- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 June 30,
2000 was 12,904,772.
1
Part 1. Financial Information
Item 1. Financial Statements
E. W. Blanch Holdings, Inc.
Consolidated Statements of Income
(in thousands, except per share amounts)
Unaudited
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
2000 1999 2000 1999
-------------------------- ---------------------------
Revenues:
Operations $ 56,596 $ 53,884 $ 108,084 $ 109,866
Other income 3,537 2,579 5,792 6,265
Interest income 3,919 1,929 7,091 4,273
-------------------------- ---------------------------
Total revenues 64,052 58,392 120,967 120,404
Expenses:
Salaries and benefits 30,035 23,864 62,584 49,749
Travel and marketing 4,680 4,629 9,350 8,132
General and administrative 11,742 11,160 25,431 23,372
Amortization of intangibles 1,659 874 3,099 1,770
Interest expense 1,224 123 2,656 443
-------------------------- ---------------------------
Total expenses 49,340 40,650 103,120 83,466
-------------------------- ---------------------------
Income before taxes 14,712 17,742 17,847 36,938
Income taxes 6,016 7,682 7,316 15,576
-------------------------- ---------------------------
Net income before minority interest and
equity in (gain) loss of unconsolidated
subsidiaries, net of tax 8,696 10,060 10,531 21,362
Minority interest, net of tax 265 (43) 220 188
Equity interest in (gain) loss of
unconsolidated subsidiaries, net of tax 252 2,230 (28) 3,811
-------------------------- ---------------------------
Net income $ 8,179 $ 7,873 $ 10,339 $ 17,363
========================== ===========================
Earnings per share - basic $ 0.63 $ 0.61 $ 0.79 $ 1.35
Earnings per share - diluted $ 0.63 $ 0.58 $ 0.77 $ 1.28
Cash dividends declared per share $ 0.14 $ 0.12 $ 0.28 $ 0.24
SEE ACCOMPANYING NOTES.
2
E. W. Blanch Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
JUNE 30, DECEMBER 31,
2000 1999
-------------------------------
ASSETS: (UNAUDITED)
Current assets:
Cash and cash equivalents $ 8,167 $ 20,819
Due from fiduciary accounts 57,903 41,137
Prepaid insurance 337 1,370
Investments, trading portfolio 5,595 5,128
Other current assets 24,733 9,322
------------------------------
Total current assets 96,735 77,776
Long-term investments 24,030 32,322
Investments in unconsolidated subsidiaries 15,559 10,528
Property and equipment, net 39,798 40,918
Intangibles, net 69,401 84,226
Other assets 21,048 16,584
Fiduciary accounts--assets 1,065,986 955,556
------------------------------
Total assets $ 1,332,557 $1,217,910
==============================
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Current liabilities:
Accrued compensation $ 5,874 $ 9,304
Notes payable to banks under lines of credit 69,174 59,360
Accounts payable 15,602 13,048
Current portion of long-term liabilities 341 308
Other current liabilities 15,053 17,948
------------------------------
Total current liabilities 106,044 99,968
Long-term debt, less current portion 87 478
Other liabilities, less current portion 4,574 4,859
Commitments and contingencies - -
Fiduciary accounts--liabilities 1,065,986 955,556
------------------------------
Total liabilities 1,176,691 1,060,861
MINORITY INTEREST: (69) 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 70,508 64,518
Treasury stock (1,236,899 shares in 2000 and 854,171
shares in 1999) (32,377) (21,446)
Accumulated other comprehensive income (1,060) 1,675
Retained earnings 118,723 112,047
Total shareholders' equity ------------------------------
155,935 156,935
------------------------------
Total liabilities, minority interest and shareholders' equity $ 1,332,557 $1,217,910
==============================
SEE ACCOMPANYING NOTES.
3
E. W. Blanch Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Unaudited
SIX MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
-------------------------
OPERATING ACTIVITIES
Net income $ 10,339 $ 17,363
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Gain on sale of investments (3,686) (1,131)
Gain on sale of subsidiaries (1,821) (1,414)
Depreciation and amortization 8,589 6,329
Deferred income tax provision (benefit) 1,782 (1,839)
Undistributed (earnings) losses of unconsolidated subsidiaries (28) 3,811
Non-cash compensation expense 2,436 2,546
Changes in operating assets and liabilities:
Due from fiduciary accounts (16,930) 2,847
Other current assets (6,281) (2,192)
Accrued compensation (3,345) (3,161)
Accounts payable and other current liabilities 567 (4,729)
Purchases of trading portfolio investments (3,427) (1,152)
Sales of trading portfolio investments 3,055 871
Other operating activities, net (5,580) 147
-------------------------
Net cash provided by (used in) operating activities (14,330) 18,296
INVESTING ACTIVITIES
Purchases of long-term investments (229) (1,190)
Sales of long-term investments 8,866 3,631
Purchases of property and equipment, net (5,348) (8,047)
Proceeds from the sale of subsidiaries, net (189) 4,260
Acquisition of unconsolidated subsidiaries -- (1,250)
Other investing activities, net 365 (90)
-------------------------
Net cash provided by (used in) investing activities 3,465 (2,686)
FINANCING ACTIVITIES
Dividends paid (3,629) (3,070)
Proceeds from the issuance of treasury shares related to
employee stock plans 4,701 3,653
Purchase of treasury stock (13,169) (3,193)
Net borrowings (repayments) on lines of credit 9,814 (8,625)
Net payments on long-term debt (26) (39)
Other financing activities, net 522 90
-------------------------
Net cash used in financing activities (1,787) (11,184)
-------------------------
Net increase (decrease) in cash and cash equivalents (12,652) 4,426
Cash and cash equivalents at beginning of period 20,819 707
-------------------------
Cash and cash equivalents at end of period $ 8,167 $ 5,133
=========================
SEE ACCOMPANYING NOTES
4
E. W. Blanch Holdings, Inc.
Notes to Consolidated Financial Statements
June 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.
Adjustments resulting from the balance sheet translation are reflected in
Shareholders' Equity. The cumulative translation adjustment at June 30, 2000, is
an unrealized $760,000 loss.
5
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 June 30, 2000, 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.
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):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ----------------------------
2000 1999 2000 1999
-------------------------------- ----------------------------
Weighted average shares - basic 12,973 12,897 13,079 12,835
Effect of dilutive securities 62 772 357 775
-------------------------------- ----------------------------
Weighted average shares - assuming dilution 13,035 13,669 13,436 13,610
================================ ============================
5. BUSINESS SEGMENT INFORMATION
The following is additional business segment information for the periods
indicated (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
PROFIT, NET OF TAX 2000 1999 2000 1999
- --------------------------------------------------------- --------------- ------------- ------------ -------------
Domestic operations $7,782 $7,024 $10,241 $15,713
Foreign operations 397 849 98 1,650
--------------- ------------- ------------ -------------
Consolidated $8,179 $7,873 $10,339 $17,363
=============== ============= ============ =============
6
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
REVENUES 2000 1999 2000 1999
- --------------------------------------------------------- --------------- ------------- ------------ -------------
Domestic operations $47,687 $45,067 $85,327 $93,109
Foreign operations 16,365 13,325 35,640 27,295
--------------- ------------- ------------ -------------
Consolidated $64,052 $58,392 $120,967 $120,404
=============== ============= ============ =============
6. COMPREHENSIVE INCOME
During the three months ended June 30, 2000 and 1999, total other comprehensive
income (loss) amounted to ($1,551,000) and $1,103,000, respectively. Total
comprehensive income for the three months ended June 30, 2000 and 1999 amounted
to $6,628,000 and $8,976,000, respectively.
During the six months ended June 30, 2000 and 1999, total other comprehensive
income (loss) amounted to ($2,735,000) and $616,000, respectively. Total
comprehensive income for the six months ended June 30, 2000 and 1999 amounted to
$7,604,000 and $17,979,000, 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
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 below); 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. These modifications have been completed and fully tested as part of the
Crawley Warren system conversion efforts and are scheduled to go into production
in the third quarter of 2000. 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" 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. The Company also assisted various other clients
in procuring workers' compensation reinsurance coverage with Reliance Insurance
Company ("Reliance"), managed by 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
8
successfully concluded. Also in January 2000, Reliance and the Company reached
an agreement in principle concerning the Company's brokerage revenue associated
with these settled reinsurance placements, which agreement subsequently was
finalized. 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 Indemnity Company ("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. To date, the Company has not
reached an agreement with EBI or those reinsurers concerning the Company's
brokerage revenues associated with the reinsurance program, although discussions
are ongoing. In 1999, the Company recognized revenue for this program in
accordance with its standard revenue recognition practices, through the third
quarter of 1999. Some, but not all, of that recognized revenue has been received
by the Company. If the Company is not successful in negotiating a satisfactory
resolution of its right to brokerage for the EBI reinsurance program, it intends
to pursue its legal remedies to enforce its rights.
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.
The Company has not made any material accruals for any loss contingency relating
to the revenues recognized to date on the Unicover litigation and workers'
compensation reinsurance issues discussed above, because in the Company's
opinion, no such loss contingencies are likely to occur. However, the Company is
of the opinion that there is a reasonable possibility (i.e., more than remote
but less than likely) of a loss contingency with respect to certain of those
issues, and estimates a possible range of loss for these reasonably possible
loss contingencies of zero to $7.1 million. The Company intends to continue to
vigorously pursue and defend its rights to brokerage on these matters, including
its rights to brokerage in addition to what it has recognized to date.
9
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):
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
---------------------------------------- ------------------------------------------
Income before Income
Revenues taxes Revenues Before taxes
----------------- ------------------- ------------------- ------------------
Domestic operations $47,687 $13,287 $45,067 $15,242
Foreign operations 16,365 1,425 13,325 2,500
----------------- ------------------- ------------------- ------------------
$64,052 $14,712 $58,392 $17,742
================= =================== =================== ==================
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
---------------------------------------- ------------------------------------------
Income before Income
Revenues taxes Revenues Before taxes
----------------- ------------------- ------------------- ------------------
Domestic operations $85,327 $16,508 $93,109 $32,312
Foreign operations 35,640 1,339 27,295 4,626
----------------- ------------------- ------------------- ------------------
$120,967 $17,847 $120,404 $36,938
================= =================== =================== ==================
Second quarter 2000 revenues include a receivable of $7.5 million for a fee
earned by the Company for work done in the second quarter as intermediary and
consultant on a transaction that was negotiated and agreed upon in the second
quarter, but that is to be performed by the parties to that transaction after
the second quarter.
SECOND QUARTER 2000 COMPARED WITH SECOND QUARTER 1999
OPERATIONS
The following are the components of revenue from operations for the quarter
ended June 30 (in thousands):
2000 1999
------------------ ----------------
Domestic operations $42,010 $42,519
Foreign operations 14,586 11,365
------------------ ----------------
$56,596 $53,884
================== ================
Domestic operations decreased slightly to $42.0 million, or 1.2%, for the three
months ended June 30, 2000 as compared to the prior year. Foreign operations
increased $3.2 million, or 28.3%, to $14.6 million for the three months ended
June 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.
OTHER INCOME
The following are the components of revenue from other income for the quarter
ended June 30 (in thousands):
2000 1999
------------------ ----------------
Domestic operations $3,389 $1,165
Foreign operations 148 1,414
------------------ ----------------
$3,537 $2,579
================== ================
10
Domestic operations increased $2.2 million, or 65.4%, to $3.4 million for the
three months ended June 30, 2000 as compared to the prior year. This increase is
due primarily to realized gains recognized from the sale of three wholly owned
subsidiaries and one long term investment in the second quarter of 2000. Foreign
operations decreased $1.3 million, or 89.5% to $0.1 million for the three months
ended June 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.
INTEREST INCOME
The following are the components of interest income for the quarter ended June
30 (in thousands):
2000 1999
------------------ ----------------
Domestic operations $2,288 $1,383
Foreign operations 1,631 546
------------------ ----------------
$3,919 $1,929
================== ================
Domestic operations increased $0.9 million, or 65.4%, to $2.3 million for the
three months ended June 30, 2000 as compared to the prior year. This increase is
due primarily to the acquisition of Crawley Warren and increased dividend and
other investment income. Foreign operations increased $1.1 million, or 198.7%,
to $1.6 million for the three months ended June 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 $4.6 million to $34.4 million, or 15.3%,
for the three months ended June 30, 2000 compared to $29.8 million the prior
year. The increase in operating expenses is primarily due to the acquisitions of
Crawley Warren and JD Warren in late 1999, increased salary and benefit expenses
due to increased staff counts and normal salary progressions, increased interest
expense due to increased borrowings on the Company's lines of credit, and
increased software amortization.
Foreign operating expenses increased $4.1 million to $14.9 million, or 38.0% for
the three months ended June 30, 2000 compared to $10.8 million the prior year.
The increase in operating expenses is primarily due to the acquisition of
Crawley Warren in late 1999.
PROFIT MARGINS
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were 27.9% for domestic
operations for the three months ended June 30, 2000, compared to 33.8% 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 8.7% for foreign
operations for the three months ended June 30, 2000, compared to 18.8% for the
same period in the prior year.
INCOME TAXES
The Company's combined federal and state effective tax rate was 40.9% for the
three months ended June 30, 2000 as compared to 43.3% for the same period the
prior year.
11
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
OPERATIONS
The following are the components of revenue from operations for the six months
ended June 30 (in thousands):
2000 1999
------------------ ----------------
Domestic operations $75,226 $85,084
Foreign operations 32,858 24,782
------------------ ----------------
$108,084 $109,866
================== ================
Domestic operations decreased $9.9 million, or 11.6%, from the prior year
primarily as a result of workers' compensation reinsurance placement revenues
recognized in 1999, some placed with Unicover, that were not replaced in 2000.
Foreign operations increased $8.1 million, or 32.6%, from the prior year
primarily as a result of the acquisition of Crawley Warren in the fourth quarter
of 1999.
OTHER INCOME
The following are the components of revenue from other income for the six months
ended June 30 (in thousands):
2000 1999
------------------ ----------------
Domestic operations $5,644 $4,842
Foreign operations 148 1,423
------------------ ----------------
$5,792 $6,265
================== ================
Domestic operations increased $0.8 million, or 16.6%, to $5.6 million for the
six months ended June 30, 2000 as compared to the prior year. This increase is
primarily due to realized gains recognized from the sale of three wholly owned
subsidiaries and one long term investment in the second quarter of 2000, and the
recognition of a $1.9 million gain from the sale of a long term investment in
the first quarter 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 $1.3 million, or 89.6%, to $0.1 million for the six months
ended June 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.
INTEREST INCOME
The following are the components of interest income for the six months ended
June 30 (in thousands):
2000 1999
------------------ ----------------
Domestic operations $4,457 $3,183
Foreign operations 2,634 1,090
------------------ ----------------
$7,091 $4,273
================== ================
12
Domestic operations increased $1.3 million, or 40.0%, to $4.5 million for the
six months ended June 30, 2000 as compared to the prior year. This increase is
due primarily to the acquisition of Crawley Warren and increased dividend and
other investment income. Foreign operations increased $1.5 million, or 141.7%,
to $2.6 million for the six months ended June 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 $8.0 million to $68.8 million, or 13.2%,
for the six months ended June 30, 2000, compared to $60.8 million the prior
year. The increase in operating expenses is primarily due to the acquisitions of
Crawley Warren and JD Warren in late 1999, increased salary and benefit expenses
due to increased staff counts and normal salary progression, increased interest
expense due to increased borrowings on lines of credit, and increased software
amortization.
International operating expenses increased $11.6 million to $34.3 million, or
51.3% for the six months ended June 30, 2000, compared to $22.7 million the
prior year. The increase in operating expenses is primarily due to the
acquisition of Crawley Warren in late 1999.
PROFIT MARGINS
Operating profit margins, calculated as income before taxes and allocation of
central costs as a percentage of total revenues, were 19.3% for domestic
operations for the six months ended June 30, 2000, compared to 34.7% 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 3.8% for foreign
operations for the six months ended June 30, 2000, compared to 16.9% for the
same period in the prior year.
INCOME TAXES
The Company's combined federal and state effective tax rate was 41.0% for the
six months ended June 30, 2000 as compared to 42.2% 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 $8.2 million at June 30,
2000.
The Company used $14.3 million of cash from operations during the first six
months of 2000 compared with $18.3 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 provided by investing activities was $3.5 million for the six months
ended June 30, 2000. The Company received proceeds from the sale of long-term
investments of $8.9 million. The Company used $5.3 million of cash for the
purchase of property and equipment, primarily computer equipment, real property,
furniture and office equipment and enhancements to the Company's Catalyst
software. The Company used $0.2 million for the purchase of long-term
investments.
13
Cash flow used in financing activities was $1.8 million for the six months ended
June 30, 2000. The primary sources of cash from financing activities were $9.8
million of borrowings on lines of credit and proceeds of $4.7 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 and $3.6 million of dividends paid to shareholders. 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.
The Company's long term investment portfolio at June 30, 2000 was $24.0 million,
comprised of equity and debt instruments. The market value of the Company's
investment portfolio at June 30, 2000 was $0.2 million below cost. The Company's
investment in unconsolidated subsidiaries at June 30, 2000 was $15.6 million.
The Company's trading portfolio at June 30, 2000 was $5.6 million, which is
comprised of debt investments. The market value of the Company's trading
portfolio at June 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.
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 $67.6 million balance outstanding under this facility as of June 30, 2000 with
an average rate of interest of 7.1%.
The Company also has a (pound) 7.0 million secured revolving credit facility,
which translates to $10.6 million at June 30, 2000. As of June 30, 2000, the
Company had no outstanding balance under this facility and the interest rate was
1.0% 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 June 30, 2000. As of June 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, the Company has a HK$5.0 million
secured revolving credit facility, which translates to $0.6 million at June 30,
2000. As of June 30, 2000, the Company had $0.6 million outstanding under this
facility and the interest rate was 1.0% above HIBOR. 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.
14
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
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There were no material changes in market risk for the Company during the first
six 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 authority to
bind ReliaStar, Blanch should be awarded money damages resulting from its
16
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, and received by the Company on July 21,
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. The Company and its legal counsel
are analyzing the potential impact of this Order on those counterclaims. No
appeal of this Order has yet been filed by AIG, although the Company expects
that AIG will do so. The Company in prior quarters (although not in the first
six months of 2000) did recognize some revenue for the placements in issue in
this lawsuit. If it ultimately were determined that those placements were never
bound, and that Blanch therefore is not entitled to brokerage, the amount of
previously recognized brokerage (net of reserves) that likely would have to be
adjusted is approximately $1.7 million.
(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
its preliminary stages. 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, 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 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, and 5 are not applicable and have been omitted.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on April 27, 2000.
Proxies for the meeting were solicited pursuant to Regulation 14 of the
Securities Exchange Act of 1934. The following matters were voted upon:
o Election of directors:
Newly elected directors:
In Favor Withheld
Kaj Ahlmann 11,299,637 442,279
Gerald A. Isom 11,311,219 430,697
o Approval of the E.W. Blanch Holdings, Inc. Management
Incentive Plan.
In Favor Opposed Abstain
8,108,030 1,905,269 478,414
o Approval to amend the certificate of incorporation to increase
the number of authorized common shares from 30,000,000 to
60,000,000.
In Favor Opposed Abstain
9,529,326 2,132,766 79,824
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o Ratification of Ernst & Young LLP as the auditors for the
Company for the year 2000.
In Favor Opposed Abstain
11,570,533 113,965 57,418
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 20 hereof.
(b.) The registrant did not file a current report on Form 8-K during the
quarter ended June 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: 7/21/00 /s/ Susan B. Wollenberg
----------- -----------------------
Susan B. Wollenberg
Senior Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit 3.1 Restated Certificate of Incorporation of the
Company
Exhibit 27 Financial Data Schedule
20