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 March 31, 1998
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.
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(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
3500 West 80th Street, Minneapolis, Minnesota 55431
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(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 April
30, 1998 was 12,776,852.
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
MARCH 31,
1998 1997
-----------------------
Revenues:
Brokerage commissions and fees $ 44,805 $ 35,244
Investment income 2,147 1,785
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Total revenues 46,952 37,029
Expenses:
Salaries and benefits 21,572 16,478
Travel and marketing 3,135 2,699
General and administrative 8,659 6,577
Amortization of goodwill 694 590
Interest and other expense 374 276
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Total expenses 34,434 26,620
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Income before taxes 12,518 10,409
Income taxes 4,808 4,006
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Net income before minority interest 7,710 6,403
Minority interest, net of tax 180 (41)
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Net income $ 7,530 $ 6,444
=======================
Net income per share $ .60 $ .50
Net income per share - assuming dilution $ .57 $ .50
=======================
Cash dividends declared per share $ 0.10 $ 0.10
=======================
SEE ACCOMPANYING NOTES.
E. W. Blanch Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
MARCH 31, DECEMBER 31,
1998 1997
------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,386 $ 11,608
Due from fiduciary accounts 25,878 30,874
Prepaid insurance 1,042 1,471
Other current assets 8,796 7,428
-----------------------
Total current assets 42,102 51,381
Long-term investments, available for sale 26,539 14,939
Property and equipment, net 27,765 26,309
Goodwill, net 31,577 34,916
Other assets 15,382 11,772
Fiduciary accounts--assets 776,813 780,450
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Total assets $ 920,178 $ 919,767
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued compensation $ 4,225 $ 6,628
Notes payable to banks 6,600 1,379
Accounts payable 11,043 14,420
Current portion of long-term liabilities 1,535 2,586
Other current liabilities 11,647 12,020
-----------------------
Total current liabilities 35,050 37,033
Long-term debt, less current portion 11,254 13,675
Other liabilities, less current portion 10,328 10,536
Fiduciary accounts--liabilities 776,813 780,450
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Total liabilities 833,445 841,694
Minority interest 2,421 1,621
SHAREHOLDERS' EQUITY 84,312 76,452
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Total liabilities and shareholders' equity $ 920,178 $ 919,767
=======================
SEE ACCOMPANYING NOTES.
E. W. Blanch Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Unaudited
THREE MONTHS ENDED MARCH 31,
1998 1997
------------------------
OPERATING ACTIVITIES
Net income $ 7,530 $ 6,444
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,549 1,806
Changes in operating assets and liabilities:
Due from fiduciary accounts 4,984 (2,931)
Other current assets (1,738) (3,803)
Accrued compensation (2,403) (2,453)
Accounts payable and other current liabilities (3,870) 8,659
Other, net (801) (192)
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Net cash provided by operating activities 6,251 7,530
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INVESTING ACTIVITIES
Purchases of property and equipment (3,047) (2,029)
Purchases of investments (15,505) --
Excess of cash acquired from purchase of subsidiary -- 480
Proceeds from the sale of a subsidiary -- 15,092
Proceeds from sales of investments 4,263 427
Other investing activities, net -- (13)
------------------------
Net cash provided by (used in) investing activities (14,289) 13,957
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FINANCING ACTIVITIES
Purchase of treasury shares -- (14,550)
Proceeds from the issuance of treasury shares to
employee benefits plans 1,460 1,065
Dividends paid (1,262) (1,326)
Borrowings (repayments) on lines of credit, net 5,400 (1,340)
Payments on long-term debt (2,860) (347)
Other financing activities, net 78 196
------------------------
Net cash provided by (used in) financing activities 2,816 (16,302)
------------------------
Net increase (decrease) in cash and cash equivalents (5,222) 5,185
Cash and cash equivalents at beginning of period 11,608 1,069
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Cash and cash equivalents at end of period $ 6,386 $ 6,254
========================
SEE ACCOMPANYING NOTES.
E. W. Blanch Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 1998
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, 1997.
E.W. Blanch Holdings, Inc. ("the Company") and its predecessor organizations
have been in operation since 1957. The Company is a leading international
provider of integrated risk management and distribution services including
reinsurance intermediary services, risk management consulting and administration
services, and primary insurance distribution services. The consolidated
financial statements include the accounts of the Company and its wholly and
majority owned subsidiaries.
2. ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly and majority owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Foreign Currency Translation
The Company's primary functional currency is the U.S. dollar. The functional
currency of the Company's foreign operations is the British pound sterling. The
Company translates income and expense accounts at the average rate in effect for
the period. Balance sheet accounts are translated at the period end exchange
rate. Adjustments resulting from the balance sheet translation are reflected in
Shareholder's Equity. The cumulative translation adjustment at March 31, 1998 is
a $216,000 loss.
3. NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the company's net income or shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders' equity to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of SFAS No. 130.
During the first quarter of 1998 and 1997, total other comprehensive income
amounted to $132,000 and $18,000.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14 and
defines financial and descriptive information about a Company's operating
segments that is to be disclosed in financial statements. The Company is
developing allocation methods to assess performance on a business segment basis.
Once completed, additional disclosures will be provided in accordance with this
Statement. The Company will adopt SFAS No. 131 for the year ended December 31,
1998.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted weighted
average shares outstanding for the three months ended March 31 (in thousands):
1998 1997
--------------------
Weighted average shares - basic 12,614 12,914
Effect of dilutive securities:
Employee stock options 701 87
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Weighted average shares - assuming dilution 13,315 13,001
====================
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. In addition to the risk factors discussed, among the
other factors that could cause actual results to differ materially are the
following: market dynamics, interest rate changes, regulatory changes,
competition, and the failure of the Company and its subsidiaries or significant
third parties to achieve Year 2000 compliance or material expense in connection
with such compliance. Additional information concerning those and other 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.
GENERAL
The Company is a leading international provider of integrated risk management
and distribution services including reinsurance intermediary services, risk
management consulting and administration services, and primary insurance
distribution services.
The following is a summary of revenues and income before taxes by geographic
area for the periods indicated (in thousands):
Quarter Ended March 31, 1998
Income
Revenues before taxes
---------- -----------
Domestic operations $36,492 $11,039
Foreign operations 10,460 1,479
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$46,952 $12,518
========== ===========
Quarter Ended March 31, 1997
Income
Revenues before taxes
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Domestic operations $31,131 $10,132
Foreign operations 5,898 277
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$37,029 $10,409
========== ===========
Domestic operations include reinsurance intermediary services, risk management
consulting and administration services, program distribution services, policy
distribution capabilities, and the general agency operations. All of these
services, except general agency operations
are focused on providing solutions for the management and distribution of risk
to a client base which is primarily comprised of property and casualty insurance
companies. These services are generally recurring and, due to the Company's
expertise and the value-added nature of its services, have been able to operate
at relatively higher operating margins. The general agency operations are
focused on the primary distribution of insurance for property and casualty
insurance companies, largely through independent insurance agents. Due to the
competitive nature of the general agency business, the Company's profit margins
for these services are relatively lower.
Foreign operations include Swire Blanch, the Company's international insurance
and reinsurance broker headquartered in London. Swire Blanch includes a Lloyd's
insurance and reinsurance brokering operation and international reinsurance
intermediary operations. Swire Blanch also provides financial services through
the sale of pension plans for insurance companies. Insurance brokerage services
include the retail operations located in northern England, and Hong Kong.
Approximately 75% of foreign revenues are generated in the United Kingdom with
the remainder primarily from the Pacific Rim. Although certain Pacific Rim
financial markets continue to experience some economic volatility, the Company
does not anticipate a significant impact to its business in that area of the
world. The Company's foreign operations currently do not enjoy the relatively
higher profit margins of the Company's domestic risk management and distribution
services. This is due to a number of factors, including competitive market
conditions for Lloyd's brokers, the small, start-up nature of many of the
international offices, the competitiveness of the Swire Renshaw primary
insurance distribution business, and the capitalization and acquisition costs
associated with the purchase. The Company seeks to grow its international
profitability through the integration of systems, services and expertise in
order to increase revenue production and processing efficiencies.
FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997
Foreign operations for the quarter ended March 31, 1998 include three months of
activity as compared to two months of activity for the quarter ended March 31,
1997. This comparison is the result of the acquisition of Swire Blanch in
February 1997.
BROKERAGE COMMISSIONS AND FEES
The following are the components of Brokerage commissions and fees for the
quarter ended March 31 (in thousands):
1998 1997
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DOMESTIC OPERATIONS
Reinsurance brokerage $29,241 $23,851
Risk management fees 1,800 1,904
Program and policy distribution fees 1,406 1,011
General agency commissions 2,513 2,927
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34,960 29,693
FOREIGN OPERATIONS
Reinsurance brokerage 2,883 1,502
Specialty lines 2,938 1,542
Financial services fees 1,652 1,466
Insurance brokerage 2,372 1,041
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9,845 5,551
$44,805 $35,244
========== ==========
Domestic reinsurance brokerage increased $5.4 million, or 22.6%, from the prior
year primarily as a result of continued growth in existing accounts and new
production. Risk management fees includes the consulting and administration
services from Paragon and fees from the licensing and maintenance of the UniSURe
software. These fees were $1.8 million for the quarter ended March 31, 1998
compared to $1.9 million the prior year, a decrease of $0.1 million, or 5.3%.
Program and policy distribution fees increased $0.4 million, or 39.1%, to $1.4
million for the quarter. This increase is primarily the result of new
production. General agency commissions decreased $0.4 million, or 14.1%, to $2.5
million for the quarter ended March 31, 1998 compared to $2.9 million the prior
year. This is primarily the result of decreasing profit margins on premium
volumes in 1998 compared to 1997.
International reinsurance intermediary services, which include those in London
and other international offices, were $2.9 million compared to $1.5 million in
the prior year. Specialty lines, which includes the specialty insurance
distribution services based in London were $2.9 million compared to $1.5 million
in the prior year. Financial services fees, generated from the sale of various
pension plan products for insurance companies, were $1.7 million compared to
$2.4 million in the prior year. Insurance brokerage generated $1.5 million
compared to $1.0 million in the prior year. Foreign operations for the quarter
ended March 31, 1998 include three months of activity as compared to two months
of activity for the quarter ended March 31, 1997. This comparison is the result
of the acquisition of Swire Blanch in February 1997.
INVESTMENT INCOME
1998 1997
--------- ---------
DOMESTIC OPERATIONS
Fiduciary investment income $1,328 $1,061
Corporate investment income 204 190
Premium finance interest and fees - 187
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1,532 1,438
FOREIGN OPERATIONS
Fiduciary investment income 466 242
Corporate investment income 149 105
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615 347
$2,147 $1,785
========= =========
Investment income was $2.1 million for the quarter ended March 31, 1998 compared
to $1.8 million the prior year, an increase of $0.3 million or 20.2%. The
primary sources of investment income are from fiduciary funds and corporate
capital. Domestic investment income, for the quarter ended March 31, 1997,
includes $0.2 million of premium finance interest and fees from the Company's
premium finance business which was sold in February 1997.
Fiduciary investment income from domestic operations was $1.3 million for the
quarter ended March 31, 1998 compared to $1.1 million the prior year, an
increase of $0.2 million or 25.2%. The average balance of domestic funds for the
quarter was $106.3 million (compared to $85.9 million for the prior year), at an
average yield of 5.04% (compared to 5.01% the prior year). Foreign operations
also earned $0.5 million of fiduciary investment income for the quarter ended
March 31, 1998 compared to $0.2 million for the two months ended March 31, 1997.
EXPENSES
Domestic operating expenses increased $4.4 million to $25.4 million, or 21.2%,
for the quarter ended March 31, 1998 compared to $20.0 million the prior year.
The increase is primarily as a result of an increase in employees as of March
31, 1998 compared to the prior year and normal salary progressions. The increase
in employees is due to increased business levels and businesses acquired or
started in 1998. Domestic operations also experienced increases in travel and
marketing, general and administrative expenses, and interest and other expenses
due to increased business levels.
Operating expenses for the three months of international operations in the
quarter ended March 31, 1998 were $9.0 million, compared to $5.6 million for the
two months ended March 31, 1997.
PROFIT MARGINS
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 30.2% for domestic operations for the quarter ended March
31, 1998, compared to 32.5% for the same period in the prior year. Gross profit
margins, calculated as income before corporate services expenses and before
taxes, was a loss of 4.6% for the general agency operations for the quarter
ended March 31, 1998, compared to a profit of 4.0% for the same period in the
prior year, as a result of lower premium volume. The Company's remaining risk
management and distributions services earned a gross profit margin of 53.3% for
the quarter ended March 31, 1998, compared to a gross profit margin of 51.4% for
the same period in the prior year, as a result of higher revenues.
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 14.1% for foreign operations for the quarter ended March
31, 1998, compared to 4.7% for the two months ended March 31, 1997. Gross profit
margins, calculated as income before corporate services expenses and before
taxes, for the quarter ended March 31, 1998 was a profit of 13.8% compared to a
loss of 11.2% the prior year, for the insurance brokerage operations and a
profit of 14.2% compared to a profit of 11.3% the prior year, for the remaining
reinsurance and specialty risk management and distribution services.
INCOME TAXES
The Company's combined federal and state effective tax rate for domestic
operations continues to be 39%. The effective tax rate provided for the
Company's foreign operations is expected to be 32% for the year ended December
31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of brokerage commissions and
fees and investment income. Funds are applied generally to the payment of
operating expenses, the purchase of equipment used in the ordinary course of
business, the repayment of outstanding indebtedness, and the distribution of
earnings. The Company's cash and cash equivalents were $6.4 million at March 31,
1998.
The Company generated $6.3 million of cash from operations during the first
three months of 1998 compared with $7.5 million for the same period in 1997. The
decrease in operating cash flow in 1998 is primarily due to the timing of cash
distributions from the fiduciary accounts to the Company and offset by changes
in certain operating assets and liabilities.
Cash flows used in investing activities was $14.3 million for the quarter ended
March 31, 1998. The primary uses of cash for financing activities were $15.5
million in purchases of investments and $3.0 million in purchases of property
and equipment. The Company received $4.3 million in proceeds from the sale of
investments. Cash flow from investing activities was $14.0 million for the
quarter ended March 31, 1997. During the quarter, the Company received net
proceeds of $15.1 million from the sale of its premium finance operations.
Consideration for the Swire Blanch transaction was $2.9 million in cash and the
assumption of (pound)6.2 million of debt (approximately $10.2 million at the
acquisition date). Swire Blanch's cash at the purchase date was $3.4 million,
thus providing $0.5 million of net cash from the acquisition. The Company also
used $2.0 million of cash for the purchase of property and equipment, primarily
computerized systems.
Cash flow from financing activities was $2.8 million for the quarter ended March
31, 1998. The Company had net borrowings from its line of credit of $5.4
million. The primary uses of cash for financing activities were $1.3 million of
dividends paid to shareholders and $2.9 million for payments on long-term debt.
In the prior year, net cash used in financing activities was $16.3 million,
consisting primarily of $14.6 million for the purchase of treasury stock. $1.3
million of dividends paid to shareholders and $1.3 million for the net repayment
of lines of credit. The Company issued $1.5 million and $1.1 million of treasury
stock to fund employee benefit plans in the quarter ended March 31, 1998 and
1997, respectively.
The Company's long-term investment portfolio at March 31, 1998 was $26.5
million, comprised of equity and debt instruments. The market value of the
Company's investment portfolio at March 31, 1998 was $0.8 million above cost.
Cash, short-term investments and the Company's line of credit are available and
managed for the payment of its operating and capital expenditures. The Company
is not subject to any regulatory capital requirements in connection with its
business.
On January 22, 1998, the Board of Directors declared a regular quarterly cash
dividend of $0.10 per share, payable March 2, 1998 to shareholders of record as
of February 9, 1998. On April 23, 1998 the Board of Directors declared a regular
quarterly cash dividend of $0.12 per share, payable June 1, 1998 to shareholders
of record as of May 4, 1998
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.
E. W. BLANCH HOLDINGS, INC.
Part II. Other Information
Items 1 through 5 are not applicable and have been omitted.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) The registrant did not file a current report on Form 8-K during the
quarter ended March 31, 1998.
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: May 15, 1998 /s/ Ian D. Packer
-----------------------------
Ian D. Packer
Executive Vice President
and Chief Financial Officer