-----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|X| SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|_| SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER 1-11794
E. W. BLANCH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1741779
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 WEST 80TH STREET, MINNEAPOLIS, MINNESOTA 55431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 835-3310
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------- -------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __x__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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
amendments to this Form 10-K. |_|
As of March 17, 1997, 12,566,657 shares of Common Stock were
outstanding and the aggregate market value of the Common Stock held by
non-affiliates of the Registrant on that date was approximately $250,578,000.
DOCUMENTS INCORPORATED BY REFERENCE.
1. Portions of Registrant's 1996 Annual Report to Shareholders are
incorporated into Part II.
2. Portions of Registrant's Proxy Statement dated March 24, 1997 are
incorporated into Part III.
-----------------------------------------------------------------------------
PART I
Item 1.
BUSINESS
GENERAL
a) Development of Business
E. W. Blanch Holdings, Inc. (the "Company") was incorporated in the
State of Delaware on March 1, 1993 as a holding company for the capital stock of
E. W. Blanch Co., Inc. ("EWBCo"). EWBCo was incorporated in the State of
Delaware on March 2, 1993 and was formed for the purpose of being the successor
to the business of E. W. Blanch Co. Limited Partnership, a Delaware limited
partnership (the "Partnership"). The Company issued shares of Common Stock to
the partners of the Partnership in exchange for their partnership interests and
the Partnership was merged with and into EWBCo, which was the surviving entity.
The Company, through predecessor organizations, was originally founded in 1957.
The Company's principal business is that of integrated risk management
services, including reinsurance intermediary services, risk management
consulting and administration services and wholesale insurance services.
In January 1994, the Company formed a wholly owned subsidiary, Paragon
Reinsurance Risk Management Services, Inc. ("Paragon"). Paragon comprises the
reinsurance risk management services historically provided by EWBCo, with an
emphasis on making these services available to a broader client base. Through
its July 1996 acquisition of a reinsurance software system, Paragon continued to
diversify and enhance the Company's revenue stream.
In July 1994, the Company's wholly owned subsidiary, E. W. Blanch
International, Inc. ("EWB International"), entered into a 50/50 joint venture
with Swire Fraser Insurance (Holdings) Ltd. ("Swire Fraser"), a subsidiary of
Swire Pacific Ltd. ("Swire Pacific"). The purpose of this joint venture, Swire
Blanch Holdings Ltd. ("Swire Blanch"), was to originate and deliver reinsurance
services on an international basis, excluding the United States and the United
Kingdom.
In February 1997, EWB International purchased 70% of Swire Fraser from
Swire Pacific and increased its ownership in Swire Blanch from 50% to 70%. Swire
Fraser provides insurance and reinsurance broking services in certain
specialized areas, risk management services, and financial advisory services,
primarily for employer retirement plans. The combined operations of Swire Fraser
and Swire Blanch have been merged into a single operation under the Swire Blanch
name, which will be owned 70% by the Company and 30% by Swire Pacific. This
transaction is expected to provide increased opportunities for international
growth.
On September 30, 1994, the Company's wholly owned subsidiary, E. W.
Blanch Wholesale Insurance Services, Inc. ("EWB Wholesale"), completed its
acquisition of the Elton George Companies, an insurance wholesale broker and
manager of program business based in San Antonio, Texas. The purpose of the
acquisition was to expand the Company's product and service capabilities and to
achieve vertical integration into the wholesale insurance business.
In December 1996, the Company recorded a $19.5 million write-down of
goodwill associated with the Elton George Companies acquisition in 1994 and a
$3.25 million reserve for the restructuring of the Company's wholesale
operations and its related lease expense. Also, as part of the restructuring of
the wholesale operations, in February 1997 EWB Wholesale completed the sale of
its premium finance business, originally acquired in 1994 as part of the Elton
George Companies acquisition. The Company received $15.2 million in exchange for
all of the outstanding stock of the premium finance subsidiaries, whose assets
included $14.9 million of premium finance notes. The net sales proceeds equaled
the Company's investment in the business, resulting in no gain or loss on the
sale. Following the restructuring, the Company believes its wholesale operation,
including a strategy focusing on higher margin, value-added services, is
better-positioned for future growth and profitability.
Effective January 1, 1996, EWB Wholesale acquired InsGroup Services
Company ("InsGroup"), an association of more than 80 independent
property/casualty insurance agencies located throughout the United States. The
Company believes that the InsGroup acquisition will enhance its capabilities in
the distribution of specialized insurance products.
Unless otherwise indicated, reference to the "Company" hereinafter
includes all operating subsidiaries.
b) Financial Information About Industry Segments
Beginning in 1995, the Company's operations were divided into three
business segments, reinsurance services, wholesale insurance services and
general corporate services. The reinsurance services segment is the primary
source of the Company's revenues and net income, and includes the reinsurance
intermediary EWBCo., the risk management services provided by Paragon, and the
50% interest in the international reinsurance services of Swire Blanch. The
wholesale insurance services segment includes the wholesale insurance
distribution and premium finance businesses provided by EWB Wholesale. As
discussed previously, the premium finance operations were sold in February 1997.
General corporate services includes investment income from corporate investments
and corporate expenses such as legal, finance, corporate development,
information systems, and the office of the chief executive.
Financial information about the Company's industry segments is
incorporated by reference to "Management's Discussion and Analysis" on pages
21-25 of the Company's 1996 Annual Report to Shareholders.
c) Narrative Description of Business
REINSURANCE SERVICES
INTERMEDIARY SERVICES
GENERAL As a reinsurance intermediary, the Company structures and arranges
reinsurance between insurers seeking to cede insurance risks and reinsurers
willing to assume such risks. Reinsurance is a form of insurance in which a
reinsurance company indemnifies a primary insurance company against all or a
portion of the risk assumed by the ceding company under an insurance policy.
Reinsurance can provide the ceding company with several major benefits.
It can reduce net liability on individual risks, thereby enabling the primary
insurer to underwrite a larger volume of risks or a larger single risk than its
resources would otherwise support. It can assist the ceding company in
maintaining acceptable financial ratios and it can stabilize underwriting
results from the effects of catastrophic events and accumulations of losses due
to variations in loss frequency. Reinsurance also provides a form of financing
for primary insurers in a period of rapidly increasing premium growth. These
benefits effectively afford a ceding company the ability to increase
underwriting capacity because the ceding company can expand the book of business
it writes without a corresponding increase in its capital and surplus position.
The Company earns reinsurance brokerage from the placement and
servicing of reinsurance, primarily on a treaty basis for property and casualty
exposures. Property reinsurance indemnifies a ceding company for all or a
specified portion of its property loss. The majority of the Company's property
reinsurance is in the form of catastrophe reinsurance. Catastrophe reinsurance
indemnifies the ceding company for the amount of property loss in excess of a
specified retention with respect to an accumulation of individual policy losses
resulting from a single catastrophic event such as a hurricane, earthquake, or
tornado. Casualty reinsurance indemnifies a ceding company for all or a
specified portion of the losses caused by injuries to third persons and the
resulting legal liability imposed on the insured. The majority of the Company's
casualty reinsurance relates to professional liability, workers' compensation,
and specialized casualty exposures underwritten by excess and surplus lines
insurance carriers. The Company also places multiple lines reinsurance that
covers both property and casualty exposures, as well as life, accident and
health, and facultative reinsurance.
The following table sets forth for the years indicated the amounts and
percentages of reinsurance brokerage earned by the type of reinsurance placed by
the Company for the year ended December 31 (dollars in thousands) as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Reinsurance Reinsurance Reinsurance
Brokerage Percentage Brokerage Percentage Brokerage Percentage
--------------- ------------- --------------- --------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Property $46,190 53% $36,681 49% $33,027 47%
Casualty 25,260 29 25,558 35 26,931 38
Multiple Lines 13,553 16 9,920 13 8,171 12
Other 1,490 2 2,314 3 2,528 3
--------------- ------------- --------------- --------------- ----------------- ----------
Total $86,493 100% $74,473 100% $70,657 100%
=============== ============= =============== =============== ================= ==========
</TABLE>
Ceding companies purchase reinsurance by paying the reinsurer a portion
of the premiums associated with the business being reinsured. The reinsurance
premium compensates the reinsurer for, among other things, the risk it has
assumed and marketing, sales and administration costs. Reinsurance brokerage
paid to the intermediary by a reinsurer is included in such costs. The primary
role of a reinsurance intermediary is to act on behalf of a ceding company in
the placement of a reinsurance program with one or more reinsurers at rates and
on terms acceptable to and approved by the ceding company.
Reinsurance brokerage rates, which vary by line of business, are
generally standard throughout the industry. Brokerage rates are based upon a
percentage of the reinsurance premium placed and generally range from one
percent on quota share contracts to ten percent on property catastrophe
contracts. Historically, reinsurance intermediaries have experienced limited
competition with respect to these brokerage rates. In recent years, however,
price competition among reinsurance intermediaries has increased and there have
been instances of fee-based compensation arrangements between certain large
insurers and intermediaries such as the Company. As a result, the compensation
received by the Company relative to premium volume has in certain instances
decreased in recent years. The introduction of fee-based compensation
arrangements may have the effect of reducing the variability of the reinsurance
intermediary's compensation due to changes in external market factors such as
changes in the price of reinsurance.
Reinsurance can be purchased either from broker reinsurers, in which
case the purchase is made through an intermediary such as the Company, or from
direct writers of reinsurance, in which case the purchase is made by the ceding
company directly from the direct writer. While a ceding company may select the
reinsurer that quotes the lowest cost, certain other factors may determine
whether reinsurance is placed with broker reinsurers or a direct writer,
including the desire for independent representation, the services required, the
capacity and quality of the reinsurer, contract terms and conditions, the speed
with which claims are paid, the size of the risk and the specialization of the
reinsurer.
From a ceding company's perspective, both the broker reinsurer market
and the direct writer market have advantages and disadvantages. A ceding
company's selection of one market over the other will be influenced by its
perception of such advantages and disadvantages relative to the reinsurance
coverage being placed. Broker market reinsurers maintain that broker market
distribution provides ceding companies with broad access to reinsurance
coverages from numerous reinsurance companies, thus better enabling ceding
companies to meet their reinsurance needs. Direct writers of reinsurance
maintain that by working directly with ceding companies they are better able to
evaluate such companies and their respective underwriting risks
COMPETITION The Company's reinsurance intermediary business is highly
competitive. The Company competes with a number of reinsurance intermediaries,
direct writers and other financial institutions, some of which have greater
financial and other resources than the Company. The Company competes on the
basis of the quality and extent of services offered and the ability to provide
solutions that meet the needs of ceding companies, including price and capacity
requirements. In certain situations, the Company competes for reinsurance with
financial institutions which offer alternative products which attempt to
securitize or finance insurance exposures. Among the Company's competitors are
Aon Risk Services, Guy Carpenter and Co., Inc., Employers Re, General Re and
Munich Re. There is also competition within the reinsurance market for
experienced and productive reinsurance professionals that are essential in
delivering the Company's services. The inability of the Company to recruit and
retain such reinsurance professionals could have a material adverse effect upon
its business
CLIENTS (CEDING COMPANIES) The Company provides intermediary services to a
diverse group of insurance companies located throughout the world, domestically
through EWBCo and internationally through Swire Blanch. During 1996, no client
accounted for more than 10% of the reinsurance brokerage earned by the Company
and the Company's ten largest clients accounted for approximately 39% of the
reinsurance brokerage earned by the Company.
REINSURERS The Company places reinsurance with approximately 500 reinsurers
located throughout the world. During 1996, the Company placed approximately $2.7
billion of reinsurance premiums, 79% of which went to reinsurers located in the
United States and the remainder to international reinsurance markets, primarily
Bermuda and London. In 1996, no single reinsurer accounted for more than 10% of
the reinsurance brokerage earned by the Company during 1996 and the top ten
reinsurers accounted for approximately 32% of the reinsurance brokerage.
FIDUCIARY ACCOUNTS A reinsurance intermediary, such as the Company, will
generally receive funds that represent premiums owed by a ceding company to a
reinsurer or loss payments owed by a reinsurer to a ceding company. Pending
remittance, these funds are held by the intermediary in segregated accounts.
Consistent with industry practice, interest on the fiduciary funds accrues to
the reinsurance intermediary. Fiduciary funds that are maintained in segregated
accounts for the benefit of a ceding company or reinsurer are not commingled
with other assets of a reinsurance intermediary and are not subject to the
claims of the intermediary's creditors.
Fiduciary funds and amounts of reinsurance premiums payable by the
ceding company to the reinsurer and loss payments payable by the reinsurer to
the ceding company pursuant to a reinsurance agreement, which amounts represent
receivables of the intermediary, are known as "fiduciary assets". At December
31, 1996, the Company had fiduciary assets and liabilities of approximately
$429.2 million. Fiduciary assets at December 31, 1996 included approximately
$41.9 million of fiduciary funds.
The Company earns investment income on the fiduciary funds it holds on
behalf of insurance and reinsurance companies. In recent years, although the
volume of funds processed through the Company's fiduciary accounts have
increased due to business growth, the period of time for which the funds are
held has declined due to advances in technology, including electronic transfers
of funds and data. As this trend continues, the amount of investment income
earned by the Company on these funds may diminish.
GOVERNMENT REGULATION The Company's reinsurance intermediary business is subject
to some government regulation. In 1990, the National Association of Insurance
Commissioners developed the Reinsurance Intermediary Model Act (the "Model Act")
which has been adopted by most states. The Company currently is licensed or is
in the process of becoming licensed in all states where it is required to be
licensed as a reinsurance intermediary.
Reinsurance intermediary licensing statutes are generally based upon
the Model Act, which requires a written contract between the ceding company and
the reinsurance intermediary which is terminable at will by the ceding company,
and disclosure to a ceding company of any relationship with any reinsurer to
which such business is ceded. The contract must also provide that the
reinsurance intermediary will render accounts to the ceding company accurately
detailing all material transactions, that all funds collected for the ceding
company's account will be held by the reinsurance intermediary in a fiduciary
capacity, that the reinsurance intermediary will keep a complete record of each
reinsurance transaction for at least ten years after the expiration of each
contract of reinsurance transacted by the reinsurance intermediary, and that the
reinsurance intermediary will comply with the written standards established by
the ceding company for the cession or retrocession of all risks. Government
regulation of the Company's business has not been a significant commercial
barrier.
RISK MANAGEMENT CONSULTING AND ADMINISTRATION SERVICES
GENERAL Through Paragon, the Company seeks to provide risk management consulting
and administration services to insurance and reinsurance companies, government
entities, underwriting facilities and other interested parties. Such services
are generally provided as part of the Company's core reinsurance intermediary
services. In addition, Paragon earns fees for providing these services directly
to third parties. Paragon's services are designed to assist insurance and
reinsurance companies and other related entities in controlling their costs and
better managing their risk through a variety of means including sophisticated
analytical techniques and technology, non-traditional risk transfer and leveling
mechanisms, reinsurance software systems and outsourcing of non-core functions.
Examples of Paragon's services include product development, facility
administration, strategic reinsurance program reviews, actuarial services,
catastrophe exposure management and analysis, run-off management and insurance
policy issuing services.
The Company also seeks to provide financial consulting services and
tailored reinsurance and capital markets products designed to assist its clients
in capital preservation and risk management. These services may include risk
evaluation, strategy formation and strategy implementation.
COMPETITION The Company competes with a number of competitors in its risk
management consulting and administration services business, including other
primary insurance brokers, reinsurance intermediaries, management consultants,
accounting firms, and financial services firms. Some of these competitors may
have or be affiliated with entities that have greater financial and other
resources than the Company. The Company competes with these entities on the
basis of the quality, price, innovation, and range of products and services.
WHOLESALE INSURANCE SERVICES
GENERAL Through EWB Wholesale, the Company provides wholesale insurance services
to retail insurance agents on behalf of primary insurance companies. These
services, which include underwriting and claims processing, enable the Company's
independent insurance agent clients to access a variety of insurance companies
and products. The Company develops, markets, quotes and processes specialized
insurance programs for targeted insurance companies. Through the wholesale
distribution mechanism, the Company believes that insurance companies are able
to produce new lines of business in various geographic locations without
incurring high start-up costs.
EWB Wholesale earns commissions and fees from the distribution of
insurance products on a wholesale basis. The Company distributes personal and
commercial property and casualty coverages, specializing in program and surplus
lines business. These products are distributed to an extensive network of retail
insurance agent clients located throughout the United States, primarily in the
State of Texas. During 1996, no client accounted for more than 10% of the
wholesale commissions and fees earned by the Company and the ten largest
wholesale insurance agent clients accounted for approximately 11% of the
wholesale commissions and fees earned by the Company.
Through EWB Wholesale, the Company also distributes insurance products
for insurance companies on a direct marketing basis and provides alternative
distribution services for the redirection and placement of targeted insurance
exposures.
EWB Wholesale places underwritten risks in one of three markets: (i)
the reinsured market, which reinsures certain classes of business (generally
commercial lines) underwritten by EWB Wholesale, (ii) markets which have granted
EWB Wholesale binding authority to underwrite certain risks, and (iii) the
brokered market, in which EWB Wholesale seeks to place business on a best
efforts basis. The Company predominately uses the reinsured market and markets
which have granted binding authority. The Company does not assume insurance risk
in any of these activities.
COMPETITION In the area of wholesale insurance services, the Company currently
competes primarily with managing general agents, particularly those specializing
in excess and surplus lines and other niche businesses. The Company also
competes with large primary insurance brokers and direct writing and captive
agency insurance companies, some of which may have, or be affiliated with
entities that have, greater financial and other resources than the Company. The
Company competes with these entities on the basis of product availability,
quality of service, insurance company relationships, agent compensation and
price.
GOVERNMENT REGULATION Through its wholesale insurance subsidiaries, the Company
is licensed as a managing general agent and premium finance company in all
states where it is required to be licensed. Statutes governing the Company's
activities generally require, among other things, a written contract between the
insurance company and the managing general agent or between the insured and the
premium finance company, as the case may be. Effective January 31, 1997, the
Company sold its premium finance business. In addition, the Company's wholesale
insurance subsidiaries are subject to periodic examination by the states in
which they are licensed.
EMPLOYEES
As of December 31, 1996, the Company had 648 employees. The table below
reflects the number of Company employees by industry segment at December 31 of
the respective year:
1996 1995
---------------- ---------------
Reinsurance Services 353 305
Wholesale Insurance Services 188 164
General Corporate Services 107 97
---------------- ---------------
Total 648 566
================ ===============
The Company believes its relationship with its employees is excellent. The
Company is not a party to any collective bargaining agreement.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company expresses caution that the following
important risk factors, among others, could cause the Company's actual results
to differ materially from those projected in forward-looking statements, both
written and verbal, about the Company made by or on behalf of the Company:
COMPETITION
The reinsurance intermediary business, the Company's primary source of revenue,
is highly competitive. The Company competes with a number of reinsurance
intermediaries in the broker reinsurance market. There has been increasing
consolidation of reinsurance intermediary competitors through mergers and
acquisitions, with the result that certain of the Company's principal
competitors have increased substantially in size and potential resources, which
may make them more formidable competitors. Results of the Company's operations
may also be affected by competition for reinsurance business between broker
reinsurers and direct reinsurance writers. Broker reinsurers compete with direct
writers based primarily upon the price of reinsurance, reinsurance capacity,
contract terms and conditions, quality and extent of services offered, financial
strength, reputation and experience. The Company competes with other reinsurance
intermediaries and direct writers on the basis of the quality and extent of
services offered to ceding companies and the ability to provide solutions that
meet the needs of ceding companies, including price and capacity requirements.
Finally, in certain situations, the Company finds itself in competition for
reinsurance business with other financial institutions which offer alternative
products which attempt to securitize or finance insurance exposures.
The Company also faces substantial competition in its efforts to generate
revenues by offering unbundled risk management consulting and administration
services to its clients and prospects.
In the area of wholesale insurance services, the Company competes with other
managing general agents, primary insurance brokers and insurance companies on
the basis of product availability, quality of service, market relationships,
agent compensation and price.
In addition, the Company competes with other entities with respect to the
employment of personnel, including reinsurance brokers. The Company's
competitors include entities which have, or are affiliated with entities that
have, greater financial and other resources than the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's business depends, and will continue to depend, on the services of
its executive officers, senior reinsurance brokers and other key employees. Such
persons may from time to time leave the Company due to, among other things,
retirement, health, personal and professional reasons. The Company has entered
into employment agreements with most of its executive officers and senior
reinsurance brokers. The employment agreements contain provisions under which
the employees have agreed not to compete with the Company for specified periods
of time following termination of employment. There can be no assurance that the
Company will be able to retain its existing personnel or to find and attract
additional qualified employees.
MARKET CONDITIONS IN THE INSURANCE AND REINSURANCE INDUSTRIES
The Company's business is affected by market conditions in the insurance and
reinsurance industries, which historically have been subject to significant
volatility in demand, supply and price.
Insurance companies generally purchase reinsurance in order to, among other
things, manage their exposures on insured risks, maintain acceptable financial
ratios and protect their underwriting results from catastrophic events. The
propensity of insurers to purchase, as well as the propensity of reinsurers to
supply, reinsurance is affected by a variety of factors, including the level of
surplus capacity in the insurance and reinsurance markets, prevailing premium
rates for insurance and reinsurance, underwriting experience, regulatory
considerations, changes in the investment environment and general economic
conditions and business trends.
To the extent that these factors influence the need for, availability of and
price of insurance and reinsurance, they may also affect the amount of
reinsurance brokerage, normally a function of the ceded premium, received by the
Company. For example, when reinsurance premium rates rise, brokerage associated
with a particular amount of coverage placed may increase. The Company's ability
to earn increased brokerage in this instance may, however, be limited if
insurers purchase less reinsurance which has been an increasing trend among the
Company's clients, or if the supply of certain reinsurance coverage is
curtailed. Conversely, declining prices for reinsurance would generally reduce
the brokerage associated with a particular placement. A reduction in brokerage
may, however, be limited if insurers purchase more reinsurance at the lower
premium rates or if more or larger placements of coverages are achieved due to
increases in the supply of reinsurance. The Company's reinsurance brokerage
revenues can also be negatively influenced by clients who choose to increase
their retentions of risk, thereby purchasing less reinsurance, and by
acquisitions of the Company's clients where the acquirer does not purchase
reinsurance, purchases less reinsurance or purchases reinsurance elsewhere.
Price competition among reinsurance intermediaries has increased in recent
years, and there have been instances of fee-based compensation arrangements
between certain large insurers and reinsurance intermediaries such as the
Company. As a result, the compensation received by the Company relative to
premium volume has in certain instances decreased in recent years and there can
be no assurance that these arrangements will not become more prevalent in the
future.
In addition, the development of state or federal underwriting facilities, pools,
or other alternate coverage mechanisms for catastrophic risks such as
earthquakes or hurricanes may, in the future, lead to a reduction in the amount
of such risks insured by primary insurers, and may consequently reduce such
insurers' needs for reinsurance of the type traditionally brokered by the
Company.
The wholesale insurance business is affected by a variety of factors, including
prevailing premium rates for insurance, agent compensation levels, underwriting
experience, regulatory considerations, changes in the investment environment and
general economic conditions and business trends. To the extent that these
factors influence the need for, availability of and price of insurance, they may
also affect the amount of commissions and fees received by the Company in its
wholesale business.
The insurance brokerage industry in general is experiencing a period of low
growth due to competitive pricing of underlying insurance and reinsurance
premiums, and competitive pressures on brokerage and commission rates. Although
the Company seeks to achieve growth in this soft market through its business
strategies, there can be no assurance that these strategies will be successful
to achieve growth in a difficult market environment.
GOVERNMENT REGULATION
Certain states in which the Company operates require the licensing of certain of
the Company's operations. Reinsurance intermediary licensing statutes generally
require, among other things, a written contract between the ceding company and
the reinsurance intermediary which is terminable at will by the ceding company.
EWB Wholesale's operations also require licensing as a managing general agent
and a premium finance company in the states in which it does business.
Recently, insurance regulation, including the regulation of intermediaries, has
been subject to increased scrutiny by the National Association of Insurance
Commissioners (the "NAIC") and legislative and regulatory bodies. The NAIC and
state insurance regulators have been reexamining existing laws and regulations,
with an emphasis on insurance company investment and solvency issues.
Legislation has been introduced in Congress that could result in the federal
government assuming some role in the regulation of the insurance industry. No
assurance can be given as to future legislative or regulatory changes or as to
their effect upon the Company.
FIDUCIARY FUNDS
As an intermediary, the Company acts as a conduit for insurance and reinsurance
premiums and loss payments which are paid to and remitted from fiduciary
accounts. The Company could be liable if it were to mishandle such funds in
violation of its fiduciary obligations.
The Company earns investment income on the fiduciary funds it holds on behalf of
insurance and reinsurance companies. In recent years, although the volume of
funds processed through the Company's fiduciary accounts have increased due to
business growth, the period of time for which the funds are held has declined
due to advances in technology, including electronic transfers of funds and data.
As this trend continues, the amount of investment income earned by the Company
on these funds may diminish. The Company's investment income on the fiduciary
funds also is impacted by fluctuating and potentially falling interest rates.
SPECIFIC ENGAGEMENTS AND NEW OPPORTUNITIES
The Company has been engaged and is pursuing a variety of specific engagements
and opportunities, in addition to its traditional reinsurance intermediary and
wholesale brokerage lines of business. Examples would be the Company's role as
lead reinsurance intermediary to the California Earthquake Authority (the "CEA")
and several alternative distribution engagements and opportunities with large
primary insurance companies. In its efforts to expand its revenues, the Company
is exploring a variety of potential initiatives and opportunities that are
related to the Company's traditional core business, but that will require the
Company in some instances to operate in areas where the Company does not have
historical experience.
These specific engagements and opportunities give rise to certain risks and
uncertainties. For example, the alternative distribution opportunities are
subject to significant negotiations among the Company, the primary insurance
company transferring the insurance risks at issue, the alternative insurance
companies assuming those risks, and the reinsurance marketplace providing the
capacity to support the risk transfer. These alternative distribution
transactions also generally require approval of terms and rates by relevant
state insurance departments. As a result, there can be no assurance these
transactions will be consummated, and the timing of the transactions is
difficult to predict, which can reduce or delay the revenues the Company expects
to receive.
These specific engagements also can result in increased fluctuations in the
Company's earnings. While the revenues in the Company's core reinsurance
intermediary and wholesale brokerage lines of business also are subject to
fluctuation, as described above, the revenues from these core lines of business
do tend to recur each year, as the reinsurance or insurance contracts are
renewed by the Company's customers. For certain of these specific engagements
and new opportunities, however, the potential revenues may not recur each year,
as tends to be the case in the Company's traditional core lines of business.
Also, as the Company expands into new (though related) lines of business, there
likely will be increased unpredictability as to whether the Company will be
successful in those new endeavors. These new opportunities generally involve
technological capabilities and personnel skill sets that the Company must
acquire externally and/or build internally. The demand and revenue potential for
some of these opportunities are unknown or uncertain. For these reasons, it is
possible the Company may invest substantial resources into these potential
specific engagements and opportunities, without achieving the revenues it
anticipates in return.
INTERNATIONAL OPERATIONS
Through Swire Blanch, the Company is significantly increasing its reinsurance
intermediary and wholesale brokerage activities outside of its traditional
territory in the United States. The Company, through this 70% subsidiary, now
has offices in the United Kingdom, Paris, Rome, Copenhagen, Hong Kong,
Singapore, Australia, Vietnam, China, and Mexico, with additional international
offices likely in the future. With these international operations come increased
risks, including the potential that the Company will not successfully integrate
its international operations with its domestic operations, currency exchange
risks, legal and regulatory constraints and liabilities in jurisdictions where
the Company does not have significant experience, and political risks,
especially in third-world countries.
Item 2.
PROPERTIES
The Company's physical properties consist primarily of leases of
commercial office space. At December 31, 1996, the Company leased approximately
276,000 square feet of office space, including 94,000 square feet at its
headquarters in Minneapolis and 102,000 square feet at its office in San
Antonio. The Company considers its properties to be adequate for its present and
reasonably foreseeable requirements.
Item 3.
LEGAL PROCEEDINGS
On November 21, 1994, E. W. Blanch Co. commenced an action in the
United States District Court for the District of Minnesota against Mr. Hussein
A. Enan, a former employee. In its complaint, the Company sought declaratory
relief that Mr. Enan voluntarily terminated his employment effective on November
14, 1994 and that accordingly, the Company and its affiliated entities owe no
further remuneration to Mr. Enan pursuant to the terms of his employment
agreement with the Company. Mr. Enan filed a counterclaim against E. W. Blanch
Co. and the Company for breach of his employment agreement and for violation of
the Minnesota Human Rights Act on the basis of age discrimination. Discovery is
completed. Cross motions for summary judgment were filed and argued in Federal
District Court in December, 1995. The Court on September 12, 1996 granted the
Company's motion in its entirety and denied Mr. Enan's motion, resulting in
dismissal of Mr. Enan's counterclaims and granting of the Company's request for
declaratory relief. Mr. Enan appealed this ruling to the United States Court of
Appeals for the Eighth Circuit. Briefing has been concluded, oral argument has
occurred, and the parties are awaiting the Court of Appeals' ruling. The Company
believes Mr. Enan's counterclaims are without merit and is vigorously defending
against them.
In the opinion of management, the foregoing legal proceeding will not
have a material adverse effect on the consolidated financial position of the
Company or on its results of operations.
The Company is also engaged in other legal proceedings in the ordinary
course of business, none of which, either individually or in the aggregate,
will, in the opinion of management, have a material adverse effect on the
consolidated financial position of the Company or the results of its operations.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the Company's fourth quarter.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF MARCH 28, 1997)
<TABLE>
<CAPTION>
DATES
ELECTED TO
NAME AND AGE OFFICE PRESENT POSITION AND BUSINESS EXPERIENCE
- ------------ ------ ---------------------------------------------------
<S> <C> <C> <C>
Edgar W. Blanch, Jr. (60) 3/03/93 Chairman and Chief Executive Officer
Prior to
3/03/93 General Partner of E. W. Blanch Limited Partnership
Chris L. Walker (39) 10/27/94 President and Chief Operating Officer
3/03/93-
10/27/94 Executive Vice President
Prior to
3/03/93 General Partner of E. W. Blanch Limited Partnership
Frank S. Wilkinson, Jr. (57) 3/03/93 Executive Vice President
Prior to
3/03/93 General Partner of E. W. Blanch Limited Partnership
Ian D. Packer (31) 7/01/96 Executive Vice President and Chief Financial Officer
1993- President and Chief Executive Officer - MarketLink, Inc.
1996 (Communications technology company)
1990- Vice President and General Partner -
1993 IAI Capital Group/Great Northern Capital (Merchant
banking group)
Tom S. Nelson (41) 7/01/96 Executive Vice President and Chief Accounting Officer
4/27/95-
7/01/96 Executive Vice President and Chief Financial Officer
3/03/93-
4/27/95 Senior Vice President, Chief Financial Officer and Treasurer
Prior to Senior Vice President and Treasurer of E. W. Blanch Limited
3/03/93 Partnership
James E. Erickson (46) 2/03/97 Senior Vice President and Chief Information Officer
1995-1997 Senior Vice President - GCC Networks (Developer of
software)
1992-1995 Vice President - Nordictrak (Manufacturer of exercise
equipment)
Daniel P. O'Keefe (44) 4/01/96 Senior Vice President, General Counsel and Corporate Secretary
Prior to
4/01/96 Partner - Dorsey & Whitney LLP (lawfirm)
Arthur C. Schmalbach (49) 10/16/94 Senior Vice President
3/03/93-
10/16/94 Vice President
Prior to
3/03/93 Vice President - E. W. Blanch Limited Partnership
</TABLE>
PART II
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS.
The information required by Item 5 is incorporated herein by reference
to the section entitled "Stocklisting and Trading Information" on the Inside
Back Cover of the Company's 1996 Annual Report to Shareholders.
Item 6.
SELECTED FINANCIAL DATA
The information on page 20 of the Company's 1996 Annual Report to
Shareholders is incorporated herein by reference.
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information on pages 21 through 26 of the Company's 1996 Annual
Report to Shareholders is incorporated herein by reference.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages 27 through 39 of the Company's 1996 Annual
Report to Shareholders is incorporated herein by reference.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by Item 10 with regard to Directors is
incorporated herein by reference to the section entitled "Election of Directors"
on page 2 in the Company's proxy statement for its Annual Meeting of
Shareholders in 1997. The information required by Item 10 with regard to
executive officers is set forth in Item 4A hereof. The information required by
Item 10 with regard to Section 16 reporting is incorporated by reference to the
section entitled "Section 16(a) Beneficial Ownership Reporting Requirements" on
page 5 of the Company's proxy statement for its Annual Meeting of Shareholders
in 1997.
Item 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the sections entitled "Directors Compensation" and "Executive Compensation"
on pages 5 and 6 respectively, in the Company's proxy statement for its Annual
Meeting of Shareholders in 1997.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in Item 12 is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners" on
page 4 in the Company's proxy statement for its Annual Meeting of Shareholders
in 1997.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section entitled "Certain Relationships and Related Transactions" on page
13 in the Company's proxy statement for its Annual Meeting of Shareholders in
1997.
PART IV
Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of E. W. Blanch
Holdings, Inc. included in the 1996 Annual Report to Shareholders are
incorporated by reference into this Report by Item 8 hereof:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995, and 1994
Notes to Consolidated Financial Statements
(a)(2) All schedules to the consolidated financial statements listed in
Article 5 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore have been omitted.
(a)(3) The Exhibits required to be a part of this Report are listed in the
Index to Exhibits on page 18 hereof.
Pursuant to Item 601 (b) (4) (iii) of Regulation S-K, copies of certain
instruments defining the rights of holders of certain long-term debt of
the Company are not filed, and in lieu thereof, the Company agrees to
furnish copies thereof to the Securities and Exchange Commission upon
request.
(b) Reports on Form 8-K
The registrant filed one Current Report on Form 8-K were during the
quarter ended December 31, 1996:
* A current Report on Form 8-K was filed on December 31, 1996
pertaining to a fourth quarter change to reflect the
restructuring of the Company's San Antonio based general
agency operations.
(c) Exhibits
Included in Item 14(a)(3) above.
(d) Financial Statement Schedules
Included in Item 14(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, E. W. Blanch Holdings, Inc. has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 28, 1997.
E. W. BLANCH HOLDINGS, INC.
(Registrant)
By: /s/ Edgar W. Blanch, Jr.
--------------------------------------------
Edgar W. Blanch, Jr., Chairman of the Board,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of E. W.
Blanch Holdings, Inc. and in the capacities indicated on March 28, 1997.
Signature Title
--------- -----
/s/ Edgar W. Blanch, Jr. Chairman of the Board, Chief Executive Officer
- ------------------------------- and Director
Edgar W. Blanch, Jr.
/s/ Ian D. Packer Executive Vice President and Chief Financial
- ------------------------------- Officer
Ian D. Packer
/s/ Tom S. Nelson Executive Vice President and Chief Accounting
- ------------------------------- Officer
Tom S. Nelson
Edgar W. Blanch, Jr., pursuant to powers of attorney which are being
filed with this Annual Report on Form 10-K, has signed below on March 28, 1997
as attorney-in-fact for the following directors of the Registrant:
James N. Land, Jr. William B. Madden
Steven G. Rothmeier Joseph D. Sargent
Paul B. Ingrey Chris L. Walker
Frank S. Wilkinson, Jr.
/s/ Edgar W. Blanch, Jr.
------------------------------------
Edgar W. Blanch, Jr.
Attorney-in-fact
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 By-Laws of the Company (2)
4.1 Specimen Common Stock Certificate (2)
4.2 Rights Agreement, dated as of January 24, 1997, between the
Registrant and Norwest Bank Minnesota, N.A., as Rights Agreement
(3)
10.1* Non-Employee Directors Stock Plan (2)
10.2* 1993 Stock Incentive Plan, as amended (2)
10.3* Employment Agreement between the Company and Edgar W. Blanch,
Jr. (2)
10.4* Employment Agreement between the Company and Frank S. Wilkinson,
Jr. (2)
10.5* Employment Agreement between the Company and Chris L. Walker (2)
10.6* Employment Agreement between the Company and Tom S. Nelson (2)
10.7* Agreement of Limited Partnership of Conning Insurance Capital
Limited Partnership III (4)
10.8* Stock Purchase Agreement, dated as of February 10, 1997, between
the Registrant and Edgar W. Blanch, Jr. (1)
13 Portions of the 1996 Annual Report to Shareholders incorporated
by reference in this Form 10-K (1)
21 Subsidiaries of the Company (1)
23 Consent of Ernst & Young LLP (1)
24 Powers of Attorney (1)
- -----------------------------------
(1) Filed with this Annual Report on Form 10-K
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 33-59198.
(3) Incorporated by reference to the Company's Registration Statement on
Form 8-A, dated January 24, 1997.
(4) Filed with the Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended December 31, 1994.
* Management contract and compensatory plan or arrangement required to
be filed pursuant to Item 601 (b) (10) (iii) (A) of Regulation S-K.
RESTATED
CERTIFICATE OF INCORPORATION
OF
E. W. BLANCH HOLDINGS, INC.
* * * * * * * * * *
E. W. Blanch Holdings, Inc., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), does hereby certify as
follows:
1. The name of the Corporation is: E. W. BLANCH HOLDINGS, INC. The date
on which the original Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the State of Delaware was March 1, 1993.
2. This Restated Certificate of Incorporation restates and amends the
Certificate of Incorporation of the Corporation to provide (a) for a classified
Board of Directors, (b) that a director of the Corporation may only be removed
for cause and only by a vote of the holders of at least fifty percent (50%) of
the outstanding shares of stock of the Corporation entitled to vote in an
election of directors and (c) that the By-Laws of the Corporation may be made,
altered, amended, repealed or rescinded only by a majority of the Board of
Directors of the Corporation or by a vote of the holders of at least eighty
percent (80%) of the outstanding shares of stock of the Corporation entitled to
vote in an election of directors.
3. The text of the Certificate of Incorporation is amended and restated
hereby to read as herein set forth in full:
FIRST: The name of the corporation (the "Corporation") is: E. W. BLANCH
HOLDINGS, INC.
SECOND: The address of its registered office in the State of Delaware
is 1209 Orange Street in the City of Wilmington, County of New Castle. The name
of its registered agent at such address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or
promoted by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 40,000,000 shares of all classes of stock. Of such
total number of authorized shares of stock, 30,000,000 shares consist of shares
of Common Stock (the "Common Stock"), $.01 par value per share, and 10,000,000
shares consist of shares of Preferred Stock (the "Preferred Stock"), $.01 par
value per share. Each issued and outstanding share of Common Stock shall entitle
the holder thereof to one vote. The holders of the Common Stock shall have no
preemptive rights to subscribe for any shares of any class of stock of the
Corporation whether now or hereafter authorized.
The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of this Article FOURTH, to provide for the issuance of
the shares of Preferred Stock in one or more series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that series;
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and if so,
the terms and conditions of such conversion, including provision for adjustments
of the conversion rate in such events as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or date
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the corporation, and
the relative rights of priority, if any, of payment of shares of that series;
and
(h) Any other relative rights, preferences and limitations of that
series.
All accrued dividends on outstanding shares of all series of Preferred
Stock shall be paid or declared and set apart for payment and all required
redemptions of all series of Preferred Stock shall be made before (i) any
dividends shall be paid or declared and set apart for payment on the shares of
Common Stock or (ii) any shares of Common Stock shall be purchased or otherwise
acquired by the Corporation.
The designations, powers, preferences and relative rights of the shares
of each series of Preferred Stock and the qualifications, limitations and
restrictions thereof, may, to the extent permitted by law, be similar to or
differ from those of any other series.
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the assets available for distribution to holders
of shares of Preferred Stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
FIFTH: The name and mailing address of the incorporator is as follows:
Patricia E. Torrente, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
SIXTH: The number of directors constituting the entire Board of
Directors shall be as set forth in the by-laws of Corporation; provided,
however, that the number of directors constituting the entire Board of Directors
shall initially be three (3) until otherwise fixed pursuant to the by-laws. The
name and mailing addresses of the persons who are to serve as directors of the
Corporation until the first annual meeting of stockholders is held (the "Initial
Annual Meeting") or until their successors are elected and qualify are as
follows:
Name Addresses
---- ---------
Edgar W. Blanch, Jr. 3500 West 80th Street
Minneapolis, Minnesota 55431
Michael W. Cashman, Sr. 3500 West 80th Street
Minneapolis, Minnesota 55431
Frank S. Wilkinson 3500 West 80th Street
Minneapolis, Minnesota 55431
SEVENTH: The Board of Directors of the Corporation shall be divided
into three classes, Class I, Class II and Class III, as nearly equal in number
as the total number of directors constituting the entire Board of Directors
permits. The term of one class of directors shall expire each year. Directors of
Class I shall be elected to the Board of Directors for a term expiring at the
Initial Annual Meeting, directors of Class II shall be elected to the Board of
Directors for a term expiring at the next succeeding annual meeting of
stockholders and directors of Class III shall be elected to the Board of
Directors for a term expiring at the second succeeding annual meeting of
stockholders. At each annual meeting of stockholders, the directors chosen to
succeed those whose terms are expiring shall be identified as being of the same
class as the directors whom they succeed and shall be elected for a term
expiring at the time of the third succeeding annual meeting of stockholders, or
thereafter in each case when their respective successors are elected and
qualified.
Subject to any rights of holders of one or more series of Preferred
Stock to elect directors under certain circumstances, any vacancies in the Board
of Directors for any reason, and any directorships resulting from any increase
in the number of directors, may be filled by the Board of Directors, acting by a
majority of the directors then in office, although less than a quorum, and any
directors so chosen shall hold office until the next election of the class for
which such directors shall have been chosen and in each case until his
respective successor shall be elected and qualified. If the number of directors
constituting the entire Board of Directors is changed, any increase or decrease
shall be apportioned among the classes by resolution of the Board of Directors
so as to maintain the number of directors in each class as nearly equal as
possible, but in no case shall a decrease in the number of directors shorten the
term of any incumbent director.
EIGHTH: Subject to any rights of holders of one or more series of
Preferred Stock, a director of the Corporation may be removed from office only
for cause and only by vote of the holders of at least fifty percent (50%) of the
outstanding shares of stock of the Corporation entitled to vote in an election
of directors.
NINTH: The by-laws of the Corporation may be made, altered, amended,
repealed or rescinded only by a majority of the entire Board of Directors or by
the vote of holders of at least eighty percent (80%) of the outstanding shares
of stock of the Corporation entitled to vote in an election of directors.
TENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all
stockholders or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
ELEVENTH: Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at an annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
TWELFTH: Elections of directors need not be by written ballot.
THIRTEENTH: (a) The Corporation shall indemnify to the fullest extent
permitted under and in accordance with the laws of the State of Delaware any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he is or
was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, trustee,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
(b) Expenses (including attorney's fees) incurred in defending any
civil, criminal, administrative or investigative action, suit or proceeding
shall (in the case of any action, suit or proceeding against a director of the
Corporation) or may (in the case of any action, suit or proceeding against an
officer, trustee, employee or agent) be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding as authorized by the
Board upon receipt of an undertaking by or on behalf of the indemnified person
to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Paragraph.
(c) The indemnification and other rights set forth in this Paragraph
shall not be exclusive of any provisions with respect thereto in the by-laws or
any other contract or agreement between the Corporation and any officer,
director, employee or agent of the Corporation.
(d) Neither the amendment nor repeal of this paragraph 13, subparagraph
(a), (b) or (c), nor the adoption of any provision of this Certificate of
Incorporation inconsistent with this paragraph 13, subparagraph (a), (b) or (c),
shall eliminate or reduce the effect of this paragraph 13, subparagraphs (a),
(b) and (c), in respect of any matter occurring before such amendment, repeal or
adoption of an inconsistent provision or in respect of any cause of action,
suite or claim relating to any such matter which would have given rise to a
right of indemnification or right to receive expenses pursuant to this paragraph
13, subparagraph (a), (b) or (c), if such provision had not been so amended or
repealed or if a provision inconsistent therewith had not been so adopted.
(e) No director shall be personally liable to the Corporation or any
stockholder for monetary damages for breach of fiduciary duty as a director,
except for any matter in respect of which such director (A) shall be liable
under Section 174 of the General Corporation Law of the State of Delaware or any
amendment thereto or successor provision thereto, or (B) shall be liable by
reason that, in addition to any and all other requirements for liability, he:
(i) shall have breached his duty of loyalty to the Corporation
or its stockholders;
(ii) shall not have acted in good faith or, in failing to act,
shall not have acted in good faith;
(iii) shall have acted in a manner involving intentional
misconduct or a knowing violation of law or, in failing to act, shall
have acted in a manner involving intentional misconduct or a knowing
violation of law; or
(iv) shall have derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is amended
after the date hereof to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended.
4. This Restated Certificate of Incorporation was duly adopted by
unanimous written consent of the stockholders in accordance with Sections 228,
242 and 245 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
executed on its behalf by Edgar W. Blanch, Jr., its Chairman of the Board of
Directors and Chief Executive Officer, and attested by Robert M. Benjamin, its
Secretary, on this 15th day of April, 1993.
\s\ Edgar W. Blanch, Jr.
------------------------------------
Edgar W. Blanch, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
Attest:
\s\ Robert M. Benjamin
- ------------------------------------
Robert M. Benjamin
Secretary
CERTIFICATE OF DESIGNATION
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
E.W. BLANCH HOLDINGS, INC.
The undersigned hereby certifies that the Board of Directors
of E.W. Blanch Holdings, Inc. (the "Corporation"), a corporation organized and
existing under the Delaware General Corporation Law, duly adopted the following
resolution on January 23, 1997:
RESOLVED, that a series of preferred stock of the Corporation
is hereby created, and the designation and amount thereof and the relative
rights and preferences of the shares of such series, are as follows:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Participating Preferred Stock" (the
"Preferred Shares") and the number of shares constituting the Preferred Shares
shall be 300,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors and any necessary shareholder approval;
provided, however, that no decrease shall reduce the number of Preferred Shares
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Preferred Shares.
Section 2. Dividends and Distributions.
(a) Subject to the rights of the holders of any series of
preferred shares (or any similar stock) ranking prior and superior to the
Preferred Shares with respect to dividends, the holders of Preferred Shares, in
preference to the holders of common shares, par value $.01 per share (the
"Common Shares"), of the Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the first day of March, June, September and December in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a Preferred Share or fraction of a Preferred Share, in an amount per share
(rounded to the nearest cent) equal to the greater of (i) $0.01 or (ii) subject
to the provision for adjustment hereinafter set forth, 100 times the aggregate
per share amount of all cash dividends, and 100 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions, other
than a dividend payable in Common Shares or a subdivision of the outstanding
Common Shares (by reclassification or otherwise), declared on the Common Shares
since the immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance of any
Preferred Share or fraction of a Preferred Share. In the event the Corporation
shall at any time after February 7, 1997, declare or pay any dividend on the
Common Shares payable in Common Shares, or effect a subdivision or combination
or consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a greater or lesser number of Common Shares, then in each such
case the amount to which holders of Preferred Shares were entitled immediately
prior to such event under clause (ii) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of Common Shares outstanding immediately after such event and the
denominator of which is the number of Common Shares that were outstanding
immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution
on the Preferred Shares as provided in paragraph (a) of this Sectionimmediately
after it declares a dividend or distribution on the Common Shares (other than a
dividend payable in Common Shares or a subdivision of the outstanding Common
Shares); provided that, in the event no dividend or distribution shall have been
declared on the Common Shares during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend
of $0.01 per share on the Preferred Shares shall nevertheless be payable, out of
funds legally available for such purpose, on such subsequent Quarterly Dividend
Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding Preferred Shares from their date of issue. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the Preferred Shares in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of Preferred Shares entitled to
receive payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the payment
thereof.
Section 3. Voting Rights.
(a) Subject to the provision for adjustment hereinafter set
forth, each Preferred Share shall entitle the holder thereof to 100 votes on all
matters submitted to a vote of the shareholders of the Corporation. In the event
the Corporation shall at any time after February 7, 1997, declare or pay any
dividend on the Common Shares payable in Common Shares, or effect a subdivision
or combination or consolidation of the outstanding Common Shares (by
reclassification or otherwise) into a greater or lesser number of Common Shares,
then in each such case the number of votes per share to which holders of
Preferred Shares were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of Common Shares outstanding immediately after such event and the denominator of
which is the number of Common Shares that were outstanding immediately prior to
such event.
(b) Except as otherwise provided herein or by law, the holders
of Preferred Shares and the holders of Common Shares and any other capital stock
of the Corporation having general voting rights shall vote together as one class
on all matters submitted to a vote of shareholders of the Corporation.
(c) Except as set forth herein or required by law, holders of
Preferred Shares shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Shares as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Preferred Shares as provided in Section2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on Preferred Shares outstanding shall
have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Preferred Shares;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Preferred Shares, except dividends paid ratably on the Preferred Shares
and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Preferred Shares; provided, however, that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such junior
stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Preferred Shares; or
(iv) redeem or purchase or otherwise acquire for consideration
any Preferred Shares, or any stock ranking on a parity with the
Preferred Shares, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any Preferred Shares purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of preferred
stock and may be reissued as part of a new series of preferred shares subject to
the conditions and restrictions on issuance set forth herein, in the Certificate
of Incorporation, or in any other certificate of designation creating a series
of preferred stock or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Preferred
Shares unless, prior thereto, the holders of Preferred Shares shall have
received the greater of (i) $100 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the date
of such payment, or (ii) an aggregate amount per share, subject to the provision
for adjustment hereinafter set forth, equal to 100 times the aggregate amount to
be distributed per share to holders of Common Shares, or (2) to the holders of
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Preferred Shares, except distributions made
ratably on the Preferred Shares and all such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall at
any time after February 7, 1997, declare or pay any dividend on the Common
Shares payable in shares of Common Shares, or effect a subdivision or
combination or consolidation of the outstanding Common Shares (by
reclassification or otherwise) into a greater or lesser number of Common Shares,
then in each such case the aggregate amount to which holders of shares of
Preferred Shares were entitled immediately prior to such event under clause
(1)(ii) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of Common Shares outstanding
immediately after such event and the denominator of which is the number of
Common Shares that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the Common Shares are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each Preferred
Share shall at the same time be similarly exchanged or changed into an amount
per share, subject to the provision for adjustment hereinafter set forth, equal
to 100 times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
Common Share is changed or exchanged. In the event the Corporation shall at any
time after February7, 1997, declare or pay any dividend on the Common Shares
payable in Common Shares, or effect a subdivision or combination or
consolidation of the outstanding Common Shares (by reclassification or
otherwise) into a greater or lesser number of Common Shares, then in each such
case the amount set forth in the preceding sentence with respect to the exchange
or change of Preferred Shares shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of Common Shares outstanding
immediately after such event and the denominator of which is the number of
Common Shares that were outstanding immediately prior to such event.
Section 8. No Redemption. The Preferred Shares shall not be
redeemable.
Section 9. Rank. The Preferred Shares shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all other
series of the Corporation's preferred stock.
Section 10. Fractional Shares. Preferred Shares may be issued
in fractions of a share which are integral multiples of one one-hundredth of a
share which shall entitle the holder, in proportion to such holder's fractional
shares, to receive dividends, participate in distributions and to have the
benefit of all other rights of holders of Preferred Shares.
Section 11. Amendment. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or rights of the Preferred Shares so as to affect
them adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding Preferred Shares, voting together as a single
class.
IN WITNESS WHEREOF, I have subscribed my name this ___ day of
_________, 1997.
E.W. BLANCH HOLDINGS, INC.
By _________________________________
Its ____________________________
EXHIBIT 10.8
STOCK PURCHASE AGREEMENT
THIS AGREEMENT, made and entered into as of the 10th day of February,
1997, by and between Edgar W. Blanch, Jr. (the "Seller"), and E.W. Blanch
Holdings, Inc., a Delaware corporation (the "Company").
WITNESSETH:
WHEREAS, the Seller is the beneficial owner of 1,536,002 shares of
common sock, $.01 par value, of the Company and desires to sell 750,000 shares
of such stock (the "Stock") to the Company pursuant to the terms and conditions
hereinafter set forth; and
WHEREAS, a committee comprised solely of the outside members of the
Company's Board of directors (the "Committee") has determined that it would be
in the best interests of the Company and its stockholders to purchase the Stock
from Seller pursuant to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, the parties hereto hereby agree as follows:
1. Seller agrees to sell to the Company, and the Company agrees to
purchase from Seller, all of the right, title and interest of Seller in and to
the Stock at the Closing (as defined in Paragraph 3) on the terms and subject to
the conditions set forth in this Agreement.
2. The purchase price for the Stock is $19.40 per share, or an
aggregate price of $14,550,000 (the "Purchase Price"), payable in the manner
provided in Paragraph 3.
3. The closing of the transaction contemplated by this Agreement (the
"Closing") will take place at the offices of the Company at 12:00 noon, C.S.T.,
on February 14, 1997, or at such other place and on such other date as is
mutually agreeable to the Company and Seller. The parties agree to consummate
the following transactions at Closing.
(a) Seller will assign and transfer to the Company good and
marketable title in and to the Stock, free and clear of all liens,
security interests, charges, pledges, mortgages or other encumbrances,
by delivering to the Company a stock certificate or certificates
representing the Stock, duly endorsed for transfer or accompanied by
duly executed stock powers endorsed in blank with requisite stock
transfer tax stamps, if any, attached; and
(b) the Company shall deliver to Seller the Purchase Price by
wire transfer of immediately available funds to the account designated
by Seller to the Company prior to the Closing;
4. Seller represents and warrants to the Company that (a) Seller is the
sole owner of the Stock, (b) Seller has good and marketable title in and to the
Stock, (c) the Stock is free and clear of all liens, security interests,
charges, pledges, mortgages or other encumbrances, (d) there is no legal action,
suit or governmental proceeding or investigation pending or, ot Seller's
knowledge, threatened against Seller which in any way adversely affects or
prevents the sale and delivery of the Stock to the Company or the performance by
Seller of the transactions contemplated hereby, and (e) the execution, delivery
and performance of this Agreement by Seller will not result in a breach or
violation of or constitute a default by Seller under any agreement, instrument
or order to which Seller is a party or by which Seller or the Stock is bound.
5. In consideration of the purchase of the Stock by the Company, Seller
agrees that, for a period of two years from the date of this Agreement, he will
not sell, assign, transfer or otherwise dispose of, or enter into any contract,
option or other arrangement or understanding with resect to the sale,
assignment, transfer or other disposition, directly or indirectly, of any of the
shares of the Company's common stock beneficially owned by Seller as of the date
of this Agreement, other than pursuant to this Agreement or except with the
prior consent of the Committee or such other committee comprised solely of the
outside members of the Company's Board of Directors appointed by the Board of
Directors to act as successor to the Committee in connection with any such
consent.
6. The Company makes no representation or warranty to Seller regarding
the tax consequences of any payment made to Seller pursuant to this Agreement.
Seller will be solely responsible for the payment of any and all taxes of
whatever kind that may be due from or payable by Seller in connection with any
payment made to Seller pursuant to this Agreement.
7. It is the intention of the parties that the laws of Delaware shall
govern the validity of this Agreement, the construction of its terms and the
interpretation of the rights and duties of the parties.
8. This Agreement may be executed concurrently in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9. This Agreement shall be binding upon the parties hereto and their
respective successors, representatives and assigns. This Agreement may not be
assigned without the prior written consent of both parties, and may be amended
or modified only in writing signed by both parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
SELLER
/S/ Edgar W. Blanch, Jr.
------------------------
Edgar W. Blanch, Jr.
E. W. BLANCH HOLDINGS, INC.
BY /S/ Steven G. Rothmeier
-----------------------
Steven G. Rothmeier
On behalf of the Committee
STOCK LISTING AND TRADING INFORMATION
The common stock of E.W. Blanch Holdings, Inc. is traded on the New York Stock
Exchange under the symbol "EWB". The following table sets forth the high, low
and closing prices and the amounts of cash dividends per common share for E.W.
Blanch Holdings, Inc. common stock for each quarter of 1996 and 1995.
<TABLE>
<CAPTION>
- ----------------------- ----------------------------------------------------- ----------------
1996 MARKET PRICE DIVIDENDS
QUARTER ENDED HIGH LOW CLOSE PER SHARE
- ----------------------- ---------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
March 31 25 1/2 19 20 $0.10
June 30 22 5/8 19 1/2 19 7/8 $0.10
September 30 21 1/4 17 3/4 19 1/4 $0.10
December 31 21 1/8 18 20 1/8 $0.10
Year $0.40
- ----------------------- ---------------- ------------------- ---------------- ----------------
- ----------------------- ----------------------------------------------------- ----------------
1995 MARKET PRICE DIVIDENDS
QUARTER ENDED HIGH LOW CLOSE PER SHARE
- ----------------------- ---------------- ------------------- ---------------- ----------------
March 31 21 7/8 18 1/2 18 1/2 $0.10
June 30 19 3/8 17 1/2 18 5/8 $0.10
September 30 20 16 1/2 19 $0.10
December 31 23 3/8 18 1/4 23 3/8 $0.10
Year $0.40
- ----------------------- ---------------- ------------------- ---------------- ----------------
</TABLE>
As of December 31, 1996 there were 286 registered shareholders of E.W. Blanch
Holdings, Inc. common stock.
<TABLE>
<CAPTION>
SIX YEAR FINANCIAL SUMMARY
Year Ended December 31
(dollars in thousands, except per share amounts) 1996 1995 1994 1993 1992 1991
- ------------------------------------------------ --------------- ------------- ------------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Revenues:
Brokerage commissions and fees $101,905 $ 87,203 $ 75,917 $ 59,993 $ 51,792 $ 41,092
Investment income 7,133 7,733 4,801 4,681 3,696 3,816
- ------------------------------------------------ --------------- ------------- ------------- ------------ -------------- ----------
Total revenues 109,038 94,936 80,718 64,674 55,488 44,908
Expenses:
Salaries and benefits 44,762 39,738 32,458 27,401 24,956 23,303
Travel and marketing 7,569 6,112 4,914 4,102 3,509 2,666
General and administrative 20,387 15,965 12,964 10,404 10,406 8,870
Amortization of goodwill 3,078 2,980 1,307 734 623 146
Interest and other expense 231 351 397 437 702 192
Restructuring charge (4) 22,750 -- -- -- -- --
- ------------------------------------------------ --------------- ------------- ------------- ------------ -------------- ----------
Total expenses 98,777 65,146 52,040 43,078 40,196 35,177
- ------------------------------------------------ --------------- ------------- ------------- ------------ -------------- ----------
Income before taxes (4) 10,261 29,790 28,678 21,596 15,292 9,731
Income taxes (1) 3,970 11,584 11,615 8,623 6,055 3,581
- ------------------------------------------------ --------------- ------------- ------------- ------------ -------------- ----------
Net income (1) (4) $ 6,291 $ 18,206 $ 17,063 $ 12,973 $ 9,237 $ 6,150
================================================ =============== ============= ============= ============ ============== ==========
PER COMMON SHARE:
Net income (1) (2) (4) $ 0.48 $ 1.34 $ 1.22 $ 0.97 $ 0.75 $ 0.50
Cash dividends (3) 0.40 0.40 0.32 0.08 -- --
Book value (2) 5.16 5.05 3.88 4.13 1.25 0.77
================================================ =============== ============= ============= ============ ============== ==========
BALANCE SHEET:
Current assets $ 35,840 $ 25,055 $ 17,836 $ 11,962 $ 4,699 $ 3,370
Long-term investments 9,793 7,035 15,837 37,519 550 3,673
Goodwill, net (4) 17,490 38,939 41,575 10,596 9,973 9,827
Total assets 514,756 497,413 529,897 432,055 394,161 320,206
Current liabilities 13,154 13,620 21,107 5,286 8,605 6,630
Long-term debt,
less current portion 1,188 350 665 946 3,288 1,338
Shareholders' equity 68,453 66,679 52,908 58,276 15,343 9,495
================================================ =============== ============= ============= ============ ============== ==========
FINANCIAL RATIOS:
Profit margin (pre-tax) (4) 9% 31% 36% 33% 28% 22%
Return on average
shareholders' equity (1) (4) 9 30 31 35 74 53
================================================ =============== ============= ============= ============ ============== ==========
OTHER:
Weighted average number of
shares outstanding (000)( 2) 13,230 13,590 14,007 13,436 12,300 12,300
Number of shares outstanding
at year-end (000) (2) 13,260 13,208 13,647 14,115 12,300 12,300
Number of employees at year-end 648 566 603 349 329 279
================================================ =============== ============= ============= ============ ============== ==========
</TABLE>
(1) Prior to the May 1993 initial public offering, the Company operated as a
partnership and therefore was not liable for corporate income taxes. Pro forma
income taxes (unaudited) of $3.5 million, $6.1 million and $3.6 million have
been included in income taxes for the years ended December 31, 1993, 1992 and
1991, respectively to illustrate what the tax consequences would have been had
the partnership been subject to corporate income taxes.
(2) Assumes 12.3 million shares of common stock issued and outstanding prior to
the May 1993 reorganization from a partnership to a corporation.
(3) Regular quarterly cash dividend of $0.08 per share initiated fourth quarter
1993; increased to $0.10 first quarter 1995. Cash dividends were declared and
paid in the same fiscal year.
(4) A $22.75 million charge was recognized in 1996 to reflect the restructuring
of the San Antonio based managing general agency operation. The charge includes
a $19.5 million write-down of goodwill as well as a $3.25 million reserve for
office lease and other related restructuring expenses. Prior to the
restructuring charge, certain 1996 operating results were: Income before taxes,
$33.0 million; Net income, $20.2 million; Net income per share, $1.53; Profit
margin (pre-tax), 30%; and Return on average shareholders' equity, 27%.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
Recent Developments
On February 14, 1997, E.W. Blanch Holdings, Inc. ("the Company" or "EWB")
purchased 70% of London based Swire Fraser Insurance (Holdings), Limited ("Swire
Fraser") from Swire Pacific Limited ("Swire Pacific") and increased its
ownership in Swire Blanch Holdings, Ltd. ("Swire Blanch") from 50% to 70%. Swire
Fraser provides insurance and reinsurance broking services in the areas of
marine hull and cargo, contractors, bloodstock, political risks, extended
warranty, professional liability, and contingency. They also provide risk
management services and independent financial advice to a wide ranging,
multi-national client base. The combined operations of Swire Fraser and Swire
Blanch will be merged into a single operation under the Swire Blanch name, which
will be owned 70% by EWB and 30% by Swire Pacific.
EWB paid Swire Pacific total consideration of (pound)8.0 million ($13.1
million, translated at acquisition date) consisting of the assumption of certain
Swire Fraser existing indebtedness of (pound)6.2 million ($10.2 million) and a
cash payment of (pound)1.8 million ($2.9 million). The combined Swire Fraser and
Swire Blanch operations had revenues of (pound)22.6 million ($36.9 million) in
1996, and showed a loss primarily due to the recognition of charges associated
with the Lloyd's Reconstruction and Reconciliation Agreement and reserves for
real estate no longer occupied by Swire Fraser.
Also on February 14, 1997, the Company purchased 750,000 shares of its
common stock, at a negotiated price of $19.40 per share, from its Chairman and
Chief Executive, E.W. Blanch, Jr. As part of the stock repurchase agreement, Mr.
Blanch has agreed that he will not make any open market or private sales of his
remaining stock for at least a two year period, except with the approval of a
select committee of the Company's outside directors.
On February 21, 1997, as part of the restructuring of its wholesale
operations, the Company completed the sale of its premium finance business. The
Company received $15.2 million in exchange for all of the outstanding stock of
the premium finance subsidiaries, whose assets included $14.9 million of premium
finance notes. The net sales proceeds equalled the Company's investment in the
business, resulting in no gain or loss on the sale. As part of the sale
agreement, the Company has an incentive to earn additional consideration based
on future premium finance sales referrals over the next five years. This
additional consideration will be recognized as income if and when it is earned.
Nature Of Business
Reinsurance Services
As a reinsurance intermediary, the Company structures and arranges reinsurance
between insurers seeking to cede insurance risk and reinsurers willing to assume
such risk. The Company's revenue is comprised primarily of reinsurance brokerage
which is generally based upon a percentage of reinsurance premiums placed.
Reinsurance brokerage as a percentage of ceded reinsurance premiums varies
depending upon, among other things, the type of reinsurance contract and the
expected frequency of loss.
Reinsurance continues to be an important part of the strategy of
insurance companies to manage exposure on insured risks in order to achieve
their financial objectives. Market factors, including the level of surplus
capacity in the insurance and reinsurance markets, prevailing premium rates,
underwriting experience, regulatory considerations, changes in the investment
environment, and general economic conditions and business trends, affect the
amount of reinsurance brokerage received by the Company. The Company seeks to
mitigate the effect of these market factors by establishing long-term
relationships with a diverse group of insurance companies, and providing these
insurance companies with solutions to their risk management problems and the
best possible reinsurance services. The Company believes it is well positioned
to take advantage of opportunities to grow its reinsurance intermediary
business.
The Company provides reinsurance intermediary services to domestic
insurance companies through E.W. Blanch Co. Inc. ("EWB Co.") and to insurance
companies based outside of the United States and the United Kingdom through
Swire Blanch. As discussed above, in February 1997, the Company purchased 70% of
Swire Fraser and increased its ownership in the Swire Blanch joint venture to
70%. This transaction is expected to provide increased opportunities for
international growth.
Through Paragon Reinsurance Risk Management Services, Inc. ("Paragon"),
the Company provides risk management consulting and administration services to
insurance and reinsurance companies, government entities, underwriting
facilities and other interested parties. Such services are generally provided as
part of the Company's core reinsurance intermediary services, as well as
directly to third parties. Through its July 1996 acquisition of a reinsurance
software system, Paragon continues to diversify and enhance the Company's
revenue stream.
The Company plans to continue to expand the development of its risk
management capabilities through the continued expansion of its catastrophe
consulting and modeling services and other technology-based services.
Wholesale Insurance Services
Through E.W. Blanch Wholesale Insurance Services, Inc. ("EWB Wholesale"), the
Company provides wholesale insurance services to retail insurance agents on
behalf of primary insurance companies. These services, which include
underwriting and claims processing, enable the Company's independent insurance
agent clients to access a variety of insurance companies and products. The
Company develops, markets, quotes, and processes specialized insurance programs
for targeted insurance companies and its independent insurance agent clients.
Through the wholesale distribution mechanism, the Company believes that
insurance companies are able to produce new lines of business in various
geographic locations without incurring high start-up costs.
Investment Income
The Company's investment income is derived from three sources: fiduciary
investments, premium finance notes and corporate investments. As an
intermediary, the Company acts as a conduit for insurance and reinsurance
premiums and loss payments which are paid to and remitted from fiduciary
accounts. Under applicable regulations, the Company is required to hold
fiduciary funds in appropriate bank and investment accounts subject to
restrictions on withdrawals and prohibitions on commingling. The Company earns
investment income on funds held in these accounts. The premium finance
business,a part of the Company's wholesale insurance operation and its primary
source of investment income, involves lending funds to certain customers of the
Company's independent insurance agent clients that require assistance in
financing insurance premiums. This business was sold in February 1997. Corporate
investment income represents interest and dividends earned on the investment of
the Company's capital, which is primarily generated through cash from
operations. Capital gains and losses may be realized from sales of the Company's
investments.
Seasonality
The Company historically has tended to realize a greater amount of its annual
brokerage revenue and net income in the first and third quarters due primarily
to semi-annual deposits on property catastrophe reinsurance contracts and the
prevalence of January and July effective dates on such contracts. In 1997, due
to softer market conditions, quarterly deposits are becoming more frequent,
which should have a smoothing effect on the Company's quarterly results. The
Company's risk management consulting and administration and wholesale
businesses, as well as certain larger transactions like the placement of
reinsurance for the California Earthquake Authority, are generally not seasonal
in nature. Based upon these factors and current business opportunities, and
given the increased significance of these non-seasonal revenue sources to the
Company's business, management believes that historical quarterly results may
not be indicative of future period results.
Business Segment Information
Segment information for the years ended December 31 are as follows:
1996
- --------------------------------------------- ---------------------------------
Income
(in thousands) Revenues Before Taxes
- --------------------------------------------- ------------------ --------------
Reinsurance services $ 94,339 $41,199
Wholesale insurance services 14,481 (26,097)
General corporate services 1,755 (4,841)
Eliminations (1,537) --
- --------------------------------------------- ------------------ --------------
$109,038 $10,261
============================================= ================== ==============
1995
- --------------------------------------------- ------------------- --------------
Income Before
(in thousands) Revenues Taxes
- --------------------------------------------- ------------------ --------------
Reinsurance services $ 81,452 $38,186
Wholesale insurance services 12,936 (2,855)
General corporate services 1,296 (5,541)
Eliminations (748) --
- --------------------------------------------- ------------------ --------------
$ 94,936 $29,790
============================================= ================== ==============
The reinsurance services segment is the primary source of the Company's
revenues and net income, and includes the reinsurance intermediary EWB Co., the
risk management services provided by Paragon and the international reinsurance
services of Swire Blanch. The wholesale insurance services segment includes the
wholesale insurance distribution and premium finance businesses provided by EWB
Wholesale. General corporate services includes investment income from corporate
investments and corporate expenses such as legal, finance, corporate
development, information systems, and the office of the chief executive.
The Company recorded a restructuring charge of $22.75 million in the
wholesale insurance services segment in the fourth quarter of 1996 resulting in
a $1.05 per share charge against earnings. This charge was comprised of two
items, a $19.5 million write-down of goodwill associated with the Elton George
Companies acquisition in 1994, and a $3.25 million reserve for the restructuring
of the Company's wholesale operations and its related lease expense.
1996 COMPARED TO 1995
Brokerage Commissions and Fees
Brokerage commissions and fees increased $14.7 million, or 16.9%, to $101.9
million in 1996 from $87.2 million in 1995. The components of brokerage
commissions and fees for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ------------------------------------------------------- -------------- --------------
<S> <C> <C>
Reinsurance Services:
Reinsurance brokerage $ 86,493 $74,473
Risk management fees 3,405 1,717
Equity in the net earnings of Swire Blanch 83 86
Wholesale Insurance Services:
Wholesale commissions and fees 11,924 10,927
- ------------------------------------------------------- -------------- --------------
Total $101,905 $87,203
- ------------------------------------------------------- -------------- --------------
</TABLE>
Reinsurance brokerage increased $12.0 million or 16.1% to $86.5 million
for the year ended December 31, 1996 compared to $74.5 million the prior year.
The net increase includes $20.8 million from new business, a significant portion
of which is from the placement of reinsurance on property exposures in Florida
and California, offset by $6.7 million of non-continuing business and $2.4
million from declines on existing business.
Risk management fees were $3.4 million for the year ended December 31,
1996 compared to $1.7 million the prior year. The increase from the prior period
is primarily the result of sales and maintenance fees associated with the new
reinsurance software business started on July 1, 1996, which contributed $1.0
million of fees, and $0.7 million of revenue from other administrative services.
Wholesale commissions and fees increased $1.0 million, or 9.1% to $11.9
million for the year ended December 31, 1996 compared to $10.9 million for the
year ended December 31, 1995. The increase was due to new business from
alternative distribution and direct marketing businesses. Commissions and fees
from the general agency declined due to decreases in commercial lines and
NAFTA/Mexican National business. These decreases were offset by increases in
both personal lines and special risks. Although the premiums and related
revenues in personal lines increased as a result of lower rates, this line of
business experienced unfavorable loss ratios. As of January 1, 1997, the Company
discontinued the non-standard auto portion of its personal lines business. In
January 1997, the Company assumed a book of commercial lines business which
management expects will generate revenues similar to those lost in the reduction
of personal lines.
Through September of 1996, the Company included the results of
operations of Medical Reinsurance Corporation ("MRC") in the wholesale insurance
services segment. In the fourth quarter of 1996, due to a change in its business
and management, this business was reclassified to the reinsurance services
segment. For financial reporting purposes, to improve historical comparisons and
due to the immaterial amounts, MRC's results are presented in the reinsurance
services segment for all of 1996 and 1995.
Investment Income
Investment income decreased $0.6 million, or 7.8%, to $7.1 million for the year
ended December 31, 1996 compared to $7.7 million the prior year. The components
of investment income for the year ended December 31 are as follows:
(in thousands) 1996 1995
- ------------------------------------------------- -------------- ------------
Fiduciary investment income $4,527 $5,177
Premium finance interest and fees 2,229 2,001
Corporate investment income 415 646
Net realized capital losses (38) (91)
- ------------------------------------------------- -------------- ------------
$7,133 $7,733
================================================= ============== ============
Fiduciary investment income declined $0.7 million, or 12.6%, to $4.5
million for the year ended December 31, 1996 compared to $5.2 million the prior
year. The average invested balance for the year ended December 31, 1996 was
$85.4 million at a weighted average rate of 5.3% compared to an average balance
of $87.7 million at a weighted average rate of 5.9% the prior year.
Premium finance interest and fees increased $0.2 million, or 11.3%, to
$2.2 million for the year ended December 31, 1996 compared to $2.0 million the
prior year primarily due to an increase in the premium finance note portfolio.
The outstanding balance of premium finance notes was $14.9 million at a weighted
average rate of 12.5% at December 31, 1996 and $12.2 million at 13.5% at
December 31, 1995. On February 21, 1997, the Company sold its premium finance
operation.
Corporate investment income declined $0.2 million, or 35.8%, to $0.4
million for the year ended December 31, 1996. This decline was due to smaller
invested balances as a result of sales of investments to fund a treasury stock
purchase in October 1995.
Salaries and Benefits
Salaries and benefits expense increased $5.0 million, or 12.6%, to $44.8 million
for the year ended December 31, 1996. Reinsurance services experienced a $4.2
million, or 15.9%, increase from the prior year. This was a result of key
additions in the risk management services area, normal salary progressions,
along with other increases. Wholesale insurance services increased $0.9 million,
or 12.3%, from the prior year as a result of staff additions in its alternative
distribution and direct marketing businesses. During 1996, the Company
experienced a net increase of 82 employees comprised of 48 in reinsurance
services, 24 in wholesale insurance services, and 10 in general corporate
services. At December 31, 1996, the Company had 648 employees with annualized
compensation of $35.4 million compared to 566 employees with annualized
compensation of $29.1 million at December 31, 1995.
Other Expenses
Travel and marketing expense increased $1.5 million, or 23.8%, to $7.6 million
for the year ended December 31, 1996. Reinsurance services travel and marketing
expense increased $1.3 million, or 26.6%, as a result of growth in the risk
management services area and additional travel related to generation of new
business. General corporate services travel and marketing expense increased $0.2
million, or 50%, to $0.5 million in 1996 as a result of key senior management
staff additions.
General and administrative expense increased $4.4 million, or 27.7%, to
$20.4 million for the year ended December 31, 1996. Reinsurance services expense
increased $2.9 million, or 41.9%, for the year ended December 31, 1996. The
increase is a result of increased catastrophe modeling expenses, expenses
associated with the acquired reinsurance software system, office rent, and other
increases resulting from growth of operations. Wholesale insurance services
expense increased $0.5 million, or 13.9%, for the year ended December 31, 1996.
This increase is the result of the growth of its alternative distribution and
direct marketing businesses. General corporate services expense increased $1.0
million or 21.6% as a result of increases in office rent, insurance, and
professional fees.
The Company recorded a $22.75 million restructuring charge related to
the Company's wholesale operation in San Antonio. This charge included $19.5
million for the write-down of the goodwill associated with the 1994 Elton George
acquisition, and a $3.25 million reserve for the restructuring of the Company's
wholesale operations and its related lease.
Income Taxes
The Company's effective tax rate was approximately 39% in 1996 and 1995. The
Company expects its effective tax rate to be 38% in 1997 primarily as a result
of the Swire Fraser acquisition.
1995 COMPARED WITH 1994
Brokerage Commissions and Fees
Brokerage commissions and fees increased $11.3 million, or 14.9%, to $87.2
million in 1995 from $75.9 million in 1994. The components of brokerage
commissions and fees for 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1995 1994
- -------------------------------------------------------- ------------- -----------
<S> <C> <C>
Reinsurance Services:
Reinsurance brokerage $74,473 $70,657
Risk management fees 1,717 1,675
Equity in the net earnings (loss) of Swire Blanch 86 (182)
Wholesale Insurance Services:
Wholesale commissions and fees 10,927 3,767
- -------------------------------------------------------- ------------- -----------
Total $87,203 $75,917
======================================================== ============= ===========
</TABLE>
Reinsurance brokerage increased $3.8 million, or 5.4%, to $74.5 million in 1995
compared to $70.7 million in 1994. The net increase was attributable to $15.7
million from the production of new business, offset by $11.6 million of
non-continuing business and $0.3 million of other declines. Risk management fees
were approximately $1.7 million for both 1995 and 1994.
EWB Wholesale contributed $10.9 million of wholesale commissions and
fees in its first full year of operations since the acquisition of the Elton
George Companies on September 30, 1994.
Investment Income
Investment income increased $2.9 million, or 61.1%, to $7.7 million in
1995 from $4.8 million in 1994. The components of investment income in 1995 and
1994 were as follows:
(in thousands) 1995 1994
- ------------------------------------------------ ------------ ------------
Fiduciary investment income $5,177 $3,073
Premium finance interest and fees 2,001 369
Corporate investment income 646 1,787
Net realized capital losses (91) (428)
- ------------------------------------------------ ------------ ------------
Total $7,733 $4,801
================================================ ============ ============
Fiduciary investment income increased $2.1 million, or 68.5%, to $5.2
million in 1995 from $3.1 million in 1994, primarily due to increases in
short-term interest rates. Average invested cash balances were $87.7 million at
an average yield of 5.9% in 1995 compared with $86.1 million at an average yield
of 3.6% in 1994.
Premium finance interest and fees were $2.0 million for the year ended
December 31, 1995, reflecting a full year of operations compared to three months
the prior year. The outstanding balance of premium finance notes was $12.2
million at an average rate of 13.5% at December 31, 1995 compared to $6.6
million at an average rate of 19.2% the prior year. The decline in average rate
is the result of increases in commercial notes, which generally have lower
average rates and higher average balances, and declines in personal notes.
Corporate investment income decreased $1.2 million, or 63.9% to $0.6
million in 1995 from $1.8 million in 1994. The decline is primarily due to
smaller invested balances resulting from the net sales of $9.5 million of
investments in 1995, primarily to fund the purchase of treasury stock in October
1995, and net sales of $26.1 million of investments in 1994, primarily to fund
the Elton George Companies acquisition and the purchase of treasury stock in
October 1994.
Salaries and Benefits
Salaries and benefits expense increased $7.2 million, or 22.4%, to $39.7 million
in 1995 from $32.5 million in 1994. This increase is primarily due to the Elton
George Companies acquisition in the fourth quarter of 1994. During 1995 the
Company experienced a net decrease of 37 employees comprised of a net increase
of seven employees in reinsurance services, a net decrease of 43 in wholesale
insurance services and a net decrease of one in general corporate services. At
December 31, 1995, the Company had 566 employees with aggregate annual salaries
of $29.1 million, compared with 603 employees with aggregate annual salaries of
$28.8 million at December 31, 1994.
Other Expenses
Travel and marketing expense increased $1.2 million, or 24.4%, to $6.1 million
in 1995 from $4.9 million in 1994. General and administrative expense,
consisting primarily of occupancy, communications, insurance and professional
fees, increased $3.0 million, or 23.1%, to $16.0 million in 1995 from $13.0
million in 1994. Amortization of goodwill increased $1.7 million, or 128.0%, to
$3.0 million in 1995 from $1.3 million in 1994. All of the above expense
increases were primarily due to a full year of wholesale insurance operations in
1995 compared to one quarter the prior year.
Income Taxes
The Company's effective tax rate in 1995 was 39.0% compared with a 40.5% tax
rate in 1994. The decline in the effective rate is primarily due to a greater
portion of the Company's business being conducted in states with generally lower
income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of brokerage commissions and
fees and investment income. Funds are applied generally to the payment of
operating expenses, the purchase of equipment used in the ordinary course of
business, the repayment of outstanding indebtedness and the distribution of
earnings.
The Company generated $15.6 million of cash from operations in 1996,
compared with $26.0 million in 1995. The decrease in operating cash flow in 1996
is primarily due to the timing of cash distributions from the fiduciary accounts
to the Company.
In 1996, the primary uses of cash in investing activities were the
purchase of $3.6 million of investments, the net issuance of $2.8 million of
premium finance notes, and the purchase of $4.7 million of property and
equipment, primarily computerized systems. The Company intends to continue to
increase its investment in such systems. In 1995, in addition to similar uses of
cash to increase investments, premium finance notes and equipment, the Company
sold $11.1 million of investments to fund both the purchase of treasury stock
and the settlement of a $4.9 million pre-acquisition liability from the Elton
George transaction.
The decline in cash used in financing activities in 1996 is primarily
due to a $7.8 million purchase of treasury stock from a former executive in
1995. The Company began using treasury shares to fund employee benefit plans in
1996.
The Company's cash and cash equivalents were $1.1 million at December
31, 1996, compared with $5.0 million in the prior year. The Company's long-term
investment portfolio at December 31, 1996 was $9.8 million which is comprised of
equity and debt investments. These investments are classified as available for
sale in accordance with SFAS No. 115. The market value of the Company's
investment portfolio at December 31, 1996 was $0.3 million below cost. Cash,
investments and the Company's lines of credit are available and managed for the
payment of its operating and capital expenditures. The Company is not subject to
any regulatory capital requirements in connection with its business.
In February 1997, the Company sold its premium finance operation for
$15.2 million, purchased 750,000 common shares from its Chairman for $14.6
million, and purchased 70% of Swire Fraser for consideration of $2.9 million in
cash and the assumption of (pound)6.2 million in debt (approximately $10.2
million at acquisition date). The Company believes the operations of Swire
Fraser will provide sufficient cash flows to satisfy its debt obligation. The
net funds of $2.3 million used in these transactions were from existing cash.
In April 1996, the Company terminated its previous $25.0 million line
of credit facility with a syndicate of banks including Norwest Bank Minnesota,
N.A., NationsBank of Texas N.A., and Morgan Guaranty Trust Company of New York
and began using a new three year $30.0 million facility with the same syndicate
of banks. The facility includes two borrowing methods: short term based on a
floating rate and longer term (30, 60, or 90 days) at 75 basis points over the
LIBOR rate. For the floating rate portion, interest is generally calculated at
75 basis points less than the base rate. The base rate is defined as the greater
of the prime rate or 150 basis points over the federal funds rate. Additionally,
the Company pays a commitment fee of 25 basis points on unused balances.
Covenants contained in the agreement require the Company to exceed minimum
levels of net worth and meet a fixed charge ratio. The Company had $1.3 million
outstanding, at a rate of 7.25%, under this credit facility at December 31,
1996.
In August 1996, the Company entered into a $30.0 million credit
facility with Ranger Funding Corporation ("Ranger"), a special purpose
corporation established by NationsBank, N.A., pursuant to which Ranger issues
commercial paper for the benefit of the Company. The above line of credit
functions as a backup liquidity facility whose capacity is reduced by any
amounts borrowed from Ranger. Interest rates on loans made by Ranger approximate
market commercial paper rates at the time of the borrowing by the Company,
thereby providing a lower cost of funds to the Company than borrowings under the
line of credit. A minimum of $5 million must be borrowed with a maximum term of
70 days, but there are no facility fees or covenants. However, as a condition of
the loan, the Company is required to maintain certain qualifying ratings from
Moody's Investors Service and Standard & Poor's Corporation. This facility is
subject to annual renewal. The Company had no balance outstanding under the
Ranger facility at December 31, 1996.
The Company paid a quarterly dividend of $0.10 per share during 1996
and 1995. The Company intends to continue paying quarterly dividends subject to
declaration by the Board of Directors. On January 24, 1997, the Board of
Directors declared a cash dividend of $0.10 per share payable March 3, 1997 to
shareholders of record as of February 7, 1997.
The Company believes that its cash and investments, combined with its
borrowing facilities and internally generated funds, will be sufficient to meet
its present and reasonably foreseeable long-term capital needs.
FORWARD-LOOKING STATEMENTS
Statements other than historical information contained in this Annual Report are
considered forward-looking and involve a number of risks and uncertainties.
Forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. There are certain
important factors that could cause results to differ materially from those
anticipated by some of the statements made above. In addition to the risk
factors discussed, among the other factors that could cause actual results to
differ materially are the following: market dynamics, interest rate changes,
regulatory changes, and competition. Additional information concerning those and
other factors are contained in the Company's Securities and Exchange Commission
filings, including but not limited to the current Form 10-K, copies of which are
available from the Company without charge.
REPORT OF INDEPENDENT AUDIOTRS
The Board of Directors
E.W. Blanch Holdings, Inc.
We have audited the accompanying consolidated balance sheets of E.W. Blanch
Holdings, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of E.W.
Blanch Holdings, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31,1996, in conformity with generally accepted accounting
principles.
As described in Note 2 to the financial statements, the Company changed
its method of accounting for certain debt and equity securities in 1994.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 24, 1997
except for Note 15, as to which the date is
February 21, 1997
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, (in thousands, except per share amounts) 1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Brokerage commissions and fees $101,905 $87,203 $75,917
Investment income 7,133 7,733 4,801
- ---------------------------------------------------------------- ----------------- --------------- ------------
Total revenues 109,038 94,936 80,718
EXPENSES:
Salaries and benefits 44,762 39,738 32,458
Travel and marketing 7,569 6,112 4,914
General and administrative 20,387 15,965 12,964
Amortization of goodwill 3,078 2,980 1,307
Interest and other expense 231 351 397
Restructuring charge 22,750 - -
- ---------------------------------------------------------------- ----------------- --------------- ------------
Total expenses 98,777 65,146 52,040
- ---------------------------------------------------------------- ----------------- --------------- ------------
Income before taxes 10,261 29,790 28,678
Income taxes 3,970 11,584 11,615
- ---------------------------------------------------------------- ----------------- --------------- ------------
Net income $ 6,291 $18,206 $17,063
================================================================ ================= =============== ============
Net income per common share and
common share equivalent $ 0.48 $ 1.34 $ 1.22
- ---------------------------------------------------------------- ----------------- --------------- ------------
Weighted average number of shares
of common stock outstanding 13,230 13,590 14,007
- ---------------------------------------------------------------- ----------------- --------------- ------------
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
At December 31, (in thousands) 1996 1995
- ------------------------------------------------------------- --------------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,069 $ 4,977
Due from fiduciary accounts 13,624 4,537
Premium finance notes 14,931 12,212
Prepaid insurance 1,749 1,212
Other current assets 4,467 2,117
- ------------------------------------------------------------- --------------------- ----------------
Total current assets 35,840 25,055
Long-term investments 9,793 7,035
Property and equipment, net 13,001 9,386
Goodwill, net 17,490 38,939
Other assets 9,452 2,143
Fiduciary accounts-- assets 429,180 414,855
- ------------------------------------------------------------- --------------------- ----------------
Total assets $514,756 $497,413
============================================================= ===================== ================
Liabilities and Shareholders' Equity Current liabilities:
Accrued compensation 4,176 3,311
Accounts payable 3,939 3,848
Notes payable to banks 1,340 4,500
Current portion of long-term liabilities 1,685 582
Other current liabilities 2,014 1,379
- ------------------------------------------------------------- --------------------- ----------------
Total current liabilities 13,154 13,620
Long-term debt, less current portion 1,188 350
Other liabilities, less current portion 2,781 1909
Commitments and contingencies - -
Fiduciary accounts-- liabilities 429,180 414,855
- ------------------------------------------------------------- --------------------- ----------------
Total liabilities 446,303 430,734
Shareholders' equity 68,453 66,679
- ------------------------------------------------------------- --------------------- ----------------
Total liabilities and shareholders' equity $514,756 $497,413
============================================================= ===================== ================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31, (in thousands, except per share amounts) 1996 1995 1994
<S> <C> <C> <C>
PREFERRED STOCK, $0.01 PAR VALUE - - -
COMMON STOCK, $0.01 PAR VALUE
Balance, beginning of year $ 141 $ 141 $ 141
Issuance of common stock - - -
- ----------------------------------------------------------------- ----------------- ------------------ --------------
Balance, end of year 141 141 141
- ----------------------------------------------------------------- ----------------- ------------------ --------------
COMMON SHARES SUBJECT TO REDEMPTION
Balance, beginning of year - (7,791) -
Issuance of put option to former executive - - (7,791)
Exercise of put option by former executive - 7,791 -
- ----------------------------------------------------------------- ----------------- ------------------ --------------
Balance, end of year - (7,791)
- ----------------------------------------------------------------- ----------------- ------------------ --------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 52,723 52,531 52,263
Issuance of common stock - 188 268
Other 46 4 -
- ----------------------------------------------------------------- ----------------- ------------------ --------------
Balance, end of year 52,769 52,723 52,531
- ----------------------------------------------------------------- ----------------- ------------------ --------------
TREASURY STOCK
Balance, beginning of year (17,370) (9,575) -
Issuance of treasury stock under employee benefit plans 1,004 - -
Purchase of treasury stock - (7,795) (9,575)
- ----------------------------------------------------------------- ----------------- ------------------ --------------
Balance, end of year (16,366) (17,370) (9,575)
- ----------------------------------------------------------------- ----------------- ------------------ --------------
UNREALIZED (LOSS) GAIN ON INVESTMENTS
Balance, beginning of year (59) (853) -
Net unrealized gain on investments at adoption of
Statement of Financial Accounting Standards No. 115 - - 191
Change in net unrealized (loss) gain on investments (270) 794 (1,044)
- ----------------------------------------------------------------- ----------------- ------------------ --------------
Balance, end of year (329) (59) (853)
- ----------------------------------------------------------------- ----------------- ------------------ --------------
RETAINED EARNINGS
Balance, beginning of year 31,244 18,455 5,872
Net income 6,291 18,206 17,063
Dividends (5,297) (5,417) (4,480)
- ----------------------------------------------------------------- ----------------- ------------------ --------------
Balance, end of year 32,238 31,244 18,455
- ----------------------------------------------------------------- ----------------- ------------------ --------------
Total Shareholders' Equity $68,453 $66,679 $ 52,908
================================================================= ================= ================== ==============
</TABLE>
There are 10 million preferred shares authorized; none issued
There are 30 million common shares authorized. The number of shares issued and
outstanding were 13,260,000, 13,208,000, and 13,647,000 at December 31, 1996,
1995, and 1994 respectively.
The shares outstanding at December 31, 1996, 1995, and 1994, are net of 882,000,
932,000, and 482,000 treasury shares, respectively. See accompanying notes.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, (in thousands) 1996 1995 1994
- -------------------------------------------------------- ----------------- ------------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,291 $18,206 $17,063
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 6,073 5,119 2,862
Net losses on sales of investments 38 91 428
Equity in the net (earnings) loss of Swire Blanch (83) (86) 182
Deferred income tax (benefit) provision (8,176) 126 244
Restructuring charge 22,750 - -
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Due from fiduciary accounts (9,087) 3,150 (7,399)
Prepaid insurance (533) (392) 162
Other current assets (2,154) (773) (152)
Accrued compensation 746 - (424)
Accounts payable and other current liabilities 406 630 (602)
Other, net (658) (77) 613
- -------------------------------------------------------- ----------------- ------------------ --------------
Net cash provided by operating activities 15,613 25,994 12,977
INVESTING ACTIVITIES
Purchases of investments (3,627) (1,600) (44,293)
Purchases of property and equipment, net (4,654) (3,918) (2,788)
Issuance of finance notes receivable, net (2,756) (5,773) (492)
Acquisition of subsidiary, net of cash acquired - (4,874) (26,610)
Sales of investments 596 11,122 70,363
Other, net (82) (308) 574
- -------------------------------------------------------- ----------------- ------------------ --------------
Net cash used in investing activities (10,523) (5,351) (3,246)
FINANCING ACTIVITIES
Dividends paid (5,297) (5,417) (4,480)
Proceeds from issuance of treasury shares 1,004 - -
Purchase of treasury stock - (7,795) (9,575)
Net (repayments) borrowings on lines of credit (3,203) (3,175) 3,699
Payments on long-term debt (1,288) (281) (251)
Other financing activities, net (214) (336) 225
- -------------------------------------------------------- ----------------- ------------------ --------------
Net cash (used in) provided by financing activities (8,998) (17,004) (10,382)
- -------------------------------------------------------- ----------------- ------------------ --------------
Net (decrease) increase in cash and cash equivalents (3,908) 3,639 (651)
Cash and cash equivalents at beginning of year 4,977 1,338 1,989
- -------------------------------------------------------- ----------------- ------------------ --------------
Cash and cash equivalents at end of year $ 1,069 $ 4,977 $ 1,338
======================================================== ================= ================== ==============
</TABLE>
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
E. W. Blanch Holdings, Inc. ("the Company") and its predecessor organizations
have been in operation since 1957. The consolidated financial statements include
the accounts of the Company and its subsidiaries. The Company categorizes its
business operations into three segments: reinsurance services, wholesale
insurance services and general corporate services. The principal subsidiaries
comprising the reinsurance services segment include E.W. Blanch Co., Inc.,
Paragon Reinsurance Risk Management Services, Inc., and E.W. Blanch
International, Inc. which owns a 50% interest in Swire Blanch Holdings, Ltd.
("Swire Blanch"), a joint venture with Swire Fraser Insurance (Holdings) Ltd.
("Swire Fraser"). The principal subsidiary comprising the wholesale insurance
segment is E.W. Blanch Wholesale Insurance Services, Inc. ("EWB Wholesale"),
which includes its primary operating subsidiary Blanch Insurance Services, Inc.
General corporate services includes investment income from corporate
investments, corporate expenses such as legal, finance, corporate development,
and the office of the chief executive, and results of other insignificant
operations.
Nature of Business
The Company is a provider of integrated risk management services including
reinsurance intermediary services, risk management consulting and administration
services, and wholesale insurance services. In its capacity as a reinsurance
intermediary, the Company structures and arranges reinsurance between insurers
seeking to cede insurance risks and reinsurers willing to assume such risks. The
Company receives and disburses funds for premium and loss transactions under
reinsurance contracts on behalf of insurance and reinsurance companies and
provides reinsurance transaction reporting and reinsurance consulting services.
The Company receives brokerage revenue for its reinsurance intermediary
services, which is generally based on a percentage of the related contract
premiums. In addition, the Company earns commissions and fees in its wholesale
business from the distribution of primary insurance policies. The Company also
earns fees from providing risk management consulting and administration
services.
Investment income is earned from the temporary investment of fiduciary
funds held by the Company, the financing of insurance premiums in the wholesale
business, and from investments owned by the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles 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
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Revenue Recognition
Reinsurance brokerage is recognized as premium reports or deposit premiums are
due. Any subsequent adjustments, including cancellations, are recognized upon
notification from the ceding companies, unless these amounts are subject to
reasonable estimation by the Company.
Wholesale commissions and fees are recognized when the underlying
premiums are invoiced, provided that substantially all services relating to the
placement of the insurance are complete, the policy premium is known or can be
reasonably estimated and coverage is provided under the insurance policy. Any
adjustments to commissions, primarily from cancellations, are estimated when the
initial commission on the policy is recognized.
Risk management fees are recognized when services are provided or
according to the terms specified in the contract.
Financial Instruments
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" as of January
1, 1994. Management has classified its investments in debt and equity securities
as available for sale. As a result, the investment portfolio is carried at fair
value and the corresponding unrealized gains or losses, net of applicable
deferred taxes, are recognized as a separate component of equity. Fair values
are generally based on quoted market prices. Where an active market does not
exist, fair values of debt securities are estimated using a pricing service and
fair values of equity securities are based on the most recent financial
statements. Realized gains and losses on sales of investments are determined
using the specific identification method.
Financial instruments held by the Company other than investments
include premium finance notes, notes receivable, notes payable to banks, and
long-term debt. These instruments are carried at their net unpaid principal
balances which approximate fair value.
Cash and Cash Equivalents
The Company considers investments in money market funds to be cash equivalents.
The carrying amount of cash and cash equivalents reported in the balance sheet
approximates fair value.
Depreciation and Amortization
Fixed assets are recorded at cost and are depreciated on a straight-line basis
over the estimated useful lives of the respective assets. Leasehold improvements
are amortized on a straight-line basis over the life of the improvement or the
remaining term of the respective lease, whichever is shorter. Amortization of
amounts capitalized under capital leases is included with depreciation expense.
Intangibles
The excess of cost over the fair value of net assets acquired (or goodwill) is
amortized on a straight-line basis over its estimated useful life. Amortization
periods range from 5 to 40 years. Accumulated amortization of goodwill at
December 31, 1996 and 1995 was $29.2 million and $6.6 million, respectively.
Management annually reviews the recoverability of intangibles using undiscounted
cash flow modeling. A write-down is recorded when the sum of the expected future
net cash flows is less than the book value. (See Note 3).
Fiduciary Accounts
As an intermediary, the Company acts as a conduit for insurance and reinsurance
premiums and loss payments which are paid to and remitted from fiduciary
accounts. Receivables and payables for premiums and losses under reinsurance
contracts are recorded in the fiduciary accounts when due or reported.
Receivables for premiums under wholesale insurance products are recorded when
the policy is invoiced. The majority of the fiduciary account assets and
liabilities represent receivables and offsetting payables between insurers and
reinsurers. Reinsurance brokerage, wholesale commissions and fees, fiduciary
investment income and reimbursement of loss advances by the Company are
transferred periodically from the fiduciary accounts to the Company's bank
accounts.
In accordance with state regulations, the Company maintains cash
resulting from fiduciary transactions in separate bank and investment accounts.
The balances and weighted average interest rates in these accounts were $41.9
million and 5.07%, and $52.4 million and 5.99% at December 31, 1996 and 1995,
respectively.
Income Taxes
Deferred taxes are recognized for all temporary differences between the tax and
financial reporting basis of the Company's assets and liabilities using tax
rates in effect for the year in which the differences are expected to reverse.
Earnings Per Share
Earnings per common share are computed based on the weighted average number of
common shares and common share equivalents outstanding.
Stock Based Compensation
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock Based Compensation"
("SFAS No. 123"). As allowed by SFAS No. 123, the Company continues to follow
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees", and the related interpretations in accounting for its stock
options. The disclosures required by SFAS No. 123 have been included in the
accompanying notes to the Company's financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. RESTRUCTURING CHARGE
During the fourth quarter, the Company recorded a $22.75 million restructuring
charge for its San Antonio based managing general agency operations. The charge
included a $19.5 million write-down of goodwill associated with the 1994
acquisition of the Elton George Companies and a $3.25 million reserve for
restructuring of the San Antonio operation and its related lease expense. This
charge reduced earnings per share for the quarter and year by $1.05.
4. LONG-TERM INVESTMENTS
The Company's investments at December 31 are summarized as follows:
<TABLE>
<CAPTION>
Gross Unrealized Fair
(in thousands) Cost Gains (Losses) Value
<S> <C> <C> <C> <C>
1996
Debt investments $ 5,458 $ 5 $ (24) $5,439
Equity investments 4,664 4 (314) 4,354
- ---------------------------- ---------------- --------------- ----------------- ----------------
$10,122 $ 9 $(338) $9,793
============================ ================ =============== ================= ================
1995
Debt investments $ 3,648 $ -- $ (33) $3,615
Equity investments 3,446 331 (357) 3,420
- ---------------------------- ---------------- --------------- ----------------- ----------------
$ 7,094 $331 $(390) $7,035
- ---------------------------- ---------------- --------------- ----------------- ----------------
</TABLE>
Gross gains realized on the sales of investments were $10,000 and $0.1
million for the years ended December 31, 1996 and 1994, respectively. Gross
losses realized on the sales of investments were $48,000, $0.1 million, and $0.5
million for the years ended December 31, 1996, 1995, and 1994, respectively.
The cost and fair values of debt securities at December 31, 1996, by
contractual maturity, are summarized as follows:
(in thousands) Cost Fair
Value
Due in one year or less $ 667 $ 667
Due after one year through five years 4,592 4,573
Due after five years 199 199
$ 5,458 $ 5,439
- ------------------------------------------------ -------------- -------------
5. PROPERTY AND EQUIPMENT
The Company's property and equipment at December 31 are summarized as follows:
(in thousands) 1996 1995
Computer hardware and software $ 13,635 $ 7,938
Office furniture and equipment 9,142 8,653
Leasehold improvements 1,559 1,399
- ------------------------------------------------ -------------- -------------
24,336 17,990
Less accumulated depreciation
and amortization (11,335) (8,604)
- ------------------------------------------------ -------------- -------------
$ 13,001 $ 9,386
================================================ ============== =============
6. LONG-TERM DEBT
The Company's long-term debt at December 31 is summarized as follows:
(in thousands) 1996 1995
Note payable with annual payments
through January 1997, interest at 11.78% $ 300 $ 567
Capital lease obligations 1,465 99
1,765 666
Less current portion (577) (316)
$1,188 $ 350
- ------------------------------------------------- ------------- -----------
Maturities of long-term debt are summarized as follows:
(in thousands)
1997 $577
1998 266
1999 281
2000 302
2001 339
- ------------------------------------- -------------
7. LINES OF CREDIT
In April 1996, the Company terminated its previous $25.0 million line of credit
facility with a syndicate of banks including Norwest Bank Minnesota, N.A.,
NationsBank of Texas N.A., and Morgan Guaranty Trust Company of New York and
began using a new three year $30.0 million facility with the same syndicate of
banks. The facility includes two borrowing methods: short term based on a
floating rate and longer term (30, 60, or 90 days) at 75 basis points over the
LIBOR rate. For the floating rate portion, interest is generally calculated at
75 basis points less than the base rate. The base rate is defined as the greater
of the prime rate or 150 basis points over the federal funds rate. Additionally,
the Company pays a commitment fee of 25 basis points on unused balances.
Covenants contained in the agreement require the Company to exceed minimum
levels of net worth and meet a fixed charge ratio. The Company had $1.3 million
outstanding under this credit facility at December 31, 1996 at a rate of 7.25%
In August 1996, the Company entered into a $30.0 million credit
facility with Ranger Funding Corporation ("Ranger"), a special purpose
corporation established by NationsBank, N.A., pursuant to which Ranger issues
commercial paper for the benefit of the Company. The above line of credit
functions as a backup liquidity facility whose capacity is reduced by any
amounts borrowed from Ranger. Interest rates on loans made by Ranger approximate
market commercial paper rates at the time of the borrowing by the Company,
thereby providing a lower cost of funds to the Company than borrowings under the
line of credit. A minimum of $5 million must be borrowed with a maximum term of
70 days, but there are no facility fees or covenants. However, as a condition of
the loan, the Company is required to maintain certain qualifying ratings from
Moody's Investors Service and Standard & Poor's Corporation. This facility is
subject to annual renewal. The Company had no balance outstanding under the
Ranger facility at December 31, 1996.
8. SHAREHOLDERS' EQUITY
Preferred Stock
The Board of Directors may from time to time direct the issuance of preferred
stock in one or more series and may, at the time of issuance, determine the
rights, preferences, and limitations of each series. The issuance of preferred
stock may adversely affect various rights, including dividend and voting rights,
of the common shareholders and may be used as an anti-takeover device.
On January 24, 1997, the Board of Directors approved a shareholder
rights plan, which provides protection against hostile takeovers and market
activities that could result in a sale of the Company. The Board of Directors
retains the right to approve a sale of the Company or redeem the rights under
certain circumstances. The Company has declared a dividend of one right for each
common share outstanding on February 7, 1997. Each right will entitle a
shareholder to buy 1/100 of a share of the Company's newly created Series A
Junior Participating Preferred Stock at an exercise price of $100. The rights
will become exercisable in the event that a person or group acquires, or makes a
tender offer for, 15% or more of the Company's common shares, subject to certain
exceptions.
Dividends
The Company initiated the payment of a quarterly cash dividend during the fourth
quarter of 1993. Cash dividends of $0.08 per share were paid each quarter to
shareholders through 1994. In January 1995, the Board of Directors increased the
quarterly dividend to $0.10 per share. The Company intends to continue paying
quarterly dividends subject to declaration by the Board of Directors. The
Company is not subject to any regulatory or capital requirements that restrict
its ability to pay dividends, except for the minimum net worth requirement in
its line of credit facility (see Note 7).
9. INCOME TAXES
Income taxes for the years ended December 31 are summarized as follows:
(in thousands) 1996 1995 1994
- ---------------------------------- --------------- -------------- -----------
Current:
Federal $10,702 $ 9,986 $ 9,635
State 1,444 1,472 1,736
12,146 11,458 11,371
Deferred taxes (8,176) 126 244
- ---------------------------------- --------------- -------------- -----------
$ 3,970 $11,584 $11,615
================================== =============== ============== ===========
The reconciliation between income tax expense and the amount computed
by applying the statutory federal income tax rate for the years ended December
31 is summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ---------------------------------------------------- -------------- --------------- -------------
<S> <C> <C> <C>
Income tax at the federal statutory rate $3,592 $10,427 $10,038
State taxes, net of federal tax benefit 321 957 1,128
Tax-exempt interest (57) (186) (594)
Goodwill amortization 257 257 257
Other (143) 129 786
$3,970 $11,584 $11,615
- ---------------------------------------------------- -------------- --------------- -------------
The components of the deferred income tax provision for the years ended
December 31 are summarized as follows:
(in thousands) 1996 1995 1994
- ---------------------------------------------------- ---------------- ------------- -------------
Prepaid expense $ 495 $(147) $128
Depreciation (38) 412 84
Goodwill amortization (6,900) -- --
Equity in the net earnings
(loss) of Swire Blanch 29 30 (74)
Accrued lease expense (1,100) 67 18
Other (662) (236) 88
- ---------------------------------------------------- ---------------- ------------- -------------
Total $(8,176) $ 126 $244
==================================================== ================ ============= =============
</TABLE>
Gross deferred tax assets and liabilities at December 31 are summarized
as follows:
<TABLE>
<CAPTION>
(in thousands) Current Non-current
- -------------------------------------------------- ----------------- ------------------
<S> <C> <C>
1996
Deferred tax liabilities $(658) $(1,733)
Deferred tax assets 461 8,896
Valuation allowance (128) --
- -------------------------------------------------- ----------------- ------------------
Total $(325) $ 7,163
================================================== ================= ==================
1995
Deferred tax liabilities $(200) $(1,780)
Deferred tax assets 205 460
Valuation allowance (23) --
- -------------------------------------------------- ----------------- ------------------
Total $ (18) $(1,320)
================================================== ================= ==================
</TABLE>
Management recorded a valuation allowance against the deferred tax
asset related to unrealized losses in the Company's investment portfolio.
Management has determined some uncertainty exists regarding the Company's
ability to utilize the tax benefits associated with the realization of the
capital losses.
<PAGE>
10. STOCK PLANS
The Company adopted the E. W. Blanch Holdings, Inc. Employee Stock Purchase Plan
("the ESPP") in May 1994. Pursuant to the ESPP, eligible employees of the
Company may purchase shares of the Company's common stock at 90% of fair market
value, subject to certain limitations and qualifications. The Company has
reserved 300,000 shares of common stock for issuance under the ESPP. At December
31, 1996, approximately 21,500 shares had been issued under the ESPP.
The Company adopted the 1993 Stock Incentive Plan ("the Stock Plan") in
May 1993. Pursuant to the Stock Plan, key employees of the Company who have been
selected as participants are eligible to receive awards of various forms of
equity-based incentive compensation including stock options, stock appreciation
rights, stock bonuses, restricted stock awards, performance units, phantom
stock, and awards consisting of combinations of such incentives. The Company has
reserved 2,400,000 shares of common stock for issuance under the Stock Plan.
Outstanding grants of shares under the Stock Plan were 785,333 and
626,500 at December 31, 1996 and 1995, respectively. In addition, the Company
had reserved 446,000 shares at December 31, 1996 for future grant, resulting in
1,168,667 and 173,500 shares available for grant under the Stock Plan at
December 31, 1996 and 1995, respectively. Outstanding awards under the Stock
Plan at December 31, 1996 are comprised of stock options which have a range of
exercise price of $17.50 - $22.75, and a weighted average contractual life of
8.1 years. The original term of all such options is 10 years and the options
become exercisable over the first five years of the term. There were 108,229
option shares exercisable at December 31, 1996 at a weighted average exercise
price of $18.91. The impact of the outstanding options on earnings per share
computations is not material.
Option activity during 1996, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
Average
Option
Price per
Shares Share
- ---------------------------------------------------- ------------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1993 397,500 $18.76
Granted 117,500 19.95
Canceled (42,500) 17.99
- ---------------------------------------------------- ------------------- ---------------
Outstanding at December 31, 1994 472,500 $19.13
Granted 215,000 18.88
Canceled (61,000) 22.01
- ---------------------------------------------------- ------------------- ---------------
Outstanding at December 31, 1995 626,500 $18.76
- ---------------------------------------------------- ------------------- ---------------
Granted 239,000 22.01
Canceled (80,167) 18.26
- ---------------------------------------------------- ------------------- ---------------
Outstanding at December 31, 1996 785,333 $19.80
==================================================== =================== ===============
</TABLE>
As permitted under SFAS No. 123, the Company continues to apply APB Opinion No.
25 and related interpretations and, accordingly, does not recognize compensation
expense for grants under its Stock Plan. If the Company had elected to recognize
compensation expense based on the fair value of the stock on the grant date as
prescribed by SFAS No. 123, net income and earnings per share would have been
reduced to the proforma amounts indicated in the table below:
(in thousands except per share amounts) 1996 1995
- ----------------------------------------------- --------------- ---------------
Net income -- as reported $6,291 $18,206
Net income -- pro forma 5,864 18,013
Earnings per share -- as reported 0.48 1.34
Earnings per share -- pro forma 0.44 1.33
=============================================== =============== ===============
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:
1996 1995
- ----------------------------------------------- --------------- ---------------
Expected dividend yield 1.80% 1.80%
Expected stock price volatility 21.80% 19.90%
Expected life of options 7 years 7 years
=============================================== =============== ===============
The Company used the seven year United States Treasury Note rate at the
date of grant for the risk-free interest rate assumption. The range of these
rates was 5.6% to 6.6% in 1996 and 6.4% to 7.9% in 1995. The weighted average
fair value of options granted during 1996 and 1995 was $7.49 and $7.33 per
share, respectively.
In 1993, the Company adopted the Non-Employee Directors' Stock Plan
("the Directors' Plan"). The Directors' Plan permits each participant to elect
to receive or defer all or a portion of the Director's fees in common stock of
the Company. The Company has reserved 25,000 shares of Common Stock for issuance
under the Directors' Plan. At December 31, 1996, approximately 2,100 shares of
stock have been earned under this plan at an average cost of $19.36 per share.
In 1993, the Company reserved an additional 191,000 shares of common
stock for issuance under its Incentive Plan (see Note 11).
11. EMPLOYEE BENEFITS AND INCENTIVE PLANS
The Company has a defined contribution retirement plan ("the Plan") for most of
its employees. Employees of EWB Wholesale became participants in the Plan
effective January 1, 1996. Contributions to the Plan are discretionary and
generally are equal to 7.5% of the employee's base salary. Employees with
salaries that exceed the Internal Revenue Service limit for qualified plans
receive the difference between 7.5% of their salary and the IRS allowable plan
contribution in cash. Total Plan expense for 1996, 1995, and 1994 was $2.0
million, $1.6 million, and $1.4 million, respectively. Of those amounts, $0.3
million, $0.3 million, and $0.2 million were paid in cash in 1996, 1995 and
1994, respectively.
The Company has a cash bonus Incentive Plan designed to reward
employees for exceptional performance in the production of new business,
servicing of existing business, and management of expenses. Awards for employees
are based on the achievement of goals set for the growth of revenues and
profits. A portion of the awards earned under the Incentive Plan may be paid in
grants of restricted common stock. The Company has reserved 191,000 shares of
common stock for issuance under the Incentive Plan; none have been issued. Total
Incentive Plan expense for the years ended December 31, 1996, 1995, and 1994 was
$1.7 million, $1.7 million, and $1.2 million, respectively.
The Company has a cash bonus Management Incentive Plan designed to
reward senior executives of the Company for exceptional performance based on
achievement of annual Company financial goals. A portion of the Management
Incentive Plan is based on the aggregate awards earned under the Incentive Plan.
No Management Incentive Plan expense was recorded in 1996 and 1995. Total
Management Incentive Plan expense for 1994 was $0.6 million.
12. RELATED PARTY TRANSACTIONS
The Company has invested in Conning Insurance Capital Limited Partnership III
("the Fund"), a private equity fund that invests in the insurance industry. One
of the Company's independent directors was Vice Chairman of Conning and Company,
the general partner of the Fund, at the time of the commitment. The Company's
Chairman and Chief Executive Officer is a current member of the Advisory Board
of the Fund. At December 31, 1996, the Company had paid its entire commitment of
$4.0 million. The amounts have been recorded as a long-term investment.
The Company had outstanding notes receivable from employees totaling
$0.8 million and $0.7 million at December 31, 1996 and 1995, respectively. The
majority of these notes are interest bearing and are payable over ten years
beginning in 1999.
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- ------------------------------------------------ ----------------- ---------------- -------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 223 $ 342 $ 344
Income taxes (federal, state, and city) 12,873 12,179 10,709
Non-cash investing activities:
Equipment acquired under capital leases 2,149 -- --
Purchase of real estate in
satisfaction of note receivable -- 392 --
Non-cash financing activities:
Write-offs of notes receivable 103 266 70
================================================ ================= ================ =============
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has operating leases for its headquarters, branch office facilities,
and certain equipment, including a corporate jet. Total rent expense for such
operating leases was $5.2 million, $4.6 million, and $3.9 million for 1996,
1995, and 1994, respectively.
Future minimum rental payments required under these leases are
summarized as follows:
(in thousands)
- -------------------------------------------------------------------- ---------
1997 $ 5,673
1998 5,359
1999 4,887
2000 2,895
2001 2,638
Thereafter 6,106
- -------------------------------------------------------------------- ---------
$27,558
==================================================================== =========
Common Stock Repurchase Agreement
Effective October 6, 1994, Michael W. Cashman, Sr. retired from his
responsibilities as President, Chief Operating Officer and Director of E. W.
Blanch Holdings, Inc. In conjunction with this event, the Company entered into a
Common Stock Repurchase Agreement (the Agreement) with Mr. Cashman.
Pursuant to the Agreement, in October 1994 the Company purchased
481,739 shares of the Company's common stock from Mr. Cashman for an aggregate
price of $9.6 million, or $19.875 per share, a price equal to 90% of the average
market price for the month of September 1994.
During the third quarter of 1995, Mr. Cashman participated with other
selling shareholders in a managed sale of common shares. Per the Agreement, this
transaction reduced the Company's commitment to purchase common shares from Mr.
Cashman by 500,000 shares. In October 1995, the Company purchased 449,978 shares
of common stock for an aggregate price of $7.8 million, or $17.325 per share,
from Mr. Cashman representing 90% of the average market price during September
1995. These transactions fulfilled the Company's commitments which arose when
Mr. Cashman retired.
Acquisition
As a component of the purchase price for the September 30, 1994 purchase of the
Elton George Companies, the Company agreed to assume responsibility for up to
$5.8 million of certain pre-acquisition liabilities of the Elton George
Companies. To the extent the liabilities settled for less than $5.8 million, any
remaining amounts would be remitted to the Georges. As of December 31, 1996, the
pre-acquisition liabilities had settled for $5.6 million, and $0.2 million was
remitted to the Georges. The Company has no remaining liability under the terms
of the Elton George Companies purchase agreement.
Legal Proceedings
In the normal course of business, the Company and its subsidiaries are parties
to a number of lawsuits. Management believes that these suits will be resolved
with no material financial impact on the Company.
15. SUBSEQUENT EVENTS
On February 14, 1997 the Company acquired 70% of Swire Fraser from Swire Pacific
Limited ("Swire Pacific") and increased its ownership in Swire Blanch from 50%
to 70% for $2.9 million in cash and the assumption of (pound)6.2 million
(approximately $10.2 million on the date of purchase) in debt. Swire Fraser is
primarily a wholesale insurance and reinsurance broker based in London with
other insurance broking operations in Hong Kong and northern England. The
combined operations of Swire Fraser and Swire Blanch will be merged into a
single operation under the Swire Blanch name, which will be owned 70% by EWB and
30% by Swire Pacific.
On February 14, 1997, the Company purchased 750,000 shares of its
common stock, at a negotiated price of $19.40 per share, from its Chairman and
Chief Executive, E.W. Blanch, Jr. As part of the stock repurchase agreement, Mr.
Blanch has agreed that he will not make any open market or private sales of his
stock for at least a two year period, except with the approval of a select
committee of the Company's outside directors.
On February 21, 1997 the Company sold its premium finance subsidiaries
of EWB Wholesale. The Company received $15.2 million in exchange for all of the
outstanding stock of the subsidiaries, whose assets included $14.9 million of
premium finance notes.
16. BUSINESS SEGMENT INFORMATION
The business segment information located on page 22 is incorporated herein by
reference. The following is additional business segment information for the year
ended December 31:
<TABLE>
<CAPTION>
Identifiable Depreciation & Capital
(in thousands) Assets Amortization Expenditures
1996
<S> <C> <C> <C>
Reinsurance services $415,139 $ 1,919 $2,734
Wholesale insurance services 63,250 22,415 762
General corporate services 78,192 1,239 1,158
Eliminations (41,825) -- --
- ------------------------------------------------- --------------------- ----------------------- -----------------
$514,756 $25,573 $4,654
1995
Reinsurance services $409,865 $ 1,163 $1,515
Wholesale insurance services 58,950 2,753 945
General corporate services 75,261 1,203 1,458
Eliminations (46,663) -- --
$497,413 $ 5,119 $3,918
</TABLE>
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
(in thousands, except per share amounts) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------------------------------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1996
REVENUES:
Brokerage commissions and fees $ 24,135 $ 21,112 $ 27,948 $ 28,710
Investment income 1,743 1,759 1,880 1,751
- ------------------------------------------------- ----------------- ---------------- ----------------- ----------------
Total revenues 25,878 22,871 29,828 30,461
Expenses:
Salaries and benefits 10,468 10,622 10,985 12,687
Travel and marketing 1,712 1,866 1,735 2,256
General and administrative 4,587 4,726 5,091 5,983
Amortization of goodwill 768 768 784 758
Interest and other expense 66 44 62 59
Restructuring charge -- -- -- 22,750
- ------------------------------------------------- ----------------- ---------------- ----------------- --------------
Total expenses 17,601 18,026 18,657 44,493
- ------------------------------------------------- ----------------- ---------------- ----------------- --------------
Income before taxes 8,277 4,845 11,171 (14,032)
Income taxes 3,171 1,910 4,312 (5,423)
- ------------------------------------------------- ----------------- ---------------- ----------------- --------------
Net income $ 5,106 $ 2,935 $ 6,859 ($ 8,609)
================================================= ================= ================ ================= ==============
Net income per share $ 0.38 $ 0.22 $ 0.52 ($ 0.65)
================================================= ================= ================ ================= ==============
1995
REVENUES:
Brokerage commissions and fees $ 25,054 $ 18,608 $ 25,072 $ 18,469
Investment income 1,776 1,832 2,132 1,993
- ------------------------------------------------- ----------------- ---------------- ----------------- --------------
Total revenues 26,830 20,440 27,204 20,462
EXPENSES:
Salaries and benefits 10,641 9,896 9,860 9,341
Travel and marketing 1,266 1,590 1,631 1,625
General and administrative 4,146 3,711 4,050 4,058
Amortization of goodwill 730 760 745 745
Interest and other expense 100 78 109 64
- ------------------------------------------------- ----------------- ---------------- ----------------- --------------
Total expenses 16,883 16,035 16,395 15,833
- ------------------------------------------------- ----------------- ---------------- ----------------- --------------
Income before taxes 9,947 4,405 10,809 4,629
Income taxes 3,880 1,682 4,178 1,844
- ------------------------------------------------- ----------------- ---------------- ----------------- --------------
Net income $ 6,067 $ 2,723 $ 6,631 $ 2,785
================================================= ================= ================ ================= ==============
Net income per share $ 0.44 $ 0.20 $ 0.49 $ 0.21
================================================= ================= ================ ================= ==============
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State or other jurisdiction of
Name of Subsidiary incorporation or organization
- ------------------ -----------------------------
E.W. Blanch Co., Inc. Delaware
Paragon Reinsurance Risk Management Services, Inc. Delaware
E.W. Blanch International, Inc. Delaware
E.W. Blanch Wholesale Insurance Services, Inc. Delaware
E.W. Blanch Capital Risk Solutions, Inc. Delaware
Blanch Catastrophe Services, Inc. Delaware
Spectrum Marketing & Resources, Inc. Delaware
EXHIBIT 23
CONSENT OF ERNST & YOUNG
INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-78300) pertaining to the Employee Stock Purchase Plan of E.W. Blanch
Holdings, Inc. of our report dated January 24, 1997, except for Note 15, as to
which the date is February 21, 1997, with respect to the consolidated financial
statements of E.W. Blanch Holdings, Inc. by reference in the Annual Report (Form
10-K) for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 28, 1997
EXHIBIT 24
POWER OF ATTORNEY
I, Paul B. Ingrey, the undersigned, of 2000 Royal Marco Point, #710,
Marco Island, Florida 34145 make, constitute, and appoint Edgar W. Blanch, Jr.,
of 4300 Centerview Drive, San Antonio, Texas 78265, my true and lawful
attorney-in-fact, in my name, place and stead to sign the E.W. Blanch Holdings,
Inc. Annual Report to the Securities and Exchange Commission on Form 10-K for
the fiscal year ended December 31, 1996.
/s/ Paul B. Ingrey
(Acknowledgment)
STATE OF Minnesota)
)ss
COUNTY OF Hennepin)
The foregoing instrument was acknowledged before me this 21st day of
March, 1997 by Paul B. Ingrey
/s/ Kathleen C. McGinnis
---------------------------------
Signature of Notary Public
POWER OF ATTORNEY
I, James N. Land, Jr., the undersigned, of P.O. Box 918, Short Hills,
New Jersey, 07078 make, constitute, and appoint Edgar W. Blanch, Jr., of 4300
Centerview Drive, San Antonio, Texas 78265, my true and lawful attorney-in-fact,
in my name, place and stead to sign the E.W. Blanch Holdings, Inc. Annual Report
to the Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1996.
/s/ James N. Land, Jr.
(Acknowledgment)
STATE OF New Jersey)
)ss
COUNTY OF Morris)
The foregoing instrument was acknowledged before me this 26th day of
March, 1997 by James N. Land, Jr.
/s/ Percy Pacheco
---------------------------------
Signature of Notary Public
POWER OF ATTORNEY
I, William B. Madden, the undersigned, of 1901 North Akard, Dallas,
Texas 75201 make, constitute, and appoint Edgar W. Blanch, Jr., of 4300
Centerview Drive, San Antonio, Texas 78265, my true and lawful attorney-in-fact,
in my name, place and stead to sign the E.W. Blanch Holdings, Inc. Annual Report
to the Securities and Exchange Commission on Form 10-K for the fiscal year ended
December 31, 1996.
/s/ William B. Madden
(Acknowledgment)
STATE OF Texas)
)ss
COUNTY OF Dallas)
The foregoing instrument was acknowledged before me this 21st day of
March, 1997 by William B. Madden
/s/ Anne Rush
---------------------------------
Signature of Notary Public
POWER OF ATTORNEY
I, Steven G. Rothmeier, the undersigned, of Great Northern Capital
Corp., 332 Minnesota Street, Suite W 1295, St. Paul, Minnesota, 55101 make,
constitute, and appoint Edgar W. Blanch, Jr., of 4300 Centerview Drive, San
Antonio, Texas 78265, my true and lawful attorney-in-fact, in my name, place and
stead to sign the E.W. Blanch Holdings, Inc. Annual Report to the Securities and
Exchange Commission on Form 10-K for the fiscal year ended December 31, 1996.
/s/ Steven G. Rothmeier
(Acknowledgment)
STATE OF Minnesota)
)ss
COUNTY OF Dakota)
The foregoing instrument was acknowledged before me this 19th day of
March, 1997 by Steven G. Rothmeier
/s/ Cathy A. Brandes
---------------------------------
Signature of Notary Public
POWER OF ATTORNEY
I, Joseph D. Sargent, the undersigned, of Connecticut Surety Corp.,
City Place II, 185 Asylum Street, Hartford, CT 06103-4105 make, constitute, and
appoint Edgar W. Blanch, Jr., of 4300 Centerview Drive, San Antonio, Texas
78265, my true and lawful attorney-in-fact, in my name, place and stead to sign
the E.W. Blanch Holdings, Inc. Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended December 31, 1996.
/s/ Joseph D. Sargent
(Acknowledgment)
STATE OF Connecticut)
)ss
COUNTY OF Hartford)
The foregoing instrument was acknowledged before me this 20th day of
March, 1997 by Joseph D. Sargent
/s/ Robert P. Martin
---------------------------------
Signature of Notary Public
POWER OF ATTORNEY
I, Chris L. Walker the undersigned, of 3500 W. 80th Street,
Bloomington, Minnesota 55431 make, constitute, and appoint Edgar W. Blanch, Jr.,
of 4300 Centerview Drive, San Antonio, Texas 78265, my true and lawful
attorney-in-fact, in my name, place and stead to sign the E.W. Blanch Holdings,
Inc. Annual Report to the Securities and Exchange Commission on Form 10-K for
the fiscal year ended December 31, 1996.
/s/ Chris L. Walker
(Acknowledgment)
STATE OF Minnesota)
)ss
COUNTY OF Hennepin)
The foregoing instrument was acknowledged before me this 19th day of
March 1997 by Chris L. Walker
/s/ Kathleen C. McGinnis
---------------------------------
Signature of Notary Public
POWER OF ATTORNEY
I, Frank S. Wilkinson, Jr. the undersigned, of 3500 W. 80th Street,
Bloomington, Minnesota 55431 make, constitute, and appoint Edgar W. Blanch, Jr.,
of 4300 Centerview Drive, San Antonio, Texas 78265, my true and lawful
attorney-in-fact, in my name, place and stead to sign the E.W. Blanch Holdings,
Inc. Annual Report to the Securities and Exchange Commission on Form 10-K for
the fiscal year ended December 31, 1996.
/s/ Frank S. Wilkinson, Jr.
(Acknowledgment)
STATE OF Minnesota)
)ss
COUNTY OF Hennepin)
The foregoing instrument was acknowledged before me this 19th day of
March, 1997 by Frank S. Wilkinson, Jr.
/S/ Kathleen C. McGinnis
---------------------------------
Signature of Notary Public
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,069
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,840
<PP&E> 24,336
<DEPRECIATION> 11,335
<TOTAL-ASSETS> 514,756
<CURRENT-LIABILITIES> 13,154
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 514,756
<SALES> 101,905
<TOTAL-REVENUES> 109,038
<CGS> 0
<TOTAL-COSTS> 98,777
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 231
<INCOME-PRETAX> 10,261
<INCOME-TAX> 3,970
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,291
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
