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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to ____________ 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 4, 2000 - 8,469,173
- Total number of pages filed including cover and under pages 25
- 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 as of
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income for the
Three months and six months ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the
Six months ended June 30, 2000 and 1999 7
Consolidated Statements of Comprehensive Income for the
Three months and six months ended June 30, 2000 and 1999 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 17
Safe Harbor Disclosure 17
PART II OTHER INFORMATION 18
2
<PAGE>
Item 1. - Financial Statements
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 and December 31, 1999
(in thousands, except par value per share)
<TABLE>
<CAPTION>
2000 1999
========= =========
(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 $20,936 and $25,610) $ 22,374 $ 27,678
Premiums and other receivables 39,199 27,265
Prepaid expenses and other assets 1,835 1,717
--------- ---------
Total current assets 63,408 56,660
Fixed assets (net of accumulated depreciation of $7,528 and $6,922) 3,550 3,770
Intangible assets (net of accumulated amortization of $4,215 and $3,845) 10,546 10,228
Other assets 454 195
--------- ---------
Total assets - insurance brokerage companies 77,958 70,853
--------- ---------
PROPERTY AND CASUALTY COMPANIES:
Investments available-for-sale:
Fixed maturities, at market value (amortized cost: 2000, $42,112;
1999, $42,273) 41,330 41,304
Equity securities, at market value (cost:2000, $6,400; 1999, $3,873) 6,617 4,496
Short term investments, at cost, which approximates market value 4,080 5,500
--------- ---------
Total investments 52,027 51,300
Cash and cash equivalents 5,090 8,827
Accrued interest and dividends 889 873
Premiums receivable 3,116 2,333
Reinsurance recoverable on paid and unpaid losses 3,808 2,747
Prepaid reinsurance premiums 717 488
Deferred acquisition costs 2,943 4,313
Deferred income taxes 1,368 1,236
Other assets 3,400 4,520
--------- ---------
Total assets - property and casualty companies 73,358 76,637
--------- ---------
CORPORATE:
Cash and cash equivalents 113 1,233
Prepaid income taxes 357
Prepaid expenses and other assets 106 153
Investments:
Equity securities, at market value (cost:2000, $308, and 1999, $243) 346 243
Deferred income taxes 115 93
--------- ---------
Total assets - corporate 1,037 1,722
--------- ---------
Total assets $ 152,353 $ 149,212
========= =========
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 and December 31, 1999
(in thousands, except par value per share)
<TABLE>
<CAPTION>
2000 1999
========= =========
(UNAUDITED)
<S> <C> <C>
LIABILITIES
INSURANCE BROKERAGE COMPANIES:
Current liabilities:
Premiums payable and unearned commissions $ 48,103 $ 42,161
Accounts payable and accrued liabilities 5,962 8,103
Notes payable 488 527
--------- ---------
Total current liabilities 54,553 50,791
Notes payable 610 841
Deferred income taxes 763 491
--------- ---------
Total liabilities-insurance brokerage companies 55,926 52,123
--------- ---------
PROPERTY AND CASUALTY COMPANIES:
Liabilities:
Unpaid losses and loss expenses 24,957 23,969
Unearned premium reserves 9,817 13,694
Accounts payable and accrued liabilities 7,072 7,953
Other liabilities 236 245
--------- ---------
Total liabilities - property and casualty companies 42,082 45,861
--------- ---------
CORPORATE:
Current liabilities:
Accounts payable and accrued liabilities 294 300
Loan payable 1,291 1,241
Income taxes payable 366
--------- ---------
Total current liabilities 1,585 1,907
Loan payable-long-term 1,412 2,070
--------- ---------
Total liabilities-corporate 2,997 3,977
--------- ---------
Total liabilities 101,005 101,961
--------- ---------
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 (2000, 8,469; 1999, 8,458) 85 85
Paid - in capital 18,019 18,019
Accumulated other comprehensive income, net of deferred
income tax benefit (2000, ($179); 1999, ($118)) (348) (228)
Unearned stock grant compensation (244) (254)
Retained earnings 33,974 29,858
Common stock in Treasury, shares at cost (2000, 17; 1999, 28) (138) (229)
--------- ---------
Total stockholders' equity 51,348 47,251
--------- ---------
Total liabilities and stockholders' equity $ 152,353 $ 149,212
========= =========
</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 and six months ended June 30, 2000 and 1999
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees - net $ 11,476 $ 10,016 $ 20,253 $ 18,580
Investment income 298 255 631 605
-------- -------- -------- --------
Total revenues 11,774 10,271 20,884 19,185
-------- -------- -------- --------
Expenses:
Compensation and benefits 5,847 6,211 11,492 11,787
Amortization of intangibles 280 274 567 628
Other operating expenses 3,386 3,110 6,560 6,486
-------- -------- -------- --------
Total operating expenses 9,513 9,595 18,619 18,901
-------- -------- -------- --------
Interest expense 213 262 421 344
-------- -------- -------- --------
Income (loss) before income taxes-insurance brokerage companies 2,048 414 1,844 (60)
-------- -------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 7,533 6,222 10,484 9,039
Change in unearned premiums (7) 287 4,106 3,890
-------- -------- -------- --------
Net premiums earned 7,526 6,509 14,590 12,929
Net investment income 777 707 1,561 1,434
Net realized gain (loss) on investments 81 (21) 466 (20)
Other income 411 17 429 35
-------- -------- -------- --------
Total revenues 8,795 7,212 17,046 14,378
-------- -------- -------- --------
Expenses:
Losses and loss expenses 3,207 2,114 5,958 4,296
Acquisition costs and general and administrative expenses 3,150 2,507 5,925 4,875
-------- -------- -------- --------
Total expenses 6,357 4,621 11,883 9,171
-------- -------- -------- --------
Income before income taxes-property and casualty companies 2,438 2,591 5,163 5,207
-------- -------- -------- --------
CORPORATE
Revenues:
Net investment income 75 256 89 259
Expenses:
Other operating expenses 209 98 292 195
Interest expense 62 85 129 164
-------- -------- -------- --------
Income (loss) before income taxes-corporate (196) 73 (332) (100)
-------- -------- -------- --------
</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 and six months ended June 30, 2000 and 1999
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income before income taxes 4,290 3,078 6,675 5,047
-------- -------- -------- --------
Provision (benefit) for income taxes
Current 574 426 1,957 1,607
Deferred 799 529 179 (42)
-------- -------- -------- --------
Total provision for income taxes 1,373 955 2,136 1,565
-------- -------- -------- --------
Net income $ 2,917 $ 2,123 $ 4,539 $ 3,482
======== ======== ======== ========
EARNINGS PER SHARE
Basic $ 0.34 $ 0.25 $ 0.54 $ 0.41
======== ======== ======== ========
Diluted $ 0.34 $ 0.25 $ 0.53 $ 0.40
======== ======== ======== ========
Weighted average of shares outstanding - basic 8,466 8,448 8,464 8,457
======== ======== ======== ========
Weighted average shares outstanding and
share equivalents outstanding - diluted 8,570 8,590 8,609 8,600
======== ======== ======== ========
</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 six months ended June 30, 2000 and 1999
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,539 $ 3,482
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs 1,370 1,165
Amortization of bond premium - net 321 320
Deferred income taxes 179 (42)
Net realized (gains) loss on investments (530) 230
Depreciation and amortization expense 1,225 1,214
Change in assets and liabilities:
Accrued interest and dividends (16) 82
Premiums and other receivables (13,478) 4,843
Prepaid expenses and other assets 612 (1,205)
Premiums payable 5,933 (7,497)
Accounts payable and accrued liabilities (2,705) (1,678)
Unpaid losses and loss expenses 988 1,324
Unearned premium reserves (3,877) (3,593)
Income taxes payable (723) (1,290)
-------- --------
Net cash used in operating activities (6,162) (2,645)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale :
Purchase of fixed maturities (4,740) (8,068)
Purchase of equity securities (4,909) (2,007)
Sales of short term investments 1,420 750
Maturities of fixed maturities 2,499 2,005
Sales of fixed maturities 1,984 3,364
Sales of equity securities 2,946 721
Purchase of fixed assets (493) (477)
Purchase of expiration lists (1,404) (3,668)
-------- --------
Net cash used in investing activities (2,697) (7,380)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition debt-repayment (188) (375)
Notes and loan payable-repayment (691) (795)
Payment of dividends (423) (422)
Proceeds from issuance of common stock 14
Acquisition of treasury stock (744)
-------- --------
Net cash used in financing activities (1,302) (2,322)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (10,161) (12,347)
Cash and cash equivalents at beginning of period 37,738 45,443
-------- --------
Cash and cash equivalents at end of period $ 27,577 $ 33,096
======== ========
Supplemental cash flow disclosure:
Interest expense $ 532 $ 387
Income taxes $ 2,680 $ 2,897
Noncash financing activity:
Reissuance of treasury stock for an acquisition $ 91 $ 545
</TABLE>
See notes to unaudited consolidated financial statements
7
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME For the three months and six months ended June 30, 2000 and 1999
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME $ 2,917 $ 2,123 $ 4,539 $ 3,482
Other comprehensive income:
Unrealized (depreciation) appreciation of investments available-for-sale, net of
deferred income tax liability (benefit) (2000, ($51), $69; 1999, ($300), ($416)) (100) (583) 132 (807)
Less: reclassification adjustment for (gain) loss included in net income, net of
deferred income tax (liability) benefit (2000, $1, ($130); 1999, $63, $62) 2 122 (252) 121
------- ------- ------- -------
Total other comprehensive loss (98) (461) (120) (686)
------- ------- ------- -------
COMPREHENSIVE INCOME $ 2,819 $ 1,662 $ 4,419 $ 2,796
======= ======= ======= =======
</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 June 30, 2000 and for the three
months and six months ended June 30, 2000 and 1999 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 and six months ended June 30,
2000 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 1999 Form 10-K. The December 31,
1999 Consolidated Balance Sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
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.
The Insurance business underwrites property and casualty risks for insureds
in the United States and is sold principally through specially designed
alternative distribution 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 and,
for the most part, the related expenses are allocated to either the Insurance
Brokerage Companies or the Property and Casualty Companies. Certain holding
company expenses are not allocated and
9
<PAGE>
include debt servicing and public company expenses, including investor relations
costs. In addition, Corporate Operations include an investment in Arista
Investors Corp.
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 and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Business Segments - 2000
-----------------------------------------------------------------------------------------------------------------
3 months ended June 30, 6 months ended June 30,
---------------------------- -----------------------------
Insurance Property & Insurance Property &
(in thousands) Brokerage Casualty Brokerage Casualty
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external sources $10,749 $ 7,526 $19,527 $14,590
Revenue from other segments 727 17 726 36
Interest income from other segments -- 69 -- 134
Depreciation and amortization expense 622 2,367 1,207 4,549
Capital expenditures 281 -- 493 --
</TABLE>
<TABLE>
<CAPTION>
Business Segments - 1999
-----------------------------------------------------------------------------------------------------------------
3 months ended June 30, 6 months ended June 30,
---------------------------- -----------------------------
Insurance Property & Insurance Property &
(in thousands) Brokerage Casualty Brokerage Casualty
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external sources $ 9,060 $ 6,509 $17,431 $12,929
Revenue from other segments 956 18 1,149 35
Depreciation and amortization expense 565 2,018 1,204 3,993
Capital expenditures 181 -- 477 --
</TABLE>
3) Loan Payable
The 7.8% Term Loan due through 2002 is secured by the stock of the Property
and Casualty Companies. Certain covenants exist on this loan, the most
significant being the requirement to maintain a minimum GAAP net worth, minimum
statutory surplus in the insurance companies, a fixed ratio of net premiums to
surplus and a minimum debt service coverage. At June 30, 2000, the Company was
in compliance with the covenants under the loan agreement.
The Company's required principal payments on the Term Loan for the
respective years are $633,000 in 2000, $1,343,000 in 2001, and $727,000 in 2002.
Interest expense for the loan for the three months and six months ended June 30,
2000 and 1999 were $62,000 and $129,000 and $85,000 and $164,000 for 1999,
respectively.
In addition, the Company has available a $4,500,000 revolving line of
credit through 2001 at a rate of LIBOR plus 175 basis points or the banks' base
rate. The line is also secured by the stock of the Property and Casualty
Companies. The proceeds are available for general operating needs and
acquisitions. At June 30, 2000, no amount was outstanding on the revolving line
of credit. A quarterly fee is assessed in the amount of .05% on the unused
balance.
10
<PAGE>
4) Treasury Stock
The Company's repurchases of shares of Common Stock are recorded as
treasury stock and result in a reduction of stockholders' equity. When treasury
shares are reissued the Company uses a first-in, first-out method and the excess
of re-issuance price over repurchase cost is treated as an increase of paid-in
capital. Net issuances/(purchases) of treasury stock for the six months ended
June 30, 2000 and 1999 amounted to 10,878 and (27,445) shares, respectively.
5) Lease Commitments and Rentals
During the second quarter of 2000, the Company, through one of its
insurance brokerage subsidiaries, Kaye Insurance Associates, Inc., entered into
a lease for office space in Woodbury, New York for occupancy in the fourth
quarter of 2000. In addition, subsequent to June 30, 2000, the Company, through
another of its insurance brokerage subsidiaries, Kaye-Western Insurance & Risk
Services, Inc., entered into a lease for office space in Arcadia, California for
occupancy in the fourth quarter of 2000. Minimum annual rental commitments as of
June 30, 2000 under various non-cancelable operating leases, (including the new
leases mentioned above), for office space and equipment are as follows (in
thousands):
Years Ending December 31,
2000 .................. $1,668
2001 .................. 3,269
2002 .................. 1,277
2003 .................. 889
Thereafter ............ 5,428
-------
12,531
Sub-lease rental income..... (45)
-------
Net rental commitments .....$12,486
-------
6) Earnings Per Share
Earnings per common share for the three months and six months ended June
30, 2000 and 1999 have been computed below in accordance with SFAS No. 128,
based upon weighted average common and dilutive shares outstanding (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (numerator) $2,917 $2,123 $4,539 $3,482
------ ------ ------ ------
Weighted average common shares and effect of
dilutive shares used in the computation of
earnings per share:
Average shares outstanding-basic 8,466 8,448 8,464 8,457
Effect of dilutive shares 104 142 145 143
------ ------ ------ ------
Average shares outstanding-diluted
(denominator) 8,570 8,590 8,609 8,600
------ ------ ------ ------
Earnings per common share:
Basic $0.34 $0.25 $0.54 $0.41
Diluted $0.34 $0.25 $0.53 $0.40
</TABLE>
11
<PAGE>
7) Dividends
On June 20, 2000, the Board of Directors declared a quarterly dividend of
$.025 per share, payable July 20, 2000 to stockholders of record on June 30,
2000.
8) Changes in Accounting Policies - Accounting Standards not yet Adopted
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101 which provides guidance for applying
generally accepted accounting principles relating to the timing of revenue
recognition in financial statements filed with the SEC. Any change required by
the SAB must be made in the fourth quarter 2000 with a cumulative effect
accounting change. Management believes that this SAB will not have a material
impact on the consolidated financial statements.
9) 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.
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.
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
12
<PAGE>
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
primarily include debt servicing and public company expenses, including investor
relations costs. In addition, Corporate Operations include an investment in
Arista Investors Corp. ("Arista").
Results of Operations
Three months ended June 30, 2000
compared with three months ended June 30, 1999
Net Income
Net Income for the three months ended June 30, 2000 increased by $794,000
to $2,917,000 or basic earnings per share of $0.34 compared to $2,123,000 or
$0.25 for the same period last year, as explained below.
Insurance Brokerage Companies
Income before income taxes increased by $1,634,000 to $2,048,000 in 2000
from $414,000 in 1999, primarily due to higher revenues, as discussed below.
Total revenues in 2000 were $11,774,000 compared with $10,271,000 in 1999,
an increase of $1,503,000 (15%). Gross commissions and fees were higher by
$1,502,000 (12%) primarily as a result of new business and timing (billings in
the second quarter of 2000 of certain renewal policies billed during the third
quarter of 1999) exceeding lost business, price increases on certain lines of
business and commission adjustments which are recorded when they occur. The
commission expense rate (defined as commission incurred to independent producers
as a percentage of gross commissions and fees) to produce new and renewal
business decreased from 18% to 16% which resulted in an increase in net
commissions and fees of approximately $266,000. Investment income increased by
$43,000 (17%) primarily due to higher fiduciary investments.
Compensation and benefits decreased by $364,000 (6%) to $5,847,000 in 2000
compared to $6,211,000 in 1999. The decrease was mainly due to lower headcount
and an increase in inter-company management fees allocated to the Property &
Casualty Companies partially offset by increased internal commission expense.
Amortization of intangibles increased $6,000 (2%) to $280,000 in 2000
compared with $274,000.
Other operating expenses increased by $276,000 (9%) to $3,386,000 in 2000
from $3,110,000 in 1999. The increase was mainly due to higher consulting and
advertising costs as
13
<PAGE>
well as higher premium financing fees offset by an increase in inter-company
management fees allocated to the Property and Casualty Companies.
Interest expense decreased by $49,000 (19%) to $213,000 in 2000 from
$262,000 in 1999 as a result of reduced acquisition contingent consideration.
Property and Casualty Companies
Income before income taxes decreased by $153,000 (6%) to $2,438,000 in 2000
from $2,591,000 in 1999. This decrease was primarily due to an increase in the
combined ratio offset by an increase in net premiums earned, investment income
and service fee income, as discussed below.
Net premiums earned for 2000 increased by $1,017,000 (16%) to $7,526,000
from $6,509,000 in 1999. The increase was due to the growth in the Brokerage
segment's managed programs via facultative reinsurance assumed and direct
premiums.
Net investment income increased by $70,000 (10%) to $777,000 in 2000 from
$707,000 in 1999. The increase was due to an increase in investments.
Net realized gains on investments of $81,000 in 2000, resulted from mutual
fund capital gain distributions partially offset by capital losses on the
maturity of bonds.
Other income increased by $394,000 as a result of non-recurring service fee
income.
The loss ratio (loss incurred expressed as a percentage of premiums earned)
increased to 43% in 2000 from 32% in 1999. The increase was due to the growth in
reinsurance liability business which generally experiences higher losses.
The acquisition costs and general and administrative expenses ratio
increased to 42% in 2000 from 39% in 1999. The increase was primarily due to an
increase in inter-company management charges.
Corporate
Net expenses before income taxes increased in 2000 by $269,000 to $196,000
from income before income taxes of $73,000 in 1999. In 1999, the segment's sole
investment in Arista was reduced due to a liquidating distribution. Arista's
management had indicated its intention to sell its remaining assets, its license
to operate, and its stock. In 1999, the liquidating distribution, partially
offset by the corresponding reduction in fair market value of Arista stock, was
included in net investment income and is the primary reason for the negative
variance, along with increased consulting fees.
Provision for Income Taxes
The provision for income taxes for 2000 and 1999 was $1,373,000 and
$955,000, respectively, resulting in an effective tax rate of 32% and 31% for
2000 and 1999, respectively.
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Six months ended June 30, 2000
compared with six months ended June 30, 1999
Net Income
Net Income for the six months ended June 30, 2000 increased by $1,057,000
to $4,539,000 or basic earnings per share of $0.54 compared to $3,482,000 or
$0.41 for the same period last year, as explained below.
Insurance Brokerage Companies
Income before income taxes increased by $1,904,000 to $1,844,000 in 2000
from a loss before income taxes of $60,000 in 1999, primarily due to higher
revenues and lower compensation and benefits, as discussed below.
Total revenues in 2000 were $20,884,000 compared with $19,185,000 in 1999,
an increase of $1,699,000 (9%). Gross commissions and fees were higher by
$2,214,000 (10%) primarily as a result new business and timing (billings in the
second quarter of 2000 of certain renewal policies billed during the third
quarter of 1999) exceeding lost business, price increases on certain lines of
business and commission adjustments which are recorded when they occur. The
commission expense rate (defined as commissions incurred to independent
producers as a percentage of gross commissions and fees) to produce new and
renewal business remained unchanged at 17%. Investment income increased by
$26,000 (4%) primarily due to higher fiduciary investments.
Compensation and benefits decreased by $295,000 (3%) to $11,492,000 in 2000
compared to $11,787,000 in 1999. The decrease was mainly the result of lower
headcount and an increase in inter-company management fees allocated to the
Property & Casualty Companies partially offset by increased internal commission
expense.
Amortization of intangibles decreased $61,000 (10%) to $567,000 in 2000
compared with $628,000 in 1999 due to a reduction in certain intangibles
acquired in 1998 as a result of the sale of the majority of the operations of
Laub Group of Florida, Inc. and of certain assets of Florida Insurance
Associates, Inc.
Other operating expenses increased by $74,000 (1%) to $6,560,000 from
$6,486,000.
Interest expense increased by $77,000 as a result of the SRW acquisition
which includes a related note payable to the Property and Casualty Companies
partially offset by lower balances on other acquisitions.
Property and Casualty Companies
Income before income taxes decreased by $44,000 (1%) to $5,163,000 in 2000
from $5,207,000 in 1999. The decrease was due to an increase in the combined
ratio offset by an increase in net premiums earned, investment income, and
service fee income, as discussed below.
Net premiums earned increased by $1,661,000 (13%) to $14,590,000 in 2000
from $12,929,000 in 1999. The increase was due to the growth in the Brokerage
segment's managed
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programs via facultative reinsurance assumed and direct premiums.
Net investment income increased by $127,000 (9%) to $1,561,000 in 2000 from
$1,434,000 in 1999. The increase was due to an increase in investments.
Net realized gains on investments of $466,000 in 2000, resulted from
re-balancing equity investments to include mutual funds and capital gain
distributions from certain mutual funds partially offset by capital losses on
the maturity of bonds.
Other income increased by $394,000 as a result of non-recurring service fee
income.
The loss ratio (loss incurred expressed as a percentage of premiums earned)
increased to 41% in 2000 from 33% in 1999. The increase was due to the growth in
reinsurance liability business which generally experiences higher losses.
The acquisition costs and general and administrative expenses ratio
increased to 41% in 2000 from 38% in 1999. The increase was primarily due to an
increase in inter-company management fees.
Corporate
Net expenses before income taxes increased by $232,000 to $332,000 in 2000
from $100,000 in 1999. In 1999, the segment's sole investment in Arista was
reduced due to a liquidating distribution. Arista's management had indicated its
intention to sell its remaining assets, its license to operate, and its stock.
In 1999, the liquidating distribution, partially offset by the corresponding
reduction in fair market value of Arista stock, was included in net investment
income and is the primary reason for the negative variance, along with increased
consulting fees.
Provision for Income Taxes
The provision for income taxes for 2000 and 1999 was $2,136,000 and
$1,565,000, respectively, resulting in an effective tax rate of 32% and 31% for
2000 and 1999, respectively.
Financial Condition and Liquidity
Management believes that the Company's operating cash flow, along with its
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 $3,141,000 (2%) to $152,353,000 at June 30, 2000
from $149,212,000 at December 31, 1999. Total liabilities decreased by $956,000
(1%) to $101,005,000 at June 30, 2000 from $101,961,000 at December 31, 1999.
Stockholders' equity increased by $4,097,000 (9%) to $51,348,000 at June
30, 2000, from $47,251,000 at December 31, 1999. The increase in equity resulted
from net income of $4,539,000, $91,000 for issuances of treasury stock, and
$10,000 related to amortization of
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unearned compensation under the Company's Stock Performance Plan, offset by
dividends paid of $423,000, and an increase in net unrealized depreciation of
investments of $120,000.
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, 2000, the Company had cash
and short term investments of $27,577,000. Of the Company's total investments,
certain amounts are pledged or deposited into trust funds to collateralize the
Company's obligations under reinsurance agreements.
As presented in the Consolidated Statements of Cash Flows, the Company's
cash and cash equivalents decreased by $10,161,000 for the period ended June 30,
2000. Operating activities used cash of $6,162,000 primarily for the payment of
premiums to insurance markets. Investing activities used cash of $2,697,000
primarily for the purchase of investments and acquisition payments. Financing
activities used cash of $1,302,000 for payments of dividends and loan
repayments.
Year 2000 Compliance
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 issued 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 did not
issue year 2000 exclusions on these policies. The Insurance Companies also
issued a number of policies with greater limits of coverage, and 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 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.
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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
On May 15, 2000, the Company's Annual Meeting of Shareholders was held and
the following matters were submitted to the shareholders for action or approval.
1. The shareholders elected eight directors of the Company, each to serve
until the next Annual Meeting of Shareholders and until his successor is
duly elected and qualified or until his earlier resignation or removal. The
votes for these directors are set forth below.
FOR AGAINST
--- -------
Bruce D. Guthart 5,907,935 258,600
Howard Kaye 5,900,777 265,758
Michael P. Sabanos 5,907,935 258,600
Robert L. Barbanell 5,907,935 258,600
Richard B. Butler 5,907,935 258,600
Elliot S. Cooperstone 5,772,052 394,483
David Ezekiel 5,907,935 258,600
Ned L. Sherwood 5,907,935 258,600
Other matters voted upon and approved by the shareholders at the Meeting, and
the number of votes cast with respect to each such matter, were as follows:
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2. The shareholders approved a proposal to amend the Company's Stock Option
Plan and Restated Supplement Stock Option Plan by merging the Plans and
increasing the number of shares of common stock available for the grant of
awards from 1,000,000 to 1,350,000 shares.
FOR AGAINST
--- -------
5,742,023 424,512
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit
Number Description
------ -----------
11 Earnings Per Share Calculation
27 Consolidated Financial Data Schedule
b) Reports on Form 8-K
There were no reports on Form 8-K for the period April 1, 2000 to June 30, 2000.
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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, 2000 /s/ Bruce D. Guthart
--------------------------------------------
Bruce D. Guthart, Chairman, President and
Chief Executive Officer
August 11, 2000 /s/ Michael P. Sabanos
--------------------------------------------
Michael P. Sabanos, Executive Vice President
and Chief Financial Officer
20
