SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT - 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 0-21988
Kaye Group Inc.
(exact name of registrant as specified in its charter)
Delaware 13-3719772
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
122 East 42nd Street, New York, NY 10168
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number: (212) 338-2100
Securities Registered Under Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange
Common Stock $.01 par value NASDAQ National Market
Securities Registered Under Section 12(g) of the Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 __
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. _X_
<PAGE>
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 20, 2000 was approximately
$35,065,000
Number of shares of the registrant's common stock outstanding as of March
20, 2000: 8,480,887.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1999
(incorporated by reference under Part III).
Total number of pages filed including cover and under pages 88.
Index to Exhibits is on page 40.
2
<PAGE>
KAYE GROUP INC.
TABLE OF CONTENTS
Part I
Item 1. Business 4
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 24
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 37
Part III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain
Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 38
Financial Statements F-1
3
<PAGE>
PART I
Item 1. Business
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 ("Brokerage Operations"), comprised of the Retail Brokerage Business
and the Program Brokerage Business, and the Property and Casualty Companies
Operations.
In addition, Corporate Operations includes those activities that benefit
the Company in its entirety and cannot be specifically identified to either the
Brokerage Operations or the Property and Casualty Companies Operations. Such
activities include debt servicing and public company expenses, including
investor relations costs.
The Company's activities are conducted in New York, New York, and in other
offices located in Pasadena, California, Westport, Connecticut, Floral Park, New
York, Woodbury, New York and Warwick, Rhode Island.
Insurance Brokerage Companies Operations
The Retail Brokerage Business operates insurance brokerage businesses
through four subsidiaries of the Company, the "Retail Brokerage Companies". The
Retail Brokerage Companies offers commercial clients a full range of insurance
brokerage services including procurement of property/casualty insurance, risk
management consulting, bonding, loss prevention engineering, and group employee
benefit consulting services. In addition, personal lines and life and health
insurance coverage are placed on behalf of individual clients.
The Retail Brokerage Business' primary strategy is to service middle market
companies and organizations just below the Fortune 500 level for which other
national brokers intensely compete. Within this middle market, the Retail
Brokerage Business has developed particular expertise and knowledge of the risks
facing a number of industry sectors including health care, real estate, retail,
manufacturing, churches, law firms, homes for the aged and fine arts.
During 1999, the Retail Brokerage Business serviced approximately 17,000
insureds. The Retail Brokerage Business is compensated for its services
primarily in the form of commissions paid by insurance companies. The commission
is usually a percentage of the premium paid by the insured. Commission rates
depend upon the type of insurance, the particular insurance company, and the
role in which the Retail Brokerage Business acts. In some cases a commission is
shared with other agents or brokers who
4
<PAGE>
have acted jointly with the Retail Brokerage Business in connection with the
transaction. The Retail Brokerage Business may also receive from an insurance
company a contingent commission that is generally based on the profitability and
volume of business placed with it by the Retail Brokerage Business over a given
period of time. The Retail Brokerage Business may also receive fees from
insureds in connection with consulting services relating to the marketing of
insurance.
Program Brokerage Corporation or "PBC" (the "Program Brokerage Business")
is a subsidiary of the Company and operates a wholesale insurance brokerage
business which offers retail insurance agents and brokers innovative solutions
to the twin insurance problems of price and availability of coverage. It
accomplishes this by organizing pools of similar risks into specially designed
alternative distribution programs through which it places insurance for affinity
groups (the "Programs").
The Program Brokerage Business is one of the leaders in the application of
purchasing groups in the commercial insurance market. Approximately 69% of PBC's
premium volume was generated by its own producers and approximately 600
unrelated retail insurance agent and broker producers serving approximately
8,000 insureds during 1999. The remaining 31% was derived from the Retail
Brokerage Business. Approximately 41% of PBC's premium volume is directly or
indirectly placed with two affiliates, Old Lyme Insurance Company of Rhode
Island, Inc. ("OLRI") and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB").
Property and Casualty Companies Operations
The Company conducts its property and casualty underwriting business
through two insurance company subsidiaries (the "Insurance Companies"), OLRI and
OLB. OLRI is a property and casualty insurance company licensed in Rhode Island
and eligible as a surplus lines insurer in New York and New Jersey. OLB is a
property and casualty insurance company organized and licensed under the laws of
Bermuda. In states where the Insurance Companies are not admitted insurers or
surplus lines insurers, the Insurance Companies underwrite risks through various
reinsurance agreements.
The Insurance Companies underwrite property risks (loss or physical damage
to property) and OLRI underwrites casualty risks (legal liability for personal
injury or damaged property of others) for insureds in the United States.
Insurance is sold principally through the Programs marketed by PBC which insure
various types of businesses and properties that have similar risk
characteristics, such as apartments, condominiums, cooperatives, restaurants,
building maintenance companies, automobile service stations, retail stores,
funeral homes and pharmacies, among others.
5
<PAGE>
The Insurance Companies' strategy is to underwrite only the first "layer"
of the property and casualty insurance provided under the Programs. Exposure to
individual insureds on individual losses is thereby generally limited to between
$10,000 and $25,000 per claim (inclusive of allocated loss expenses), depending
on the Program. Under the Programs, the Insurance Companies' policies are sold
in conjunction with policies issued by unaffiliated Program insurers that
provide coverage for losses above the first layer of risk underwritten by the
Insurance Companies. In addition, OLRI has issued policies on a selected basis
with limits up to $25,000,000, retaining up to the first $50,000 of exposure and
reinsuring the remaining limits with unaffiliated reinsurers rated A or better
by A.M. Best Company ("A.M. Best"), a major rating agency for insurers.
The Property and Casualty Companies Operations includes Claims
Administration Corporation ("CAC"), a subsidiary of the Company which is
responsible for the administration of a large majority of the claims submitted
to the Insurance Companies. The administration of claims includes investigation,
engagement of legal counsel, approval of settlements and the making of payments
to, or on behalf of insureds. CAC also provides claims administration service to
certain of the unaffiliated Program insurers for a fee.
History of the Company
1952 to 1993
Prior to the initial public offering ("IPO") of Old Lyme Holding
Corporation's ("Holding") common stock in August 1993, the operations of the
Retail Brokerage Companies, PBC, the Insurance Companies and CAC were part of a
single combined insurance and brokerage business owned by Kaye International
L.P. ("KILP") and certain individuals. KILP, via several stock and asset
acquisitions and mergers, traces its origins back to 1952. Prior to the IPO,
KILP developed the concept of the "deductible" primary "layer" of insurance
coverage administered through Programs. This business was placed through the
Insurance Companies. In August 1993, after years of successful growth, the
Insurance Companies, PBC and CAC were organized under Holding, of which
approximately 33% was sold to the public.
At the time of the IPO, management of Holding believed that its historical
marketing efforts and ability to expand its business were hampered by its small
capital base and its lack of a letter rating from A.M. Best. Approximately
$13,000,000 of the proceeds of the IPO were contributed to OLRI to increase its
capital and surplus to permit it to (i) increase its underwriting capabilities,
(ii) obtain a letter rating from A.M. Best, and (iii) enable OLRI to meet
certain regulatory capital and surplus requirements. As a result of the proceeds
being contributed, OLRI significantly increased its underwriting capacity. This
enabled it to ultimately obtain an A.M. Best rating of A- (Excellent) (which it
currently maintains) and meet all regulatory capital and surplus requirements.
6
<PAGE>
The business growth of OLRI however depends on the creation of new Programs
and the addition of insureds into existing Programs. OLRI relies on PBC to
develop new Programs. PBC is also OLRI's most important and significant
producing broker, historically producing all of the Insurance Companies' net
premiums earned.
1994
In 1994, the Retail Brokerage Business completed the integration of its
1992 acquisition of Amalgamated Programs Corporation and related entities
("Amalgamated") and continued to downsize to adjust for the continuing "soft
market" in property and casualty premium rates. At the time, the officers of the
general partners of KILP (which included members of Holding's Board of
Directors) concluded that the combination of Holding and the Retail Brokerage
Business would be advantageous for both OLRI and KILP. This conclusion was based
on three factors: (a) improved operating results derived from the Amalgamated
integration and "soft market" downsizing, (b) the improved outlook for the
Retail Brokerage Business and (c) the fact that the Retail Brokerage Business
accounted for approximately one-half of PBC's premium volume.
In evaluating the combination, Holding's Board of Directors also considered
the fact that the market for Holding's common stock following the IPO was
relatively illiquid. The Board believed that the combination of the Retail
Brokerage Business with Holding would increase the size of Holding, make it a
more financially diverse company and potentially attract a broader spectrum of
investors.
1995
The combination ("Transaction") was effective October 2, 1995 and was
accounted for as a transfer and exchange between companies under common control.
Accordingly, the assets and liabilities of the Retail Brokerage Business were
combined with those of Holding at their historical cost in a manner similar to a
"pooling of interests" (see Note 2 to the consolidated financial statements of
the Company). The combination was accomplished as follows:
1. Holding transferred to then recently formed Kaye Holding Corp.
("KHC") all of the outstanding stock of the Insurance Companies and its two
other subsidiaries, PBC and CAC, and its other assets in exchange for (i)
82,400 shares of KHC common stock, representing 82.4% of the total
outstanding KHC common stock, and (ii) the assumption by KHC of certain of
Holding's liabilities.
2. KILP transferred all of its interest in the limited partnerships
conducting the Retail Brokerage Business (the "Retail Partnerships") and
certain related assets to KHC in exchange for (i) 17,200 shares of KHC
common stock, representing 17.2% of the total outstanding KHC common stock,
and (ii) the assumption by KHC of certain KILP liabilities.
7
<PAGE>
3. Certain individuals transferred to KHC all of their interests in
the corporate general partners of the Retail Partnerships (the "Retail
Brokerage Companies") in exchange for 400 shares of KHC common stock,
representing 0.4% of the total outstanding KHC common stock.
4. KHC contributed its interests in the Retail Partnerships to the
Retail Brokerage Companies thereby causing the dissolution of the Retail
Partnerships. As a result, the Retail Brokerage Companies, as a group, owns
all of the assets and is subject to all of the liabilities, of the Retail
Brokerage Business.
1997
On December 30, 1997 stockholders of the Company approved a restructuring
that merged KHC into the Company. This eliminated the minority interest in KHC
held by KILP and simplified the corporate structure and reporting of the
Company.
1998
On May 12, 1998 KILP was dissolved and approximately 6,100,000 shares of
the Company were distributed by KILP to its partners, consisting of Kaye
Investments L.P., ZS Kaye, L.P., other entities and individuals.
The chart below reflects the current structure of the Company:
[GRAPHIC OMITTED]
8
<PAGE>
Affinity Group Marketing
The Company generally services middle market entities just below the
Fortune 500 level. Within this market, it has developed particular expertise and
knowledge of risks facing a number of industry sections. Based on this expertise
and knowledge, the Company develops and markets insurance programs for various
purchasing groups (Affinity Group Marketing), including hospitals, churches, law
firms, mental health practitioners, homes for the aged and fine arts, among
others. Affinity Group Marketing programs (including alternative distribution
programs) contribute 62% of the Company's 1999 consolidated revenues, excluding
investment income.
Retail Brokerage Operations
The Retail Brokerage Business generally services middle market entities as
described above. Approximately 23% of the Retail Brokerage Business' 1999
revenues relate to such affinity groups. Of this 23%, approximately 51% of the
related revenues are derived from unrelated insurance markets. The remaining 49%
are derived from PBC. (The premium volume associated with this 49% represents
approximately one-third of PBC's premium volume.) No premiums are placed with
the Insurance Companies directly by the Retail Brokerage Business.
PBC and Insurance Companies Operations
PBC designs alternative distribution programs for affinity groups and
markets via a network of retail insurance brokers, including the Retail
Brokerage Companies. PBC's distribution network includes its own producers and
approximately 600 unrelated retail agent and broker producers. These producers
account for two-thirds of PBC's premium volume. The Insurance Companies
underwrite a portion of the Programs and only underwrite programs designed by
PBC.
During the past seven years the original 1:2 ratio of insurance premiums
produced by unrelated retail brokers to insurance premiums produced by the
Retail Brokerage Companies (the "Production Ratio"), respectively, has reversed.
But production from both sources has grown. PBC's total premium volume for 1999
of $68,000,000 increased 12% over 1998. It is expected that the Production Ratio
will approach 3:1 during 2000, consistent with PBC's strategy of growing the
unrelated retail producer distribution network.
Once PBC establishes a program, it acts as the placing broker with respect
to insurance under the Programs. In such a role, PBC acts as an intermediary in
placing the programs with various unaffiliated insurers as well as the Insurance
Companies.
9
<PAGE>
PBC receives commissions from OLRI and the unaffiliated Program insurers.
Pursuant to sub-brokerage agreements, PBC pays commissions to retail brokers
based upon all business produced by such agents and brokers (including business
placed by PBC with the unaffiliated Program insurers).
The Insurance Companies' strategy in most cases is to underwrite only the
first "layer" per claim (the deductible range) (primarily inclusive of allocated
loss expenses) of the property and casualty insurance provided under the
Programs developed by PBC. This limits their exposure to individual insureds on
individual losses to the deductible range depending on the Program. Under the
Programs, the Insurance Companies' policies are sold in conjunction with
policies issued by unaffiliated insurers that provide coverage for losses above
the first "layer" of risk underwritten by the Insurance Companies. The Insurance
Companies believe that their rates for the first "layer" of risk, when combined
with the rates of such other unrelated insurers for the coverage above such
layer, are generally competitive with the rates that other insurance companies
would charge to provide comparable insurance coverage.
The Insurance Companies currently participates in 29 alternative
distribution programs. The major program groupings are as follows:
1. The residential real estate programs provide property and casualty
insurance for residential real estate including rental apartments,
cooperatives, and condominiums. Policies protect the owner from property
losses and casualty claims, such as claims brought by a tenant or member of
the public injured on the premises. These programs are offered principally
in the New York City area and have approximately 2,100 insureds.
2. The restaurant programs insure restaurants against casualty claims
(most typically brought by an injured restaurant patron) and property
losses. Many of the restaurants that participate in these programs are
"white tablecloth" restaurants. The restaurant programs have approximately
1,700 insureds.
3. The real estate umbrella program insures residential and commercial
real estate owners against certain types of casualty losses. Insureds are
provided with an extra level of protection in conjunction with a standard
umbrella policy. Coverage is provided for losses that are included within
the broad terms of the policy, but are excluded under the general casualty
policy. This program also offers high umbrella casualty limits primarily
provided by unrelated Program insurance companies to individual real estate
owners. OLRI has a maximum exposure of $10,000 per claim. The real estate
umbrella program has approximately 500 insureds.
10
<PAGE>
4. The remaining programs represent 17% of the net premiums earned by
the Insurance Companies in 1999. They have approximately 3,700 insureds and
include among others the following affinity groups: catalog showrooms,
homeowners, retail stores, drug stores, funeral directors, bars and
taverns, waste haulers, laundromats and dry cleaners, New England
restaurants, Asian American restaurants, automobile service stations,
houses of worship, and main street small businesses.
The restaurant programs, residential real estate programs and real estate
umbrella program accounted for 83% of the net premiums earned by the Insurance
Companies in 1999. The following table sets forth the percentage of net premiums
earned attributable to the programs and all other business during the years
ended December 31, 1999, 1998 and 1997.
Net Premiums Earned
Years Ended December 31,
1999 1998 1997
---- ---- ----
Residential real estate programs .............. 45% 43% 46%
Restaurant programs ........................... 22% 26% 26%
Real estate umbrella program .................. 16% 18% 17%
Other ......................................... 17% 13% 11%
--- --- ---
100% 100% 100%
=== === ===
Acquisitions
During 1997, the Brokerage Operations acquired certain assets and
liabilities of Western Insurance Associates, Inc. ("WIA"). This acquisition was
accounted for as a purchase and achieved critical mass for the brokerage
operations located in Pasadena, California. In addition, this acquisition was
synergistic as WIA's competitive advantage was in the production of business
from affinity groups, including churches and homes for the aged.
During 1998, the Brokerage Operations acquired certain assets and
liabilities of Florida Insurance Associates, Inc. ("FIA"), Daniel V. Keane
Agency, Inc. ("DVK") and Laub Group of Florida, Inc. ("LGF"). These acquisitions
were accounted for as purchases. FIA, located in Hollywood, Florida, represented
the Company's entrance into the Florida marketplace. DVK, located in Bridgeport,
Connecticut, was relocated to the Company's Westport, Connecticut office and
added to that office's personal lines and main street (small business)
operations. LGF, located in Hollywood, Florida, added alternative distribution
transfer capabilities to the FIA operations.
During the first quarter of 1999, the Brokerage Operations acquired certain
assets and liabilities of Seaman, Ross, & Weiner, Inc. ("SRW"). This acquisition
was accounted for as a purchase. SRW, located in Woodbury, New York, enhances
the general commercial, group benefits and life insurance Brokerage Operations
in the New York City metropolitan area.
11
<PAGE>
During the first quarter of 2000, the Brokerage Operations sold the
operations of LGF at no gain or loss. The Company is finalizing the sale of FIA.
The Company believes that the effect of past, present and future
acquisitions will be to expand its insurance program services to affinity
groups, thus providing earnings to all operations.
The Company is considering and intends to consider from time to time
additional acquisitions and divestitures on terms it deems consistent with its
strategies. The Company at this time is engaged in preliminary discussions with
a number of candidates for possible future acquisitions but has not signed
contracts or agreements in principle to make additional acquisitions. No
assurances can be given that any additional acquisitions or divestitures will be
completed, or if completed, that they will be advantageous to the Company.
Seasonality
The Brokerage Operations' revenues vary significantly from quarter to
quarter as a result of the timing of policy renewals and their related billings.
This is due to the revenue recognition method for brokerage commissions which
requires that a full year's commissions be recognized immediately upon the
billing date of the related policies. Further, the majority of the Retail
Brokerage Business' incentive commissions from insurance companies are recorded
when collected which is usually during the first quarter. However, premium
revenues of the Insurance Companies are recognized ratably over the term of the
related policies. As a result, there is little variation from quarter to quarter
in the Property and Casualty Companies Operations' revenues.
Consolidated revenues by quarter for 1999, 1998 and 1997 were earned as
follows. Amounts shown represent a percentage of the related full year
consolidated revenues.
1999 1998 1997
---- ---- ----
First Quarter 23% 23% 22%
Second Quarter 26% 24% 23%
Third Quarter 24% 26% 28%
Fourth Quarter 27% 27% 27%
12
<PAGE>
Competition, and Industry and Market Risk
The Company is the 27th largest insurance broker in the United States
according to "Business Insurance", a leading insurance industry publication. It
operates in a highly competitive industry and faces competition from regional
brokers and regional offices of worldwide brokers and insurers.
The insurance brokerage business is highly competitive. The Company
believes that it is well positioned to compete within its designated market
because of the expertise and knowledge it has developed in servicing middle
market companies, the Programs it has developed and the proprietary database of
affinity group underwriting and claims information it has developed. In general,
premium pricing and commission rate reductions continue to impact the Company
and the insurance industry as a whole. The Company has been successful in
replacing business lost from such premium and commission rate reductions and
attrition through new business developed from new accounts and programs, and
extension of service to existing accounts. During 1999, the Retail Brokerage
Operations no longer served as the primary broker for certain New York City -
based entities' medical malpractice coverage. This portfolio of business
represented the majority of the Retail Brokerage Operations revenues in this
concentration of coverage placement.
Many insurance companies which compete with OLRI have a higher A.M. Best
- -rating (OLRI is rated A-(Excellent)), and are larger and have greater
financial, marketing and management resources than OLRI. Competition is based on
many factors, including perceived overall financial strength of the insurer,
premiums charged, policy terms and conditions, services offered, reputation and
experience. Due to its size, management and operational flexibility, the Company
can respond quickly to, and take advantage of, changing circumstances
encountered in the marketplace.
In the event that admitted insurers (including the unaffiliated Program
insurers) begin to offer the coverage in New York which the Company offers as a
surplus lines insurer, it is possible that OLRI may be unable to receive
placements on a surplus lines basis, because brokers are generally required
first to obtain three "declinations" from admitted carriers before they can
offer the business to a surplus lines underwriter. In addition, in soft
insurance markets, other insurance companies may be more willing to offer low
deductibles, at prices competitive with or lower than the insurance offered
under the Programs.
As part of its ongoing business, the Company is exposed to certain market risks
of potential losses from adverse changes in market rates and prices. The
Company's primary market risk exposure is interest rate risk in regard to fixed
rate domestic instruments and outstanding debt. The Company has certain
investments in equity securities, which have market risk exposure. It has no
derivative instruments. The Company's financial instruments consist of the
investment portfolio of OLRI. These instruments are comprised of Corporate and
Municipal Bonds, U.S. Treasury securities and equity securities that are
13
<PAGE>
classified as available for sale. OLRI generally selects investment assets with
characteristics such as duration, yield, currency, and liquidity to match cash
flows of related insurance and reinsurance contracts. It selects medium term
fixed rate investments to support general liability claims and shorter
investments to support property claims. The fair value of and weighted average
interest rate on the investment portfolio as of December 31, 1999 was
$46,043,000 and 5%, respectively.
Year 2000 Compliance
Many computers, software programs and microprocessors embedded in certain
equipment (collectively, "systems") were designed to accommodate only two-digit
date fields to represent a given year (e.g., "98" represents 1998). It was
thought possible that such systems would not be able to accurately process data
containing information relating to dates before, during or after the year 2000.
It was thought possible that such systems could fail entirely, although in many
instances the consequences of a system not being "year 2000 complaint" were
unknown.
Testing conducted by a team of informational technology personnel and
operational line staff from January 1, 2000 through January 3, 2000 on its
application operating software and hardware determined that the Company's Y2K
remediation efforts had been successful. This has been confirmed by post January
3, 2000 normal operations being unimpeded by Y2K related issues.
The total cost to modify these existing production systems, which includes
both internal and external costs of programming, coding, testing and
software/hardware and equipment purchases was approximately $473,000 and has
been reflected in the financial statements.
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 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.
14
<PAGE>
Ceded Reinsurance
OLRI has from time to time obtained reinsurance for portions of, or
specific risks under, the first layer of risks underwritten by OLRI. Reinsurance
has been placed with PXRE Reinsurance Company, The Hartford Steam Boiler
Inspection and Insurance Co. and CNA Reinsurance Company Ltd., which are rated A
or better by A.M. Best. However, if reinsurance should become more widely
available at economical prices, OLRI may increase the amount of reinsurance it
purchases (see Note 13 to the consolidated financial statements of the Company).
Losses and Loss Expenses
The Insurance Companies are directly liable for losses and loss expense
payments under the terms of insurance policies that they write, and under the
reinsurance agreements to which they are party. In many cases, several years may
elapse between the occurrence of an insured loss, the reporting of the loss to
the Insurance Companies and the Insurance Companies payment of that loss. The
Insurance Companies reflect their liability for the ultimate payment of all
incurred losses and loss expenses by establishing loss and loss expense
reserves, which are balance sheet liabilities representing estimates of future
amounts needed to pay claims and related expenses with respect to insured events
that have occurred.
When a claim involving a probable loss is reported, the Insurance Companies
establish a loss reserve for the estimated amount of the Insurance Companies'
ultimate loss and loss expense payments. The estimate reflects an informed
judgment based on established reserving practices and the experience and
knowledge of CAC's claims examiners regarding the nature and value of the claim,
as well as the estimated expense of settling the claim, including legal and
other fees, and general expenses of administering the claims adjustment process.
The Insurance Companies also establish reserves on an aggregate basis to provide
for losses incurred but not reported ("IBNR reserves"), as well as future
developments on losses reported to the Insurance Companies. The amount of an
insurer's incurred losses in a given period is determined by adding losses and
loss expenses paid during the period to case loss and loss expense reserves and
IBNR reserves (collectively "loss reserves") at the end of the period, and then
subtracting loss reserves existing at the beginning of the period.
As part of the reserving process, historical data is reviewed and
consideration is given to the anticipated effect of various factors, including
anticipated legal developments, changes in social attitudes, inflation and
economic conditions. Reserve amounts are necessarily based on Management's best
estimates, and as other data becomes available and is reviewed, these estimates
are revised, resulting in increases or decreases to existing reserves.
15
<PAGE>
OLRI receives claims related to lead paint exposures it insures under
various residential real estate programs. There are uncertainties in estimating
the amount of reserves due to factors including: difficulty in properly
allocating responsibility and/or liability for the lead paint exposure; changes
in the underlying laws and the judicial interpretation of those laws; and
questions regarding the interpretation and application of insurance and
reinsurance coverage. OLRI has reserves established for these claims on a case
basis and an incurred but not reported basis. The reserves provided are
established based on Management's best estimate of ultimate liabilities.
However, due to the nature of the exposures, such reserves cannot be, and are
not established using standard actuarial techniques.
To further review the adequacy of the reserves, the Insurance Companies
engage independent actuarial consultants to perform annual case and ultimate
loss reserve analysis.
The following table sets forth a reconciliation of the change in the
reserves for outstanding losses and loss expenses, including paid losses and
loss expenses, for each year in the three year period ended December 31, 1999.
Years Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Balance at January 1, $ 21,567 $ 19,126 $ 15,227
Less reinsurance recoverables (2,811) (882)
-------- -------- --------
(3,220)
Net balance 18,347 16,315 14,345
-------- -------- --------
Incurred related to:
Current year 10,410 8,461 8,824
Prior years 35 (108)
-------- -------- --------
Total incurred 9,754 8,496 8,716
-------- -------- --------
Paid related to:
Current year 2,188 1,877 1,802
Prior years 4,622 4,587 4,944
-------- -------- --------
Total paid 6,810 6,464 6,746
-------- -------- --------
Net balance at December 31, 21,291 18,347 16,315
Plus reinsurance recoverables 2,678 3,220 2,811
-------- -------- --------
Balance $ 23,969 $ 21,567 $ 19,126
======== ======== ========
16
<PAGE>
The following table presents the development of unpaid losses and loss
expense reserves for the past ten years for the Insurance Companies. During the
ten year period covered by this table, OLB changed its fiscal year-end during
1989 from July 31 to April 30 and then to December 31 for the year ended
December 31, 1990. In addition, Bermuda domiciled insurance companies, unlike
U.S. domiciled insurers, are not required to file calendar year loss development
information with regulatory authorities. Accordingly, the loss development
information included in the following table with respect to OLB prior to 1992,
reflects development data converted from the policy year loss development data
maintained by OLB through the use of mathematical models. The top line of the
table shows the estimated reserve for unpaid losses and loss expenses at the
balance sheet date for each of the indicated years. These figures represent the
estimated amount of unpaid losses and loss expenses for claims arising in the
current and all prior years that were unpaid at the balance sheet date,
including losses that had been incurred but not yet reported. The table also
shows the re-estimated amount of the previously recorded reserve based on
experience as of the end of each succeeding year. The estimate changes as more
information becomes available, principally about the frequency of claims for
individual years. The table is presented gross of reinsurance for all years
presented. The reinsurance recoverable on unpaid losses at December 31, 1999 and
1998 were $2,678,000 and $3,220,000, respectively.
17
<PAGE>
KAYE GROUP INC.
LOSS DEVELOPMENT SCHEDULE
(In thousands)
<TABLE>
<CAPTION>
Year Ended 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for outstanding
losses and loss expenses
on December 31, $8,418 $12,555 $16,244 $18,444 $17,929 $14,118 $12,672 $15,227 $19,126 $21,567 $23,969
Cumulative amount paid as of:
One year later $2,505 $4,374 $5,569 $6,379 $6,965 $4,161 $3,697 $4,943 $4,587 $4,674
Two years later 5,266 7,545 9,258 11,704 10,002 6,802 6,882 7,780 7,716
Three years later 7,041 9,245 12,695 13,833 12,278 9,455 8,691 9,756
Four years later 7,600 11,378 13,813 14,973 14,120 10,917 9,425
Five years later 8,539 11,705 14,146 15,784 15,281 11,539
Six years later 8,660 11,768 14,385 16,374 15,788
Seven years later 8,681 11,877 14,562 16,641
Eight years later 8,701 11,917 14,635
Nine years later 8,720 11,931
Ten years later 8,724
Re-estimated liability as of:
One year later $9,127 $13,665 $16,117 $18,140 $17,856 $14,254 $12,257 $15,494 $18,534 $19,613
Two years later 9,767 13,003 15,182 18,511 18,184 13,487 12,454 15,352 16,944
Three years later 9,288 11,850 15,609 18,636 16,552 13,990 12,448 14,635
Four years later 9,002 12,410 15,462 18,177 18,157 13,985 12,113
Five years later 9,060 12,468 15,312 18,252 17,993 13,840
Six years later 8,973 12,224 14,982 17,999 17,887
Seven years later 8,893 12,121 14,872 17,916
Eight years later 8,847 11,996 14,911
Nine years later 8,733 11,994
Ten years later 8,733
Cumulative
Redundancy (Deficiency): ($315) $561 $1,333 $528 $42 $278 $559 $592 $2,182 $1,954
</TABLE>
18
<PAGE>
Regulation
The Company is subject to a substantial degree of regulation that is
designed to protect the interests of insurance policyholders. As a Rhode Island
property and casualty insurance company, OLRI is primarily subject to the
regulatory oversight of the Rhode Island Department of Business Regulation
through its Insurance Division.
As a Bermuda property and casualty insurance company, OLB is subject to
regulation of the regulatory body of Bermuda. Such regulation relates to, among
other things, authorized lines of business, capital and surplus requirements and
general standards of solvency, the filing of annual and other financial reports
prepared on the basis of statutory accounting practices, the filing and form of
actuarial reports, the establishment and maintenance of reserves for unearned
premiums, losses and loss expenses, underwriting limitations, investment
parameters, transactions with affiliates, dividend limitations, changes in
control and a variety of other financial and non-financial matters.
The National Association of Insurance Commissioners has developed
risk-based capital formulas to be applied to all domestic insurance companies.
These formulas calculate a minimum required statutory net worth, based on the
underwriting, investment and other business risks inherent in an insurance
company's operations. Any insurance company that does not meet threshold
risk-based capital levels ultimately will be subject to statutory receivership
proceedings. The statutory net worth of OLRI is adequate in light of its current
and anticipated future business and OLRI has met its risk-based capital and
surplus requirements at December 31, 1999. The authorized control level
risk-based capital for OLRI, as of December 31, 1999 was $5,069,989 and OLRI
exceeded that threshold by $26,030,098.
Employees
As of December 31, 1999, the Company had 368 employees. The Company is not
unionized and believes that its employee relationships are satisfactory.
Item 2. Properties
The Company owns approximately 7,500 square feet of space in an office
condominium building in Warwick, Rhode Island, which is utilized by employees of
PBC and OLRI. The Company also leases space located in New York, New York,
Pasadena, California, Westport, Connecticut, Woodbury, New York and Floral Park,
New York. The Company's total leased space at these locations is approximately
116,000 square feet and is suitable for its current needs.
19
<PAGE>
Item 3. 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.
As licensed brokers, the Insurance Brokerage Companies are or may become
party to administrative inquiries and at times to administrative proceedings
commenced by state insurance regulatory bodies. Certain subsidiaries were
involved in an administrative investigation commenced in 1992 by the New York
Insurance Department ("Department") relating to how property insurance policies
were issued for the Residential Real Estate Program. As a result, the manner in
which policies are structured for certain clients in this Program were altered,
which has not had a material adverse effect on this Program. While the Company
had discussions with the Department regarding settlement of such investigation,
this matter has not been pursued for several years. If the matter is not closed
or settled, the Department could institute formal proceedings against the
subsidiaries seeking fines or license revocation. Management does not believe
the resolution of this issue will have a material adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1999.
20
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
In August 1993, in connection with the consummation of the IPO, the
Company's Common Stock was listed on the NASDAQ National Market System under the
symbol "OLHC". On October 2, 1995, in connection with the combination of the
Retail Brokerage Business of Kaye with Holding, Holding changed its name to Kaye
Group Inc. and is now listed under its new symbol "KAYE". The following table
sets forth the closing high and low prices for the Common Stock as reported on
NASDAQ for the indicated periods and the dividends paid per share during such
periods.
Price Range Dividends
----------- Paid
High Low Per Share
---- --- ---------
1999:
First Quarter $7 7/8 $7 1/8 $ .025 cash
Second Quarter 8 3/8 6 3/4 $ .025 cash
Third Quarter 9 7/16 7 $ .025 cash
Fourth Quarter 9 7 1/4 $ .025 cash
1998:
First Quarter $7 13/16 $6 1/4 $ .025 cash
Second Quarter 7 1/2 6 3/8 $ .025 cash
Third Quarter 7 1/4 6 1/4 $ .025 cash
Fourth Quarter 7 5/8 5 1/8 $ .025 cash
The approximate number of holders of record of the Company's Common Stock
as of March 20, 2000 was 98.
See Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Dividends" for a discussion of dividends paid by the
Company.
21
<PAGE>
Item 6. Selected Financial Data
The following table should be read in conjunction with, and is supplemented in
its entirety by, the consolidated financial statements and the notes thereto.
Financial data has been restated to take into effect the Transactions effective
October 2, 1995. The financial data for the years 1995 through 1999 has been
derived from the audited consolidated financial statements of the Company.
<TABLE>
<CAPTION>
Years ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Operating revenues(1) $ 64,231 $ 60,191 $ 55,309 $ 51,339 $ 51,582
Net investment income 4,529 4,735 4,312 3,576 3,912
Net realized gains (losses) on investments (16) 85 21 72 (47)
--------- --------- --------- --------- ---------
Total revenues $ 68,744 $ 65,011 $ 59,642 $ 54,987 $ 55,447
--------- --------- --------- --------- ---------
Net income $ 7,504 $ 7,282 $ 4,357 $ 3,071 $ 5,181
Earnings per share:
Basic $ 0.89 $ 0.86 $ 0.62 $ 0.44 $ 0.74
Diluted $ 0.87 $ 0.85 $ 0.62 $ 0.44 $ 0.74
- ----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME AND EPS - BASIC(2)
Income before minority interest and income taxes $ 10,729 $ 10,554 $ 7,555 $ 5,211 $ 6,309
Provision for income taxes 3,225 3,272 2,267 1,484 1,995
--------- --------- --------- --------- ---------
Income before minority interest 7,504 7,282 5,288 3,727 4,314
Minority interest (931) (656) (759)
--------- --------- --------- --------- ---------
Pro forma net income $ 7,504 $ 7,282 $ 4,357 $ 3,071 $ 3,555
Pro forma earnings per share - basic $ 0.89 $ 0.86 $ 0.62 $ 0.44 $ 0.51
Weighted average of shares outstanding - basic 8,460 8,474 7,024 7,020 7,020
Weighted average of shares and
share equivalents outstanding - diluted 8,630 8,593 7,083 7,021 7,023
</TABLE>
22
<PAGE>
Item 6. Selected Financial Data (Continued)
<TABLE>
<CAPTION>
Years ended December 31,
- -------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Balance Sheet data:
Total assets 157,073 $ 167,066 $ 141,025 $ 156,102 $ 174,000
Long-term debt(3) 2,911 4,672 5,810 12,787 13,679
Stockholders' equity 47,251 41,769 35,168 24,984 22,882
Net book value per share(4) 5.59 4.93 4.15 3.56 3.26
Cash dividend per share 0.10 0.10 0.10 0.10 0.10
GAAP operating data:
Loss ratio 36.4% 34.4% 38.2% 36.4% 28.8%
Expense ratio 41.8% 39.3% 41.0% 42.5% 41.1%
Combined ratio 78.2% 73.7% 79.2% 78.9% 69.9%
Statutory operating data(5):
Net underwriting gain $ 6,603 $ 6,925 $ 5,890 $ 4,455 $ 7,104
Policyholders' surplus 32,514 29,286 25,566 25,485 26,231
Loss ratio 33.2% 33.1% 36.6% 34.1% 24.4%
Expense ratio 40.6% 39.1% 38.6% 40.0% 37.1%
Combined ratio 73.8% 72.2% 75.2% 74.1% 61.5%
</TABLE>
(1) Subsequent to 1995, commission expense paid to internal producers has been
reclassified to salary expense to more accurately reflect salaries and
benefits. Previously this expense was netted against operating revenues and
accordingly operating revenues for 1995 and 1994 are not comparable.
Operating revenues include transactions between segments. These
transactions have not been eliminated.
(2) Prior to the Transaction certain entities were partnerships or S
Corporations under the Internal Revenue Code and therefore not liable for
Federal income taxes. A charge in lieu of income taxes is presented as if
the income of these entities were taxed to those entities rather than to
partners or stockholders not otherwise included in the Company's
consolidated group.
(3) Excludes that portion of long-term debt maturing in less than one year.
(4) Based upon 8,458,295 shares outstanding at December 31, 1999 and 8,474,435
shares outstanding at December 31, 1998 and 1997 and 7,020,000 outstanding
at December 31, 1996, and 1995.
(5) Based upon statutory accounting practices and derived from the statutory
financial statements of the Insurance Companies, which excludes the effects
of CAC.
(6) Certain information prior to 1998 has been reclassified to conform with the
1998 and forward year presentation.
23
<PAGE>
Item 7. 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 (see Note 1 to the consolidated financial statements of
the Company).
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, 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 the Insurance Brokerage
Companies or the Property and Casualty Companies. Certain holding company
expenses are not allocated and include debt servicing and public company
expenses, including investor relations costs.
The Company has foreign operations in Bermuda. For further discussion see
Note 20 to the consolidated financial statements of the Company.
24
<PAGE>
Results of Operations
Year ended December 31, 1999 compared with the year ended December 31, 1998
Net Income
Net Income for the year ended December 31, 1999 increased by $222,000 to
$7,504,000 or basic earnings per share of $0.89 compared to $7,282,000 or $0.86
for the same period last year as explained below. During the fourth quarter of
1999 the Company updated the assumptions used to allocate certain human resource
and other operating costs to its insurance brokerage and underwriting units.
These costs are corporate administrative expenses, attributable to all of the
Company's operations, but not previously allocated to all revenue-generating
business segments. The effect of this revision was to move approximately
$1,300,000 of expenses from the Insurance Brokerage Companies to the Property
and Casualty Companies, but had no effect on the Company's consolidated results.
Insurance Brokerage Companies
Income before income taxes increased by $617,000 to $2,322,000 in 1999 from
$1,705,000 in 1998. The increased operating result was primarily due to a
reduction of expenses as a result of an increase in intercompany management fees
allocated to the Property and Casualty Companies, as discussed below.
Total revenues in 1999 were $38,753,000 compared with $37,202,000 in 1998,
an increase of $1,551,000 (4%). Gross commissions and fees grew by $3,325,000
(8%) as a result of new business and acquisitions exceeding lost business. The
SRW acquisition generated $3,653,000 of gross revenues during 1999. Included in
lost business were revenues that had been derived from a certain New York City -
based entities' medical malpractice coverage. This portfolio of business
represented the majority of the Retail Brokerage Operations revenues in this
concentration of coverage placement. 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 18% to
20% which resulted in a decrease in net commissions and fees of $860,000.
Investment income decreased by $472,000 (26%) primarily due to lower fiduciary
investments as a result of certain lost business.
Salaries and benefits increased by $1,023,000 (5%) to $22,346,000 in 1999
compared to $21,323,000 in 1998. The increase was the result of acquisitions and
salary increments offset partially by headcount reductions, reduced incentive
compensation and an increase in intercompany management fees allocated to the
Property and Casualty Companies discussed previously.
25
<PAGE>
Amortization of intangibles increased $416,000 to $1,095,000 in 1999
compared with $679,000 in 1998 due to amortization of acquisition related
intangibles on 1998 and 1999 acquisitions.
Other operating expenses decreased by $1,231,000 (9%) to $12,215,000 in
1999 compared with $13,446,000 in 1998 mainly due to an increase in intercompany
management fees allocated to the Property and Casualty Companies (discussed
previously) as well as reduced insurance costs.
Interest expense increased by $726,000 as a result of the SRW acquisition,
which includes a related note payable to the Property and Casualty Companies.
Property and Casualty Companies
Income before income taxes decreased by $811,000 (8%) to $8,826,000 in 1999
from $9,637,000 in 1998. The decrease was due to an increase in the combined
ratio due to an increase in intercompany management fees (discussed previously)
offset by an increase in net premiums earned.
Net premiums earned for 1999 increased by $2,091,000 (8%) to $26,780,000
from $24,689,000 in 1998. The Company's efforts to develop new alternative
distribution programs and broaden the distribution network of existing programs
and coverage types has contributed to the growth of premium volume.
Net investment income increased by $29,000 (1%) to $2,949,000 in 1999 from
$2,920,000 in 1998. The increase was due to an increase in investments.
Net realized loss was $16,000 in 1999 compared to a realized gain $85,000
in 1998. The realization of investment gains and losses is determined by market
conditions and management's decision regarding the holding period of the
portfolio.
The loss ratio (loss incurred expressed as a percentage of premiums earned)
was 36% and 34% for 1999 and 1998, respectively. Exclusive of the intercompany
claims management fee increase in 1999 discussed previously, the loss ratio
would have been 35% and 34% for 1999 and 1998, respectively. This increase was
due to the change in the mix of business toward assumed general liability, which
traditionally experiences a higher loss frequency.
The acquisition costs and general and administrative expenses ratio was 42%
and 39% for 1999 and 1998, respectively. Exclusive of a bad debt recovered in
1998, the ratio would have been 42% and 40% for 1999 and 1998, respectively.
Exclusive of the intercompany management fee increase in 1999 discussed
previously, the expense ratio would have been 40% for 1999 and 1998.
26
<PAGE>
Corporate
Net expenses before income taxes decreased in 1999 by $369,000 to $419,000
from $788,000 in 1998. The segment's sole investment in Arista Investors Corp.
was reduced due to an initial liquidating distribution. Arista's management has
indicated its intention to sell its remaining asset, its license to operate, and
its stock. This initial liquidating distribution, partially offset by the
corresponding reduction in fair market value of Arista stock, was accounted for
in net investment income and is the primary reason for the positive variance
along with lower interest expense due to the June 1998 restructuring of
corporate debt.
Provision for Income Taxes
The provision for income taxes for 1999 and 1998 was $3,225,000 and
$3,272,000, respectively. The 1999 provision reflects an adjustment to reflect
the tax on the Company's income tax returns resulting in an effective tax rate
of 30% and 31% for 1999 and 1998, respectively. The difference between the
statutory rate and the effective rate was primarily related to tax exempt
interest.
Year ended December 31, 1998 compared with year ended December 31, 1997
Net Income
Net income for the year ended December 31, 1998 increased by $2,925,000 to
$7,282,000 or basic earnings per share of $0.86 compared to $4,357,000 or $0.62
for the same period last year as explained below. $931,000 of the increase was
due to the elimination of minority interest (see Note 2 to the consolidated
financial statements of the Company).
Insurance Brokerage Companies
Income before income taxes increased by $938,000 to $1,705,000 in 1998 from
$767,000 in 1997. The improved operating result was mainly due to increased
revenues offset by the increase in salaries and benefits, as discussed below.
Total revenues in 1998 were $37,202,000 compared with $33,782,000 in 1997,
an increase of $3,420,000 (10%). Gross commission and fees grew by $4,222,000
(11%) mainly as a result of new business exceeding lost business, acquisitions
and an increase in contingency commissions due to volume and profitability of
1997 premiums placed with certain insurance carriers. The commission expense
rate incurred to produce new and renewal business increased from 17% to 18%.
Investment income increased in 1998 by $281,000 (18%) primarily due to
collection efficiencies resulting in a longer holding period for fiduciary
investments.
27
<PAGE>
Salaries and benefits increased by $2,418,000 (13%) to $21,323,000 in 1998
compared to $18,905,000 in 1997. This increase was due to acquisitions, salary
increments, increased commission expense to employees and annual incentive based
compensation.
Amortization of intangibles increased by $172,000 (34%) to $679,000 from
$507,000 in 1997 as a result of increased amortization of acquisition related
intangibles due to 1997 and 1998 acquisitions.
Other operating expenses increased by $243,000 (2%) to $13,446,000 in 1998
compared with $13,203,000 in 1997. This increase was mainly the result of a
reserve for E & O deductibles partially offset by reduced rent costs.
Interest expense decreased by $351,000 primarily as a result of the early
payment of the $6,000,000 note payable to KILP in August, 1997.
Property & Casualty Companies
Income before income taxes increased by $1,918,000 (25%) to $9,637,000 in
1998 from $7,719,000 in 1997. The increase in operating result was due to
increased net premiums earned, investment income and a decreased combined ratio.
Net premiums earned for 1998 increased by $1,842,000 (8%) to $24,689,000
from $22,847,000 in 1997. The Property & Casualty Companies' efforts, combined
with the efforts of the Brokerage segment's Program Brokerage Corporation, to
develop new alternative distribution programs and broaden the distribution
network of the existing programs and coverage types, has contributed to the
growth of premium volume.
Net investment income increased by $228,000 (8%) to $2,920,000 from
$2,692,000 in 1997. This increase was due to an increase in investments
generated by cash flow from operations.
Net realized gain on investment transactions for 1998 increased by $64,000
to $85,000 compared to $21,000 in 1997. The realization of investment gains and
losses is determined by market conditions and management's decision regarding
the holding period of the portfolio.
Other income for 1998 decreased by $99,000 to $146,000 from $245,000 in
1997. This decrease is mainly due to discontinued warranty contracts in 1998.
Loss and loss expenses decreased in 1998 by $220,000 (3%) to $8,496,000
from $8,716,000 in 1997. The loss ratio (loss incurred expressed as a percentage
of premiums earned) for 1998 and 1997 was 34% and 38%, respectively. This
decrease was due to low general liability losses and an improvement in loss and
loss expense under the property programs resulting from mild weather.
28
<PAGE>
Acquisition costs and general and administrative expenses increased in 1998
by $337,000 (4%) to $9,707,000 from $9,370,000 in 1997. The expense ratio
(acquisition costs and general and administrative expenses) for 1998 and 1997
was 39% and 41%, respectively. Exclusive of a bad debt recovered, the expense
ratio would have been 40% and 41%, respectively. This decrease was due to lower
general and administrative expenses in 1998.
Corporate
Net expenses before income taxes decreased in 1998 by $143,000 (15%) to
$788,000 from $931,000 in 1997. This decrease was the result of lower interest
expense and insurance costs partially offset by a provision for investment
decline and costs related to the restructuring of debt.
Effective Tax Rate (See Note 9)
The effective tax rate for 1998 and 1997 was, 31%, and 30%, respectively.
The difference between the statutory tax rate and the effective tax rate in 1998
and 1997 was primarily related to tax exempt interest.
Financial Condition and Liquidity
Management believes that the Company's operating cash flow, along with the
cash equivalents and short term investments will provide sufficient sources of
liquidity and capital to meet the Company's anticipated needs during the next
twelve months and the foreseeable future. The Company has no capital commitments
that are material individually or in the aggregate.
Total assets decreased by $11,371,000 (7%) to $149,212,000 at December 31,
1999 from $160,583,000 at December 31, 1998. Total liabilities decreased by
$16,853,000 (14%) to $101,961,000 at December 31, 1999 from $118,814,000 at
December 31, 1998. These reductions were primarily due to reductions in
brokerage segment fiduciary assets and liabilities (insurance premiums).
Stockholders' equity increased by $5,482,000 (13%) to $47,251,000 at
December 31, 1999, from $41,769,000 at December 31, 1998. The increase in equity
resulted from net income of $7,504,000 and $35,000 for shares issued related to
the exercise of stock options, offset by an increase in net unrealized
depreciation of investments of $769,000, dividends paid of $847,000, $229,000
for net purchases of treasury stock, and $212,000 related to shares issued for
the Stock Performance Plan, net of amortization.
The Company maintains a substantial level of cash and liquid short term
investments, which are used to meet anticipated payment obligations. At December
31, 1999 and 1998, the Company had cash and short term investments of
$43,238,000 and $48,393,000, respectively, of which $25,610,000 and $33,218,000
represents premiums
29
<PAGE>
collected and held in a fiduciary capacity which are generally not available for
operating needs of the Company. Of the Company's total invested assets, fixed
maturities and cash equivalents carried at market value of $22,270,000 and
$13,747,000 as of December 1999 and 1998, respectively, 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 $7,705,000 for the year ended December
31, 1999. Operating activities provided cash of $8,359,000. Investing activities
used cash of $12,309,000 primarily for the purchase of investments and
acquisition payments. Financing activities used cash of $3,755,000 for payments
of dividends, loan repayments and treasury stock purchases.
During 1998, the Company paid off its revolving credit line of $6,094,000
early, and replaced it with a term loan of $5,000,000, at an interest rate
reduction of approximately 50 basis points, thereby reducing debt by $1,094,000.
As of December 31, 1999, $3,311,000 is outstanding on the Term Loan. In
addition, the Company has available a $4,500,000 revolving line of credit with a
bank. Both lines are collateralized by the stock of the Property and Casualty
Companies. The proceeds are available for general operating needs and
acquisitions. As of December 31, 1999, no amount is outstanding on the revolving
line of credit.
The Company has calculated risk-based capital and the result is that the
statutory net worth of OLRI is adequate in light of the current requirements.
The Company is subject to a substantial degree of regulation, which is
designed to protect the interests of insurance policyholders. As a Rhode Island
property and casualty insurance company, OLRI is primarily subject to the
regulatory oversight of the Rhode Island Department of Business Regulation
through its Insurance Division.
The Company's primary source of cash is derived from insurance premiums
(fiduciary assets), insurance brokerage commissions and fees, proceeds from the
sale of investments, and investment income. The Company's principal uses of cash
are payments of insurance premiums (fiduciary liabilities), commissions to
brokers who produce the business, losses and loss expenses and operating
expenses, and purchases of investments, acquisitions and fixed assets.
The Company has minimized its investment risk by investing in a mix of cash
equivalents; high quality tax exempt municipal bonds; U.S. Government and
government agency securities and corporate bonds rated A or better by an
accredited rating agency with an average duration of approximately four years;
and equity securities. The Company currently intends to continue this investment
strategy.
30
<PAGE>
The table below sets forth the composition of the Company's portfolio of
fixed maturity investments by rating as of December 31, 1999 (in thousands):
Market Value as Percentage of
Amortized Reflected on Total at Market
Rating (a) Cost Balance Sheet Value
---------- ---- ------------- -----
AAA(b) $28,977 $28,213 68.3%
AA+ 609 598 1.4%
AA 4,944 4,911 11.9%
AA- 2,916 2,837 6.9%
A+ 2,283 2,230 5.4%
A 2,544 2,515 6.1%
------- ------- -----
$42,273 $41,304 100.0%
======= ======= =====
(a) Ratings are assigned primarily by Standard & Poors Corporation with the
remaining ratings assigned by Moody's Investors Services, Inc. and
converted to the equivalent Standard & Poors ratings.
(b) Includes U.S. Government Obligations.
The amortized cost and estimated market value of fixed maturities at
December 31, 1999, by contractual maturity date, are listed below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without penalties.
Investments Available
for Sale
-------------------------------
Amortized Aggregate Fair
Cost Value
--------- --------------
Due in one year or less $3,231 $3,218
Due after one year through five years 19,687 19,414
Due after five years through ten years 15,171 14,654
Due after ten years 4,184 4,018
------- -------
Total $42,273 $41,304
======= =======
31
<PAGE>
Investment results of the Company for each of the three years in the period
ended December 31, 1999 are shown in the following table (in thousands):
As of, or for the
years ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
Average cash and cash equivalents
and invested assets(1) $ 91,097 $ 85,191 $ 76,534
Investment income $ 4,529 $ 4,735 $ 4,312
Average yield on total investments 5.0% 5.6% 5.6%
Net realized investment gain (loss) ($ 16) $ 85 $ 21
(1) Based upon the average of the beginning and end of the period amortized
cost for fixed maturities and cost for equity securities.
The Company's insurance subsidiaries require capital to support premium
writing. The guidelines set forth by the NAIC for OLRI suggest that a property
and casualty insurer's ratio of annual statutory net premiums written to
policyholders' surplus should not exceed 3 to 1. At December 31, 1999, OLRI,
with a statutory surplus of $31,100,000, had a ratio of annual statutory net
premiums written to its statutory surplus of approximately .85 to 1.
Quantitative and Qualitative Disclosures about Market Risk
As part of its ongoing business, the Company is exposed to certain market
risks of potential losses from adverse changes in market rates and prices. The
Company's primary market risk exposure is interest rate risk in regard to fixed
rate domestic instruments, equity securities and outstanding debt. The Company
is exposed to the changes in the prices of equity securities owned by the
Company. The equity price risk related to the Company's current investments in
equity securities are not material. The Company has no derivative instruments.
The Company's financial instruments consist of the investment portfolio of OLRI.
These instruments are comprised of Corporate and Municipal Bonds, equity
securities, and U.S. Treasury Securities that are classified as available for
sale.
The Company generally selects investment assets with characteristics such
as duration, yield, currency, and liquidity to reflect the underlying
characteristics of related insurance and reinsurance contracts. The Company
selects medium term fixed rate investments to support general liability claims
and shorter investments to support property claims.
32
<PAGE>
The following table summarizes information about the Company's financial
instruments that are sensitive to changes in interest rate as of December 31,
1999. The table presents principal and interest cash flow and related weighted
average interest rates by expected maturity dates for assets and liabilities.
The Company has presumed the call date as the expected maturity date for those
asset instruments with call features. Weighted average rates are calculated
using the sum of expected investment income or interest expense divided by the
sum of the amortized cost of assets or the sum of the average debt outstanding
at each respective period. For variable rate debt, expected interest cash flow
is calculated using the December 31, 1999 weighted average interest rate without
any adjustments for projected fluctuations in prime rate.
<TABLE>
<CAPTION>
EXPECTED CASH FLOW
(in thousands)
------------------------------------------------------------------
Fair Total There
Assets Value Value 2000 2001 2002 2003 2004 after
- ------ ----- ----- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Notes
Interest rates
ranging from 4.63% to 6.75% $3,224 $3,852 $476 $1,000 $507 $1,203 $666
Weighted average interest rate 4.9% 5.4% 5.1% 5.1% 4.5% 2.6%
Municipal Bonds with call
features, Interest rates
ranging from 5.4% to 12.6% 8,926 11,287 1,164 870 1,407 3,229 1,450 3,167
Weighted average interest rate 6.4% 6.9% 6.8% 6.3% 5.8% 6.6% 5.9%
Municipal Bonds
without call
features, Interest
rates ranging from
3.8% to 10.9% 25,539 35,928 2,837 2,745 4,667 2,622 3,946 19,111
Weighted average interest rate 6.2% 6.1% 6.1% 6.1% 6.3% 6.4% 6.2%
Corporate Bonds,
Interest rates
ranging from 4.6% to 7.5% 3,615 4,190 1,350 897 638 536 769
Weighted average interest rate 5.2% 5.5% 5.8% 4.4% 5.8% 2.9%
Total Fixed Rate
Instruments $41,304 $55,257 $5,827 $5,512 $7,219 $7,590 $6,831 $22,278
Weighted average
interest rate 6.1% 6.2% 6.2% 6.0% 6.1% 6.2% 6.2%
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXPECTED CASH FLOW
(in thousands)
------------------------------------------------------------------
Fair Total There
Liabilities Value Value 2000 2001 2002 2003 2004 after
- ----------- ----- ----- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt - Fixed Rate
Interest rate of 7.8% $3,631 $4,033 $1,623 $1,622 $788
Weighted average 8.3% 8.4% 8.8% 6.0%
interest rate
Debt - Variable Rate
Interest rates
ranging from prime to 1,048 1,158 460 411 287
prime +1/2%
Weighted average 7.6% 8.1% 7.7% 4.3%
interest rate
Total Debt $4,679 $5,191 $2,083 $2,033 $1,075
Weighted average
interest rate 8.1% 8.3% 8.5% 5. 5%
</TABLE>
Dividends
On December 21, 1999 the Board of Directors declared a quarterly dividend
of $.025 per share, payable January 20, 2000 to stockholders of record on
December 31, 1999. The Company is largely dependent upon dividends from the
Insurance Companies to pay dividends to the stockholders. The Company's
Insurance Companies are subject to regulations that restrict their ability to
pay dividends.
Under Rhode Island Insurance Law, OLRI may pay cash dividends only from
earned surplus determined on a statutory basis, subject to the maintenance of
minimum capital and surplus of $3,000,000. Further, OLRI is restricted (on the
basis of the lesser of 10% of OLRI's statutory surplus at the end of the
preceding twelve-month period or 100% of OLRI's net income, excluding realized
capital gains, for the preceding twelve-month period) as to the amount of
dividends it may declare or pay in any twelve-month period without prior
approval of the Department of Business Regulation of Rhode Island. Without
special permission, at December 31, 1999, $3,110,000 was available for
distribution.
OLB is required to maintain a minimum statutory capital and surplus based
upon the higher of $1,000,000 or an amount derived by applying a variable rate
to its current premium volume or outstanding losses at December 31, 1999. At
December 31, 1999, $414,000 was available for distribution from OLB and its
subsidiary, Park Brokerage Ltd.
34
<PAGE>
The continued payment and the amount of any cash dividends will depend
upon, among other factors, the Company's operating results, overall financial
condition, capital requirements and general business conditions.
Newly Adopted Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which requires
capitalization of external and certain internal costs incurred to obtain or
develop internal-use computer software during the application development stage.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. This
statement did not materially impact the Company's consolidated financial
statements.
In late 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts that Do Not Transfer Insurance Risk. This
SOP effective for fiscal years beginning after June 15, 1999, provides guidance
to both the insured and insurer on how to apply the deposit method of accounting
when it is required for insurance and reinsurance contracts that do not transfer
insurance risk. This SOP did not materially impact the Company's consolidated
financial statements.
Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 (as amended), Accounting for
Derivative Instruments and Hedging Activities. This statement requires all
derivatives to be recognized as either assets or liabilities in the statement of
financial position and to be measured at fair value. This statement is effective
for all fiscal quarters and fiscal years beginning after December 31,2000.
Management believes that the statement will not have a material impact on the
financial position of the Company.
35
<PAGE>
Year 2000 Compliance
Many computers, software programs and microprocessors embedded in certain
equipment (collectively, "systems") were designed to accommodate only two-digit
date fields to represent a given year (e.g., "98" represents 1998). It was
thought possible that such systems would not be able to accurately process data
containing information relating to dates before, during or after the year 2000.
It was thought possible that such systems could fail entirely, although in many
instances the consequences of a system not being "year 2000 complaint" were
unknown.
Testing conducted by a team of informational technology personnel and
operational line staff from January 1, 2000 through January 3, 2000 on its
application operating software and hardware determined that the Company's Y2K
remediation efforts had been successful. This has been confirmed by post January
3, 2000 normal operations being unimpeded by Y2K related issues.
The total cost to modify these existing production systems, which includes
both internal and external costs of programming, coding, testing and
software/hardware and equipment purchases was approximately $473,000 and has
been reflected in the financial statements.
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 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.
36
<PAGE>
Safe Harbor Disclosure
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This SEC Form 10-K 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 Securities and Exchange Commission)
include, but are not limited to, uncertainties relating to general economic
conditions and cyclical industry conditions, 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", "expect", "anticipate", "project", "plan", 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.
Item 8. Financial Statements and Supplementary Data
See page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999, and which is incorporated herein by reference. If the
definitive proxy statement is not filed within that time, the Company will file
an amendment to the Form 10-K within that time frame.
37
<PAGE>
Item 11. Executive Compensation
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999, and which is incorporated herein by reference. If the
definitive proxy statement is not filed within that time, the Company will file
an amendment to the Form 10-K within that time frame.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999, and which is incorporated herein by reference. If the
definitive proxy statement is not filed within that time, the Company will file
an amendment to the Form 10-K within that time frame.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999, and which is incorporated herein by reference. If the
definitive proxy statement is not filed within that time, the Company will file
an amendment to the Form 10-K within that time frame.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements and schedules.
1. Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
38
<PAGE>
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule II -- Condensed Financial Information of Registrant:
Balance Sheets as of December 31, 1999 and 1998
Statements of Income for the years ended December 31, 1999,
1998 and 1997
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Condensed Financial Statements
Schedule IV -- Reinsurance for the years ended December 31, 1999,
1998 and 1997
Schedule VI -- Supplemental Information Concerning Property and
Casualty Insurance Operations for the years ended December 31,
1999, 1998 and 1997
The information for Schedule I is contained in the Notes to the
Consolidated Financial Statements. The information for Schedule
III is included in Schedule VI.
The information required for Schedule V is not applicable.
39
<PAGE>
3. Exhibits:
Exhibit
Number Description
- ------ -----------
2 Acquisition Agreement, dated as of August 3, 1995, among Kaye
Group Inc. (formerly known as Old Lyme Holding Corporation), Kaye
International, L.P., certain individuals and Kaye Holding Corp.(a
copy of which was filed with the Commission on March 31, 1995
(Registration No. 33-64664), and which is incorporated herein by
this reference).
3 (i) Certificate of Incorporation of Kaye Group Inc. (formerly known
as Old Lyme Holding Corporation) (a copy of which was filed with
the Commission on June 17, 1993 as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-64664),
and which is incorporated herein by this reference).
3 (ii) By-laws of Kaye Group Inc. (formerly known as Old Lyme Holding
Corporation) (a copy of which was filed with the Commission on
June 17, 1993 as Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (Registration No. 33-64664), and which is
incorporated herein by this reference).
4.1 Form of certificate representing shares of Common Stock of the
Company (a copy of which was filed with the Commission on March
31, 1995 (Registration No. 33-64664), and which is incorporated
herein by this reference).
10.1 Kaye Group Inc. (formerly known as Old Lyme Holding Corporation)
1993 Stock Option Plan (a copy of which was filed with the
Commission on August 17, 1993 as Exhibit 10.6 to Amendment No. 3
to the Company's Registration Statement on Form S-1 (Registration
No. 33-64664), and which is incorporated herein by this
reference).
10.1 (i) Kaye Group Inc. Supplemental Stock Option Plan (a copy of which
was filed with the Commissioner on March 31, 1997) (Registration
No.33- 64664), as Exhibit 10.1(i) to the Company's Form 10-K, and
which is incorporated herein by this reference).
10.1 (ii) Kaye Group Inc. Restated Supplementa1 Stock Option Plan.
10.2 Registration Agreement among Kaye Group Inc. (formerly known as
Old Lyme Holding Corporation), Kaye International, L.P. and Old
Lyme Holdings of Rhode Island, Inc. (a copy of which was filed
with the Commission on August 17, 1993 as Exhibit 10.7 to
Amendment No. 3 to
40
<PAGE>
the Company's Registration Statement on Form S-1 (Registration
No. 33- 64664), and which is incorporated herein by this
reference).
10.11 Loan Agreement among Summit Bank and Kaye Group Inc., dated June
24, 1998 (a copy of which was filed with the Commission on March
30, 1999, on Exhibit 10.11 to the Company's Form 10-K, and which
is incorporated herein by reference).
10.11 (i) First Amendment to Loan Agreement among Summit Bank and Kaye
Group Inc., dated July 31, 1999.
10.11 (ii) Second Amendment to Loan Agreement among Summit Bank and Kaye
Group Inc., dated November 1, 1999.
10.17 Executive Employment Agreement between Kaye Group Inc. and Bruce
D. Guthart, dated as of January 2, 1997 (a copy of which was
filed with the Commission on March 31, 1997, (Registration
No.33-64664), as Exhibit 10.17 to the Company's Form 10-K, and
which is incorporated herein by this reference).
10.18 Employment Agreement between Kaye Group Inc. and Michael P.
Sabanos, dated as of May 15, 1996 (a copy of which was filed with
the Commission on March 31, 1997, (Registration No.33-64664), as
Exhibit 10.18 to the Company's Form 10-K, and which is
incorporated herein by this reference).
10.18 (i) Amendment of Employment Agreement between Kaye Group Inc. and
Michael Sabanos, dated as of March 18, 1998 (a copy of which was
filed with the Commission on March 30, 1999, Registration no.
33-64664), as Exhibit 10.18 (i) to the Company's Form 10-K, and
which is incorporated herein by this reference.
10.19 Kaye Group Inc. Stock Performance Plan, dated as of October 2,
1997. (a copy of which was filed with the Commission on December
8, 1997, as Annex B to Schedule 14(a), Information to the
Company's Proxy Statement, pursuant to Section 14(a), and which
is incorporated herein by this reference).
10.20 Asset Purchase Agreement between Kaye Insurance Associates, Inc.,
Seaman, Ross & Weiner, Inc., AMSCO Coverage Corp. and D.S.I.
Associates, Inc., dated as of January 1, 1999. (a copy of which
was filed with the Commission on March 30, 1999, as Exhibit 10.22
to the Company's Form 10-K, and which is incorporated herein by
this reference).
41
<PAGE>
10.21 1999 Equity Incentive Compensation Plan
10.22 Employment Agreement between Kaye Insurance Associates, Inc. and
Robert Munao, dated as of May 25, 1999.
10.23 Employment Agreement between Program Brokerage Corporation and
Marc Cohen, dated as of February 2, 1998.
10.23(i) Addendum to Employment Agreement between Program Brokerage
Corporation and Marc Cohen dated as of March 11, 1999.
11 Statement regarding computation of earnings per share.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K for the period October 1, 1999 to December 31,
1999.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By:/ s / Bruce D. Guthart
-------------------------------
Bruce D. Guthart, Chairman
Dated: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Signature Title Date
- --------- ----- ----
/ s / Bruce D. Guthart Director, Chairman, March 28, 2000
- ------------------------- President, and
Bruce D. Guthart Chief Executive Officer
(Principal Executive Officer)
/ s / Howard Kaye Director March 28, 2000
- -------------------------
Howard Kaye
/ s / Michael P. Sabanos Director, Executive Vice March 28, 2000
- ------------------------- President, Chief Financial
Michael P. Sabanos Officer (Principal Financial
Officer and Accounting Officer)
/ s / Robert Barbanell Director March 28, 2000
- -------------------------
Robert Barbanell
/ s / Richard Butler Director March 28, 2000
- -------------------------
Richard Butler
/ s / David Ezekiel Director March 28, 2000
- -------------------------
David Ezekiel
/ s / Elliot Cooperstone Director March 28, 2000
- -------------------------
Elliot Cooperstone
/ s / Ned Sherwood Director March 28, 2000
- -------------------------
Ned Sherwood
43
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Index to Notes to Consolidated Financial Statements F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets as of December 31, 1999
and 1998 F-4
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 F-8
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997 F-9
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1999, 1998, and 1997 F-9
Notes to Consolidated Financial Statements F-10
Financial Statement Schedules:
Schedule II - Condensed Financial Information of Registrant:
Balance Sheets as of December 31, 1999 and 1998 F-37
Statements of Income for the years ended
December 31, 1999, 1998 and 1997 F-38
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-39
Notes to Condensed Financial Statements F-40
Schedule IV - Reinsurance for the years ended
December 31, 1999, 1998 and 1997 F-41
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations for the
years ended December 31, 1999, 1998 and 1997 F-42
The information for Schedule I is contained in the Notes to the Consolidated
Financial Statements. The information for Schedule III is included in Schedule
VI. The information required for Schedule V is not applicable.
F-1
<PAGE>
Index to Notes to Consolidated Financial Statements
- ---------------------------------------------------
Footnote Description Page
- -------- ----------- ----
1 Business F-10
2 Organization F-12
3 Significant Accounting Policies F-13
4 Changes in Accounting Policies F-18
5 Acquisitions F-18
6 Funds Held in Fiduciary Capacity F-20
7 Investments F-20
8 Notes Payable F-23
9 Income Taxes F-24
10 Lease Commitments and Rentals F-26
11 Pension and Retirement Plans F-26
12 Contingent Liabilities F-26
13 Reinsurance F-27
14 Losses and Loss Expenses F-28
15 Statutory Financial Information and Dividend Restrictions F-29
16 Related Party Transactions F-29
17 Capital Structure F-30
18 Stock Performance and Stock Option Plans F-31
19 Quarterly Financial Information (Unaudited) F-34
20 Business Segments F-35
21 Supplemental Cash Flow Disclosures F-36
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Kaye Group Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Kaye
Group Inc. and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2000
F-3
<PAGE>
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and December 31, 1998
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<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 $25,610 and $33,218) $ 27,678 $ 34,267
Premiums and other receivables 27,265 40,572
Prepaid expenses and other assets 1,717 1,895
--------- ---------
Total current assets 56,660 76,734
Fixed assets (net of accumulated depreciation of $6,922 and $5,662) 3,770 3,683
Intangible assets (net of accumulated amortization of $3,845 and $2,575) 10,228 6,795
Other assets 195 205
--------- ---------
Total assets - insurance brokerage companies 70,853 87,417
--------- ---------
PROPERTY AND CASUALTY COMPANIES:
Investments available-for-sale:
Fixed maturities, at market value (amortized cost: 1999,
$42,273; 1998, $42,980) 41,304 43,597
Equity securities, at market value
(cost:1999, $3,873; 1998, $696) 4,496 782
Short term investments, at cost, which approximates market value 5,500 2,950
--------- ---------
Total investments 51,300 47,329
Cash and cash equivalents 8,827 10,806
Accrued interest and dividends 873 961
Premiums receivable 2,333 2,644
Reinsurance recoverable on paid and unpaid losses 2,747 3,220
Prepaid reinsurance premiums 488 162
Deferred acquisition costs 4,313 3,921
Deferred income taxes 1,236 586
Other assets 4,520 2,304
--------- ---------
Total assets - property and casualty companies 76,637 71,933
--------- ---------
CORPORATE:
Cash and cash equivalents 1,233 370
Prepaid expenses and other assets 153 248
Investments:
Equity securities, at market value
(cost:1999, $243, and 1998, $497) 243 615
Deferred income taxes 93
--------- ---------
Total assets - corporate 1,722 1,233
--------- ---------
Total assets $ 149,212 $ 160,583
========= =========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
KAYE GROUP INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and December 31, 1998
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
LIABILITIES
INSURANCE BROKERAGE COMPANIES:
Current liabilities:
Premiums payable and unearned commissions $ 42,161 $ 59,472
Accounts payable and accrued liabilities 8,103 9,045
Notes payable 527 718
--------- ---------
Total current liabilities 50,791 69,235
Notes payable 841 1,369
Deferred income taxes 491 162
Other liabilities 1,005
--------- ---------
Total liabilities-insurance brokerage companies 52,123 71,771
--------- ---------
PROPERTY AND CASUALTY COMPANIES:
Liabilities:
Unpaid losses and loss expenses 23,969 21,567
Unearned premium reserves 13,694 12,327
Accounts payable and accrued liabilities 7,953 7,451
Other liabilities 245 143
--------- ---------
Total liabilities - property and casualty companies 45,861 41,488
--------- ---------
CORPORATE:
Current liabilities:
Accounts payable and accrued liabilities 300 511
Loan payable 1,241 1,153
Deferred income taxes 20
Income taxes payable 366 568
--------- ---------
Total current liabilities 1,907 2,252
Loan payable-long-term 2,070 3,303
--------- ---------
Total liabilities-corporate 3,977 5,555
--------- ---------
Total liabilities 101,961 118,814
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 1,000 shares authorized;
none issued or outstanding
Common stock, $.01 par value; 20,000 shares authorized;
shares issued and outstanding (1999, 8,458; 1998, 8,474) 85 85
Paid - in capital 18,019 17,942
Accumulated other comprehensive income, net of deferred
income tax (benefit) liability (1999, ($118); 1998, $280) (228) 541
Unearned stock grant compensation (254)
Retained earnings 29,858 23,201
Common stock in Treasury, 28 shares at cost in 1999 (229)
--------- ---------
Total stockholders' equity 47,251 41,769
--------- ---------
Total liabilities and stockholders' equity $ 149,212 $ 160,583
========= =========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998 and 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees - net $ 37,379 $ 35,356 $ 32,217
Investment income 1,374 1,846 1,565
-------- -------- --------
Total revenues 38,753 37,202 33,782
-------- -------- --------
Expenses:
Salaries and benefits 22,346 21,323 18,905
Amortization of intangibles 1,095 679 507
Other operating expenses 12,215 13,446 13,203
-------- -------- --------
Total operating expenses 35,656 35,448 32,615
-------- -------- --------
Interest expense 775 49 400
-------- -------- --------
Income before income taxes-insurance brokerage companies 2,322 1,705 767
-------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 27,821 24,538 22,270
Change in unearned premiums (1,041) 151 577
-------- -------- --------
Net premiums earned 26,780 24,689 22,847
Net investment income 2,949 2,920 2,692
Net realized (loss) gain on investments (16) 85 21
Other income 72 146 245
-------- -------- --------
Total revenues 29,785 27,840 25,805
-------- -------- --------
Expenses:
Losses and loss expenses 9,754 8,496 8,716
Acquisition costs and general and administrative expenses 11,205 9,707 9,370
-------- -------- --------
Total expenses 20,959 18,203 18,086
-------- -------- --------
Income before income taxes-property and casualty companies 8,826 9,637 7,719
-------- -------- --------
CORPORATE
Revenues:
Net investment income (loss) 206 (31) 55
Expenses:
Other operating expenses 309 314 438
Interest expense 316 443 548
-------- -------- --------
Net expenses before income taxes-corporate (419) (788) (931)
-------- -------- --------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998 and 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income before income taxes and minority interest $ 10,729 $ 10,554 $ 7,555
-------- -------- --------
Provision (benefit) for income taxes
Current 3,261 3,422 1,921
Deferred (36) (150) 346
-------- -------- --------
Total provision for income taxes 3,225 3,272 2,267
-------- -------- --------
Income before minority interest 7,504 7,282 5,288
Minority interest 931
-------- -------- --------
Net income $ 7,504 $ 7,282 $ 4,357
======== ======== ========
EARNINGS PER SHARE
Basic $ 0.89 $ 0.86 $ 0.62
======== ======== ========
Diluted $ 0.87 $ 0.85 $ 0.62
======== ======== ========
Weighted average of shares outstanding - basic 8,460 8,474 7,024
======== ======== ========
Weighted average shares outstanding and
share equivalents outstanding - diluted 8,630 8,593 7,083
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,504 $ 7,282 $ 4,357
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs (392) 18 134
Amortization of bond premium - net 695 599 650
Deferred income taxes (36) (150) 346
Net realized loss (gains) on investments 290 (85) (21)
Depreciation and amortization expense 2,381 1,813 1,667
Minority interest 931
Change in assets and liabilities:
Accrued interest and dividends 88 (79) 87
Premiums and other receivables 14,071 (8,125) 23,011
Prepaid expenses and other assets (2,263) (1,253) (1,785)
Premiums payable and unearned commissions (17,235) 18,371 (21,870)
Accounts payable and accrued liabilities (311) 2,055 5,116
Unpaid losses and loss expenses 2,402 2,441 3,899
Unearned premium reserves 1,367 (251) (598)
Income taxes payable (202) 552 (79)
-------- -------- --------
Net cash provided by operating activities 8,359 23,188 15,845
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments available - for - sale :
Purchase of fixed maturities (11,560) (15,012) (11,907)
Purchase of equity securities (4,049) (200) (500)
Purchase of short term investments (2,550) (2,094)
Maturities of fixed securities 5,474 4,861 4,487
Sales of fixed securities 6,094 8,158 5,297
Sales of of short term investments 480
Sales of equity securities 832 425 1,100
Purchase of fixed assets (1,347) (2,089) (1,481)
Acquisition payments (5,203) (1,239) (777)
Funds held under deposit contracts:
Purchase of fixed maturities (976)
Sales of short term investments 173 2,344
Sales of fixed maturities 1,851
Maturities of fixed maturities 452
-------- -------- --------
Net cash used in investing activities (12,309) (4,443) (2,204)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Acquisition debt-repayment (375) (657)
Notes and loan payable-repayment (1,489) (7,981) (6,757)
Proceeds from issuance of common stock 35
Acquisition of treasury stock (1,079)
Payment of dividends (847) (849) (702)
Proceeds from borrowings 5,000 642
Payment of dividends to minority stockholders (150)
Payments under deposit contracts (122) (3,326)
-------- -------- --------
Net cash used in financing activities (3,755) (4,609) (10,293)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (7,705) 14,136 3,348
Cash and cash equivalents at beginning of period 45,443 31,307 27,959
-------- -------- --------
Cash and cash equivalents at end of period $ 37,738 $ 45,443 $ 31,307
======== ======== ========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock
------------------------ Common Unearned
Outstanding Par Stock Stock Grant
Shares Value in Treasury Compensation
----------- ----- ----------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 7,020 $70
Change in unrealized appreciation, net of deferred
income tax of ($174)
Net income
Dividends declared (per share-$0.10)
Shares issued to purchase minority interest, net of
deferred income tax of ($34) 1,454 15
------- ----- ------- -------
Balance, December 31, 1997 8,474 85
Change in unrealized appreciation, net of deferred
income tax of ($88)
Net income
Dividends declared (per share-$0.10)
------- ----- ------- -------
Balance, December 31, 1998 8,474 85
Change in unrealized depreciation, net of deferred
income tax of $398
Shares issued - employee stock option plan 7
Shares issued - stock performance plan 5 (264)
Amortization of unearned restricted stock 10
Net income
Dividends declared (per share-$0.10)
Acquisition of treasury stock net of reissuances (28) (229)
------- ----- ------- -------
Balance, December 31, 1999 8,458 $85 ($229) ($254)
======= ===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Paid-In Comprehensive Retained Stockholders'
Capital Income Earnings Equity
------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $7,776 ($31) $17,169 $24,984
Change in unrealized appreciation, net of deferred
income tax of ($174) 338 338
Net income 4,357 4,357
Dividends declared (per share-$0.10) (702) (702)
Shares issued to purchase minority interest, net of
deferred income tax of ($34) 10,166 66 (4,056) 6,191
------- ----- ------- -------
Balance, December 31, 1997 17,942 373 16,768 35,168
Change in unrealized appreciation, net of deferred
income tax of ($88) 168 168
Net income 7,282 7,282
Dividends declared (per share-$0.10) (849) (849)
------- ----- ------- -------
Balance, December 31, 1998 17,942 541 23,201 41,769
Change in unrealized depreciation, net of deferred
income tax of $398 (769) (769)
Shares issued - employee stock option plan 35 35
Shares issued - stock performance plan 42 (222)
Amortization of unearned restricted stock 10
Net income 7,504 7,504
Dividends declared (per share-$0.10) (847) (847)
Acquisition of treasury stock net of reissuances (229)
------- ----- ------- -------
Balance, December 31, 1999 $18,019 ($228) $29,858 $47,251
======= ===== ======= =======
</TABLE>
KAYE GROUP INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
NET INCOME $7,504 $7,282 $4,357
Other comprehensive income:
Unrealized (depreciation) appreciation of
investments available -for-sale, net of
deferred income tax (benefit) liability
(1999, ($482); 1998, $116; 1997, $214) (932) 221 417
Less: reclassification adjustment for loss
(gains) included in net income, net of
deferred income tax (benefit) liability
(1999, ($84); 1998, $28; 1997, $6) 163 (53) (13)
------ ------ ------
Total other comprehensive income (769) 168 404
------ ------ ------
COMPREHENSIVE INCOME $6,735 $7,450 $4,761
====== ====== ======
</TABLE>
See notes to consolidated financial statements
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998 and 1997
1) Business
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
("Brokerage Operations"), comprised of the Retail Brokerage Business and the
Program Brokerage Business, and the Property and Casualty Companies Operations.
In addition, 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 Operations.
Such activities include debt servicing and public company expenses, including
investor relations costs.
Insurance Brokerage Companies Operations
The Retail Brokerage Business operates an insurance brokerage business through
four subsidiaries of the Company, the "Retail Brokerage Companies". It offers
commercial clients a full range of insurance brokerage services including
procurement of property/casualty insurance, risk management consulting, bonding,
loss prevention engineering, and group employee benefit consulting services. In
addition, personal lines and life and health insurance coverage are placed on
behalf of individuals.
The Retail Brokerage Business' primary strategy is to service middle market
companies and organizations just below the Fortune 500 level for which other
national brokers intensely compete. Within this market, the Retail Brokerage
Business has developed particular expertise and knowledge of the risks facing a
number of industry sectors including health care, real estate, manufacturing,
churches, law firms, homes for the aged and fine arts.
During 1999, the Retail Brokerage Business serviced approximately 17,000
insureds. The Retail Brokerage Business is compensated for its services
primarily in the form of commissions paid by insurance companies. The commission
is usually a percentage of the premium paid by the insured. Commission rates
depend upon the type of insurance, the particular insurance company, and the
role in which the Retail Brokerage Business acts. In some cases a commission is
shared with other agents or brokers who have acted jointly with the Retail
Brokerage Business in connection with the transaction. The Retail Brokerage
Business may also receive from an insurance company a contingent commission that
is generally based on the profitability and volume of business placed with it by
the Retail Brokerage Business over a given period of time. The Retail Brokerage
Business may also receive fees in connection with consulting services relating
to the marketing of insurance.
F-10
<PAGE>
Program Brokerage Corporation or "PBC" (the "Program Brokerage Business") is a
subsidiary of the Company and operates a wholesale insurance brokerage business
which offers retail insurance agents and brokers innovative solutions to the
twin insurance problems of price and availability of coverage. It accomplishes
this by organizing pools of similar risks into specially designed Affinity Group
Insurance Programs (the "Programs").
Approximately 69% of PBC's premium volume is generated by approximately 600
unrelated retail insurance agents and brokers serving approximately 8,000
insureds during 1999. The remaining 31% is derived from the Retail Brokerage
Business. Approximately 41% of PBC's premium volume is directly or indirectly
placed with two affiliates, Old Lyme Insurance Company of Rhode Island, Inc.
("OLRI") and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB").
Property and Casualty Companies Operations
The Company conducts its property and casualty underwriting business through its
two insurance company subsidiaries (the "Insurance Companies"), OLRI and OLB.
OLRI is a property and casualty insurance company licensed in Rhode Island and
eligible as a surplus lines insurer in New York and New Jersey. OLB is a
property and casualty insurance company organized and licensed under the laws of
Bermuda. In states where the Insurance Companies are not admitted insurers or
surplus lines insurers, the Insurance Companies underwrite risks through various
reinsurance agreements.
The Insurance Companies underwrite property risks (loss or physical damage to
property) and OLRI underwrites casualty risks (legal liability for personal
injury or damaged property of others) for insureds in the United States.
Insurance is sold principally through the Programs marketed by PBC which insure
various types of businesses and properties that have similar risk
characteristics, such as apartments, condominiums, cooperatives, restaurants,
building maintenance companies, automobile service stations, retail stores,
funeral homes and pharmacies, among others.
The Insurance Companies' strategy is to underwrite only the first "layer" of the
property and casualty insurance provided under the Programs. Its exposure to
individual insureds on individual losses is thereby generally limited to between
$10,000 and $25,000 per claim, depending on the Program. Under the Programs, the
Insurance Companies' policies are sold in conjunction with policies issued by
unaffiliated Program insurers that provide coverage for losses above the first
layer of risk underwritten by the Insurance Companies. OLRI also issues policies
on a selected basis with limits up to $25,000,000 , retaining up to the first
$50,000 of exposure and reinsuring the remaining limits with unaffiliated
reinsurers, rated A or better by A.M. Best Company ("A.M. Best"), a major rating
agency.
F-11
<PAGE>
The Property and Casualty Companies Operations includes Claims Administration
Corporation ("CAC"), a subsidiary of the Company which is responsible for the
administration of a large majority of the claims submitted to the Insurance
Companies. The administration of claims includes investigation, engagement of
legal counsel, approval of settlements and the making of payments to, or on
behalf of insureds. CAC also provides claims administration service to certain
of the unaffiliated Program insurers for a fee.
2) Organization
In 1994 the Retail Brokerage Business completed the integration of its 1992
acquisition of Amalgamated Programs Corporation and related entities
("Amalgamated") and continued to downsize to adjust to the continuing "soft
market" in property and casualty premium rates. At the time, the officers of the
general partners of Kaye International L.P. ("KILP") (which included members of
Old Lyme Holding Corporation's ("Holding") Board of Directors) concluded that
the combination of Holding and the Retail Brokerage Business would be
advantageous for both OLRI and KILP. This conclusion was based on three factors:
(a) improved operating results derived from the Amalgamated integration and
"soft market" downsizing, (b) the improved outlook for the Retail Brokerage
Business and (c) the fact that the Retail Brokerage Business accounted for
approximately half of the PBC's premium volume.
The combination was effective October 2, 1995 and was accounted for as a
transfer and exchange between companies under common control. Accordingly, the
assets and liabilities of the Retail Brokerage Business were combined with those
of Holding at their historical cost in a manner similar to a "pooling of
interests". The combination was accomplished as follows:
1. Holding transferred to Kaye Holding Corp. ("KHC") (a subsidiary) all of
the outstanding stock of the Insurance Companies and its two other subsidiaries,
PBC and CAC and its other assets in exchange for (i) 82,400 shares of KHC common
stock, representing 82.4% of the total outstanding KHC common stock, and (ii)
the assumption by KHC of certain of Holding's liabilities.
2. KILP transferred all of its interest in the limited partnerships
conducting the Retail Brokerage Business (the "Retail Partnerships") and certain
related assets to KHC in exchange for (i) 17,200 shares of KHC common stock,
representing 17.2% of the total outstanding KHC common stock, and (ii) the
assumption by KHC of certain KILP liabilities.
3. Certain individuals transferred to KHC all of their interests in the
corporate general partners of the Retail Partnerships (the "Retail Brokerage
Companies") in exchange for 400 shares of KHC common stock, representing 0.4% of
the total outstanding KHC common stock.
F-12
<PAGE>
4. KHC contributed its interests in the Retail Partnerships to the Retail
Brokerage Companies thereby causing the dissolution of the Retail Partnerships.
As a result, the Retail Brokerage Companies, as a group, owned all of the assets
and were subject to all of the liabilities, of the Retail Brokerage Business.
On December 30, 1997, the stockholders of the Company approved a restructuring
that merged KHC into the Company. This eliminated KILP's minority interest in
KHC of $6,191,000 as of December 31, 1997 and increased stockholders' equity of
the Company by the same amount. KILP was the Company's largest shareholder. The
merger was accounted for as a transfer and exchange between entities under
common control. Accordingly, common stock of Kaye Group Inc. issued in exchange
for the KHC shares was accounted for by using the closing NASDAQ market price on
(the effective date of the merger) October 24, 1997 ($7.00). This increased the
number of shares of common stock by 1,454,435 at the par value $.01, per share,
or $14,544. Paid-in capital was increased by $10,166,000 which was the
difference between the market value price per share and the par value per share.
Minority interest in KHC was eliminated as a result of the merger and retained
earnings of Kaye Group Inc. was reduced to account for the difference between
the market value of the shares issued, and the book value of the minority
interest in KHC.
Effective May 12, 1998, KILP, the Company's then largest stockholder, was
dissolved, and its shares in the Company were distributed to its partners.
3) Significant Accounting Policies
(a) Basis of Presentation
The accompanying Consolidated Balance Sheets, Statements of Income, Cash Flows,
Stockholders' Equity and Comprehensive Income (the "financial statements") have
been prepared in accordance with generally accepted accounting principles
("GAAP") and predominant industry practice.
The Consolidated Balance Sheets are presented on a segmented basis with
intercompany balances eliminated.
The Statements of Income are segmented and present the consolidated results of
the Insurance Brokerage Companies segment, the Property and Casualty Companies
segment and the Corporate segment. Intersegment transactions have not been
eliminated. However, transactions within each segment are eliminated. For
details on segment activity refer to Note 20.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and
F-13
<PAGE>
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Certain prior year information has been reclassified to conform with the 1999
presentation.
(b) Segment Reporting
The accompanying consolidated financial statements have been prepared on a
segmented basis. See Note 1 for segments and their respective operations. Income
before income taxes of the two operating segments includes expenses incurred by
Corporate on behalf of the segments, which are allocated to operations of the
segments. The allocation is based upon total revenues of each segment except for
the allocation of the incentive bonus which is allocated based on the percentage
of profits contributed to the Company. Identifiable assets by segment are those
assets used in the Company's operations in each business segment. Corporate
assets are principally cash and cash equivalents and an investment in an equity
security.
(c) Commission Income
Commission income together with the related accounts receivable from clients and
premiums payable to insurance carriers, is recorded principally as of the
billing date. Commission income related to installment billing arrangements is
recorded at the date of the initial billing. Contingent commissions and
commissions on premiums billed directly by insurance carriers are recorded when
collected or known. Commission adjustments (including cancellations) are
recorded when they occur.
Unearned commissions represent commission income that is earned in installments
on multiyear policies.
(d) Fixed Assets
Furniture, equipment, computer hardware and software, and leasehold improvements
are carried at cost, less accumulated depreciation and amortization computed
using the straight-line method. Fixed assets are depreciated over periods
ranging from three to seven years, and leasehold improvements are amortized over
the remaining terms of the leases which expire through 2002.
(e) Intangible Assets
Acquired expiration lists, covenants not to complete and goodwill are carried at
cost, less accumulated amortization which is computed using the straight-line
method over the estimated useful life of the asset not to exceed twenty years.
F-14
<PAGE>
(f) Investments
Fixed maturity securities, and equity securities, which include common and
preferred stocks held by the Property and Casualty Companies, are stated at fair
value as they are considered available for sale. The difference between the cost
and fair value of fixed maturity and equity securities is reflected as
unrealized appreciation or depreciation, net of applicable deferred income
taxes, as a separate component of stockholders' equity. Realized gains or losses
from the sale of investments are determined on the basis of specific
identification and are reflected as a component of revenues. Investment income
is recognized when earned.
The fair value of fixed maturities and equity securities is based on the closing
price of the investments on December 31.
If a decline in fair value of an investment is considered to be other than
temporary, the investment is reduced to its net realizable value and the
reduction is accounted for as a realized investment loss. In evaluating whether
a decline is other than temporary, management considers the duration and extent
to which the market value has been less than cost, the financial condition and
near-term prospects of the issuer, including events that may impact the issuer's
operations and impair the earnings potential of the investment, and management's
ability and intent to hold an investment for a sufficient period to allow for an
anticipated recovery in fair value.
Investments in equity securities in which the Company does not exert significant
influence and there is no readily determinable fair value are carried at the
lower of cost or market.
(g) Insurance Premiums Earned
Insurance premiums are recognized as revenues ratably over the terms of the
related policies in force. Unearned premiums are established to cover the
unexpired portion of premiums written and are calculated using the daily pro
rata method. Premiums earned are net of reinsurance ceded.
(h) Deferred Acquisition Costs
Deferred acquisition costs include commissions incurred by the Insurance
Companies that vary and are attributed to new and renewal insurance policies or
contracts. These costs are deferred and amortized over the applicable premium
recognition period, generally one year. These deferred costs have been limited
to the amount expected to be recovered from future earned premiums. Acquisition
costs of $8,292,000, $7,630,000 and $7,269,000 were amortized to expense in
1999, 1998 and 1997, respectively.
F-15
<PAGE>
(i) Unpaid Losses and Loss Expenses
The estimated liability for unpaid losses and loss expenses is based on an
evaluation of claims reported by policyholders. A provision which is based on
historical experience and modified for current trends, is also included for
losses and loss expenses which have been incurred but not reported. The methods
of determining such estimates and establishing the resulting reserves are
continually reviewed and modified to reflect current conditions, and any
adjustments are reflected currently in results of operations.
The Company has received claims related to lead paint exposures it insures under
various residential real estate programs. There are uncertainties in estimating
the amount of reserves due to factors including: difficulty in properly
allocating responsibility and/or liability for the lead paint exposure; changes
in the underlying laws and the judicial interpretation of those laws; and
questions regarding the interpretation and application of insurance and
reinsurance coverage. The Company has reserves established for these claims on a
case basis and an incurred but not reported basis. The reserves provided were
established based on Management's best estimate of ultimate liabilities.
However, due to the nature of the exposures such reserves cannot be, and are not
established using standard actuarial techniques.
(j) Reinsurance
Assumed reinsurance premiums written, commission, and unpaid losses are
accounted for based principally on the reports received from the ceding
insurance companies and in a manner consistent with the terms of the related
reinsurance agreements. Liabilities for unpaid losses, loss expenses and
unearned premiums are stated gross of ceded reinsurance recoverables. Deferred
acquisition costs are stated net of the amounts of reinsurance ceded, as are
premiums written and earned, losses and loss expenses incurred, and amortized
acquisition costs.
(k) Income Taxes
The Company recognizes deferred tax assets or liabilities for temporary
differences between the financial reporting and tax basis of assets and
liabilities based on enacted tax rates. The principal temporary differences
relate to deferred acquisition costs, unearned premiums, discount for tax
purposes of the unpaid losses and loss expense reserves, amortization of
expiration lists, accrual adjustment for commission income and unrealized gains
or losses on investments (see Note 9).
(l) Cash and Cash Equivalents
Cash and cash equivalents include money market funds and certificates of
deposit, including funds held in a fiduciary capacity for the Insurance
Brokerage Companies, with a maturity of three months or less. The Company
maintains cash with banks in excess of federally insured limits and is exposed
to the credit risk from this concentration of cash.
F-16
<PAGE>
(m) Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share include
the effect of all potentially dilutive securities. Earnings per common share has
been compiled below (in thousands, except per share amounts):
1999 1998 1997
---- ---- ----
Net income (numerator) $7,504 $7,282 $4,357
------ ------ ------
Weighted average common shares and effect of
dilutive shares used in the computation of
earnings per share:
Average shares outstanding-basic 8,460 8,474 7,024
Effect of dilutive shares 170 119 59
------ ------ ------
Average shares outstanding - diluted
(denominator) 8,630 8,593 7,083
------ ------ ------
Earnings per common share:
Basic $0.89 $0.86 $0.62
Diluted $0.87 $0.85 $0.62
A warrant that expired in February 1998, (relating only to 1997) and options to
purchase 219,250, 161,450 and 284,000, common shares at prices from $7.88 to
$11.63, $7.06 to $11.63, and $7.06 to $11.63 per share were outstanding at
December 31, 1999, 1998 and 1997, respectively, but were not included in the
computation of earnings per diluted share for the respective years, because
their exercise price was greater than the average market price of the common
shares. The options, which expire through November 1, 2000, December 10, 2008
and December 31, 2007 respectively, were still outstanding at the end of 1999.
(n) Capitalized Software Policy
Capitalized computer software costs (included in fixed assets on the
Consolidated Balance Sheets) consist of costs to purchase and develop software.
All capitalized software costs are amortized on a straight line method over a
period of five years. Amortization expense charged to operations was $425,265 in
1999, $199,272 in 1998 and $81,061 in 1997.
(o) Accounting Policy for Stock Compensation Plans
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock based compensation plans. Accordingly, no compensation expense has even
recognized for its Stock Option Plan as the exercise price of the options
equaled the market price of the
F-17
<PAGE>
stock at the date of grant. Compensation expense has been recognized for the
Stock Performance Plan based on the market price at the date of the award.
(p) Fair Value of Financial Instruments
The carrying amounts reported in the Consolidated Balance Sheets for cash and
cash equivalents, receivable and premiums payable and long-term debt approximate
those assets and liabilities fair values.
4) Changes in Accounting Policies
(a) Newly Adopted Accounting Standards
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which requires capitalization
of external and certain internal costs incurred to obtain or develop
internal-use computer software during the application development stage. SOP
98-1 is effective for fiscal years beginning after December 15, 1998. This
statement did not materially impact the Company's consolidated financial
statements.
In late 1998, the AICPA issued SOP 98-7. Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts that Do Not Transfer Insurance Risk. This
SOP effective for fiscal years beginning after June 15, 1999, provides guidance
to both the insured and insurer on how to apply the deposit method of accounting
when it is required for insurance and reinsurance contracts that do not transfer
insurance risk. This SOP did not materially impact the Company's consolidated
financial statements.
(b) Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 (as amended), Accounting for
Derivative Instruments and Hedging Activities. This statement requires all
derivatives to be recognized as either assets or liabilities in the statement of
financial position and to be measured at fair value. This statement is effective
for all fiscal quarters and fiscal years beginning after December 31, 2000.
Management believes that the statement will not have a material impact on the
financial position of the Company.
5) Acquisitions
Effective January 1, 1999, the Company, through one of its insurance brokerage
subsidiaries, Kaye Insurance Associates, Inc. ("KIA"), purchased the assets,
including customer lists, and certain liabilities of Woodbury, N.Y. - based
broker Seaman, Ross & Wiener, Inc. ("SRW") and related entities for an initial
purchase price of $2,422,000 in cash and $500,000 in stock of the Company.
Additional payments of $1,972,000 in cash
F-18
<PAGE>
and $125,000 in stock of the Company have been made through December 31, 1999.
The total purchase price is contingent on future billings related to the
acquired customer lists and will increase significantly from the initial
purchase price. This acquisition is being accounted for using the purchase
method of accounting. Accordingly, intangible assets (including customer lists)
of approximately $5,019,000, resulting from the allocation of the preliminary
purchase price and payments made through December 31, 1999, are being amortized
by using the straight-line method over a period of not more than fifteen years.
The above acquisition has been included in the Company's consolidated financial
statements from the effective date. The following unaudited pro forma summary
presents the consolidated results of operations of the Company as if the SRW
acquisition had occurred on January 1, 1998. The pro forma results are shown for
illustrative purposes only and do not purport to be indicative of the results
which would have been reported if the acquisition had occurred on the dates
indicated or which may occur in the future.
Unaudited
(in thousands except per share amounts)
1999 1998
---- ----
Pro forma revenues -
Insurance Brokerage Companies $38,753 $40,568
Pro forma net income $7,504 $ 7,647
Pro forma earnings per share - basic $0.89 $ 0.90
Pro forma earnings per share- diluted $0.87 $ 0.89
During 1998, the Company acquired certain assets and liabilities of Florida
Insurance Associates, Inc. ("FIA"), Daniel V. Keane Agency, Inc. ("DVK"), and
Laub Group of Florida, Inc. ("LGF") for cash of $275,000, $1,077,000, and
$201,000, respectively, paid through December 31, 1999 and estimated amounts
payable in future periods of $1,031,000 (DVK). The total acquired intangible
assets (including expiration lists) were $275,000, $2,108,000, and $201,000 for
FIA, DVK, and LGF, respectively. These acquisitions were accounted for under the
purchase method. During the first quarter of 2000, the Brokerage Operations sold
the operations of LGF at no gain or loss. The Company is finalizing the sale of
FIA.
During 1997, the Company acquired certain assets and liabilities of Western
Insurance Associates, Inc. ("WIA") for cash of $2,350,000 paid through December
31, 1999 and amounts contingently payable in future periods of $547,000. The
amounts payable are the Company's estimate of the costs it will incur. The total
acquired expiration list was 2,897,000 at December 31, 1999 and 1998. This
acquisition was accounted for as a purchase.
F-19
<PAGE>
6) Funds Held in Fiduciary Capacity
Premiums collected by the Insurance Brokerage Companies but not yet remitted to
insurance carriers are approximately $25,610,000 and $33,218,000 at December 31,
1999 and 1998, respectively, some of which are restricted as to use by law in
certain states in which the Insurance Brokerage Companies operate. These
balances are held in cash and cash equivalents or short term investments. The
offsetting obligation is recorded in premiums payable.
7) Investments
Net investment income for the years ended December 31, 1999, 1998 and 1997 is
derived from the following sources (in thousands):
1999 1998 1997
------ ------ ------
Insurance Brokerage Companies
Short term investments $1,374 $1,846 $1,565
------ ------ ------
Property and Casualty Companies
Fixed maturities 2,176 2,031 2,083
Equity securities 45 67 119
Short term investments 532 791 382
Other 259 98 143
------ ------ ------
Total investment income 3,012 2,987 2,727
Investment expenses (63) (67) (35)
------ ------ ------
2,949 2,920 2,692
------ ------ ------
Corporate
Short term investments 206 (31) 55
------ ------ ------
Net investment income $4,529 $4,735 $4,312
====== ====== ======
F-20
<PAGE>
Net realized gains or losses and the change in unrealized appreciation
(depreciation) on investments for the years ended December 31, 1999, 1998 and
1997 are summarized below (in thousands):
1999 1998 1997
------- ------- -------
Net realized gains (losses):
Fixed maturities:
Gross realized gains $37 $85 $26
Gross realized losses (13) (5)
Equity securities:
Gross realized gains 4
Gross realized losses (44)
------- ---- ----
Net realized gain (loss) on investments $(16) $85 $21
------- ---- ----
Change in unrealized
appreciation (depreciation):
Fixed maturities $(1,586) $ 47 $636
Equity securities 419 209 (14)
------- ---- ----
Net change in unrealized appreciation
(depreciation) $(1,167) $256 $622
======= ==== ====
The composition, cost (amortized cost for fixed maturities) and estimated market
values of the Company's investments at December 31, 1999 and 1998 are presented
below.
<TABLE>
<CAPTION>
Aggregate
Gross Unrealized Holding Fair
Cost Gains Losses Value
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
1999
Investments available for sale:
Fixed Maturities:
U.S. Government (a) $ 3,351 $ 6 $ (132) $ 3,225
States (b) 35,247 53 (836) 34,464
Corporate 3,675 7 (67) 3,615
------- ------- ------- -------
Total fixed maturities $42,273 $ 66 $(1,035) $41,304
------- ------- ------- -------
Equity Securities:
Common Stock $ 4,066 838 $ (215) $ 4,689
Preferred Stock 50 50
------- ------- ------- -------
Total equity securities $ 4,116 $ 838 $ (215) $ 4,739
======= ======= ======= =======
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
Aggregate
Gross Unrealized Holding Fair
Cost Gains Losses Value
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
1998
Investments available for sale:
Fixed Maturities:
U.S. Government (a) $ 2,144 $ 18 $ 2,162
States (b) 36,144 643 $ (75) 36,712
Corporate 4,692 42 (11) 4,723
------- ------- ------- -------
Total fixed maturities $42,980 $ 703 $ (86) $43,597
------- ------- ------- -------
Equity Securities:
Common Stock $ 643 $ 204 $ 847
Preferred Stock 500 500
------- ------- -------
Total equity securities $ 1,143 $ 204 $ 1,347
======= ======= =======
</TABLE>
(a) Includes U.S. Government agencies and authorities
(b) Includes municipalities and subdivisions
The amortized cost and estimated market value of fixed maturities at December
31, 1999, by contractual maturity date, are listed below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
Investments Available
for Sale
------------------------
(in thousands)
Amortized Aggregate
Cost Fair Value
--------- ----------
Due in one year or less $ 3,231 $ 3,218
Due after one year through five years 19,687 19,414
Due after five years through ten years 15,171 14,654
Due after ten years 4,184 4,018
------- -------
Total $42,273 $41,304
======= =======
Fixed maturities and cash carried at market value of $3,422,000 and $3,560,000,
in 1999 and 1998, respectively, were on deposit for governmental authorities, as
required by law. Fixed maturities and cash equivalents carried at market value
of $22,270,000 and $13,747,000 in 1999 and 1998, respectively, have been
deposited in trust funds or pledged to collateralize the obligations of OLB and
OLRI to ceding companies under reinsurance agreements.
F-22
<PAGE>
The Company's short term investment of cash is maintained principally with seven
banks and two institutional money market funds. To control this risk, the
Company utilizes only high credit quality financial institutions. Additionally,
under the insurance laws of the State of Rhode Island, where OLRI is domiciled,
insurers and reinsurers are restricted as to the types of investments they may
purchase and the concentration of risk they may accept in any one issuer or
group of issuers. The Company complies with such laws which insure that the
concentration of risk in its investment portfolio is at an acceptable and
authorized level.
8) Notes Payable
Notes payable consist of the following in thousands at December 31,:
1999 1998
------ ------
Insurance Brokerage:
Note payable, due through 7/1/2002, interest
at prime $1,031 $1,406
Finance company note, due through 2000, interest at
prime rate plus 1/2% 17 86
Finance company note, due through 2002, interest at 7.75% 320 445
Capital lease due through 8/30/99, interest at 7.375% -- 150
------ ------
1,368 2,087
Less current portion 527 718
------ ------
Notes payable - long term $ 841 $1,369
------ ------
Corporate:
Term loan, due through 2002, interest at 7.8% $3,311 $4,456
Less current portion 1,241 1,153
------ ------
Notes payable- long term $2,070 $3,303
====== ======
The note payable, due through July 1, 2002, represents debt incurred related to
the DVK acquisition.
The 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 December 31, 1999, the Company was in
compliance with the convenants under the loan agreement.
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
December 31, 1999, no amount was outstanding on the revolving line of credit. A
quarterly fee is assessed in the amount of .05% on the unused balance.
F-23
<PAGE>
The aggregate maturities of all notes payable by year are as follows (in
thousands):
2000 .......................... $1,768
2001 .......................... 1,864
2002 .......................... 1,047
Thereafter ................... 0
Based on the borrowing rates currently available to the Company for bank loans
with similar terms and average maturities, the fair value of the notes payable
at December 31, 1999 and 1998 approximates their carrying value.
Interest expense in the accompanying consolidated statements of income for the
years ended December 31, 1999, 1998 and 1997 was $1,091,000, $492,000, and
$948,000, respectively.
9) Income Taxes
The Company's effective income tax rate for the years ended December 31, 1999,
1998 and 1997 differs from the statutory rate on ordinary income before income
taxes as follows (in thousands, except percentages):
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed at the statutory rate $ 3,648 34.0% $ 3,588 34.0% $ 2,569 34.0%
Increase (decrease) in taxes resulting from:
Tax-exempt investment income (507) (4.7) (456) (4.3) (516) (6.8)
State and local income taxes and other 84 0.8 140 1.3 214 2.8
------- ---- ------- ---- ------- ----
Provision for income taxes $ 3,225 30.1% $ 3,272 31.0% $ 2,267 30.0%
======= ==== ======= ==== ======= ====
</TABLE>
The source of the significant temporary differences and the related deferred tax
effects are as follows:
1999 1998 1997
----- ----- -----
(in thousands)
Expiration lists $ 395 $ 394 $ 394
Deferred acquisition costs 133 (6) (46)
Accrual adjustment 60 (85) (59)
Unearned premium reserves (71) 10 40
Other (200) (217) 47
Loss reserve discount (353) (246) (30)
----- ----- -----
Deferred tax (benefit) expense $ (36) $(150) $ 346
===== ===== =====
F-24
<PAGE>
The components of the net deferred tax assets and liabilities, in the
accompanying consolidated balance sheets at December 31, 1999 and 1998, are as
follows:
1999 1998
---- ----
(in thousands)
Deferred tax assets:
Loss and loss expense reserves $1,649 $1,296
Unearned premium reserves 898 827
Other 525 325
Expiration lists 152 547
Unrealized losses on investments 118
------ ------
Total deferred tax asset 3,342 2,995
------ ------
Deferred tax liabilities:
Deferred acquisition costs 1,466 1,333
Other accrual adjustments 1,038 978
Unrealized gains on investments 280
------ ------
Total deferred tax liability 2,504 2,591
------ ------
Net deferred tax asset $ 838 $ 404
====== ======
Management believes it is more likely than not that all deferred tax assets are
realizable based upon the past earnings history of the Company.
OLB, as a Bermuda domiciled company is not subject to federal income taxes but,
rather, the Company is subject to federal income taxes based on OLB's taxable
income for the entire year. Accordingly, the Company includes the taxable income
of OLB in its separate company income for tax purposes, but for segment
reporting the income is included with the Property and Casualty Companies. OLB
has received an undertaking from the Bermuda Government exempting it from all
taxes computed on profit or income, or computed on any capital asset gain or
appreciation until 2016.
The Company and its wholly owned domestic subsidiaries are party to a Tax
Allocation Agreement (the "Agreement"). The Agreement requires these companies
to file a U.S. consolidated income tax return. The Agreement provides that each
member of the group will compute its separate tax liability or benefit on a
separate return basis and pay or receive such amounts to or from the Company.
F-25
<PAGE>
10) Lease Commitments and Rentals
Minimum annual rental commitments under various non-cancelable operating leases
for office space and equipment are as follows (in thousands):
Years Ending December 31,
2000 ............................. $2,856
2001 ............................. 2,475
2002 ............................. 486
2003 ............................. 43
Thereafter ....................... 1
------
5,861
Sub-lease rental income................... (91)
------
Net rental commitments.................. $5,770
======
Leases for office space include various escalation clauses, none of which
individually or in the aggregate are material. Escalation clauses are accounted
for on a straight-line basis over the remaining life of the lease. The leases
also contain provisions for the payment of certain operating expenses and real
estate taxes.
Rent expense for the years ended December 31, 1999, 1998 and 1997, amounted to
approximately $3,242,000 $2,928,000 and $2,992,000, respectively, net of
sublease rental income of $48,000, $48,000 and $128,000, respectively.
11) Pension and Retirement Plans
Substantially all officers and employees of the Company are entitled to
participate in a qualified retirement savings plan (defined contribution plan)
and prior to 1995 were entitled to participate in a defined benefit pension
plan. The cost to the Company to participate in these plans included in the
accompanying consolidated statements of income was approximately $406,000,
$255,000 and $385,000 for 1999, 1998 and 1997, respectively.
12) Contingent Liabilities
In the ordinary course of business, the Company and its subsidiaries are subject
to various claims and lawsuits consisting primarily of alleged errors and
omissions in connection with the placement of insurance. Subject to specified
limits, the stockholders of predecessors to the Retail Brokerage Business are
responsible for any costs arising from those claims which were asserted prior to
November 1, 1991, the date on which KILP was formed. In the opinion of
management, the ultimate resolution of all asserted and potential claims both
prior and subsequent to the formation of KILP, will not have a material effect
on the consolidated financial position and results of operations of the Company.
F-26
<PAGE>
As licensed brokers, the Insurance Brokerage Companies are or may become party
to administrative inquiries and at times to administrative proceedings commenced
by state insurance regulatory bodies. Certain subsidiaries were involved in an
administrative investigation commenced in 1992 by the New York Insurance
Department ("Department") relating to how property insurance policies were
issued for the Residential Real Estate Program. As a result, the manner in which
policies are structured for certain clients in this Program was altered, which
has not had a material adverse effect on this Program. While the Company had
discussions with the Department regarding settlement of such investigation, this
matter has not been pursued for several years. If the matter is not closed or
settled, the Department could institute formal proceedings against the
subsidiaries seeking fines or license revocation. Management does not believe
the resolution of this issue will have a material adverse effect on the Company.
13) Reinsurance
The components of net written and net earned insurance premiums were as follows
for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
-------- -------- --------
Written premiums:
Direct $ 12,120 $ 11,586 $ 11,106
Assumed 16,668 13,207 11,700
Ceded (967) (255) (536)
-------- -------- --------
Net written premiums $ 27,821 $ 24,538 $ 22,270
-------- -------- --------
Earned premiums
Direct $ 11,576 $ 11,652 $ 11,496
Assumed 15,846 13,392 11,909
Ceded (642) (355) (558)
-------- -------- --------
Net earned premiums $ 26,780 $ 24,689 $ 22,847
======== ======== ========
OLRI assumes reinsurance under arrangements with unaffiliated insurance
companies. The Insurance Brokerage Companies of the Company produce the business
assumed under these arrangements. The business has limits varying from $25,000
to $100,000 per occurrence. Claim liabilities under these agreements are secured
with fixed maturity securities and cash and cash equivalents, which are
deposited in trust funds. Approximately $22,270,000 and $13,747,000 as of
December 31, 1999 and 1998, respectively, are held in these trust funds.
Premiums earned for the years ended December 31, 1999, 1998 and 1997 from
assumed premiums relating to insurance agreements with RLI were $7,318,000,
$6,229,000 and $4,272,000, respectively.
With respect to the assumed business OLRI retains the first $25,000 of exposure
and cedes the remaining $75,000 to PXRE Reinsurance Company ("PXRE"). In
addition, OLRI purchases annual stop loss policies to limit its exposure to
adverse claim experience.
F-27
<PAGE>
On direct business written, OLRI cedes risk on an excess of loss basis to PXRE.
OLRI underwrites direct business with limits up to $25,000,000 retaining up to
the first $50,000 of exposure and reinsuring the balances to other insurers or
reinsurers.
Under the terms of the reinsurance agreements, loss and loss adjustment expenses
(incurred) recovered in 1999, 1998 and 1997 were $(451,000), $409,000 and
$1,929,000, respectively. Commissions received on reinsurance ceded in 1999,
1998 and 1997 were $148,000, $45,000 and $88,000, respectively.
A contingent liability exists with respect to reinsurance ceded, which would
become an ultimate liability of OLRI in the event that the assuming companies
were unable to meet their obligations under the reinsurance agreements in force
at December 31, 1999.
14) Losses and Loss Expenses
The following table sets forth a reconciliation of the changes in the reserves
for outstanding losses and loss expenses, including paid losses and loss
expenses, for each year in the three year period ended December 31, 1999.
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Balance at January 1, $ 21,567 $ 19,126 $ 15,227
Less: reinsurance recoverables (3,220) (2,811) (882)
-------- -------- --------
Net balance 18,347 16,315 14,345
-------- -------- --------
Incurred related to:
Current year 10,410 8,461 8,824
Prior years (656) 35 (108)
-------- -------- --------
Total incurred 9,754 8,496 8,716
-------- -------- --------
Paid related to:
Current year 2,188 1,877 1,802
Prior years 4,622 4,587 4,944
-------- -------- --------
Total paid 6,810 6,464 6,746
-------- -------- --------
Net balance at December 31, 21,291 18,347 16,315
Add: reinsurance recoverables 2,678 3,220 2,811
-------- -------- --------
Balance $ 23,969 $ 21,567 $ 19,126
======== ======== ========
F-28
<PAGE>
15) Statutory Financial Information and Dividend Restrictions
The Company's Insurance Subsidiaries file separate financial statements in
accordance with accounting practices prescribed or permitted by the insurance
regulatory authorities where they are domiciled. These statutory accounting
practices ("SAP") differ in certain respects from GAAP. These differences are
primarily comprised of the accounting for prepaid acquisition costs, deferred
income taxes, and fixed maturity and equity investments.
The following is a reconciliation of net income and surplus regarding
policyholders in accordance with SAP as reported to the Rhode Island and Bermuda
insurance regulatory authorities to net income and capital as determined in
conformity with GAAP.
<TABLE>
<CAPTION>
Statutory Surplus /
Stockholders' Equity Net Income for years ended
as of December 31, December 31,
------------------------- ---------------------------------------
1999 1998 1999 1998 1997
-------- -------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated amount in accordance with GAAP $ 47,251 $ 41,769 $ 7,504 $ 7,282 $ 4,357
Deficit (equity) in net assets and net loss
(income) of non-insurance companies (10,083) (7,273) (226) (141) 2,086
-------- -------- -------- -------- --------
Combined amount in accordance with GAAP 37,168 34,496 7,278 7,141 6,443
Deferred acquisition costs (4,313) (3,921) (392) 18 134
Non-admitted assets, deferred
income taxes and other (341) (1,289) (292) (241) 54
-------- -------- -------- -------- --------
Combined amount in accordance with SAP $ 32,514 $ 29,286 $ 6,594 $ 6,918 $ 6,631
======== ======== ======== ======== ========
</TABLE>
The Insurance Subsidiaries are currently subject to various regulations that
limit the maximum amount of dividends ultimately available to the Company
without prior approval of insurance regulatory authorities. Under SAP,
approximately $3,524,000 of statutory surplus is available for distribution in
2000 without prior regulatory approval.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance, which will replace
the current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The new accounting guidance becomes effective
January 1, 2001. The Company has not estimated the potential effect of the
Codification guidance.
16) Related Party Transactions
The administrative support for OLB is provided by International Advisory
Services, Ltd. ("IAS"), an insurance management company located in Bermuda. A
director of IAS is an officer of OLB and is a director of the Company.
Management fees paid to IAS under a service contract for the years ended
December 31, 1999, 1998 and 1997 were $20,000 $30,000 and $37,500, respectively.
F-29
<PAGE>
The director of IAS, who is a director of the Company, is also a director of an
insurance brokerage company, H & H Reinsurance Brokers, Ltd. ("H & H
Reinsurance"). H & H Reinsurance has a reinsurance contract between OLRI and
unrelated insurance carriers (CNA Reinsurance Company Ltd., Transatlantic
Reinsurance Company and USF Reinsurance Company). H & H Reinsurance received
commissions of $0, $0 and $38,114 in 1999, 1998 and 1997, respectively, as a
result of such contact.
In January 1997, KIA entered into a management agreement with KILP, whereby KIA
provided certain administrative services for a fee of $50,000 per year. At
December 31, 1998 and 1997, the Company recorded $50,000 for such services
provided. This management fee arrangement terminated in 1998 with the
dissolution of KILP.
A director of the Company is also a director of, and had shared beneficial
ownership of more than ten percent of the outstanding common stock of Sun
Television and Appliances, Inc. ("Sun TV"). In 1994, Sun TV and a subsidiary of
the Company entered into two agreements whereby the Company's subsidiary agreed
to assume certain service contracts that were sold by Sun TV to its retail
customers (the "Agreement") and contracted with Sun TV to have Sun TV provide
repair services under certain service contracts. The Board of Directors believes
that the agreements were commercially reasonable. On September 11, 1998, Sun TV
filed bankruptcy petitions under Chapter 11 of the Bankruptcy Code. The
Company's subsidiary filed a proof of claim on March 11, 1999 for any and all
amounts that are due and owing under the Agreement.
17) Capital Structure
The Board of Directors is authorized to issue preferred stock in classes or
series and to fix the designations, preferences, qualifications, limitations or
restrictions of any class or series with respect to the rate and nature of
dividends, the price and terms and conditions on which shares may be redeemed,
the amount payable in the event of voluntary or involuntary liquidation, the
terms and conditions for conversion or exchange into any other class or series
of stock, voting rights and other terms. No preferred stock is currently issued
or outstanding.
The Board of Directors of the Company declared annual dividends of $847,000 and
$849,000 for the years ended December 1999 and 1998, respectively, of which
$212,000 was unpaid at December 31, 1999 and 1998.
In December 1998, the Board of Directors authorized the repurchase, at
management's discretion, of up to 300,000 shares of the Company's Common 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
reissuance price over repurchase cost is treated as an increase of paid-in
capital. Purchases of treasury stock for the year ended December 31, 1999
amounted to 155,523 shares of which 127,866 shares were used for the SRW
F-30
<PAGE>
acquisition and the Company's 401(k) plan and Stock Performance Plan. Treasury
shares at December 31, 1999 amounted to 27,657 shares at a cost of approximately
$229,000.
18) Stock Performance and Stock Option Plans
On December 30, 1997, the Company adopted a Stock Performance Plan, under which
up to 350,000 shares of the Company's common stock may be granted and awarded to
key employees. The grant of stock under this plan is contingent upon criteria
established by the Company's Compensation Committee of the Board of Directors.
Awards are based on performance targets of the Company's stock based on
increases in the market value of the Company's common stock from the price on
the date the stock is initially granted by the Company. Shares must be granted,
awarded, and vested before participants take full title to the performance
stock. Awards vest on the occurrence of any of the following events, (i) fifteen
years of continuous service with the Company from the date shares are granted to
the participant, (ii) death or disability of the participant, (iii) immediately
before a change of control (as defined under the plan), (iv) attaining the age
of 65, or (v) immediately before a sale or merger (as defined under the plan).
During 1999 and 1998, 26,016 and 185,282 shares of performance stock were
granted under this plan, respectively. During July 1999, the Company awarded
33,844 shares of restricted stock from shares previously granted under the Stock
Performance Plan to certain key employees. The market value of these shares
awarded totaled approximately $264,000 and has been recorded as unearned stock
grant compensation (net of amortization) as a separate component of
stockholders' equity. Unearned compensation is being amortized to expense on a
straight line basis over the remaining vesting period. At December 31, 1999 and
1998, no performance stock under this plan was vested.
F-31
<PAGE>
In addition to the Stock Performance Plan the Company has a Stock Option Plan
and a Supplemental Stock Option Plan (the "Option Plans"). The terms of the
Option Plans are identical. Under the Option Plans a total of 1,000,000 shares
of common stock are reserved for issuance. The plans provide for the granting to
directors, executives or other key employees (including officers) of the Company
non-qualified stock options (NQO's) or incentive stock options (ISO's) within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The
Committee determines the terms of the options including the exercise price,
number of shares subject to option and exercisability. The exercise price of all
ISO's and NQO's under the Plans are generally at least the fair market value of
the common stock of the Company on the date of grant. A summary of the stock
option activity and related information consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
==========================================================================================
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ------------- ==========================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 659,200 $6.15 624,850 $6.12 528,550 $7.53
Granted 361,800 7.63 54,500 6.46 450,750 5.14
Exercised (6,900) 5.06
Forfeited (21,100) 5.93 (20,150) 7.88 (354,450) 6.87
------- ------- -------
Outstanding at end of year 993,000 $6.70 659,200 $6.15 624,850 $6.12
======= ======= =======
Options exercisable at year-end 341,300 232,900 143,450
======= ======= =======
Weighted-average fair value of
options granted during the year $2.34 $2.17 $1.29
======= ======= =======
</TABLE>
F-32
<PAGE>
The following table summarizes information about the stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
========================================================== ====================================
Number Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Remaining Weighted-Average Exercisable Exercise
at 12/31/99 Contractual Life Exercise Price at 12/31/99 Price
========================================================== ====================================
<S> <C> <C> <C> <C> <C>
$11.63 500 4.08 years $11.63 500 $11.63
$10.91 5,000 4.08 10.91 5,000 10.91
$10.00 75,500 3.63 10.00 75,500 10.00
$8.43 39,750 5.83 8.43 31,800 8.43
$8.24 68,500 9.83 8.24
$8.03 15,000 7.83 8.03 6,000 8.03
$7.88 15,000 5.70 7.88 12,000 7.88
$7.50 252,500 9.96 7.50
$7.41 800 9.12 7.41
$7.38 40,000 9.15 7.38
$7.06 10,000 6.37 7.06 6,000 7.06
$6.70 2,000 8.50 6.70 2,000 6.70
$6.64 5,000 8.00 6.64 2,000 6.64
$6.60 23,000 8.94 6.60 4,600 6.60
$6.17 20,000 8.84 6.17 4,000 6.17
$5.06 160,450 7.15 5.06 64,900 5.06
$5.00 250,000 7.20 5.00 123,000 5.00
$4.97 10,000 7.49 4.97 4,000 4.97
------- -------
993,000 7.87 $6.70 341,300 $6.78
======= =======
</TABLE>
Unless otherwise specified, the options vest and are exerciseable at the rate of
20% per year and terminate ten years from date of grant. At December 31, 1999,
1998 and 1997, 341,300, 232,900 and 143,450 options were exerciseable and there
were 0, 40,800 and 75,150 options available for future grants, respectively.
F-33
<PAGE>
Had the compensation cost for the Company's stock based compensation plans been
determined based on the fair value at the grant date for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):
1999 1998 1997
---- ---- ----
Net Income As reported $7,504 $7,282 $4,357
Pro forma 7,361 7,167 4,280
Earnings per share - basic As reported .89 .86 .62
Pro forma .87 .85 .61
Earnings per share - diluted As reported .87 .85 .62
Pro forma .85 .84 .60
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: (i) dividend
yield of 1.3%, (ii) expected volatility range of 30%, (iii) risk-free interest
rate of 6.18%, and (iv) expected life of 5 years.
19) Quarterly Financial Information (Unaudited)
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1999 and 1998 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.
<TABLE>
<CAPTION>
For the three months ended
====================================================================================================================================
(in thousands, except for per share)
March 31, June 30, September 30, December 31,
--------- -------- ------------- --------------
1999 1998 1999 1998 1999 1998 1999 1998
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $16,083 $14,809 $17,739 $15,548 $16,599 $17,230 $18,323 $17,424
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,359 $ 971 $ 2,123 $ 1,734 $ 1,723 $ 2,296 $ 2,299 $ 2,281
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.16 $ 0.11 $ 0.25 $ 0.20 $ 0.20 $ 0.27 $ 0.27 $ 0.27
Diluted 0.16 0.11 0.25 0.20 0.20 0.27 0.27 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 8,460 8,474 8,448 8,474 8,460 8,474 8,464 8,474
Diluted 8,605 8,596 8,590 8,595 8,655 8,591 8,667 8,580
====================================================================================================================================
</TABLE>
F-34
<PAGE>
20) Business Segments
The Company operates in two insurance business segments, the procuring of
property and casualty insurance ("Insurance Brokerage Companies") and the
underwriting of property and casualty risks ("Property and Casualty Companies").
In addition, Corporate Operations include those activities that benefit the
Company in its entirety and cannot be specifically identified to either the
Insurance Brokerage Companies or the Property and Casualty Companies. Such
activities include debt servicing and public company expenses, including
investor relations costs. The identifiable segment assets, operating profits and
income before income taxes and minority interests 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
years ended December 31, 1999, 1998 and 1997:
Business Segments - 1999
- -------------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty
- -------------------------------------------------------------------------------
Revenue from external sources $33,158 $26,780
Revenue from other segments 4,221 72
Depreciation expense 1,260 17
Interest income from other segments 192
Amortization expense 1,095 8,292
Capital expenditures 1,347
Business Segments - 1998
- -------------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty
- -------------------------------------------------------------------------------
Revenue from external sources $31,324 $24,689
Revenue from other segments 4,032 69
Depreciation expense 1,114 21
Amortization expense 678 7,630
Capital expenditures 2,089
Business Segments - 1997
- -------------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty
- -------------------------------------------------------------------------------
Revenue from external sources $28,387 $22,847
Revenue from other segments 3,830 65
Depreciation expense 1,123 24
Amortization expense 520 7,269
Capital expenditures 1,481
F-35
<PAGE>
The foreign operations set forth below, relate solely to the operations of OLB,
and its wholly owned subsidiary Park Brokerage, and business assumed from third
party insurance companies. All such risks assumed originate in the United
States.
1999
======================================
Foreign Domestic Total
======================================
(in thousands)
Consolidated Revenues $ 1,717 $ 67,027 $ 68,744
Income before minority
interest 1,055 9,674 10,729
and income taxes
Identifiable assets 2,648 146,564 149,212
<TABLE>
<CAPTION>
1998 1997
====================================== ======================================
Foreign Domestic Total Foreign Domestic Total
====================================== ======================================
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Revenues $2,092 $62,919 $65,011 $2,246 $57,396 $59,642
Income before minority interest
and income taxes 1,169 9,385 10,554 1,398 6,157 7,555
Identifiable assets 2,936 157,647 160,583 3,575 137,450 141,025
</TABLE>
There were no material intercompany revenue transactions between OLB and OLRI.
21) Supplemental Cash Flow Disclosures
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the period for:
Interest expense $ 1,214 $ 501 $ 948
Income taxes $ 3,463 $ 2,870 $ 2,000
Non-cash investing and financing activities:
Stock issued to purchase minority interest $ 10,181
Stock issued under Stock Performance Plan $ 222
Details of acquisitions:
Purchase payments including outstanding payable
$ 7,784 $ 5,196 $ 3,062
Amounts contingently payable (1,578) (3,300) (2,285)
Less: reissuance of treasury stock (628)
Less acquisition debt repayment (375) (657)
-------- -------- --------
Cash paid for acquisitions $ 5,203 $ 1,239 $ 777
======== ======== ========
</TABLE>
F-36
<PAGE>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Condensed Balance Sheets
As of December 31, 1999 and 1998
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1999 1998
======== ========
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,233 $ 370
Prepaid expenses and other assets 153 248
Investments:
Equity securities, at market (cost: 1999, $243, and 1998, $497) 243 615
Deferred income taxes 93
Due from subsidiaries 890 2,118
Investment in subsidiaries 48,616 43,973
-------- --------
Total assets $ 51,228 $ 47,324
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and other liabilities $ 300 $ 511
Note payable 1,241 1,153
Deferred income taxes 0 20
Income taxes payable 366 568
-------- --------
Total current liabilities 1,907 2,252
Note payable - long term 2,070 3,303
-------- --------
Total liabilities 3,977 5,555
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 1,000 shares authorized;
none issued or outstanding 0 0
Common stock, $.01 par value; 20,000 shares authorized;
(1999, 8,458; 1998, 8,474 shares issued and outstanding) 85 85
Paid-in capital 18,019 17,942
Unearned stock grant compensation (254)
Common stock in Treasury, 28 shares at cost in 1999 (229)
Unrealized appreciation (depreciation) of investments, net of deferred
income tax provision(benefit), (1999, ($118); 1998, $280) (228) 541
Retained earnings 29,858 23,201
-------- --------
Total stockholders' equity 47,251 41,769
-------- --------
Total liabilities and stockholders' equity $ 51,228 $ 47,324
======== ========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
F-37
<PAGE>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Condensed Statements of Income
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
==== ==== ====
<S> <C> <C> <C>
REVENUES:
Net investment income (loss) 206 (31)
Equity in income of subsidiaries 11,148 11,342 7,555
EXPENSES:
Other operating expenses 309 314
Interest expense 316 443
------ ------ -----
Income before income taxes and minority interest 10,729 10,554 7,555
Provision for income taxes 3,225 3,272 2,267
------ ------ -----
Income before minority interest 7,504 7,282 5,288
Minority interest 931
------- ------- -------
NET INCOME 7,504 7,282 4,357
====== ====== =====
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
F-38
<PAGE>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Condensed Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,504 $ 7,282 $ 4,357
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Deferred income tax benefit (93) (150)
Restricted stock compensation 10
Equity in net income of subsidiaries (8,115) (7,826) (6,590)
Dividends received from subsidiaries 3,886 4,060 6,350
Realized loss on investment 274
Minority interest 931
Change in assets and liabilities:
Prepaid expenses and other assets 95 (20) (199)
Due from subsidiaries 1,228 1,294 (3,892)
Accounts payable and other liabilities (211) (263)
Income taxes payable (202) 552 (137)
------- ------- -------
Net cash provided by operating activities 4,376 4,929 820
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends (847) (849) (852)
Notes payable-repayment (1,145) (7,575) (69)
Acquisition of treasury stock (571)
Proceeds from borrowing 5,000
Capital contribution to subsidiary (950) (1,200) (300)
------- ------- -------
0 0 0
Net cash used in financing activities (3,513) (4,624) (1,221)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 863 305 (401)
Cash and cash equivalents at beginning of period 370 65 466
------- ------- -------
Cash and cash equivalents at end of period $ 1,233 $ 370 $ 65
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest expense $ 316 $ 480 $ 548
Income taxes $ 3,463 $ 2,870 $ 2,000
Noncash investing and financing activities:
Stock issued to purchase minority interest $10,181
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.
F-39
<PAGE>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Notes to Condensed Financial Statements
1. Condensed Financial Statements
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
2. Basis of Presentation
As detailed in Note 2 to the consolidated financial statements of the
Company, Kaye Holding Corp. ("KHC"), (a subsidiary) was merged into the
Company on December 30, 1997. Accordingly, prior to 1998 corporate expenses
and investment income were recorded by KHC and are reflected in the
condensed statements of income included in equity in income of
subsidiaries.
3. Significant Accounting Policies
The Company carries its investment in subsidiaries under the equity method.
All other accounting policies are consistent with those of the Company on a
consolidated basis.
F-40
<PAGE>
Schedule IV
KAYE GROUP INC.
REINSURANCE
For The Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
======================================================================================================================
Column A Column B Column C Column D Column E Column F
======================================================================================================================
Percentage
Insurance Gross Ceded To Other Assumed from of Amount
Premiums Earned Amount Companies Other Companies Net Amount Assumed to Net
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 $11,576 $642 $15,846 $26,780 59%
1998 $11,652 $355 $13,392 $24,689 54%
1997 $11,496 $558 $11,909 $22,847 52%
</TABLE>
F-41
<PAGE>
Schedule VI
KAYE GROUP INC
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
====================================================================================================
Column A Column B Column C Column D Column E
====================================================================================================
Reserves For
Unpaid Claims Discount
Affiliation Deferred And Claim If Any
With Acquisition Adjustment Deducted In Unearned
Registrant Costs Expenses Column C Premiums
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign $ 152 $ 260 N/A $ 725
Domestic 4,161 23,709 N/A 12,969
-----------------------------------------------------------------------------
1999 $4,313 $23,969 N/A $13,694
=============================================================================
Foreign $ 193 $ 295 N/A $ 916
Domestic 3,728 21,272 N/A 11,411
-----------------------------------------------------------------------------
1998 $3,921 $21,567 N/A $12,327
=============================================================================
Foreign $ 240 $ 204 N/A $ 1,132
Domestic 3,699 18,922 N/A 11,446
-----------------------------------------------------------------------------
1997 $3,939 $19,126 N/A $12,578
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================================
Column A Column F Column G Column H
================================================================================================
Claims and Claim
Adjustment Expenses
Incurred Related to
Affiliation Net (1) (2)
With Earned Investment Current Prior
Registrant Premiums Income Year Years
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign $1,598 $119 $375 ($114)
Domestic 25,182 2,678 10,035 (542)
-----------------------------------------------------------------------------
1999 $26,780 $2,797 $10,410 ($656)
=============================================================================
Foreign $1,957 $135 $313 $95
Domestic 22,732 2,453 8,148 (60)
-----------------------------------------------------------------------------
1998 $24,689 $2,588 $8,461 $35
=============================================================================
Foreign $2,118 $127 $326 ($47)
Domestic 20,729 2,565 8,498 (61)
-----------------------------------------------------------------------------
1997 $22,847 $2,692 $8,824 ($108)
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
=================================================================================================
Column A Column I Column J Column K Column L
=================================================================================================
Paid
Amortization Claims
Affiliation Of Deferred and Claim Other
With Acquisition Adjustment Premiums Operating
Registrant Costs Expenses Written Expenses
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign $335 $296 $1,408 $66
Domestic 7,957 6,514 26,414 2,847
---------------------------------------------------------------------------
1999 $8,292 $6,810 $27,822 $2,913
===========================================================================
Foreign $414 $317 $1,742 $102
Domestic 7,216 6,147 22,796 2,178
---------------------------------------------------------------------------
1998 $7,630 $6,464 $24,538 $2,280
===========================================================================
Foreign $456 $234 $1,938 $113
Domestic 6,813 6,512 20,332 1,988
---------------------------------------------------------------------------
1997 $7,269 $6,746 $22,270 $2,101
===========================================================================
</TABLE>
F-42
KAYE GROUP INC.
RESTATED SUPPLEMENTAL STOCK OPTION PLAN
ARTICLE I
Purpose of Plan
The Stock Option Plan (the "Plan") of Kaye Group Inc. ("KGI" and, together
with its subsidiaries, the "Company"), adopted by the Board of Directors and
stockholders of KGI effective May, 1996, is intended to advance the best
interests of KGI by providing executives, directors and other employees of the
Company with additional incentives by allowing such employees to acquire an
ownership interest in KGI.
ARTICLE II
Definitions
For purposes of the Plan the following terms have the indicated meanings:
"Board" means the Board of Directors of KGI.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor statute.
"Committee" means the Compensation Committee or such other committee of the
Board as the Board may designate to administer the Plan. The Committee shall be
composed solely of two or more disinterested persons (as that term is defined in
Rule 16b-3 under the Securities Exchange Act of 1934) as appointed from time to
time by the Board.
"Common Stock" means the Common Stock, par value $.Ol per share, of KGI.
"Fair Market Value" of the Common Stock as of any date shall be deemed to
be the closing price of the Common Stock on the principal securities exchange or
market on which the Common Stock is listed or quoted for trading on (or the last
trading day before) the date that such determination is to be made. If the
Common Stock is not listed or quoted on any exchange or market as of the date
such determination is to be made or the Committee determines in good faith that
the price determined in the previous sentence should not be used, then the
Committee shall determine the fair market value of the Common Stock (expressed
on a per-share basis) as of such date, based on the consolidated results of
operations, financial condition and future prospects of the Company and such
other factors as the Committee may deem appropriate. Fair Market Value shall be
determined without regard to any restriction on transferability of the Common
Stock other than any such restriction which by its terms will never lapse.
A-l
<PAGE>
"Participant" means any director, executive or other employee of the
Company who has been selected to participate in the Plan by the Committee or the
Board.
"Sale of KGI" means a merger or consolidation effecting a change in control
of KGI, a sale of all or substantially all of the assets of KGI or a sale of a
majority of the outstanding voting securities of KGI effecting a change in
control of KGI.
"Subsidiary" means any subsidiary corporation (as such term is defined in
Section 424(f) of the Code) of KGI.
ARTICLE III
Administration
The Plan shall be administered by the Committee. Subject to the limitations
of the Plan, the Committee shall have the sole and complete authority to: (i)
select Participants, (ii) grant Options to Participants (each as defined in
Article IV) in such forms and amounts as it shall determine, (iii) impose such
limitations, restrictions and conditions upon such Options as it shall deem
appropriate, (iv) interpret the Plan and adopt, amend and rescind administrative
guidelines and other rules and regulations relating to the Plan, (v) correct any
defect or omission or reconcile any inconsistency in the Plan or in any Options
granted under the Plan and (vi) make all other determinations and take all other
actions necessary or advisable for the implementation and administration of the
Plan. The Committee's determinations on matters within its authority shall be
conclusive and binding upon the Participants, the Company and all other persons.
All expenses associated with the administration of the Plan shall be borne by
the Company. The Committee may, as approved by the Board and to the extent
permissible by law, delegate any of its authority hereunder to such persons or
entities as it deems appropriate.
ARTICLE IV
Limitation on Aggregate Shares
The number of shares of Common Stock with respect to which stock purchase
options ("Options") may be granted under the Plan shall not exceed, in the
aggregate, 650,000 shares, subject to adjustment in accordance with paragraph
6.4. To the extent any Options expire unexercised or are cancelled, terminated
or forfeited in any manner without the issuance of Common Stock thereunder, such
shares shall again be available under the Plan. The shares of Common Stock
available under the Plan may consist of authorized and unissued shares, treasury
shares or a combination thereof, as the Committee shall determine.
A-2
<PAGE>
ARTICLE V
Awards
5.1 Grant of Options. The Committee may grant Options to Participants from
time to time in accordance with this Article V. Subject to the preceding
sentence, the Committee may grant all available options under the Plan to a
single Participant in one or more grants. Options wanted under the Plan may be
nonqualified stock options or "incentive stock options" within the meaning of
Section 422 of the Code or any successor provision, as specified by the
Committee; provided, however, that no incentive stock option may be granted to
any Participant who, at the time of grant, owns stock of the Company (or any
Subsidiary) representing more than 10% of the total combined voting power of all
classes of stock of the Company (or such Subsidiary, unless the exercise price
of such incentive stock option equals at least 110% of the Fair Market Value of
the Common Stock determined as of the date of Option grant). The exercise price
per share of Common Stock under each Option shall be fixed by the Committee at
the time of grant of the Option and shall equal at least 100% of the Fair Market
Value of a share of Common Stock on the date of grant, but not less than the par
value per share (as adjusted pursuant to paragraph 6.4). Options shall be
exercisable at such time or times as the Committee shall determine; provided,
however, that the aggregate Fair Market Value of the Common Stock (determined as
of the date of Option grant) with respect to which incentive stock options are
exercisable for the first time by any Participant during any calendar year
(under all stock option plans of the Company) may not exceed $100,000. The
Committee shall determine the term of each Option, which term shall not exceed
ten years from the date of grant of the Option.
5.2 Exercise Procedure. Options shall be exercisable by written notice to
the Company (to the attention of the Company's Secretary) accompanied by payment
in full of the applicable exercise price. Payment of such exercise price may be
made (i) in cash (including check, bank draft or money order), (ii) at the
discretion of the Committee, by delivery of a full recourse promissory note
bearing interest at a rate not less than the applicable federal rate determined
pursuant to Section 1274 of the Code as of the date of purchase or exercise (a
"Note"), (iii) in shares of Common Stock valued at their Fair Market Value as of
the date of exercise as provided in Section 5.3 below or (iv) a combination of
the foregoing.
5.3 Exchange of Previously Acquired Stock. The option price for shares
being acquired upon the exercise of an Option may be paid, in full or in part,
by the delivery to the Company of a number of shares of Common Stock having an
aggregate Fair Market Value as of the "exercise measurement date" (as
hereinafter defined) equal to the exercise price for the shares being acquired.
5.4 Withholding Tax Requirements. It shall be a condition of the exercise
of any Option (including any exercise of an alternative cash settlement right)
that the Participant exercising the Option make appropriate payment or other
provision acceptable to the Company with respect to any withholding tax
requirement arising from such exercise. The amount of withholding tax required,
if any, with respect to any Option exercise (the "Withholding Amount") shall be
determined by the Treasurer or other appropriate officer of the Company, and the
Participant shall furnish such information and make such representations as such
officer requires to make such determination. If the Company determines that
withholding tax is required with respect to any Option exercise, the Company
shall notify the Participant
A-3
<PAGE>
of the Withholding Amount, and the Participant shall pay to the Company an
amount not less than the Withholding Amount. In lieu of making such payment, the
Participant may elect to pay the Withholding Amount by either (i) delivering to
the Company a number of shares of Common Stock having an aggregate Fair Market
Value as of the "measurement date" (as hereinafter defined) not less than the
Withholding Amount or (ii) directing the Company to withhold (and not to deliver
or issue to the Participant) a number of shares of Common Stock otherwise
issuable upon the Option exercise having an aggregate Fair Market Value as of
the measurement date not less than the Withholding Amount. If the Company
approves, a Participant may elect pursuant to the prior sentence to deliver or
direct the withholding of shares of Common Stock having an aggregate Fair Market
Value in excess of the minimum Withholding Amount but not in excess of the
Participant's applicable highest marginal combined federal income and state
income tax rate, as estimated in good faith by such Participant. Any fractional
share interests resulting from the delivery or withholding of shares of Common
Stock to meet withholding tax requirements shall be settled in cash. All amounts
paid to or withheld by the Company and the value of all shares of Common Stock
delivered to or withheld by the Company pursuant to this Section 5.4 shall be
deposited in accordance with applicable law by the Company as withholding tax
for the Participant's account. If the Treasurer or other appropriate officer of
the Company determines that no withholding tax is required with respect to the
exercise of any Option (because such Option is an incentive stock option or
otherwise), but subsequently it is determined that the exercise resulted in
taxable income as to which withholding is required (as a result of a disposition
of shares or otherwise), the Participant shall promptly, upon being notified of
the withholding requirement, pay to the Company by means acceptable to the
Company the amount required to be withheld; and at its election the Company may
condition any transfer of shares issued upon exercise of an incentive stock
option upon receipt of such payment. The term "measurement date" as used in this
Section 5.4 shall mean the date on which any taxable income resulting from the
exercise of an Option is determined under applicable federal income tax law.
5.5 Conditions and Limitations on Exercise. At the discretion of the
Committee, Options may be made exercisable, in one or more installments, upon
(i) the happening of certain events, (ii) the passage of a specified period of
time, (iii) the fulfillment of certain conditions, or (iv) the achievement by
the Company or any Subsidiary of certain performance goals. In the event of a
Sale of the Company, the Committee may provide, in its discretion, that the
outstanding Options shall become immediately exercisable and that such Options
shall terminate if not exercised as of the date of the Sale of the Company or
any other designated date or that such Options shall thereafter represent only
the right to receive the excess of the consideration per share of Common Stock
offered in such Sale of the Company over the exercise price of such Options.
5.6 Expiration of Options.
(a) Normal Expiration. In no event shall any part of any Option be
exercisable after the stated date of expiration thereof.
(b) Early Expiration Upon Termination of Employment. Except as otherwise
provided by the Committee at the time of grant of such Options, upon termination
for any reason of a Participant's employment by the Company and its
Subsidiaries, all Options or portions thereof held by
A-4
<PAGE>
such Participant that are not vested and exercisable on the date of such
termination shall expire and be forfeited as of such date and all vested Options
held by such Participant shall expire to the extent not theretofore exercised on
the first anniversary of (or, in the case of any incentive stock option, 90 days
following) the date of such termination.
ARTICLE VI
General Provisions
6.1 Written Agreement. Each Option granted hereunder shall be embodied in a
written option agreement which shall be signed by the Participant to whom the
Option is granted and shall be subject to the terms and conditions set forth
herein.
6.2 Listing, Registration and Legal Compliance. If at any time the
Committee determines, in its discretion, that the listing, registration or
qualification of the shares subject to Options upon any securities exchange or
under any state or federal securities or other law or regulation, or the consent
or approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of Options or the purchase or
issuance of shares thereunder, no Options may be granted or exercised, in whole
or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holders of such Options will supply the Company
with such certificates, representations and information as the Company shall
request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent or approval. In the case of
officers and other persons subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Committee may at any time impose any limitations
upon the exercise of Options that, in the Committee's discretion, are necessary
or desirable in order to comply with such Section 16(b) and the rules and
regulations thereunder. If the Company, as part of an offering of securities or
otherwise, finds it desirable because of federal or state regulatory
requirements to reduce the period during which any Options may be exercised, the
Committee may, in its discretion and without the Participant's consent, so
reduce such period on not less than 15 days' written notice to the holders
thereof.
6.3 Options Not Transferrable. Options may not be transferred other than by
will or the laws of descent and distribution and, during the lifetime of the
Participant to whom they were granted, may be exercised only by such Participant
(or his or her legal guardian or legal representative). In the event of the
death of a Participant Options which are not vested and exercisable on the date
of death shall terminate; exercise of Options granted hereunder to such
Participant, which are vested as of the date of death, may be made only by the
executor or administrator of such Participant's estate or the person or persons
to whom such Participant's rights under the Options will pass by will or the
laws of descent and distribution.
6.4 Adjustments. In the event of a reorganization, recapitalization, stock
dividend or stock split, or combination or other change in the shares of Common
Stock, the Board or the Committee may, in order to prevent the dilution or
enlargement of rights under outstanding Options, make such adjustments in the
number and type of shares authorized by the Plan, the number and type of shares
covered by outstanding Options and the exercise prices specified therein as may
be determined to be
A-5
<PAGE>
appropriate and equitable.
6.5 Rights of Participants. Nothing in the Plan shall interfere with or
limit in any way the right of the Company or any Subsidiary to terminate any
Participant's employment at any time (with or without cause), or confer upon any
Participant any right to continue in the employ of the Company or any Subsidiary
for any period of time or to continue to receive such Participant's current (or
other) rate of compensation. No employee shall have a right to be selected as a
Participant or, having been so selected, to be selected again as a Participant.
6.6 Amendment, Suspension and Termination of Plan. The Board or the
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; provided, however, that no such amendment shall be
made without stockholder approval to the extent such approval is required by
law, agreement or the rules of any exchange upon which the Common Stock is
listed, and no such amendment, suspension or termination shall impair the rights
of Participants under outstanding Options without the consent of the
Participants affected thereby, except as provided below. No Options shall be
granted hereunder after the tenth anniversary of the approval of the Plan by the
stockholders of the Company.
6.7 Amendment of Outstanding Options. The Committee may amend or modify any
Option in any manner to the extent that the Committee would have had the
authority under the Plan initially to grant such Option; provided that, except
as expressly contemplated elsewhere herein or in any agreement evidencing such
Option, no such amendment or modification shall impair the rights of any
Participant under any outstanding Option without the consent of such
Participant.
6.8 Indemnification. In addition to such other rights of indemnification as
they may have as members of the Board or the Committee, the members of the
Committee shall be indemnified by the Company against all costs and expenses
reasonably incurred by them in connection with any action, suit or proceeding to
which they or any of them may be party by reason of any action taken or failure
to act under or in connection with the Plan or any Option granted under the
Plan, and against all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of a judgment in any such action, suit or
proceeding; provided, however, that any such Committee member shall be entitled
to the indemnification rights set forth in this paragraph 6.8 only if such
member has acted in good faith and in a manner that such member reasonably
believed to be in or not opposed to the best interests of the Company and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
that such conduct was unlawful, and further provided that upon the institution
of any such action, suit or proceeding a Committee member shall give the Company
written notice thereof and an opportunity to handle and defend the same before
such Committee member undertakes to handle and defend it on his own behalf.
* * * * *
A-6
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT (the "Agreement") is dated as of the
31st day of July, 1999 and is by and between SUMMIT BANK, a banking institution
of the State of New Jersey having an office at 250 Moore Street, Hackensack, New
Jersey 07601 (the "Bank"); and KAYE GROUP INC., a Delaware corporation having
its principal executive offices located at 122 East 42nd Street, New York, New
York 10168 (the "Borrower").
WITNESSETH:
WHEREAS, the Borrower and the Bank have heretofore entered into that
certain Loan Agreement dated June 24, 1998 (the "Loan Agreement"); and
WHEREAS, the Borrower has requested the Bank to make certain amendments to
the Loan Agreement, and the Bank has agreed to do so upon the terms and
conditions described herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Defined Terms. Except as otherwise indicated herein, all words and terms
defined in the Loan Agreement shall have the same meanings when used herein.
2. Amendment to Loan Agreement. The following definition appearing in
Section 1.1 of the Loan Agreement is hereby amended to read in its entirety as
follows:
"Revolving Loan Termination Date" shall mean October 29, 1999.
3. Substitute Note. Concurrently herewith, the Borrower is executing and
delivering to the Bank a substitute revolving note in the maximum principal
amount of $4,500,000 (the "Substitute Note") in substitution for, but not in
repayment of, that certain Revolving Note dated June 24, 1998 in the maximum
principal amount of $4,500,000 (the "Prior Note") previously issued by the
Borrower to the Bank. The execution and delivery by the Borrower of the
Substitute Note pursuant to the provisions hereof shall not constitute a
refinancing, repayment, accord and satisfaction or novation of the Prior Note or
the indebtedness evidenced thereby.
4. Representations and Warranties. In order to induce the Bank to enter
into this Agreement and amend the Loan Agreement as provided herein, the
Borrower hereby represents and warrants to the Bank that:
(a) All of the representations and warranties of the Borrower set
forth in Article IV of the Loan Agreement are true, complete and correct in
all material respects on and as of the date hereof with the same force and
effect as if made on and as of the date hereof and as if set forth at
length herein (except that representations and warranties which are
expressly stated to be as of a certain date are true, complete and correct
in all material respects as of such certain date).
(b) No Default or Event of Default presently exists and is continuing
on and as of the date hereof.
<PAGE>
(c) Since the date of the Borrower's most recent financial statements
delivered to the Bank, no material adverse change has occurred in the
business, assets, liabilities, financial condition or results of operations
of the Borrower, and no event has occurred or failed to occur which is
likely to have a material adverse effect on the business, assets,
liabilities, financial condition or results of operations of the Borrower.
(d) The Borrower has full power and authority to execute, deliver and
perform any action or step which may be necessary to carry out the terms of
this Agreement and all other agreements, documents and instruments executed
and delivered by the Borrower to the Bank concurrently herewith or in
connection herewith (collectively, the "Amendment Documents"); each
Amendment Document to which the Borrower is a party has been duly executed
and delivered by the Borrower and is the legal, valid and binding
obligation of the Borrower enforceable in accordance with its terms,
subject to any applicable bankruptcy, insolvency, general equity principles
or other similar laws affecting the enforcement of creditors' rights
generally.
(e) The execution, delivery and performance of the Amendment Documents
will not (i) violate any provision of any existing law, statute, rule,
regulation or ordinance, (ii) conflict with, result in a breach of, or
constitute a default under (A) the certificate of incorporation or by-laws
of the Borrower, (B) any order, judgment, award or decree of any court,
governmental authority, bureau or agency, or (C) any mortgage, indenture,
lease, contract or other agreement or undertaking to which the Borrower is
a party or by which the Borrower or any of its properties or assets may be
bound, or (iii) result in the creation or imposition of any lien or other
encumbrance upon or with respect to any property or asset now owned or
hereafter acquired by the Borrower.
(f) No consent, license, permit, approval or authorization of,
exemption by, notice to, report to, or registration, filing or declaration
with any person is required in connection with the execution, delivery,
performance or validity of the Amendment Documents or the transactions
contemplated thereby.
5. No Defenses. The Borrower expressly acknowledges and agrees that (a) as
of August 2, 1999, the outstanding principal amount of (i) the Revolving Loan is
$0, (ii) all Acquisition Advances is $0, and (iii) the Term Loan is
$3,896,079.21, and (b) such amounts, together with accrued interest thereon, are
owed to the Bank without defense, offset or counterclaim of any nature
whatsoever. The Borrower hereby waives and releases all claims against the Bank
with respect to the Obligations and the documents evidencing or securing the
same.
6. Bank Costs. The Borrower shall reimburse the Bank on demand for all
costs, including legal fees and expenses, incurred by the Bank in connection
with this Agreement, the other Amendment Documents and the transactions
referenced herein. If such amounts are not paid within ten days of the Bank's
request therefor, the Borrower hereby authorizes the Bank to charge the
Borrower's account for the amount of such fees and expenses.
7. No Change. Except as expressly set forth herein, all of the terms and
provisions of the Loan Agreement shall continue in full force and effect.
8. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts and all such counterparts taken together shall constitute
one and the same instrument.
9. Governing Law. This Agreement shall be governed by and construed in
accordance the laws of the State of New Jersey.
2
<PAGE>
IN WITNESS WHEREOF, the Borrower and the Bank have executed this Agreement
as of the date above written.
SUMMIT BANK
By: /S/ Lisa Cohen
-------------------------
Vice President
KAYE GROUP INC.
By: /s/ Michael P. Sabanos
-------------------------
Michael P. Sabanos
Senior Vice President
and Chief Financial
Officer
3
<PAGE>
STATE OF NEW JERSEY :
:ss.
COUNTY OF ESSEX :
BE IT REMEMBERED, that on this 12th day of August, 1999, before me, the
subscriber, personally appeared LISA COHEN, who I am satisfied is the Vice
President of SUMMIT BANK, the corporation named in and subscribing to the within
instrument; and she, being by me duly sworn, acknowledged, deposed and said
that, in her capacity as such officer, she executed the foregoing instrument on
behalf of said corporation for the uses and purposes therein expressed.
/s/ Lisa Denovchik
-----------------------------------
Lisa Denovchik
A Notary Public of New Jersey
My Commission Expires March 8, 2002
STATE OF NY :
ss.
COUNTY OF NY :
BE IT REMEMBERED, that on this 6 day of August, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE GROUP INC., the
corporation named in and subscribing to the foregoing instrument; and he, being
by me duly sworn, acknowledged, deposed and said that such instrument was made
by such corporation, and that he signed and delivered the same as such officer
of such corporation as its voluntary act and deed for the uses and purposes
therein expressed.
/s/ IVY S. FISCHER
---------------------------
IVY S. FISCHER
Notary Public State of New York
No. 31 4786741
Qualified in New York County
Commission Expires August 31, 1999
4
<PAGE>
SUBSTITUTE REVOLVING NOTE
$4,500,000 As of July 3l, 1999
FOR VALUE RECEIVED, the undersigned, KAYE GROUP INC., a Delaware
corporation (the "Borrower"), hereby unconditionally promises to pay on or
before October 29, 1999 (the "Revolving Loan Termination Date"), to the order of
SUMMIT BANK, a banking institution of the State of New Jersey (the "Bank"), at
the office of the Bank located at 250 Moore Street, Hackensack, New Jersey, or
at such other location as the Bank shall designate, in lawful money of the
United States of America and in immediately available funds, the principal
amount of the lesser of(i) $4,500,000 or (ii) so much thereof as shall have been
advanced (the "Advances") by the Bank to the Borrower pursuant to that certain
Loan Agreement dated June 24, 1998, as amended, between the Borrower and the
Bank (the "Agreement"). Terms defined in the Agreement shall have the same
meanings when used herein.
The Borrower further agrees to pay interest in like money at such office on
the unpaid principal amount hereof from time to time at a rate or rates per
annum and at such times as are provided in the Agreement.
The Borrower shall pay to the Bank a late charge (the "Late Charge") in an
amount equal to five percent (5%) of any payment which is more than ten (10)
days in arrears to cover the extra expense involved in handling delinquent
payments, but in no event shall any Late Charge be less than $25 or more than
$2,500. The term "payments" shall be construed to include principal, interest,
fees and any other amount due under the terms of this Note or any of the other
Loan Documents. Acceptance by the Bank of payment of a Late Charge shall in no
way be construed to be an election of remedies or waiver by the Bank of any of
its rights at law or under the terms of any of the Loan Documents.
Subject to the provisions of Section 2.25 of the Agreement, this Note may
be prepaid, in whole or in part, at one time or from time to time, without
premium or penalty in accordance with the provisions of the Agreement.
All payments made hereunder shall be applied: first, to any fees or other
charges owing to the Bank hereunder; second, to accrued and unpaid interest; and
third, to the outstanding principal balance hereof. Notwithstanding the
foregoing, upon the occurrence of an Event of Default, the Bank may apply
payments received hereunder in such manner as it shall determine in its sole and
absolute discretion.
This Note is secured by the Collateral described in the Agreement, the
Pledge and Security Agreement and the other Loan Documents, and is guaranteed by
the Guarantors pursuant to the Guaranty Agreement.
This Note is being executed and delivered by the Borrower to the Bank in
substitution for that certain Revolving Note dated June 24, 1998 from the
Borrower in favor of the Bank in the maximum principal amount of $4,500,000 (the
"Prior Note"). The execution and
<PAGE>
delivery of this Note shall not constitute a repayment, refinancing, accord and
satisfaction or novation of the Prior Note or the indebtedness evidenced
thereby.
The Bank may declare this Note to be immediately due and payable if any of
the following events shall have occurred and be continuing:
(1) Failure by the Borrower to make any payment of principal or
interest under this Note on any date when due; or
(2) An Event of Default shall have occurred under the Agreement or any
of the other Loan Documents.
Upon the occurrence of any Event of Default, the Bank may, in addition to
such other and further rights and remedies as provided by law or under the
Agreement or under any of the other Loan Documents, (i) collect interest on such
overdue amount from the date of such maturity until paid at a rate per annum
equal to three (3%) percent in excess of Base Rate, (ii) setoff such amount
against any deposit account maintained in the Bank by the Borrower, and such
right of setoff shall be deemed to have been exercised immediately upon such
stated or accelerated maturity even though such setoff is not noted on the
records of the Bank until a later time and (iii) hold as security any property
heretofore or hereafter delivered into the custody, control or possession of the
Bank or any entity acting as agent for the Bank by any person liable for the
payment of this Note.
This Note may not be changed orally, but only by an agreement in writing,
signed by the party against whom enforcement of any waiver, change, modification
or discharge is sought.
Should the indebtedness represented by this Note or any part hereof be
collected at law or in equity, or in bankruptcy, receivership, or any other
court proceeding, or should this Note be placed in the hands of attorneys for
collection upon default, the Borrower agrees to pay, in addition to the
principal and interest due and payable hereon, all reasonable costs of
collecting or attempting to collect this Note, including reasonable attorneys'
fees and expenses.
This Note shall be and remain in full force and effect and in no way
impaired until the actual payment thereof to the Bank, its successors or
assigns.
Anything herein to the contrary notwithstanding, the obligations of the
Borrower under this Note shall be subject to the limitation that payments of
interest shall not be required to the extent that receipt of any such payment by
the Bank would be contrary to provisions of law applicable to the Bank limiting
the maximum rate of interest which may be charged or collected by the Bank.
The Borrower and all endorsers and guarantors of this Note hereby waive
presentment, demand for payment, protest and notice of dishonor of this Note.
This Note is binding upon the Borrower and its successors and assigns and
shall inure to the benefit of the Bank and its successors and assigns.
2
<PAGE>
This Note and the rights and obligations of the parties hereto shall be
subject to and governed by the laws of the State of New Jersey.
IN WITNESS WHEREOF, the undersigned has caused this Substitute Revolving
Note to be duly executed by its authorized officer as of the day and year above
written.
KAYE GROUP INC.
By: /s/ Michael P. Sabanos
-------------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
3
<PAGE>
STATE OF NY :
ss.
COUNTY OF NY :
BE IT REMEMBERED, that on this 6 day of August, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE GROUP INC., the
corporation named in and subscribing to the foregoing instrument; and he, being
by me duly sworn, acknowledged, deposed and said that such instrument was made
by such corporation, and that he signed and delivered the same as such officer
of such corporation as its voluntary act and deed for the uses and purposes
therein expressed.
/s/ IVY S. FISCHER
---------------------------
IVY S. FISCHER
Notary Public State of New York
No. 31 4786741
Qualified in New York County
Commission Expires August 31, 1999
4
<PAGE>
[signature continued from previous page]
STATE OF NY :
ss.
COUNTY OF NY :
BE IT REMEMBERED, that on this 1 day of November, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of PROGRAM BROKERAGE
CORPORATION, the corporation named in and subscribing to the foregoing
instrument; and he, being by me duly sworn, acknowledged, deposed and said that
such instrument was made by such corporation, and that he signed and delivered
the same as such officer of such corporation as its voluntary act and deed for
the uses and purposes therein expressed.
/s/ IVY S. FISCHER
----------------------------------
IVY S. FISCHER
Notary Public State of New York
No. 02F14786741
Qualified in New York County
Commission Expires August 31, 2001
5
<PAGE>
Letterhead KAYE GROUP INC.
As of July 31, 1999
Summit Bank
250 Moore Street
Hackensack, New Jersey 07601
Re: Reaffirmation of Guaranty in connection with
Extension of Various Loans from Summit Bank to
Kaye Group Inc.
----------------------------------------------
Dear Sir or Madam:
Each of the undersigned guarantors (collectively, the "Guarantors")
executed and delivered to Summit Bank (the "Bank") a certain Guaranty Agreement
dated June 24, 1998 (the "Guaranty"), pursuant to which each of the Guarantors
jointly, severally and unconditionally guaranteed to the Bank all of the
obligations of Kaye Group Inc. (the "Borrower") under that certain Loan
Agreement dated June 24, 1998 between the Borrower and the Bank.
The Guarantors hereby acknowledge that, concurrently herewith, the Borrower
and the Bank are entering into a First Amendment to Loan Agreement (the "First
Amendment"), and in connection therewith, the Borrower is executing and
delivering to the Bank a Substitute Revolving Note in the maximum principal
amount of $4,500,000 (the "Substitute Note") pursuant to which, among other
things, the maturity date of the existing Revolving Note dated June 24, 1998
from the Borrower to the Bank in the maximum principal amount of $4,500,000 is
being extended to October 29, 1999. The Guarantors hereby further acknowledge
that, as a condition to entering into the First Amendment and accepting the
Substitute Note, the Bank has required that each of the Guarantors reaffirm the
Guaranty to the Bank.
Accordingly, each of the Guarantors hereby (a) ratifies and reaffirms its
obligations under the Guaranty, all of the terms and conditions of which remain
in full force and effect, (b) consents to the execution and delivery of the
First Amendment and the Substitute Note by the Borrower and (c) acknowledges and
agrees that the Guaranty shall continue to apply with full force and effect to
all obligations of the Borrower to the Bank, including without limitation, the
obligations under the Substitute Note. As of the date hereof there are no
counterclaims, offsets or defenses to the Guarantors' obligations under the
Guaranty and the Guarantors waive and release all claims against the Bank which
exist on the date hereof in connection therewith.
<PAGE>
This Reaffirmation of Guaranty may be signed in any number of counterparts,
all of which, when taken together, shall constitute but one and the same
instrument.
KAYE INSURANCE ASSOCIATES, INC.
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
KAYE CORPORATION OF CONNECTICUT
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
KAYE ADMINISTRATORS CORP.
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
KAYE SERVICES CORP.
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
KAYE-WESTERN INSURANCE &
RISK SERVICES, INC.
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
[SIGNATURES CONTINUE ON FOLLOWING PAGE]
2
<PAGE>
PROGRAM BROKERAGE CORPORATION
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
3
<PAGE>
STATE OF NY :
ss.
COUNTY OF NY :
BE IT REMEMBERED, that on this 6 day of August, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE INSURANCE ASSOCIATES,
INC., the corporation named in and subscribing to the foregoing instrument; and
he, being by me duly sworn, acknowledged, deposed and said that such instrument
was made by such corporation, and that he signed and delivered the same as such
officer of such corporation as its voluntary act and deed for the uses and
purposes therein expressed.
Ivy S. Fischer
Notary Public, State of New York
No. 31-4788741
Qualified in New York County
Commission Expires August 31, 1999 /s/ Ivy S. Fischer
------------------
STATE OF NY :
ss.
COUNTY OF NY :
BE IT REMEMBERED, that on this 6 day of August, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE CORPORATION OF
CONNECTICUT, the corporation named in and subscribing to the foregoing
instrument; and he, being by me duly sworn, acknowledged, deposed and said that
such instrument was made by such corporation, and that he signed and delivered
the same as such officer of such corporation as its voluntary act and deed for
the uses and purposes therein expressed.
Ivy S. Fischer
Notary Public, State of New York
No. 31-4788741
Qualified in New York County
Commission Expires August 31, 1999 /s/ Ivy S. Fischer
------------------
STATE OF NY :
ss.
COUNTY OF NY :
BE IT REMEMBERED, that on this 6 day of August, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE ADMINISTRATORS CORP.,
the corporation named in and subscribing to the foregoing instrument; and he,
being by me duly sworn, acknowledged, deposed and said that such instrument was
made by such corporation, and that he signed and delivered the same as such
officer of such corporation as its voluntary act and deed for the uses and
purposes therein expressed.
Ivy S. Fischer
Notary Public, State of New York
No. 31-4788741
Qualified in New York County
Commission Expires August 31, 1999 /s/ Ivy S. Fischer
------------------
4
<PAGE>
STATE OF NY :
ss.
COUNTY OF NY :
BE IT REMEMBERED, that on this 6 day of August, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE SERVICES CORP., the
corporation named in and subscribing to the foregoing instrument; and he, being
by me duly sworn, acknowledged, deposed and said that such installment was made
by such corporation, and that he signed and delivered the same as such officer
of such corporation as its voluntary act and deed for the uses and purposes
therein expressed.
Ivy S. Fischer
Notary Public, State of New York
No. 31-4788741
Qualified in New York County
Commission Expires August 31, 1999 /s/ Ivy S. Fischer
------------------
STATE OF NY :
ss.
COUNTY OF NY :
BE IT REMEMBERED, that on this 6 day of August, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE-WESTERN INSURANCE &
RISK SERVICES, INC., the corporation named in and subscribing to the foregoing
instrument; and he, being by me duly sworn, acknowledged, deposed and said that
such instrument was made by such corporation, and that he signed and delivered
the same as such officer of such corporation as its voluntary act and deed for
the uses and purposes therein expressed.
Ivy S. Fischer
Notary Public, State of New York
No. 31-4788741
Qualified in New York County
Commission Expires August 31, 1999 /s/ Ivy S. Fischer
------------------
STATE OF NY :
ss.
COUNTY OF NY :
BE IT REMEMBERED, that on this 6 day of August, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of PROGRAM BROKERAGE
CORPORATION, the corporation named in and subscribing to the foregoing
instrument; and he, being by me duly sworn, acknowledged, deposed and said that
such instrument was made by such corporation, and that he signed and delivered
the same as such officer of such corporation as its voluntary act and deed for
the uses and purposes therein expressed.
Ivy S. Fischer
Notary Public, State of New York
No. 31-4788741
Qualified in New York County
Commission Expires August 31, 1999 /s/ Ivy S. Fischer
------------------
6
SECOND AMENDMENT TO LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT (the "Agreement") is dated as of
the 1st day of November, 1999 and is by and between SUMMIT BANK, a banking
institution of the State of New Jersey having an office at 250 Moore Street,
Hackensack, New Jersey 07601 (the "Bank"); and KAYE GROUP INC., a Delaware
corporation having its principal executive offices located at 122 East 42nd
Street, New York, New York 10168 (the "Borrower").
WITNESSSETH:
WHEREAS, the Borrower and the Bank have heretofore entered into that
certain Loan Agreement dated June 24, 1998, as amended by a First Amendment to
Loan Agreement dated as of July 31, 1999 (the "Loan Agreement"); and
WHEREAS, the Borrower has requested the Bank to make certain additional
amendments to the Loan Agreement, and the Bank has agreed to do so upon the
terms and conditions described herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Defined Terms. Except as otherwise indicated herein, all words and
terms defined in the Loan Agreement shall have the same meanings when used
herein.
2. Amendment to Loan Agreement.
The following definitions appearing in Section 1.1 of the Loan
Agreement are hereby amended to read in their entirety as follows:
"Revolving Loan Termination Date" shall mean October 31, 2000.
"Debt Service Coverage Ratio" shall mean, for any period, the ratio of (i)
Consolidated Net Income, plus consolidated depreciation and amortization
for the Borrower and its Subsidiaries, plus consolidated interest expense
for the Borrower and its Subsidiaries, minus dividends and distributions
paid by the Borrower or its Subsidiaries, all determined on a trailing four
quarters basis to (ii) the current portion of the consolidated Indebtedness
of the Borrower and its Subsidiaries (but excluding the outstanding
Advances under the Revolving Loan and any intercompany balances) comprised
of (A) indebtedness for borrowed money (whether by loan or the issuance and
sale of debt securities) or for the deferred purchase price of property or
services (other than current trade liabilities incurred in the ordinary
course of business and payable in accordance with customary practices) or
(B) any other indebtedness which is evidenced by a note, bond, debenture or
similar instrument plus the consolidated interest expense of the Borrower
and its Subsidiaries, determined on a trailing four quarters basis.
<PAGE>
3. Substitute Note. Concurrently herewith, the Borrower is executing and
delivering to the Bank a substitute revolving note in the maximum principal
amount of $4,500,000 (the "Substitute Note") in substitution for, but not in
repayment of, that certain Substitute Revolving Note dated as of July 31, 1999
in the maximum principal amount of $4,500,000 (the "Prior Note") previously
issued by the Borrower to the Bank. The execution and delivery by the Borrower
of the Substitute Note pursuant to the provisions hereof shall not constitute a
refinancing, repayment, accord and satisfaction or novation of the Prior Note or
the indebtedness evidenced thereby.
4. Representations and Warranties. In order to induce the Bank to enter
into this Agreement and amend the Loan Agreement as provided herein, the
Borrower hereby represents and warrants to the Bank that:
(a) All of the representations and warranties of the Borrower set
forth in Article IV of the Loan Agreement are true, complete and correct in
all material respects on and as of the date hereof with the same force and
effect as if made on and as of the date hereof and as if set forth at
length herein (except that representations and warranties which are
expressly stated to be as of a certain date are true, complete and correct
in all material respects as of such certain date).
(b) No Default or Event of Default presently exists and is continuing
on and as of the date hereof.
(c) Since the date of the Borrower's most recent financial statements
delivered to the Bank; no material adverse change has occurred in the
business, assets, liabilities, financial condition or results of operations
of the Borrower, and no event has occurred or failed to occur which is
likely to have a material adverse effect on the business, assets,
liabilities, financial condition or results of operations of the Borrower.
(d) The Borrower has full power and authority to execute, deliver and
perform any action or step which may be necessary to carry out the tenus of
this Agreement and all other agreements, documents and instruments executed
and delivered by the Borrower to the Bank concurrently herewith or in
connection herewith (collectively, the "Amendment Documents"); each
Amendment Document to which the Borrower is a party has been duly executed
and delivered by the Borrower and is the legal, valid and binding
obligation of the Borrower enforceable in accordance with its terms,
subject to any applicable bankruptcy, insolvency, general equity principles
or other similar laws affecting the enforcement of creditors' rights
generally.
(e) The execution, delivery and performance of the Amendment Documents
will not (i) violate any provision of any existing law, statute, rule,
regulation or ordinance, (ii) conflict with, result in a breach of, or
constitute a default under (A) the certificate of incorporation or by-laws
of the Borrower, (B) any order, judgment, award or decree of any court,
governmental authority, bureau or agency, or (C) any mortgage, indenture,
lease, contract or other agreement or undertaking to which the Borrower is
a party or by which the Borrower or any of its properties or assets may be
bound, or (iii) result in the creation or imposition of any lien or other
encumbrance upon or with respect to any property or asset now owned or
hereafter acquired by the Borrower.
(f) No consent, license, permit, approval or authorization of,
exemption by, notice to, report to, or registration, filing or declaration
with any person is required with the
2
<PAGE>
execution, delivery, performance or validity of the Amendment Documents or
the transactions contemplated thereby.
5. No Defenses. The Borrower expressly acknowledges and agrees that (a) as
of October 31, 1999, the outstanding principal amount of (i) the Revolving Loan
is $0, (ii) all Acquisition Advances is $0, and (iii) the Term Loan is
$3,606,947.38, and (b) such amounts, together with accrued interest thereon, are
owed to the Bank without defense, offset or counterclaim of any nature
whatsoever. The Borrower hereby waives and releases all claims against the Bank
with respect to the Obligations and the documents evidencing or securing the
same.
6. Bank Costs. The Borrower shall reimburse the Bank on demand for all
costs, including legal fees and expenses, incurred by the Bank in connection
with this Agreement, the other Amendment Documents and the transactions
referenced herein. If such amounts are not paid within ten days of the Bank's
request therefor, the Borrower hereby authorizes the Bank to charge the
Borrower's account for the amount of such fees and expenses.
7. No Change. Except as expressly set forth herein, all of the terms and
provisions of the Loan Agreement shall continue in full force and effect.
8. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts and all such counterparts taken together shall constitute
one and the same instrument.
9. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey.
IN WITNESS WHEREOF, the Borrower and the Bank have executed this Agreement
of the date above written.
SUMMIT BANK
By: /s/ Lisa Cohen
----------------------------
Lisa Cohen
Vice President
KAYE GROUP INC.
By: /s/ Michael P. Sabanos
----------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
3
<PAGE>
STATE OF NEW JERSEY :
:ss.
COUNTY OF BERGEN :
BE IT REMEMBERED, that on this 1st day of November, 1999, before me, the
subscriber, personally appeared LISA COHEN, who I am satisfied is the Vice
President of SUMMIT BANK, the corporation named in and subscribing to the within
instrument; and she, being by me duly sworn, acknowledged, deposed and said
that, in her capacity as such officer, she executed the foregoing instrument on
behalf of said corporation for the uses and purposes therein expressed.
/s/ Ruth S. Figueroa
----------------------------------
RUTH S.FIGUEROA
NOTARY PUBLIC OF NEW JERSEY
MY COMMISSION EXPIRES JULY 5, 1999
STATE OF NEW YORK :
ss.
COUNTY OF NEW YORK :
BE IT REMEMBERED, that on this 1 day of November, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE GROUP INC., the
corporation named in and subscribing to the foregoing instrument; and he, being
by me duly sworn, acknowledged, deposed and said that such instrument was made
by such corporation, and that he signed and delivered the same as such officer
of such corporation as its voluntary act and deed for the uses and purposes
therein expressed.
/s/ Ivy S. Fischer
----------------------------------
IVY S. FISCHER
Notary Public, State of New York
No. 02F14788741
Qualified in New York County
Commission Expires August 31, 2001
4
<PAGE>
SUBSTITUTE REVOLVING NOTE
$4,500,000 As of November 1, 1999
FOR VALUE RECEIVED, the undersigned, KAYE GROUP INC., a Delaware
corporation (the "Borrower"), hereby unconditionally promises to pay on or
before October 31, 2000 (the "Revolving Loan Termination Date"), to the order of
SUMMIT BANK, a banking institution of the State of New Jersey (the "Bank"), at
the office of the Bank located at 250 Moore Street, Hackensack, New Jersey, or
at such other location as the Bank shall designate, in lawful money of the
United States of America and in immediately available funds, the principal
amount of the lesser of (i) $4,500,000 or (ii) so much thereof as shall have
been advanced (the "Advances") by the Bank to the Borrower pursuant to that
certain Loan Agreement dated June 24, 1998, as amended, between the Borrower and
the Bank (the "Agreement"). Terms defined in the Agreement shall have the same
meanings when used herein.
The Borrower further agrees to pay interest in like money at such office on
the unpaid principal amount hereof from time to time at a rate or rates per
annum and at such times as are provided in the Agreement.
The Borrower shall pay to the Bank a late charge (the "Late Charge") in an
amount equal to five percent (5%) of any payment which is more than ten (10)
days in arrears to cover the extra expense involved in handling delinquent
payments, but in no event shall any Late Charge be less than $25 or more than
$2,500. The term "payments" shall be construed to include principal, interest,
fees and any other amount due under the terms of this Note or any of the other
Loan Documents. Acceptance by the Bank of payment of a Late Charge shall in no
way be construed to be an election of remedies or waiver by the Bank of any of
its rights at law or under the terms of any of the Loan Documents.
Subject to the provisions of Section 2.25 of the Agreement, this Note may
be prepaid, in whole or in part, at one time or from time to time, without
premium or penalty in accordance with the provisions of the Agreement.
All payments made hereunder shall be applied: first, to any fees or other
charges owing to the Bank hereunder, second, to accrued and unpaid interest; and
third, to the outstanding principal balance hereof. Notwithstanding the
foregoing, upon the occurrence of an Event of Default, the Bank may apply
payments received hereunder in such manner as it shall determine in its sole and
absolute discretion.
This Note is secured by the Collateral described in the Agreement, the
Pledge and Security Agreement and the other Loan Documents, and is guaranteed by
the Guarantors pursuant to the Guaranty Agreement.
This Note is being executed and delivered by the Borrower to the Bank in
substitution for that certain Substitute Revolving Note dated as of July 31,
1999 from the Borrower in favor of the Bank in the maximum principal amount of
$4,500,000 (the "Prior Note"). The execution and delivery
<PAGE>
of this Note shall not constitute a repayment, refinancing, accord and
satisfaction or novation of the Prior Note or the indebtedness evidenced
thereby.
The Bank may declare this Note to be immediately due and payable if any of
the following events shall have occurred and be continuing:
(1) Failure by the Borrower to make any payment of principal or
interest under this Note on any date when due; or
(2) An Event of Default shall have occurred under the Agreement or any
of the other Loan Documents.
Upon the occurrence of any Event of Default, the Bank may, in addition to
such other and further rights and remedies as provided by law or under the
Agreement or under any of the other Loan Documents, (i) collect interest on such
overdue amount from the date of such maturity until paid at a rate per annum
equal to three (3%) percent in excess of Base Rate, (ii) setoff such amount
against any deposit account maintained in the Bank by the Borrower, and such
right of setoff shall be deemed to have been exercised immediately upon such
stated or accelerated maturity even though such setoff is not noted on the
records of the Bank until a later time and (iii) hold as security any property
heretofore or hereafter delivered into the custody, control or possession of the
Bank or any entity acting as agent for the Bank by any person liable for the
payment of this Note.
This Note may not be changed orally, but only by an agreement in writing,
signed by the party against whom enforcement of any waiver, change, modification
or discharge is sought.
Should the indebtedness represented by this Note or any part hereof be
collected at law or in equity, or in bankruptcy, receivership, or any other
court proceeding, or should this Note be placed in the hands of attorneys for
collection upon default, the Borrower agrees to pay, in addition to the
principal and interest due and payable hereon, all reasonable costs of
collecting or attempting to collect this Note, including reasonable attorneys'
fees and expenses.
This Note shall be and remain in full force and effect and in no way
impaired until the actual payment thereof to the Bank, its successors or
assigns.
Anything herein to the contrary notwithstanding, the obligations of the
Borrower under this Note shall be subject to the limitation that payments of
interest shall not be required to the extent that receipt of any such payment by
the Bank would be contrary to provisions of law applicable to the Bank limiting
the maximum rate of interest which may be charged or collected by the Bank.
The Borrower and all endorsers and guarantors of this Note hereby waive
presentment, demand for payment, protest and notice of dishonor of this Note.
This Note is binding upon the Borrower and its successors and assigns and
shall inure to the benefit of the Bank and its successors and assigns.
2
<PAGE>
This Note and the rights and obligations of the parties hereto shall be
subject to and governed by the laws of the State of New Jersey.
IN WITNESS WHEREOF, the undersigned has caused this Substitute Revolving
Note to be duly executed by its authorized officer as of the day and year above
written.
KAYE GROUP INC.
By: /s/ Michael P. Sabanos
-----------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
3
<PAGE>
STATE OF NEW YORK :
ss.
COUNTY OF NEW YORK :
BE IT REMEMBERED, that on this 1 day of November, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE GROUP INC., the
corporation named in and subscribing to the foregoing instrument; and he, being
by me duly sworn, acknowledged, deposed and said that such instrument was made
by such corporation, and that he signed and delivered the same as such officer
of such corporation as its voluntary act and deed for the uses and purposes
therein expressed.
/s/ IVY S. FISCHER
----------------------------------
IVY S. FISCHER
Notary Public, State of New York
No. 02F14788741
Qualified in New York County
Commission Expires August 31, 2001
4
<PAGE>
Letterhead KAYE GROUP INC.
November 1, 1999
Summit Bank
250 Moore Street
Hackensack, New Jersey 07601
Re: Reaffirmation of Guaranty in connection
with Extension of Various Loans from Summit Bank to
Kaye Group Inc.
---------------------------------------------------
Dear Sir or Madam:
Each of the undersigned guarantors (collectively, the "Guarantors")
executed and delivered to Summit Bank (the "Bank") a certain Guaranty Agreement
dated June 24, 1998 (the "Guaranty"), pursuant to which each of the Guarantors
jointly, severally and unconditionally guaranteed to the Bank all of the
obligations of Kaye Group Inc. (the "Borrower") under that certain Loan
Agreement dated June 24, 1998, as amended, between the Borrower and the Bank.
The Guarantors hereby acknowledge that, concurrently herewith, the Borrower
and the Bank are entering into a Second Amendment to Loan Agreement (the "Second
Amendment"), and in connection therewith, the Borrower is executing and
delivering to the Bank a Substitute Revolving Note dated as of November 1, 1999
in the maximum principal amount of $4,500,000 (the "Substitute Note") pursuant
to which, among other things, the maturity date of the existing Substitute
Revolving Note dated as of July 31, 1999 from the Borrower to the Bank in the
maximum principal amount of $4,500,000 is being extended to October 31, 2000.
The Guarantors hereby further acknowledge that, as a condition to entering into
the Second Amendment and accepting the Substitute Note, the Bank has required
that each of the Guarantors reaffirm the Guaranty to the Bank.
Accordingly, each of the Guarantors hereby (a) ratifies and reaffirms its
obligations under the Guaranty, all of the terms and conditions of which remain
in full force and effect, (b) consents to the execution and delivery of the
Second Amendment and the Substitute Note by the Borrower and (c) acknowledges
and agrees that the Guaranty shall continue to apply with full force and effect
to all obligations of the Borrower to the Bank, including without limitation,
the obligations under the Substitute Note. As of the date hereof, there are no
counterclaims, offsets or defenses to the Guarantors' obligations under the
Guaranty and the Guarantors waive and release all claims against the Bank which
exist on the date hereof in connection therewith.
This Reaffirmation of Guaranty may be signed in any number of counterparts,
all of which, when taken together, shall constitute but one and the same
instrument.
<PAGE>
Letterhead KAYE GROUP INC.
November 1, 1999
Summit Bank
250 Moore Street
Hackensack, New Jersey 07601
Re: Reaffirmation of Guaranty in connection with Extension of
Various Loans from Summit Bank to Kaye Group Inc.
---------------------------------------------------------
Dear Sir or Madam:
Each of the undersigned guarantors (collectively, the "Guarantors")
executed and delivered to Summit Bank (the "Bank") a certain Guaranty Agreement
dated June 24, 1998 (the "Guaranty"), pursuant to which each of the Guarantors
jointly, severally and unconditionally guaranteed to the Bank all of the
obligations of Kaye Group Inc. (the "Borrower") under that certain Loan
Agreement dated June 24, 1998, as amended, between the Borrower and the Bank.
The Guarantors hereby acknowledge that, concurrently herewith, the Borrower
and the Bank are entering into a Second Amendment to Loan Agreement (the "Second
Amendment"), and in connection therewith, the Borrower is executing and
delivering to the Bank a Substitute Revolving Note dated as of November 1, 1999
in the maximum principal amount of $4,500,000 (the "Substitute Note") pursuant
to which, among other things, the maturity date of the existing Substitute
Revolving Note dated as of July 31, 1999 from the Borrower to the Bank in the
maximum principal amount of $4,500,000 is being extended to October 31, 2000.
The Guarantors hereby further acknowledge that, as a condition to entering into
the Second Amendment and accepting the Substitute Note, the Bank has required
that each of the Guarantors reaffirm the Guaranty to the Bank.
Accordingly, each of the Guarantors hereby (a) ratifies and reaffirms its
obligations under the Guaranty, all of the terms and conditions of which remain
in full force and effect, (b) consents to the execution and delivery of the
Second Amendment and the Substitute Note by the Borrower and (c) acknowledges
and agrees that the Guaranty shall continue to apply with full force and effect
to all obligations of the Borrower to the Bank, including without limitation,
the obligations under the Substitute Note. As of the date hereof, there are no
counterclaims, offsets or defenses to the Guarantors' obligations under the
Guaranty and the Guarantors waive and release all claims against the Bank which
exist on the date hereof in connection therewith.
This Reaffirmation of Guaranty may be signed in any number of counterparts
all of which, when taken together, shall constitute but one and the same
instrument.
<PAGE>
KAYE INSURANCE ASSOCIATES, INC.
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
KAYE CORPORATION OF CONNECTICUT
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
KAYE ADMINISTRATOR CORP.
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
KAYE SERVICES CORP.
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
KAYE-WESTERN INSURANCE &
RISK SERVICES, INC.
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
2
<PAGE>
[signatures continued from previous page]
PROGRAM BROKERAGE CORPORATION
By: /s/ Michael P. Sabanos
---------------------------
Michael P. Sabanos
Senior Vice President
& Chief Financial Officer
STATE OF NEW YORK :
ss.
COUNTY OF NEW YORK :
BE IT REMEMBERED, that on this 1 day of November, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE INSURANCE ASSOCIATES,
INC., the corporation named in and subscribing to the foregoing instrument; and
he, being by me duly sworn, acknowledged, deposed and said that such instrument
was made by such corporation, and that he signed and delivered the same as such
officer of such corporation as its voluntary act and deed for the uses and
purposes therein expressed.
/s/ IVY S. FISCHER
----------------------------------
IVY S. FISCHER
Notary Public, State of New York
No. 02F14788741
Qualified in New York County
Commission Expires August 31, 2001
STATE OF NEW YORK :
ss.
COUNTY OF NEW YORK :
BE IT REMEMBERED, that on this 1 day of November, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE CORPORATION OF
CONNECTICUT, the corporation named in and subscribing to the foregoing
instrument; and he, being by me duly sworn, acknowledged, deposed and said that
such instrument was made by such corporation, and that he signed and delivered
the same as such officer of such corporation as its voluntary act and deed for
the uses and purposes therein expressed.
/s/ IVY S. FISCHER
----------------------------------
IVY S. FISCHER
Notary Public, State of New York
No. 02F14788741
Qualified in New York County
Commission Expires August 31, 2001
STATE OF NEW YORK :
ss.
COUNTY OF NEW YORK :
3
<PAGE>
[signatures continued from preyious page]
BE IT REMEMBERED, that on this 1 day of November, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE ADMINISTRATORS CORP.,
the corporation named in and subscribing to the foregoing instrument; and he,
being by me duly sworn, acknowledged, deposed and said that such instrument was
made by such corporation, and that he signed and delivered the same as such
officer of such corporation as its voluntary act and deed for the uses and
purposes therein expressed.
/s/ IVY S. FISCHER
----------------------------------
IVY S. FISCHER
Notary Public, State of New York
No. 02F14788741
Qualified in New York County
Commission Expires August 31, 2001
STATE OF NEW YORK :
ss.
COUNTY OF NEW YORK :
BE IT REMEMBERED, that on this 1 day of November, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE SERVICES CORP., the
corporation named in and subscribing to the foregoing instrument; and he, being
by me duly sworn, acknowledged, deposed and said that such instrument was made
by such corporation, and that he signed and delivered the same as such officer
of such corporation as its voluntary act and deed for the uses and purposes
therein expressed.
/s/ IVY S. FISCHER
----------------------------------
IVY S. FISCHER
Notary Public, State of New York
No. 02F14788741
Qualified in New York County
Commission Expires August 31, 2001
STATE OF NEW YORK :
ss.
COUNTY OF NEW YORK :
BE IT REMEMBERED, that on this 1 day of November, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of KAYE-WESTERN INSURANCE &
RISK SERVICES, INC., the corporation named in and subscribing to the foregoing
instrument; and he, being by me duly sworn, acknowledged, deposed and said that
such instrument was made by such corporation, and that he signed and delivered
the same as such officer of such corporation as its voluntary act and deed for
the uses and purposes therein expressed.
/s/ IVY S. FISCHER
----------------------------------
IVY S. FISCHER
Notary Public, State of New York
No. 02F14788741
Qualified in New York County
Commission Expires August 31, 2001
4
<PAGE>
[signatures continued from previous page]
STATE OF NEW YORK :
ss.
COUNTY OF NEW YORK :
BE IT REMEMBERED, that on this 1 day of November, 1999, before me, the
subscriber, personally appeared Michael P. Sabanos, who I am satisfied is the
Senior Vice President and Chief Financial Officer of PROGRAM BROKERAGE
CORPORATION, the corporation named in and subscribing to the foregoing
instrument; and he, being by me duly sworn, acknowledged, deposed and said that
such instrument was made by such corporation, and that he signed and delivered
the same as such officer of such corporation as its voluntary act and deed for
the uses and purposes therein expressed.
/s/ IVY S. FISCHER
----------------------------------
IVY S. FISCHER
Notary Public, State of New York
No. 02F14788741
Qualified in New York County
Commission Expires August 31, 2001
5
KAYE GROUP INC.
1999 EQUITY INCENTIVE COMPENSATION PLAN
1. Purpose. The purposes of this Kaye Group Inc. 1999 Equity Incentive
Compensation Plan (the "Plan") are to promote the interests of Kaye Group Inc.
(the "Company") and its stockholders by (i) attracting and retaining officers
and other employees of the Company and its Subsidiaries (as defined below); (ii)
motivating such individuals by means of performance-related incentives to
achieve longer-range performance goals; and (iii) enabling such individuals to
participate in the long-term growth and financial success of the Company.
2. Definitions. As used in the Plan, the following terms shall have the meanings
set forth below:
"Affiliate" shall mean (i) any entity that, directly or indirectly, is
controlled by, or controls, or is under common control with, the Company and
(ii) any entity in which the Company has a significant equity interest, in
either case as determined by the Committee.
"Award" shall mean any award of Restricted Stock.
"Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" For purposes of the Plan, a "Change in Control" shall
mean the occurrence of any of the following: (a) the direct or indirect sale,
lease, exchange or other transfer of all or substantially all of the assets of
the Company to any "person" or "group" (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act); (b) the merger or consolidation of
the Company with or into another corporation with the effect that the then
existing stockholders of the Company hold less than 60% of the combined voting
power of the then outstanding securities of the surviving corporation of such
merger or the corporation resulting from such consolidation having the right to
vote in the election of directors; (c) the replacement of a majority of the
Board over a two-year period from the directors who constituted the Board at the
beginning of such period, and such replacement shall not have been approved by
the Board as constituted at the beginning of such period; (d) a "person" or
"group" (other than an employee stock ownership plan of the Company or any
"person" or "group" that is the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of 5% or more of the combined voting power of the
Company's securities on the date on which the Plan was approved by the Board) as
a result of a tender or exchange offer, open market purchases, privately
negotiated purchases or otherwise, shall have become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of securities of the
Company representing 30% or more of the combined voting power of the then
outstanding securities of the Company having the right to vote in the election
of directors; or (e) the adoption by the Board and approval by the Company's
stockholders of a plan of liquidation or dissolution of the Company.
B-1
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Compensation Committee of the Board.
"Company" shall mean Kaye Group Inc., a Delaware corporation, and any
successor thereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"Fair Market Value" shall mean, with respect to a Share, as of any date,
(A) if the principal market for the Shares is a national securities exchange,
the closing sales price per Share on such day as reported by such exchange or on
a composite tape reflecting transactions on such exchange, (B) if the principal
market for the Shares is not a national securities exchange and the Shares are
quoted on The Nasdaq Stock Market ("Nasdaq"), and (I) if actual sales price
information is available with respect to the Shares, the closing sales price per
Share on such day on Nasdaq, or (II) if such information is not available, the
average of the highest bid and lowest asked prices per Share on such day on
Nasdaq, or (C) if the principal market for the Shares is not a national
securities exchange and the Shares are not quoted on Nasdaq, the average of the
highest bid and lowest asked prices per Share on such day as reported on the OTC
Bulletin Board Service or by National Quotation Bureau, Incorporated or a
comparable service; provided, however, that if clauses (A), (B) and (C) of this
paragraph are all inapplicable, or if no trades have been made, no quotes are
available for such day, or, in the reasonable judgment of the Committee, none of
the foregoing fairly represents Fair Market Value, the fair market value of a
Share shall be determined by the Committee by any method consistent with
applicable regulations adopted by the Treasury Department relating to the
valuation of stock, stock options or other forms of compensation.
"Participant" shall mean any officer or other employee of the Company or
its Subsidiaries eligible for an Award under Section 5 of the Plan and selected
by the Committee to receive an Award under the Plan.
"Performance Compensation Award" shall mean any Award designated by the
Committee as a Performance Compensation Award pursuant to Section 6(d) of the
Plan.
"Performance Criteria" shall mean the criterion or criteria that the
Committee shall select for purposes of establishing the Performance Goals for a
Performance Period with respect to any Performance Compensation Award under the
Plan. The Performance Criteria that will be used to establish the Performance
Goals shall be based on the attainment of specific levels of performance of the
Company (or Subsidiary, Affiliate, division or operational unit of the Company)
and shall be limited to the following: return on net assets, return on
stockholders' equity, return on assets, return on capital, stockholder returns,
profit margin, earnings per share, net earnings, operating earnings, book value
per share, Fair Market Value per share and sales or market share. To the extent
required under Section 162(m) of the Code, the Committee shall, within the
maximum period allowed under Section 162(m) of the Code, define in an objective
fashion the manner of calculating the Performance Criteria it selects to use for
such Performance Period.
"Performance Formula" shall mean, for a Performance Period, the one or more
B-2
<PAGE>
objective formulas applied against the relevant Performance Goal to determine,
with regard to the Performance Compensation Award of a particular Participant,
whether all, some portion but less than all, or none of the Performance
Compensation Award has been earned for the Performance Period.
"Performance Goals" shall mean, for a Performance Period, the one or more
goals established by the Committee for the Performance Period based upon the
Performance Criteria. The Committee is authorized at any time during the first
90 days of a Performance Period, or at any time thereafter (but only to the
extent the exercise of such authority after the first 90 days of a Performance
Period would not cause the Performance Compensation Awards granted to any
Participant for the Performance Period to fail to qualify as "performance-based
compensation" under Section 162(m) of the Code), in its sole and absolute
discretion, to adjust or modify the calculation of a Performance Goal for such
Performance Period to the extent permitted under Section 162(m) of the Code in
order to prevent the dilution or enlargement of the rights of Participant (i) in
the event of, or in anticipation of, any unusual or extraordinary corporate
item, transaction, event or development affecting the Company; or (ii) in
recognition of, or in anticipation of, any other unusual or nonrecurring event
affecting the Company, or the financial statements of the Company, or in
response to, or in anticipation of, changes in applicable laws, regulations,
accounting principles, or business conditions.
"Performance Period" shall mean the one or more periods of time of at least
one year in duration, as the Committee may select, over which the attainment of
one or more Performance Goals will be measured for the purpose of determining a
Participant's right to and the payment of a Performance Compensation Award.
"Person" shall mean any individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or political
subdivision thereof or other entity.
"Plan" shall mean this Kaye Group Inc. 1999 Equity Incentive Compensation
Plan, as amended from time to time.
"Restricted Stock" shall mean any Share granted (or a right to receive a
Share granted) by the Committee under Section 6 of the Plan.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated under the Exchange Act,
or any successor rule or regulation thereto as in effect from time to time.
"SEC" shall mean the Securities and Exchange Commission or any successor
thereto and shall include the Staff thereof.
"Shares" shall mean the common shares of the Company, $.0l par value per
share, or such other securities of the Company (i) into which such common shares
shall be changed by reason of a recapitalization, merger, consolidation,
split-up, combination, exchange of shares or other similar transaction or (ii)
as may be determined by the Committee pursuant to Section 4(b) of the Plan.
B-3
<PAGE>
"Subsidiary" shall mean (i) any entity that, directly or indirectly, is
controlled by the Company and (ii) any entity in which the Company has a
significant equity interest, in either case as determined by the Committee.
"Substitute Awards" shall have the meaning specified in Section 4(c) of the
Plan.
3. Administration.
a. The Plan shall be administered by the Committee. Subject to the terms
of the Plan and applicable law, and in addition to other express
powers and authorizations conferred on the Committee by the Plan, the
Committee shall have full power and authority to: (i) designate
Participants; (ii) determine the number of Shares to be covered by, or
with respect to which payments, rights, or other matters are to be
calculated in connection with, Awards; (iii) determine the terms and
conditions of any Award; (iv) determine whether, to what extent, and
under what circumstances Awards may be canceled, forfeited, or
suspended and the method or methods by which Awards may be canceled,
forfeited, or suspended; (v) interpret, administer, reconcile any
inconsistency, correct any default, or supply any omission in the Plan
and any instrument or agreement relating to an Award made under the
Plan; (vi) establish, amend, suspend, or waive such rules and
regulations and appoint such agents as it shall deem appropriate for
the administration of the Plan; and (vii) make any other determination
and take any other action that the Committee deems necessary or
desirable for the administration of the Plan.
b. Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations and other decisions under or with
respect to the Plan or any Award shall be within the sole discretion
of the Committee, may be made at any time and shall be final,
conclusive and binding upon all Persons, including the Company, any
Affiliate, any Participant, any holder or beneficiary of any Award.
c. No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Award
hereunder.
4. Shares Available for Awards.
a. Shares Available. Subject to adjustment as provided in Section 4(b),
the aggregate number of Shares with respect to which Awards may be
granted under the Plan shall be 375,000. If, after the effective date
of the Plan, any Share covered by an Award granted under the Plan, or
to which such an Award relates, is forfeited, or if an Award has
expired, terminated or been canceled for any reason whatsoever (other
than by reason of vesting), then the Shares covered by such Award
shall again be, or shall become, Shares with respect to which Awards
may be granted hereunder.
b. Adjustments. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares,
other securities, or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation,
B-4
<PAGE>
split-up, spin-off, combination, repurchase, or exchange of Shares or
other securities of the Company, issuance of warrants or other rights
to purchase Shares or other securities of the Company, or other
similar corporate transaction or event affects the Shares such that an
adjustment is determined by the Committee in its discretion to be
appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the
Plan, then the Committee may, in such manner as it may deem equitable,
adjust any or all of (i) the number of Shares or other securities of
the Company (or the number and kind of other securities or property)
with respect to which Awards may be granted, (ii) the number of Shares
or other securities of the Company (or the number and kind of other
securities or property) subject to outstanding Awards, and (iii) if
deemed appropriate, make provision for a cash payment to the holder of
an outstanding Award in consideration for the cancellation of such
Award.
c. Substitute Awards. Awards may, in the discretion of the Committee, be
made under the Plan in substitution (to the extent otherwise
permitted) for outstanding awards previously granted by the Company or
its Affiliates or by a company acquired by the Company or with which
the Company combines ("Substitute Awards"). The number of Shares
underlying any Substitute Award shall be counted against the aggregate
number of Shares available for Awards under the Plan.
d. Sources of Shares Deliverable Under Awards. Any Shares delivered
pursuant to an Award may consist, in whole or in part, of authorized
and unissued Shares or of treasury Shares.
5. Eligibility. Any officer or other employee of the Company or any of its
Subsidiaries (including any prospective officer or employee) shall be
eligible to be designated a Participant.
6. Restricted Stock.
a. Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete authority to determine the Participants to whom
Shares of Restricted Stock shall be granted, the number of shares of
Restricted Stock to be granted to each Participant, the duration of
the period during which, and the conditions under which, the
Restricted Stock may vest, including, without limitation, that the
Fair Market Value exceed a targeted Share price and the effect, if
any, of a Change in Control upon the vesting of the Restricted Stock,
and the other terms and conditions of such Awards.
b. Transfer Restrictions. Shares of Restricted Stock (or any interest
therein) may not be sold, assigned, transferred, pledged or otherwise
encumbered, except, in the case of Restricted Stock, as otherwise
provided in the Plan or the applicable Award Agreement (including, but
not limited to, provisions in the Applicable Award Agreement
permitting certain transfers to immediate family members, trusts for
the benefit of immediate family members or the Participant, or other
similar arrangements). Certificates issued in respect of shares of
Restricted Stock shall be registered in the name of the Participant
and retained by the Company. Each Participant shall deposit with the
Company a stock power duly endorsed in blank with respect to all
certificates issued in respect of shares of Restricted Stock. Upon the
lapse of the restrictions applicable to such Shares, the Company shall
deliver a certificate in respect of the applicable number of shares to
the Participant or the Participant's legal representative.
B-5
<PAGE>
c. Dividends or Dividend Equivalents. An Award shall provide the
Participant with dividends or dividend equivalents, payable in cash,
Shares, other securities or other property on a current or deferred
basis.
d. Performance Compensation Awards.
i. General. The Committee shall have the authority, at the time of
grant of any Award, to designate such Award as a Performance
Compensation Award in order to qualify such Award as
"performance-based compensation" under Section 162(m) of the
Code.
ii. Eligibility. The Committee will, in its sole discretion,
designate within the maximum period allowed under Section 162(m)
of the Code which Participants will be eligible to receive
Performance Compensation Awards in respect of such Performance
Period. However, designation of a Participant eligible to receive
an Award hereunder for a Performance Period shall not in any
manner entitle the Participant to receive payment in respect of
any Performance Compensation Award for such Performance Period.
The determination as to whether or not such Participant becomes
entitled to payment in respect of any Performance Compensation
Award shall be decided solely in accordance with the provisions
of this paragraph (d). Moreover, designation of a Participant
eligible to receive an Award hereunder for a particular
Performance Period shall not require designation of such
Participant eligible to receive an Award hereunder in any
subsequent Performance Period and designation of one Person as a
Participant eligible to receive an Award hereunder shall not
require designation of any other Person as a Participant eligible
to receive an Award hereunder in such period or in any other
period.
iii. Discretion of Committee with Respect to Performance Compensation
Awards. With regard to a particular Performance Period, the
Committee shall have full discretion to select the length of such
Performance Period, the Performance Criteria that will be used to
establish the Performance Goals, the kinds and levels of the
Performance Goals that are to apply to the Company and the
Performance Formula. Within the within the maximum period allowed
under Section 162(m) of the Code, the Committee shall, with
regard to the Performance Compensation Awards to be issued for
such Performance Period, exercise its discretion with respect to
each of the matters enumerated in the immediately preceding
sentence of this paragraph (d) and record the same in writing.
iv. Payment of Performance Compensation Awards.
(a) Condition to Receipt of Payment. Unless otherwise provided
in the applicable Award Agreement, a Participant must be
employed by the Company on the last day of a Performance
Period to be eligible to receive Shares or other payment in
respect of a Performance Compensation Award for such
Performance Period.
(b) Limitation. A Participant shall be eligible to receive
payment in
B-6
<PAGE>
respect of a Performance Compensation Award only to the
extent that: (A) the Performance Goals for such period are
achieved; and (B) the Performance Formula as applied against
such Performance Goals determines that all or some portion
of such Participant's Performance Award has been earned for
the Performance Period.
(c) Certification. Following the completion of a Performance
Period, the Committee shall meet to review and certify in
writing whether, and to what extent, the Performance Goals
for the Performance Period have been achieved and, if so, to
calculate and certify in writing that amount of the
Performance Compensation Awards earned for the period based
upon the Performance Formula. The Committee shall then
determine the actual size of each Participant's Performance
Compensation Award for the Performance Period.
(d) Maximum Award Payable. Notwithstanding any provision
contained in this Plan to the contrary, the maximum
Performance Compensation Award payable to any one
Participant under the Plan for a Performance Period is the
Fair Market Value of such Shares on the last day of the
Performance Period to which such Award relates.
7. Amendment and Termination.
a. Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan or any portion thereof at any time;
provided, however, that no such amendment, alteration, suspension,
discontinuation or termination shall be made without stockholder
approval if such approval is necessary to comply with any tax or
regulatory requirement applicable to the Plan and, provided, further,
that any such amendment, alteration, suspension, discontinuance or
termination that would impair the rights of any Participant or any
holder or beneficiary of any Award theretofore granted shall not to
that extent be effective without the consent of the affected
Participant, holder or beneficiary.
b. Amendments to Awards. The Committee may waive any conditions or rights
under, amend any terms (including, but not limited to, the
acceleration of the vesting of an Award in the case of a Change in
Control) of, or alter, suspend, discontinue, cancel or terminate, any
Award theretofore granted, prospectively or retroactively; provided,
however, that any such waiver, amendment, alteration, suspension,
discontinuance, cancellation or termination that would impair the
rights of any Participant or any holder or beneficiary of any Award
theretofore granted shall not to that extent be effective without the
consent of the affected Participant, holder or beneficiary.
c. Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee is hereby authorized to make
adjustments in the terms and conditions of, and the criteria included
in, Awards in recognition of (i) unusual or nonrecurring events
(including, without limitation, the events described in Section 4(b)
of the Plan) affecting the Company, any Affiliate, or the financial
statements of the Company or any Affiliate, or (ii) changes in
applicable laws, regulations, or accounting principles, whenever, in
any such case, the Committee determines such adjustments are
appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits that are intended to be made available
under the Plan, or otherwise.
B-7
<PAGE>
8. General Provisions.
a. Nontransferability. Except as otherwise provided in the Plan or the
Applicable Award Agreement (including, but not limited to, provisions
in the Applicable Award Agreement permitting transfers to immediate
family members, trusts for the benefit of immediate family members or
the Participant, or other similar arrangements), no Award may be
assigned, alienated, pledged, attached, sold or otherwise transferred
or encumbered by a Participant otherwise than by will or by the laws
of descent and distribution, and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance shall be
void and unenforceable against the Company or any Affiliate; provided,
however, that the designation of a beneficiary shall not constitute an
assignment, alienation, pledge, attachment, sale, transfer or
encumbrance.
b. No Rights to Awards. No Participant or other Person shall have any
claim to be granted any Award, and there is no obligation for
uniformity of treatment of Participants or holders or beneficiaries of
Awards. The terms and conditions of Awards and the Committee's
determinations and interpretations with respect thereto need not be
the same with respect to each Participant (whether or not such
Participants are similarly situated).
c. Share Certificates. All certificates for Shares or other securities of
the Company or any Affiliate delivered under the Plan pursuant to any
Award shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the
rules, regulations, and other requirements of the SEC, any stock
exchange upon which such Shares or other securities are then listed,
and any applicable Federal or state laws, and the Committee may cause
a legend or legends to be put on any such certificates to make
appropriate reference to such restrictions.
d. Withholding. A Participant may be required to pay to the Company or
any Affiliates, and the Company or any Affiliate shall have the right
and is hereby authorized to withhold from any Award, from any payment
due or transfer made under any Award or under the Plan or from any
compensation or other amount owing to a Participant, the amount (in
cash, Shares, other securities, other Awards or other property as
determined by the Committee in its sole discretion) of any applicable
withholding taxes or other amounts in respect of an Award and to take
such other action as may be necessary in the opinion of the Company to
satisfy all obligations for the payment of such taxes and amounts. The
Committee may provide for additional cash payments to holders of
Awards to defray or offset any tax arising from the grant or vesting
of any Award.
e. Award Agreements. Each Award hereunder shall be evidenced by an Award
Agreement which shall be delivered to the Participant and shall
specify the terms and conditions of the Award and any rules applicable
thereto, including, but not limited to, the effect on such Award of
the death, disability or termination of employment or service of a
Participant and the effect, if any, of such other events as may be
determined by the Committee.
f. No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or
continuing in effect other compensation arrangements, and such
arrangements may be either generally applicable or applicable only in
specific cases.
g. No Right to Employment. The grant of an Award shall not be construed
as giving a
B-8
<PAGE>
Participant the right to be retained in the employ of, or in any
consulting relationship with, the Company or any Affiliate.
h. No Rights as Stockholder. Subject to the provisions of the applicable
Award, no Participant, holder or beneficiary of any Award shall have
any rights as a stockholder with respect to any shares of Restricted
Stock to be distributed under the Plan until such shares of Restricted
Stock shall be issued in accordance with this Plan and the terms of
the applicable Award Agreement. From and after the date of original
issuance, a Participant shall have the right to vote the shares of
Restricted Stock and to receive and to retain all cash dividends
payable or distributable to holders of Shares of record. In connection
with each grant of Restricted Stock hereunder, the applicable Award
Agreement shall specify if and to what extent the Participant shall be
entitled to other rights of a stockholder in respect of such
Restricted Stock.
i. Governing Law. The validity, construction, and effect of the Plan and
any rules and regulations relating to the Plan and any Award Agreement
shall be determined in accordance with the laws of the State of New
York.
j. Severability. If any provision of the Plan or any Award is or becomes
or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the
Plan or any Award under any law deemed applicable by the Committee,
such provision shall be construed or deemed amended to conform the
applicable laws, or if it cannot be construed or deemed amended
without, in the determination of the Committee, materially altering
the intent of the Plan or the Award, such provision shall be stricken
as to such jurisdiction, Person or Award and the remainder of the Plan
and any such Award shall remain in full force and effect.
k. Other Laws. The Committee may refuse to issue or transfer any Shares
or other consideration under an Award if, acting in its sole
discretion, it determines that the issuance or transfer of such Shares
or such other consideration might violate any applicable law or
regulation or entitle the Company to recover the same under Section
16(b) of the Exchange Act. Without limiting the generality of the
foregoing, no Award granted hereunder shall be construed as an offer
to sell securities of the Company, and no such offer shall be
outstanding, unless and until the Committee in its sole discretion has
determined that any such offer, if made, would be in compliance with
all applicable requirements of the U.S. federal securities laws.
l. No Trust or Fund Created. Neither the Plan nor any Award shall create
or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a
Participant or any other Person. To the extent that any Person
acquires a right to receive payments from the Company or any Affiliate
pursuant to an Award, such right shall be no greater than the right of
any unsecured general creditor of the Company or any Affiliate.
m. No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall
determine whether cash, other securities, or other property shall be
paid or transferred in lieu of any fractional Shares or whether such
fractional Shares or any rights thereto shall be canceled, terminated,
or otherwise eliminated.
n. Headings. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings
shall not be deemed in any way
B-9
<PAGE>
material or relevant to the construction or interpretation of the Plan
or any provision thereof.
9. Term of the Plan.
a. Effective Date. The Plan shall become effective as of the date of its
approval by the Board; provided, however, that no Award shall be
exercisable unless the Plan is approved by the stockholders of the
Company.
b. Expiration. The Plan shall terminate 10 years after the earlier of the
date on which it becomes effective and the date it is approved by the
stockholders of the Company. Notwithstanding the foregoing, all Awards
made under the Plan prior to such termination date shall remain in
effect until such Awards have been satisfied or terminated in
accordance with the terms and provisions of the Plan and the
applicable Award Agreement.
B-10
EMPLOYMENT AGREEMENT
AGREEMENT made as of MAY 25, 1999 between KAYE INSURANCE ASSOCIATES, INC.
("Employer"), with offices 122 East 42nd Street, New York, NY 10168 and Robert
N. Munao ("Employee"), residing at 28 Marlboro Dr, Huntington, NY 11743.
WHEREAS, in order to induce Employer to engage Employee to perform services
for Employer, Employee agrees to enter into this Agreement upon the terms and
conditions hereof
NOW THEREFORE, in consideration of the premises and the mutual promises
contained herein, the parties agree as follows:
1. Employment The Employer hereby employs Employee as its Executive
Director-National Benefits Practice, and Employee hereby accepts such employment
under the terms and conditions hereinafter contained.
2. Term
2.1 The employment of Employee hereunder and the term of this Agreement
(the "Term") shall commence on a date to be mutually agreed upon by Employer and
Employee, but no later than 10/29, 1999, and shall continue for a two year
period, unless sooner terminated pursuant to Section 2.2 hereof. Employment
shall continue thereafter on at "employment at-will" basis, terminable by
Employer or Employee for any reason, or for no reason, upon 60 days written
notice to the other in accordance with Section 14.2 herein.
2.2 Notwithstanding the above, Employer shall have the right to terminate
this Agreement for cause at any time upon notice which sets forth the basis for
the termination. As used herein, "cause" shall mean:
(a) Loss, revocation or suspension of any license required for the
performance of Employee's duties, unless such loss, revocation or
suspension is cured within 30 days;
(b) Conviction of any non-traffic related felony, whether or not related
to the performance of Employee's duties;
(c) Conviction of any non-traffic related misdemeanor related to the
performance of Employee's duties;
(d) A holding or determination by a court, regulatory body or appropriate
tribunal that Employee has violated any material law or regulation
applicable to the Employee while fulfilling his obligations hereunder
the effect of which is
<PAGE>
materially adverse to the Employer;
(e) Failure to perform any material duties required hereunder where said
non-performance remains uncorrected thirty (30) days after the
Employer gives written notice detailing such non-performance, unless
such failure is the result of a Disability (as defined in Section 2.4)
or occurs during such period as reasonably may be required to
determine whether there is a Disability which has been claimed by
Employee in accordance with the procedures of Section 2.4;
(f) The commission of an act involving, theft from Employer, or its
employees, clients or insurance markets;
(g) Willful misconduct or gross negligence in the performance or
non-performance of the Employee's obligations under this Agreement
remaining uncorrected, if reasonably susceptible to correction, thirty
(30) days after Employer gives written notice to Employee detailing
the acts of misconduct and/or gross negligence;
(h) Any breach of a material representation, warranty or covenant
contained herein;
(i) Conviction of Employee for a violation of a securities law or
regulation, if the same may, in the opinion of Employer's counsel,
have a material adverse effect on Kaye Group Inc.'s status as a public
company.
2.3 Change of Control. If any materially adverse change occurs in the
title, compensation or duties of Employee within 12 months following upon a
"Change in Control", Employee will be entitled to a continuation of his then
base compensation (and continued participation in Company benefit plans and
programs or to payment of the amount which the Employer would have paid in his
behalf) for a duration of difference between 12 months minus the period which
has elapsed following the Change in Control until the happening of the event
above.
(a) The entitlement of Employee to payments hereunder shall not apply if
Employee is offered an employment agreement incident to a Change in
Control which continues his services and compensation as an executive
employee (regardless of whether his title and specific authority are
changed) for a term of at least 12 months.
(b) It is a condition to the entitlement of the Employee to the above
payments that Employee fulfills all obligations which continue to
apply to him after cessation of his employment.
(c) No payments under this Section shall be made if the Employee
terminates his
2
<PAGE>
employment or fails to perform his required duties upon a Change in
Control.
(d) Any payments which might be due to Employee under the remaining
provisions of this Agreement which are applicable to periods after
termination of the services the Employee shall be credited against and
shall reduce the entitlement of the Employee to the compensation set
forth above in Section.
(e) As used herein, "Change in Control" shall mean the occurrence of (i)
and (ii) below during the term of this Agreement or at any time
thereafter while Employee continues to serve as Executive
Director-National Benefits Practice of the Employer,
(i) any acquisition of any person or entity of shares (or rights to
vote shares) which entitle such person or entity to elect a
majority of the members of the Board or Directors of Kaye Group
Inc.; and
(ii) within 12 months following (i) above, a change occurs in the
composition of the Board of Directors of Kaye Group Inc. such
that different individuals comprise a majority of the members of
the Board of Directors of Kaye Group Inc. as compared with the
composition of the Board prior to such change in shareholdings.
2.4 Death or Disability.
(a) The Term shall terminate on the date of Employee's death, in which
event Employee's salary and benefits owing to Employee through the date of death
shall be paid to his estate.
(b) If, during employment: (i) in the opinion of a duly licensed physician
selected by the Employer and a duly licensed physician selected by Employee
(and, in the event of a disagreement between the two, a neutral third physician
who is selected by agreement of the parties), the Employee shall become
substantially unable to perform the duties and services required of him under
this Agreement because of physical or mental illness or incapacity
("Disability"), and (ii) such Disability continues for a period of 4 consecutive
months or 16 weeks in the aggregate during any twelve-month period; then and
only upon the occurrence of each of (i) and (ii) above, the Company may
terminate Employee's employment upon at least thirty (30) days' prior written
notice to Employee given at any time after the expiration of such 16-week or 4
consecutive month period.
2.5 In the event of termination as set forth in this Section 2, Employee
shall be entitled to receive his salary and benefits owing to Employee through
the effective date of termination. Employee shall not be entitled to any other
compensation under this Agreement upon termination of his employment pursuant to
this Section 2.
3
<PAGE>
3. Duties
Employee agrees: (a) to perform all necessary acts and to devote full business
time and effort to the furtherance of maintaining and growing Employer's account
servicing and production of life/health/benefits insurance nationally (Employee
shall be based in Employer's New York City offices); (b) to manage Employer's
staff assigned to the life/health/benefits departments; (c) to perform
faithfully and to the best of his ability all assignments of work given to
Employee by Employer consistent with Employee's qualifications, status and
experience; (d) to abide by Employer's written policies and procedures, and by
such other policies and procedures of which Employee has received notice; and
(e) that during the Term of this Agreement, Employee will not engage in any
activity that competes in any way with Employer or interferes with the
performance of Employee's duties hereunder. For purposes of this paragraph,
Employer shall refer to Kaye Insurance Associates, Inc. and it Affiliates (as
hereinafter defined).
4.Compensation/ Benefits
4.1 Salary. Employer agrees to pay Employee an annual salary of $235,000
payable bi-weekly or at such other interval as Employer may establish for its
usual payroll payment and subject to required withholding of taxes, social
security, benefit payments, etc.
4.2 Commissions equal to the following percentages of Earned Commissions
(as hereinafter defined) on Property & Casualty insurance business originated by
Employee for Employer, subject to reduction as set forth below:
i. Non-Program Accounts: 30% of Earned Commissions received by
Employer on new property and casualty accounts (except Program Business)
and 20% of Earned Commissions received by Employer on renewal of property
and casualty accounts (except Program Business).
ii. Program Accounts:5% of premium received by Employer on new Program
Business and 2.5% of premium received by Employer on renewal Program
Business or the commission equivalent, subject to the billing preference of
Employer. The scope and nature of all Program Business referred to in this
Agreement shall be exclusively determined by Employer.
(a) Accommodation Business. No Commission shall be paid to Employee on new
and renewal Accommodation Business. The scope and nature of all
Accommodation Business referred to in this Agreement shall be
exclusively determined by Employer. Individual medical insurance will
be treated as Accommodation Business for which no commission will be
paid.
4
<PAGE>
(b) Insurance Underwritten by Affiliate. Notwithstanding any other
provision of this Agreement, the Earned Commission for insurance
underwritten or reinsured by an affiliate of Employer shall in no
event exceed 16% of premiums, even if the actual percentage received
by Employer is greater.
(c) "Earned Commissions" shall mean and include gross commissions, fees,
and other income received by Employer on all paid-in full premiums (or
installments thereof) from accounts originated by Employee for
Employer during the Term of this Agreement, but does not include any
general agency overrides, volume or persistency bonuses, etc. Gross
commissions do not include any contingent commission or expense
reimbursement allowances that Employer receives, regardless of whether
insurance originated by Employee is included in the computation or
determination thereof. In calculating "Earned Commissions", the
following should be excluded: (i) any commission, fee and/or return
premium that are repaid or become repayable by Employer to customers
and/or insurers and; and (ii) any commission and/or fee Employer is
obligated to pay to an independent contractor, sub-broker and/or
sub-agent.
(d) For purposes of this Agreement, all insurance business originated by
Employee that is billed and paid in full during the Term of this
Agreement, regardless of the effective coverage date, shall be deemed
originated under this Agreement.
4.3 Benefits. Employee shall be entitled to participate in Employer's
insurance and other benefit plans, in accordance with the provisions of such
plans on terms and conditions no less favorable to Employee than generally
available to Employer's other employees of comparable levels of responsibility
and compensation, unless otherwise specifically provided in such plans. The
Employer reserves the right to amend, terminate and/ or suspend such benefits
generally in a manner which does not adversely discriminate against Employee.
4.4 Reimbursement of Automobile Expenses. Employer shall reimburse Employee
for all ordinary and necessary automobile expenses incurred by Employee as a
result of Employee's activities on behalf of Employer which qualify' under IRS
regulations, the annual total of which shall not exceed $12,000.00.
4.5 Annual Incentive Bonus. Employee shall be entitled to participate in
Employer's Annual Incentive Plan (the "Plan"). Specifically, annual Threshold
Contribution Margin [defined as Benefit & Life Net Revenue less direct expenses
("Contribution Margin") equal to the greater of 87% of budgeted Contribution
Margin or $2,118,000] is subtracted from actual annual Contribution Margin. Any
positive excess becomes the basis for the AIP award pool. The AIP award pool
equals 22% of the excess. Employee will be entitled to 100% of the AIP award
pool subject to a maximum AIP award equal to $125,000. Notwithstanding anything
to the contrary set forth in the terms of the Plan, Employer agrees that during
the Term of this Employment Agreement, Employee's bonus calculated in accordance
with the Plan and subject to the provisions of this Section 4.5 shall not be
subject to any discretionary reduction and shall be
5
<PAGE>
subject to pro-ration for partial periods notwithstanding any discretionary or
permissive features contained in the Plan.
4.6 Options. On or about June 30, 1999, Employee shall receive an option to
purchase 10,000 shares of Kaye Group Inc. stock at an exercise price to be
determined (but no greater than the fair market value of Kaye Group Inc. common
stock on the date that the option is granted), in accordance with the Kaye Group
Inc. Supplemental Stock Option Plan.
4.7 Restricted Stock. Employee shall be granted Kaye Group Inc. Performance
Stock, (pursuant to the Kaye Group Inc. Stock Performance Plan) with a trading
value (as of the date of the grant) of $100,000 (13004 shares @ $7.69 per
share). A copy of the Kaye Group Inc. Stock Performance Plan and Agreement
Letter are Attachments B and C, respectively to this Agreement.
4.8 Employer agrees to purchase a split-dollar life insurance policy for
the benefit of Employee in accordance with the insurance plan and terms set
forth on Schedule 4.8 annexed hereto. In the event of a Change in Control,
Employee shall have the option to assume ownership of such split-dollar life
insurance policy from Employer, and Employer shall recoup, from the insurance
company which issued the policy, all premiums paid through the date that
Employee assumes ownership of the policy.
5. Representations and Warranties
5.1 Subject only to the matters described in the following paragraph,
Employee warrants that he has full power and authority to enter into this
Agreement and that such act, and the performance of his obligations hereunder
will not conflict with any other agreements or understandings to which he is a
party or by which he is bound.
Employer acknowledges that Employer has received and reviewed with counsel
a copy of the Employment Agreement between Employee and Kalvin Miller Consulting
Group, Inc. ("Previous Employer") dated August 1, 1995 and amended as of August
1, 1998 (the "Previous Agreement"). Employer hereby agrees to indemnify and hold
Employee harmless from and against any claim or litigation asserted by Previous
Employer against Employee arising from the provisions of Section 6 of the
Previous Agreement or from the commencement of the term of Employee's employment
hereunder, including the costs of defense (including reasonable attorneys' fees
and disbursements), as well as the costs of any liability or settlement.
Employer may defend any such matter with counsel of its choice, who shall be
reasonably acceptable to Employee. Employee shall cooperate with Employer in the
defense of any such claim and shall be entitled to participate in such defense
at his own cost with counsel of his choice.
5.2 Employee represents and warrants that to the extent that he heretofore
received any proprietary, confidential or privileged information of any third
party, Employee is instructed and agrees to keep such information in confidence
in fulfillment of his legal, ethical and/or contractual obligations to such
third party. Employer neither requests nor desires any disclosure of such
6
<PAGE>
information to Employer.
5.3 Each party hereto represents and warrants that this Agreement is the
valid and binding obligation of such party, enforceable against such party in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, or other similar laws affecting the enforcement of
creditors' rights generally or by limitations on the availability of equitable
remedies.
5.4 Employee represents and warrants that he holds a current, valid license
issued by the New York Insurance Department, a copy of which is attached as
Exhibit 5.4 to this Agreement.
6. Limitations on Competing Interests
6.1 During the term of this Agreement, Employee shall not, without prior
written disclosure to the Employer and consent by it, acquire or maintain any
material, financial or economic interest in, or accept any position,
association, employment, gratuities or compensation from any person,
corporation, firm, partnership or other entity whatsoever whose business is
competitive with the business of the Employer or its affiliates.
6.2 No provision of this Agreement shall be deemed to prohibit Employee
from making passive business investments or serving on the boards of directors
of civic groups or of other businesses that do not compete with Employer or its
affiliates so long as such activities do not conflict with the written policies
of Employer, including any policies requiring the disclosure of such activities
or preclude Employee from performing his obligations pursuant to this Agreement;
provided, however, that neither Employer nor its affiliates shall have
responsibility or liability for any such activities of Employee. Employer's
written policies applicable to Employee shall contain the same terms and
conditions generally applicable to employees of comparable levels of
responsibility and compensation.
7. Securities Law Compliance
7.1 Employee represents and warrants as follows:
(a) no event, act or omission has occurred prior to the effective date of
this Agreement (including without limitation any criminal conviction or failure
on Employee's part to contest any criminal proceeding, or any judicial or
administrative decree or order by which Employee is bound or event affecting any
business as to which Employee was a director, officer employee or service
provider) which would in any manner (i) require disclosure pursuant to the
provisions of Regulation S-K promulgated under the Securities Act of 1933
regarding disclosures of "Involvement in certain legal proceedings"; or (ii)
limit Employee's ability to serve as an employee of the publicly held company;
or (iii) occasion the concern of any Federal or State regulatory body (including
without limitation the Securities and Exchange Commission or any body with which
the securities of the Employer may be listed) regarding Employee's capacity,
qualification, character or fitness, or (iv) result in the refusal or inaction
of any provider of
7
<PAGE>
directors and officers liability insurance and/or errors and omissions insurance
and/or fidelity insurance to include Employee within its coverage; and
7.2 In amplification of 7.1 above, except as disclosed in writing to
Employer, Employee has not been in any manner involved in any civil, criminal,
judicial or regulatory proceeding involving any insurance or reinsurance broker,
agent, consultant or intermediary, and/or any entity with responsibility of any
nature or kind for the auditing of the foregoing or for the monitoring or
investment of the assets of the foregoing.
7.3 Disclosure of Conflicts of Interest; Abstention from Speculation in
Securities of Client
(a) In order to avoid actual or apparent conflicts of interest, Employee
shall take all necessary actions to disclose to Employer any direct or indirect
ownership or financial interest in any company, person or entity which is a
service provider to Employer, an actual or intended client of the Employer, an
insurer or reinsurer of the Employer or which is engaged in by the Employer.
(b)While Employee is employed by Employer, Employee shall abstain from any
direct or indirect acquisition of securities of the Employer or its clients or
customers except as may be specifically approved in writing by Employer upon
Employee's prior written request, and from divulging or appropriating to
Employee's own use or to that of others any secret, confidential or proprietary
information or knowledge regarding the Employer, its clients or customers for
the purpose of speculation in the securities of any of them.
7.4 General Requirements Employee shall observe such business ethics,
premises security and similar Employer requirements as may from time-to-time
apply generally to employees having comparable levels of responsibility and
compensation.
7.5 Insider Trading Considering that the Employer is a subsidiary of a
publicly-traded corporation, Employee hereby agrees that Employee will comply
with any and all federal and state securities laws including but not limited to
those that relate to non disclosure of information, insider trading and
individual reporting requirements and shall specifically abstain from discussing
the Employer's business affairs with any individual who does not have a business
need to know such information for the benefit of Employer.
8. Ownership of Insurance Accounts, Work Product, Etc.
Employee expressly agrees that: (a) any and all insurance business produced
or transacted by Employee or referred to Employee by any entity; (b) any
proposal which Employee may develop for the production, transaction or referral
of any insurance business; and/or (c) any other work product produced by or work
performed by Employee while Employee is employed by Employer is and shall be the
permanent and exclusive property of Employer. The aforesaid
8
<PAGE>
business, proposals, work product and/or work shall be for Employer's exclusive
benefit to use and exploit, or to decline to use or exploit, during and/or
following the period of Employee's services without: (a) any claim or right by
Employee to further remuneration, and/or (b) any claim or right by Employee
against Employer and/or any other entity.
9. Protection of Confidential Information
9.1 Employee will not at any time, during or after the period of Employee's
employment, divulge or appropriate to Employee's own use or to the use of
others, any secret, confidential or proprietary information or knowledge
regarding the Employer or its clients, either obtained by Employee or of which
Employee becomes aware in any manner whatsoever during or in connection with
Employee's services.
9.2 Employee acknowledges that the following constitute business assets of
the Employer which are confidential: (a) the Employer's list of prior, current
or proposed clients or accounts; (b) information regarding actual or potential
providers of insurance or reinsurance to the clients of the Employer; (c)
information regarding actual or potential wholesale or specialty brokers who
assist or may assist in finding insurance or reinsurance for clients of the
Employer; and/or (d) information regarding the structure and operations of
programs of insurance for groups of insureds.
10. Protection of Employer Property All records, files, manuals, lists of
customers, blanks, forms, supplies, computer programs, and/or other materials
furnished to Employee by Employer used by Employee on Employer's behalf, or
generated or obtained by Employee during the course of Employee's employment,
shall be and remain, the property of Employer. Employee further acknowledges
that this property is confidential and is not readily accessible to Employer's
competitors. Upon termination of employment hereunder, Employee shall
immediately deliver to Employer or its authorized representative all such
property, including all copies, remaining in Employee's possession or control.
11. Restrictive Covenant
In view of the personal identification of customers and sources with
brokerage employees, the potential exists for appropriation by employees of the
benefits of the relationships developed with such customers and sources, despite
Employer's investment in the development of those relationships on its behalf.
Accordingly, since Employer would suffer irreparable harm if Employee should
leave the employment of the brokerage and solicit customers, establish or work
on competing insurance programs, or solicit any other employee to terminate its
relationship with Employer, it is reasonable to protect Employer against such
activities for the limited period of time necessary for Employer to establish,
renew and/or restore its business relationship with the foregoing individual and
commercial customers and sources.
For the above reasons, in the event that Employee ceases to be an employee
of Employer for any reason ("Withdrawal from the Company"), Employee may conduct
business in
9
<PAGE>
competition with Employer. However, for the two (2) year period immediately
following the Withdrawal from the Company, Employee may not:
(i) directly or indirectly solicit, join, provide services to, advise,
give assistance to, or contact any person or entity who was a client
of Employer, or any employee of such client, with respect to the
provision of insurance or insurance-related services;
(ii) accept compensation in any form from any person or entity who was a
client of Employer, or any employee of such client, with respect to
the provision of insurance or insurance-related services;
(iii)solicit any persons or entities who, to the knowledge of Employee,
are or were identified through leads developed while Employee was
employed by Employer;
(iv) solicit professional relationships introduced to such Employee by any
employee or client of Employer while Employee was an employee of
Employer;
(v) offer employment to or employ any person who is then, or had been
within 6 months of such offer, an employee of Employer; or
(vi) solicit any employee of Employer to terminate his or her employment.
Employee acknowledges that a material part of his current and future
compensation, including salary increases and/or bonuses (including, without
limitation, Employee's participation in Employer's Annual Incentive Plan) is
being paid in consideration for Employee's promises to honor the restrictive
covenants and confidentiality aspects of this Employment Agreement. The Employee
agrees that the restrictive covenants and confidentiality provisions set forth
in this Employment Agreement are both reasonable and necessary to protect the
vital interests of Employer and to promote an open and productive working
relationship between Employer and Employee, from which Employee will benefit.
12. Advise of Counsel
Employee acknowledges that, in connection with this Agreement, Employee has been
advised to seek the advise of counsel and is now so advised.
13. Covenant to Cooperate Employee agrees to furnish such information and
proper assistance to Employer during and/or following the period of Employee's
services as may reasonably be required by Employer in connection with any
litigation, regulatory or administrative investigation or proceeding in which
the Employer is or may become a party.
14. Miscellaneous
10
<PAGE>
14.1 Definition of Affiliate The term "Affiliate", shall be defined for the
purpose of this Agreement to mean any entity directly or indirectly controlling,
controlled by or under common control with the Employer, including but not
limited to the parents, subsidiaries and/or associated entities of the Employer.
14.2 Notice All notices and other communications that are required or
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been duly given if hand delivered against receipt, or mailed,
registered or certified mail, return receipt requested, postage prepaid, or
delivered by facsimile transmission as follows:
To Employee at:
Attention:
To Employer at: Kaye Insurance Associates, Inc.
122 East 42nd Street
Chanin Building
New York, New York 10168
Attention: Bruce D. Guthart, President
With a copy to: Kaye Insurance Associates, Inc.
122 East 42nd Street
Chanin Building
New York, New York 10168
Attention: Ivy Fischer, General Counsel
or to such other address as any party shall have specified by notice in writing
to the others.
14.3 Applicability of Agreement This Agreement shall apply with respect to
Employee's services on behalf of Employer and its affiliates.
14.4 Counterparts This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
14.5 Paragraph Heading The headings of Paragraphs of this Agreement are for
convenience and reference only and shall not affect the construction or
interpretation of any of the provisions hereof
14.6 Severability of Agreement Provisions It is the desire and intent of
the parties
11
<PAGE>
that the provisions contained in this Agreement shall be enforceable to the
fullest extent permitted by law. The invalidity and/or unenforceability in whole
or in part of any provision of this Agreement shall not render invalid or
unenforceable any other provision of this Agreement, which instead will remain
in full force and effect.
14.7 Scope of Agreement This Agreement contains the entire Agreement of the
parties concerning its subject matter, superseding all prior representations,
agreements, and understandings between the parties with respect to the subject
matter herein and supersedes and nullifies all prior understandings and
agreements with respect to the subject matter hereof. This Agreement may be
changed only by a written instrument signed by both parties.
14.8 Non-Assignability of Agreement This Agreement may not be assigned by
Employee without the prior written consent of Employer, and any assignment
without such written consent shall be void and of no effect. Employer, however,
shall have the right to assign this Agreement which will then remain in full
force and effect between the Employer and the assignee.
14.9 Waiver of Breach Not a Waiver of Subsequent Breaches The waiver by
Employer or Employee of any breach of this Agreement shall not operate or be
construed as a waiver of any subsequent breach.
14.10 Right to Injunctive Relief Employee acknowledges that damages at law
will be an insufficient remedy for Employer in the event of a breach by the
Employee of paragraphs 8, 9, 10 and 11 of this Agreement. Therefore, it is
agreed that in the event of any such breach or threatened breach, the Employer
and/or its affiliates shall be entitled, in addition to any other remedies and
damages available at law or in equity, to an injunction to restrain such breach
or threatened breach thereof by Employee, his partners, agents, servants,
employers and/or employees, and any other person(s) acting for or with Employee.
Employee agrees to pay any and all reasonable attorney's fees and expenses
incurred by the Employer and/or its Affiliates in enforcing any covenants
contained in paragraphs 8, 9, 10 and/or 11.
Any rights or remedies of either party pursuant to the provisions of this
Agreement shall be in addition to, and not in substitution of, any rights or
remedies otherwise available to either party by law.
14.11 Construction. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rule of strict construction shall be applied against any party.
14.12 Enforceability This Agreement shall be governed by and enforced
according to
12
<PAGE>
the laws of the State of New York regardless of its place of execution or
performance.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and
year first above written.
Witness Employer
/s/ ILLEGIBLE By: /s/ ILLEGIBLE
- ------------------------------- ---------------------------
Witness Employee
/s/ ILLEGIBLE
- ------------------------------- ---------------------------
5/25/99
13
EMPLOYMENT AGREEMENT
AGREEMENT made as of February 2, 1998, between PROGRAM BROKERAGE
CORPORATION ("Employer"), with offices 122 East 42nd Street, New York, NY 10168
and Marc Cohen ("Employee").
WHEREAS, in order to induce Employer to engage Employee to perform services
for Employer, Employee agrees to enter into this Agreement upon the terms and
conditions hereof.
NOW THEREFORE, in consideration of the premises and the mutual promises
contained herein, the parties agree as follows:
1. Employment The Employer hereby employs Employee and Employee hereby
accepts such employment under the terms and conditions hereinafter contained.
2. Term
2.1 Employer and Employee acknowledge that Employer is an "employee at
will" and that Employer may terminate this Agreement for any reason, or for no
reason, at any time in accordance with the notice provisions set forth herein.
2.2 The employment of Employee hereunder and the Term of this Agreement
(the "Term") shall commence on the date hereof, and shall continue until either
party gives ten (10) days notice to the other, in accordance with the notice
provisions set forth herein.
2.3 Notwithstanding the above, Employer shall have the right to terminate
this Agreement for cause at any time without notice. As used herein, cause shall
mean:
(a) Loss or suspension of any license required for the performance of
Employee's duties;
(b) Conviction of any criminal offense, whether or not related to the
performance of Employee's duties;
(c) Violation of any law or regulation applicable to the Employer in
the course of its business and/or to Employee while fulfilling Employee's
obligations under this Agreement.
(d) Failure or inability to perform any material duties required
hereunder where said non-performance remains uncorrected ten (10) days
after the Employer gives notice of such non-performance;
<PAGE>
(e) Any action whether occurring on or off the premises of the
Employer which causes or may reasonably be anticipated to cause the
Employer to be held in disrepute or to incur adverse publicity;
(f) Willful misconduct or gross negligence in the performance or
non-performance of the Employee's obligations under this Agreement;
(g) Any misrepresentation or violation of the obligations of the
Employee under this Agreement.
3. Duties Employee agrees: (a) to devote Employee's full time business time
and effort to the furtherance of the business of Employer; (b) to perform
faithfully and to the best of his/her ability all assignments of work given to
Employee by Employer consistent with Employee's qualifications, status and
experience; (c) to abide by Employer's written policies and procedures, and by
such other policies and procedures of which Employee has received notice; and
(d) that during the Term of this Agreement, Employee will not engage in any
activity that competes in any way with Employer or interferes with the
performance of Employee's duties hereunder.
4. Compensation/Benefits
4.1 In full consideration of Employee's obligations and performance under
this Agreement, Employer agrees to pay Employee an annual salary of $250,000.00
payable bi-weekly or at such other interval as Employer may establish for its
usual payroll payment and subject to required withholding of taxes, social
security, benefit payments, etc.
4.2 Employee may participate, in Employer's employee insurance and other
benefit plans, in accordance with the provisions of such plans, unless otherwise
specifically provided in such plans. The Employer reserves the right to amend,
terminate and/or suspend such benefits generally.
5. Representation and Warranties
5.1 Employee warrants that he/she has full power and authority to enter
into this Agreement and that such act, and the performance of his/her
obligations hereunder will not conflict with any other agreements or
undertakings to which he/she is a party or to which he/she is bound, or give
rise to any claim or proceeding against Employer, and that he/she will fully
indemnify Employer and hold it harmless from and against any and all such
claims, charges or liabilities, including reasonable attorney's fees and
disbursements incurred by Employer in connection therewith.
5.2 Employee represents and warrants that to the extent that he/she
heretofore received any proprietary, confidential or privileged information of
any third party,
2
<PAGE>
Employee is instructed and agrees to keep such information in confidence in
fulfillment of his/her legal, ethical and/or contractual obligations to such
third party. Employer neither requests nor desires any disclosure of such
information to Employer.
5.3 Each party hereto represents and warrants that this Agreement is the
valid and binding obligation of such party, enforceable against such party in
accordance with its terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, or other similar laws affecting the enforcement of
creditors' rights generally or by limitations on the availability of equitable
remedies.
6. Limitations on Competing Interests
6.1 During the term of this Agreement, Employee shall not, without prior
written disclosure to the Employer and consent by it, acquire or maintain any
material, financial or economic interest in, or accept any position,
association, employment, gratuities or compensation from any person,
corporation, firm, partnership or other entity whatsoever whose business is
competitive with the business of the Employer or its affiliates.
6.2 No provision of this Agreement shall be deemed to prohibit Employee
from making passive business investments or serving on the boards of directors
of civic groups or of other businesses that do not compete with Employer or its
affiliates so long as such activities do not conflict with the written policies
of Employer, including any policies requiring the disclosure of such activities
or preclude Employee from performing his/her obligations pursuant to this
Agreement; provided, however, that neither Employer nor its affiliates shall
have responsibility or liability for any such activities of Employee.
7. Securities Law Compliance
7.1 Employee represents and warrants as follows:
(a) no event act or omission has occurred prior to the effective date
of this Agreement (including without limitation any criminal conviction or
failure on employee's part to contest any criminal proceeding, or any
judicial or administrative decree or order by which employer is bound or
event affecting any business as to which employee was a director, officer
employee or service provider) which would in any manner (i) require
disclosure pursuant to the provisions of Regulation S-K promulgated under
the Securities Act of 1933 regarding disclosures of "Involvement in certain
legal proceedings"; or (ii) limit employee's ability to serve as an
employee of the publicly held company; or (iii) occasion the concern of any
Federal or State regulatory body (including without limitation the
Securities and Exchange Commission or any body with which the securities of
the Employer may be listed) regarding Employee's capacity, qualification,
character or fitness, or (iv) result in the refusal or inaction of any
provider of
3
<PAGE>
directors and officers liability insurance and/or errors and omissions
insurance and/or fidelity insurance to include Employee within its
coverage; and
7.2 In amplification of 7.1 above, except as disclosed in writing to
Employer, Employee has not been in any manner involved in any civil, criminal,
judicial or regulatory proceeding involving any insurance or reinsurance broker,
agent, consultant or intermediary, and/or any entity with responsibility of any
nature or kind for the auditing of the foregoing or for the monitoring or
investment of the assets of the foregoing.
7.3 Disclosure of Conflicts of Interest; Abstention from Speculation in
Securities of Client
(a) In order to avoid actual or apparent conflicts of interest,
Employee shall take all necessary actions to disclose to Employer any
direct or indirect ownership or financial interest in any company, person
or entity which is a service provider to Employer, an actual or intended
client of the Employer, an insurer or reinsurer of the Employer or which is
engaged in by the Employer.
(b) While Employee is employed by Employer, Employee shall abstain
from any direct or indirect acquisition of securities of the Employer or
its clients or customers except as may be specifically approved in writing
by Employer upon Employee's prior written request, and from divulging or
appropriating to Employee's own use or to that of others any secret,
confidential or proprietary information or knowledge regarding the
Employer, its clients or customers for the purpose of speculation in the
securities of any of them.
7.4 General Requirements Employee shall observe such business ethics,
premises security and similar Employer requirements as may from time-to-time
apply.
7.5 Insider Trading Considering that the Employer is a publicly-traded
corporation, Employee hereby agrees that Employee will comply with any and all
federal and state securities laws including but not limited to those that relate
to non disclosure of information, insider trading and individual reporting
requirements and shall specifically abstain from discussing the Employer's
business affairs with any individual who does not have a business need to know
such information for the benefit of Employer.
8. Ownership of Insurance Accounts, Work Product, Etc.
Employee expressly agrees that: (a) any and all insurance business produced
or transacted by Employee or referred to Employee by any entity; (b) any
proposal which Employee may develop for the production, transaction or referral
of any insurance business; and/or (c) any other work product produced by or work
performed by Employee while Employee is employed by Employer is and shall be the
permanent and exclusive property of
4
<PAGE>
Employer. The aforesaid business, proposals, work product and/or work shall be
for Employer's exclusive benefit to use and exploit, or to decline to use or
exploit, during and/or following the period of Employee's services without: (a)
any claim or right by Employee to further remuneration, and/or (b) any claim or
right by Employee against Employer and/or any other entity.
9. Protection of Confidential Information
9.1 Employee will not at any time, during or after the period of Employee's
employment, divulge or appropriate to Employee's own use or to the use of
others, any secret, confidential or proprietary information or knowledge
regarding the Employer or its clients, either obtained by Employee or of which
Employee becomes aware in any manner whatsoever during or in connection with
Employee's services.
9.2 Employee acknowledges that the following constitute business assets of
the Employer which are confidential: (a) the Employer's list of prior, current
or proposed clients or accounts; (b) information regarding actual or potential
providers of insurance or reinsurance to the clients of the Employer; (c)
information regarding actual or potential wholesale or specialty brokers who
assist or may assist in finding insurance or reinsurance for clients of the
Employer; and/or (d) information regarding the structure and operations of
programs of insurance for groups of insureds.
10. Protection of Employer Property All records, files, manuals, lists of
customers, blanks, forms, supplies, computer programs, and/or other materials
furnished to Employee by Employer used by Employee on Employer's behalf or
generated or obtained by Employee during the course of Employee's employment,
shall be and remain, the property of Employer. Employee further acknowledges
that this property is confidential and is not readily accessible to Employer's
competitors. Upon termination of employment hereunder, Employee shall
immediately deliver to Employer or its authorized representative all such
property, including all copies, remaining in Employees possession or control.
11. Restrictive Covenant
In the event that Employee ceases to be an employee of Employer for any reason
("Withdrawal from the Company"), Employee may conduct business in competition
with Employer. However, for the two year period immediately following the
Withdrawal from the Company, Employee may not:
(i) solicit, join, provide services to, advise; give assistance to, or contact
any person or entity who was a client of Employer, or any employee of such
client, with respect to the provision of insurance or insurance-related
services;
(ii) solicit any persons or entities who, to the knowledge of Employee, are or
were identified through leads developed while Employee was employed by Employer;
5
<PAGE>
(iii) solicit professional relationships introduced to such Employee by any
employee or client of Employer while Employee was an employee of Employer;
(iv) offer employment to or employ any person who is then, or had been within 6
months of such offer, an employee of Employer; or
(v) solicit any employee of Employer to terminate his or her employment.
Employee acknowledges that a material part of his/her current and future
compensation, including salary increases and/or bonuses, is being paid in
consideration for Employee's promises to honor the restrictive covenants and
confidentiality aspects of this Employment Agreement. The Employee agrees that
the restrictive covenants and confidentiality provisions set forth in this
Employment Agreement are both reasonable and necessary to protect the vital
interests of Employer and to promote an open and productive working relationship
between Employer and Employee, from which Employee will benefit.
12. Advise of Counsel
Employee acknowledges that, in connection with this Agreement, Employee has been
advised to seek the advise of counsel and is now so advised.
13. Covenant to Cooperate Employee agrees to furnish such information and
proper assistance to Employer during and/or following the period of Employee's
services as may reasonably be required by Employer in connection with any
litigation, regulatory or administrative investigation or proceeding in which
the Employer is or may become a party.
14. Miscellaneous
14.1 Definition of Affiliate The term "affiliate", shall be defined for the
purpose of this Agreement to mean any entity directly or indirectly controlling,
controlled by or under common control with the Employer, including but not
limited to the parents, subsidiaries and/or associated entities of the Employer.
14.2 Notice All notices and other communications that are required or
permitted to be given under this Agreement shall be in writing and shall
be deemed to have been duly given if hand delivered against receipt, or mailed,
registered or certified mail, return receipt requested, postage prepaid, or
delivered by facsimile transmission as follows:
6
<PAGE>
To Employee at: 130 Peach Drive
Roslyn, NY 11576
Attention: Marc Cohen
To Employer at: Kaye Insurance Associates, Inc.
122 East 42nd Street
Chanin Building
New York, New York 10168
Attention: Carmin de Cespedes
Director of Human Resources
With a copy to: Kaye Insurance Associates, Inc.
122 East 42nd Street
Chanin Building
New York, New York 10168
Attention: Ivy Fischer
Corporate Counsel
or to such other address as any party shall have specified by notice in writing
to the others.
14.3 Applicability of Agreement This Agreement shall apply with respect to
Employee's services on behalf of Employer and its affiliates.
14.4 Counterparts This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
14.5 Paragraph Heading The headings of Paragraphs of this Agreement are for
convenience and reference only and shall not affect the construction or
interpretation of any of the provisions hereof.
14.6 Severability of Agreement Provisions It is the desire and intent of
the parties that the provisions contained in this Agreement shall be enforceable
to the fullest extent permitted by law. The invalidity and/or unenforceability
in whole or in part of any provision of this Agreement shall not render invalid
or unenforceable any other provision of this Agreement, which instead will
remain in full force and effect.
14.7 Scope of Agreement This Agreement contains the entire Agreement of the
parties concerning its subject matter, superseding all prior representations,
agreements, and understandings between the parties with respect to the subject
matter herein and supersedes and nullifies all prior understandings and
agreements with respect to the subject matter hereof. This Agreement may be
changed only by a written instrument signed by both parties.
7
<PAGE>
14.8 Non-Assignability of Agreement This Agreement may not be assigned by
Employee without the prior written consent of Employer, and any assignment
without such written consent shall be void and of no effect. Employer, however,
shall have the right to assign this Agreement which will then remain in full
force and effect between the Employer and the assignee.
14.9 Waiver of Breach Not a Waiver of Subsequent Breaches The waiver by
Employer or Employee of any breach of this Agreement shall not operate or be
construed as a waiver of any subsequent breach.
14.10 Right to injunctive Relief Employee hereby acknowledges that damages
at law will be an insufficient remedy for Employer in the event of a breach by
the Employee of paragraphs 8, 9, 10 and 11 of this Agreement. Therefore, it is
agreed that in the event of any such breach or threatened breach, the Employer
and/or its affiliates shall be entitled, in addition to any other remedies and
damages available at law or in equity, to an injunction to restrain such breach
or threatened breach thereof by Employee, his/her partners, agents, servants,
employers and/or employees, and any other person(s) acting for or with Employee.
Employee agrees to pay any and all reasonable attorney's fees and expenses
incurred by the Employer and/or its Affiliates in enforcing any covenants
contained in paragraphs 8, 9, 10 and/or 11.
Any rights or remedies of either party pursuant to the provisions of this
Agreement shall be in addition to, and not in substitution of, any rights or
remedies otherwise available to either party by law.
14.11 Enforceability This Agreement shall be governed by and enforced
according to the laws of the State of New York regardless of its place of
execution or performance.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in New York,
New York the day and year first above written.
Witness Employer
By: /s/ ILLEGIBLE
- ------------------------------- ----------------------------
Witness Employee
/s/ ILLEGIBLE /s/ ILLEGIBLE
- ------------------------------- ----------------------------
8
ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum to Employment Agreement is made by and between PROGRAM BROKERAGE
CORPORATION and MARC COHEN.
In consideration of the mutual agreements contained herein and for other good
and valuable consideration, receipt of which is hereby acknowledged by the
parties to this Addendum, it is hereby understood and agreed that effective
March 11th, 1999, the following amendment is made to the above-referenced
Employment Agreement:
THE SECTION IN THE AGREEMENT ENTITLED "RESTRICTIVE COVENANT" OR "COVENANT NOT TO
SOLICIT AND COMPETE" IS HEREBY REPLACED WITH THE FOLLOWING:
"In view of the personal identification of customers and sources with
brokerage employees, the potential exists for appropriation by employees of the
benefits of the relationships developed with the foregoing, despite Employer's
investment in the development of those relationships on its behalf. Accordingly,
since Employer would suffer irreparable harm if Employee should leave the
employment of the brokerage and solicit customers, establish or work on
competing programs of insurance, or solicit any other employee to terminate its
relationship with the brokerage, it is reasonable to protect Employer against
such activities for the limited period of time necessary for Employer to
establish, renew and/or restore its business relationship with the foregoing
individual and commercial customers and sources.
For the above reasons, in the event that Employee ceases to be an employee
of Employer for any reason ("Withdrawal from the Company"), Employee may conduct
business in competition with Employer. However, for the two year period
immediately following the Withdrawal from the Company, Employee may not:
(i) solicit, join, provide services to, advise, give assistance to, or
contact any person or entity who was a client of Employer, or any employee of
such client with respect to the provision of insurance or insurance-related
services;
(ii) work on, consult with, provide services to, advise, or give assistance
to any business, person or entity in establishing or in any way working on or
consulting with a program of insurance which will solicit or accept business
from Employer's clients;
(iii) solicit any persons or entities who, to the knowledge of Employee,
are or were identified through leads developed while Employee was employed by
Employer;
(iv) solicit professional relationships introduced to such Employee by any
employee or client of Employer while Employee was an employee of Employer;
<PAGE>
(v) offer employment to or employ any person who is then, or had been
within 6 months of such offer, an employee of Employer, or
(vi) solicit any employee of Employer to terminate his or her employment.
Employee acknowledges that a material part of his/her current and future
compensation, including salary increases and/or bonuses, is being paid in
consideration for Employee's promises to honor the restrictive covenants and
confidentiality aspects of this Employment Agreement. Employee specifically
acknowledges receipt of an Incentive Bonus as part of the consideration for
signing this Restrictive Covenant. The Employee agrees that the restrictive
covenants and confidentiality provisions set forth in this Employment Agreement
are both reasonable and necessary to protect the vital interests of Employer and
to promote an open and productive working relationship between Employer and
Employee, from which Employee will benefit."
All other terms and condition of the Employment Agreement remain unchanged and
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum on March
11th, 1999.
PROGRAM-BROKERAGE CORPORATION MARC COHEN
BY: /s/ ILLEGIBLE /s/ ILLEGIBLE
- -------------------------- --------------------------
EXHIBIT 11
Page 1 of 2
KAYE GROUP INC
Earnings Per Share Calculation
For the Twelve Months Ended December 31,1999
Shares outstanding at 12/31/98 8,474,435 (A)
Less: Net purchase of Treasury Stock
(1/1 - 12/31/99) (27,657)
PLUS:Shares issued on award of Restricted Stocks 4,617
PLUS:Shares issued on exercise of options 6,900
---------
Balance @ 12/31/99 8,458,295 (B)
Balance @ 9/30/99 8,470,645 (C)
Balance @ 6/30/99 8,449,890 (D)
Balance @ 3/31/99 8,446,435 (E)
---------
Weighted average 8,459,940 [(A)+(B)+(C)+D+E]/5
---------
Twelve months
ended
Dec.31,1999
-------------
Net Income $ 7,504,000 (1)
I. Average Shares: 8,459,940 (2)
II. Basic EPS 0.8870 (1)/(2)
=============
III. Diluted EPS
Weighted Average Shares 8,459,940 (2)
Dilution 169,864 (3)
-------------
8,629,804 (4)
=============
Diluted EPS 0.8695 (1)/(4)
=============
<PAGE>
EXHIBIT 11
Page 2 of 2
KAYE GROUP INC
Earnings Per Share Calculation
For the Twelve Months Ended December 31,1999
IV. Outstanding at December 31, 1999
<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) 160,450 5.060 811,877 172,550 873,103
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 8,400 56,280
Options (10/30/98) 20,000 6.170 123,400 20,000 123,400
Options (12/10/98) 23,000 6.600 151,800 24,200 159,720
Options (2/15/99) 800 7.410 5,928 640 4,742
Options (2/24/99) 40,000 7.380 295,200 32,000 236,160
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 50,500 378,750
------- ------------ ------- ---------
993,000 $ 6,652,402 583,290(5) 3,235,655
======= ============ ======= =========
Dilutive Shares 583,290(5) 3,235,655(6)
======= ============
</TABLE>
V. Average market value/share
Average Close on
Close last day
--------- ----------
January 7.081
February 7.352
March 7.500 7.125
---------
Hash total 3 mths 21.933
=========
April 7.058
May 7.235
June 7.547 7.500
---------
Hash total 3 mths 21.840
=========
July 8.131
August 8.642
September 8.352 8.500
---------
Hash total 3 mths 25.125
=========
October 8.109
November 8.622
December 8.288 8.375
---------
Hash total 3 mths 25.019
=========
---------
Hash total 12 mths 93.917
=========
/ 12
---------
Average price per share Twelve mths 7.826
=========
VII. Diluted
Twelve Months
--------------
Total Proceeds from exercise $ 3,235,655 (6)
Divided by average price 7.826
Repurchase shares of 413,426
Shares issued (options) 583,290 (5)
-------------
Dilution - Shares (3) 169,864
=============
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 41,304
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,739
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 51,543
<CASH> 37,738
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 4,313
<TOTAL-ASSETS> 149,212
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 13,694
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,679
0
0
<COMMON> 85
<OTHER-SE> 47,166
<TOTAL-LIABILITY-AND-EQUITY> 149,212
26,780
<INVESTMENT-INCOME> 4,529
<INVESTMENT-GAINS> 16
<OTHER-INCOME> 37,451
<BENEFITS> 9,754
<UNDERWRITING-AMORTIZATION> 8,292
<UNDERWRITING-OTHER> 2,913
<INCOME-PRETAX> 10,729
<INCOME-TAX> 3,225
<INCOME-CONTINUING> 7,504
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,504
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.87
<RESERVE-OPEN> 21,567
<PROVISION-CURRENT> 11,253
<PROVISION-PRIOR> (1,950)
<PAYMENTS-CURRENT> 2,227
<PAYMENTS-PRIOR> 4,674
<RESERVE-CLOSE> 23,969
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
