-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MSZuUaOLtI3H0x13XTDQGFkKhaiVto1CWMGZSOr2r809iUEvc8UGGls9KUBx1NXb WdwGePXWWn5jXGValBvc+Q== 0000897101-99-001079.txt : 19991117 0000897101-99-001079.hdr.sgml : 19991117 ACCESSION NUMBER: 0000897101-99-001079 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLANCH E W HOLDINGS INC CENTRAL INDEX KEY: 0000898438 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE CARRIERS, NEC [6399] IRS NUMBER: 411741779 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11794 FILM NUMBER: 99752558 BUSINESS ADDRESS: STREET 1: 3500 W 80TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55431 BUSINESS PHONE: 6128353310 MAIL ADDRESS: STREET 1: 3500 W 80TH ST CITY: MINNEAPOLIS STATE: MN ZIP: 55431 10-Q 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO __________________ COMMISSION FILE NUMBER: 1-11794 E. W. BLANCH HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 41-1741779 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 NORTH AKARD, SUITE 4500, DALLAS, TEXAS 75201 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 756-7000 NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES _X_ NO ___ The number of shares of the Registrant's common stock outstanding as of September 30, 1999 was 13,151,339. 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ -------------------- 1999 1998 1999 1998 ------------------ -------------------- Revenues: Operations $56,453 $52,539 $172,584 $142,628 Interest income 2,549 2,504 6,822 6,734 ------------------ -------------------- Total revenues 59,002 55,043 179,406 149,362 Expenses: Salaries and benefits 23,770 22,894 73,519 67,883 Travel and marketing 3,277 3,609 11,409 11,049 General and administrative 10,608 10,018 34,230 27,455 Amortization of goodwill 735 696 2,255 2,084 Interest expense 245 550 688 1,393 ------------------ -------------------- Total expenses 38,635 37,767 122,101 109,864 ------------------ -------------------- Income before taxes 20,367 17,276 57,305 39,498 Income taxes 7,832 6,689 23,408 15,196 ------------------ -------------------- Net income before minority interest and equity in loss of unconsolidated subsidiaries 12,535 10,587 33,897 24,302 Minority interest, net of tax 17 535 205 588 Equity in net loss of unconsolidated subsidiaries, net of tax 1,761 1,435 5,572 2,412 ------------------ -------------------- Net income $10,757 $ 8,617 $ 28,120 $ 21,302 ================== ==================== Per share data: Basic earnings $ 0.83 $ 0.67 $ 2.18 $ 1.67 Diluted earnings $ 0.78 $ 0.65 $ 2.05 $ 1.62 Cash dividends declared $ 0.12 $ 0.12 $ 0.36 $ 0.34
SEE ACCOMPANYING NOTES. 2 E. W. Blanch Holdings, Inc. Consolidated Balance Sheets (in thousands)
SEPTEMBER 30, DECEMBER 31, 1999 1998 --------------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,036 $ 707 Due from fiduciary accounts 43,687 41,551 Prepaid insurance 1,415 1,141 Investments, trading portfolio 5,149 5,245 Other current assets 12,282 13,603 ----------------------- Total current assets 65,569 62,247 Long-term investments, available for sale 19,406 18,427 Investments in unconsolidated subsidiaries 15,612 20,014 Property and equipment, net 38,299 32,420 Intangibles, net 48,774 30,425 Other assets 10,465 8,805 Fiduciary accounts--assets 750,850 760,918 ----------------------- Total assets $ 948,975 $ 933,256 ======================= LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY LIABILITIES: Current liabilities: Accrued compensation $ 9,591 $ 9,865 Notes payable to banks under lines of credit 17,463 11,112 Accounts payable 16,498 16,950 Current portion of long-term liabilities 235 289 Other current liabilities 6,344 10,119 ----------------------- Total current liabilities 50,131 48,335 Long-term debt, less current portion 408 557 Other liabilities, less current portion 7,667 9,177 Fiduciary accounts--liabilities 750,850 760,918 ----------------------- Total liabilities 809,056 818,987 MINORITY INTEREST: 84 3,632 SHAREHOLDERS' EQUITY: Common stock - par value $0.01 per share (authorized 30,000,000 shares; issued and outstanding: 14,141,671 shares in 1999 and 1998) 141 141 Additional paid in capital 61,115 56,996 Treasury stock (990,332 shares in 1999 and 1,299,714 shares in 1998) (25,644) (26,598) Accumulated other comprehensive income 1,951 1,327 Retained earnings 102,272 78,771 ----------------------- Total shareholders' equity 139,835 110,637 ----------------------- Total liabilities, minority interest and shareholders' equity $ 948,975 $ 933,256 =======================
SEE ACCOMPANYING NOTES. 3 E. W. Blanch Holdings, Inc. Consolidated Statements of Cash Flows (in thousands) Unaudited
NINE MONTHS ENDED SEPTEMBER 30, --------------------- 1999 1998 --------------------- OPERATING ACTIVITIES Net income $ 28,120 $ 21,302 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,298 7,966 Deferred income tax provision (benefit) (4,054) 1,195 Undistributed loss of unconsolidated subsidiaries 5,572 2,412 Non-cash compensation expense 3,949 2,070 Changes in operating assets and liabilities: Due from fiduciary accounts (2,673) 1,056 Other current assets 549 (4,804) Accrued compensation (274) (1,328) Accounts payable and other current liabilities (6,388) (3,582) Purchases of trading portfolio investments (2,503) (9,028) Sales of trading portfolio investments 2,063 5,743 Other operating activities, net (3,895) 4,077 --------------------- Net cash provided by operating activities 29,764 27,079 INVESTING ACTIVITIES Purchases of investments, available for sale (2,183) (1,289) Sales of investments, available for sale 3,969 4,602 Purchases of property and equipment, net (13,081) (12,809) Acquisition of unconsolidated subsidiaries and consolidated subsidiaries, net of cash acquired (22,526) (28,330) Proceeds from the sale of subsidiaries 4,260 2,500 Other investing activities, net (865) 201 --------------------- Net cash used in investing activities (30,426) (35,125) FINANCING ACTIVITIES Dividends paid (4,618) (4,311) Proceeds from the issuance of treasury shares to employee stock plans 4,320 5,870 Purchase of treasury stock (3,193) (4,326) Net borrowings on lines of credit 6,351 3,800 Payments on long-term debt (39) (445) Other financing activities, net 170 117 --------------------- Net cash provided by financing activities 2,991 705 --------------------- Net increase (decrease) in cash and cash equivalents 2,329 (7,341) Cash and cash equivalents at beginning of period 707 11,608 --------------------- Cash and cash equivalents at end of period $ 3,036 $ 4,267 =====================
SEE ACCOMPANYING NOTES. 4 E. W. Blanch Holdings, Inc. Notes to Consolidated Financial Statements September 30, 1999 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report to shareholders for the year ended December 31, 1998. E.W. Blanch Holdings, Inc. ("the Company") and its predecessor organizations have been in operation since 1957. The Company is a leading provider of integrated risk management and distribution services including reinsurance intermediation and technical, analytic, and financial consulting services. The consolidated financial statements include the accounts of the Company and its wholly and majority owned subsidiaries. Certain prior year amounts have been reclassified to conform with current year presentation. 2. ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts and operations of the Company and its wholly and majority owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Foreign Currency Translation The Company's primary functional currency is the U.S. dollar. The functional currency of the Company's foreign operations is the British pound sterling. The Company translates income and expense accounts at the average rate in effect for the period. Balance sheet accounts are translated at the period end exchange rate. Adjustments resulting from the balance sheet translation are reflected in Shareholder's Equity. The cumulative translation adjustment at September 30, 1999, is a $150,000 gain. 5 3. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. While an analysis is not complete, based on the Company's derivative positions at September 30, 1999, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. Because the standard allows certain foreign currency transactions to be accounted for as hedges for financial reporting purposes that were not previously treated as hedges, the Company may change its policies toward the management of certain foreign currency exposures. Any changes that may occur would be to further reduce the Company's exposure to foreign currency risks. 4. EARNINGS PER SHARE The following table sets forth basic and diluted weighted average shares outstanding for the periods indicated (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1999 1998 1999 1998 ------------------ ------------------ Weighted average shares - basic 12,974 12,804 12,878 12,725 Effect of dilutive securities 873 445 824 429 ------------------ ------------------ Weighted average shares - assuming dilution 13,847 13,249 13,702 13,154 ================== ==================
5. BUSINESS SEGMENT INFORMATION The following is additional business segment information for the periods indicated (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------- PROFIT(LOSS), NET OF TAX 1999 1998 1999 1998 - ---------------------------------------------------------------- ------------------- Domestic Primary $8,733 $8,053 $24,446 $20,565 Domestic Wholesale Insurance Services -- (163) -- (962) -------------------- ------------------- Total Domestic Operations 8,733 7,890 24,446 19,603 Foreign Operations 2,024 727 3,674 1,699 -------------------- ------------------- Consolidated $10,757 $8,617 $28,120 $21,302 ==================== ===================
6
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ------------------- REVENUES 1999 1998 1999 1998 - ---------------------------------------------------------------- ------------------- Domestic Primary $46,318 $41,087 $139,427 $110,097 Domestic Wholesale Insurance Services -- (78) -- 4,386 -------------------- ------------------- Total Domestic Operations 46,318 $41,009 139,427 $114,483 Foreign Operations 12,684 14,034 39,979 34,879 -------------------- ------------------- Consolidated $59,002 $55,043 $179,406 $149,362 ==================== ===================
6. COMPREHENSIVE INCOME During the three months ended September 30, 1999 and 1998, total other comprehensive income (loss) amounted to $8,000 and ($617,000), respectively. Total comprehensive income for the three months ended September 30, 1999 and 1998 amounted to $10,765,000 and $8,000,000, respectively. During the nine months ended September 30, 1999 and 1998, total other comprehensive income amounted to $624,000 and $471,000, respectively. Total comprehensive income for the nine months ended September 30, 1999 and 1998 amounted to $28,744,000 and $21,773,000, respectively. 7. ACQUISITIONS During the third quarter of 1999, the Company acquired JD Warren, Inc., a Pittsburgh, PA based services company specializing in the identification and recovery of outstanding third party deductibles for the insurance industry. This acquisition is accounted for under the purchase method. The following are the Pro Forma results for the Company had JD Warren, Inc. been acquired at the beginning of the periods indicated (in thousands): NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1999 1998 ------------------------- Revenues $180,987 $150,747 Net Income $27,692 $20,916 Also, in the third quarter of 1999, the Company purchased the thirty percent of its international joint venture, Swire Blanch Insurance (Holdings), Ltd., it did not previously own. Swire Blanch Insurance (Holdings), Ltd. is now a wholly owned subsidiary of the Company and has been renamed E.W. Blanch Holdings, Ltd. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Statements other than historical information contained herein are considered forward-looking and involve a number of risks and uncertainties. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein. Some of the factors that could cause actual results to differ materially are the following: market dynamics (including the workers' compensation reinsurance market as discussed on page 10 below), interest rate changes, regulatory changes, competition, legal proceedings that could impact reinsurance placements facilitated by the Company, and the failure of the Company and its subsidiaries or significant third parties to achieve Year 2000 compliance or material expense in connection with such compliance. Additional information concerning risk factors are contained in the Company's Securities and Exchange Commission filings, including but not limited to the most recent Form 10-K, copies of which are available from the Company without charge. YEAR 2000 ISSUE BACKGROUND The Year 2000 issue is the result of computer systems using a two-digit format, as opposed to four digits, to indicate the year. Computer systems using a two-digit format will be unable to correctly interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to a disruption in the operation of those systems. STATE OF READINESS The Company began reviewing all of its information technology ("IT") systems developed internally and from outside vendors in the early 1990's because of the Company's growth and the need to bring about operational improvements. As a result, the Company decided to develop a new back office processing system and to implement a new financial and human resource system. All of these systems are Year 2000 compliant. In 1997, the Company expanded its international operations through the acquisition of Swire Blanch. Since the acquisition, the Company began to integrate all worldwide systems into appropriate existing, Year 2000 compliant Company systems. The integration of the Company's IT systems is substantially complete. The Company's senior management and the Board of Directors receive regular updates on the status of the Company's Year 2000 readiness. The Company markets services and software products that are internally developed or acquired from third party vendors. These software based products and services were developed using Year 2000 compliant technologies. Testing is completed and certifications of compliance have been received on software that the Company developed internally. The Company has obtained written certifications from all of its third party developers of software marketed by the Company. The process of confirming Year 2000 compliance for the software that the Company currently markets is complete. Interfaces with Third Parties The Company is reviewing, and has initiated formal communications with third parties that provide goods or services which are essential to the Company's operations in order to: (1) determine the extent to which the Company is vulnerable to any failure by such material third parties to remediate their respective Year 2000 problems; and (2) resolve such problems to the extent practicable. In May 1998, 8 the Company requested information from customers and vendors regarding the status of their Year 2000 compliance. Follow up requests were sent in December 1998 to those third parties that had not responded to the Company's initial request or that indicated compliance issues. A certification letter has been requested from each of our vendors to validate compliance. The Company has received responses from a majority of its vendors. Of the responses received from the Company's critical vendors (i.e. financial institutions and technical vendors), a majority have been determined to be Year 2000 compliant. Additional follow up requests were sent in the third quarter of 1999 to those vendors that have not responded to previous requests or that have indicated compliance issues. Contingency plans are currently being formulated for these vendors. The Company has also requested a statement of Year 2000 compliance from companies in which the Company has made capital investments. The Company has received responses from a majority of the companies that inquiries were sent to. The Company is in the process of following up with those companies that have not responded or have indicated compliance issues. Independent Verification and Validation All new IT systems implemented, and any subsequent changes to those systems, go through several layers of testing and validation, including program testing, systems testing by an independent quality assurance group, user testing, and lastly, parallel processing with the old system it is replacing. Portions of the parallel testing process involve validation of automated interfaces and reporting by the Company's customers. In addition, the Company has conducted joint testing with Lloyd's of London on the international back office processing system. The Company's system has passed all tests and has been certified by Lloyd's of London. COSTS In recent years the Company has made significant investments in new IT systems that are Year 2000 compliant. However, those investments were made for operating reasons other than strictly Year 2000 compliance. As stated above, these systems, whether purchased from an outside vendor or developed internally, are Year 2000 compliant. The schedule to implement these systems has not been accelerated because of the Year 2000 issue, nor have any other system projects been deferred because of the Year 2000 issue. Although the Company does not record or attempt to allocate expenses for these IT systems which relate solely to Year 2000 compliance, due to their immateriality, the Company believes that these costs will not exceed $2 million in total. This estimate does not include the Company's potential share of Year 2000 costs that may be incurred by other entities, which the Company does not control. RISKS The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Company believes that, with the installation of the Year 2000 compliant systems described above, the possibility of significant interruptions of normal operations should be substantially reduced. However, due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third parties, the Company is continuing to assess the risks and develop its contingency plans. 9 CONTINGENCY PLANS The Company has further integrated its existing business interruption and Year 2000 contingency plans to address internal and external issues specific to Year 2000 compliance, to the extent practicable. These plans are intended to enable the Company to continue to operate and include performing certain processes manually; repairing or obtaining replacement systems; and changing suppliers. The Company believes, however, that due to the widespread nature of potential Year 2000 issues, the contingency planning process is an ongoing one which will require further modifications as the Company obtains additional information regarding the Company's internal readiness and the status of third party Year 2000 readiness. Forward-Looking Statements Readers are cautioned that forward-looking statements contained in the Year 2000 Issue disclosures should be read in conjunction with the Company's disclosures under the heading: "Forward-Looking Statements" on page 8. EUROPEAN MONETARY UNIT The Company has initiated an analysis of the new European Monetary Unit ("EMU") and its effects on the Company's business processes and IT system requirements. The Company's core back office processing and financial systems are currently capable of handling multiple currencies and will therefore be able to handle the EMU as another currency. However, it is likely that the Company will have to modify its systems to accommodate decimalization and rounding issues, currency conversions, and the new reporting requirements of the EMU. The Company has contracted with an outside consulting firm to develop further detailed business and consequent IT requirements for each phase of the EMU changeover. This study has been completed and a three year project plan approved by the Company's audit committee in the second quarter of 1999. The Company's management believes that the costs associated with upgrading IT systems and the impact on business processes will be immaterial to the Company's results of operations, liquidity and financial condition. UNICOVER LITIGATION AND WORKERS' COMPENSATION REINSURANCE ISSUES It has been publicly reported that certain lawsuits and arbitrations have been commenced that relate directly or indirectly to one or more reinsurance pools managed by Unicover Managers, Inc. ("Unicover"). The Company has been named as a third-party defendant in one such lawsuit, as described in more detail under "Legal Proceedings" on page 16. Management of the Company believes, based on current information, that this proceeding will not have a material effect upon the financial position or results of operations of the Company. The Company is not currently a party to any other proceedings that relate directly or indirectly to the Unicover reinsurance pool nor, to the Company's knowledge, do these other proceedings place in issue the validity of the reinsurance programs the Company has placed through Unicover on behalf of its clients. There are certain ongoing discussions between clients of the Company, who issue primary workers' compensation insurance policies, and reinsurers of those clients for those policies. These discussions primarily involve reinsurers who were represented by Unicover. These discussions may result in a renegotiation of the reinsurance coverages at issue, and in conjunction with any such renegotiations it is possible that the Company's brokerage revenues for those reinsurance placements could be impacted in a material adverse manner, both retroactively, and prospectively. 10 GENERAL The Company is a leading provider of integrated risk management and distribution services, including reinsurance intermediation and technical, analytic, and financial consulting services. The following is a summary of revenues and income before taxes by geographic area for the periods indicated (in thousands):
THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 --------------------------- ---------------------------- Income Income Revenues Before taxes Revenues Before taxes -------- ------------ -------- ------------ Domestic operations $46,318 $16,805 $41,009 $14,937 Foreign operations 12,684 3,562 14,034 2,339 ------- ------- ------- ------- $59,002 $20,367 $55,043 $17,276 ======= ======= ======= ======= NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 --------------------------- ---------------------------- Income Income Revenues Before taxes Revenues Before taxes -------- ------------ -------- ------------ Domestic operations $139,427 $49,117 $114,483 $34,230 Foreign operations 39,979 8,188 34,879 5,268 -------- ------- -------- ------- $179,406 $57,305 $149,362 $39,498 ======== ======= ======== =======
In the third quarter of 1999, the Company acquired JD Warren, Inc., a Pittsburgh, PA based services company specializing in the identification and recovery of outstanding third party deductibles for the insurance industry. In the third quarter of 1999, the Company also acquired the thirty percent of its international joint venture, Swire Blanch Insurance (Holdings), Ltd., it did not previously own. Swire Blanch Insurance (Holdings), Ltd. is now a wholly owned subsidiary of the Company and has been renamed E.W. Blanch Holdings, Ltd. THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER 1998 OPERATIONS The following are the components of revenue from operations for the quarter ended September 30 (in thousands): 1999 1998 ------- ------- Domestic operations $44,327 $39,118 Foreign operations 12,126 13,421 ------- ------- $56,453 $52,539 ======= ======= Domestic operations increased $5.2 million, or 13.3%, from the prior year primarily as a result of new client production. Foreign operations decreased $1.3 million or 9.6% from the prior year as a result of the sale of two non-strategic subsidiaries of E.W. Blanch Holdings, Ltd. in the second quarter of 1999. 11 INTEREST INCOME The following are the components of interest income for the quarter ended September 30 (in thousands): 1999 1998 ------ ------ Domestic operations $1,991 $1,891 Foreign operations 558 613 ------ ------ $2,549 $2,504 ====== ====== Interest income increased slightly for the quarter ended September 30, 1999 as compared to the prior year. EXPENSES Domestic operating expenses increased $3.4 million to $29.5 million, or 13.1%, for the quarter ended September 30, 1999 compared to $26.1 million the prior year. This is primarily a result of increases in salary and benefits due to increased employee count and normal salary progressions, and increased general and administrative expenses due to increased business levels. Foreign operating expenses decreased $2.6 million to $9.1 million, or 21.9% for the quarter ended September 30, 1999 compared to $11.7 million the prior year. The reason for the decrease is primarily due to the sale of two non-strategic subsidiaries of E.W. Blanch Holdings, Ltd. in the second quarter of 1999. EQUITY IN NET LOSS OF UNCONSOLIDATED SUBSIDIARIES Equity in net loss of unconsolidated subsidiaries increased $0.3 million to $1.8 million for the three months ended September 30, 1999, compared to $1.4 million the prior year. The primary reason is the start up nature of the Company's equity investment in Insurance Holdings of America, Inc. ("IHA"). Future losses from the IHA investment will be limited to the Company's pre-tax basis of $2.2 million. Any future loss in excess of this amount will not be recognized by the Company. PROFIT MARGINS Operating profit margins, calculated as income before taxes and allocation of central costs as a percentage of total revenues, were 36.3% for domestic operations for the quarter ended September 30, 1999, compared to 36.4% for the same period in the prior year. Operating profit margins, calculated as income before taxes and allocation of central costs as a percentage of total revenues, were 28.1% for foreign operations for the three months ended September 30, 1999, compared to 16.7% for the same period in the prior year. INCOME TAXES The Company's combined federal and state effective tax rate was 38.5% for the quarter ended September 30, 1999 as compared to 38.7% for the same period the prior year. 12 NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1998 OPERATIONS The following are the components of revenue from operations for the nine months ended September 30 (in thousands): 1999 1998 -------- -------- Domestic operations $134,253 $109,557 Foreign operations 38,331 33,071 -------- -------- $172,584 $142,628 ======== ======== Domestic operations increased $24.7 million, or 22.5% from the prior year primarily as a result of new client production and recognition of a $3.5 million gain from the sale of the Clarendon National Florida Personal Lines Property program to Tower Hill Insurance Group, Inc. in the first quarter of 1999. Foreign operations increased $5.3 million or 15.9% from the prior year as a result of new client production and increased revenue as a result of the acquisition of Dunn & Carter Ltd. in July 1998. INTEREST INCOME The following are the components of interest income for the nine months ended September 30 (in thousands): 1999 1998 ------ ------ Domestic operations $5,174 $4,926 Foreign operations 1,648 1,808 ------ ------ $6,822 $6,734 ====== ====== Interest income increased slightly for the nine months ended September 30, 1999 as compared to the prior year. EXPENSES Domestic operating expenses increased $10.1 million to $90.3 million, or 12.5%, for the nine months ended September 30, 1999, compared to $80.3 million the prior year. This is primarily a result of an increase in general and administrative expenses due to increased business levels. General and administrative expenses also include a reserve for a portion of the brokerage recognized in 1998 for the placement of certain workers' compensation reinsurance contracts for the AIG Companies, because the validity of those placements has been placed into question in a judicial proceeding. See "Legal Proceedings" discussion, on page 16, below. Similarly, a portion of the revenues for those placements, which otherwise would have been recognized in 1999, was not recognized, for the same reasons. Domestic operations also experienced increases in employee count and normal salary progressions. The increase in employees is due to increased business levels and businesses acquired or started by the Company. Foreign operating expenses increased $2.2 million to $31.8 million, or 7.4% for the nine months ended September 30, 1999, compared to $29.6 million the prior year. The reason for the increase is the costs of new operations and the acquisition of Dunn & Carter Ltd. in July 1998. These increases were partially offset by the sale of two non-strategic subsidiaries of E.W. Blanch Holdings, Ltd. in the second quarter of 1999. 13 EQUITY IN NET LOSS OF UNCONSOLIDATED SUBSIDIARIES Equity in net loss of unconsolidated subsidiaries increased $3.2 million to $5.6 million for the nine months ended September 30, 1999, compared to $2.4 million the prior year. The primary reason is the start up nature of the Company's equity investment in IHA. Future losses from the IHA investment will be limited to the Company's pre-tax basis of $2.2 million. Any future loss in excess of this amount will not be recognized by the Company. PROFIT MARGINS Operating profit margins, calculated as income before taxes and allocation of central costs as a percentage of total revenues, were 35.2% for domestic operations for the nine months ended September 30, 1999, compared to 29.9% for the same period in the prior year. Operating profit margins, calculated as income before taxes and allocation of central costs as a percentage of total revenues, were 20.5% for foreign operations for the nine months ended September 30, 1999, compared to 15.1% for the same period in the prior year. INCOME TAXES The Company's combined federal and state effective tax rate was 40.8% for the nine months ended September 30, 1999 as compared to 38.5% for the same period the prior year. The increase in the tax rate is due to changes in the apportionment of state taxes and taxes on foreign operations. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of funds consist primarily of brokerage commissions and fees and interest income. Funds are applied generally to the payment of operating expenses, the purchase of equipment used in the ordinary course of business, the repayment of outstanding indebtedness, and the distribution of earnings. The Company's cash and cash equivalents were $3.0 million at September 30, 1999. The Company generated $29.8 million of cash from operations during the first nine months of 1999 compared with $27.1 million for the same period in 1998. The increase in operating cash flow in 1999 is primarily due to an increase in earnings and the timing of changes in various operating assets and liabilities. Cash flow used in investing activities was $30.4 million for the nine months ended September 30, 1999. The Company used $13.1 million of cash for the purchase of property and equipment, primarily computerized systems. The Company intends to increase its investment in such systems. The Company used $1.3 million to acquire a 50% interest in Russell Miller Advisors Asia, LLC ("RMAA"). The Company accounts for RMAA under the equity method as an unconsolidated subsidiary. The Company used $17.4 million for the acquisition of JD Warren, Inc. and used $3.8 million for the purchase of the remaining thirty percent of Swire Blanch that the Company did not previously own. The Company used $2.2 million for the purchase of available for sale investments and received proceeds from sale of available for sale investments of $4.0 million. The Company received $4.3 million in proceeds from the sale of two non-strategic subsidiaries of E.W. Blanch Holdings, Ltd. in the second quarter of 1999. The Company recognized an immaterial gain with this disposition. Cash flow generated from financing activities was $3.0 million for the nine months ended September 30, 1999. The primary sources of cash from financing activities were proceeds of $4.3 million from the issuance of treasury shares to fund employee benefit plans and proceeds of $6.4 million from the net 14 borrowings on lines of credit. The primary uses of cash for financing activities were $3.2 million for the purchase of treasury stock and $4.6 million of dividends paid to shareholders. The Company's long-term investment portfolio at September 30, 1999 was $19.4 million, comprised of equity and debt instruments. These investments are classified as available for sale. The market value of the Company's available for sale investment portfolio at September 30, 1999, was $3.4 million above cost. The Company's investment in unconsolidated subsidiaries at September 30, 1999 was $15.6 million. The Company's trading portfolio at September 30, 1999 was $5.1 million, which is comprised of debt investments. The market value of the Company's trading portfolio at September 30, 1999 was $0.1 million below cost. Cash, short-term investments and the Company's revolving credit facilities are available and managed for the payment of its operating and capital expenditures. The Company is not subject to any significant regulatory capital requirements in connection with its business. On January 28, 1999, the Board of Directors declared a regular quarterly cash dividend of $0.12 per share, payable March 2, 1999 to shareholders of record as of February 9, 1999. On April 26, 1999, the Board of Directors declared a regular quarterly cash dividend of $0.12 per share, payable June 1, 1999 to shareholders of record as of May 3, 1999. On July 22, 1999, the Board of Directors declared a regular quarterly cash dividend of $0.12 per share, payable September 1, 1999 to shareholders of record as of August 2, 1999. On October 28, 1999, the Board of Directors declared an increase to the quarterly cash dividend to $0.14 per share, payable December 1, 1999 to shareholders of record as of November 12, 1999. The Company has a $100 million revolving credit facility with several banks that will be used to fund general corporate requirements. This facility, which expires in 2001, carries market rates of interest, which may vary depending upon the Company's degree of leverage. Commitment fees of .200% to .375% are payable on any unused portion. The facility contains several financial covenants and restrictions related to acquisitions, payment of dividends and sales of assets. Covenants contained in the agreement require the Company to exceed minimum levels of net worth and meet a fixed charge ratio. The Company is currently in compliance with all of its covenants governing its indebtedness. The Company had $15.9 million outstanding under this facility as of September 30, 1999 at a rate of 8.2%. The Company also has a (pound)7.0 million secured revolving credit facility, which translates to $11.5 million at September 30, 1999. As of September 30, 1999, the Company had no outstanding balance under this facility. The interest rate is 0.32% above the London Inter Bank Offer Rate ("LIBOR"). In addition, the Company has a HK$7.1 million secured revolving credit facility, which translates to $0.9 million at September 30, 1999. As of September 30, 1999, the Company had $0.9 million outstanding under this facility. The interest rate is 0.32% above the Hong Kong Inter Bank Offer Rate ("HIBOR"). Also, the Company has a HK$5.0 million secured revolving credit facility, which translates to $0.6 million at September 30, 1999. As of September 30, 1999, the Company had $0.6 million outstanding under this facility. The interest rate is 0.32% above HIBOR. The Company believes that its cash and investments, combined with its borrowing facilities and internally generated funds, will be sufficient to meet its present and reasonably foreseeable long-term capital needs. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in market risk for the Company during the first nine months of 1999. Part II. Other Information Item 1. Legal Proceedings The various lawsuits to which the Company is a party are routine in nature and incidental to the Company's business, with the following exception: E.W. Blanch Co. ("Blanch"), a subsidiary of the Company, is a third-party defendant in a lawsuit venued in the Supreme Court of the State of New York, County of New York. This lawsuit was instituted on February 16, 1999, and Blanch was added as a third-party defendant on March 23, 1999. Plaintiffs are AIU Insurance Company and various other insurance companies, all of whom are part of the "AIG" group of companies. Defendants are Unicover Managers, Inc. ("Unicover") and ReliaStar Life Insurance Company ("ReliaStar"). Blanch was joined in the lawsuit as a third-party defendant by ReliaStar. In this lawsuit, AIG as plaintiff alleges that ReliaStar, through its agent Unicover, agreed to provide certain reinsurance protection to AIG, relating to workers compensation insurance policies issued by the plaintiff AIG companies in California and elsewhere in the United States. Defendants assert that the reinsurance coverages in issue never were bound, and defendant ReliaStar further asserts that if defendant Unicover in fact did bind those coverages, it acted beyond the authority granted to it by ReliaStar. In ReliaStar's third party complaint against Blanch, ReliaStar alleges that Blanch, as AIG's reinsurance broker on the reinsurance placements in issue, knew or should have known that the reinsurance coverages were not bound and knew or should have known that Unicover did not have the authority to bind ReliaStar to those coverages. The relief being sought by AIG in its complaint against ReliaStar and Unicover is that defendants be required to honor the reinsurance commitments that AIG alleges were made, and be required to pay an unspecified amount of money damages for alleged breach of those reinsurance commitments and (with respect to Unicover) for negligent misrepresentation. The relief being sought by ReliaStar in its third party complaint against Blanch is that, in the event ReliaStar is found to be liable to AIG, Blanch be required to indemnify and hold ReliaStar harmless for that liability, or in the alternative Blanch be required to make a contribution for a portion of that liability in an amount to be determined by the Court. Blanch in turn has filed a counterclaim back against ReliaStar and Unicover. The counterclaim alleges that ReliaStar and Unicover in fact did bind the reinsurance coverages in issue, and therefore they owe Blanch the reinsurance brokerage to which Blanch is entitled under those reinsurance contracts, and, alternatively, if it is determined that Unicover misrepresented its authority to bind ReliaStar, that Blanch be awarded money damages resulting from its reliance on those misrepresentations. 16 This lawsuit is in the discovery stage. Prior to Blanch being joined in the case, plaintiffs moved for and were denied a preliminary injunction. Recently, the court granted a motion by Unicover for dismissal of AIG's claims against Unicover. Blanch intends to defend vigorously the claims made against it by ReliaStar and to pursue vigorously its counterclaims against ReliaStar and Unicover. Management believes, based on current information, that these actions will not have a material adverse effect upon the financial position or results of operations of the Company. Items 2, 3, 4, and 5 are not applicable and have been omitted. Item 6. Exhibits and Reports on Form 8-K. (a.) Exhibits Exhibit 27 - Financial Data Schedule (b.) The registrant did not file a current report on Form 8-K during the quarter ended September 30, 1999. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. E. W. BLANCH HOLDINGS, INC. Dated: 10/29/99 /s/ Ian D. Packer ------------------------ -------------------------------- Ian D. Packer Executive Vice President and Chief Financial Officer 18 EXHIBIT INDEX Exhibit 27 Financial Data Schedule 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 3,036 0 0 0 0 65,569 38,299 0 948,975 50,131 0 0 0 141 0 948,975 172,584 179,406 0 122,101 0 0 688 57,305 23,408 0 0 0 0 28,120 2.18 2.05
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