10.20 to the Company's Form 10-K, and
which is incorporated herein by this reference).
*10.20(i) Amendment to Executive Employment Agreement between Kaye Insurance
Associates, Inc. and Richard Bass, dated as of December 11, 1995 (a
copy of which was filed with the Commission on March 31, 1997,
(Registration No.33-64664), as Exhibit 10.20 (i) to the Company's
Form 10-K, and which is incorporated herein by this reference).
40
<PAGE>
*10.21 Kaye Group Inc. Stock Performance Plan dated as of October 2, 1997.
(a copy of which was filed with the Commission on December 8, 1997,
as Annex B to Schedule 14(a), Information to the Company's Proxy
Statement, pursuant to Section 14(a), and which is incorporated
herein by this reference).
11 Statement regarding computation of earnings per share.
23 Consent of Independent Accountants
27 Financial Data Schedule
Location of Documents Pertaining to
Executive Compensation Plans and Arrangements
Name of Document Item in Exhibit Index
*Executive Compensation and Arrangement *
* Documents noted by "*" in exhibits
(b) Reports on Form 8-K
Exhibit
99.2 Kaye Group Inc. (the "Company") announced on October 28, 1997 the
merger of Kaye Holding Corp. into Kaye Group Inc. A press release
announcing the merger was issued by the Company on October 28, 1997.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Bruce D. Guthart
-------------------------------
Bruce D. Guthart, Chairman
Dated: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Bruce D. Guthart Director, Chairman, President
- ----------------------- Chief Executive Officer
Bruce D. Guthart (Principal Executive Officer) March 27, 1998
/s/ Howard Kaye Director March 27, 1998
- -----------------------
Howard Kaye
/s/ Michael P. Sabanos Director, Senior Vice President,
- ----------------------- Chief Financial Officer (Principal
Michael P. Sabanos Financial Officer and Accounting
Officer) March 27, 1998
/s/ Robert Barbanell Director March 27, 1998
- -----------------------
Robert Barbanell
/s/ Richard Butler Director March 27, 1998
- -----------------------
Richard Butler
/s/ David Ezekiel Director March 27, 1998
- -----------------------
David Ezekiel
/s/ Elliot Cooperstone Director March 27, 1998
- -----------------------
Elliot Cooperstone
/s/ Ned Sherwood Director March 27, 1998
- -----------------------
Ned Sherwood
42
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Index to Notes to Consolidated Financial Statement F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets at December 31, 1997
and 1996 F-4
Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996
and 1995 F-8
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996
and 1995 F-9
Notes to Consolidated Financial Statements F-10
Financial Statement Schedules:
Schedule II - Condensed Financial Information of Registrant:
Balance Sheets at December 31, 1997 and 1996 F-38
Statements of Income for the years ended
December 31, 1997, 1996 and 1995 F-39
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-40
Notes to Condensed Financial Statements F-41
Schedule IV - Reinsurance for the years ended
December 31, 1997, 1996 and 1995 F-42
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations for the
years ended December 31, 1997, 1996 and 1995 F-43
The information for Schedule I is contained in the Notes to the Consolidated
Financial Statements. The information for Schedule III is included in Schedule
VI. The information required for Schedule V is not applicable.
F-1
<PAGE>
INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Footnote Description Page
- -------- ----------- ----
1 Business F-10
2 Organization and Basis of Presentation F-12
3 Significant Accounting Policies F-13
4 Changes in Accounting Policies F-18
5 Funds Held in Fiduciary Capacity F-18
6 Investments F-19
7 Notes Payable F-22
8 Income Taxes F-23
9 Lease Commitments and Rentals F-25
10 Pension and Retirement Plans F-26
11 Management Services Agreement F-26
12 Contingent Liabilities F-27
13 Reinsurance F-27
14 Losses and Loss Expenses F-29
15 Statutory Financial Information and Dividend Restrictions F-29
16 Related Party Transactions F-31
17 Acquisitions F-31
18 Preferred Stock F-31
19 Common Stock Warrants and Dividends Declared F-32
20 Stock Performance and Stock Option Plans F-32
21 Quarterly Financial Information (Unaudited) F-34
22 Premiums F-35
23 Business Segments F-35
24 Supplemental Cash Flow Disclosures F-37
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kaye Group Inc.:
We have audited the accompanying consolidated financial statements and the
financial statement schedules of KAYE GROUP INC. listed in the index on page F-1
of this Form 10-K. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KAYE GROUP INC. as
of December 31, 1997 and 1996, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedules referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information required
to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 25, 1998
F-3
<PAGE>
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1997 1996
======== ========
<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 $22,322 and $23,879) $24,833 $24,789
Premiums and other receivables 32,790 56,255
Prepaid expenses and other assets 1,385 1,587
-------- --------
Total current assets 59,008 82,631
Fixed assets (net of accumulated depreciation of $4,553 and $7,646) 3,145 2,349
Expiration lists (net of accumulated amortization of $1,969 and $1,600) 4,702 2,092
Deferred income taxes 966 1,354
Other assets 181 237
-------- --------
Total assets - insurance brokerage companies 68,002 88,663
-------- --------
PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
Fixed maturities, at market value (amortized cost: 1997, $40,771;
1996, $39,216) 41,313 39,145
Equity securities, at market value (cost:1997, $1,629; 1996, $2,246) 1,767 2,316
Short term investments, at cost, which approximates market value 3,430 1,336
-------- --------
Total investments 46,510 42,797
Cash and cash equivalents 6,409 2,714
Accrued interest and dividends 882 969
Premiums receivable 2,344 4,079
Premiums receivable - insurance brokerage companies 3,185 2,904
Prepaid reinsurance premiums 262 283
Reinsurance recoverable on unpaid losses and loss expenses 2,811 882
Funds held under deposit contracts, at market value (amortized cost:
1997, $173; 1996, $3,842) 173 3,847
Deferred acquisition costs 3,939 4,073
Deferred income taxes 379 639
Other assets 1,810 2,266
Intercompany receivable 556
-------- --------
Total assets - property and casualty companies 68,704 66,009
-------- --------
CORPORATE
Cash and cash equivalents 65 456
Prepaid expenses and other assets 107 443
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 41 9
Intercompany receivable 3,664
-------- --------
Total assets - corporate 4,319 1,430
-------- --------
Total assets $141,025 $156,102
======== ========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1997 1996
========= =========
<S> <C> <C>
LIABILITIES:
INSURANCE BROKERAGE COMPANIES
Current liabilities:
Premiums payable $40,872 $63,081
Premiums payable - property and casualty companies 3,185 2,904
Accounts payable and accrued liabilities 7,983 6,074
Notes payable 434 595
Deferred income taxes 1,063 1,122
Intercompany payable 3,342 344
--------- ---------
Total current liabilities 56,879 74,120
Notes payable 654 537
Note payable - KILP 6,000
Other liabilities 1,466
--------- ---------
Total liabilities-insurance brokerage companies 58,999 80,657
--------- ---------
PROPERTY AND CASUALTY COMPANIES
Liabilities:
Unpaid losses and loss expenses 19,126 15,227
Unearned premium reserves 12,578 13,176
Deposit contracts 122 3,448
Accounts payable and accrued liabilities 6,661 4,991
Reinsurance payable 228 170
Intercompany payable 322
--------- ---------
Total liabilities - property and casualty companies 39,037 37,012
--------- ---------
CORPORATE
Current liabilities:
Accounts payable and accrued liabilities 774 704
Intercompany payable 212
Note payable 1,875 850
Income taxes payable 16 95
--------- ---------
Total current liabilities 2,665 1,861
Note payable-long-term 5,156 6,250
--------- ---------
Total liabilities-corporate 7,821 8,111
--------- ---------
Total liabilities 105,857 125,780
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN EQUITY OF
KAYE HOLDING CORP 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;
1997, 8,474; 1996, 7,020 shares issued and outstanding 85 70
Paid - in capital 17,942 7,776
Appreciation (depreciation) of investments available-for-sale, net of
deferred income tax liability (benefit) ( 1997, $192; 1996, ($16)) 373 (31)
Retained earnings 16,768 17,169
--------- ---------
Total stockholders' equity 35,168 24,984
--------- ---------
Total liabilities and stockholders' equity $141,025 $156,102
========= =========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
======== ======== ========
<S> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees - net $27,294 $27,201 $31,142
Commissions and fees - net - Property and Casualty Companies 3,830 3,368 2,800
Interest and dividends 1,565 1,026 1,028
-------- -------- --------
Total revenues 32,689 31,595 34,970
-------- -------- --------
Expenses:
Salaries and benefits 18,868 18,569 21,125
Other operating expenses 12,654 13,621 13,951
-------- -------- --------
Total operating expenses 31,522 32,190 35,076
-------- -------- --------
Interest expense 400 600 600
-------- -------- --------
Income (loss) before income taxes-insurance brokerage companies 767 (1,195) (706)
-------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 22,270 20,689 15,160
Change in unearned premiums 577 (1,362) 1,685
-------- -------- --------
Net premiums earned 22,847 19,327 16,845
Net investment income 2,692 2,461 2,819
Net realized gains on investments 21 72 1
Other income 245 445 795
-------- -------- --------
Total revenues 25,805 22,305 20,460
-------- -------- --------
Expenses:
Losses and loss expenses 8,716 7,036 4,850
Acquisition costs and general
and administrative expenses 9,370 8,218 6,928
-------- -------- --------
Total expenses 18,086 15,254 11,778
-------- -------- --------
Income before income taxes-property and casualty companies 7,719 7,051 8,682
-------- -------- --------
CORPORATE
Revenues:
Net investment income 55 89 17
-------- -------- --------
Expenses:
Other operating expenses 438 220 133
Cost of combining operations 863
-------- -------- --------
Total operating expenses 438 220 996
-------- -------- --------
Interest expense 548 514 688
-------- -------- --------
Net expenses before income taxes-corporate (931) (645) (1,667)
-------- -------- --------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
======= ======= =======
<S> <C> <C> <C>
Income before minority interest and income taxes $7,555 $5,211 $6,309
------- ------- -------
Provision for income taxes:
Current 1,921 364 1,276
Deferred 346 1,120 1,689
Tax effect of change in tax status (2,944)
------- ------- -------
Total income taxes 2,267 1,484 21
------- ------- -------
Income before minority interest 5,288 3,727 6,288
Minority interest 931 656 1,107
------- ------- -------
Net income $4,357 $3,071 $5,181
======= ======= =======
EARNINGS PER SHARE
Basic $0.62 $0.44 $0.74
======= ======= =======
Diluted $0.62 $0.44 $0.74
======= ======= =======
PRO FORMA NET INCOME
Income before minority interest and income taxes $7,555 $5,211 $6,309
Provision for income taxes/charge in lieu of income taxes 2,267 1,484 1,995
------- ------- -------
Income before minority interest 5,288 3,727 4,314
Minority interest 931 656 759
------- ------- -------
Net income $4,357 $3,071 $3,555
======= ======= =======
PRO FORMA EARNINGS PER SHARE
Basic $0.62 $0.44 $0.51
======= ======= =======
Diluted $0.62 $0.44 $0.51
======= ======= =======
Weighted average of shares outstanding - basic 7,024 7,020 7,020
======= ======= =======
Weighted average shares outstanding and
share equivalents outstanding - diluted 7,083 7,021 7,023
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
======== ======== ========
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,357 $3,071 $5,181
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs 134 (370) 826
Amortization of bond premium - net 650 751 430
Deferred income taxes 346 1,120 (1,268)
Net realized (gains) losses on investments (21) (72) 47
Depreciation and amortization expense 1,667 2,000 1,999
Minority interest 931 656 1,107
Change in assets and liabilities:
Accrued interest and dividends 87 22 (102)
Premiums and other receivables 23,011 19,217 11,426
Prepaid expenses and other assets (1,785) 760 (1,043)
Unpaid losses and loss expenses 3,899 2,556 (1,447)
Unearned premium reserves (598) 1,362 (1,685)
Premiums payable (21,870) (14,865) (13,639)
Income taxes payable (79) 1,356 (2,221)
Accounts payable and accrued liabilities 5,116 (767) 972
-------- -------- --------
Net cash provided by operating activities 15,845 16,797 583
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available-for-sale :
Purchase of fixed maturities (11,907) (14,291) (12,506)
Purchase of equity securities (500) (825) (45)
Purchase of short term investments (2,094) (2,450)
Maturities of fixed maturities 4,487 3,318 1,755
Sales of fixed maturities 5,297 8,707 9,635
Sales of equity securities 1,100 201
Sales of short term investments 1,814
Funds held under deposit contracts
Purchase of fixed maturities (976) (469) (1,650)
Sales (purchases) of short term investments 2,344 (815) 2,199
Sales of fixed maturities 1,851 2,535 2,922
Maturities of fixed maturities 452 480 829
Purchase of fixed assets (1,481) (888) (396)
Purchase of expiration list (777)
-------- -------- --------
Net cash provided by (used in) investing activities (2,204) (434) 494
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under deposit contracts (3,326) (1,553) (4,007)
Notes payable-repayment (6,757) (416) (6,145)
Proceeds from borrowings 642 553 7,268
Payment of dividends (702) (702) (702)
Payment of dividends to minority shareholders (150) (150)
Increase in net advances from KILP (392)
-------- -------- --------
Net cash used in financing activities (10,293) (2,268) (3,978)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,348 14,095 (2,901)
Cash and cash equivalents at beginning of period 27,959 13,864 16,765
-------- -------- --------
Cash and cash equivalents at end of period $31,307 $27,959 $13,864
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996, and 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock
---------------------- Unrealized Minimum Total
Outstanding Par Paid-In Appreciation/ Pension Retained Stockholders'
Shares Value Capital (Depreciation) Liability Earnings Equity
----------- ----- ------- -------------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 7,020 $70 $38,588 ($1,220) ($404) ($20,358) $16,676
Change in unrealized appreciation,
net of deferred
income tax of ($750) 1,456 1,456
Net income 5,181 5,181
Decrease in net advances from KILP (133) (133)
Dividends declared (per share-$0.10) (702) (702)
Effect of combining operations (30,679) 30,679 0
Minimum pension liability 404 404
----- --- ------- ------- ----- -------- -------
Balance, December 31, 1995 7,020 70 7,776 236 0 14,800 22,882
Change in unrealized depreciation,
net of deferred
income tax benefit of $138 (267) (267)
Net income 3,071 3,071
Dividends declared (per share-$0.10) (702) (702)
----- --- ------- ------- ----- -------- -------
Balance, December 31, 1996 7,020 70 7,776 (31) 0 17,169 24,984
Change in unrealized appreciation,
net of deferred
income tax of ($174) 338 338
Net income 4,357 4,357
Dividends declared (per share-$0.10) (702) (702)
Shares issued to purchase minority
interest, net of
deferred income tax of $34 1,454 15 10,166 66 (4,056) 6,191
----- --- ------- ------- ----- -------- -------
Balance, December 31, 1997 8,474 $85 $17,942 $373 $0 $16,768 $35,168
===== === ======= ======= ===== ======== =======
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997, 1996, and 1995
1) Business
Kaye Group Inc. (the "Company") a Delaware corporation, formerly Old Lyme
Holding Corporation ("Holding"), is a holding company which, through its
subsidiaries, is engaged in a broad range of insurance brokerage, underwriting
and related activities. The Company operates in two insurance business segments
- - the Insurance Brokerage Companies Operations ("Brokerage Operations"),
comprised of the Retail Brokerage Business and the Program Brokerage Business,
and the Property and Casualty Companies Operations.
In addition, Corporate Operations include those activities that benefit the
Company in its entirety and cannot be specifically identified to either the
Insurance Brokerage Companies or the Property and Casualty Companies Operations.
Such activities include debt servicing and public company expenses, including
investor relations costs.
Insurance Brokerage Companies Operations
The Retail Brokerage Business operates an insurance brokerage business through
four subsidiaries of the Company, the "Retail Brokerage Companies". It offers
commercial clients a full range of insurance brokerage services including
procurement of property/casualty insurance, risk management consulting, bonding,
insurance coverage loss prevention engineering, and group employee benefit
consulting services. In addition, personal lines and life and health insurance
coverage are placed on behalf of individuals.
The Retail Brokerage Business' primary strategy is to service middle market
companies and organizations just below the Fortune 500 level for which other
national brokers intensely compete. Within this market, the Retail Brokerage
Business has developed particular expertise and knowledge of the risks facing a
number of industry sectors including health care, real estate, manufacturing,
churches, law firms, homes for the aged and fine arts.
During 1997, the Retail Brokerage Business serviced approximately 10,000
insureds. The Retail Brokerage Business is compensated for its services
primarily in the form of commissions paid by insurance companies. The commission
is usually a percentage of the premium paid by the insured. Commission rates
depend upon the type of insurance, the particular insurance company, and the
role in which the Retail Brokerage Business acts. In some cases a commission is
shared with other agents or brokers who have acted jointly with the Retail
Brokerage Business in connection with the transaction. The Retail Brokerage
Business may also receive from an insurance company a contingent commission that
is generally based on the profitability and volume of business placed with it by
the Retail Brokerage Business over a given period of time. The Retail Brokerage
Business
F-10
<PAGE>
may also receive fees in connection with consulting services relating to the
marketing of insurance.
Program Brokerage Corporation or "PBC" (the Program Brokerage Business) is a
subsidiary of the Company and operates a wholesale insurance brokerage business
which offers retail insurance agents and brokers innovative solutions to the
twin insurance problems of price and availability of coverage. It accomplishes
this by organizing pools of similar risks into specially designed Affinity Group
Insurance Programs (the "Programs").
Approximately two thirds of PBC's premium volume is generated by approximately
400 unrelated retail insurance agents and brokers serving approximately 4,300
insureds during 1997. The remaining one third is derived from the Retail
Brokerage Business. Approximately half of PBC's premium volume is directly or
indirectly placed with two affiliates, Old Lyme Insurance Company of Rhode
Island, Inc. ("OLRI") and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB").
Property and Casualty Companies Operations
The Company conducts its property and casualty underwriting business through two
insurance company subsidiaries (the "Insurance Companies"), OLRI and OLB. OLRI
is a property and casualty insurance company licensed in Rhode Island and
eligible as a surplus lines insurer in New York and New Jersey. OLB is a
property and casualty insurance company organized and licensed under the laws of
Bermuda. In states where the Insurance Companies are not admitted insurers or
surplus lines insurers, the Insurance Companies underwrite risks through various
reinsurance agreements.
The Insurance Companies underwrite property risks (loss or physical damage to
property) and OLRI underwrites casualty risks (legal liability for personal
injury or damaged property of others) for insureds in the United States.
Insurance is sold principally through the Programs marketed by PBC which insure
various types of businesses and properties that have similar risk
characteristics, such as apartments, condominiums, cooperatives, restaurants,
building maintenance companies, churches, funeral homes and pharmacies, among
others.
The Insurance Companies' strategy is to underwrite only the first "layer" of the
property and casualty insurance provided under the Programs. Its exposure to
individual insureds on individual losses is thereby generally limited to between
$1,000 and $25,000 per claim (inclusive of allocated loss expenses), depending
on the Program. Under the Programs, the Insurance Companies' policies are sold
in conjunction with policies issued by unaffiliated Program insurers that
provide coverage for losses above the first layer of risk underwritten by the
Insurance Companies. In addition, the Insurance Companies have issued policies
on a selected basis with limits up to $1,000,000, retaining the first $50,000 of
exposure and reinsuring the remaining limits with an unaffiliated reinsurer.
F-11
<PAGE>
Property and Casualty Companies Operations includes Claims Administration
Corporation ("CAC"), a subsidiary of the Company which is responsible for the
administration of a large majority of the claims submitted to the Insurance
Companies. The administration of claims includes investigation, engagement of
legal counsel, approval of settlements and the making of payments to, or on
behalf of insureds. CAC also provide claims administration service to the
unaffiliated Program insurers for a fee.
2) Organization and Basis of Presentation
In 1994 the Retail Brokerage Business completed the integration of its 1992
acquisition of Amalgamated Programs Corporation and related entities
("Amalgamated") and continued to downsize to adjust to the continuing "soft
market" in property and casualty premium rates. At the time, the officers of the
general partners of Kaye International L.P. ("KILP") (which included members of
Holding's Board of Directors) concluded that the combination of Holding and the
Retail Brokerage Business would be advantageous for both OLRI and KILP. This
conclusion was based on three factors: (a) improved operating results derived
from the Amalgamated integration and "soft market" downsizing, (b) the improved
outlook for the Retail Brokerage Business and (c) the fact that the Retail
Brokerage Business accounted for approximately half of the PBC's premium volume.
The combination was effective October 2, 1995 and was accounted for as a
transfer and exchange between companies under common control. Accordingly, the
assets and liabilities of the Retail Brokerage Business were combined with those
of Holding at their historical cost in a manner similar to a "pooling of
interests". The combination was accomplished as follows:
1. Holding transferred to Kaye Holding Corp. ("KHC") all of the outstanding
stock of the Insurance Companies and its two other subsidiaries, PBC and CAC and
its other assets in exchange for (i) 82,400 shares of KHC common stock,
representing 82.4% of the total outstanding KHC common stock, and (ii) the
assumption by KHC of certain of Holding's liabilities.
2. KILP transferred all of its interest in the limited partnerships
conducting the Retail Brokerage Business (the "Retail Partnerships") and certain
related assets to KHC in exchange for (i) 17,200 shares of KHC common stock,
representing 17.2% of the total outstanding KHC common stock, and (ii) the
assumption by KHC of certain KILP liabilities.
3. Certain individuals transferred to KHC all of their interests in the
corporate general partners of the Retail Partnerships (the "Retail Brokerage
Companies") in exchange for 400 shares of KHC common stock, representing 0.4% of
the total outstanding KHC common stock.
4. KHC contributed its interests in the Retail Partnerships to the Retail
Brokerage Companies thereby causing the dissolution of the Retail Partnerships.
As a result, the
F-12
<PAGE>
Retail Brokerage Companies, as a group, own all of the assets and are subject to
all of the liabilities, of the Retail Brokerage Business.
On December 30, 1997, the stockholders of the Company approved a restructuring
that merged KHC into the Company. This eliminated KILP's minority interest in
KHC of $6,191,000 at December 31, 1997 and increased stockholders' equity of the
Company by the same amount. KILP is the Company's largest shareholder. The
merger was accounted for as a transfer and exchange between entities under
common control. Accordingly, common stock of Kaye Group Inc. issued in exchange
for the KHC shares was accounted for by using the closing NASDAQ market price on
(the effective date of the merger) October 24, 1997 ($7.00). This increased the
number of shares of common stock by 1,454,435 at the par value $.01, per share,
or $14,544. Paid-in capital was increased by $10,166,000 which was the
difference between the market value price per share and the par value per share.
Minority interest in KHC was eliminated as a result of the merger and retained
earnings of Kaye Group Inc. was reduced to account for the difference between
the market value of the shares issued, and the book value of the minority
interest in KHC.
3) Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") and include
the accounts of the Company for all periods presented and restated effective in
1995 to give effect to the combination as a transfer and exchange between
companies under common control. Accordingly, the assets and liabilities of the
Retail Brokerage Business have been combined with Holding at the historical
costs in a manner similar to a pooling of interests. The historical Consolidated
Financial Statements reflect the combination as if the pooling of interests was
consummated at the beginning of the earliest year presented and give retroactive
effect to the restructuring for all periods prior to the IPO. All significant
intercompany balances and transactions within segments have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Effective upon the closing of the October 2, 1995 combination (see Note 2), the
entities comprising the Retail Brokerage Business ceased being either limited
partnerships or S corporations and became taxable corporations (see Note 8 ).
Accordingly, the accumulated deficit of the Retail Brokerage Business at October
1, 1995 of $30,679,000 was reclassed to paid-in capital, and a deferred tax
benefit of $2,944,000 was recorded as the tax effect of the change in tax status
in the accompanying 1995 Consolidated Statement of Income (see Note 8).
F-13
<PAGE>
The accompanying consolidated financial statements have been prepared on a
segmented basis. See Note 1 for segments and their respective operations.
Income (loss) before income taxes of the two operating segments includes
expenses incurred by Corporate on behalf of the segments, which are allocated to
operations of the segments. The allocation is based upon total revenues of each
segment except for the allocation of the incentive bonus which is allocated
based on the percentage of profits contributed to the Company.
Identifiable assets by segment are those assets used in the Company's operations
in each business segment. Corporate assets are principally cash and cash
equivalents and investments in equity securities.
Certain prior year information has been reclassified to conform with the 1997
presentation.
(b) Commission Income
Commission income together with the related accounts receivable from clients and
premiums payable to insurance carriers, is recorded principally as of the
billing date. Commission income related to installment billing arrangements is
recorded at the date of the initial billing. Contingent commissions, commissions
on premiums billed directly by insurance carriers and commission adjustments
(including cancellations) are recorded when collected or known.
(c) Fixed Assets
Furniture, equipment, computer hardware and software, and leasehold improvements
are carried at cost, less accumulated depreciation and amortization computed
using the straight-line method. Fixed assets are depreciated over periods
ranging from three to seven years, and leasehold improvements are amortized over
the remaining terms of the leases which expire commencing 1997 through 2001.
(d) Intangible Assets
Acquired expiration lists are carried at cost, less accumulated amortization
which is computed using the straight-line method over a period of not more than
fifteen years. Corporate organizational costs are carried at cost, less
accumulated amortization and are amortized using the straight-line method over a
period of five years. Such costs were fully amortized at December 31, 1996.
F-14
<PAGE>
(e) Investments
Fixed maturity securities, funds held under deposit contracts and equity
securities, which include common and preferred stocks, are stated at market
value. The difference between the cost and market value of fixed maturity and
equity securities is reflected as unrealized appreciation or depreciation, net
of applicable deferred income taxes, as a separate component of stockholders'
equity. Realized gains or losses from the sale of investments are determined on
the basis of specific identification and are reflected as a component of
revenues. Investment income is recognized when earned.
The fair value of fixed maturities is based on the closing price of the
investments on December 31. The fair value of equity securities is based on the
closing sale price on December 31.
If a decline in fair value of an investment is considered to be other than
temporary, the investment is reduced to its net realizable value and the
reduction is accounted for as a realized investment loss. In evaluating whether
a decline is other than temporary, management considers the duration and extent
to which the market value has been less than cost, the financial condition and
near-term prospects of the issuer, including events that may impact the issuer's
operations and impair the earnings potential of the investment, and management's
ability and intent to hold an investment for a sufficient period to allow for an
anticipated recovery in fair value.
(f) Insurance Premiums Earned
Insurance premiums are recognized as revenues ratably over the terms of the
related policies in force. Unearned premiums are established to cover the
unexpired portion of premiums written and are calculated using the daily pro
rata method. Premiums earned are net of reinsurance ceded.
(g) Deferred Acquisition Costs
Deferred acquisition costs represent costs to acquire or renew insurance
policies or contracts and are deferred and amortized over the applicable premium
recognition period, generally one year. These deferred costs have been limited
to the amount expected to be recovered from future earned premiums. Acquisition
costs of $7,269,000, $6,086,000, and $5,193,000 were amortized to expense in
1997, 1996 and 1995, respectively.
(h) Unpaid Losses and Loss Expenses
The estimated liability for unpaid losses and loss expenses is based on an
evaluation of claims reported by policyholders. A provision, which is based on
historical experience and modified for current trends, is also included for
losses and loss expenses which have been incurred but not reported. The methods
of determining such estimates and establishing the
F-15
<PAGE>
resulting reserves are continually reviewed and modified to reflect current
conditions, and any adjustments are reflected currently in results of
operations.
The Company has received claims related to lead paint exposures it insures under
various residential real estate programs. There are uncertainties in estimating
the amount of reserves due to factors including: difficulty in properly
allocating responsibility and/or liability for the lead paint exposure; changes
in the underlying laws and the judicial interpretation of those laws; questions
regarding the interpretation and application of insurance and reinsurance
coverage. The Company has reserves established for these claims on a case basis
and an incurred but not reported basis. The reserves provided were established
based on Management's estimate of ultimate liabilities. However, due to the
nature of the exposures such reserves cannot be, and are not established using
standard actuarial techniques.
(i) Reinsurance
Assumed reinsurance premiums written, commission, and unpaid losses are
accounted for based principally on the reports received from the ceding
insurance companies and in a manner consistent with the terms of the related
reinsurance agreements. Liabilities for unpaid losses, loss expenses and
unearned premiums are stated gross of ceded reinsurance recoverables. Deferred
acquisition costs are stated net of the amounts of reinsurance ceded, as are
premiums written and earned, losses and loss expenses incurred, and amortized
acquisition costs. Assumed reinsurance contracts which do not involve the
transfer of risk to the Company are recorded as deposit contracts (see Note 13).
(j) Income Taxes
The Company recognizes deferred tax assets or liabilities for temporary
differences between the financial reporting and tax basis of assets and
liabilities based on enacted tax rates. The principal temporary differences
relate to deferred acquisition costs, unearned premiums, discount for tax
purposes of the unpaid losses and loss expense reserves, amortization of
expiration lists and deferred compensation, accrual adjustment for commission
income and unrealized gains or losses on investments (see Note 8).
(k) Cash and Cash Equivalents
Cash and cash equivalents include money market funds and certificates of
deposit, including funds held in a fiduciary capacity for Insurance Brokerage
Companies, with a maturity of three months or less.
(l) Pro forma Net Income
Prior to the Transaction certain entities were partnerships or S Corporations
under the Internal Revenue code and therefore not liable for Federal income
taxes. Also, OLB, as a Bermuda domiciled company, was not liable for income
taxes. The charge in lieu of
F-16
<PAGE>
income taxes information is presented as if the income of these entities were
taxed to those entities rather than to partners or stockholders not otherwise
included in the Company's consolidated group.
(m) Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128 Earnings Per Share which requires an
enterprise to present basic and diluted earnings per share on the face of the
income statement. Basic earnings per share, which is calculated by dividing net
income by the weighted average number of common shares outstanding, replaces
primary earnings per share from the prior standard. For all periods previously
reported by the Company, basic earnings per share is the same as primary
earnings per share, since the impact of the Company's common stock equivalents
for those periods did not reach the significance threshold prescribed to require
adjustment under the prior standard. Diluted earnings per share include the
effect of all potentially dilutive securities.
Earnings per common share has been computed below in accordance with SFAS No.
128, based upon weighted average common and dilutive shares outstanding (in
thousands, except per share accounts):
1997 1996 1995
---- ---- ----
Net income (numerator) $4,357 $3,071 $5,181
------ ------ ------
Pro Forma net income (numerator) $4,357 $3,071 $3,555
------ ------ ------
Weighted average common shares and effect
of dilutive shares used in the
computation of earnings per share:
Average shares outstanding-basic
(denominator) 7,024 7,020 7,020
Effect of dilutive shares 59 1 3
------ ------ ------
Average shares outstanding - diluted
(denominator) 7,083 7,021 7,023
------ ------ ------
Earnings per common share:
Basic $0.62 $0.44 $0.74
Diluted $0.62 $0.44 $0.74
Pro Forma earnings per share
Basic $0.62 $0.44 $0.51
Diluted $0.62 $0.44 $0.51
Options and the warrant to purchase 284,000, 419,000, and 300,000 common shares
at prices from $7.06 to $11.63, $7.06 to $11.63, and $9.75 to $11.63 per share
were outstanding at December 31, 1997, 1996, and 1995, respectively, but were
not included in the computation of earnings per diluted share for the respective
years, because the options' exercise price was greater than the average market
price of the common
F-17
<PAGE>
shares. The options, which expire through December 31, 2007, December 27, 2006,
and October 20, 2005, respectively, were still outstanding at the end of 1997.
4) Changes in Accounting Policies
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
statement establishes standards for the reporting and display of comprehensive
income and its components in the consolidated financial statements. The purpose
of reporting comprehensive income is to report the change in equity of a
business enterprise for the period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. These items include currency translation adjustments and unrealized
appreciation of investments, which are currently reported as separate components
of equity in the balance sheet. The statement is effective in 1998 and will
change the presentation of information in the financial statements but will not
have any effect on the financial position or results from operations of the
Company.
Also in June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. This statement requires that companies
report certain information about their operating segments in the financial
statements including, information about the products and services from which
revenues are derived, the geographic areas of operations, and information about
major customers. Operating segments are determined by the way management decides
how to allocate resources and how it assesses performance. Descriptive
information about the method used to identify the reportable operating segments
must also be disclosed. The statement also requires a reconciliation of
revenues, net income, and assets and other amounts disclosed for the segments to
the corresponding amounts in the consolidated financial statements. The
statement is effective for year end 1998 and is not expected to change the
Company's current segmentation of its business. The financial position and
operating results of the company will not be affected by this statement.
5) Funds Held in Fiduciary Capacity
Premiums collected by the Insurance Brokerage Companies but not yet remitted to
insurance carriers are approximately $22,322,000 and 23,879,000 at December 31,
1997 and 1996 respectively, some of which 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.
F-18
<PAGE>
6) Investments
Net investment income for the years ended December 31, 1997, 1996 and 1995 is
derived from the following sources (in thousands):
1997 1996 1995
------- ------- -------
Insurance Brokerage Companies
Short term investments $1,565 $1,026 $1,028
------- ------- -------
Property and Casualty Companies
Fixed maturities 2,083 2,099 2,373
Equity securities 119 114 115
Short term investments 382 82 207
Other 143 191 185
------- ------- -------
Total Investment income 2,727 2,486 2,880
Investment expenses (35) (25) (61)
------- ------- -------
2,692 2,461 2,819
------- ------- -------
Corporate
Short term investments 55 89 65
------- ------- -------
Net investment income $4,312 $3,576 $3,912
======= ======= =======
Net realized gains or losses and the increase or decrease in unrealized
appreciation (depreciation) on investments for the years ended December 31,
1997, 1996 and 1995 are summarized below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net realized gains (losses):
Fixed maturities:
Gross realized gains $26 $82 $112
Gross realized losses (5) (10) (167)
------- ------- -------
21 72 (55)
------- ------- -------
Equity securities - Gross realized gains 8
------- ------- -------
Net realized gains (losses) on investments $21 $72 $(47)
======= ======= =======
Change in unrealized appreciation
(depreciation):
Fixed maturities $608 $(543) $2,656
Equity securities 14 48 26
------- ------- -------
Net change in unrealized appreciation
(depreciation) $622 $(495) $2,682
======= ======= =======
</TABLE>
F-19
<PAGE>
The composition, cost (amortized cost for fixed maturities) and estimated market
values of the Company's investments at December 31, 1997 and 1996 are presented
below. Equity security investments with a cost of $36,000 and a fair value of
$19,000 are included in other assets of the Insurance Brokerage Companies in the
accompanying consolidated balance sheet at December 31, 1996.
<TABLE>
<CAPTION>
Gross Unrealized Holding Aggregate
-------------------------- Fair
Cost Gains Losses Value
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
1997
Investments available for sale:
Fixed Maturities:
U.S. Government (a) $3,641 $10 $(24) $3,627
States (b) 34,013 591 (3) 34,601
Corporate 3,117 16 (48) 3,085
------- ------- ------- -------
Total fixed maturities $40,771 $617 $(75) $41,313
------- ------- ------- -------
Equity Securities:
Common Stock $703 111 $(115) $699
Preferred Stock 1,483 27 1,510
------- ------- ------- -------
Total equity securities $2,186 $138 $(115) $2,209
------- ------- ------- -------
Funds held under deposit contracts
- Cash and cash equivalents $173 $173
------- ------- -------
1996
Investments available for sale:
Fixed Maturities:
U.S. Government (a) $6,167 $98 $(80) $6,185
States (b) 31,231 213 (252) 31,192
Corporate 1,827 34 (84) 1,777
------- ------- ------- -------
Total fixed maturities $39,225 $345 $(416) $39,154
------- ------- ------- -------
Equity Securities:
Common Stock $145 $56 $201
Preferred Stock 2,694 14 $(61) 2,647
------- ------- ------- -------
Total equity securities $2,839 $70 $(61) $2,848
------- ------- ------- -------
Funds held under deposit contracts:
Fixed Maturities
U.S. Government (a) $517 $5 $522
States (b) 507 507
Corporate 300 300
------- ------- -------
Total fixed maturities 1,324 5 1,329
Cash and cash equivalents 2,518 2,518
------- ------- -------
Total funds held under deposit contracts $3,842 $5 $3,847
======= ======= =======
</TABLE>
(a) Includes U.S. Government agencies and authorities
(b) Includes municipalities and subdivisions
F-20
<PAGE>
The amortized cost and estimated market value of fixed maturities at December
31, 1997, by contractual maturity date, are listed below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
Investments Available
for Sale
-------------------------------
(in thousands)
Amortized Aggregate Fair
Cost Value
--------- --------------
Due in one year or less $3,602 $3,585
Due after one year through five years 15,341 15,594
Due after five years through ten years 19,255 19,520
Due after ten years 2,573 2,614
------- -------
Total $40,771 $41,313
======= =======
Fixed maturities, equity securities, and cash carried at market value of
$3,511,000, and $3,417,000 in 1997 and 1996, respectively, were on deposit with
governmental authorities, as required by law. Fixed maturity investments and
cash equivalents carried at market value of $11,733,000 and $6,670,000 in 1997
and 1996, respectively, have been deposited in trust funds or pledged to
collateralize the obligations of OLB and OLRI to ceding companies under
reinsurance agreements, including intercompany reinsurance agreements, and to
policy holders under policies (see Note 13).
The Company's short term investment of cash is maintained principally with five
banks and an institutional money market fund. To control this risk, the Company
utilizes only high credit quality financial institutions. Additionally, under
the insurance laws of the State of Rhode Island, where OLRI is domiciled,
insurers and reinsurers are restricted as to the types of investments they may
purchase and the concentration of risk they may accept in any one issuer or
group of issuers. The Company complies with such laws which insure that the
concentration of risk in its investment portfolio is at an acceptable and
authorized level.
F-21
<PAGE>
7) Notes Payable
Notes payable consist of the following in thousands at December 31,:
1997 1996
------ ------
Insurance Brokerage:
Finance company notes, due through 2000, interest at
prime rate plus 1/2% $179 $578
Finance company notes, due through 2002, interest at 7.75% 546
Capital lease due through 8/30/99, interest at 7.375% 363 554
Subordinated promissory note payable to KILP,
due the later of 8/30/97 or 30 days after repayment of
the revolving line of credit 6,000
------ ------
1,088 7,132
Less current portion 434 595
------ ------
Notes payable - long term $654 $6,537
====== ======
Corporate:
Revolving line of credit, due through 2001
interest at 5.9375% plus 2.5% $7,031 $7,100
Less current portion 1,875 850
------ ------
Notes payable - long term $5,156 $6,250
====== ======
The Company has a $7,031,250, revolving line of credit (the "Loan") with a bank,
collateralized by the stock of the Insurance Companies. 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 plus
2.5%. 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 December 31, 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 $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
$1,875,000 in 1998 through 2000 and $1,406,250 in 2001. Interest expense under
the Loan for the years ended December 31, 1997, 1996, and 1995 was approximately
$548,000, $514,000, and $688,000, respectively.
F-22
<PAGE>
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 year ended December 31, 1997, 1996, and 1995 was
$400,000, $600,000, and $600,000, respectively.
The aggregate maturities of all notes payable by year are as follows (in
thousands):
1998 ...................................... $2,309
1999 ...................................... 2,222
2000 ...................................... 2,021
2001 ...................................... 1,535
Thereafter ............................... 32
Based on the borrowing rates currently available to the Company for bank loans
with similar terms and average maturities, the fair value of the notes payable
at December 31, 1997 and 1996 approximates their carrying value.
Interest expense in the accompanying consolidated statements of income for the
years ended December 31, 1997, 1996 and 1995 was $948,000, $1,114,000, and
$1,288,000, respectively.
8) Income Taxes
The Company's effective income tax rate for the years ended December 31, 1997,
1996 and 1995 differs from the statutory rate on ordinary income before income
taxes as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed at the statutory rate $2,569 34.0% $1,772 34.0% $2,145 34.0%
Increases (decrease) in taxes resulting from:
Transactions (a) 969 15.4
Establishment of deferred taxes (b) (2,944) (46.7)
Tax-exempt investment income (516) (6.8) (403) (7.7) (399) (6.3)
Non-deductible costs of combining operations 293 4.6
State and local income taxes and other 214 2.8 115 2.2 (43) (0.7)
------ ---- ------ ---- ------ ----
Provision for income taxes $2,267 30.0% $1,484 28.5% $21 0.3%
====== ==== ====== ==== ====== ====
</TABLE>
(a) Income (loss) of Retail Partnerships and Corporations taxed to their
respective partners and shareholders
(b) See Note 3(a)
F-23
<PAGE>
The Retail Partnerships and the Retail 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. Effective upon the closing of the October 2, 1995
combination (see Note 2), the entities comprising the Retail Brokerage Business
ceased being either limited partnerships or S corporations and became taxable
corporations. Accordingly, the accumulated deficit of the Retail Brokerage
Business at October 1, 1995 of $30,679,000 was reclassed to paid-in capital, and
a deferred tax benefit of $2,944,000 was recorded as the tax effect of the
change in tax status in the accompanying 1995 Consolidated Statement of Income.
The net deferred tax benefit relates to temporary differences (at October 2,
1995) between the financial reporting and tax basis of assets and liabilities of
the Retail Brokerage Business, principally amortization of expiration lists and
deferred compensation, deduction of previously accrued management bonuses, and
accrual adjustments for commission income.
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 combination of the various partnerships and S corporations,
were taxed to those entities rather than to their partners or shareholders.
The source of the significant temporary differences and the related deferred tax
effects are as follows:
1997 1996 1995
------- ------- -------
(in thousands)
Expiration lists $394 $393 $226
Other 47 (137) 553
Unearned premium reserves 40 (93) 115
Deferred compensation 850 255
Loss reserve discount (30) 37 193
Deferred acquisition costs (46) 126 (281)
Accrual adjustment (59) (56) 628
------- ------- -------
Deferred tax expense $346 $1,120 $1,689
======= ======= =======
The components of the net deferred tax asset, in the accompanying consolidated
balance sheets at December 31, 1997 and 1996, are as follows:
1997 1996
------ ------
(in thousands)
Deferred tax assets:
Loss and loss expense reserves $1,048 $1,018
Expiration lists 941 1,335
Unearned premium reserves 837 877
Unrealized losses on investments and other 91 157
------ ------
Total deferred tax asset 2,917 3,387
------ ------
Deferred tax liabilities:
Deferred acquisition costs 1,339 1,385
Unrealized gains on investments and other accrual adjustments 1,255 1,122
----- -----
Total deferred tax liability 2,594 2,507
------ ------
Net deferred tax asset $323 $880
====== ======
F-24
<PAGE>
Management believes it is more likely than not that all deferred tax assets are
realizable based upon the past earnings history of the Company.
OLB, as a Bermuda domiciled company is not subject to federal income taxes but,
rather, the Company is subject to federal income taxes based on OLB's taxable
income for the entire year. Accordingly, the Company includes the taxable income
of OLB in its separate company income for tax purposes, but for segment
reporting the income is included with the Property and Casualty Companies. OLB
has received an undertaking from the Bermuda Government exempting it from all
taxes computed on profit or income, or computed on any capital asset gain or
appreciation until 2016.
The Company and its wholly owned subsidiaries are party to a Tax Allocation
Agreement (the "Agreement"). The Agreement requires these companies to file a
U.S. consolidated income tax return. The Agreement provides that each member of
the group will compute its separate tax liability or benefit on a separate
return basis and pay or receive such amounts to or from the Company. For
purposes of segment information, amounts due to or from the Company by its
subsidiaries are included in the intercompany receivable/payable in the
accompanying consolidated balance sheets.
9) Lease Commitments and Rentals
Minimum annual rental commitments under various noncancelable operating leases
for office space, automobiles and equipment are as follows (in thousands):
Years Ending December 31,
-------------------------
1998............................. $2,587
1999............................. 2,518
2000............................. 2,400
2001............................. 2,113
Thereafter....................... 263
------
9,881
Sub-lease rental income...................... (186)
------
Net rental commitments....................... $9,695
======
Leases for office space include various escalation clauses, none of which
individually or in the aggregate are material. Escalation clauses are accounted
for on a straight-line basis over the life of the lease. The leases also contain
provisions for the payment of certain operating expenses and real estate taxes.
Rent expense for the years ended December 31, 1997, 1996 and 1995, amounted to
approximately $2,992,000, $2,857,000, and $2,946,000, respectively, net of
sublease rental income of $193,000, $197,000, and $168,000, respectively.
F-25
<PAGE>
10) Pension and Retirement Plans
Substantially all officers and employees of the Company are entitled to
participate in a qualified retirement savings plan (defined contribution plan)
and prior to 1995 were entitled to participate in a defined benefit pension
plan. The costs to the Company to participate in these plans included in the
accompanying consolidated statements of income was approximately $385,000,
$55,000, and 688,000 for 1997, 1996 and 1995, respectively.
The defined benefit pension plan (the "Plan") was frozen effective December 31,
1994, at which time participants became 100% vested in their accrued benefits.
All pension benefits were frozen at then current levels. The termination
resulted in an insignificant curtailment loss pursuant to Statement of Financial
Accounting Standards No. 88 ("SFAS 88") in 1994. During 1995, the Plan's
obligations were settled, resulting in a settlement loss pursuant to SFAS 88 in
the amount of $494,000, which included the additional minimum liability charged
directly to equity at December 31, 1994 in accordance with SFAS No. 87
"Employers Accounting for Pensions".
11) Management Services Agreement
In September 1992, Kaye Insurance Associates, L.P. ("KIA"), a predecessor of one
of the entities comprising the Retail Brokerage Business, entered into a
management services agreement with APCO Corp. (the "Manager"), whereby the
Manager was obliged to provide the administrative and operational functions for
the Amalgamated Division, from which certain assets and liabilities were
acquired in 1992. The Manager was owned by the individuals who sold the
Amalgamated Division to KIA. In return for the Manager's services, commencing
September 1, 1992 and continuing through August 31, 1997, KIA was obliged to pay
annually to the Manager a base fee which is subject to certain adjustments as
specified in the agreement. KIA incurred management service fees of $911,000,
$1,536,000, and $1,732,000 for the years ended December 31, 1997, 1996, and
1995, respectively, which was included in other operating expenses of the
Insurance Brokerage Companies.
In addition, the Manager was entitled to receive an incentive bonus in an amount
equal to a specified percentage (ranging from 16% to 19%) of gross income of the
Amalgamated division, as defined in the agreement, for each of the five years of
the period ended August 31, 1997. In accordance with the terms of the agreement,
however, in no event should the cumulative amount paid by KIA, with respect to
this incentive bonus, be less than $2,876,000 or exceed $4,220,000 subject to
the continued employment of certain key personnel by the Manager. The cost of
this bonus to KIA, which was charged to salaries and benefits as the related
gross income earned, was $0, $364,000, and $1,027,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. These agreements expired on
August 31, 1997.
F-26
<PAGE>
12) 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 effect
on the consolidated 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 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. While the Company
has been 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 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.
13) Reinsurance
As of December 31, 1997 and 1996, included in the amounts reflected in the
consolidated financial statements are unearned premiums of $4,963,000 and
$5,173,000, respectively, and unpaid losses and loss expenses of $12,445,000 and
$6,534,000, respectively, for reinsurance assumed from non-affiliates, although
all such reinsurance assumed relates to business produced by the Insurance
Brokerage Companies. The Insurance Companies have established trust funds and
deposited fixed maturities and cash therein to satisfy the collateral
requirements of certain reinsurance agreements. The trust funds established for
the benefit of ceding companies amounted to approximately $11,812,000 as of
December 31, 1997.
In accordance with the normal practice of the insurance industry, OLRI assumes
and cedes reinsurance with other insurers or reinsurers. The reinsurance
arrangements provide greater diversification of business and minimize OLRI's
maximum net loss arising from large risks. OLRI assumes reinsurance under
reinsurance treaty arrangements generally with limits of $25,000 (inclusive of
loss expenses) per occurrence. To limit OLRI's exposure for the reinsurance
assumed, OLRI purchased an annual aggregate stop loss
F-27
<PAGE>
policy. This policy insures OLRI in the event the losses under the policy exceed
a fixed percentage of premium earned. OLRI will be reimbursed up to $7,500,000.
OLRI's ceded reinsurance is on an excess of loss basis with an unaffiliated
company, National Reinsurance Corporation ("Nat Re"). OLRI issues policies on a
selected basis with limits up to $1,000,000 retaining the first $50,000 of
exposure and reinsuring $950,000 to Nat Re. The remaining reinsurance
arrangements are on a quota share basis and excess of loss with non-affiliated
insurers or reinsurers.
The Insurance Companies also entered into reinsurance agreements, wherein they
reinsured certain general liability and property risks. These reinsurance
agreements include per claim and aggregate limits and provide funds that are
placed into trusts for the benefit of the insurers. Since these reinsurance
contracts do not transfer risk to the Insurance Companies, they are included in
"Funds Held Under Deposit Contracts" in the accompanying consolidated balance
sheets.
A contingent liability exists with respect to reinsurance ceded, which would
become an ultimate liability of OLRI in the event that the assuming companies
were unable to meet their obligations under the reinsurance agreements in force
at December 31, 1997. The amounts deducted from liabilities, revenues and
expenses for reinsurance ceded by OLRI were as follows:
1997 1996
---- ----
(in thousands)
Liabilities - Unpaid losses and loss expenses $2,811 $882
Revenue and expenses:
Premiums earned 558 520
Losses and loss expenses 1,929 764
F-28
<PAGE>
14) Losses and Loss Expenses
The following table sets forth a reconciliation of the changes in the reserves
for outstanding losses and loss expenses, including paid losses and loss
expenses, for each year in the three year period ended December 31, 1997.
Years Ended December 31,
-----------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
Balance at January 1, $15,227 $12,671 $14,118
Less reinsurance recoverables (882)
-------- -------- --------
Net balance 14,345 12,671 14,118
-------- -------- --------
Incurred related to:
Current year 8,824 6,621 4,986
Prior year (108) 415 (136)
-------- -------- --------
Total incurred 8,716 7,036 4,850
-------- -------- --------
Paid related to:
Current year 1,802 1,832 2,138
Prior year 4,944 3,530 4,159
-------- -------- --------
Total paid 6,746 5,362 6,297
-------- -------- --------
Net balance at December 31, 16,315 14,345 12,671
Add reinsurance recoverables 2,811 882
-------- -------- --------
Balance $19,126 $15,227 $12,671
======== ======== ========
15) Statutory Financial Information and Dividend Restrictions
The Company's insurance subsidiaries file separate financial statements in
accordance with accounting practices prescribed or permitted by the insurance
regulatory authorities where they are domiciled. Statutory financial statements
do not reflect deferred acquisition costs, deferred income taxes, market value
changes and certain other items recognized under GAAP.
OLB is required to maintain a minimum statutory capital and surplus based upon
the higher of $1,000,000 or an amount derived by applying a variable rate to its
current premium volume or outstanding losses at December 31, 1997. At December
31, 1997, $904,000 was available for distribution from OLB and its subsidiary,
Park Brokerage Ltd. Pursuant to Rhode Island Insurance Law, OLRI may pay cash
dividends only from earned surplus determined on a statutory basis, subject to
the maintenance of minimum capital and surplus of $3,000,000. Further, OLRI is
restricted (on the basis of the lesser of 10%
F-29
<PAGE>
of OLRI's statutory surplus at the end of the preceding twelve-month period or
100% of OLR's net income, excluding realized capital gains, for the preceding
twelve-month period) as to the amount of the dividends it may declare or pay in
any twelve-month period without prior approval of the Department of Business
Regulation of Rhode Island. At December 31, 1997, $2,366,000 is available for
distribution during 1998, without prior approval. Statutory information is as
follows:
Old Lyme Old Lyme
Rhode Island Bermuda Combined
------------ ------- --------
(in thousands)
Policyholders' surplus at
December 31,
1997 $23,662 $1,904 $25,566
1996 $24,034 $1,451 $25,485
Net income for the years ended
December 31,
1997 $5,178 $1,453 $6,631
1996 $2,459 $2,890 $5,349
1995 $6,243 $1,890 $8,133
The following is a reconciliation of net income and surplus regarding
policyholders in accordance with statutory accounting principle ("SAP") as
reported to the Rhode Island and Bermuda insurance regulatory authorities to net
income and capital as determined in conformity with generally accepted
accounting principles ("GAAP") basis.
<TABLE>
<CAPTION>
Statutory Surplus /
Stockholders' Equity Net Income for years ended
as of December 31, December 31,
---------------------- -----------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated amount in accordance with GAAP $35,168 $24,984 $4,357 $3,071 $5,181
Deficit (equity) in net assets and net
loss of non-insurance companies (4,388) 5,768 2,086 3,217 2,354
-------- -------- -------- -------- --------
Combined amount in accordance with GAAP 30,780 30,752 6,443 6,288 7,535
Excess of statutory formula reserves over
GAAP reserves (890) (621)
Deferred acquisition costs (3,939) (4,073) 134 (370) 826
Non-admitted assets, deferred income taxes and other (385) (573) 54 (569) (228)
-------- -------- -------- -------- --------
Combined amount in accordance with SAP $25,566 $25,485 $6,631 $5,349 $8,133
======== ======== ======== ======== ========
</TABLE>
F-30
<PAGE>
16) Related Party Transactions
The administrative support for OLB is provided by International Advisory
Services, Ltd. ("IAS"), an insurance management company located in Bermuda. The
principal stockholder of IAS is an officer of OLB and is a director of the
Company. Management fees paid to IAS under a service contract for the years
ended December 31, 1997, 1996 and 1995 were $37,500, $36,250, and $65,000,
respectively.
The principal stockholder of IAS, who is a director of the Company, is also a
stockholder in a insurance brokerage company, H & H Reinsurance Brokers, Ltd.
("H & H Reinsurance"). H & H Reinsurance has a reinsurance contract between OLRI
and unrelated insurance carriers, (Transatlantic Reinsurance Company and USF
Reinsurance Company). H & H Reinsurance received commissions of $38,114, $7,000,
and $24,587 in 1997, 1996, and 1995, respectively, as a result of such
transaction.
The Company had a $6,000,000 note payable to KILP which was paid in full during
1997 (see Note 7).
KIA incurred a management fee of $175,000 annually to ZS Fund, L.P. which is one
of the general partners of KILP. KIA had an accrued payable to ZS Fund, L.P. as
of December 31, 1996 of $175,000. This management fee arrangement terminated on
December 31, 1996.
In January 1997, KIA entered into a management agreement with KILP, whereby the
Company provides certain administrative services for a fee of $50,000 per year.
At December 31, 1997, the Company recorded $50,000 for such services provided.
17) Acquisitions
During 1997, the Company acquired certain assets and liabilities of Western
Insurance Associates, Inc. ("Western") for cash of $777,000 and amounts payable
in future periods of $2,285,000. The amounts payable are the Company's estimate
of the probable costs it will incur. The total acquired expiration list was
$3,062,000 at December 31, 1997. This acquisition was accounted for as a
purchase.
18) Preferred Stock
The Board of Directors is authorized to issue preferred stock in classes or
series and to fix the designations, preferences, qualifications, limitations or
restrictions of any class or series with respect to the rate and nature of
dividends, the price and terms and conditions on which shares may be redeemed,
the amount payable in the event of voluntary or involuntary liquidation, the
terms and conditions for conversion or exchange into any other class or series
of stock, voting rights and other terms. No preferred stock is currently
outstanding.
F-31
<PAGE>
19) Common Stock Warrants and Dividends Declared
The Company has issued a warrant to KILP to purchase 105,000 shares of its
common stock. The exercise price of the warrant is the IPO price of such shares
($10.00), subject to certain anti-dilution adjustments. The warrant is
exercisable through February 16, 1998.
The Board of Directors of the Company declared annual dividends of $702,000 for
the years ended December 1997 and 1996, respectively, of which $175,000 remains
unpaid at December 1997 and 1996, respectively.
20) Stock Performance and Stock Option Plans
On December 30, 1997, the Company adopted a Stock Performance Plan, under which
up to 350,000 shares of the Company's common stock may be granted and awarded to
key employees. The grant of stock under this plan is contingent upon criteria
established by the Company's Compensation Committee of the Board of Directors.
Awards are based on performance targets of the Company's stock based on
increases in the market value of the Company's common stock from the price on
the date the stock is initially granted by the Company. Shares must be granted,
awarded, and vested before participants take full title to the performance
stock. Awards vest on the occurrence of any of the following events, (i) fifteen
years of continuous service with the Company from the date shares are granted to
the participant, (ii) death or disability of the participant, (iii) immediately
before a change of control (as defined under the plan), (iv) attaining the age
of 65, or (v) immediately before a sale or merger (as defined under the plan).
At December 31, 1997, no performance stock under this plan was granted or
awarded.
At December 31, 1997, the Company has a Stock Option Plan and a Supplemental
Stock Option Plan (the "Plans"). Both plans are identical and are stock-based
compensation plans, which are described below. The Company adopted the
disclosure requirements of SFAS 123 effective January 1, 1996 and continues to
account for its employee stock-based compensation plans under APB 25.
Accordingly, the adoption of SFAS 123 had no impact on the Company's financial
position or results of operations.
Under the Plans a total of 700,000 shares of common stock are reserved for
issuance. The Plans provide for the granting to directors, executives or other
key employees (including officers) of the Company non-qualified stock options
("NQOs") or incentive stock options ("ISOs") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended. The exercise price of all ISOs
and NQOs under the Plans are generally at least the fair market value of the
common stock of the Company on the date of grant.
The Compensation Committee (the "Committee") determines the terms of the options
including the exercise price, number of shares subject to option and
exercisability.
F-32
<PAGE>
In addition, the Plans authorize grants of alternative cash settlement rights at
the discretion of the Committee, which entitles participants to receive a
payment in cash equal to the fair market value of such shares on the date of
surrender less the purchase price required to purchase such shares. A summary of
the status of the Plans as of December 31, 1997, 1996, and 1995 and changes
during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
==========================================================================================
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
==========================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 528,550 $7.53 323,000 $9.33 194,550 $10.71
Granted 450,750 5.14 225,000 5.09 155,500 8.49
Exercised
Forfeited (354,450) 6.87 (19,450) 9.24 (27,050) 10.10
-------- ------- -------
Outstanding at end of year 624,850 $6.12 528,550 $7.53 323,000 $9.33
======== ======= =======
Options exercisable at year-end 143,450 124,150 64,480
======== ======= =======
Weighted-average fair value
of options granted during the year $1.29 $1.21 $2.31
======== ======= =======
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Remaining Exercise Exercisable Exercise
at 12/31/97 Contractual Life Price at 12/31/97 Price
<S> <C> <C> <C> <C> <C>
$11.63 500 6.08 years $11.63 300 $11.63
$10.91 5,000 6.08 10.91 3,000 10.91
$10.00 84,750 5.63 10.00 69,600 10.00
$ 8.43 43,850 7.83 8.43 19,550 8.43
$ 8.03 15,000 9.83 8.03
$ 7.88 15,000 7.70 7.88 6,000 7.88
$ 7.06 10,000 8.37 7.06 2,000 7.06
$ 6.64 5,000 10.00 6.64
$ 5.06 185,750 9.15 5.06
$ 5.00 250,000 9.20 5.00 43,000 5.00
$ 4.97 10,000 9.49 4.97
------- -------
624,850 8.56 $6.12 143,450 $8.20
======= =======
</TABLE>
The options vest and are exercisable at the rate of 20% per year and terminate
ten years from date of grant. At December 31, 1997, 1996 and 1995, 143,450,
124,150, and 64,480 options were exercisable and there were 75,150, 171,450, and
27,000 options available for future grants, respectively.
F-33
<PAGE>
Had the compensation cost for the Company's stock based compensation plans been
determined based on the fair value at the grant for awards under those plans
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1997 1996 1995
---- ---- ----
Net Income As reported $4,357 $3,071 $3,555
Pro forma 4,280 3,060 3,517
Earnings per share - basic As reported .62 .44 .51
Pro forma .61 .44 .50
Earnings per share - diluted As reported .62 .44 .51
Pro forma .60 .44 .50
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: (i) dividend
yield of 1.6%, (ii) expected volatility range of 25%, (iii) risk-free interest
rate of 6.4%, and (iv) expected life of 5 years.
21) Quarterly Financial Information (Unaudited)
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1997 and 1996 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.
<TABLE>
<CAPTION>
For the three months ended
====================================================================================================================================
(in thousands, except for per share)
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
1997 1996 1997 1996 1997 1996 1997 1996
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 12,866 $ 11,753 $ 13,545 $ 11,780 $ 16,466 $ 15,206 $ 15,672 $ 15,250
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 228 $ (27) $ 724 $ 175 $ 1,547 $ 1,246 $ 1,858 $ 1,677
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.03 $ 0.00 $ 0.11 $ 0.02 $ 0.22 $ 0.18 $ 0.26 $ 0.24
Diluted 0.03 0.00 0.11 0.02 0.22 0.18 0.26 0.24
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 7,020 7,020 7,020 7,020 7,020 7,020 7,036 7,020
Diluted 7,020 7,020 7,020 7,020 7,161 7,020 7,164 7,021
====================================================================================================================================
</TABLE>
F-34
<PAGE>
22) Premiums
Of the Company's net premiums earned approximately 62%, 63%, and 55% related to
the residential real estate program and 25%, 24%, and 32% related to the
restaurant program for the years 1997, 1996, and 1995, respectively. Of the
Company's net premiums earned approximately 82%, 83%, and 98% related to
insureds located in New York State for the years 1997, 1996, and 1995,
respectively.
Premiums earned for the three years ended December 31, 1997, 1996 and 1995,
which include in assumed premiums relating to reinsurance agreements with RLI of
$4,272,000, $3,878,000, and $2,409,000 in 1997, 1996 and 1995, respectively, are
summarized below:
1997 1996 1995
-------- -------- --------
(in thousands)
Direct $ 11,496 $ 9,979 $ 13,063
Assumed 11,909 9,869 3,892
-------- -------- --------
Total 23,405 19,848 16,955
Ceded (558) (521) (110)
-------- -------- --------
Net $ 22,847 $ 19,327 $ 16,845
======== ======== ========
23) Business Segments
The Company operates in two business segments, the procuring of property and
casualty insurance ("Insurance Brokerage Companies") and the underwriting of
property and casualty risks ("Property and Casualty Companies"). The
identifiable segment assets, operating profits and income before income taxes
and minority interests are shown on the accompanying consolidated balance sheets
and statements of income.
The following table is a summary of certain other segment information for the
years ended December 31, 1997, 1996 and 1995:
Business Segments - 1997
- --------------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty Consolidated
- --------------------------------------------------------------------------------
Depreciation expense $1,123 $24 $1,147
Amortization expense $ 520 $ 520
Capital expenditures $1,481 $1,481
F-35
<PAGE>
Business Segments - 1996
- --------------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty Consolidated
- --------------------------------------------------------------------------------
Depreciation expense $1,024 $23 $1,047
Amortization expense $ 953 $ 953
Capital expenditures $ 888 $ 888
Business Segments - 1995
- --------------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty Consolidated
- --------------------------------------------------------------------------------
Depreciation expense $ 940 $18 $ 958
Amortization expense $1,041 $1,041
Capital expenditures $ 396 $ 396
The foreign operations set forth below, relate solely to the operations of OLB,
and its wholly owned subsidiary Park Brokerage, and include reinsurance assumed
from OLRI, as well as from third party insurance companies. All such risks
assumed originate in the United States.
1997
===============================================
Foreign Domestic Total
===============================================
(in thousands)
Revenues $2,246 $56,303 $58,549
Income before minority interest
and income taxes 1,398 6,157 7,555
Identifiable assets 3,575 137,450 141,025
<TABLE>
<CAPTION>
1996 1995
============================= ===============================
Foreign Domestic Total Foreign Domestic Total
============================= ===============================
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues $2,104 $51,885 $53,989 $2,828 $52,619 $55,447
Income before minority interest
and income taxes 2,857 2,354 5,211 2,062 4,247 6,309
Identifiable assets 4,925 151,177 156,102 15,579 158,421 174,000
</TABLE>
There were no material intercompany revenue transactions between OLB and OLRI.
F-36
<PAGE>
In 1997, OLRI entered into a novation reinsurance agreement with National Union
Fire Insurance Company of Pittsburgh, PA. ("N.U."), pursuant to which OLRI paid
$807,000 and transferred its $950,000 IBNR liability to N.U.
In 1996, OLRI entered into the following reinsurance agreements:
1. Commutation Agreement: OLRI commuted all liabilities and obligations
arising out of reinsurance agreements between OLRI and OLB for the sum of
$3,337,729. This transaction increased OLRI's reserves by $4,466,384 and
decreased statutory underwriting income by $1,128,655.
2. Novation Agreement: OLRI has agreed to replace OLB under all reinsurance
agreements in either RLI and/or Mt. Hawley. OLB offered and OLRI accepted
in full and final satisfaction arising out of OLB's participation in all
reinsurance agreements with either RLI or Mt. Hawley, the sum of
$1,203,974. This transaction increased OLR's premium written by $1,203,974,
reserves by $1,611,098 and decreased statutory underwriting income by
$407,124.
24) Supplemental Cash Flow Disclosures
1997 1996 1995
---- ---- ----
Cash paid during the period for:
Interest expense $948 $1,114 $1,288
Income taxes (refunded) $2,000 ($992) $3,521
Noncash investing and financing activities:
Stock issued to purchase minority interest $10,181
Details of expiration list acquisition:
Fair value $3,062
Amounts payable in future periods (2,285)
-------
Cash paid for purchase of expiration list $777
-------
F-37
<PAGE>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Condensed Balance Sheets
December 31, 1997 and 1996
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1997 1996
======== ========
<S> <C> <C>
ASSETS
Cash and cash equivalents $65 $1
Prepaid expenses and other assets 590
Due from subsidiaries 3,664 271
Investment in subsidiaries 38,670 24,983
-------- --------
Total assets $42,989 $25,255
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and other liabilities $774 $176
Note payable 1,875
Income taxes payable 16 95
-------- --------
Total current liabilities 2,665 271
Note payable - long term 5,156
-------- --------
Total liabilities 7,821 271
-------- --------
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;
1997, 8,474; 1996, 7,020 shares issued and outstanding 85 70
Paid-in capital 17,942 7,776
Unrealized appreciation (depreciation) of investments, net of deferred
income tax provision (benefit), (1997, $192; 1996, ($16)) 373 (31)
Retained earnings 16,768 17,169
-------- --------
Total stockholders' equity 35,168 24,984
-------- --------
Total liabilities and stockholders' equity $42,989 $25,255
======== ========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
F-38
<PAGE>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Condensed Statements of Income
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
====== ====== ======
REVENUES:
Equity in income of subsidiaries net of taxes $4,357 $3,071 $5,181
------ ------ ------
NET INCOME $4,357 $3,071 $5,181
====== ====== ======
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
F-39
<PAGE>
Schedule II
KAYE GROUP INC.
(PARENT COMPANY ONLY)
Condensed Statements of Cash
Flows For the years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
======== ======== ========
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,357 $3,071 $5,181
-------- -------- --------
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Equity in net income of subsidiaries (6,590) (3,071) (5,181)
Dividends received from subsidiaries 6,350 702 702
Minority interest 931
Change in assets and liabilities:
Prepaid expenses and other assets (199)
Due from subsidiaries (3,892) (1,356) 2,222
Income taxes payable (137) 1,356 (2,221)
-------- -------- --------
Net cash provided by operating activities 820 702 703
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (852) (702) (702)
Notes payable-repayment (69)
Contribution to subsidiaries (300)
-------- -------- --------
Net cash used in financing activities (1,221) (702) (702)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (401) 1
Cash and cash equivalents at beginning of period 466 1
-------- -------- --------
Cash and cash equivalents at end of period $65 $1 $1
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest expense $548 $514 $688
Income taxes (refunded) $2,000 ($992) $3,521
Noncash investing and financing activities:
Stock issued to purchase minority interest $10,181
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
F-40
<PAGE>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Notes to Condensed Financial Statements
1. Condensed Financial Statements
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
2. Significant Accounting Policies
The Parent Company carries its investment in subsidiaries under the equity
method.
F-41
<PAGE>
Schedule IV
KAYE GROUP INC.
REINSURANCE
For The Years Ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
==============================================================================================
Column A Column B Column C Column D Column E Column F
==============================================================================================
Percentage
Insurance Gross Ceded To Other Assumed from of Amount
Premiums Earned Amount Companies Other Companies Net Amount Assumed to Net
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 $11,496 $558 $11,909 $22,847 52%
1996 $9,979 $511 $9,869 $19,327 51%
1995 $13,063 $110 $3,892 $16,845 23%
</TABLE>
F-42
<PAGE>
Schedule VI
KAYE GROUP INC
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
==========================================================================================================================
Column A Column B Column C Column D Column E Column F Column G Column H
==========================================================================================================================
Claims and Claim
Reserves For Adjustment Expenses
Unpaid Claims Discount Incurred Related to
Affiliation Deferred And Claim If Any Net (1) (2)
With Acquisition Adjustment Deducted In Unearned Earned Investment Current Prior
Registrant Costs Expenses Column C Premiums Premiums Income Year Years
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Foreign $240 $204 N/A $1,132 $2,118 $127 $326 ($47)
Domestic 3,699 18,922 N/A 11,446 20,729 2,565 8,498 (61)
----------------------------------------------------------------------------------------------------------
1997 $3,939 $19,126 N/A $12,578 $22,847 $2,692 $8,824 ($108)
==========================================================================================================
Foreign $295 $160 N/A $1,311 $1,542 $271 $313 ($1,580)
Domestic 3,778 15,067 N/A 11,865 17,785 2,190 6,308 1,995
----------------------------------------------------------------------------------------------------------
1996 $4,073 $15,227 N/A $13,176 $19,327 $2,461 $6,621 $415
==========================================================================================================
Foreign $325 $6,268 N/A $1,443 $1,399 $742 $338 ($38)
Domestic 3,378 6,403 N/A 10,471 15,446 2,077 4,648 (98)
----------------------------------------------------------------------------------------------------------
1995 $3,703 $12,671 N/A $11,914 $16,845 $2,819 $4,986 ($136)
==========================================================================================================
<CAPTION>
===========================================================================
Column A Column I Column J Column K Column L
===========================================================================
Paid
Amortization Claims
Affiliation Of Deferred and Claim Other
With Acquisition Adjustment Premiums Operating
Registrant Costs Expenses Written Expenses
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign $456 $234 $1,938 $113
Domestic 6,813 6,512 20,332 1,988
-----------------------------------------------------------
1997 $7,269 $6,746 $22,270 $2,101
===========================================================
Foreign $347 $3,637 $1,411 $167
Domestic 5,739 1,725 19,278 1,965
-----------------------------------------------------------
1996 $6,086 $5,362 $20,689 $2,132
===========================================================
Foreign $316 $2,629 $2,127 $161
Domestic 4,878 3,668 13,033 1,573
-----------------------------------------------------------
1995 $5,194 $6,297 $15,160 $1,734
===========================================================
</TABLE>
F-43
THIRD AMENDMENT AND WAIVER
TO THE
CREDIT AGREEMENT
Dated as of September 30, 1997
This THIRD AMENDMENT AND WAIVER dated as of September 30, 1997 (this "Third
Amendment") is between Kaye Holding Corp., a Delaware corporation (the
"Borrower"), and FLEET NATIONAL BANK, a national banking association, formerly
known as Fleet National Bank of Connecticut and Shawmut Bank Connecticut, N.A.
(the "Bank").
PRELIMINARY STATEMENTS. The Borrower and the Bank entered into a Credit
Agreement dated as of October 2, 1995, which Credit Agreement was amended by a
First Amendment to the Credit Agreement dated as of March 31, 1996 and by a
Second Amendment to the Credit Agreement dated as of May 15, 1996 (as so
amended, the "Credit Agreement"). The Borrower and the Bank wish to amend the
Credit Agreement further to: (i) extend the Revolving Loan Termination Date,
(ii) increase the Applicable Eurodollar Margin, (iii) amend the schedule
pursuant to which the Bank's Commitment with respect to the Revolving Loans
shall be automatically reduced, (iv) amend the covenant applicable to minimum
interest coverage for the fiscal quarter ended September 30, 1997, (v) waive the
covenant applicable to minimum fixed charge coverage for the fiscal quarters
ending March 31, 1997 and June 30, 1997 and amend such covenant for each fiscal
quarter thereafter, (vi) consent to the prepayment of the unsecured debt of Kaye
Insurance Associates, Inc. and waive the covenants applicable to such prepayment
and to Distributions to permit such prepayment and, (vii) consent to the merger
of Kaye Holding Corp. into Kaye Group Inc. and waive the covenant applicable to
mergers to permit such merger.
NOW THEREFORE, the Borrower and the Bank agree as follows:
Section 1. Amendments to the Credit Agreement. Effective as of September
30, 1997 and subject to the satisfaction of the conditions precedent set forth
in Section 3 hereof, the Credit Agreement is hereby amended as follows:
(a) Section 1.1 (Definitions) of the Credit Agreement is amended by
substituting for the defined terms "Applicable Eurodollar Margin" and "Revolving
Loan Termination Date" the following:
"Applicable Eurodollar Margin" means, for each Eurodollar Rate Loan
comprising part of the same Borrowing, an amount equal to 2.50%
"Revolving Loan Termination Date" means June 30, 2001; provided, however,
if not fewer than sixty (60) days nor more than ninety (90) days prior to
each
<PAGE>
-2-
Anniversary Date, the Borrower requests the Bank to extend the Revolving
Loan Termination Date for an additional year and if the Bank, in its sole
discretion in writing within thirty (30) days of such request, grants such
request, the Revolving Loan Termination Date means the date to which the
Revolving Loan Termination Date has been so extended. If such day is not a
Business Day, the Revolving Loan Termination Date shall be the next
preceding Business Day.
(b) Subsection (a) of Section 2.5 (Quarterly Reduction of Commitment) of
the Credit Agreement is replaced with the following:
"(a) On each March 31, June 30, September 30 and December 31, of each
calendar year commencing on September 30, 1996 (the "Reduction Commencement
Date") until the Revolving Loan Termination Date, the Commitment of the
Bank shall be reduced automatically by an amount equal to the following:
$625,000 for each of such dates from and including September 30, 1996 to
and including June 30, 1997 and $468,750 for each of such dates
thereafter."
(c) Subsection (a) of Section 2.8 (Interest on the Revolving Loans) of the
Credit Agreement is replaced with the following:
"(a) Each Base Rate Loan shall bear interest on the outstanding
principal amount thereof, for each day from the date such Base Rate Loan is
made until it becomes due, at a rate per annum equal to the Base Rate for
such day. Interest shall be payable on the last day of the Interest Period
applicable thereto. Such interest shall accrue from and including the date
of such Borrowing to but excluding the date of any repayment thereof and
shall be computed on the basis of a fraction, the numerator of which is the
actual number of days elapsed from the date of Borrowing and the
denominator of which is three hundred sixty (360). Overdue principal of
and, to the extent permitted by law, overdue interest on the Base Rate
Loans shall bear interest for each day until paid at a rate per annum equal
to the Default Rate."
(d) Section 7.10 (Capital Expenditures) of the Credit Agreement is replaced
with the following:
"Make or permit to be made any Capital Expenditure in any fiscal year,
or commit to make any Capital Expenditure in any fiscal year, which when
added to the aggregate Capital Expenditures of the Borrower and its
Subsidiaries theretofore made or committed to be made in that fiscal year,
would exceed $1,500,000 excluding the aggregate amount of rentals and other
costs paid and payable in such fiscal year with respect to leases (other
than Capital Leases)."
<PAGE>
-3-
(e) Section 7.14 (Minimum Interest Coverage) of the Credit Agreement is
amended to provide that for the fiscal quarter ending September 30, 1997, and
only for such quarter, the minimum interest coverage requirement set forth in
Section 7.14 shall be 2.75 to 1.
(f) Section 7.15 (Minimum Fixed Charge Coverage) of the Credit Agreement is
amended to provide that the minimum fixed charge coverage requirement set forth
in Section 7.15 for the fiscal quarter ending September 30, 1997 shall be 1.1 to
1 and for each fiscal quarter thereafter shall be 1.25 to 1.
Section 2. Waivers and Consents
(a) The Bank hereby waives those Events of Default that occurred under the
Credit Agreement as a result of the failure of the Borrower to comply with
Section 7.14 for the fiscal quarters ending March 31, 1997 and June 30, 1997.
(b) The Bank hereby consents to the prepayment (the "Prepayment") by the
Borrower of $6,000,000 principal amount of unsecured debt of Kaye Insurance
Associates, Inc. which debt has been assumed by the Borrower, and waives any
Events of Default occurring under the Credit Agreement as a result of the
failure of the Borrower thereby to comply with Sections 7.1(e) and 7.18 of the
Credit Agreement.
(c) The Bank hereby consents to the merger of Kaye Holding Corp. into Kaye
Group Inc. (the "Merger") and waives any Events of Default occurring under the
Credit Agreement as a result of the failure of the Borrower thereby to comply
with Section 7.6 of the Credit Agreement.
(d) Subject to Section 3, the foregoing waivers shall be effective only for
those Events of Default specified in subsections (a), (b) and (c) above and
shall not entitle the Borrower to any future waiver in similar or other
circumstances.
Section 3. Conditions of Effectiveness. Subject to the receipt by the Bank
of a counterpart of this Third Amendment duly executed by the Borrower, this
Third Amendment shall become effective as of September 30, 1997; provided,
however, that the effectiveness of the consent and waiver with respect to the
Merger described in Section 2(c) shall be subject to the execution and delivery
by Kaye Group Inc. of (i) a confirmation and assumption agreement satisfactory
to the Bank confirming Kaye Group Inc.'s assumption of all of the Borrower's
obligations under the Credit Agreement and the Pledge Agreements and (ii) a
replacement Revolving Note naming Kaye Group Inc. as borrower.
<PAGE>
-4-
Section 4. Representations and Warranties of the Borrower. The Borrower
represents as follows:
(a) The execution, delivery and performance by the Borrower of this
Third Amendment and the Prepayment have been duly authorized by all
necessary corporate action and do not and will not (i) require any consent
or approval of its shareholders; (ii) violate any provisions of its
articles of incorporation or by-laws; (iii) violate any provision of, or
require any filing, registration, consent or approval under, any law, rule,
regulation (including without limitation, Regulations U and X), order,
writ, judgment, injunction, decree, determination or award presently in
effect having applicability to and binding upon the Borrower or any
Subsidiary; (iv) result in a breach of or constitute a default or require
any consent under any indenture or loan or credit agreement (other than the
Credit Agreement) or any other material agreement, lease or instrument to
which the Borrower or any Subsidiary is a party or by which it or its
Properties may be bound; or (v) result in, or require, the creation or
imposition of any Lien upon or with respect to any of the Properties now
owned or hereafter acquired by the Borrower.
(b) The consummation of the Merger will not (i) result in a breach of
or constitute a default or require any consent under any indenture or loan
or credit agreement (other than the Credit Agreement) or any other material
agreement, lease or instrument to which the Borrower or any Subsidiary is a
party or by which it or its Properties may be bound; or (ii) result in, or
require, the creation or imposition of any Lien upon or with respect to any
of the Properties now owned or hereafter acquired by the Borrower.
(c) No authorization, consent, approval, order, license or permit
from, or filing, registration or qualification with, or exemption by, any
governmental or public body or authority, or any subdivision thereof, or
any other Person, is required to authorize, or is required in connection
with the execution, delivery and performance by the Borrower of, or the
legality, validity, binding effect or enforceability of, this Third
Amendment.
(d) This Third Amendment, when delivered, will constitute the legal,
valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with its terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency and other
similar laws affecting creditors' rights generally and by general
principles of equity.
(e) The representations and warranties contained in Article 5 of the
Credit Agreement are correct on and as of the date hereof as though made on
and as of the date hereof.
(f) Except for those waived by this Third Amendment, no Event of
Default or Default has occurred and is continuing or would result from the
signing of this Third Amendment, the Prepayment or the Merger or the
transactions contemplated hereby.
<PAGE>
-5-
(g) There has been no material adverse change in the financial
condition, operations, Properties, business or business prospects of the
Borrower and its Subsidiaries, if any, since the date of the last financial
statements furnished to the Bank.
(h) No actions, suits or proceedings or investigations (other than
routine examinations performed by insurance regulatory authorities) are
pending or, to the knowledge of the Borrower, threatened against or
affecting the Borrower or any Subsidiary, or any Property of any of them
before any court, governmental agency or arbitrator, which, if determined
adversely to the Borrower or any Subsidiary, would, in any one case or in
the aggregate, materially adversely affect the financial condition,
operations, Properties, business or, to the knowledge of the Borrower,
prospects of the Borrower and its Subsidiaries taken as a whole or the
ability of the Borrower to perform its obligations under the Credit
Agreement, as amended by this Third Amendment.
(i) No information, exhibit or report furnished in writing by or on
behalf of the Borrower or any officer or director of the Borrower to the
Bank in connection with the negotiation of, or pursuant to the terms of,
this Third Amendment contained when made any material misstatement of fact
or omitted to state a material fact necessary to make the statements
contained therein not misleading.
Section 5. Reference to and Effect on the Credit Agreement.
(a) Upon the effectiveness of this Third Amendment, on and after the date
hereof, each reference in the Credit Agreement to "this Credit Agreement",
"hereunder", "hereof", "herein" or words of like import and each reference in
the Revolving Note to the Credit Agreement shall mean and be a reference to the
Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement shall remain
in full force and effect and is hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Third Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of the Bank under the Credit Agreement, nor constitute a waiver
of any provision of the Credit Agreement.
Section 6. Costs, Expenses and Taxes. The Borrower agrees to pay on demand
all reasonable costs and expenses of the Bank in connection with the
preparation, execution and delivery of this Third Amendment and any other
instruments and documents to be delivered hereunder, including, without
limitation, the reasonable fees and out-of-pocket expenses of counsel for the
Bank with respect thereto and with respect to advising the Bank as to its rights
and responsibilities hereunder. In addition, the Borrower shall pay any and all
stamp and other
<PAGE>
-6-
taxes payable or determined to be payable in connection with the execution and
delivery of this Third Amendment and any other instruments and documents to be
delivered hereunder, and agrees to save the Bank harmless from and against any
and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
Section 7. Execution in Counterparts. This Third Amendment may be executed
in any number of counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together shall
constitute but one and the same instrument.
Section 8. Governing Law. This Third Amendment shall be governed by, and
construed in accordance with, the laws of the State of Connecticut.
Section 9. Defined Terms. Capitalized terms used herein which are not
expressly defined herein shall have the meanings ascribed to them in the Credit
Agreement.
[Remainder of page intentionally left blank]
<PAGE>
-7-
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
KAYE HOLDING CORP.
By
----------------------------------
Name:
Title:
FLEET NATIONAL BANK
By /s/ Vijay Nazareth
Name: Vijay Nazareth
Title: Vice President
EXIBIT 11
PAGE 1 OF 2
KAYE GROUP INC
Earnings Per Share Calculation
For the Year Ended December 31, 1997
Net Income $4,357,000(1)
I. Weighted Average Shares:
1/01/97-12/30/97 (364/365 X 7,020,000) 7,000,767
12/31/97 (1/365 X 8,474,435) 23,217
----------
Weighted Average Shares 7,023,984(2)
==========
II. Basic E/P/S 0.6203(3) = (1) / (2)
==========
III. Diluted E/P/S
Weighted Average Shares 7,023,984(2)
Dilution 58,753(4)
----------
7,082,737(5)
==========
Diluted E/P/S 0.6152(6) = (1) / (5)
==========
<PAGE>
EXHIBIT 11
PAGE 1 OF 2
<TABLE>
<CAPTION>
IV. Options outstanding Dilutive Shares
Weighted
Units Price/Share Proceeds Average Proceeds
======= ================== ========== ======= =========
<S> <C> <C> <C> <C> <C>
A. Options (8/17/93) 84,750 $ 10.000 $ 847,500
Warrants (8/17/93) 105,000 10.000 1,050,000
Options (1/24/94) 5,000 10.910 54,550
Options (2/3/94) 500 11.625 5,813
Options (9/13/95) 15,000 7.880 118,200
Options (10/20/95) 43,850 8.430 369,656
Options (5/15/96) 10,000 7.060 70,600
Options (12/27/96) 15,000 5.000 75,000 15,000 75,000
Options (2/1/97) 35,000 5.000 175,000 32,083 160,417
Options (2/25/97) 185,750 5.060 939,895 154,792 783,246
Options (4/15/97) 200,000 5.000 1,000,000 141,667 708,333
Options (7/1/97) 10,000 4.970 49,700 5,000 24,850
Options (10/31/97) 15,000 8.030 120,450
Options (12/31/97) 5,000 6.640 33,200
------- ---------- ------- ---------
729,850 $4,876,363 348,542(7) 1,751,846(8)
======= ========== ======= =========
<CAPTION>
V. Average market value/share
Average Average Average Close on
High Low Close last day
======= ================== ========== =========
<S> <C> <C> <C> <C>
Jan 5.025 4.800 4.850
Feb 5.143 4.958 5.100
Mar 4.833 4.806 4.806 4.500
----------
Hash total 3 mths 14.756
==========
April 4.725 4.644 4.650
May 4.982 4.946 4.982
June 5.000 4.917 4.964 5.000
----------
Hash total 3 mths 14.596
==========
July 5.925 5.738 5.856
Aug 7.758 7.625 7.688
Sept 8.667 8.442 8.508 8.375
----------
Hash total 3 mths 22.052
==========
Oct 7.913 7.663 7.722
Nov 7.015 6.787 6.838
Dec 6.633 6.546 6.579 6.625
----------
Hash total 3 mths 21.139
==========
Hash total 12 mths 72.543
==========
/ 12
Average price per share twelve mths 6.045
==========
<CAPTION>
VII. Diluted
Year Ended
------------------
<S> <C>
Total Proceeds from exercise $ 1,751,846(8)
Divided by average price 6.045
Repurchase shares of 289,789
Shares issued (options) 348,542(7)
------------------
Dilution - Shares 58,753(4)
==================
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Kaye Group Inc. on Form S-8 of our report dated February 25, 1998, on our audits
of the consolidated financial statements and financial statement schedules of
Kaye Group Inc. as of December 31, 1997 and 1996, and for the years ended
December 31, 1997, 1996, and 1995, which is included in this Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 41,486
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,209
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 47,125
<CASH> 31,307
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,939
<TOTAL-ASSETS> 141,025
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 12,578
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 122
<NOTES-PAYABLE> 8,119
0
0
<COMMON> 85
<OTHER-SE> 35,083
<TOTAL-LIABILITY-AND-EQUITY> 141,025
22,847
<INVESTMENT-INCOME> 4,312
<INVESTMENT-GAINS> 21
<OTHER-INCOME> 31,369
<BENEFITS> 8,716
<UNDERWRITING-AMORTIZATION> 9,370
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 7,555
<INCOME-TAX> 2,267
<INCOME-CONTINUING> 4,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,357
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
<RESERVE-OPEN> 15,227
<PROVISION-CURRENT> 8,260
<PROVISION-PRIOR> 1,820
<PAYMENTS-CURRENT> 5,013
<PAYMENTS-PRIOR> 1,168
<RESERVE-CLOSE> 19,126
<CUMULATIVE-DEFICIENCY> (267)
</TABLE>
