UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 7, 1998 - 8,474,435
- - Total number of pages filed including cover and under pages 20
- - 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
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income for the
three months and six months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
three months and six months ended June 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
Safe Harbor Disclosure 17
PART II OTHER INFORMATION 18
2
<PAGE>
Item 1. - Financial Statements
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
June 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 $29,896 and $22,322) $ 31,655 $ 24,833
Premiums and other receivables 78,611 32,790
Prepaid expenses and other assets 1,465 1,385
-------- --------
Total current assets 111,731 59,008
Fixed assets (net of accumulated depreciation of $5,014 and $4,553) 3,476 3,145
Expiration lists (net of accumulated amortization of $2,346 and $1,969) 4,307 4,702
Deferred income taxes 966
Other assets 261 181
-------- --------
Total assets - insurance brokerage companies 119,775 68,002
-------- --------
PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
Fixed maturities, at market value (amortized cost: 1998, $40,905;
1997, $41,529) 41,308 42,099
Equity securities, at market value (cost:1998, $871; 1997, $871) 958 981
Short term investments, at cost, which approximates market value 2,150 3,430
-------- --------
Total investments 44,416 46,510
Cash and cash equivalents 8,893 6,409
Accrued interest and dividends 788 882
Premiums receivable 2,435 2,344
Premiums receivable - insurance brokerage companies 1,726 3,185
Prepaid reinsurance premiums 132 262
Reinsurance recoverable on unpaid losses and loss expenses 2,486 2,811
Funds held under deposit contracts, at market value, which
approximates cost 50 173
Deferred acquisition costs 2,650 3,939
Deferred income taxes 596 379
Other assets 1,909 1,810
Intercompany receivable 49
-------- --------
Total assets - property and casualty companies 66,130 68,704
-------- --------
CORPORATE
Cash and cash equivalents 695 65
Prepaid expenses and other assets 17 107
Prepaid income tax 735
Investments available-for-sale:
Equity securities, at market value (cost:1998, $497, and 1997, $557) 500 442
Deferred income taxes 41
Intercompany receivable 1,500 3,664
-------- --------
Total assets - corporate 3,447 4,319
-------- --------
Total assets $189,352 $141,025
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
June 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 $ 99,688 $ 40,872
Premiums payable - property and casualty companies 1,726 3,185
Accounts payable and accrued liabilities 5,814 7,983
Notes payable 375 434
Deferred income taxes 395 1,063
Intercompany payable 1,549 3,342
-------- --------
Total current liabilities 109,547 56,879
Notes payable 521 654
Other liabilities 1,130 1,466
-------- --------
Total liabilities-insurance brokerage companies 111,198 58,999
-------- --------
PROPERTY AND CASUALTY COMPANIES
Liabilities:
Unpaid losses and loss expenses 19,702 19,126
Unearned premium reserves 8,249 12,578
Deposit contracts 27 122
Accounts payable and accrued liabilities 7,605 6,661
Reinsurance payable 99 228
Intercompany payable 322
-------- --------
Total liabilities - property and casualty companies 35,682 39,037
-------- --------
CORPORATE
Current liabilities:
Accounts payable and accrued liabilities 60 774
Loan payable 1,109 1,875
Deferred income taxes 11
Income taxes payable 16
-------- --------
Total current liabilities 1,180 2,665
Loan payable-long-term 3,891 5,156
-------- --------
Total liabilities-corporate 5,071 7,821
-------- --------
Total liabilities 151,951 105,857
-------- --------
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, $168; 1997, $192) 326 373
Retained earnings 19,048 16,768
-------- --------
Total stockholders' equity 37,401 35,168
-------- --------
Total liabilities and stockholders' equity $189,352 $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 six months ended June 30, 1998 and 1997
(in thousands, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
====================== ======================
1998 1997 1998 1997
======== ======== ======== ========
<S> <C> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees - net $ 6,941 $ 6,270 $ 13,898 $ 12,475
Commissions and fees - net - Property and Casualty Companies 931 793 1,139 1,015
Investment income 372 237 882 722
-------- -------- -------- --------
Total revenues 8,244 7,300 15,919 14,212
-------- -------- -------- --------
Expenses:
Salaries and benefits 5,042 4,393 10,497 9,240
Other operating expenses 3,008 3,174 6,049 6,357
-------- -------- -------- --------
Total operating expenses 8,050 7,567 16,546 15,597
-------- -------- -------- --------
Interest expense 150 300
-------- -------- -------- --------
Income (loss) before income taxes-insurance brokerage companies 194 (417) (627) (1,685)
-------- -------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 6,023 5,238 8,077 7,031
Change in unearned premiums 122 241 4,199 3,676
-------- -------- -------- --------
Net premiums earned 6,145 5,479 12,276 10,707
Net investment income 773 688 1,469 1,354
Net realized gains on investments 21 6 33 6
Other income 64 61 127 118
-------- -------- -------- --------
Total revenues 7,003 6,234 13,905 12,185
-------- -------- -------- --------
Expenses:
Losses and loss expenses 2,227 2,086 4,573 4,094
Acquisition costs and general and administrative expenses 2,212 2,282 4,228 4,354
-------- -------- -------- --------
Total expenses 4,439 4,368 8,801 8,448
-------- -------- -------- --------
Income before income taxes-property and casualty companies 2,564 1,866 5,104 3,737
-------- -------- -------- --------
CORPORATE
Revenues:
Net investment income (loss) (20) 11 (49) 14
Expenses:
Other operating expenses 86 75 200 161
Interest expense 103 131 251 255
-------- -------- -------- --------
Net expenses before income taxes-corporate (209) (195) (500) (402)
-------- -------- -------- --------
</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 six months ended June 30, 1998 and 1997
(in thousands, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
====================== ======================
1998 1997 1998 1997
======== ======== ======== ========
<S> <C> <C> <C> <C>
Income before income taxes and minority interest 2,549 1,254 3,977 1,650
-------- -------- -------- --------
Provision (benefit) for income taxes
Current 23 (70) 1,115 431
Deferred 792 446 157 64
-------- -------- -------- --------
Total provision for income taxes 815 376 1,272 495
-------- -------- -------- --------
Income before minority interest 1,734 878 2,705 1,155
Minority interest 154 203
-------- -------- -------- --------
Net income 1,734 724 2,705 952
======== ======== ======== ========
EARNINGS PER SHARE
Basic $ 0.20 $ 0.10 $ 0.32 $ 0.13
======== ======== ======== ========
Diluted $ 0.20 $ 0.10 $ 0.31 $ 0.13
======== ======== ======== ========
Weighted average of shares outstanding - basic 8,474 7,020 8,474 7,020
======== ======== ======== ========
Weighted average shares outstanding and
share equivalents outstanding - diluted 8,595 7,020 8,595 7,020
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1998 and 1997
(in thousands)
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
======== ========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,705 $ 952
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs 1,289 1,125
Amortization of bond premium - net 318 343
Deferred income taxes 157 64
Net realized (gains) losses on investments 27 (6)
Depreciation and amortization expense 751 748
Minority interest 203
Change in assets and liabilities:
Accrued interest and dividends 94 43
Premiums and other receivables (43,897) 3,800
Prepaid expenses and other assets (153) 1,651
Unpaid losses and loss expenses 576 1,511
Unearned premium reserves (4,329) (3,659)
Premiums payable 57,228 (1,843)
Income taxes payable (749) (568)
Accounts payable and accrued liabilities (1,416) (485)
-------- --------
Net cash provided by operating activities 12,601 3,879
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale :
Purchase of fixed maturities (6,902) (5,057)
Purchase of equity securities (200) (600)
Purchase of short term investments 1,280 (1,664)
Maturities of fixed maturities 2,865 2,345
Sales of fixed maturities 4,350 1,639
Sales of equity securities 200 300
Funds held under deposit contracts:
Sales of short term investments 123 1,465
Sales of fixed maturities 802
Maturities of fixed maturities 350
Purchase of fixed assets (1,236) (855)
Acquisition payments (402)
-------- --------
Net cash provided by (used in) investing activities 78 (1,275)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under deposit contracts (95) (2,272)
Notes payable-repayment (7,223) (319)
Proceeds from borrowings 5,000 612
Payment of dividends (425) (351)
Payment of dividends to minority stockholders (75)
-------- --------
Net cash used in financing activities (2,743) (2,405)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 9,936 199
Cash and cash equivalents at beginning of period 31,307 27,959
-------- --------
Cash and cash equivalents at end of period $ 41,243 $ 28,158
======== ========
Supplemental cash flow disclosure:
Interest expense $ 251 $ 555
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 June 30, 1998 and for the three
months and six months ended June 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 six months ended June 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.
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 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 largest stockholder, was
dissolved, and its shares in the Company were distributed to its partners.
8
<PAGE>
3) Changes in Accounting Policies
Effective January 1, 1998 the Company adopted 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME $ 1,734 $ 724 $ 2,705 $ 952
Net comprehensive (loss) income (9) 101 (47) 23
------- ------- ------- -------
COMPREHENSIVE INCOME $ 1,725 $ 825 $ 2,658 $ 975
======= ======= ======= =======
</TABLE>
4) Notes 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%. 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 June 30, 1998, no amount is 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 June 30, 1998, the
Company is in compliance with the covenants of the Loan agreement.
The Company's required payments on the Loan for the respective years are
$544,000 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 June 30, 1998 and 1997 were $103,000 and $131,000
respectively, and for the six months ended June 30, 1998 and 1997 were $251,000
and $255,000, respectively.
9
<PAGE>
5) 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.
6) Dividends
On June 19, 1998, the Board of Directors declared a quarterly dividend of
$.025 per share, payable July 20, 1998 to stockholders of record on June 30,
1998.
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 June
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 ended
December 31, 1998.
10
<PAGE>
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 June 30, 1998 the Company has no derivative financial
instruments.
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 June 30, 1998
compared with three months ended June 30, 1997
Net Income
Net Income for the three months ended June 30, 1998 increased by $1,010,000
to $1,734,000 or basic earnings per share of $0.20 compared to $724,000 or $0.10
for the same period last year as explained below.
Insurance Brokerage Companies
Income before taxes increased by $611,000 to $194,000 in 1998 from a loss
of $417,000 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 $8,244,000 compared with $7,300,000 in 1997, an
increase of $944,000 (13%). Gross commissions and fees grew by $1,206,000 (14%)
as a result of the July, 1997 acquisition of Western Insurance Associates, Inc.
and the introduction of new programs. The commission expense rate incurred to
produce new and renewal business increased from 18% to 20%. Investment income
increased by $135,000 (57%) primarily due to collection efficiencies resulting
from a longer holding period for fiduciary investments.
Salaries and benefits increased by $649,000 (15%) to $5,042,000 in 1998
compared to $4,393,000 in 1997. The increase was the result of the July, 1997
acquisition of Western Insurance Associates, Inc. and accrued incentive based
compensation.
Other operating expenses decreased by $166,000 (5%) to $3,008,000 in 1998
compared with $3,174,000 in 1997. This decrease was mainly due to reduced
consulting expenses, insurance costs, and outside rating service fees.
Interest expense decreased by $150,000 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 $698,000 (37%) to $2,564,000 in
1998 from $1,866,000 in 1997. The increase in operating result was due to the
increase in net premiums earned and investment income, as well as the decrease
in the combined ratio.
Net premiums earned for 1998 increased by $666,000 (12%) to $6,145,000 from
$5,479,000 in 1997. The Company's efforts to broaden the distribution network of
the Programs and coverage types contributed to the growth of premium volume.
Net investment income for 1998 increased by $85,000 (12%) to $773,000 from
$688,000 in 1997. This increase was due to the increase in investments.
13
<PAGE>
The loss ratio decreased to 36% in 1998 from 38% 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.
The expense ratio (acquisition costs and general and administrative
expenses) decreased to 36% in 1998 from 42% in 1997. The decrease was due to
lower administrative charges.
Corporate
Net expenses before income taxes increased in 1998 by $14,000 compared to
1997.
Six months ended June 30, 1998
compared with six months ended June 30, 1997
Net Income
Net income for the six months ended June 30, 1998 increased by $1,753,000
to $2,705,000 or basic earnings per share of $0.32 compared to $952,000 or $0.13
for the same period last year as explained below.
Insurance Brokerage Companies
Loss before income taxes decreased by $1,058,000 (63%) to $627,000 in 1998
from $1,685,000 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 $15,919,000 compared with $14,212,000 in 1997,
an increase of $1,707,000 (12%). Gross commission and fees grew by $1,930,000
(12%) mainly as a result of an increase in contingency commission of $933,000
due to volume and profitability of 1997 premiums placed with certain insurance
carriers, the July, 1997 acquisition of Western Insurance Associates, Inc., and
the introduction of new programs, offset by lost business exceeding new
business, and continued price reductions on renewal business. The commission
expense rate incurred to produce new and renewal business increased from 16% to
18%. Investment income increased in 1998 by $160,000 (22%) primarily due to
collection efficiencies resulting in a longer holding period for fiduciary
investments.
Salaries and benefits increased by $1,257,000 (14%) to $10,497,000 in 1998
compared to $9,240,000 in 1997. This increase was primarily due to the July,
1997 acquisition of Western Insurance Associates, Inc. and accrued incentive
based compensation.
Other operating expenses decreased by $308,000 (5%) to $6,049,000 in 1998
compared with $6,357,000 in 1997. This decrease was the result of reduced
consulting expenses, insurance costs, outside rating service costs, and lower
finance charges related to premium finance arrangements.
Interest expense decreased by $300,000 as a result of the early payment of
the $6,000,000 note payable to KILP in August, 1997.
14
<PAGE>
Property and Casualty Companies
Income before income taxes increased by $1,367,000 (37%) to $5,104,000 in
1998 from $3,737,000 in 1997. The increase in operating result was due to an
increase in net premiums earned and investment income, as well as a decrease in
the combined ratio.
Net premiums earned for 1998 increased by $1,569,000 (15%) to $12,276,000
from $10,707,000 in 1997. The Company's efforts to broaden the distribution
network of the Programs and coverage types contributed to the growth of premium
volume.
Net investment income for 1998 increased by $115,000 (8%) to $1,469,000
from $1,354,000 in 1997. This increase was due to the increase in investments.
The loss ratio decreased to 37% in 1998 from 38% 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 (acquisition costs and general and administrative
expenses) for 1998 and 1997 was 34% and 41%, respectively. Exclusive of a bad
debt recovery, the expense ratio would have been 36% and 41%, respectively. This
decrease was due to lower acquisition and administrative charges.
Corporate
Net expenses before income taxes increased in 1998 by $98,000 (24%) to
$500,000 from $402,000 in 1997. This increase was the result of a provision for
investment decline and costs related to the restructuring of debt.
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 $48,327,000 (34%) to $189,352,000 at June 30,
1998 from $141,025,000 at December 31, 1997. Total liabilities increased by
$46,094,000 (44%) to $151,951,000 at June 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. The
significant increase this quarter was due to an early billing of certain Medical
Malpractice Program premiums.
Stockholders' equity increased by $2,233,000 to $37,401,000 at June 30,
1998, from $35,168,000 at December 31, 1997. The increase in equity resulted
from net income of $2,705,000 partially offset by a decrease in net unrealized
appreciation of investments of $47,000 and dividends paid of $425,000.
The Company's cash and cash equivalents increased by $9,936,000 for the six
months ended June 30, 1998. Operating activities provided cash of $12,601,000
primarily as a result of premiums received from assureds not yet paid to
insurance markets. Investing activities provided cash of $78,000 from the sale
and maturity of investments offset by fixed asset purchases (primarily software)
and acquisition payments. Financing activities used cash of $2,743,000 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 June 30, 1998, the Company had cash
and short term investments of $43,393,000. 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. 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 June 30, 1998, no amount is outstanding on the revolving
line of credit.
16
<PAGE>
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.
17
<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 The Annual Meeting
of Stockholders of the Company was held May 11, 1998 (the "Meeting"). At the
Meeting, the following eight directors were nominated for and elected to serve
as members of the Board of Directors of the Company until the Company's next
Annual Meeting or until their successors are duly elected and qualified:
Nominee Votes for
------- ---------
Bruce D. Guthart 6,618,310
Howard Kaye 6,618,310
Michael P. Sabanos 6,618,310
Robert L. Barbanell 6,618,310
Richard B. Butler 6,618,310
Elliot Cooperstone 6,618,310
David Ezekiel 6,618,310
Ned L. Sherwood 6,618,310
Item 5. Other Information - None
18
<PAGE>
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
There were no reports filed on Form 8-K during the period
April 1, 1998 to June 30, 1998.
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
August 11, 1998 /s/ Bruce D. Guthart
----------------------------------------------
Bruce D. Guthart, President &
Chief Executive Officer
August 11, 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 Six Months Ended June 30, 1998
Three months Six months
ended ended
June. 30, 1998 June. 30, 1998
============== ==============
Net Income $ 1,734,000 $ 2,705,000(1)
I. Weighted Average Shares: 8,474,000 8,474,000(2)
=========== ===========
II. Basic EPS 0.2046 0.3192(1)/(2)
=========== ===========
III. Diluted EPS
Weighted Average Shares 8,474,000 8,474,000(2)
Dilution 121,319 120,737(3)
----------- -----------
8,595,319 8,594,737(4)
=========== ===========
Diluted EPS 0.2017 0.3147(1)/(4)
=========== ===========
<PAGE>
EXHIBIT 11
Page 2 of 2
KAYE GROUP INC
Earnings Per Share Calculation
For the Three Months and Six Months Ended June 30, 1998
IV. Outstanding at June 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) 178,650 5.060 903,969 178,650 903,969
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
----------- ------------- --------- ----------
605,400 $ 3,705,397 443,650(5) 2,236,869(6)
=========== ============= ========= ==========
Dilutive Shares 443,650(5) 2,236,869(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
=============
Hash total 6 mths 41.563
=============
/ 3
Average price per share three mths 6.940
=============
/ 6
-------------
Average price per share six mths 6.927
=============
</TABLE>
VII. Diluted
<TABLE>
<CAPTION>
Six Months Three Months
----------------- ----------------
<S> <C> <C>
Total Proceeds from exercise $ 2,236,869(6) $ 2,236,869(6)
Divided by average price 6.927 6.940
Repurchase shares of 322,913 322,331
Shares issued (options) 443,650 443,650(5)
--------------- -------------
Dilution - Shares 120,737 121,319(3)
=============== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 41,308
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,458
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 44,966
<CASH> 41,243
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,650
<TOTAL-ASSETS> 189,352
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 8,249
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 27
<NOTES-PAYABLE> 5,896
0
0
<COMMON> 85
<OTHER-SE> 37,316
<TOTAL-LIABILITY-AND-EQUITY> 189,352
12,276
<INVESTMENT-INCOME> 2,302
<INVESTMENT-GAINS> 33
<OTHER-INCOME> 15,164
<BENEFITS> 4,573
<UNDERWRITING-AMORTIZATION> 4,228
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 3,977
<INCOME-TAX> 1,272
<INCOME-CONTINUING> 2,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,705
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
<RESERVE-OPEN> 19,126
<PROVISION-CURRENT> 5,171
<PROVISION-PRIOR> (1,148)
<PAYMENTS-CURRENT> 353
<PAYMENTS-PRIOR> 3,094
<RESERVE-CLOSE> 19,702
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
