SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
-------------------- -----------------------
Commission File Number: 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
NONE
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO ___
The number of shares of the Registrant's common stock outstanding as of August
11, 1997 was 12,575,000.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
E. W. Blanch Holdings, Inc.
Consolidated Statements of Income
(in thousands, except per share amounts)
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------- -----------------
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Revenues:
Brokerage commissions and fees $37,842 $21,112 $73,086 $45,248
Investment income 2,222 1,759 4,007 3,501
------- ------- ------- -------
Total revenues 40,064 22,871 77,093 48,749
Expenses:
Salaries and benefits 19,430 10,622 35,908 21,090
Travel and marketing 3,746 1,866 6,445 3,578
General and administrative 7,589 4,726 14,166 9,313
Amortization of goodwill 688 768 1,278 1,536
Interest and other expense 321 44 597 110
------- ------- ------- -------
Total expenses 31,774 18,026 58,394 35,627
------- ------- ------- -------
Income before taxes 8,290 4,845 18,699 13,122
Income taxes 3,340 1,910 7,346 5,081
------- ------- ------- -------
Net income before minority interest 4,950 $ 2,935 11,353 $ 8,041
Minority interest, net of tax 130 - 89 -
------- ------- ------- -------
Net income $ 4,820 $ 2,935 $11,264 $ 8,041
======= ======= ======= =======
Net income per share $ 0.38 $ 0.22 $ 0.88 $ 0.60
======= ======= ======= =======
Weighted average number of shares of Common
Stock outstanding 12,740 13,323 12,858 13,309
======= ======= ======= =======
Cash dividends declared per share $ 0.10 $ 0.10 $ 0.20 $ 0.20
======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
E. W. Blanch Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
JUNE 30, DECEMBER 31,
1997 1996
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,545 $ 1,069
Due from fiduciary accounts 22,215 13,624
Premium finance notes - 14,931
Prepaid insurance 707 1,749
Other current assets 6,536 4,467
-------- --------
Total current assets 36,003 35,840
Long-term investments, available for sale 9,733 9,793
Property and equipment, net 22,007 13,001
Goodwill, net 30,992 17,490
Other assets 11,897 9,452
Fiduciary accounts--assets 712,416 429,180
-------- --------
Total assets $823,048 $514,756
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accrued compensation $ 2,740 $ 4,176
Notes payable to banks 931 1,340
Accounts payable 11,340 3,939
Current portion of long-term liabilities 5,196 1,685
Other current liabilities 4,966 2,014
-------- --------
Total current liabilities 25,173 13,154
Long-term debt, less current portion 14,207 1,188
Other liabilities, less current portion 5,704 2,781
Fiduciary accounts--liabilities 712,416 429,180
-------- --------
Total liabilities 757,499 446,303
Minority interest 1,645 -
SHAREHOLDERS' EQUITY 63,904 68,453
-------- --------
Total liabilities and shareholders' equity $823,048 $514,756
======== ========
SEE ACCOMPANYING NOTES.
<PAGE>
E. W. Blanch Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Unaudited
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,264 $ 8,041
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,869 2,876
Changes in operating assets and liabilities:
Due from fiduciary accounts (4,484) (2,895)
Other current assets (7,788) 1
Accrued compensation (1,021) (1,223)
Accounts payable and other current liabilities 9,732 (504)
Other, net 1,171 (143)
-------- --------
Net cash provided by operating activities 12,743 6,153
INVESTING ACTIVITIES
Purchases of property and equipment (5,477) (1,698)
Issuance of finance notes receivable, net (14) (3,361)
Excess of cash acquired from purchase of subsidiary 480 -
Proceeds from the sale of a subsidiary 15,092 -
Other investing activities, net 268 455
-------- --------
Net cash provided by (used) in investing activities 10,349 (4,604)
FINANCING ACTIVITIES
Purchase of treasury shares (14,550) -
Proceeds from the issuance of treasury shares to
employee benefit plans 1,224 831
Dividends paid (2,583) (2,646)
Net (repayments) borrowings on lines of credit (1,340) (2,593)
Payments on long-term debt (538) (549)
Other financing activities, net 171 (91)
-------- --------
Net cash (used in) financing activities (17,616) (5,048)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,476 (3,499)
Cash and cash equivalents at beginning of period 1,069 4,977
-------- --------
Cash and cash equivalents at end of period $ 6,545 $ 1,478
======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
E. W. Blanch Holdings, Inc.
Notes to Consolidated Financial Statements
June 30, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the interim periods are
not necessarily indicative of the results for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report to shareholders for the year
ended December 31, 1996.
E.W. Blanch Holdings, Inc. ("the Company") and its predecessor organizations
have been in operation since 1957. The Company is a leading international
provider of integrated risk management and distribution services including
reinsurance intermediary services, risk management consulting and administration
services, and primary insurance distribution services. The consolidated
financial statements include the accounts of the Company and its wholly and
majority owned subsidiaries. In 1997, the Company purchased a 70% interest in
Swire Fraser Insurance (Holdings) Limited (Swire Fraser) and an additional 20%
interest in the Swire Blanch joint venture. The combined operations of Swire
Fraser and Swire Blanch were merged into a single operation under the Swire
Blanch name, which is owned 70% by EWB and 30% by Swire Pacific Limited (Swire
Pacific).
2. ACCOUNTING POLICIES
Principles Of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly and majority owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Foreign Currency Translation
The Company's primary functional currency is the U.S. dollar. The functional
currency of the Company's foreign operations is the British pound sterling. The
Company translates income and expense accounts at the average rate in effect for
the period. Balance sheet accounts are translated at the period end exchange
rate. Adjustments resulting from the balance sheet translation are reflected in
Shareholder's Equity. The cumulative translation adjustment at June 30, 1997 is
a $52,000 gain.
<PAGE>
3. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share" in February 1997. The Company will adopt the statement in the fourth
quarter of 1997, as required, and early adoption is not permitted. Upon
adoption, prior periods will be restated. The Company has completed an initial
analysis and does not expect the difference in earnings per share to be
material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 defines the financial statement presentation for "all changes in a
company's equity during a period except those resulting from investments by
owners and distributions to owners." SFAS No. 130 is effective for financial
statements issued for fiscal years beginning after December 15, 1997 and will be
adopted by the Company in the first quarter of 1998. Because the statement is
merely an adjustment of presentation, the Company does not expect the adoption
of this statement to have any impact on the amount of net income, earnings per
share or total shareholders' equity reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14 and
defines financial and descriptive information about a Company's operating
segments that is to be disclosed in financial statements. The Company is
developing allocation methods to assess performance on a business segment basis.
Once completed, additional disclosures will be provided in accordance with this
Statement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the matters discussed in
this quarterly report on Form 10-Q are forward looking statements that involve
risks and uncertainties, many of which are outside the Company's control and,
accordingly, actual results may differ materially. These risks and uncertainties
include competition, dependence on key personnel, market conditions in the
insurance and reinsurance industries, government regulation, fiduciary funds,
international operations and the impact of specific engagements and new
opportunities. The Company's Annual Report on Form 10-K filed with the SEC on
March 31, 1997 includes a discussion of these risk factors and is incorporated
herein by reference.
GENERAL
The Company is a leading international provider of integrated risk management
and distribution services including reinsurance intermediary services, risk
management consulting and administration services, and primary insurance
distribution services.
In February1997, the Company purchased a 70% interest in Swire Blanch
(previously named Swire Fraser). The consideration for the Swire Blanch purchase
included the assumption of certain existing indebtedness of (pound)6.2 million
($10.2 million at purchase date) and a cash payment of (pound)1.8 million ($2.9
million). As part of the purchase agreement, after a minimum of three years
either party has the option to request the purchase by the Company of the 30%
minority interest at a price defined by formula. 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.
In February 1997, the Company purchased 750,000 shares of its common stock, at a
negotiated price of $19.40 per share, from its Chairman. Total consideration was
$14.6 million.
As part of the restructuring of its primary insurance distribution operations,
the Company completed the sale of its premium finance business in February 1997.
The Company received $15.2 million in exchange for the outstanding stock of the
premium finance subsidiaries. The net proceeds equaled the Company's investment
in the business, resulting in no gain or loss from the transaction.
Due to the integrated nature of the Company's risk management and distribution
business, and because the primary insurance distribution operations after
restructuring are no longer significant, the Company has discontinued its
financial reporting by business segment. Current year operations reflect the
operations from the Swire Blanch acquisition discussed above on a consolidated
basis from the date of acquisition, due to the Company's 70% controlling
interest. Prior year results of foreign operations include only the equity or
loss in the earnings of the Swire Blanch international reinsurance intermediary,
jointly owned 50% by the Company and 50% by Swire Pacific. The
<PAGE>
following is a summary of revenues and income before taxes by geographic area
for the periods indicated (in thousands):
Quarter Ended June 30, 1997 Quarter Ended June 30, 1996
----------------------- -------------------------
Income Income
Revenues before taxes Revenues before taxes
-------- -------- -------- --------
Domestic operations $ 29,841 $ 7,335 $ 22,921 $ 4,895
Foreign operations 10,223 955 (50) (50)
-------- -------- -------- --------
$ 40,064 $ 8,290 $ 22,871 $ 4,845
======== ======== ======== ========
Six Months Ended June 30, 1997 Six Months Ended June 30, 1996
----------------------- -------------------------
Income Income
Revenues before taxes Revenues before taxes
-------- -------- -------- --------
Domestic operations $ 61,021 $ 17,294 $ 48,653 $ 13,026
Foreign operations 16,072 1,405 96 96
-------- -------- -------- --------
$ 77,093 $ 18,699 $ 48,749 $ 13,122
======== ======== ======== ========
Domestic operations include the reinsurance intermediary services provided by
E.W. Blanch Co., Inc. (EWBCo.), the risk management consulting and
administration services provided by Paragon Reinsurance Risk Management
Services, Inc. (Paragon), the program distribution services of Rockwood
Programs, Inc. (Rockwood), the policy distribution capabilities of Alternative
Distribution Managers (Alternative Distribution), and the general agency
operations of Blanch Insurance Services, Inc. (Blanch GA). The services provided
by EWBCo., Paragon, Rockwood and Alternative Distribution are focused on
providing solutions for the management and distribution of risk to a client base
which is primarily comprised of property and casualty insurance companies. These
services are generally recurring and, due to the Company's expertise and the
value-added nature of its services, have been able to operate at relatively
higher operating margins. The services provided by Blanch GA are focused on the
primary distribution of insurance to property and casualty insurance companies,
largely through independent insurance agents. Due to the competitive nature of
Blanch GA's business, the Company's profit margins for these services are
relatively lower. Corporate services, which includes the operations of the
holding company are also included in Domestic operations.
Foreign operations include Swire Blanch, the Company's international insurance
and reinsurance broker headquartered in London. Swire Blanch includes a Lloyd's
insurance and reinsurance broking operation and international reinsurance
intermediary operations. Swire Blanch also provides financial services through
the sale of pension plans for insurance companies. Primary insurance
distribution services of Swire Blanch include the retail operations of Swire
Renshaw, located in northern England, and Swire Insurance Brokers, located in
Hong Kong. Approximately 75%, of Swire Blanch's revenues are generated in the
United Kingdom with the remainder primarily from the Pacific Rim. The Company's
foreign operations currently do not enjoy the relatively higher profit margins
of the Company's domestic risk management and distribution services. This is due
to a number of factors, including competitive market conditions for Lloyd's
brokers, the small, start-up nature of many of the international offices, the
competitiveness of the Swire Renshaw primary insurance distribution business,
and the capitalization and acquisition costs associated with the purchase. The
Company seeks to grow its international profitability through the integration of
systems, services and expertise in order to increase revenue production and
processing efficiencies.
<PAGE>
The Company plans to increase its investments in technology, particularly in the
areas of risk management and risk distribution, which includes both catastrophic
modeling and consulting capabilities.
SECOND QUARTER 1997 COMPARED WITH SECOND QUARTER 1996
BROKERAGE COMMISSIONS AND FEES
The following are the components of Brokerage commissions and fees for the
quarter ended June 30 (in thousands):
1997 1996
-------- --------
DOMESTIC OPERATIONS
Reinsurance brokerage $ 22,730 $ 17,083
Risk management fees 1,737 589
Program and policy distribution fees 1,015 730
General agency commissions 2,685 2,760
-------- --------
28,167 21,162
FOREIGN OPERATIONS
Reinsurance brokerage 2,657 (50)
Specialty lines 3,076 -
Financial services fees 1,420 -
Swire Renshaw 1,548 -
Swire Insurance Brokers 974 -
-------- --------
9,675 (50)
$ 37,842 $ 21,112
======== ========
Domestic operations reinsurance brokerage increased $5.6 million, or 33.1%, from
the prior year primarily as a result of new production, including continuing
revenue from the California Earthquake Authority contract and property
catastrophe coverage in Florida. Risk management fees include the consulting and
administration services from Paragon and fees from the licensing and maintenance
of the UniSURe software, a business which began July 1, 1996. These fees were
$1.7 million for the quarter ended June 30, 1997 compared to $0.6 million the
prior year, an increase of $1.1 million, or 194.9%. This increase is
attributable to fees related to the licensing and maintenance of the UniSURe
software, $0.9 million, and additional administrative services, $0.2 million.
Program and policy distribution fees increased $0.3 million, or 39.0%, to $1.0
million for the quarter. This increase is primarily the result of new production
which commenced in late 1996. General agency commissions decreased $0.1 million,
or 2.7%, to $2.7 million for the quarter ended June 30, 1997 compared to $2.8
million the prior year. This is primarily the result of decreased premium
volume, $17.6 million for the quarter ended June 30, 1997 compared to $22.0
million in 1996.
International operations had $9.7 million of brokerage commission and fees in
the quarter ended June 30, 1997. Reinsurance intermediary services, which
include those in London and other international offices, had $2.7 million of
fees. Specialty lines, which includes the specialty insurance distribution
services based in London, contributed $3.1 million of revenues. Financial
services fees, generated from the sale of various pension plan products for
insurance companies, were $1.4 million. Finally, Swire Renshaw and Swire
Insurance Brokers generated $1.5 million and $1.0 million of revenues,
respectively, from the primary distribution of insurance from their offices in
northern England and Hong Kong, respectively. For the quarter ended June 30,
1996 foreign revenues were a
<PAGE>
loss of $0.1 million and comprised only the Company's 50% equity in the net
income of the Swire Blanch joint venture.
INVESTMENT INCOME
1997 1996
------ ------
DOMESTIC OPERATIONS
Fiduciary investment income $1,480 $1,087
Corporate investment income 194 92
Premium finance interest and fees - 581
------ ------
1,674 1,760
FOREIGN OPERATIONS
Fiduciary investment income 434 -
Corporate investment income 114 -
------ ------
548 -
$2,222 $1,760
====== ======
Investment income was $2.2 million for the quarter ended June 30, 1997 compared
to $1.8 million the prior year, an increase of $0.5 million or 26.3 %. The
primary sources of investment income are from fiduciary funds and corporate
capital.
Fiduciary investment income from domestic operations was $1.5 million for the
quarter ended June 30, 1997 compared to $1.1 million the prior year, an increase
of $0.4 million or 36.2%. The average balance of domestic funds for the quarter
was $105.5 million (compared to $81.3 million for the prior year), at an average
yield of 5.6% (compared to 5.4% the prior year). Swire Blanch also earned $0.4
million of fiduciary investment income in the three months ended June 30, 1997.
Corporate investment income from domestic operations increased to $0.2 million
from $0.1 million as a result of larger invested balances in 1997. Swire Blanch
earned $0.1 million of corporate investment income for the three months ended
June 30, 1997.
Prior year investment income included $0.6 million of premium finance interest
and fees. This business was sold in February 1997.
EXPENSES
Domestic operating expenses increased $4.5 million to $22.5 million, or 24.8%,
for the quarter ended June 30, 1997 compared to $18.0 million the prior year.
The increase is primarily a result of increases in salaries and benefits
expenses including normal salary progressions, increases in benefit costs and an
increase of 25 employees as of June 30, 1997 compared to the prior year. The
increase in employees is due to increased business levels and businesses
acquired or started in 1996. Domestic operations also experienced increases in
travel and marketing and general and administrative expenses offset by a
reduction in goodwill amortization, the result of the goodwill writedown
recorded in fiscal 1996.
Operating expenses for international operations in the quarter ended June 30,
1997 were $9.3 million. Similar to the Company's domestic operations,
approximately two-thirds of these expenses relate to salaries and benefits for
employees.
<PAGE>
PROFIT MARGINS
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 24.6% for domestic operations for the quarter ended June
30, 1997, compared to 21.4% for the same period in the prior year. Gross profit
margins, calculated as income before corporate services expenses and before
taxes, were a loss of 8.0% for the Blanch GA for the quarter ended June 30,
1997, compared to a loss of 7.6% for the same period in the prior year. The
Company's remaining risk management and distributions services earned a gross
profit margin of 48.6% for the quarter ended June 30, 1997, compared to a gross
profit margin of 39.6% for the same period in the prior year.
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 9.3% for foreign operations for the quarter ended June 30,
1997. Gross profit margins, calculated as income before corporate services
expenses and before taxes, for the quarter ended June 30, 1997 were 24.4% for
the primary insurance distribution operations of Swire Renshaw and Swire
Insurance Brokers and 4.0% for the remaining reinsurance and specialty risk
management and distribution services. The majority of the operating profit from
the primary insurance distribution operation is recorded in the first half of
the year.
SIX MONTHS ENDED 1997 COMPARED WITH SIX MONTHS ENDED 1996
BROKERAGE COMMISSIONS AND FEES
The following are the components of Brokerage commissions and fees for the six
months ended June 30 (in thousands):
1997 1996
------- -------
DOMESTIC OPERATIONS
Reinsurance brokerage $46,630 $37,877
Risk management fees 3,641 1,189
Program and policy distribution fees 2,026 859
General agency commissions 5,612 5,227
------- -------
57,909 45,152
FOREIGN OPERATIONS
Reinsurance brokerage 4,110 96
Specialty lines 4,617 -
Financial services fees 2,887 -
Swire Renshaw 2,272 -
Swire Insurance Brokers 1,291 -
------- -------
15,177 96
$73,086 $45,248
======= =======
For the six months ended June 30, 1997, domestic operations reinsurance
brokerage increased $8.8 million, or 23.1%, from the prior year primarily as a
result of new production, including continuing revenue from the California
Earthquake Authority contract and property catastrophe coverage in Florida. Risk
management fees includes the consulting and administration services from Paragon
and fees from the licensing and maintenance of the UniSURe software, a business
which began July 1, 1996. These fees were $3.6 million for the six months ended
June 30, 1997 compared to $1.2 million the prior year, an increase of $2.4
million, or 206.2%. This increase is attributable to fees related to the
licensing and maintenance of the UniSURe software, $1.9 million, and additional
<PAGE>
administrative services, $0.5 million. Program and policy distribution fees
increased $1.2 million, or 235.9%, to $2.0 million for the six months ended June
30. This increase is primarily the result of new production which commenced in
late 1996. General agency commissions increased $0.4 million, or 7.3%, to $5.6
million for the six months ended June 30, 1997 compared to $5.2 million the
prior year.
International operations had $15.2 million of brokerage commissions and fees in
the six months ended June 30, 1997. Reinsurance intermediary services, which
include those in London and other international offices, had $4.1 million in
fees. Specialty lines, which includes the specialty insurance distribution
services based in London, contributed $4.6 million of revenues. Financial
services fees, generated from the sale of various pension plan products for
insurance companies, were $2.9 million. Finally, Swire Renshaw and Swire
Insurance Brokers generated $2.3 million and $1.3 million of revenues,
respectively, from the primary distribution of insurance from their offices in
northern England and Hong Kong, respectively. For the six months ended June 30,
1996 foreign revenues were $0.1 million and comprised only the Company's 50%
equity in the net income of the Swire Blanch joint venture.
INVESTMENT INCOME
1997 1996
------ ------
DOMESTIC OPERATIONS
Fiduciary investment income $2,540 $2,245
Corporate investment income 385 159
Premium finance interest and fees 187 1,097
------ ------
3,112 3,501
FOREIGN OPERATIONS
Fiduciary investment income 676 -
Corporate investment income 219 -
------ ------
895 -
$4,007 $3,501
====== ======
Investment income was $4.0 million for the six months ended June 30, 1997
compared to $3.5 million the prior year, an increase of $0.5 million or 14.4%.
The primary sources of investment income are from fiduciary funds, corporate
capital, and premium finance notes. The premium finance operation was sold in
February 1997.
Fiduciary investment income from domestic operations was $2.5 million for the
six months ended June 30, 1997 compared to $2.2 million the prior year, an
increase of $0.3 million or 13.1%. The average balance of domestic funds for the
six months ended June 30, 1997 was $95.8 million (compared to $82.2 million for
the prior year), at an average yield of 5.3% (compared to 5.5% the prior year).
Swire Blanch also earned $0.7 million of fiduciary investment income in the six
months ended June 30, 1997.
Corporate investment income from domestic operations increased to $0.4 million
from $0.2 million as a result of larger invested balances in 1997. Swire Blanch
earned $0.2 million of corporate investment income for the six months ended June
30, 1997.
<PAGE>
Premium finance interest and fees were $0.2 million for the six months ended
June 30, 1997 compared to $1.1 million the prior year. The decrease is the
result of the sale of the premium finance business in February 1997.
EXPENSES
Domestic operating expenses increased $8.1 million to $43.7 million, or 22.7%,
for the six months ended June 30, 1997 compared to $35.6 million the prior year.
The increase is primarily a result of increases in salaries and benefits
expenses including normal salary progression, increased employee benefit cost
and an increase of 25 employees as of June 30, 1997 compared to the prior year.
The increase in employees is due to increased business levels and businesses
acquired or started in 1996. Domestic operations also experienced increases in
travel and marketing and general and administrative expenses offset by a
reduction in goodwill amortization, the result of the goodwill writedown
recorded in fiscal 1996.
Operating expenses for the five months of international operations included in
the six months ended June 30, 1997 were $14.7 million. Similar to the Company's
domestic operations, approximately two-thirds of these expenses relate to
salaries and benefits for employees.
PROFIT MARGINS
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 28.3% for domestic operations for the six months ended June
30, 1997, compared to 26.9% for the same period in the prior year. Gross profit
margins, calculated as income before corporate services expenses and before
taxes, were a loss of 1.5% for the Blanch GA for the six months ended June 30,
1997, compared to a loss of 9.3% for the same period in the prior year. The
Company's remaining risk management and distributions services earned a gross
profit margin of 50.1% for the six months ended June 30, 1997, compared to a
gross profit margin of 45.9% for the same period in the prior year.
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 8.7% for foreign operations for the five months ended June
30, 1997. Gross profit margins, calculated as income before corporate services
expenses and before taxes, for the six months ended ended June 30, 1997 were
14.0% for the primary insurance distribution operations of Swire Renshaw and
Swire Insurance Brokers and 7.1% for the remaining reinsurance and specialty
risk management and distribution services. The majority of the operating profit
from the primary insurance distribution operation is recorded in the first half
of the year.
INCOME TAXES
The Company's combined federal and state effective tax rate for domestic
operations continues to be 39%. The effective tax rate provided for the
Company's foreign operations is expected to be 35%.
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's cash and cash equivalents were $6.5 million at June 30,
1997.
The Company generated $12.7 million of cash from operations during the first six
months of 1997 compared with $6.2 million for the same period in 1996. The
increase in operating cash flow in 1997
<PAGE>
is primarily due to the increase in net income, the timing of cash distributions
from the fiduciary accounts to the Company and the timing of changes in various
operating assets and liabilities.
Cash flow from investing activities was $10.3 million for the six months ended
June 30, 1997. During the six months ended June 30, 1997, the Company received
net proceeds of $15.1 million from the sale of its premium finance operations.
Consideration for the Swire Blanch transaction was $2.9 million in cash and the
assumption of (pound)6.2 million of debt (approximately $10.2 million at the
acquisition date). The Company believes the operations of Swire Blanch will
provide sufficient cash flows to satisfy the debt. Swire Blanch's cash at the
purchase date was $3.4 million, thus providing $0.5 million of net cash from the
acquisition. The Company also used $5.5 million of cash for the purchase of
property and equipment, primarily computerized systems. The Company intends to
increase its investment in such systems. During 1996, the Company used cash in
investing activities primarily for a $3.4 million net issuance of premium
finance notes and $1.7 million for the purchase of property and equipment.
The primary uses of cash for financing activities for the six months ended June
30, 1997 were $14.6 million for the purchase of treasury stock, $2.6 million of
dividends paid to shareholders and $1.3 million for the net repayment of lines
of credit. In the prior year, net cash used by financing activities was $5.0
million, consisting primarily of cash dividends paid to shareholders and net
repayments of lines of credit. The Company issued $1.2 million and $0.8 million
of treasury stock to fund employee benefit plans in the six months ended June
30, 1997 and 1996, respectively.
The Company's long-term investment portfolio at June 30, 1997 was $9.7 million,
comprised of equity and debt instruments. The market value of the Company's
investment portfolio at June 30, 1997 was $0.3 million below cost. Cash,
short-term investments and the Company's line 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.
On January 24, 1997, the Board of Directors declared a regular quarterly cash
dividend of $0.10 per share, payable March 3, 1997 to shareholders of record as
of February 7, 1997. On April 24, 1997, the Board of Directors declared a
regular quarterly cash dividend of $0.10 per share, payable June 2, 1997 to
shareholders of record as of May 9, 1997. On July 24, 1997, the Board of
Directors declared a regular quarterly dividend of $0.10 per share payable on
September 2, 1997 to shareholders of record as of August 12, 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.
<PAGE>
E. W. BLANCH HOLDINGS, INC.
Part II. Other Information
Items 1, 2, 3 and 5 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders on April 24, 1997.
Proxies for the meeting were solicited pursuant to Regulation 14 of the
Securities Exchange Act of 1934. The following matters were voted upon:
* Election of directors:
Newly elected directors:
In Favor Withheld
Joseph D. Sargent 7,994,453 414,156
Frank S. Wilkinson, Jr. 7,994,753 413,856
* Approval of the E.W. Blanch Holdings, Inc. Restricted Stock
Incentive Plan.
In Favor Opposed Abstained Broker Non-Vote
7,981,138 106,096 41,153 280,222
* Approval of the E.W. Blanch Holdings, Inc. Management
Incentive Plan.
In Favor Opposed Abstained Broker Non-Vote
7,829,859 72,795 225,733 280,222
* Approval of an amendment to the Employee Stock Purchase Plan.
In Favor Opposed Abstained Broker Non-Vote
8,348,038 19,633 40,938 0
* Approval of an amendment to the E.W. Blanch Holdings, Inc.
1993 Stock Incentive Plan.
In Favor Opposed Abstained Broker Non-Vote
8,202,876 128,172 42,224 35,337
* Ratification of Ernst & Young LLP as the auditors for the
Company for the year 1997.
In Favor Opposed Abstained Broker Non-Vote
8,405,509 1,813 1,287 0
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits
Exhibit 10 Employment agreement for E.W. Blanch, Jr.
Exhibit 27 Financial Data Schedule
(b.) The registrant did not file a current report on Form 8-K
during the quarter ended June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
E. W. BLANCH HOLDINGS, INC.
Dated: August 13, 1997 /s/ Ian D. Packer
-----------------
Ian D. Packer
Executive Vice President
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit 10 Employment Agreement for E.W. Blanch, Jr.
Exhibit 27 Financial Data Schedule
EXHIBIT 10
EMPLOYMENT AGREEMENT
AGREEMENT between E. W. Blanch Holdings, Inc., a Delaware corporation
(hereinafter called the "Company"), and Edgar W. Blanch, Jr. (hereinafter called
the "Employee").
1. EFFECTIVE DATE. The effective date of this Agreement shall be
January 1, 1997.
2. EMPLOYMENT. The Company hereby employs the Employee and the Employee
hereby accepts employment upon the terms and conditions hereinafter set forth.
3. TERM. The term of this Agreement shall be from the effective date of
this Agreement to March 31, 2002. This Agreement is also subject to early
termination by the Company for "Cause."
For purposes of this Agreement, the Company shall have Cause to
terminate Employee's employment hereunder upon (A) the Employee having been
convicted of any felony under any state or federal law; (B) an act or acts of
personal dishonesty committed by Employee and intended to result in substantial
personal enrichment of Employee at the expense of the Company; (C) the willful
malfeasance or gross negligence by the Employee in the performance of his duties
hereunder; or (D) gross misconduct by the Employee materially injurious to the
Company. In the event that this Agreement shall be terminated for Cause, the
Company shall continue to make payments hereunder for all services rendered by
the Employee up to the date of termination but shall have no further obligations
to make payments after that date.
The Company may terminate the Employee's employment hereunder if (i)
the Employee becomes disabled, as such term is defined in the group disability
insurance policy of Employer or (ii) the Employee dies. In any such case, the
Company shall have no further obligation or liability under this Agreement.
4. COMPENSATION. For all services rendered by the Employee under this
Agreement, the Company shall pay the Employee at a salary rate of One Million
Dollars ($1,000,000) per year, payable in accordance with the Company's payroll
practice as from time to time in effect. This compensation amount will not
preclude Employee from participation in other supplemental compensation programs
that the Company may choose at is discretion to adopt during the term of this
Agreement.
5. DUTIES. The Employee is engaged as Chief Executive Officer of the
Company and hereby promises to perform and discharge faithfully and efficiently
the duties which may be assigned to him from time to time.
6. EXTENT OF SERVICES. The Employee shall devote substantially his full
time, attention and energies to the business of the Company and shall not during
the term of this Agreement be engaged in any other substantial business
activity, whether or not such business
<PAGE>
activity is pursued for gain, profit or other pecuniary advantage; but this
shall not be construed as preventing the Employee from investing his personal
assets in businesses which do not compete with the Company in such form or
manner as will not require any substantial services on the part of the Employee
in the operation of the affairs of the companies in which such investments are
made and in which his participation is solely that of an investor and except
that the Employee may purchase securities in any corporation whose securities
are regularly traded, provided that such purchases shall not result in him
collectively owning beneficially at any time more than 1% of any class of
securities of any corporation engaged in a business competitive with that of the
Company.
7. COVENANTS NOT TO SOLICIT, COMPETE OR INTERFERE. For a period of two
(2) years from and after the termination of Employee's employment hereunder for
any reason, Employee will not, directly or indirectly, as a sole proprietor,
member of a partnership, or stockholder, investor, officer or director of a
corporation, or as an employee, agent, associate or consultant of any person,
firm or corporation:
(a) Engage in business activities of the types performed by the Company
or its affiliates in the geographic areas where the Company or its affiliates
conducts those business activities.
(b) Solicit or accept business (i) from any clients or prospects of the
Company or its affiliates who were solicited or serviced directly or indirectly
by the Employee or where the Employee supervised, directly or indirectly, in
whole or in part, the solicitation or service activities related to such clients
or prospects or (ii) from any former client of the Company or its affiliates who
was such within five (5) years prior to Employee's date of termination and who
was solicited or serviced directly by the Employee or where the Employee
supervised, directly or indirectly, in whole or in part, the solicitation or
service activities related to such former client; or
(c) Solicit, or assist anyone else in the solicitation of, any of the
Company's employees to terminate their employment with the Company and to become
employed by any business enterprise with which the Employee may then be
associated, affiliated, or connected; or
As used in this paragraph 7 and in paragraph 8, "affiliate" shall mean
any person, firm or corporation that, directly or indirectly, controls, is
controlled by, or is under common control with, the Company, whether such
control is through stock ownership, contract or otherwise, and shall expressly
include the Company's predecessor, E. W. Blanch Co. Limited Partnership; and
"prospect" shall mean any person or organization to whom a proposal for services
was rendered by the Company or its affiliates during the 12-month period
immediately preceding the Employee's date of termination; and "solicit" includes
but is not limited to any contact or communication of any nature with a prospect
or existing client for the purpose of or having the effect of maintaining or
establishing goodwill as a basis for any present, future or expanded business,
or otherwise furthering a business goal.
It is the desire and intent of the parties that the provisions of this
paragraph 7 shall be enforced to the fullest extent permissible under the laws
and public policies applied in each jurisdiction in which enforcement is sought.
Accordingly, if any particular portion of this paragraph 7 shall be adjudicated
to be invalid or unenforceable, this paragraph 7 shall be
<PAGE>
deemed amended to permit a court to modify the portion thus adjudicated to be
invalid or unenforceable, so that this paragraph shall be legally enforceable to
the full extent permitted in the law of the particular jurisdiction in which
such adjudication is made.
8. NONDISCLOSURE OF INFORMATION. Employee recognizes and acknowledges
that the Company's trade secrets and confidential or proprietary information,
including such trade secrets or information as may exist from time to time, and
information as to the identity of clients of the Company, reinsurance contract
data and other similar items, are valuable, special and unique assets of the
Company's business, access to and knowledge of which are essential to the
performance of the duties of Employee hereunder. Employee will not, during or
after the term hereof, in whole or in part, disclose such secrets or
confidential or proprietary information to any person, firm, corporation,
association or other entity for any reason or purpose whatsoever, nor shall
Employee make use of any such property for his own purposes or for the benefits
of any person, firm, corporation or other entity (except the Company) under any
circumstances, during or after the term hereof, provided that after the term
hereof these restrictions shall not apply to such secrets or information which
are then in the public domain (provided that Employee was not responsible,
directly or indirectly, for such secrets or information entering the public
domain without the Company's consent).
9. INJUNCTIVE RELIEF. If there is a breach or threatened breach of the
provisions of paragraphs 7 or 8 of this Agreement, the Company shall be entitled
to an injunction restraining Employee from such breach. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies for such
breach or threatened breach including recovery of and damages incurred by the
Company and any profits made by Employee as a result of such breach or
threatened breach. The Company shall be entitled to recovery of its legal fees
and related costs in the event of a breach or threatened breach of this
Agreement by Employee.
10. EMPLOYEE BENEFITS. During the term of this Agreement, Employee
shall participate in all employee benefit plans of the Company, subject to the
eligibility, enrollment and other requirements of such plans; provided, however,
that to the extent Employee's participation in any such plans would result in
taxable income to Employee in an amount that would not be deductible by the
Company under Section 162(m) of the Internal Revenue Code, then Employee's
salary as set forth in paragraph 4 shall be reduced accordingly, unless Employer
and Employee agree to a deferral of that taxable income in a manner designed to
render the deferred income deductible when received under Section 162(m) of the
Internal Revenue Code.
11. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been duly given or
delivered if delivered personally or mailed by registered or certified mail,
return receipt requested, with first class postage prepaid, to his residence in
the case of Employee and to its principal office in the case of the Company.
12. BREACH, WAIVER OF BREACH. The waiver by the Company of a breach of
any provision of this Agreement by the Employee shall not operate or be
construed as a waiver of any subsequent breach by the Employee.
13. GOVERNING LAW. The validity, interpretation, construction,
performance, enforcement and remedies of or relating to this Agreement, and the
rights and obligations of
<PAGE>
the parties hereunder, shall be governed by the substantive laws of the State of
Minnesota (without regard to the conflict of laws rules or statutes of any
jurisdiction), and any and every legal proceeding arising out of or in
connection with this Agreement shall be brought in the appropriate courts of the
State of Minnesota, each of the parties hereby consenting to the exclusive
jurisdiction of said courts for this purpose.
14. ASSIGNMENT. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
of the Company and may be assigned, for all or any part of the term hereof, by
the Company to any corporation, (i) which at the time controls the capital stock
of the Company, (ii) which succeeds to substantially all the assets of the
Company or (iii) the controlling capital stock of which is at the time owned by
the Company; provided, however, that in the event of any transaction specified
in (i), (ii) or (iii) above, the Company shall remain liable with respect to the
obligations of the Company under this Agreement. In the event of such
assignment, any and all references to the "Company" in other paragraphs of this
Agreement shall be deemed to mean and include such assignee corporation.
15. SURVIVAL. The parties expressly acknowledge and agree that the
provisions of this Agreement, which by their express or implied terms extend
beyond the termination of Employee's employment hereunder (including, without
limitation, the provisions of paragraphs 7 and 8 relating to noncompetition and
nondisclosure of information), shall continue in full force and effect
notwithstanding Employee's termination of employment hereunder or the
termination of this Agreement, respectively.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the dates below.
E. W. Blanch Holdings, Inc.
3500 West 80th Street
Minneapolis, MN 55431
By: /S/ Chris L. Walker June 8, 1997
Its: President Date
/S/ Edgar W. Blanch, Jr. May 27, 1997
Edgar W. Blanch, Jr. Date
415 Hiway 46W
Boerne, TX 78006
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,545
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,003
<PP&E> 41,161
<DEPRECIATION> 19,154
<TOTAL-ASSETS> 823,048
<CURRENT-LIABILITIES> 25,173
<BONDS> 0
0
0
<COMMON> 141
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 823,048
<SALES> 73,086
<TOTAL-REVENUES> 77,093
<CGS> 0
<TOTAL-COSTS> 58,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 597
<INCOME-PRETAX> 18,699
<INCOME-TAX> 7,346
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,264
<EPS-PRIMARY> 0.88
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