UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-21988
KAYE GROUP INC.
(Exact name of registrant as specified in charter)
Delaware 13-3719772
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
122 East 42nd Street, New York, N.Y. 10168
(Address of principal executive office)
(Zip code)
212-338-2100
(Registrant's telephone number, including area code)
----------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _x_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 6, 1998 - 8,474,435
- - Total number of pages filed including cover and under pages 23
- - Exhibit index is located on page 19
<PAGE>
KAYE GROUP INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for the
three months and nine months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Year 2000 Compliance 16
Safe Harbor Disclosure 18
PART II OTHER INFORMATION 19
2
<PAGE>
Item 1. - Financial Statements
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS:
INSURANCE BROKERAGE COMPANIES
Current assets:
Cash and cash equivalents
(including short term investments, and funds held in a fiduciary
capacity of $28,915 and $22,322) $ 29,199 $ 24,833
Premiums and other receivables 49,249 32,790
Prepaid expenses and other assets 2,018 1,385
-------- --------
Total current assets 80,466 59,008
Fixed assets (net of accumulated depreciation of $5,292 and $4,553) 3,622 3,145
Intangible assets (net of accumulated amortization of $2,431and $1,969) 6,351 4,702
Deferred income taxes 966
Other assets 208 181
-------- --------
Total assets - insurance brokerage companies 90,647 68,002
-------- --------
PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
Fixed maturities, at market value (amortized cost: 1998, $36,456;
1997, $41,529) 37,223 42,099
Equity securities, at market value (cost:1998, $646; 1997, $871) 750 981
Short term investments, at cost, which approximates market value 3,730 3,430
-------- --------
Total investments 41,703 46,510
Cash and cash equivalents 18,259 6,409
Accrued interest and dividends 871 882
Premiums receivable 1,083 2,344
Premiums receivable - insurance brokerage companies 51 3,185
Prepaid reinsurance premiums 66 262
Reinsurance recoverable on unpaid losses and loss expenses 3,040 2,811
Funds held under deposit contracts, at market value, which
approximates cost 173
Deferred acquisition costs 2,802 3,939
Deferred income taxes 500 379
Other assets 1,749 1,810
Intercompany receivable 185
-------- --------
Total assets - property and casualty companies 70,309 68,704
-------- --------
CORPORATE
Cash and cash equivalents 168 65
Prepaid expenses and other assets 270 107
Investments available-for-sale:
Equity securities, at market value (cost:1998, $497, and 1997, $557) 487 442
Deferred income taxes 41
Intercompany receivable 2,335 3,664
-------- --------
Total assets - corporate 3,260 4,319
-------- --------
Total assets $164,216 $141,025
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
LIABILITIES:
INSURANCE BROKERAGE COMPANIES
Current liabilities:
Premiums payable $ 67,100 $ 40,872
Premiums payable - property and casualty companies 51 3,185
Accounts payable and accrued liabilities 7,803 7,983
Notes payable 818 434
Deferred income taxes 419 1,063
Intercompany payable 2,520 3,342
-------- --------
Total current liabilities 78,711 56,879
Notes payable 550 654
Other liabilities 1,973 1,466
-------- --------
Total liabilities-insurance brokerage companies 81,234 58,999
-------- --------
PROPERTY AND CASUALTY COMPANIES
Liabilities:
Unpaid losses and loss expenses 20,988 19,126
Unearned premium reserves 8,994 12,578
Accounts payable and accrued liabilities 7,814 6,661
Other liabilities 2 350
Intercompany payable 322
-------- --------
Total liabilities - property and casualty companies 37,798 39,037
-------- --------
CORPORATE
Current liabilities:
Accounts payable and accrued liabilities 194 774
Note and loan payable 1,351 1,875
Deferred income taxes 12
Income taxes payable 298 16
-------- --------
Total current liabilities 1,855 2,665
Loan payable-long-term 3,602 5,156
-------- --------
Total liabilities-corporate 5,457 7,821
-------- --------
Total liabilities 124,489 105,857
-------- --------
COMMITMENTS AND CONTINGENCIES
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;
8,474 shares issued and outstanding 85 85
Paid - in capital 17,942 17,942
Accumulated other comprehensive income, net of deferred
income tax liability (1998, $293; 1997, $192) 568 373
Retained earnings 21,132 16,768
-------- --------
Total stockholders' equity 39,727 35,168
-------- --------
Total liabilities and stockholders' equity $164,216 $141,025
======== ========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months and nine months ended September 30, 1998 and 1997
(in thousands, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees - net $ 9,525 $ 9,442 $ 25,144 $ 23,260
Investment income 657 560 1,539 1,282
-------- -------- -------- --------
Total revenues 10,182 10,002 26,683 24,542
-------- -------- -------- --------
Expenses:
Salaries and benefits 5,480 5,122 16,559 14,690
Other operating expenses 3,455 3,580 9,504 9,937
-------- -------- -------- --------
Total operating expenses 8,935 8,702 26,063 24,627
-------- -------- -------- --------
Interest expense 21 100 21 400
-------- -------- -------- --------
Income (loss) before income taxes-insurance brokerage companies 1,226 1,200 599 (485)
-------- -------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 7,069 6,292 15,146 13,323
Change in unearned premiums (812) (333) 3,387 3,343
-------- -------- -------- --------
Net premiums earned 6,257 5,959 18,533 16,666
Net investment income 729 673 2,198 2,027
Net realized gains on investments 49 10 82 16
Other income 3 62 130 181
-------- -------- -------- --------
Total revenues 7,038 6,704 20,943 18,890
-------- -------- -------- --------
Expenses:
Losses and loss expenses 2,175 2,561 6,748 6,655
Acquisition costs and general and administrative expenses 2,644 2,472 6,872 6,826
-------- -------- -------- --------
Total expenses 4,819 5,033 13,620 13,481
-------- -------- -------- --------
Income before income taxes-property and casualty companies 2,219 1,671 7,323 5,409
-------- -------- -------- --------
CORPORATE
Revenues:
Net investment income (loss) 10 37 (39) 51
Expenses:
Other operating expenses 33 93 233 254
Interest expense 98 133 349 388
-------- -------- -------- --------
Net expenses before income taxes-corporate (121) (189) (621) (591)
-------- -------- -------- --------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months and nine months ended September 30, 1998 and 1997
(in thousands, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income before income taxes and minority interest 3,324 2,682 7,301 4,333
------ ------ ------ ------
Provision (benefit) for income taxes
Current 1,032 1,041 2,147 1,472
Deferred (4) (236) 153 (172)
------ ------ ------ ------
Total provision for income taxes 1,028 805 2,300 1,300
------ ------ ------ ------
Income before minority interest 2,296 1,877 5,001 3,033
Minority interest 330 534
------ ------ ------ ------
Net income 2,296 1,547 5,001 2,499
====== ====== ====== ======
EARNINGS PER SHARE
Basic $ 0.27 $ 0.22 $ 0.59 $ 0.36
====== ====== ====== ======
Diluted $ 0.27 $ 0.22 $ 0.58 $ 0.36
====== ====== ====== ======
Weighted average of shares outstanding - basic 8,474 7,020 8,474 7,020
====== ====== ====== ======
Weighted average shares outstanding and
share equivalents outstanding - diluted 8,591 7,020 8,594 7,020
====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1998 and 1997
(in thousands)
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,001 $ 2,499
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs 1,137 1,113
Amortization of bond premium - net 488 483
Deferred income taxes 153 (172)
Net realized gains on investments (22) (16)
Depreciation and amortization expense 1,202 1,205
Minority interest 534
Change in assets and liabilities:
Accrued interest and dividends 11 109
Premiums and other receivables (12,005) 23,540
Prepaid expenses and other assets (783) (2,230)
Unpaid losses and loss expenses 1,862 2,979
Unearned premium reserves (3,584) (3,386)
Premiums payable 22,868 (23,265)
Income taxes payable 282 472
Accounts payable and accrued liabilities 446 3,640
-------- --------
Net cash provided by operating activities 17,056 7,505
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale :
Purchase of fixed maturities (7,161) (10,014)
Purchase of equity securities (200) (500)
Purchase of short term investments (300) (2,314)
Maturities of fixed maturities 3,982 4,127
Sales of fixed maturities 7,852 5,097
Sales of equity securities 425 600
Funds held under deposit contracts:
Purchase of fixed maturities (778)
Sales of short term investments 173 2,467
Sales of fixed maturities 905
Maturities of fixed maturities 350
Purchase of fixed assets (1,656) (1,118)
Acquisition payments (1,294) (609)
-------- --------
Net cash provided by (used in) investing activities 1,821 (1,787)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under deposit contracts (122) (2,596)
Notes and loan payable-repayment (7,638) (6,619)
Proceeds from borrowings 5,839 612
Payment of dividends (637) (526)
Payment of dividends to minority stockholders (113)
-------- --------
Net cash used in financing activities (2,558) (9,242)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 16,319 (3,524)
Cash and cash equivalents at beginning of period 31,307 27,959
-------- --------
Cash and cash equivalents at end of period $ 47,626 $ 24,435
======== ========
Supplemental cash flow disclosure:
Interest expense $ 328 $ 788
Income taxes $ 1,866 $ 1,000
</TABLE>
See notes to consolidated financial statements
7
<PAGE>
ITEM 1. - Financial Statements (continued)
KAYE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The consolidated financial statements as of September 30, 1998 and for the
three months and nine months ended September 30, 1998 and 1997 are unaudited,
and have been prepared in accordance with generally accepted accounting
principles and, in the opinion of management, reflect all adjustments
(consisting of normal, recurring adjustments) necessary for a fair presentation
of the results for such periods. The results of operations for the three months
and nine months ended September 30, 1998 are not necessarily indicative of
results for the full year.
These financial statements should be read in conjunction with the financial
statements and related notes in the Company's 1997 Form 10-K. The December 31,
1997 Consolidated Balance Sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
Certain prior year information has been reclassified to conform with the
1998 presentation. In order to more accurately present Insurance Brokerage
Companies salaries and benefits, the Company has reclassified employee producer
commission expense to salaries and benefits on the Consolidated Statements of
Income for all periods presented. Previously, this expense was netted against
commissions and fees-net. The amount of the reclassification for the three
months ended September 30, 1998 and 1997 was $301,000 and $278,000,
respectively, and for the nine months ended September 30, 1998 and 1997 was
$883,000 and $605,000, respectively. In addition, commissions and fees earned by
the Insurance Brokerage Companies from the Property and Casualty Companies for
the three months ended September 30, 1998 and 1997 were $1,233,000 and
$1,111,000, respectively, and for the nine months ended September 30, 1998 and
1997 were $2,372,000 and $2,140,000, respectively, and are now included in
commission and fees-net. Previously, commissions and fees-net from the Property
and Casualty Companies were presented separately on the Consolidated Statements
of Income.
2) Organization
Effective October 2, 1995 Old Lyme Holding Corporation ("Old Lyme")
combined its operations with the insurance brokerage operations (the "Retail
Brokerage Business") of Kaye International L.P. ("KILP") and changed its name to
Kaye Group Inc. (the "Company"). KILP was the Company's largest stockholder. On
December 30, 1997, the stockholders of the Company approved a restructuring that
merged Kaye Holding Corp. ("KHC") (a subsidiary) 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. 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 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
8
<PAGE>
value of the minority interest in KHC.
For further details of the combination, reference is hereby made to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, as
previously filed with the Securities and Exchange Commission ("SEC").
Effective May 12, 1998 KILP, the Company's then largest stockholder, was
dissolved, and its shares in the Company were distributed to its partners.
3) Changes in Accounting Policies
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This
statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual financial
statements. This statement also requires that an entity classify items of other
comprehensive earnings by their nature in an annual financial statement. For
example, other comprehensive earnings may include foreign currency translation
adjustments, minimum pension liability adjustments, and unrealized gains and
losses on marketable securities classified as available-for-sale. Annual
financial statements for prior periods will be reclassified, as required. The
Company's total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
NET INCOME $2,296 $1,547 $5,001 $2,499
Net comprehensive income
- net unrealized gains, net of
deferred income tax liability 242 147 195 170
------ ------ ------ ------
COMPREHENSIVE INCOME $2,538 $1,694 $5,196 $2,669
====== ====== ====== ======
</TABLE>
4) Loan Payable
On June 23, 1998, the Company paid in full the $6,094,000 bank revolving
line of credit, and replaced it with a $5,000,000 term loan (the "Loan") with
another bank. The Loan is collateralized by the stock of the Property and
Casualty Companies. The Loan bears interest at a fixed rate per year of 7.8%. At
September 30, 1998, $4,731,000 was outstanding under this term loan. In
addition, the Company has available a $4,500,000 revolving line of credit with
the same bank, collateralized by the stock of the Property and Casualty
Companies. The proceeds are available for general operating needs and
acquisitions. As of September 30, 1998, no amount was outstanding on the
revolving line of credit. A quarterly fee is assessed in the amount of 0.05% on
the unused balance. Among other covenants, the Loan agreement requires
maintenance of minimum consolidated GAAP net worth, statutory surplus, ratio of
net premiums written to surplus, and minimum debt service coverage. As of
September 30, 1998, the Company was in compliance with the covenants of the Loan
agreement.
9
<PAGE>
The Company's required payments on the Loan for the respective years are
$275,000 in 1998, $1,153,000 in 1999, $1,245,000 in 2000, $1,345,000 in 2001,
and $713,000 in 2002. Interest expense for the loans mentioned above for the
three months ended September 30, 1998 and 1997 were $98,000 and $133,000
respectively, and for the nine months ended September 30, 1998 and 1997 were
$349,000 and $388,000, respectively.
5) Earnings Per Share
Effective December 31, 1997, the Company adopted 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.
Net income per share has been computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
------ ------ ------ ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net Income (numerator) $2,296 $1,547 $5,001 $2,499
====== ====== ====== ======
Weighted average common and effect
of dilutive shares used in the
computation of net income per
share:
Average shares outstanding
-basic (denominator) 8,474 7,020 8,474 7,020
Effect of dilutive shares 117 -- 120 --
------ ------ ------ ------
Average shares outstanding
-diluted (denominator) 8,591 7,020 8,594 7,020
Net income per common share:
Basic $ 0.27 $ 0.22 $ 0.59 $ 0.36
Diluted 0.27 0.22 0.58 0.36
</TABLE>
6) Dividends
On September 21, 1998, the Board of Directors declared a quarterly dividend
of $.025 per share, payable October 20, 1998 to stockholders of record on
September 30, 1998.
10
<PAGE>
7) Contingent Liabilities
In the ordinary course of business, the Company and its subsidiaries are
subject to various claims and lawsuits in connection with the placement of
insurance. In the opinion of management, the ultimate resolution of all asserted
and potential claims will not have a material adverse effect on the consolidated
financial position of the Company.
8) New Accounting Standards
In February 1997, the 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
September 30, 1998, the Company has no derivative financial instruments.
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. The Company will
adopt the disclosure requirements of this pronouncement for the year ending
December 31, 1998.
In June 1997, the Financial Accounting Standards Board ("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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. As of September 30, 1998 the Company has no derivative
financial instruments. The financial position and operating results of the
Company will not be affected by this statement.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company, a Delaware corporation, formerly Old Lyme, 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 Corporation.
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.
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.
12
<PAGE>
Results of Operations
Three months ended September 30, 1998
compared with three months ended September 30, 1997
Net Income
Net Income for the three months ended September 30, 1998 increased by
$749,000 to $2,296,000 or basic earnings per share of $0.27 compared to
$1,547,000 or $0.22 for the same period last year as explained below.
Insurance Brokerage Companies
Income before income taxes increased by $26,000 to $1,226,000 in 1998 from
$1,200,000 in 1997. The improved operating result was primarily due to increased
revenues offset by an increase in salaries and benefits, as discussed below.
Total revenues in 1998 were $10,182,000 compared with $10,002,000 in 1997,
an increase of $180,000 (2%). Gross commissions and fees grew by $374,000 (3%)
as a result of new business exceeding lost business and acquisitions made during
the third quarter of 1998. The commission expense rate incurred to produce new
and renewal business increased from 17% to 19%. Investment income increased by
$97,000 (17%) primarily due to collection efficiencies resulting from a longer
holding period for fiduciary investments.
Salaries and benefits increased by $358,000 (7%) to $5,480,000 in 1998
compared to $5,122,000 in 1997. The increase was the result of salary increments
and acquisitions.
Other operating expenses decreased by $125,000 (3%) to $3,455,000 in 1998
compared with $3,580,000 in 1997. The decrease was mainly due to the expiration
of certain management service contracts.
Interest expense decreased by $79,000 as a result of the early payment of
the $6,000,000 note payable to KILP in August, 1997.
Property and Casualty Companies
Income before income taxes increased by $548,000 (33%) to $2,219,000 in
1998 from $1,671,000 in 1997. The increase in operating result was due to
increased net premiums earned, investment income, and a reduced combined ratio.
Net premiums earned for 1998 increased by $298,000 (5%) to $6,257,000 from
$5,959,000 in 1997. The Company's efforts to develop new Alternative Risk
Transfer programs and broaden the distribution network of existing programs and
coverage types has contributed to the growth of premium volume.
13
<PAGE>
Net investment income increased by $56,000 (8%) to $729,000 from $673,000
in 1997. This increase was due to an increase in investments generated by cash
flow from operations.
The loss ratio (loss incurred expressed as a percentage of net premium
earned) decreased to 35% in 1998 from 43% in 1997. The decrease was due to an
increase in premiums earned from the excess loss reinsurance treaty which
generally experiences a lower loss ratio coupled with a decrease in property
loss frequency in 1998.
The expense ratio increased to 42% in 1998 from 41% in 1997. The increase
was due to accrued incentive based compensation.
Corporate
Net expenses before income taxes decreased in 1998 by $68,000 (36%) to
$121,000 from $189,000 in 1997. This decrease was the result of lower interest
expense due the restructuring of corporate debt and lower insurance costs
partially offset by lower investment income.
Nine months ended September 30, 1998
compared with nine months ended September 30, 1997
Net Income
Net income for the nine months ended September 30, 1998 increased by
$2,502,000 to $5,001,000 or basic earnings per share of $0.59 compared to
$2,499,000 or $0.36 for the same period last year as explained below.
Insurance Brokerage Companies
Income before income taxes increased by $1,084,000 to $599,000 in 1998 from
a loss of $485,000 in 1997. The improved operating result was due to increased
revenues offset by the increase in salaries and benefits, as discussed below.
Total revenues in 1998 were $26,683,000 compared with $24,542,000 in 1997,
an increase of $2,141,000 (9%). Gross commission and fees grew by $2,304,000
(8%) mainly as a result of acquistions and an increase in contingency
commissions due to volume and profitability of 1997 premiums placed with certain
insurance carriers. The commission expense rate incurred to produce new and
renewal business increased from 15% to 16%. Investment income increased in 1998
by $257,000 (20%) primarily due to collection efficiencies resulting in a longer
holding period for fiduciary investments.
Salaries and benefits increased by $1,869,000 (13%) to $16,559,000 in 1998
compared to $14,690,000 in 1997. This increase was primarily due to
acquisitions, salary increments and accrued incentive based compensation.
14
<PAGE>
Other operating expenses decreased by $433,000 (4%) to $9,504,000 in 1998
compared with $9,937,000 in 1997. This decrease was mainly the result of the
expiration of certain management service contracts.
Interest expense decreased by $379,000 as a result of the early payment of
the $6,000,000 note payable to KILP in August, 1997.
Property & Casualty Companies
Income before income taxes increased by $1,914,000 (35%) to $7,323,000 in
1998 from $5,409,000 in 1997. The increase in operating result was due to
increased net premiums earned, investment income, and a reduced combined ratio.
Net premiums earned for 1998 increased by $1,867,000 (11%) to $18,533,000
from $16,666,000 in 1997. The Company's efforts to develop new Alternative Risk
Transfer programs and broaden the distribution network of the existing programs
and coverage types has contributed to the growth of premium volume.
Net investment income increased by $171,000 (8%) to $2,198,000 from
$2,027,000 in 1997. This increase was due to an increase in investments
generated by cash flow from operations.
The loss ratio (loss incurred expressed as a percentage of net premium
earned) decreased to 36% in 1998 from 40% in 1997. The decrease was due to an
increase in premiums earned from the excess loss reinsurance treaty which
traditionally experiences a lower loss ratio.
The expense ratio for 1998 and 1997 was 37% and 41%, respectively. The
decrease was due to lower acquisition and administrative charges.
Corporate
Net expenses before income taxes increased in 1998 by $30,000 (5%) to
$621,000 from $591,000 in 1997. This increase was the result of a provision for
investment decline and costs related to the restructuring of debt, partially
offset by lower interest expense.
15
<PAGE>
Financial Condition and Liquidity
Management believes that the Company's operating cash flow, along with the
cash equivalents and short term investments will provide sufficient sources of
liquidity and capital to meet the Company's anticipated needs during the next
twelve months and the foreseeable future. The Company has no capital commitments
that are material individually or in the aggregate.
Total assets increased by $23,191,000 (16%) to $164,216,000 at September
30, 1998 from $141,025,000 at December 31, 1997. Total liabilities increased by
$18,632,000 (18%) to $124,489,000 at September 30, 1998 from $105,857,000 at
December 31, 1997. Due to the cyclical nature of the business, premiums
receivable and premiums payable fluctuate significantly from quarter to quarter.
Stockholders' equity increased by $4,559,000 (13%) to $39,727,000 at
September 30, 1998, from $35,168,000 at December 31, 1997. The increase in
equity resulted from net income of $5,001,000 and an increase in net unrealized
appreciation of investments of $195,000, partially offset by dividends paid of
$637,000.
The Company's cash and cash equivalents increased by $16,319,000 for the
nine months ended September 30, 1998. Operating activities provided cash of
$17,056,000 partially as a result of premiums received from assureds not yet
paid to insurance markets. Investing activities provided cash of $1,821,000 from
the sale and maturity of investments offset by fixed asset purchases (primarily
software) and acquisition payments. Financing activities used cash of $2,558,000
for payments of dividends and loan restructuring, including a reduction of
$1,100,000 of corporate debt.
The Company maintains a substantial level of cash and liquid short term
investments which are used to meet anticipated payment obligations, primarily
premiums payable to insurance markets. As of September 30, 1998, the Company had
cash and short term investments of $47,626,000. Of the Company's total
investments, certain amounts are pledged or deposited into trust funds to
collateralize the Company's obligations under reinsurance agreements.
The Company paid off its revolving credit line of $6,094,000 early, and
replaced it with a term loan of $5,000,000, at an interest rate reduction of
approximately 50 basis points, thereby reducing debt by $1,100,000. As of
September 30, 1998, $4,731,000 is outstanding on the term loan. In addition, the
Company has available a $4,500,000 revolving line of credit with a bank. Both
lines are collateralized by the stock of the Property and Casualty Companies.
The proceeds are available for general operating needs and acquisitions. As of
September 30, 1998, no amount was outstanding on the revolving line of credit.
Year 2000 Compliance
Many computers, software programs and microprocessors embedded in certain
equipment (collectively, "systems") were designed to accommodate only two-digit
date fields to represent a given year (e.g., "98" represents 1998). It is
possible that such systems will not be able to accurately process data
containing information relating to dates before, during or after the year 2000.
It is also possible that such systems could fail entirely, although in many
instances the consequences of a system not being "year 2000 compliant" are
unknown. In response to this issue, the Company has evaluated its applications
and operating software and is in the process of evaluating its hardware and
software products, end user computing activities, third-party data
16
<PAGE>
exchanges and business relationships, and has established a project team
responsible for overseeing progress on the Company's compliance program and
periodically reporting to management.
As of September 30, 1998, the Company has completed approximately 70% of
its efforts to bring its own applications software and hardware in compliance,
with the objective of having all critical production systems year 2000 compliant
by the middle of 1999. Testing of critical applications is being accomplished
through the use of a special systems testing environment that simulates system
operations in the year 2000. The Company also purchased and implemented new
operational and accounting software in 1998. In addition to being year 2000
compliant, these new systems will add increased functionality to the Company.
The Company has completed its assessment of its midrange hardware, operating
software and has completed its assessment of its servers and client server
operating software.
The total cost (both current and future) to modify these existing
production systems, which includes both internal and external costs of
programming, coding and testing is not material.
In addition to addressing hardware/software information technology ("IT"),
the Company has also been assessing year 2000 issues with respect to non-IT
systems such as telephones and various building services which may rely on
embedded microprocessors. Although failure of non-IT systems such as telephone
service could disrupt the Company's business, the Company's communications with
the relevant vendors have not identified any significant year 2000 problems.
The Company believes that if systems were not compliant for year
2000-related problems there could be a material adverse impact on the Company's
Statement of Income. The Company believes that it is taking the necessary
measures to address issues that may arise relating to year 2000-related problems
and that its systems should be compliant. The Company realizes, however, that
non-compliance by third parties could impact its business. The Company's plan
addresses potential year 2000 issues related to the processing of transactions
with third parties. The possibility exists that some of the Company's external
business contacts may not be compliant. The Company began contacting its
external business contacts and continues to do so to determine their status of
compliance and to assess the impact of noncompliance to the Company. The Company
is working closely with all critical business relationships to minimize its
exposure to year 2000-related problems. It should be noted, however, that there
can be no assurance that the systems of other companies will be year-2000
compliant, or that their conversion will be comparable with information included
in the Company's systems without having a material adverse effect on the
Company.
Although it has considered various scenarios concerning the possible
effects of the year 2000 issue, the Company does not have formal contingency
plans relating to either its internal processing environment or its external
business contacts. As it completes the upgrading and testing of non-compliant
systems and continues to monitor the status of its important external contacts
into early 1999, the Company will develop contingency plans if deemed necessary
for critical systems and relationships.
17
<PAGE>
A comprehensive review was performed by the Company of the insurance
policies written by its Insurance Companies and their underwriting guidelines to
determine Year 2000 exposure. The Insurance Companies primarily issue policies
covering all or part of an insured's self-insured retention, with limits
generally up to $25,000, that follow the form of the policies excess of the
Insurance Companies' policies. The Insurance Companies have not issued
exclusions on these policies. The Insurance Companies have also issued a number
of policies with greater limits of coverage, and have included a year 2000
exclusion on such policies. The Company is aware that Year 2000 liabilities may
be deemed not to be fortuitous in nature and, therefore, not covered under the
policies issued by the Insurance Companies. Moreover, based upon the classes of
insurance primarily underwritten by the Insurance Companies, the Company
believes that its coverage exposure with respect to Year 2000 losses will not be
material. However, changes in social and legal trends may establish coverage
unintended for Year 2000 exposures by re-interpreting insurance contracts and
exclusions. It is impossible to predict what exposure insurance companies may
bear for the Year 2000 losses.
Safe Harbor Disclosure
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q or any other written or
oral statements made by or on behalf of the Company may include forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain uncertainties and other factors that could cause actual results to
differ materially from such statements. These uncertainties and other factors
(which are described in more detail elsewhere in documents filed by the Company
with the SEC) include, but are not limited to, uncertainties relating to
government and regulatory policies, volatile and unpredictable developments
(including storms and catastrophes), the legal environment, the uncertainties of
the reserving process and the competitive environment in which the Company
operates. The words "believe", "anticipate", "project", "plan", "expect" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
18
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits arising in the normal course of
business. Virtually all pending lawsuits in which the Insurance Companies are a
party, involve claims under policies underwritten or reinsured by such
Companies. Management believes these lawsuits have been adequately provided for
in its established loss and loss expense reserves and that the resolution of
these lawsuits will not have a material adverse effect on the Company's
financial condition or results of operations.
The Insurance Brokerage Companies are subject to various claims and
lawsuits from both private and governmental parties, which include claims and
lawsuits in the ordinary course of business. The majority of pending lawsuits
involve insurance claims, errors and omissions, employment claims, and breaches
of contract. The Company believes that the resolution of these lawsuits will not
have a material adverse effect on the Company's financial condition or results
of operations.
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
- ------ -----------
11 Statement regarding computation of earnings per share
27 Financial Data Schedule
b) Reports on Form 8-K
On July 1, 1998, the Company filed Form 8-K announcing the dissolution
of Kaye International L.P., it's then largest stockholder.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KAYE GROUP INC.
-------------------------------------------
Registrant
November 13, 1998 /s/ Bruce D. Guthart
-------------------------------------------
Bruce D. Guthart, President &
Chief Executive Officer
November 13, 1998 /s/ Michael P. Sabanos
-------------------------------------------
Michael P. Sabanos, Senior Vice President &
Chief Financial Officer
20
EXHIBIT 11
Page 1 of 2
KAYE GROUP INC
Earnings Per Share Calculation
For the Three Months and Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Three months Nine months
ended ended
Sept.30,1998 Sept.30,1998
------------ ------------
<S> <C> <C>
Net Income $2,296,000 $5,001,000(1)
I. Weighted Average Shares: 8,474,000 8,474,000(2)
========== ==========
II. Basic EPS 0.2709 0.5902(1)/(2)
========== ==========
III. Diluted EPS
Weighted Average Shares 8,474,000 8,474,000(2)
Dilution 116,592 119,515(3)
---------- ----------
8,590,592 8,593,515(4)
========== ==========
Diluted EPS 0.2673 0.5820(1)/(4)
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
Page 2 of 2
KAYE GROUP INC
Earnings Per Share Calculation
For the Three Months and Nine Months Ended September 30, 1998
IV. Outstanding at September 30, 1998
<TABLE>
<CAPTION>
Weighted
Units Price/Share Proceeds Average Proceeds
----- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
A. Options (8/17/93) 75,750 $10.000 $ 757,500
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) 40,500 8.430 341,415
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 35,000 175,000
Options (2/25/97) 178,250 5.060 901,945 178,250 901,945
Options (4/15/97) 200,000 5.000 1,000,000 200,000 1,000,000
Options (7/1/97) 10,000 4.970 49,700 10,000 49,700
Options (10/31/97) 15,000 8.030 120,450
Options (12/31/97) 5,000 6.640 33,200 5,000 33,200
Options (07/01/98) 10,000 6.700 67,000 10,000 67,000
------- ---------- ------- ---------
615,000 $3,770,373 453,250(5) 2,301,845
======= ========== ======= =========
Dilutive Shares 453,250(5) 2,301,845(6)
======= ==========
</TABLE>
V. Average market value/share
<TABLE>
<CAPTION>
Average Average Average Close on
High Low Close last day
---- --- ----- --------
<S> <C> <C> <C> <C>
Jan 6.578 6.459 6.538
Feb 7.153 7.023 7.013
Mar 7.224 7.162 7.193 7.500
-------
Hash total 3 mths 20.744
=======
April 7.413 7.181 7.272
May 7.225 6.869 6.887
June 6.869 6.636 6.660 6.500
-------
Hash total 3 mths 20.819
=======
July 7.250 6.500 7.017
August 7.125 6.625 6.870
September 7.000 6.250 6.625 6.625
-------
Hash total 3 mths 20.512
=======
Hash total 9 mths 62.075
=======
/ 3
Average price per share three mths 6.837
=======
/ 9
-------
Average price per share Nine mths 6.897
=======
</TABLE>
VII. Diluted
Three Months Nine Months
------------ -----------
Total Proceeds from exercise $ 2,301,845 $ 2,301,845(6)
Divided by average price 6.837 6.897
Repurchase shares of 336,658 333,735
Shares issued (options) 453,250 453,250(5)
----------- -----------
Dilution - Shares (3) 116,592 (3) 119,515
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
KAYE GROUP INC. AND SUBSIDIARIES
FINANCIAL DATA SCHEDULE
For the nine months ended September 30, 1998
(in thousands, except per share amounts)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 37,223
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,237
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 42,190
<CASH> 47,626
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,802
<TOTAL-ASSETS> 164,216
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 8,994
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 6,321
0
0
<COMMON> 85
<OTHER-SE> 39,642
<TOTAL-LIABILITY-AND-EQUITY> 164,216
18,533
<INVESTMENT-INCOME> 3,698
<INVESTMENT-GAINS> 82
<OTHER-INCOME> 25,274
<BENEFITS> 6,748
<UNDERWRITING-AMORTIZATION> 6,872
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 7,301
<INCOME-TAX> 2,300
<INCOME-CONTINUING> 5,001
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,001
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.58
<RESERVE-OPEN> 19,126
<PROVISION-CURRENT> 7,377
<PROVISION-PRIOR> (816)
<PAYMENTS-CURRENT> 917
<PAYMENTS-PRIOR> 3,782
<RESERVE-CLOSE> 20,988
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
