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 March 31, 1999
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 May 7, 1999 - 8,441,435
- - Total number of pages filed including cover and under pages 22
- - Exhibit index is located on page 18
<PAGE>
KAYE GROUP INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income for the
three months ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 7
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 1999 and 1998 8
Notes to Unaudited Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Year 2000 Compliance 15
Safe Harbor Disclosure 17
PART II OTHER INFORMATION
2
<PAGE>
Item 1. - Financial Statements
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1999 1998
-------- --------
(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 $21,195 and $33,218) $ 25,195 $ 34,267
Premiums and other receivables 12,852 40,572
Prepaid expenses and other assets 2,062 1,895
-------- --------
Total current assets 40,109 76,734
Fixed assets (net of accumulated depreciation of $5,941 and $5,662) 3,699 3,683
Intangible assets (net of accumulated amortization of $3,104 and $2,750) 9,379 6,795
Deferred income taxes 252 816
Other assets 203 205
-------- --------
Total assets - insurance brokerage companies 53,642 88,233
-------- --------
PROPERTY AND CASUALTY COMPANIES:
Investments available-for-sale:
Fixed maturities, at market value (amortized cost: 1999, $47,355;
1998, $42,980) 47,685 43,597
Equity securities, at market value (cost:1999, $696; 1998, $696) 740 782
Short term investments, at cost, which approximates market value 4,100 2,950
-------- --------
Total investments 52,525 47,329
Cash and cash equivalents 4,444 10,806
Accrued interest and dividends 1,006 961
Premiums receivable 1,307 2,644
Premiums receivable - insurance brokerage companies 367 3,041
Reinsurance recoverable on unpaid losses and loss expenses 3,439 3,220
Deferred acquisition costs 2,786 3,921
Deferred income taxes 830 586
Other assets 3,401 2,466
Intercompany note receivable 3,000
Intercompany receivable 2,449 508
-------- --------
Total assets - property and casualty companies 75,554 75,482
-------- --------
CORPORATE:
Cash and cash equivalents 360 370
Prepaid expenses and other assets 255 248
Investments available-for-sale:
Equity securities, at market value (cost:1999, $497, and 1998, $497) 602 615
Deferred income taxes 10
Intercompany receivable 362 2,118
-------- --------
Total assets - corporate 1,589 3,351
-------- --------
Total assets $130,785 $167,066
======== ========
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
LIABILITIES
INSURANCE BROKERAGE COMPANIES:
Current liabilities:
Premiums payable $ 28,367 $ 59,472
Premiums payable - property and casualty companies 367 3,041
Accounts payable and accrued liabilities 6,571 9,045
Notes payable 633 718
Deferred income taxes 978
Intercompany payable 2,811 2,626
--------- ---------
Total current liabilities 38,749 75,880
Notes payable 1,231 1,369
Intercompany note payable 3,000
Other liabilities 748 1,005
--------- ---------
Total liabilities-insurance brokerage companies 43,728 78,254
--------- ---------
PROPERTY AND CASUALTY COMPANIES:
Liabilities:
Unpaid losses and loss expenses 22,550 21,567
Unearned premium reserves 8,767 12,327
Accounts payable and accrued liabilities 7,355 7,451
Other liabilities 74 143
--------- ---------
Total liabilities - property and casualty companies 38,746 41,488
--------- ---------
CORPORATE:
Current liabilities:
Accounts payable and accrued liabilities 475 511
Note and loan payable 1,170 1,153
Deferred income taxes 20
Income taxes payable 1,176 568
--------- ---------
Total current liabilities 2,821 2,252
Loan payable-long-term 3,010 3,303
--------- ---------
Total liabilities-corporate 5,831 5,555
--------- ---------
Total liabilities 88,305 125,297
--------- ---------
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;
shares issued and outstanding (1999, 8,446; 1998, 8,474) 85 85
Paid - in capital 17,942 17,942
Accumulated other comprehensive income, net of deferred
income tax liability (1999, $163; 1998, $280) 316 541
Retained earnings 24,344 23,201
Treasury stock, 28 shares at cost (207)
--------- ---------
Total stockholders' equity 42,480 41,769
--------- ---------
Total liabilities and stockholders' equity $ 130,785 $ 167,066
--------- ---------
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 1999 and 1998
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------
1999 1998
------- -------
<S> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees - net $ 8,564 $ 7,426
Investment income 350 510
------- -------
Total revenues 8,914 7,936
------- -------
Expenses:
Salaries and benefits 5,576 5,492
Amortization of intangibles 354 144
Other operating expenses 3,376 3,121
------- -------
Total operating expenses 9,306 8,757
------- -------
Interest expense 82
------- -------
Loss before income taxes-insurance brokerage companies (474) (821)
------- -------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 2,817 2,054
Change in unearned premiums 3,603 4,077
------- -------
Net premiums earned 6,420 6,131
Net investment income 727 696
Net realized gains on investments 1 12
Other income 18 63
------- -------
Total revenues 7,166 6,902
------- -------
Expenses:
Losses and loss expenses 2,182 2,346
Acquisition costs and general and administrative expenses 2,368 2,016
------- -------
Total expenses 4,550 4,362
------- -------
Income before income taxes-property and casualty companies 2,616 2,540
------- -------
CORPORATE
Revenues:
Net investment income (loss) 3 (29)
Expenses:
Other operating expenses 97 114
Interest expense 79 148
------- -------
Net expenses before income taxes-corporate (173) (291)
------- -------
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 1999 and 1998
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
1999 1998
------- -------
<S> <C> <C>
Income before income taxes 1,969 1,428
------- -------
Provision (benefit) for income taxes
Current 1,181 1,092
Deferred (571) (635)
------- -------
Total provision for income taxes 610 457
------- -------
Net income $ 1,359 $ 971
------- -------
EARNINGS PER SHARE
Basic $ 0.16 $ 0.11
------- -------
Diluted $ 0.16 $ 0.11
------- -------
Weighted average of shares outstanding - basic 8,460 8,474
------- -------
Weighted average shares outstanding and
share equivalents outstanding - diluted 8,605 8,596
------- -------
</TABLE>
See notes to unaudited consolidated financial statements
6
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1999 and 1998
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
======== ========
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,359 $ 971
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs 1,135 1,271
Amortization of bond premium - net 138 142
Deferred income taxes (571) (635)
Net realized (gains) losses on investments (1) 18
Depreciation and amortization expense 639 383
Change in assets and liabilities:
Accrued interest and dividends (45) (7)
Premiums and other receivables 31,458 7,300
Prepaid expenses and other assets (1,072) 61
Unpaid losses and loss expenses 983 (156)
Unearned premium reserves (3,560) (4,109)
Premiums payable (33,848) (773)
Income taxes payable 608 1,092
Accounts payable and accrued liabilities (2,674) (1,965)
-------- --------
Net cash provided by (used in) operating activities (5,451) 3,593
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale :
Purchase of fixed maturities (5,573) (2,831)
Purchase of short term investments (1,150) (1,320)
Maturities of fixed maturities 960 1,676
Sales of fixed maturities 101 1,222
Sales of equity securities 200
Funds held under deposit contracts
Sales of short term investments 10
Purchase of fixed assets (296) (727)
Purchase of expiration lists (2,612) (188)
-------- --------
Net cash used in investing activities (8,570) (1,958)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts under deposit contracts 8
Acquisition debt-repayment (94)
Notes and loan payable-repayment (405) (1,024)
Acquisition of treasury stock (712)
Payment of dividends (212) (212)
-------- --------
Net cash used in financing activities (1,423) (1,228)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (15,444) 407
Cash and cash equivalents at beginning of period 45,443 31,307
-------- --------
Cash and cash equivalents at end of period $ 29,999 $ 31,714
======== ========
Supplemental cash flow disclosure:
Interest expense $ 115 $ 148
Income taxes $ 573
Noncash financing activity:
Reissuance of treasury stock for an acquisition $ 505
</TABLE>
See notes to unaudited consolidated financial statements
7
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
NET INCOME $ 1,359 $ 971
Other comprehensive income:
Unrealized depreciation of investments available -for-sale, net of
deferred income tax benefit (1999, $117; 1998, $25) (224) (50)
Less: reclassification adjustment for gain included in net income,
net of deferred income tax liability (benefit) (1999, $0; 1998, $(6)) (1) 12
------- -------
Total other comprehensive income (225) (38)
------- -------
COMPREHENSIVE INCOME $ 1,134 $ 933
======= =======
</TABLE>
See notes to unaudited consolidated financial statements
8
<PAGE>
ITEM 1. - Financial Statements (continued)
KAYE GROUP INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1) General
The consolidated financial statements as of March 31, 1999 and for the
three months ended March 31, 1999 and 1998 are unaudited, 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 ended March 31, 1999 are not
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 1998 Form 10-K. The December 31,
1998 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
current year 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 March 31, 1999 and 1998 was $307,000 and $261,000,
respectively. In addition, commissions and fees earned by the Insurance
Brokerage Companies from the Property and Casualty Companies for the three
months ended March 31, 1999 and 1998 were $193,000 and $208,000, 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) Business Segments
Kaye Group Inc. (the "Company"), a Delaware corporation, 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") comprised of the Insurance Companies and
Claims Administration Corporation.
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.
9
<PAGE>
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.
The identifiable segment assets, operating profits and income before income
taxes 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 three months ended March 31, 1999 and 1998:
Business Segments - 1999
------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty
------------------------------------------------------------------------
Revenue from external sources $8,371 $6,420
Revenue from other segments 193 18
Depreciation expense 285 2
Amortization expense 354 1,973
Capital expenditures 296
Business Segments - 1998
------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty
------------------------------------------------------------------------
Revenue from external sources $7,218 $6,177
Revenue from other segments 208 17
Depreciation expense 239 4
Amortization expense 144 1,882
Capital expenditures 727
3) 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
March 31, 1999, $4,180,000 was outstanding under the Loan. In addition, the
Company has available a $4,500,000 revolving line of credit with the same bank,
also collateralized by the stock of the Property and Casualty Companies. The
proceeds are available for general operating needs and acquisitions. As of March
31, 1999, 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
10
<PAGE>
consolidated GAAP net worth, statutory surplus, ratio of net premiums written to
surplus, and minimum debt service coverage. As of March 31, 1999, the Company
was in compliance with the covenants of the Loan agreement.
The Company's required payments on the Loan for the respective years are
$869,000 in 1999, $1,241,000 in 2000, $1,343,000 in 2001, and $727,000 in 2002.
Interest expense for the loans mentioned above for the three months ended March
31, 1999 and 1998 were $79,000 and $148,000, respectively.
4) 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.
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 amounts):
Three Months Ended
March 31,
---------
1999 1998
------ ------
Net income (numerator) $1,359 $ 971
------ ------
Weighted average common shares and effect of
dilutive shares used in the computation of
earnings per share:
Average shares outstanding-basic 8,460 8,474
Effect of dilutive shares 145 122
------ ------
Average shares outstanding-diluted
(denominator) 8,605 8,596
------ ------
Earnings per common share:
Basic $ 0.16 $ 0.11
Diluted $ 0.16 $ 0.11
5) Dividends
On March 19, 1999, the Board of Directors declared a quarterly dividend of
$.025 per share, payable April 20, 1999 to stockholders of record on March 31,
1999.
6) 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.
11
<PAGE>
7) Acquisition
Effective January 1, 1999, the Company, through its insurance brokerage
subsidiary, Kaye Insurance Associates, Inc., purchased the assets, including
customer lists and certain liabilities of Woodbury, N.Y. - based broker Seaman,
Ross, & Wiener, Inc. ("SRW") and related entities for an initial purchase price
of $2,430,000 in cash and $500,000 in stock of the Company. The total purchase
price is contingent on future billings related to the acquired customer lists
and will increase significantly from the initial purchase price. This
acquisition is being accounted for using the purchase method of accounting.
Accordingly, intangible assets (including customer lists) of approximately $2.9
million resulting from the preliminary purchase price allocation are being
amortized by using the straight-line method over a period of not more than
twenty years.
The above acquisition has been included in the Company's consolidated
financial statements from the effective date. The following unaudited pro forma
summary presents the consolidated results of operations of the Company as if the
SRW acquisition had occurred on January 1, 1998. The pro forma results are shown
for illustrative purposes only and do not purport to be indicative of the
results which would have been reported if the acquisition had occurred on the
dates indicated or which may occur in the future.
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------
(in thousands except per share amounts)
1999 1998
--------- ---------
<S> <C> <C>
Pro forma revenues - Insurance Brokerage Companies $8,914 $8,956
Pro forma net income $1,359 $1,210
Pro forma earnings per share - basic $0.16 $0.14
Pro forma earnings per share- diluted $0.16 $0.14
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Kaye Group Inc. (the "Company"), a Delaware corporation, 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") comprised of the Insurance Companies and Claims
Administration Corporation.
12
<PAGE>
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.
Results of Operations
Three months ended March 31, 1999
compared with three months ended March 31, 1998
Net Income
Net Income for the three months ended March 31, 1999 increased by $388,000
to $1,359,000 or basic earnings per share of $0.16 compared to $971,000 or $0.11
for the same period last year as explained below.
Insurance Brokerage Companies
Loss before income taxes decreased by $347,000 to $474,000 in 1999 from
$821,000 in 1998. The increased operating result was primarily due to increased
revenues partially offset by an increase in salaries and benefits and other
operating expenses, as discussed below.
Total revenues in 1999 were $8,914,000 compared with $7,936,000 in 1998, an
increase of $978,000 (12%). Gross commissions and fees grew by $1,749,000 (22%)
as a result of new business and acquisitions exceeding lost business. The
commission expense rate incurred to produce new and renewal business increased
from 10% to 15% as a result of certain new business and acquisitions having
higher production costs, and certain lost business that had lower production
costs. Investment income decreased by $160,000 (31%) primarily due to lower
fiduciary investments as a result of certain lost business.
13
<PAGE>
Salaries and benefits increased by $84,000 (2%) to $5,576,000 in 1999
compared to $5,492,000 in 1998. The increase was the result of salary
increments, and 1998 and 1999 acquisitions, offset partially by headcount
reductions and lower annual incentive based compensation accruals.
Amortization of intangibles increased by $210,000 to $354,000 in 1999
compared with $144,000 in 1998 due to amortization of acquisition related
intangibles on 1998 and 1999 acquisitions.
Other operating expenses increased by $255,000 (8%) to $3,376,000 in 1999
compared with $3,121,000 in 1998. The increase was mainly due to 1998 and 1999
acquisitions and increased consulting expenses.
Interest expense increased by $82,000 as a result of acquisition
indebtedness and a note payable to the Property & Casualty Companies.
Property and Casualty Companies
Income before income taxes increased by $76,000 (3%) to $2,616,000 in 1999
from $2,540,000 in 1998. This increase was due to an increase in net premiums
earned, investment income and a decrease in the loss ratio offset by an increase
in general and administrative expenses.
Net premiums earned for 1999 increased by $289,000 (5%) to $6,420,000 from
$6,131,000 in 1998. 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.
Net investment income increased by $31,000 (4%) to $727,000 in 1999 from
$696,000 in 1998. The increase was due to an increase in investments generated
by cash flow from operations.
The loss ratio (losses incurred expressed as a percentage of premiums
earned) decreased to 34% in 1999 from 38% in 1998. The decrease was due to lower
losses and loss expense under the property program resulting from mild weather
partially offset by an increase in assumed general liability losses.
The acquisition costs and general and administrative expense ratio was 37%
and 33% for 1999 and 1998, respectively. Exclusive of bad debt recovered in
1998, the ratio would have been 37% and 36% for 1999 and 1998, respectively.
This increase was due to higher administrative expenses.
Corporate
Net expenses before income taxes decreased in 1999 by $118,000 (41%) to
$173,000 from $291,000 in 1998. This decrease was primarily the result of lower
interest expense due the 1998 restructuring of corporate debt and lower
insurance costs.
14
<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 decreased by $36,281,000 (22%) to $130,785,000 at March 31,
1999 from $167,066,000 at December 31, 1998. Total liabilities decreased by
$36,992,000 (30%) to $88,305,000 at March 31, 1999 from $125,297,000 at December
31, 1998. Due to the cyclical nature of the business, premiums receivable and
premiums payable fluctuate significantly from quarter to quarter and are
generally related. The collection of premiums receivable and the amortization of
acquisition costs, with the corresponding payments to underwriters and the
amortization of unearned premiums related to the fourth quarter renewal of the
real estate programs accounted for the major portion of the decrease.
Stockholders' equity increased by $711,000 (2%) to $42,480,000 at March 31,
1999, from $41,769,000 at December 31, 1998. The increase in equity resulted
from net income of $1,359,000 offset by an increase in net unrealized
depreciation of investments of $225,000, dividends paid of $212,000, and
$211,000 for net purchases of treasury stock.
The Company's cash and cash equivalents decreased by $15,444,000 for the
period ended March 31, 1999. Operating activities used cash of $5,451,000
primarily as result of premiums paid to insurance markets. Investing activities
used cash of $8,570,000 primarily for the purchase of investments and
acquisition payments. Financing activities used cash of $1,423,000 for payments
of dividends, loan repayments and treasury stock purchases..
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 March 31, 1999, the Company had
cash and short term investments of $29,999,000. Of the Company's total
investments, certain amounts are pledged or deposited into trust funds to
collateralize the Company's obligations under reinsurance agreements.
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 possible that such systems could fail entirely, although in many instances
the consequences of a system not being "year 2000 complaint" 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 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.
15
<PAGE>
As of March 31, 1998 the Company has completed approximately 85% 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 system 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 are intended to add increased functionality to the Company. The Company
has completed its assessment of its servers and client server operating
software. The results of this assessment were identification of hardware and
software issues requiring remediation in order to assure year 2000 compliance.
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 estimated to be $266,000 and has been
reflected in the financial statements.
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 complaint for year
2000-related problems there could be a material adverse impact on the Company's
financial statements. 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 these 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 mid 1999, the Company will develop contingency plans if deemed necessary
for critical systems and relationships.
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 for coverage in
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
16
<PAGE>
Company is aware that year 2000 liabilities may be deemed not to be fortuitous
in nature and, therefore, not covered under the policies underwritten 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.
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 - 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
There were no reports on Form 8-K for the period January 1, 1999 to March 31,
1999.
18
<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
May 13, 1999 /s/ Bruce D. Guthart
-----------------------------------------
Bruce D. Guthart, Chairman, President and
Chief Executive Officer
May 13, 1999 /s/ Michael P. Sabanos
-----------------------------------------
Michael P. Sabanos, Senior Vice President and
Chief Financial Officer
19
KAYE GROUP INC EXHIBIT 11
Earnings Per Share Calculation Page 1 of 2
For the Three Months Ended March 31, 1999
<TABLE>
<S> <C>
Shares outstanding at 12/31/98 8,474,435(A)
Less: Net purchase of Treasury Stock (1/1 - 3/31/99) 28,000
Balance @ 3/31/99 8,446,435(B)
---------
Weighted average 8,460,435[(A)+(B)] /2
=========
<CAPTION>
Three months
ended
March 31, 1999
--------------
<S> <C>
Net Income $ 1,359,000(1)
I. Average Shares: 8,460,435(2)
II. Basic EPS 0.1606(1)/(2)
==========
III. Diluted EPS
Weighted Average Shares 8,460,435(2)
Dilution 144,255(3)
----------
8,604,690(4)
==========
Diluted EPS 0.1579(1)/(4)
==========
</TABLE>
<PAGE>
KAYE GROUP INC
Earnings Per Share Calculation
For the Twelve Months Ended March 31, 1999
EXHIBIT 11
Page 2 of 2
IV. Outstanding at March 31, 1999
<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 11.630 5,815
Options (9/13/95) 15,000 7.880 118,200
Options (10/25/95) 40,200 8.430 338,886
Options (5/15/96) 10,000 7.060 70,600 10,000 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
Options (10/30/98) 20,000 6.170 123,400 20,000 123,400
Options (12/10/98) 24,500 6.600 161,700 24,500 161,700
Options (2/19/99) 800 7.410 5,928
Options (12/10/98) 40,000 7.380 295,200
------- ---------- ------- ---------
700,000 $4,354,074 507,750(5) 2,657,545(6)
======= ========== ======= =========
Dilutive Shares 507,750(5) 2,657,545(6)
======= =========
</TABLE>
V. Average market value/share
Average Close on
Close last day
----- --------
Jan 7.081
Feb 7.352
Mar 7.500 7.125
------
Hash total 3 mths 21.933
======
/ 3
------
Average price per share Three mths 7.311
======
VII. Diluted
Three Months
------------
Total Proceeds from exercise $ 2,657,545(6)
Divided by average price 7.311
Repurchase shares of 363,495
Shares issued (options) 507,750(5)
--------
Dilution - Shares (3) 144,255
========
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 47,685
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,342
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 53,127
<CASH> 29,999
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,786
<TOTAL-ASSETS> 130,785
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 8,767
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 6,044
0
0
<COMMON> 85
<OTHER-SE> 42,395
<TOTAL-LIABILITY-AND-EQUITY> 130,785
6,420
<INVESTMENT-INCOME> 1,080
<INVESTMENT-GAINS> 1
<OTHER-INCOME> 8,582
<BENEFITS> 2,182
<UNDERWRITING-AMORTIZATION> 1,973
<UNDERWRITING-OTHER> 395
<INCOME-PRETAX> 1,969
<INCOME-TAX> 610
<INCOME-CONTINUING> 1,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,359
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
<RESERVE-OPEN> 21,567
<PROVISION-CURRENT> 2,409
<PROVISION-PRIOR> (107)
<PAYMENTS-CURRENT> 56
<PAYMENTS-PRIOR> 1,263
<RESERVE-CLOSE> 22,550
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
