UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------
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 October 6, 2000 - 8,476,003
- 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
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income for the
Three months and nine months ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the
Nine months ended September 30, 2000 and 1999 7
Consolidated Statements of Comprehensive Income for the
Three months and nine months ended September 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 18
PART II OTHER INFORMATION 19
2
<PAGE>
Item 1. - Financial Statements
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
As of September 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 $19,852 and $25,610) .................................................. $ 20,438 $ 27,678
Premiums and other receivables ......................................................... 33,320 27,265
Prepaid expenses and other assets ...................................................... 2,783 1,717
-------- --------
Total current assets .................................................................. 56,541 56,660
Fixed assets (net of accumulated depreciation of $7,769 and $6,922) ......................... 4,327 3,770
Intangible assets (net of accumulated amortization of $4,509 and $3,845) .................... 11,046 10,228
Other assets ................................................................................ 660 195
-------- --------
Total assets - insurance brokerage companies ........................................... 72,574 70,853
-------- --------
PROPERTY AND CASUALTY COMPANIES:
Investments available-for-sale:
Fixed maturities, at market value (amortized cost: 2000, $42,640;
1999, $42,273) ..................................................................... 42,165 41,304
Equity securities, at market value (cost:2000, $7,408; 1999, $3,873) ................... 7,865 4,496
Short term investments, at cost, which approximates market value ....................... 7,427 5,500
-------- --------
Total investments ...................................................................... 57,457 51,300
Cash and cash equivalents ................................................................... 5,437 8,827
Accrued interest and dividends .............................................................. 848 873
Premiums receivable ......................................................................... 1,317 2,333
Reinsurance recoverable on paid and unpaid losses ........................................... 4,328 2,747
Prepaid reinsurance premiums ................................................................ 830 488
Deferred acquisition costs .................................................................. 3,081 4,313
Deferred income taxes ....................................................................... 1,209 1,236
Other assets ................................................................................ 4,042 4,520
-------- --------
Total assets - property and casualty companies ......................................... 78,549 76,637
-------- --------
CORPORATE:
Cash and cash equivalents ................................................................... 358 1,233
Prepaid expenses and other assets ........................................................... 82 153
Investments:
Equity securities, at market value (cost:2000, $308, and 1999, $243) ................... 487 243
Deferred income taxes ....................................................................... 0 93
-------- --------
Total assets - corporate ............................................................... 927 1,722
-------- --------
Total assets ........................................................................... $152,050 $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 September 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 ........................................ $ 41,308 $ 42,161
Accounts payable and accrued liabilities ......................................... 8,461 8,103
Notes payable .................................................................... 518 527
--------- ---------
Total current liabilities ........................................................ 50,287 50,791
Notes payable ......................................................................... 451 841
Deferred income taxes ................................................................. 485 491
--------- ---------
Total liabilities-insurance brokerage companies .................................. 51,223 52,123
--------- ---------
PROPERTY AND CASUALTY COMPANIES:
Liabilities:
Unpaid losses and loss expenses .................................................. 25,792 23,969
Unearned premium reserves ........................................................ 10,454 13,694
Accounts payable and accrued liabilities ......................................... 7,196 7,953
Other liabilities ................................................................ 182 245
--------- ---------
Total liabilities - property and casualty companies .............................. 43,624 45,861
--------- ---------
CORPORATE:
Current liabilities:
Accounts payable and accrued liabilities ......................................... 225 300
Loan payable ..................................................................... 1,317 1,241
Deferred income taxes ............................................................ 140
Income taxes payable ............................................................. 445 366
--------- ---------
Total current liabilities ........................................................ 2,127 1,907
Loan payable-long-term ................................................................ 1,073 2,070
--------- ---------
Total liabilities-corporate ...................................................... 3,200 3,977
--------- ---------
Total liabilities ................................................................ 98,047 101,961
--------- ---------
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, 8,476; 1999, 8,458) .................... 85 85
Paid-in capital ................................................................ 18,019 18,019
Accumulated other comprehensive income, net of deferred
income tax liability (benefit) (2000, $55; 1999, ($118)) ................... 106 (228)
Unearned stock grant compensation ............................................... (239) (254)
Retained earnings ............................................................... 36,112 29,858
Common stock in Treasury, shares at cost (2000, 10; 1999, 28) ................... (80) (229)
--------- ---------
Total stockholders' equity ....................................................... 54,003 47,251
--------- ---------
Total liabilities and stockholders' equity ....................................... $ 152,050 $ 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 nine months ended September 30, 2000
and 1999 (in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ------------------------
2000 1999 2000 1999
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees - net ......................................... $ 9,984 $ 8,660 $ 30,237 $ 27,240
Investment income .................................................. 390 509 1,021 1,114
-------- ------- -------- --------
Total revenues ..................................................... 10,374 9,169 31,258 28,354
-------- ------- -------- --------
Expenses:
Compensation and benefits .......................................... 5,959 5,492 17,451 17,279
Amortization of intangibles ........................................ 295 313 862 941
Other operating expenses ........................................... 3,396 3,014 9,956 9,500
-------- ------- -------- --------
Total operating expenses ........................................... 9,650 8,819 28,269 27,720
-------- ------- -------- --------
Interest expense ................................................... 234 209 655 553
-------- ------- -------- --------
Income before income taxes-insurance brokerage companies ........... 490 141 2,334 81
-------- ------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written ............................................... 8,319 7,893 18,803 16,932
Change in unearned premiums ........................................ (524) (1,089) 3,582 2,801
-------- ------- -------- --------
Net premiums earned ................................................ 7,795 6,804 22,385 19,733
Net investment income .............................................. 742 734 2,303 2,168
Net realized (loss) gain on investments ............................ -- (76) 466 (96)
Other income ....................................................... 21 18 450 53
-------- ------- -------- --------
Total revenues ..................................................... 8,558 7,480 25,604 21,858
-------- ------- -------- --------
Expenses:
Losses and loss expenses ........................................... 2,506 2,490 8,464 6,786
Acquisition costs and general and administrative expenses .......... 3,121 2,547 9,046 7,422
-------- ------- -------- --------
Total expenses ..................................................... 5,627 5,037 17,510 14,208
-------- ------- -------- --------
Income before income taxes-property and casualty companies ......... 2,931 2,443 8,094 7,650
-------- ------- -------- --------
CORPORATE
Revenues:
Net investment income .............................................. 5 (50) 94 209
Expenses:
Other operating expenses ........................................... 63 102 355 297
Interest expense ................................................... 56 80 185 244
-------- ------- -------- --------
Net expenses before income taxes-corporate ......................... (114) (232) (446) (332)
-------- ------- -------- --------
</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 nine months ended September 30, 2000
and 1999 (in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
2000 1999 2000 1999
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Income before income taxes ....................................... 3,307 2,352 9,982 7,399
------- ------- ------ -------
Provision (benefit) for income taxes
Current ..................................................... 1,056 872 3,013 2,479
Deferred .................................................... (98) (243) 81 (285)
------- ------- ------ -------
Total provision for income taxes ............................ 958 629 3,094 2,194
------- ------- ------ -------
Net income ....................................................... $ 2,349 $ 1,723 $6,888 $ 5,205
------- ------- ------ -------
EARNINGS PER SHARE
Basic ....................................................... $ 0.28 $ 0.20 $ 0.81 $ 0.62
------- ------- ------ -------
Diluted ..................................................... $ 0.27 $ 0.20 $ 0.80 $ 0.60
------- ------- ------ -------
Weighted average of shares outstanding - basic ................... 8,473 8,460 8,467 8,460
------- ------- ------ -------
Weighted average shares outstanding and
share equivalents outstanding - diluted .......................... 8,610 8,655 8,609 8,621
------- ------- ------ -------
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
2000 1999
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $6,888 $5,205
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
cash provided by (used in) operating activities:
Deferred acquisition costs 1,232 918
Amortization of bond premium - net 514 494
Deferred income taxes 81 (285)
Net realized loss (gains) on investments (530) 363
Depreciation and amortization expense 1,977 1,864
Change in assets and liabilities:
Accrued interest and dividends 25 27
Premiums and other receivables (6,250) 25,752
Prepaid expenses and other assets (871) (652)
Premiums payable (916) (30,646)
Accounts payable and accrued liabilities (133) (546)
Unpaid losses and loss expenses 1,823 2,363
Unearned premium reserves (3,240) (2,582)
Income taxes payable 79 (418)
---------- -----------
Net cash provided by operating activities 679 1,857
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
INVESTMENTS AVAILABLE - FOR - SALE :
PURCHASE OF FIXED MATURITIES (6,886) (10,543)
PURCHASE OF EQUITY SECURITIES (6,383) (3,407)
PURCHASE OF SHORT TERM INVESTMENTS (1,927) (2,980)
MATURITIES OF FIXED MATURITIES 3,924 4,309
SALES OF FIXED MATURITIES 1,984 3,938
SALES OF EQUITY SECURITIES 2,946 865
PURCHASE OF FIXED ASSETS (1,769) (778)
ACQUISITION PAYMENTS (2,119) (4,414)
---------- -----------
Net cash used in investing activities (10,230) (13,010)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
ACQUISITION DEBT-REPAYMENT (281) (375)
NOTES AND LOAN PAYABLE-REPAYMENT (1,039) (1,161)
PROCEEDS FROM ISSUANCE OF COMMON STOCK 35
ACQUISITION OF TREASURY STOCK (935)
PAYMENT OF DIVIDENDS (634) (635)
---------- -----------
Net cash used in financing activities (1,954) (3,071)
---------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (11,505) (14,224)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,738 45,443
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $26,233 $31,219
---------- -----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest expense $830 $698
Income taxes $2,933 $2,897
NONCASH FINANCING ACTIVITY:
REISSUANCE OF TREASURY STOCK FOR AN ACQUISITION $149 $585
Reissuance of treasury stock under the restricted stock plan $222
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the
three months and nine months ended September 30, 2000 and 1999
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
2000 1999 2000 1999
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
NET INCOME $2,349 $1,723 $6,888 $5,205
Other comprehensive income:
Unrealized (depreciation) appreciation of investments available-for-sale,
net of deferred income tax liability (benefit)
(2000, $234, $303; 1999, ($141), ($557) 454 (273) 586 (1,079)
Less: reclassification adjustment for (gain) loss included in net income,
net of deferred income tax (liability) benefit
(2000, $0, ($130); 1999, $45, $107) 0 88 (252) 208
--------- ---------- --------- ----------
Total other comprehensive income (loss) 454 (185) 334 (871)
--------- ---------- --------- ----------
COMPREHENSIVE INCOME $2,803 $1,538 $7,222 $4,334
--------- ---------- --------- ----------
</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 September 30, 2000 and for the
three months and nine months ended September 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 nine months
ended September 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 nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Business Segments - 2000
------------------------------------------------------------------------------------------------------------------------------------
3 months ended September 30, 9 months ended September 30,
----------------------------- ----------------------------
Insurance Property & Insurance Property &
(in thousands) Brokerage Casualty Brokerage Casualty
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external sources ........................ $9,056 $7,795 $28,583 $22,385
Revenue from other segments .......................... 928 21 1,654 57
Interest income from other segments .................. -- 71 -- 205
Depreciation and amortization expense ................ 743 2,415 1,950 6,964
Capital expenditures ................................. 1,276 -- 1,769 --
<CAPTION>
Business Segments - 1999
------------------------------------------------------------------------------------------------------------------------------------
3 months ended September 30, 9 months ended September 30,
----------------------------- ----------------------------
Insurance Property & Insurance Property &
(in thousands) Brokerage Casualty Brokerage Casualty
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external sources ........................ $7,612 $6,804 $25,043 $19,733
Revenue from other segments .......................... 1,048 18 2,197 53
Depreciation and amortization expense ................ 641 2,117 1,845 6,110
Capital expenditures ................................. 301 -- 778 --
</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 September 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 $320,000 in 2000, $1,343,000 in 2001, and $727,000 in 2002.
Interest expense for the loan for the three months and nine months ended
September 30, 2000 and 1999 were $56,000 and $185,000 for 2000, and $80,000 and
$244,000 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 September 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 nine months ended
September 30, 2000 and 1999 amounted to 17,708 and (15,307) 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, during the third quarter of 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 September 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 .............................. $ 694
2001 .............................. 3,108
2002 .............................. 1,199
2003 .............................. 859
Thereafter .......................... 5,932
-------
11,792
Sub-lease rental income........................ (268)
-------
Net rental commitments ........................ $11,524
6) Earnings Per Share
Earnings per common share for the three months and nine months ended
September 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 Nine months ended
September 30, September 30,
------------------ -------------------
2000 1999 2000 1999
---- ---- ------ ------
<S> <C> <C> <C> <C>
Net income (numerator) ............................................. $2,349 $1,723 $6,888 $5,205
------ ------ ------ ------
Weighted average common shares and effect of
dilutive shares used in the computation of
earnings per share:
Average shares outstanding-basic .......................... 8,473 8,460 8,467 8,460
Effect of dilutive shares ................................. 137 195 142 161
------ ------ ------ ------
Average shares outstanding-diluted
(denominator) ............................................. 8,610 8,655 8,609 8,621
------ ------ ------ ------
Earnings per common share:
Basic ..................................................... $ 0.28 $ 0.20 $ 0.81 $0.62
Diluted ................................................... $ 0.27 $ 0.20 $ 0.80 $0.60
</TABLE>
11
<PAGE>
7) Dividends
On September 20, 2000, the Board of Directors declared a quarterly dividend
of $.025 per share, payable October 20, 2000 to stockholders of record on
September 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.
12
<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
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 September 30, 2000
compared with three months ended September 30, 1999
Net Income
Net Income for the three months ended September 30, 2000 increased by
$626,000 to $2,349,000 or basic earnings per share of $0.28 compared to
$1,723,000 or $0.20 for the same period last year, as explained below.
Insurance Brokerage Companies
Income before income taxes increased by $349,000 to $490,000 in 2000 from
$141,000 in 1999, primarily due to higher revenues, as discussed below.
Total revenues in 2000 were $10,374,000 compared with $9,169,000 in 1999,
an increase of $1,205,000 (13%). Gross commissions and fees were higher by
$1,934,000 (17%) primarily as a result of new business exceeding lost business,
price increases on certain lines of business and commission adjustments on prior
period renewals 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 increased from
24% to 26% which resulted in a decrease in net commissions and fees of
approximately $254,000. Investment income decreased by $119,000 (23%) primarily
due to a non-recurring gain on a miscellaneous investment in 1999.
Compensation and benefits increased by $467,000 (9%) to $5,959,000 in 2000
compared to $5,492,000 in 1999. The increase was mainly due to increased annual
incentive based compensation accruals and increased internal commission expense
partially offset by compensation reductions due to lower headcount and an
increase in inter-company management fees allocated to the Property and Casualty
Companies.
13
<PAGE>
Amortization of intangibles decreased $18,000 (6%) to $295,000 in 2000
compared with $313,000 in 1999 due to a reduction in certain intangibles
acquired in 1998.
Other operating expenses increased by $382,000 (13%) to $3,396,000 in 2000
from $3,014,000 in 1999. The increase was mainly due to higher consulting and
advertising costs offset by an increase in inter-company management fees
allocated to the Property and Casualty Companies.
Interest expense increased by $25,000 (12%) to $234,000 in 2000 from
$209,000 in 1999 as a result of higher interest rates.
Property and Casualty Companies
Income before income taxes increased by $488,000 (20%) to $2,931,000 in
2000 from $2,443,000 in 1999. This increase was due to an increase in net
premiums earned together with a decrease in the combined ratio, as discussed
below.
Net premiums earned for 2000 increased by $991,000 (15%) to $7,795,000 from
$6,804,000 in 1999. The increase was due to the growth in the Brokerage
segment's managed programs which are insured via direct premiums and facultative
reinsurance assumed.
Net investment income was $742,000 in 2000 as compared to $734,000 in 1999.
The loss ratio (loss incurred expressed as a percentage of premiums earned)
decreased to 32% in 2000 from 37% in 1999. The decrease was due to a favorable
property loss development on prior-year losses offset by the growth in the
reinsurance liability business which generally experiences a higher loss
frequency.
The acquisition costs and general and administrative expense ratio
increased to 40% in 2000 from 37% in 1999. The increase was primarily due to an
increase in inter-company management charges and contingent commissions earned
by the Brokerage segment.
Corporate
Net expenses before income taxes decreased in 2000 by $118,000 to $114,000
from $232,000 in 1999 primarily due to lower consulting fees and interest
expense for 2000 as well as the 1999 reduction in fair market value of Arista,
which was included as a reduction in net investment income in the prior year.
Provision for Income Taxes
The provision for income taxes for 2000 and 1999 was $958,000 and $629,000,
respectively. The 2000 and 1999 provisions reflect an adjustment to match the
tax rate on the Company's income tax returns resulting in an effective tax rate
of 29% and 27% for 2000 and 1999, respectively.
14
<PAGE>
Nine months ended September 30, 2000
compared with nine months ended September 30, 1999
Net Income
Net Income for the nine months ended September 30, 2000 increased by
$1,683,000 to $6,888,000 or basic earnings per share of $0.81 compared to
$5,205,000 or $0.62 for the same period last year, as explained below.
Insurance Brokerage Companies
Income before income taxes increased by $2,253,000 to $2,334,000 in 2000
from $81,000 in 1999, primarily due to higher revenues, as discussed below.
Total revenues in 2000 were $31,258,000 compared with $28,354,000 in 1999,
an increase of $2,904,000 (10%). Gross commissions and fees were higher by
$4,148,000 (12%) primarily as a result new business exceeding lost business,
price increases on certain lines of business and commission adjustments on prior
period renewals 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 increased from
19% to 21% which resulted in a decrease in net commissions and fees of
approximately $693,000. Investment income decreased by $93,000 (8%) primarily
due to a non-recurring gain on a miscellaneous investment in 1999.
Compensation and benefits increased by $172,000 (1%) to $17,451,000 in 2000
compared to $17,279,000 in 1999. The increase was mainly the result of increased
annual incentive based compensation accruals and increased internal commission
expense partially offset by compensation reductions due to lower headcount and
an increase in inter-company management fees allocated to the Property and
Casualty Companies.
Amortization of intangibles decreased $79,000 (8%) to $862,000 in 2000
compared with $941,000 in 1999 due to a reduction in certain intangibles
acquired in 1998.
Other operating expenses increased by $456,000 (5%) to $9,956,000 from
$9,500,000. The increase was mainly due to increased consulting expense
partially offset by an increase in inter-company management fees allocated to
the Property and Casualty Companies.
Interest expense increased by $102,000 (18%) to $655,000 in 2000 from
$553,000 in 1999 as a result of the 1999 SRW acquisition which includes a
related note payable to the Property and Casualty Companies and higher interest
rates partially offset by lower balances on other acquisitions.
15
<PAGE>
Property and Casualty Companies
Income before income taxes increased by $444,000 (6%) to $8,094,000 in 2000
from $7,650,000 in 1999. The increase was due to an increase in net premiums
earned, investment income, and service fee income offset by an increase in the
combined ratio, as discussed below.
Net premiums earned increased by $2,652,000 (13%) to $22,385,000 in 2000
from $19,733,000 in 1999. The increase was due to the growth in the Brokerage
segment's managed programs which are insured via direct premiums and facultative
reinsurance assumed.
Net investment income increased by $135,000 (6%) to $2,303,000 in 2000 from
$2,168,000 in 1999. The increase was due to an increase in investments.
Net realized gains on investments of $466,000 resulting from the
re-balancing of equity investments to include mutual funds and capital gain
distributions from certain mutual funds.
Other income of $397,000 was non-recurring service fee income.
The loss ratio (loss incurred expressed as a percentage of premiums earned)
increased to 38% in 2000 from 34% in 1999. The increase was due to the growth in
reinsurance liability business which generally experiences a higher loss
frequency offset by favorable property loss development on prior-year losses.
The acquisition costs and general and administrative expense ratio
increased to 40% in 2000 from 38% in 1999. The increase was due to an increase
in inter-company management fees and contingent commissions earned by the
Brokerage segment.
Corporate
Net expenses before income taxes increased by $114,000 to $446,000 in 2000
from $332,000 in 1999 due to increased consulting fees.
Provision for Income Taxes
The provision for income taxes for 2000 and 1999 was $3,094,000 and
$2,194,000, respectively. The 2000 and 1999 provisions reflect an adjustment to
match the tax rate on the Company's income tax returns resulting in an effective
tax rate of 31% and 30% for 2000 and 1999, respectively.
16
<PAGE>
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 $2,838,000 (2%) to $152,050,000 at September 30,
2000 from $149,212,000 at December 31, 1999. Total liabilities decreased by
$3,914,000 (4%) to $98,047,000 at September 30, 2000 from $101,961,000 at
December 31, 1999.
Stockholders' equity increased by $6,752,000 (14%) to $54,003,000 at
September 30, 2000, from $47,251,000 at December 31, 1999. The increase in
equity resulted from net income of $6,888,000, an increase in net unrealized
appreciation of investments of $334,000, $149,000 for issuances of treasury
stock, and $15,000 related to amortization of unearned compensation under the
Company's Stock Performance Plan, offset by dividends paid of $634,000.
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 September 30, 2000, the Company had
cash and short-term investments of $26,233,000. 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 $11,505,000 for the period ended
September 30, 2000. Operating activities provided cash of $679,000. Investing
activities used cash of $10,230,000 primarily for the purchase of investments
and fixed assets, and acquisition payments. Financing activities used cash of
$1,955,000 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.
17
<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.
18
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits arising in the normal course of
business. Virtually all pending lawsuits in which the Insurance Companies are a
party, involve claims under policies underwritten or reinsured by such
Companies. Management believes these lawsuits have been adequately provided for
in its established loss and loss expense reserves and that the resolution of
these lawsuits will not have a material adverse effect on the Company's
financial condition or results of operations.
The Insurance Brokerage Companies are subject to various claims and
lawsuits from both private and governmental parties, which include claims and
lawsuits in the ordinary course of business. The majority of pending lawsuits
involve insurance claims, errors and omissions, employment claims, and breaches
of contract. The Company believes that the resolution of these lawsuits will not
have a material adverse effect on the Company's financial condition or results
of operations.
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. 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 July 1, 2000 to September 30,
2000.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KAYE GROUP INC.
----------------
Registrant
November 13, 2000 /s/ Bruce D. Guthart
------------------------------------------------------
Bruce D. Guthart, Chairman, President and
Chief Executive Officer
November 13, 2000 /s/ Michael P. Sabanos
------------------------------------------------------
Michael P. Sabanos, Executive Vice President and
Chief Financial Officer
20
<PAGE>
KAYE GROUP INC EXHIBIT 11
Earnings Per Share Calculation Page 1 of 4
For the Three Months Ended September 30, 2000
Shares outstanding at 12/31/99 ............. 8,458,295 (A)
Plus: Net Issuance of Treasury Stock ....... 17,708
------------
Balance @ 9/30/00 .......................... 8,476,003 (B)
Balance @ 6/30/00 .......................... 8,469,173 (C)
------------
Weighted average @ 9/30/00 ................. 8,472,588 [(B)+(C)] /2
------------
Three months
ended
Sept. 30,2000
---------------------
Net Income ................................ $ 2,349,000 (1)
I. Average Shares: ........................... 8,472,588 (2)
II. Basic EPS ................................. 0.2772 (1) / (2)
============
III.Diluted EPS
Weighted Average Shares ......... 8,472,588 (2)
Dilution ........................ 137,634 (3)
------------
8,610,222 (4)
------------
Diluted EPS ..................... 0.2728 (1) / (4)
============
<PAGE>
KAYE GROUP INC EXHIBIT 11
Earnings Per Share Calculation Page 2 of 4
For the Three Months Ended September 30,2000
IV. Outstanding at September 30, 2000
<TABLE>
<CAPTION>
Weighted
Units Price/Share Proceeds Average Proceeds
------------- ---------------- ----------------- --------- ----------
<S> <C> <C> <C> <C> <C>
A. Options (8/17/93) 75,500 $ 10.000 $ 755,000
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) 39,750 8.430 335,093
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) 157,950 5.060 799,227 58,000 799,480
Options (4/15/97) 200,000 5.000 1,000,000 00,000 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) 2,000 6.700 13,400 2,000 13,400
Options (10/30/98) 20,000 6.170 123,400 20,000 123,400
Options (12/10/98) 21,800 6.600 143,880 22,200 146,520
Options (2/15/99) 800 7.410 5,928
Options (2/24/99) 40,000 7.380 295,200
Options (10/29/99) 20,000 8.240 164,800
Options (11/01/99) 48,500 8.240 399,640
Options (12/15/99) 252,500 7.500 1,893,750
Options (05/15/00) 122,500 7.500 918,750
------------- ----------------- --------- ----------
1,111,800 $ 7,550,583 77,200 (5) 2,486,300
============= ================= ========= ==========
Dilutive Shares 477,200 (5) 2,486,300 (6)
============= =================
</TABLE>
V. Average market value/share
<TABLE>
<CAPTION>
Average Close on
Close last day
=====================
<S> <C> <C>
July 6.635
August 7.712
September 7.619 5.938
---------------------
Hash total 3 mths 21.966
=====================
3
---------------------
Average price per share Three mths 7.322
=====================
</TABLE>
VII. Diluted
<TABLE>
<CAPTION>
Three Months
---------------------
<S> <C>
Total Proceeds from exercise $ 2,486,300 (6)
Divided by average price 7.322
Repurchase shares of 339,566
Shares issued (options) 477,200 (5)
---------------------
Dilution - Shares 137,634 (3)
=====================
</TABLE>
<PAGE>
KAYE GROUP INC EXHIBIT 11
Earnings Per Share Calculation Page 3 of 4
For the Nine Months Ended September 30, 2000
Shares outstanding at 12/31/99 ........ 8,458,295 (A)
Plus: Net Issuance of Treasury Stock .. 17,708
-----------------
Balance @ 9/30/00 ..................... 8,476,003 (B)
Balance @ 6/30/00 ..................... 8,469,173 (C)
Balance @ 3/31/00 ..................... 8,463,357 (D)
-----------------
Weighted average @ 9/30/00 ............ 8,466,707 [(A)+(B)+(C)+(D)]/4
-----------------
Nine months
ended
Sept. 30,2000
---------------------
Net Income $ 6,888,000 (1)
I. Average Shares: 8,466,707 (2)
II. Basic EPS 0.8135 (1) / (2)
=====================
III. Diluted EPS
Weighted Average Shares 8,466,707 (2)
Dilution 142,448 (3)
---------------------
8,609,155 (4)
=====================
Diluted EPS 0.8001 (1) / (4)
=====================
<PAGE>
KAYE GROUP INC EXHIBIT 11
Earnings Per Share Calculation Page 4 of 4
For the Nine Months Ended September 30,2000
IV. Outstanding at September 30, 2000
<TABLE>
<CAPTION>
Weighted
Units Price/Share Proceeds Average Proceeds
------------- --------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
A. Options (8/17/93) 75,500 $ 10.000 $ 755,000
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) 39,750 8.430 335,093
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) 157,950 5.060 799,227 158,625 802,643
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) 2,000 6.700 13,400 2,000 13,400
Options (10/30/98) 20,000 6.170 123,400 20,000 123,400
Options (12/10/98) 21,800 6.600 143,880 22,200 146,520
Options (2/15/99) 800 7.410 5,928 800 5,928
Options (2/24/99) 40,000 7.380 295,200 40,000 295,200
Options (10/29/99) 20,000 8.240 164,800
Options (11/01/99) 48,500 8.240 399,640
Options (12/15/99) 252,500 7.500 1,893,750
Options (05/15/00) 122,500 7.500 918,750
------------- -------------- ------------ -----------
1,111,800 $ 7,550,583 518,625 (5) 2,790,591
============= ============== ============ ===========
Dilutive Shares 518,625 (5) 2,790,591 (6)
============= ==============
</TABLE>
V. Average market value/share
<TABLE>
<CAPTION>
Average Close on
Close last day
--------------------- ---------
<S> <C> <C>
January 8.728
February 8.788
March 7.360 6.563
---------------------
Hash total 3 mths 24.876
=====================
April 6.765
May 7.179
June 5.979 5.813
---------------------
Hash total 3 mths 19.923
=====================
July 6.635
August 7.712
September 7.619 5.938
---------------------
Hash total 3 mths 21.966
=====================
---------------------
Hash total 9 mths 66.765
=====================
/ 9
---------------------
Average price per share Nine mths 7.418
=====================
</TABLE>
VII. Diluted
<TABLE>
<CAPTION>
Nine Months
---------------------
<S> <C>
Total Proceeds from exercise $ 2,790,591 (6)
Divided by average price 7.418
Repurchase shares of 376,177
Shares issued (options) 518,625 (5)
---------------------
Dilution - Shares 142,448 (3)
=====================
</TABLE>
