- --------------------------------------------------------------------------------
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 SEPTEMBER 30, 1999
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.)
500 NORTH AKARD, SUITE 4500, DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 756-7000
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
September 30, 1999 was 13,151,339.
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 1999 1998
------------------ --------------------
<S> <C> <C> <C> <C>
Revenues:
Operations $56,453 $52,539 $172,584 $142,628
Interest income 2,549 2,504 6,822 6,734
------------------ --------------------
Total revenues 59,002 55,043 179,406 149,362
Expenses:
Salaries and benefits 23,770 22,894 73,519 67,883
Travel and marketing 3,277 3,609 11,409 11,049
General and administrative 10,608 10,018 34,230 27,455
Amortization of goodwill 735 696 2,255 2,084
Interest expense 245 550 688 1,393
------------------ --------------------
Total expenses 38,635 37,767 122,101 109,864
------------------ --------------------
Income before taxes 20,367 17,276 57,305 39,498
Income taxes 7,832 6,689 23,408 15,196
------------------ --------------------
Net income before minority interest and
equity in loss of unconsolidated
subsidiaries 12,535 10,587 33,897 24,302
Minority interest, net of tax 17 535 205 588
Equity in net loss of unconsolidated
subsidiaries, net of tax 1,761 1,435 5,572 2,412
------------------ --------------------
Net income $10,757 $ 8,617 $ 28,120 $ 21,302
================== ====================
Per share data:
Basic earnings $ 0.83 $ 0.67 $ 2.18 $ 1.67
Diluted earnings $ 0.78 $ 0.65 $ 2.05 $ 1.62
Cash dividends declared $ 0.12 $ 0.12 $ 0.36 $ 0.34
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
E. W. Blanch Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,036 $ 707
Due from fiduciary accounts 43,687 41,551
Prepaid insurance 1,415 1,141
Investments, trading portfolio 5,149 5,245
Other current assets 12,282 13,603
-----------------------
Total current assets 65,569 62,247
Long-term investments, available for sale 19,406 18,427
Investments in unconsolidated subsidiaries 15,612 20,014
Property and equipment, net 38,299 32,420
Intangibles, net 48,774 30,425
Other assets 10,465 8,805
Fiduciary accounts--assets 750,850 760,918
-----------------------
Total assets $ 948,975 $ 933,256
=======================
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
LIABILITIES:
Current liabilities:
Accrued compensation $ 9,591 $ 9,865
Notes payable to banks under lines of credit 17,463 11,112
Accounts payable 16,498 16,950
Current portion of long-term liabilities 235 289
Other current liabilities 6,344 10,119
-----------------------
Total current liabilities 50,131 48,335
Long-term debt, less current portion 408 557
Other liabilities, less current portion 7,667 9,177
Fiduciary accounts--liabilities 750,850 760,918
-----------------------
Total liabilities 809,056 818,987
MINORITY INTEREST: 84 3,632
SHAREHOLDERS' EQUITY:
Common stock - par value $0.01 per share (authorized
30,000,000 shares; issued and outstanding: 14,141,671
shares in 1999 and 1998) 141 141
Additional paid in capital 61,115 56,996
Treasury stock (990,332 shares in 1999 and 1,299,714
shares in 1998) (25,644) (26,598)
Accumulated other comprehensive income 1,951 1,327
Retained earnings 102,272 78,771
-----------------------
Total shareholders' equity 139,835 110,637
-----------------------
Total liabilities, minority interest and shareholders' equity $ 948,975 $ 933,256
=======================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
E. W. Blanch Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Unaudited
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1999 1998
---------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 28,120 $ 21,302
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,298 7,966
Deferred income tax provision (benefit) (4,054) 1,195
Undistributed loss of unconsolidated subsidiaries 5,572 2,412
Non-cash compensation expense 3,949 2,070
Changes in operating assets and liabilities:
Due from fiduciary accounts (2,673) 1,056
Other current assets 549 (4,804)
Accrued compensation (274) (1,328)
Accounts payable and other current liabilities (6,388) (3,582)
Purchases of trading portfolio investments (2,503) (9,028)
Sales of trading portfolio investments 2,063 5,743
Other operating activities, net (3,895) 4,077
---------------------
Net cash provided by operating activities 29,764 27,079
INVESTING ACTIVITIES
Purchases of investments, available for sale (2,183) (1,289)
Sales of investments, available for sale 3,969 4,602
Purchases of property and equipment, net (13,081) (12,809)
Acquisition of unconsolidated subsidiaries and consolidated
subsidiaries, net of cash acquired (22,526) (28,330)
Proceeds from the sale of subsidiaries 4,260 2,500
Other investing activities, net (865) 201
---------------------
Net cash used in investing activities (30,426) (35,125)
FINANCING ACTIVITIES
Dividends paid (4,618) (4,311)
Proceeds from the issuance of treasury shares to
employee stock plans 4,320 5,870
Purchase of treasury stock (3,193) (4,326)
Net borrowings on lines of credit 6,351 3,800
Payments on long-term debt (39) (445)
Other financing activities, net 170 117
---------------------
Net cash provided by financing activities 2,991 705
---------------------
Net increase (decrease) in cash and cash equivalents 2,329 (7,341)
Cash and cash equivalents at beginning of period 707 11,608
---------------------
Cash and cash equivalents at end of period $ 3,036 $ 4,267
=====================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
E. W. Blanch Holdings, Inc.
Notes to Consolidated Financial Statements
September 30, 1999
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, 1998.
E.W. Blanch Holdings, Inc. ("the Company") and its predecessor organizations
have been in operation since 1957. The Company is a leading provider of
integrated risk management and distribution services including reinsurance
intermediation and technical, analytic, and financial consulting services. The
consolidated financial statements include the accounts of the Company and its
wholly and majority owned subsidiaries.
Certain prior year amounts have been reclassified to conform with current year
presentation.
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 September 30,
1999, is a $150,000 gain.
5
<PAGE>
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 2000. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Statement will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
While an analysis is not complete, based on the Company's derivative positions
at September 30, 1999, management does not anticipate that the adoption of the
new Statement will have a significant effect on earnings or the financial
position of the Company. Because the standard allows certain foreign currency
transactions to be accounted for as hedges for financial reporting purposes that
were not previously treated as hedges, the Company may change its policies
toward the management of certain foreign currency exposures. Any changes that
may occur would be to further reduce the Company's exposure to foreign currency
risks.
4. EARNINGS PER SHARE
The following table sets forth basic and diluted weighted average shares
outstanding for the periods indicated (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------------------ ------------------
<S> <C> <C> <C> <C>
Weighted average shares - basic 12,974 12,804 12,878 12,725
Effect of dilutive securities 873 445 824 429
------------------ ------------------
Weighted average shares - assuming dilution 13,847 13,249 13,702 13,154
================== ==================
</TABLE>
5. BUSINESS SEGMENT INFORMATION
The following is additional business segment information for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
PROFIT(LOSS), NET OF TAX 1999 1998 1999 1998
- ---------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C>
Domestic Primary $8,733 $8,053 $24,446 $20,565
Domestic Wholesale Insurance Services -- (163) -- (962)
-------------------- -------------------
Total Domestic Operations 8,733 7,890 24,446 19,603
Foreign Operations 2,024 727 3,674 1,699
-------------------- -------------------
Consolidated $10,757 $8,617 $28,120 $21,302
==================== ===================
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
REVENUES 1999 1998 1999 1998
- ---------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C>
Domestic Primary $46,318 $41,087 $139,427 $110,097
Domestic Wholesale Insurance Services -- (78) -- 4,386
-------------------- -------------------
Total Domestic Operations 46,318 $41,009 139,427 $114,483
Foreign Operations 12,684 14,034 39,979 34,879
-------------------- -------------------
Consolidated $59,002 $55,043 $179,406 $149,362
==================== ===================
</TABLE>
6. COMPREHENSIVE INCOME
During the three months ended September 30, 1999 and 1998, total other
comprehensive income (loss) amounted to $8,000 and ($617,000), respectively.
Total comprehensive income for the three months ended September 30, 1999 and
1998 amounted to $10,765,000 and $8,000,000, respectively.
During the nine months ended September 30, 1999 and 1998, total other
comprehensive income amounted to $624,000 and $471,000, respectively. Total
comprehensive income for the nine months ended September 30, 1999 and 1998
amounted to $28,744,000 and $21,773,000, respectively.
7. ACQUISITIONS
During the third quarter of 1999, the Company acquired JD Warren, Inc., a
Pittsburgh, PA based services company specializing in the identification and
recovery of outstanding third party deductibles for the insurance industry. This
acquisition is accounted for under the purchase method.
The following are the Pro Forma results for the Company had JD Warren, Inc. been
acquired at the beginning of the periods indicated (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
-------------------------
Revenues $180,987 $150,747
Net Income $27,692 $20,916
Also, in the third quarter of 1999, the Company purchased the thirty percent of
its international joint venture, Swire Blanch Insurance (Holdings), Ltd., it did
not previously own. Swire Blanch Insurance (Holdings), Ltd. is now a wholly
owned subsidiary of the Company and has been renamed E.W. Blanch Holdings, Ltd.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FORWARD-LOOKING STATEMENTS
Statements other than historical information contained herein 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 herein. Some of the factors that could cause actual results
to differ materially are the following: market dynamics (including the workers'
compensation reinsurance market as discussed on page 10 below), interest rate
changes, regulatory changes, competition, legal proceedings that could impact
reinsurance placements facilitated by the Company, and the failure of the
Company and its subsidiaries or significant third parties to achieve Year 2000
compliance or material expense in connection with such compliance. Additional
information concerning risk factors are contained in the Company's Securities
and Exchange Commission filings, including but not limited to the most recent
Form 10-K, copies of which are available from the Company without charge.
YEAR 2000 ISSUE
BACKGROUND
The Year 2000 issue is the result of computer systems using a two-digit format,
as opposed to four digits, to indicate the year. Computer systems using a
two-digit format will be unable to correctly interpret dates beyond the year
1999, which could cause a system failure or other computer errors, leading to a
disruption in the operation of those systems.
STATE OF READINESS
The Company began reviewing all of its information technology ("IT") systems
developed internally and from outside vendors in the early 1990's because of the
Company's growth and the need to bring about operational improvements. As a
result, the Company decided to develop a new back office processing system and
to implement a new financial and human resource system. All of these systems are
Year 2000 compliant. In 1997, the Company expanded its international operations
through the acquisition of Swire Blanch. Since the acquisition, the Company
began to integrate all worldwide systems into appropriate existing, Year 2000
compliant Company systems. The integration of the Company's IT systems is
substantially complete. The Company's senior management and the Board of
Directors receive regular updates on the status of the Company's Year 2000
readiness.
The Company markets services and software products that are internally developed
or acquired from third party vendors. These software based products and services
were developed using Year 2000 compliant technologies. Testing is completed and
certifications of compliance have been received on software that the Company
developed internally. The Company has obtained written certifications from all
of its third party developers of software marketed by the Company. The process
of confirming Year 2000 compliance for the software that the Company currently
markets is complete.
Interfaces with Third Parties
The Company is reviewing, and has initiated formal communications with third
parties that provide goods or services which are essential to the Company's
operations in order to: (1) determine the extent to which the Company is
vulnerable to any failure by such material third parties to remediate their
respective Year 2000 problems; and (2) resolve such problems to the extent
practicable. In May 1998,
8
<PAGE>
the Company requested information from customers and vendors regarding the
status of their Year 2000 compliance. Follow up requests were sent in December
1998 to those third parties that had not responded to the Company's initial
request or that indicated compliance issues. A certification letter has been
requested from each of our vendors to validate compliance. The Company has
received responses from a majority of its vendors. Of the responses received
from the Company's critical vendors (i.e. financial institutions and technical
vendors), a majority have been determined to be Year 2000 compliant. Additional
follow up requests were sent in the third quarter of 1999 to those vendors that
have not responded to previous requests or that have indicated compliance
issues. Contingency plans are currently being formulated for these vendors. The
Company has also requested a statement of Year 2000 compliance from companies in
which the Company has made capital investments. The Company has received
responses from a majority of the companies that inquiries were sent to. The
Company is in the process of following up with those companies that have not
responded or have indicated compliance issues.
Independent Verification and Validation
All new IT systems implemented, and any subsequent changes to those systems, go
through several layers of testing and validation, including program testing,
systems testing by an independent quality assurance group, user testing, and
lastly, parallel processing with the old system it is replacing. Portions of the
parallel testing process involve validation of automated interfaces and
reporting by the Company's customers.
In addition, the Company has conducted joint testing with Lloyd's of London on
the international back office processing system. The Company's system has passed
all tests and has been certified by Lloyd's of London.
COSTS
In recent years the Company has made significant investments in new IT systems
that are Year 2000 compliant. However, those investments were made for operating
reasons other than strictly Year 2000 compliance. As stated above, these
systems, whether purchased from an outside vendor or developed internally, are
Year 2000 compliant. The schedule to implement these systems has not been
accelerated because of the Year 2000 issue, nor have any other system projects
been deferred because of the Year 2000 issue. Although the Company does not
record or attempt to allocate expenses for these IT systems which relate solely
to Year 2000 compliance, due to their immateriality, the Company believes that
these costs will not exceed $2 million in total. This estimate does not include
the Company's potential share of Year 2000 costs that may be incurred by other
entities, which the Company does not control.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. The Company believes
that, with the installation of the Year 2000 compliant systems described above,
the possibility of significant interruptions of normal operations should be
substantially reduced. However, due to the general uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third parties, the Company is continuing to assess the risks and
develop its contingency plans.
9
<PAGE>
CONTINGENCY PLANS
The Company has further integrated its existing business interruption and Year
2000 contingency plans to address internal and external issues specific to Year
2000 compliance, to the extent practicable. These plans are intended to enable
the Company to continue to operate and include performing certain processes
manually; repairing or obtaining replacement systems; and changing suppliers.
The Company believes, however, that due to the widespread nature of potential
Year 2000 issues, the contingency planning process is an ongoing one which will
require further modifications as the Company obtains additional information
regarding the Company's internal readiness and the status of third party Year
2000 readiness.
Forward-Looking Statements
Readers are cautioned that forward-looking statements contained in the Year 2000
Issue disclosures should be read in conjunction with the Company's disclosures
under the heading: "Forward-Looking Statements" on page 8.
EUROPEAN MONETARY UNIT
The Company has initiated an analysis of the new European Monetary Unit ("EMU")
and its effects on the Company's business processes and IT system requirements.
The Company's core back office processing and financial systems are currently
capable of handling multiple currencies and will therefore be able to handle the
EMU as another currency. However, it is likely that the Company will have to
modify its systems to accommodate decimalization and rounding issues, currency
conversions, and the new reporting requirements of the EMU. The Company has
contracted with an outside consulting firm to develop further detailed business
and consequent IT requirements for each phase of the EMU changeover. This study
has been completed and a three year project plan approved by the Company's audit
committee in the second quarter of 1999. The Company's management believes that
the costs associated with upgrading IT systems and the impact on business
processes will be immaterial to the Company's results of operations, liquidity
and financial condition.
UNICOVER LITIGATION AND WORKERS' COMPENSATION REINSURANCE ISSUES
It has been publicly reported that certain lawsuits and arbitrations have been
commenced that relate directly or indirectly to one or more reinsurance pools
managed by Unicover Managers, Inc. ("Unicover"). The Company has been named as a
third-party defendant in one such lawsuit, as described in more detail under
"Legal Proceedings" on page 16. Management of the Company believes, based on
current information, that this proceeding will not have a material effect upon
the financial position or results of operations of the Company. The Company is
not currently a party to any other proceedings that relate directly or
indirectly to the Unicover reinsurance pool nor, to the Company's knowledge, do
these other proceedings place in issue the validity of the reinsurance programs
the Company has placed through Unicover on behalf of its clients.
There are certain ongoing discussions between clients of the Company, who issue
primary workers' compensation insurance policies, and reinsurers of those
clients for those policies. These discussions primarily involve reinsurers who
were represented by Unicover. These discussions may result in a renegotiation of
the reinsurance coverages at issue, and in conjunction with any such
renegotiations it is possible that the Company's brokerage revenues for those
reinsurance placements could be impacted in a material adverse manner, both
retroactively, and prospectively.
10
<PAGE>
GENERAL
The Company is a leading provider of integrated risk management and distribution
services, including reinsurance intermediation and technical, analytic, and
financial consulting services.
The following is a summary of revenues and income before taxes by geographic
area for the periods indicated (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------- ----------------------------
Income Income
Revenues Before taxes Revenues Before taxes
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Domestic operations $46,318 $16,805 $41,009 $14,937
Foreign operations 12,684 3,562 14,034 2,339
------- ------- ------- -------
$59,002 $20,367 $55,043 $17,276
======= ======= ======= =======
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------- ----------------------------
Income Income
Revenues Before taxes Revenues Before taxes
-------- ------------ -------- ------------
Domestic operations $139,427 $49,117 $114,483 $34,230
Foreign operations 39,979 8,188 34,879 5,268
-------- ------- -------- -------
$179,406 $57,305 $149,362 $39,498
======== ======= ======== =======
</TABLE>
In the third quarter of 1999, the Company acquired JD Warren, Inc., a
Pittsburgh, PA based services company specializing in the identification and
recovery of outstanding third party deductibles for the insurance industry.
In the third quarter of 1999, the Company also acquired the thirty percent of
its international joint venture, Swire Blanch Insurance (Holdings), Ltd., it did
not previously own. Swire Blanch Insurance (Holdings), Ltd. is now a wholly
owned subsidiary of the Company and has been renamed E.W. Blanch Holdings, Ltd.
THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998
OPERATIONS
The following are the components of revenue from operations for the quarter
ended September 30 (in thousands):
1999 1998
------- -------
Domestic operations $44,327 $39,118
Foreign operations 12,126 13,421
------- -------
$56,453 $52,539
======= =======
Domestic operations increased $5.2 million, or 13.3%, from the prior year
primarily as a result of new client production.
Foreign operations decreased $1.3 million or 9.6% from the prior year as a
result of the sale of two non-strategic subsidiaries of E.W. Blanch Holdings,
Ltd. in the second quarter of 1999.
11
<PAGE>
INTEREST INCOME
The following are the components of interest income for the quarter ended
September 30 (in thousands):
1999 1998
------ ------
Domestic operations $1,991 $1,891
Foreign operations 558 613
------ ------
$2,549 $2,504
====== ======
Interest income increased slightly for the quarter ended September 30, 1999 as
compared to the prior year.
EXPENSES
Domestic operating expenses increased $3.4 million to $29.5 million, or 13.1%,
for the quarter ended September 30, 1999 compared to $26.1 million the prior
year. This is primarily a result of increases in salary and benefits due to
increased employee count and normal salary progressions, and increased general
and administrative expenses due to increased business levels.
Foreign operating expenses decreased $2.6 million to $9.1 million, or 21.9% for
the quarter ended September 30, 1999 compared to $11.7 million the prior year.
The reason for the decrease is primarily due to the sale of two non-strategic
subsidiaries of E.W. Blanch Holdings, Ltd. in the second quarter of 1999.
EQUITY IN NET LOSS OF UNCONSOLIDATED SUBSIDIARIES
Equity in net loss of unconsolidated subsidiaries increased $0.3 million to $1.8
million for the three months ended September 30, 1999, compared to $1.4 million
the prior year. The primary reason is the start up nature of the Company's
equity investment in Insurance Holdings of America, Inc. ("IHA"). Future losses
from the IHA investment will be limited to the Company's pre-tax basis of $2.2
million. Any future loss in excess of this amount will not be recognized by the
Company.
PROFIT MARGINS
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were 36.3% for domestic
operations for the quarter ended September 30, 1999, compared to 36.4% for the
same period in the prior year.
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were 28.1% for foreign
operations for the three months ended September 30, 1999, compared to 16.7% for
the same period in the prior year.
INCOME TAXES
The Company's combined federal and state effective tax rate was 38.5% for the
quarter ended September 30, 1999 as compared to 38.7% for the same period the
prior year.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
OPERATIONS
The following are the components of revenue from operations for the nine months
ended September 30 (in thousands):
1999 1998
-------- --------
Domestic operations $134,253 $109,557
Foreign operations 38,331 33,071
-------- --------
$172,584 $142,628
======== ========
Domestic operations increased $24.7 million, or 22.5% from the prior year
primarily as a result of new client production and recognition of a $3.5 million
gain from the sale of the Clarendon National Florida Personal Lines Property
program to Tower Hill Insurance Group, Inc. in the first quarter of 1999.
Foreign operations increased $5.3 million or 15.9% from the prior year as a
result of new client production and increased revenue as a result of the
acquisition of Dunn & Carter Ltd. in July 1998.
INTEREST INCOME
The following are the components of interest income for the nine months ended
September 30 (in thousands):
1999 1998
------ ------
Domestic operations $5,174 $4,926
Foreign operations 1,648 1,808
------ ------
$6,822 $6,734
====== ======
Interest income increased slightly for the nine months ended September 30, 1999
as compared to the prior year.
EXPENSES
Domestic operating expenses increased $10.1 million to $90.3 million, or 12.5%,
for the nine months ended September 30, 1999, compared to $80.3 million the
prior year. This is primarily a result of an increase in general and
administrative expenses due to increased business levels. General and
administrative expenses also include a reserve for a portion of the brokerage
recognized in 1998 for the placement of certain workers' compensation
reinsurance contracts for the AIG Companies, because the validity of those
placements has been placed into question in a judicial proceeding. See "Legal
Proceedings" discussion, on page 16, below. Similarly, a portion of the revenues
for those placements, which otherwise would have been recognized in 1999, was
not recognized, for the same reasons. Domestic operations also experienced
increases in employee count and normal salary progressions. The increase in
employees is due to increased business levels and businesses acquired or started
by the Company.
Foreign operating expenses increased $2.2 million to $31.8 million, or 7.4% for
the nine months ended September 30, 1999, compared to $29.6 million the prior
year. The reason for the increase is the costs of new operations and the
acquisition of Dunn & Carter Ltd. in July 1998. These increases were partially
offset by the sale of two non-strategic subsidiaries of E.W. Blanch Holdings,
Ltd. in the second quarter of 1999.
13
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EQUITY IN NET LOSS OF UNCONSOLIDATED SUBSIDIARIES
Equity in net loss of unconsolidated subsidiaries increased $3.2 million to $5.6
million for the nine months ended September 30, 1999, compared to $2.4 million
the prior year. The primary reason is the start up nature of the Company's
equity investment in IHA. Future losses from the IHA investment will be limited
to the Company's pre-tax basis of $2.2 million. Any future loss in excess of
this amount will not be recognized by the Company.
PROFIT MARGINS
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were 35.2% for domestic
operations for the nine months ended September 30, 1999, compared to 29.9% for
the same period in the prior year.
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were 20.5% for foreign
operations for the nine months ended September 30, 1999, compared to 15.1% for
the same period in the prior year.
INCOME TAXES
The Company's combined federal and state effective tax rate was 40.8% for the
nine months ended September 30, 1999 as compared to 38.5% for the same period
the prior year. The increase in the tax rate is due to changes in the
apportionment of state taxes and taxes on foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of brokerage commissions and
fees and interest 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 $3.0 million at September
30, 1999.
The Company generated $29.8 million of cash from operations during the first
nine months of 1999 compared with $27.1 million for the same period in 1998. The
increase in operating cash flow in 1999 is primarily due to an increase in
earnings and the timing of changes in various operating assets and liabilities.
Cash flow used in investing activities was $30.4 million for the nine months
ended September 30, 1999. The Company used $13.1 million of cash for the
purchase of property and equipment, primarily computerized systems. The Company
intends to increase its investment in such systems. The Company used $1.3
million to acquire a 50% interest in Russell Miller Advisors Asia, LLC ("RMAA").
The Company accounts for RMAA under the equity method as an unconsolidated
subsidiary. The Company used $17.4 million for the acquisition of JD Warren,
Inc. and used $3.8 million for the purchase of the remaining thirty percent of
Swire Blanch that the Company did not previously own. The Company used $2.2
million for the purchase of available for sale investments and received proceeds
from sale of available for sale investments of $4.0 million. The Company
received $4.3 million in proceeds from the sale of two non-strategic
subsidiaries of E.W. Blanch Holdings, Ltd. in the second quarter of 1999. The
Company recognized an immaterial gain with this disposition.
Cash flow generated from financing activities was $3.0 million for the nine
months ended September 30, 1999. The primary sources of cash from financing
activities were proceeds of $4.3 million from the issuance of treasury shares to
fund employee benefit plans and proceeds of $6.4 million from the net
14
<PAGE>
borrowings on lines of credit. The primary uses of cash for financing activities
were $3.2 million for the purchase of treasury stock and $4.6 million of
dividends paid to shareholders.
The Company's long-term investment portfolio at September 30, 1999 was $19.4
million, comprised of equity and debt instruments. These investments are
classified as available for sale. The market value of the Company's available
for sale investment portfolio at September 30, 1999, was $3.4 million above
cost. The Company's investment in unconsolidated subsidiaries at September 30,
1999 was $15.6 million. The Company's trading portfolio at September 30, 1999
was $5.1 million, which is comprised of debt investments. The market value of
the Company's trading portfolio at September 30, 1999 was $0.1 million below
cost. Cash, short-term investments and the Company's revolving credit facilities
are available and managed for the payment of its operating and capital
expenditures. The Company is not subject to any significant regulatory capital
requirements in connection with its business.
On January 28, 1999, the Board of Directors declared a regular quarterly cash
dividend of $0.12 per share, payable March 2, 1999 to shareholders of record as
of February 9, 1999. On April 26, 1999, the Board of Directors declared a
regular quarterly cash dividend of $0.12 per share, payable June 1, 1999 to
shareholders of record as of May 3, 1999. On July 22, 1999, the Board of
Directors declared a regular quarterly cash dividend of $0.12 per share, payable
September 1, 1999 to shareholders of record as of August 2, 1999. On October 28,
1999, the Board of Directors declared an increase to the quarterly cash dividend
to $0.14 per share, payable December 1, 1999 to shareholders of record as of
November 12, 1999.
The Company has a $100 million revolving credit facility with several banks that
will be used to fund general corporate requirements. This facility, which
expires in 2001, carries market rates of interest, which may vary depending upon
the Company's degree of leverage. Commitment fees of .200% to .375% are payable
on any unused portion. The facility contains several financial covenants and
restrictions related to acquisitions, payment of dividends and sales of assets.
Covenants contained in the agreement require the Company to exceed minimum
levels of net worth and meet a fixed charge ratio. The Company is currently in
compliance with all of its covenants governing its indebtedness. The Company had
$15.9 million outstanding under this facility as of September 30, 1999 at a rate
of 8.2%.
The Company also has a (pound)7.0 million secured revolving credit facility,
which translates to $11.5 million at September 30, 1999. As of September 30,
1999, the Company had no outstanding balance under this facility. The interest
rate is 0.32% above the London Inter Bank Offer Rate ("LIBOR"). In addition, the
Company has a HK$7.1 million secured revolving credit facility, which translates
to $0.9 million at September 30, 1999. As of September 30, 1999, the Company had
$0.9 million outstanding under this facility. The interest rate is 0.32% above
the Hong Kong Inter Bank Offer Rate ("HIBOR"). Also, the Company has a HK$5.0
million secured revolving credit facility, which translates to $0.6 million at
September 30, 1999. As of September 30, 1999, the Company had $0.6 million
outstanding under this facility. The interest rate is 0.32% above HIBOR.
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.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in market risk for the Company during the first
nine months of 1999.
Part II. Other Information
Item 1. Legal Proceedings
The various lawsuits to which the Company is a party are routine in nature and
incidental to the Company's business, with the following exception:
E.W. Blanch Co. ("Blanch"), a subsidiary of the Company, is a third-party
defendant in a lawsuit venued in the Supreme Court of the State of New York,
County of New York. This lawsuit was instituted on February 16, 1999, and Blanch
was added as a third-party defendant on March 23, 1999. Plaintiffs are AIU
Insurance Company and various other insurance companies, all of whom are part of
the "AIG" group of companies. Defendants are Unicover Managers, Inc.
("Unicover") and ReliaStar Life Insurance Company ("ReliaStar"). Blanch was
joined in the lawsuit as a third-party defendant by ReliaStar.
In this lawsuit, AIG as plaintiff alleges that ReliaStar, through its agent
Unicover, agreed to provide certain reinsurance protection to AIG, relating to
workers compensation insurance policies issued by the plaintiff AIG companies in
California and elsewhere in the United States. Defendants assert that the
reinsurance coverages in issue never were bound, and defendant ReliaStar further
asserts that if defendant Unicover in fact did bind those coverages, it acted
beyond the authority granted to it by ReliaStar.
In ReliaStar's third party complaint against Blanch, ReliaStar alleges that
Blanch, as AIG's reinsurance broker on the reinsurance placements in issue, knew
or should have known that the reinsurance coverages were not bound and knew or
should have known that Unicover did not have the authority to bind ReliaStar to
those coverages.
The relief being sought by AIG in its complaint against ReliaStar and Unicover
is that defendants be required to honor the reinsurance commitments that AIG
alleges were made, and be required to pay an unspecified amount of money damages
for alleged breach of those reinsurance commitments and (with respect to
Unicover) for negligent misrepresentation.
The relief being sought by ReliaStar in its third party complaint against Blanch
is that, in the event ReliaStar is found to be liable to AIG, Blanch be required
to indemnify and hold ReliaStar harmless for that liability, or in the
alternative Blanch be required to make a contribution for a portion of that
liability in an amount to be determined by the Court.
Blanch in turn has filed a counterclaim back against ReliaStar and Unicover. The
counterclaim alleges that ReliaStar and Unicover in fact did bind the
reinsurance coverages in issue, and therefore they owe Blanch the reinsurance
brokerage to which Blanch is entitled under those reinsurance contracts, and,
alternatively, if it is determined that Unicover misrepresented its authority to
bind ReliaStar, that Blanch be awarded money damages resulting from its reliance
on those misrepresentations.
16
<PAGE>
This lawsuit is in the discovery stage. Prior to Blanch being joined in the
case, plaintiffs moved for and were denied a preliminary injunction. Recently,
the court granted a motion by Unicover for dismissal of AIG's claims against
Unicover. Blanch intends to defend vigorously the claims made against it by
ReliaStar and to pursue vigorously its counterclaims against ReliaStar and
Unicover.
Management believes, based on current information, that these actions will not
have a material adverse effect upon the financial position or results of
operations of the Company.
Items 2, 3, 4, and 5 are not applicable and have been omitted.
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits
Exhibit 27 - Financial Data Schedule
(b.) The registrant did not file a current report on Form 8-K during the
quarter ended September 30, 1999.
17
<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: 10/29/99 /s/ Ian D. Packer
------------------------ --------------------------------
Ian D. Packer
Executive Vice President
and Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
19
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<FISCAL-YEAR-END> DEC-31-1999
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