--------------------------------------------------------------------------------
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER: 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, 2000 was 12,973,687.
1
<PAGE>
Part I. 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,
----------------------------- ----------------------------
2000 1999 2000 1999
----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues:
Operations $ 39,662 $ 56,462 $ 147,746 $ 166,328
Other income (loss) (1,649) (9) 4,143 6,256
Interest income 3,164 2,549 10,255 6,822
----------------------------- ----------------------------
Total revenues 41,177 59,002 162,144 179,406
Expenses:
Salaries and benefits 29,793 23,770 92,377 73,519
Travel and marketing 4,304 3,277 13,654 11,409
General and administrative 16,518 10,483 41,949 33,855
Amortization of intangibles 2,907 860 6,006 2,630
Interest expense 1,932 245 4,588 688
----------------------------- ----------------------------
Total expenses 55,454 38,635 158,574 122,101
----------------------------- ----------------------------
Income (loss) before taxes (14,277) 20,367 3,570 57,305
Income tax (benefit) expense (5,901) 7,832 1,415 23,408
----------------------------- ----------------------------
Net income (loss) before minority interest
and equity in loss of unconsolidated
subsidiaries, net of tax (8,376) 12,535 2,155 33,897
Minority interest, net of tax 101 17 321 205
Equity interest in loss of unconsolidated
subsidiaries, net of tax 356 1,761 328 5,572
----------------------------- ----------------------------
Net income (loss) $ (8,833) $ 10,757 $ 1,506 $ 28,120
============================= ============================
Earnings (loss) per share - basic $ (0.69) $ 0.83 $ 0.12 $ 2.18
Earnings (loss) per share - diluted $ (0.69) $ 0.78 $ 0.11 $ 2.05
Cash dividends declared per share $ 0.14 $ 0.12 $ 0.42 $ 0.36
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
E. W. Blanch Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------------------------
ASSETS: (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,748 $ 20,819
Due from fiduciary accounts 31,579 41,137
Prepaid insurance 2,256 1,370
Investments, trading portfolio 5,629 5,128
Other current assets 21,395 13,510
---------------------------------
Total current assets 76,607 81,964
Long-term investments 21,254 32,322
Investments in unconsolidated subsidiaries 15,036 10,528
Property and equipment, net 41,215 40,918
Intangibles, net 70,153 84,226
Other assets 15,478 16,584
Fiduciary accounts--assets 993,198 955,556
---------------------------------
Total assets $ 1,232,941 $ 1,222,098
=================================
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Current liabilities:
Accrued compensation $ 8,540 $ 9,304
Notes payable to banks under lines of credit 58,169 59,360
Accounts payable 13,958 17,236
Current portion of long-term liabilities 724 777
Other current liabilities 8,499 17,479
---------------------------------
Total current liabilities 89,890 104,156
Long-term debt, less current portion 1,150 478
Other liabilities, less current portion 5,181 4,859
Commitments and contingencies -- --
Fiduciary accounts--liabilities 993,198 955,556
---------------------------------
Total liabilities 1,089,419 1,065,049
MINORITY INTEREST: 360 114
SHAREHOLDERS' EQUITY:
Common stock - par value $0.01 per share (authorized
60,000,000 shares; issued and outstanding: 14,141,671
shares in 2000 and 1999) 141 141
Additional paid-in capital 70,194 64,518
Treasury stock (1,167,984 shares in 2000 and 854,171
shares in 1999) (29,844) (21,446)
Accumulated other comprehensive income (loss) (5,388) 1,675
Retained earnings 108,059 112,047
---------------------------------
Total shareholders' equity 143,162 156,935
---------------------------------
Total liabilities, minority interest and shareholders' equity $ 1,232,941 $ 1,222,098
=================================
</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,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,506 $ 28,120
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on investments (897) (833)
Gain on sale of subsidiaries (1,921) (1,414)
Depreciation and amortization 14,561 9,298
Deferred income tax provision (benefit) 2,653 (4,054)
Undistributed losses of unconsolidated subsidiaries 328 5,572
Non-cash compensation expense 3,607 3,949
Changes in operating assets and liabilities:
Due from fiduciary accounts 10,050 (2,673)
Other current assets (2,067) 549
Accrued compensation (736) (274)
Accounts payable and other current liabilities (11,524) (6,388)
Purchases of trading portfolio investments (5,270) (2,503)
Sales of trading portfolio investments 4,924 2,063
Effect of exchange rate changes (4,652) 65
Other operating activities, net 820 (1,713)
-----------------------------
Net cash provided by operating activities 11,382 29,764
INVESTING ACTIVITIES
Purchases of long-term investments (347) (2,183)
Proceeds from long-term investments 8,884 3,969
Purchases of property and equipment, net (9,701) (13,081)
Proceeds from the sale of subsidiaries, net 2,061 4,260
Acquisition of consolidated and unconsolidated subsidiaries,
net of cash acquired (3,910) (22,526)
Other investing activities, net 1,096 (865)
-----------------------------
Net cash used in investing activities (1,917) (30,426)
FINANCING ACTIVITIES
Dividends paid (5,494) (4,618)
Proceeds from the issuance of treasury shares related to
employee stock plans 5,723 4,320
Purchase of treasury stock (13,169) (3,193)
Net borrowings (repayments) on lines of credit (1,190) 6,351
Net borrowings (payments) on long-term debt 497 (39)
Other financing activities, net (903) 170
-----------------------------
Net cash provided by (used in) financing activities (14,536) 2,991
-----------------------------
Net increase (decrease) in cash and cash equivalents (5,071) 2,329
Cash and cash equivalents at beginning of period 20,819 707
-----------------------------
Cash and cash equivalents at end of period $ 15,748 $ 3,036
=============================
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
E. W. Blanch Holdings, Inc.
Notes to Consolidated Financial Statements
September 30, 2000
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, 1999.
E. W. Blanch Holdings, Inc. and its subsidiaries ("the Company") and its
predecessor organizations have been in operation since 1957. The Company is a
leading provider of risk management and distribution services including
reinsurance intermediation and technical, analytical, and financial consulting
services. These services are sold both on bundled and component bases. 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 currency of the primary
economic environment in which the subsidiary operates. 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, except
for intercompany accounts which are translated at historical rates. Adjustments
resulting from the balance sheet translation are reflected in Shareholders'
Equity. The cumulative translation adjustment at September 30, 2000, is an
unrealized $5,231,000 loss as compared to an unrealized $39,000 gain at December
31, 1999. This decrease in the cumulative translation adjustment is primarily
due to the decline in the exchange rate for the British Pound Sterling in 2000
and the significant capital investment in UK operations which includes the
Crawley Warren acquisition in the fourth quarter of 1999.
5
<PAGE>
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("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.
Management has substantially completed its analysis of the effect of adopting
SFAS No. 133. The Company does occasionally deal with free-standing derivatives
in the form of forward currency contracts in order to hedge international
brokerage revenues. All such contracts entered into beginning in 2001 will be
recorded on the balance sheet at fair value and marked to market throughout the
term of the contract with the change in fair value immediately recognized in
earnings. Only one such forward currency contract exists as of September 30,
2000. This contract will close in the fourth quarter of 2000 and any gain or
loss on this transaction will be recorded in 2000. Management believes that the
effect of adopting SFAS No. 133 will be immaterial to the operating results and
the financial position of the Company.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." SAB No.
101 summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company will adopt SAB No. 101 in the fourth quarter of 2000. Management is
currently analyzing the effect of applying SAB No. 101 and the impact on prior
periods, if material, will be reported in the fourth quarter of 2000 as a
cumulative effect adjustment.
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,
--------------------- ----------------------
2000 1999 2000 1999
--------------------- ----------------------
<S> <C> <C> <C> <C>
Weighted average shares - basic 12,849 12,974 13,012 12,878
Effect of dilutive securities -- 873 291 824
--------------------- ----------------------
Weighted average shares - assuming dilution 12,849 13,847 13,303 13,702
===================== ======================
</TABLE>
6
<PAGE>
5. BUSINESS SEGMENT INFORMATION
The following is business segment information for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
------------------------ ------------------------
<S> <C> <C> <C> <C>
PROFIT (LOSS), NET OF TAX:
Domestic operations ($ 9,671) $ 8,733 $ 570 $ 24,446
Foreign operations 838 2,024 936 3,674
------------------------ ------------------------
Consolidated ($ 8,833) $10,757 $ 1,506 $ 28,120
======================== ========================
REVENUES:
Domestic operations $ 21,002 $46,318 $106,329 $139,427
Foreign operations 20,175 12,684 55,815 39,979
------------------------ ------------------------
Consolidated $ 41,177 $59,002 $162,144 $179,406
======================== ========================
</TABLE>
6. COMPREHENSIVE INCOME
During the three months ended September 30, 2000 and 1999, total other
comprehensive income (loss) amounted to ($4,328,000) and $8,000, respectively.
Total comprehensive income (loss) for the three months ended September 30, 2000
and 1999 amounted to ($13,161,000) and $10,765,000, respectively.
During the nine months ended September 30, 2000 and 1999, total other
comprehensive income (loss) amounted to ($7,063,000) and $624,000, respectively.
Total comprehensive income (loss) for the nine months ended September 30, 2000
and 1999 amounted to ($5,557,000) and $28,744,000, respectively.
7. CONTINGENCIES
In the normal course of business, the Company and its subsidiaries are parties
to a number of lawsuits. Management believes that these suits will be resolved
with no material financial impact on the Company.
The various lawsuits to which the Company is a party are routine in nature and
incidental to the Company's business with the exception of the AIG and HomePlus
lawsuits. For discussion of these lawsuits, see Part II, Item 1. Legal
Proceedings in this filing.
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: world-wide and national economic
conditions; market dynamics within the world-wide and national insurance and
reinsurance markets; interest rate changes; regulatory changes; competition;
ability to effectively and efficiently integrate operations; timing and
completion of non-recurring transactions; inability to collect receivables; loss
of key personnel; and legal proceedings that could impact reinsurance placements
facilitated by the Company. The Company may be especially vulnerable to loss of
key personnel and loss of customers due to the resignations without advance
notice by Rodman Fox and Paul Karon, two senior executives with the Company, on
March 20, 2000. As a result of their departure, the Company has lost some
customers and other key employees, and there is a risk of more such losses in
the future. The Company currently is in litigation with Fox and Karon. See Part
II, Item 1. Legal Proceedings, below. 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.
EUROPEAN MONETARY UNIT
The Company completed its analysis of the new European Monetary Unit ("EMU") and
its effects on the Company's business processes and IT system requirements in
the second quarter of 1999. 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, the Company
did identify several minor system modifications to accommodate decimalization
and rounding issues, currency conversions, and the new reporting requirements of
the EMU. The modifications in the business processing systems have been
completed. Required modifications to the general ledger system are currently
being evaluated by the Company's management. 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
The workers' compensation reinsurance industry was impacted in 1999 by certain
events principally surrounding an entity called Unicover Managers, Inc.
("Unicover"). Unicover served as a managing general underwriter for various
insurance companies that provided reinsurance coverage to the workers'
compensation primary insurance industry. It has been alleged that Unicover, on
behalf of companies it represented, assumed reinsurance exposures at prices and
volume levels that were imprudent for those companies and their
retrocessionaires, and that correspondingly were advantageous to the customers
who procured reinsurance coverage through Unicover. Various clients of the
Company, employing the Company's reinsurance intermediary services, procured
workers' compensation reinsurance coverage through Unicover in late 1998 and
early 1999.
One client that the Company assisted in procuring reinsurance through Unicover
was the "AIG"
8
<PAGE>
group of insurance companies. A lawsuit was commenced in 1999 relating to that
reinsurance program. The Company is the third-party defendant and cross-claimant
in that litigation, which is described in more detail in Part II, Item 1. Legal
Proceedings. In the third quarter of 2000, the Company established a reserve
against the amount of reinsurance brokerage it has recognized as revenue in
prior years for these AIG placements, because of an adverse court ruling in that
lawsuit.
The Company also assisted various other clients in procuring workers'
compensation reinsurance coverage with Reliance Insurance Company ("Reliance")
through Unicover. In 1999, Reliance engaged in negotiations with those clients
of the Company, to settle Reliance's reinsurance obligations to those clients of
the Company. In January 2000, Reliance announced that those settlement
negotiations had been successfully concluded. Also in January 2000, Reliance and
the Company reached an agreement concerning the Company's brokerage revenue
associated with these settled reinsurance placements. As a result of this
agreement, the Company will not experience any material adverse impact with
respect to revenues the Company has previously recognized for these placements.
The Company also assisted another client company, EBI Companies ("EBI"), in
procuring workers' compensation reinsurance coverage through Unicover. The
Company has been advised that the reinsurance companies represented by Unicover
settled their obligations to EBI in January 2000. The Company has reached an
agreement with EBI concerning the brokerage revenues the Company is to receive
for these reinsurance placements. Pursuant to this agreement, the Company will
receive an amount less than the amount the Company recognized as revenue in
prior years. The Company has established a reserve in the third quarter of 2000
for the difference between what it will receive under this agreement and what
has been previously recognized.
The total reserves recorded in the third quarter 2000, related to the AIG and
EBI matters described above, of approximately $3.2 million are included in
general and administrative expense.
The Company also assisted a client, Superior National Insurance Group ("SNIG"),
in procuring workers' compensation reinsurance coverage. This coverage was
procured through a competitor of Unicover, Web Management LLC ("WEB"), which
represented a reinsurer named United States Life Insurance Co. of the City of
New York ("U.S. Life"). The Company is advised that U.S. Life in late 1999
commenced an arbitration proceeding against SNIG, which in March of 2000 was
placed into conservatorship by the California Department of Insurance. The
Company is advised that U.S. Life alleges, possibly among other things, that
this reinsurance program should be rescinded, for alleged nondisclosure of
material information. The Company is not a party to this arbitration proceeding.
However, it is possible that in the event U.S. Life is successful in that
proceeding, the Company may be required to return reinsurance brokerage
previously received and recognized. If the Company were required to return all
of its previously recognized and received brokerage for this program, the amount
would have a material adverse impact on the Company's financial position and
results of operations. However, based on currently available information, the
Company does not believe that this is likely to occur.
9
<PAGE>
GENERAL
The Company is a leading provider of integrated risk management and distribution
services, including reinsurance intermediation and technical, analytical, 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, 2000 SEPTEMBER 30, 1999
---------------------------- ---------------------------
Income Income
Revenues before taxes Revenues Before taxes
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Domestic operations $ 21,002 ($ 16,525) $ 46,318 $ 16,805
Foreign operations 20,175 2,248 12,684 3,562
---------- --------- ---------- ----------
$ 41,177 ($ 14,277) $ 59,002 $ 20,367
========== ========= ========== ==========
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
---------------------------- ---------------------------
Income Income
Revenues before taxes Revenues Before taxes
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Domestic operations $ 106,329 ($ 17) $ 139,427 $ 49,117
Foreign operations 55,815 3,587 39,979 8,188
---------- --------- ---------- ----------
$ 162,144 $ 3,570 $ 179,406 $ 57,305
========== ========= ========== ==========
</TABLE>
THIRD QUARTER 2000 COMPARED WITH THIRD QUARTER 1999
OPERATIONS
The following are the components of revenue from operations for the quarter
ended September 30 (in thousands):
2000 1999
----------- -----------
Domestic operations $21,253 $44,327
Foreign operations 18,409 12,135
----------- -----------
$39,662 $56,462
=========== ===========
Domestic operations decreased 52.1% to $21.3 million for the three months ended
September 30, 2000 as compared to the prior year. This decrease is due in part
to the reversal in 2000 of $7.5 million of revenue due to a third quarter
renegotiation of a transaction by the principals. The Company acted as
intermediary and advisor to the transaction in the second quarter. Also
contributing to the decrease is the workers' compensation reinsurance placement
revenues recognized in 1999, some placed with Unicover, and other one-time
revenues recognized in 1999 that were not replaced in 2000. The remainder of the
decline is caused by reduced core domestic brokerage exclusive of non-recurring
transactions in the third quarter of 2000, partially offset by the acquisitions
of JD Warren and domestic Crawley Warren entities in late 1999 and 2000,
respectively.
Foreign operations increased $6.3 million, or 51.7%, to $18.4 million for the
three months ended September 30, 2000 as compared to the prior year. This
increase is primarily the result of the Crawley Warren acquisition in the fourth
quarter of 1999 and the acquisition of a controlling interest in MSTC Blanch
S.A. in the second quarter of 2000.
10
<PAGE>
OTHER INCOME
The following are the components of revenue from other income for the quarter
ended September 30 (in thousands):
2000 1999
----------- -----------
Domestic operations ($2,750) $ 0
Foreign operations 1,101 (9)
----------- -----------
($1,649) $ (9)
=========== ===========
Domestic operations decreased $2.8 million for the three months ended September
30, 2000 as compared to the prior year. This decrease is primarily due to the
third quarter 2000 write-down of $2.9 million related to a strategic investment
as a result of a decline in value.
Foreign operations increased $1.1 million for the three months ended September
30, 2000 as compared to the prior year. This increase is due primarily to the
third quarter 2000 expiration of a contingent liability related to the fourth
quarter 1999 acquisition of Crawley Warren.
INTEREST INCOME
The following are the components of interest income for the quarter ended
September 30 (in thousands):
2000 1999
----------- -----------
Domestic operations $2,499 $1,991
Foreign operations 665 558
----------- -----------
$3,164 $2,549
=========== ===========
Domestic operations increased $0.5 million, or 25.5%, to $2.5 million for the
three months ended September 30, 2000 as compared to the prior year. This
increase is due primarily to the acquisition of domestic Crawley Warren entities
and increased dividend and other investment income.
Foreign operations increased $0.1 million, or 19.2%, to $0.7 million for the
three months ended September 30, 2000 as compared to prior year primarily as a
result of the acquisition of Crawley Warren in the fourth quarter of 1999.
EXPENSES
Domestic operating expenses increased $8.0 million to $37.5 million, or 27.2%,
for the three months ended September 30, 2000 compared to $29.5 million the
prior year. The increase in operating expenses is primarily due to third quarter
2000 provisions for previously recognized revenue of $3.2 million related to two
reinsurance placements made through Unicover Managers, Inc., a write-off of $1.6
million of intangibles associated with two assets which are no longer
recoverable and a $0.7 million increase in an existing bad debt reserve related
to an insurance company in receivership. The increase in operating expenses is
also due to the acquisitions of domestic Crawley Warren entities in 2000 and JD
Warren in late 1999, higher salary and benefit expenses due to greater average
staff counts and normal salary progression, higher interest expense due to
increased borrowings on the Company's lines of credit, and increased software
amortization.
11
<PAGE>
Foreign operating expenses increased $8.8 million to $17.9 million or 96.5% for
the three months ended September 30, 2000 compared to $9.1 million the prior
year. The increase in operating expenses is primarily due to the acquisition of
Crawley Warren in late 1999 and the acquisition of a controlling interest in
MSTC Blanch S.A. in the second quarter of 2000.
PROFIT MARGINS
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were (78.7)% for domestic
operations for the three months ended September 30, 2000, compared to 36.3% 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 11.1% for foreign
operations for the three months ended September 30, 2000, compared to 28.1% for
the same period in the prior year.
INCOME TAXES
The Company's combined federal and state effective tax rate was 41.3% for the
three months ended September 30, 2000 as compared to 38.5% for the same period
the prior year.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
OPERATIONS
The following are the components of revenue from operations for the nine months
ended September 30 (in thousands):
2000 1999
----------- -----------
Domestic operations $ 96,479 $129,411
Foreign operations 51,267 36,917
----------- -----------
$147,746 $166,328
=========== ===========
Domestic operations decreased $32.9 million, or 25.4% from the prior year. This
decrease is partially a result of the workers' compensation reinsurance
placement revenues recognized in 1999, some placed with Unicover, and other
one-time revenues recognized in 1999 that were not replaced in 2000. The
remainder of the decline is caused by reduced core domestic brokerage exclusive
of non-recurring transactions in the third quarter of 2000, partially offset by
the acquisitions of JD Warren and domestic Crawley Warren entities in late 1999
and 2000, respectively.
Foreign operations increased $14.4 million, or 38.9%, from the prior year
primarily as a result of the acquisition of Crawley Warren in the fourth quarter
of 1999 and the acquisition of a controlling interest in MSTC Blanch S.A. in the
second quarter of 2000.
12
<PAGE>
OTHER INCOME
The following are the components of revenue from other income for the nine
months ended September 30 (in thousands):
2000 1999
----------- -----------
Domestic operations $2,894 $4,842
Foreign operations 1,249 1,414
----------- -----------
$4,143 $6,256
=========== ===========
Domestic operations decreased $1.9 million, or 40.2%, to $2.9 million for the
nine months ended September 30, 2000 as compared to the prior year. This
decrease is primarily due to the third quarter 2000 write-down of $2.9 million
related to a strategic investment as a result of a decline in value. The
write-down was partially offset by $1.8 million of realized gains recognized
from the sale of certain wholly and majority owned subsidiaries in the second
and third quarters of 2000. In addition, $2.7 million in realized gains from the
sales of long-term investments were recognized in the first and second quarters
of 2000. In the first quarter of 1999, the Company recognized a $3.5 million
gain from the sale of a personal lines property program.
Foreign operations decreased $0.2 million, or 11.7%, to $1.2 million for the
nine months ended September 30, 2000 as compared to the prior year. This
decrease is due primarily to realized gains recognized in the second quarter of
1999 from the sale of two non-strategic subsidiaries, partially offset by the
third quarter 2000 expiration of a contingent liability related to the fourth
quarter 1999 acquisition of Crawley Warren.
INTEREST INCOME
The following are the components of interest income for the nine months ended
September 30 (in thousands):
2000 1999
----------- -----------
Domestic operations $ 6,956 $5,174
Foreign operations 3,299 1,648
----------- -----------
$10,255 $6,822
=========== ===========
Domestic operations increased $1.8 million, or 34.4%, to $7.0 million for the
nine months ended September 30, 2000 as compared to the prior year. This
increase is due primarily to the acquisition of domestic Crawley Warren entities
and increased dividend and other investment income.
Foreign operations increased $1.7 million, or 100.2%, to $3.3 million for the
nine months ended September 30, 2000 as compared to the prior year primarily as
a result of the acquisition of Crawley Warren in the fourth quarter of 1999.
EXPENSES
Domestic operating expenses increased $16.0 million to $106.3 million, or 17.8%,
for the nine months ended September 30, 2000, compared to $90.3 million the
prior year. The increase in operating expenses is primarily due to the
acquisitions of domestic Crawley Warren entities in 2000 and JD Warren in late
1999, increased salary and benefit expenses due to greater average staff counts
and normal salary progression, provisions for previously recognized revenue of
$3.2 million related to two reinsurance placements made through Unicover
Managers, Inc., a write-off of $1.6 million of intangibles associated with two
assets which are no longer recoverable and a
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$0.7 million increase in an existing bad debt reserve related to an insurance
company in receivership, increased interest expense due to increased borrowings
on lines of credit, and increased software amortization.
Foreign operating expenses increased $20.4 million to $52.2 million, or 64.3%
for the nine months ended September 30, 2000, compared to $31.8 million the
prior year. The increase in operating expenses is primarily due to the
acquisition of Crawley Warren in late 1999 and the acquisition of a controlling
interest in MSTC Blanch S.A. in the second quarter of 2000.
PROFIT MARGINS
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were near break-even for
domestic operations for the nine months ended September 30, 2000, compared to
35.2% 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 6.4% for foreign
operations for the nine months ended September 30, 2000, compared to 20.5% for
the same period in the prior year.
INCOME TAXES
The Company's combined federal and state effective tax rate was 39.6% for the
nine months ended September 30, 2000 as compared to 40.8% for the same period
the prior year.
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 $15.7 million at
September 30, 2000.
The Company generated $11.4 million of cash from operations during the first
nine months of 2000 compared with $29.8 million of cash provided by operations
for the same period in 1999. The decrease in operating cash flow in 2000 is
primarily due to a decrease in earnings and the timing of changes in various
operating assets and liabilities.
Cash flow used in investing activities was $1.9 million for the nine months
ended September 30, 2000. The Company received proceeds from long-term
investments of $8.9 million and $2.1 million in proceeds from the sale of
subsidiaries. The Company used $9.7 million of cash for the purchase of property
and equipment, primarily furniture, office and computer equipment. The Company
used $3.9 million in the acquisition of an additional interest in a majority
owned subsidiary and $0.3 million for the purchase of long-term investments.
Cash flow used in financing activities was $14.5 million for the nine months
ended September 30, 2000. The primary source of cash from financing activities
was proceeds of $5.7 million from the issuance of treasury shares to fund
employee benefit plans. The primary uses of cash for financing activities were
$13.2 million for the purchase of treasury stock, $5.5 million of dividends paid
to shareholders and $1.2 million of net repayments on lines of credit. Of the
$13.2 million used for the purchase of treasury stock, $0.7 million was used to
purchase 15,798 shares of the Company's common stock from its Chairman.
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The Company's long-term investment portfolio at September 30, 2000 was $21.3
million, comprised of equity and debt instruments. The market value of the
Company's investment portfolio at September 30, 2000 was $0.1 million below
cost. The Company's investment in unconsolidated subsidiaries at September 30,
2000 was $15.0 million. The Company's trading portfolio at September 30, 2000
was $5.6 million, which is comprised of debt investments. The market value of
the Company's trading portfolio at September 30, 2000 was $0.1 million less than
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 significant regulatory capital requirements in
connection with its business.
On February 1, 2000, the Board of Directors declared a regular quarterly cash
dividend of $0.14 per share, payable March 1, 2000 to shareholders of record as
of February 7, 2000. On April 27, 2000, the Board of Directors declared a
regular quarterly cash dividend of $0.14 per share, payable June 1, 2000 to
shareholders of record as of May 9, 2000. On July 28, 2000, the Board of
Directors declared a regular quarterly cash dividend of $0.14 per share, payable
September 1, 2000 to shareholders of record as of August 9, 2000. On October 30,
2000, the Board of Directors declared a regular quarterly cash dividend of $0.14
per share, payable December 1, 2000 to shareholders of record as of November 10,
2000.
The Company has a $100 million revolving credit facility with several banks that
is 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
a $56.6 million balance outstanding under this facility as of September 30, 2000
with an average rate of interest during the third quarter 2000 of 7.5%.
The Company also has several foreign credit facilities. During the third quarter
of 2000, the Company's (pound)7.0 million secured revolving credit facility
expired and was replaced with a (pound)4.0 million overdraft facility, which
translates to $5.9 million at September 30, 2000. As of September 30, 2000, the
Company had no outstanding balance under this facility and the interest rate was
1.0% above the Hong Kong and Shanghai Banking Corporation ("HSBC") base rate. In
addition, in the third quarter of 2000 the Company's HK$7.1 million secured
revolving credit facility was converted to an HK$7.1 million overdraft facility,
which translates to $0.9 million at September 30, 2000. As of September 30,
2000, the Company had $0.9 million outstanding under this facility and the
interest rate was 1.0% above the Hong Kong Inter Bank Offer Rate ("HIBOR"). Also
in the third quarter of 2000, the Company's HK$5.0 million secured revolving
credit facility was converted to an HK$5.0 million overdraft facility, which
translates to $0.6 million at September 30, 2000. As of September 30, 2000, the
Company had $0.6 million outstanding under this facility and the interest rate
was 1.0% above HIBOR. The average rate of interest on these two overdraft
facilities during the third quarter of 2000 was 7.1%. These credit facilities
are used for general corporate funding requirements.
The Board of Directors of the Company authorized a stock repurchase program on
April 17, 2000 to purchase up to 20% of the Company's then outstanding common
stock. The purchases may be made from time-to-time at prevailing prices in the
open market, by block purchases or in private transactions for a two-year
period, subject to possible renewal at the end of that period. The shares
repurchased will be available for reissuance to satisfy employee stock plans and
for other corporate purposes. In the second quarter, the Company repurchased
522,000 shares of common stock. No additional repurchases were made in the third
quarter of 2000.
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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.
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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 2000.
Part II. Other Information
Item 1. Legal Proceedings
The Company is engaged in legal proceedings in the ordinary course of business,
none of which, either individually or in the aggregate, are likely to have a
material adverse effect on the consolidated financial position of the Company or
the results of its operations, in the opinion of management.
The various lawsuits to which the Company is a party are routine in nature and
incidental to the Company's business, with the following exceptions:
(1) 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 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 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.
Alternatively, if it is determined that Unicover misrepresented its
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authority to bind ReliaStar, Blanch should be awarded money damages resulting
from its reliance on those misrepresentations.
Discovery has been completed in this lawsuit, and the parties have filed certain
pre-trial motions, including a motion for summary judgement by ReliaStar against
AIG. In an Order filed on July 19, 2000, the trial court granted ReliaStar's
motion for summary judgement against AIG. As part of that Order, the trial court
dismissed ReliaStar's third-party complaint against Blanch as moot. The trial
court did not rule on Blanch's counterclaims against ReliaStar and Unicover, but
the effect of the ruling likely is to dismiss Blanch's counterclaims. Both AIG
and Blanch have appealed this ruling, and that appeal is pending. As stated on
page 9 above, as a result of this ruling, the Company has established a reserve
for revenues recognized for these AIG reinsurance placements in prior years.
(2) The Company is a defendant and counterclaimant in a lawsuit venued in the
United States District Court for the District of Minnesota.
Plaintiffs/Counterdefendants are HomePlus Insurance Agency, Inc. and Securian
Financial Group, Inc. This lawsuit was instituted on May 1, 2000. Plaintiffs
allege that the Company is in breach of contract, with respect to an agreement
whereby the Company was to provide plaintiff with certain software products and
services, and certain other related services. The lawsuit asserts that as a
result of the Company's alleged breach of contract and breach of warranty,
plaintiffs have suffered damages in an amount to be proven at trial, which would
include, but not be limited to, $1.5 million allegedly paid by plaintiffs to the
Company to date. The Company has counterclaimed, asserting that the Company is
not in material breach under the contract in issue, and seeking damages for the
counterdefendants' failure and refusal to honor the agreement. Those damages
would include, but not be limited to, the account receivable currently on the
Company's books for this transaction, which is $4.1 million. This lawsuit is in
the pre-trial, discovery stage. The Company intends vigorously to defend the
claims against it and vigorously to pursue its counterclaims.
(3) On March 20, 2000, the Company was sued in Dallas, Texas County Court, by
Rodman Fox, a director and executive officer of the Company who resigned the
same day. The lawsuit seeks a declaration that the restrictive covenants in his
employment agreement are unenforceable. The Company has counterclaimed against
Mr. Fox and filed third-party claims against Paul Karon, Benfield Greig Group
plc, and various related Benfield Greig entities. Paul Karon was an executive
vice president of E. W. Blanch Co., who resigned with Mr. Fox on March 20, 2000.
Benfield Greig is the current employer of Mr. Fox and Mr. Karon. The Company's
counterclaim and third-party claims are based principally on alleged breach of
fiduciary duty, misappropriation of confidential information, and violation of
restrictive covenants, based on the alleged wrong doing of Mr. Fox, Mr. Karon
and Benfield Greig both before and after the resignations of Messrs. Fox and
Karon without prior notice on March 20, 2000. The trial court in an Order dated
June 13, 2000, granted the Company's motion for a temporary injunction,
restraining Fox and Karon from soliciting or assisting in the solicitation of
Company employees, and restraining Fox, Karon and Benfield Greig from
disseminating trade secrets or confidential information of the Company. The
trial court denied the Company's motion with respect to enforcement of the other
restrictive covenants in Fox and Karon's employment contract, finding them to be
unenforceable, and also denied the motion with respect to breach of fiduciary
duty, finding that while the Company had "demonstrated a probable right to
prevail" on the breach of fiduciary claims, an injunction was not warranted
because the Company has an adequate remedy at law in the form of a jury award of
damages. The Company has appealed the
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June 13, 2000 Order to the extent it denies the Company's temporary injunction
request. The trial court has set a trial date on this matter for July 10, 2001.
Items 2, 3, 4, and 5 are not applicable and have been omitted.
Item 6. Exhibits and Reports on Form 8-K.
(a.) The Exhibits required to be a part of this Report are listed in the
Index to Exhibits on page 21 hereof.
(b.) The registrant did not file a current report on Form 8-K during the
quarter ended September 30, 2000.
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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: November 10, 2000 /s/ Susan B. Wollenberg
----------------- -----------------------------------
Susan B. Wollenberg
Senior Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
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