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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
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: 1-6732
DANIELSON HOLDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-6021257
(State of Incorporation) (I.R.S. Employer Identification No.)
767 THIRD AVENUE, NEW YORK, NEW YORK 10017-2023
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 888-0347
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
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 7, 1995
----- -------------------------------
Common Stock, $0.10 par value 15,360,255 shares
Cover page 1 of 13
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share information)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ------------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Gross premiums earned $17,647 $28,074 $ 61,261 $81,260
Ceded premiums earned (3,884) (3,494) (12,195) (9,691)
------- ------- -------- -------
Net premiums earned 13,763 24,580 49,066 71,569
Trust fee income 1,100 1,250 3,311 3,531
Net investment income 3,013 3,124 9,167 8,808
Net realized investment gains 158 - 116 12
Other income 529 105 1,366 385
------- ------- -------- -------
TOTAL REVENUES 18,563 29,059 63,026 84,305
------- ------- -------- -------
LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses 15,010 19,538 48,858 57,650
Ceded losses and loss adjustment expenses (4,142) (2,697) (10,421) (7,168)
------- ------- -------- -------
Net losses and loss adjustment expenses 10,868 16,841 38,437 50,482
Policyholder dividends - 2,512 137 6,087
Policy acquisition expenses 3,034 4,954 10,673 14,261
General and administrative expenses 3,742 3,502 11,375 10,509
Interest expense - - - 65
------- ------- -------- -------
TOTAL LOSSES AND EXPENSES 17,644 27,809 60,622 81,404
------- ------- -------- -------
Income before provision for income taxes 919 1,250 2,404 2,901
Income tax provision 51 44 144 91
------- ------- -------- -------
NET INCOME $ 868 $ 1,206 $ 2,260 $ 2,810
======= ======= ======== =======
Earnings per share of Common Stock
and common equivalent share $.05 $.08 $.14 $.18
==== ==== ==== ====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
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DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31,
ASSETS: (UNAUDITED) 1994
------------------- -------------
<S> <C> <C>
Fixed maturities:
Held-to-maturity at amortized cost
(Fair value: $140,570 and $134,843) $139,363 $145,331
Available-for-sale at fair value
(Cost: $34,516 and $33,020) 34,787 32,450
Equity securities at fair value (Cost: $256 and $256) 632 548
Other investments at fair value (Cost: $356 and $250) 422 250
Short term investments, at cost which
approximates fair value 2,013 3,184
-------- --------
TOTAL INVESTMENTS 177,217 181,763
Cash 671 342
Accrued investment income 2,263 2,903
Premiums and fees receivable, net of allowances
of $121 and $323 10,541 17,061
Reinsurance recoverable on paid losses, net of allowances
of $424 and $675 4,193 6,108
Reinsurance recoverable on unpaid losses, net of
allowances of $425 and $425 19,584 17,705
Prepaid reinsurance premiums 2,867 2,713
Property and equipment, net of accumulated depreciation
of $6,834 and $5,807 4,463 5,174
Deferred acquisition costs 1,318 2,204
Excess of cost over net assets acquired 3,403 3,513
Other assets 853 1,043
-------- --------
TOTAL ASSETS $227,373 $240,529
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses $140,620 $146,330
Unearned premiums 10,015 14,328
Policyholder dividends 4,760 6,280
Reinsurance premiums payable 888 1,679
Funds withheld on ceded reinsurance 1,842 1,810
Other liabilities 3,965 7,784
-------- --------
TOTAL LIABILITIES 162,090 178,211
Common stock ($0.10 par value; authorized 20,000,000
shares; issued 15,370,894 shares; outstanding
15,360,255 shares and 15,360,270 shares) 1,537 1,537
Additional paid-in capital 46,131 46,417
Net unrealized gain (loss) on available-for-sale securities 713 (278)
Retained earnings 16,968 14,708
Treasury stock (Cost of 10,639 shares and 10,624 shares) (66) (66)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 65,283 62,318
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $227,373 $240,529
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
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DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NET UNREALIZED GAIN (LOSS) TREASURY STOCK
------------ PAID-IN ON AVAILABLE-FOR-SALE RETAINED --------------
SHARES AMOUNT CAPITAL SECURITIES EARNINGS SHARES AMOUNT TOTAL
------ ------ ------- ---------- -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 15,370,894 $1,537 $46,417 $(278) $14,708 10,624 $(66) $62,318
Net income 2,260 2,260
Change in net unrealized loss on
available-for-sale securities 991 991
Purchase of stock options (286) (286)
Purchase of treasury stock 15 - -
---------- ------ ------- ------ ------- ------ ---- -------
Balance, September 30, 1995 15,370,894 $1,537 $46,131 $ 713 $16,968 10,639 $(66) $65,283
========== ====== ======= ====== ======= ====== ==== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
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DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,260 $ 2,810
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net realized investment gains (116) (12)
Depreciation and amortization 1,396 1,363
Change in other invested asset - (205)
Change in accrued investment income 640 (597)
Change in premiums and fees receivable 6,520 (839)
Change in reinsurance recoverables 1,915 (310)
Change in reinsurance recoverable on unpaid losses (1,879) (2,136)
Change in prepaid reinsurance premiums (154) (25)
Change in deferred acquisition costs 886 (15)
Change in unpaid losses and loss adjustment expenses (5,710) 9,602
Change in unearned premiums (4,313) (727)
Change in policyholder dividends payable (1,520) (788)
Change in reinsurance payables and funds withheld (759) (540)
Other, net (2,441) 1,197
-------- --------
Net cash provided by (used in) operating activities (3,275) 8,778
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Fixed income maturities available-for-sale 2,715 3,239
Investments, matured or called:
Fixed income maturities held-to-maturity 16,453 15,955
Fixed income maturities available-for-sale 8,032 8,831
Investments purchased:
Fixed income maturities held-to-maturity (835) (32,364)
Fixed income maturities available-for-sale (23,202) (22,028)
Proceeds of other invested asset - 19,531
Purchases of other investments (105) -
Purchases of property and equipment (339) (799)
-------- --------
Net cash provided by (used in) investing activities 2,719 (7,635)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of Western Trust Services - (2,533)
Paydown of bank loan - (2,250)
Capital lease obligation - (96)
Change in loans to trust accounts - 165
Purchase of treasury stock - (56)
Purchase of stock options (286) -
-------- --------
Net cash used in financing activities (286) (4,770)
-------- --------
Net decrease in cash and short term investments (842) (3,627)
Cash and short term investments at beginning of year 3,526 5,396
-------- --------
Cash and short term investments at end of period $ 2,684 $ 1,769
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
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DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of Danielson
Holding Corporation ("DHC" or "Registrant") and subsidiaries (collectively with
DHC, the "Company") have been prepared in accordance with generally accepted
accounting principles. However, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated 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 nine months
ended September 30, 1995 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1995. For further information,
reference is made to the Consolidated Financial Statements and footnotes thereto
included in DHC's Annual Report on Form 10-K for the year ended December 31,
1994 and its Quarterly Report on Form 10-Q for the three months ended June 30,
1995, as amended by its Report on Form 10-Q/A (No. 1) for the same period.
Certain prior year amounts have been reclassified to conform to current year
presentation.
2) PER SHARE DATA
Per share data is based on the weighted average number of shares of Common
Stock of DHC, par value $0.10 per share ("Common Stock"), outstanding during a
particular year or other relevant period. Earnings per share computations, as
calculated under the treasury stock method, include the average number of shares
of Common Stock issuable for stock options. All stock options are included
within the computation, whether or not currently exercisable. Such average
shares outstanding for the three months ended September 30, 1995 and 1994 were
15,994,838 and 16,025,972, respectively, and for the nine months ended September
30, 1995 and 1994, the average shares outstanding were 16,014,207 and
16,029,936, respectively.
3) INCOME TAX
DHC files a Federal consolidated income tax return with its subsidiaries
and certain trusts that assumed various former liabilities of certain present
and former subsidiaries of DHC. It is anticipated that the trusts will generate
losses exceeding the income of the Company.
The Company has made provisions for certain state and local franchise
taxes. The amount of these provisions is not material to the consolidated
financial statements. Tax filings for these jurisdictions do not consolidate
the activity of the trusts described above. For further information, reference
is made to footnote 8 of the Notes to Consolidated Financial Statements included
in DHC's Annual Report for the year ended December 31, 1994.
4) REINSURANCE
As of September 30, 1995, NAICC had paid $5.5 million in losses and loss
adjustment expenses relating to an environmental claim filed by Hughes Aircraft
(the "Hughes Claim"). The Hughes Claim alleged that environmental damages
occurred continuously over a period of approximately 34 years. NAICC assumed a
general liability policy issued to Hughes Aircraft for three of those years.
The Hughes Claim liability is reinsured in each of the three years under various
contracts involving numerous reinsurance companies; of the $5.3 million ceded,
$5.2 million was disputed by the reinsurers. NAICC commenced arbitration
proceedings relating to $2.9 million and litigation proceedings relating
6
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to $2.3 million in order to collect amounts due NAICC. In April 1993, the
arbitration proceedings were concluded and NAICC was awarded $684,000. NAICC
received payment of the entire amount of the arbitration award by January 1994.
In August 1993, the U.S. District Court for the Central District of California
granted NAICC's motion for summary judgment against the reinsurers in the
litigation proceedings. On September 30, 1995, the judgment was upheld on
appeal by the United States Court of Appeals for the Ninth Circuit. That Court
subsequently denied a motion by the reinsurers for reconsideration en banc.
Collection is pending issuance of a mandate from the Court. Management of NAICC
believes that any amount which ultimately may not be collected by NAICC on its
judgment will not be material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1. GENERAL
Danielson Holding Corporation ("DHC") is organized as a holding company
with substantially all of its operations conducted by subsidiaries (collectively
with DHC, the "Company"). DHC, on a parent-only basis, has limited continuing
expenditures for rent and administrative expenses and derives revenues primarily
from investment return on portfolio securities. Therefore, the analysis of the
Company's financial condition is generally best done on an operating subsidiary
basis.
2. RESULTS OF NAICC'S OPERATIONS
The operations of the DHC's principal subsidiary, National American
Insurance Company of California ("NAICC"), are primarily in property and
casualty insurance.
Property and Casualty Insurance Operations
Net written premiums for the three and nine months ended September 30, 1995
were $11.8 million and $44.6 million, respectively, as compared with $23.7
million and $70.8 million, respectively, for the comparable periods ended
September 30, 1994. Net earned premiums for the three and nine months ended
September 30, 1995 were $13.8 million and $49.1 million, respectively, as
compared with $24.6 million and $71.6 million, respectively, for the comparable
periods ended September 30, 1994. The decreases in premiums are attributable to
both reduced average premium and number of California workers' compensation
policies in force, discussed below.
Net written premiums for the workers' compensation line of business were
$31.8 million and $60.5 million for the nine months ended September 30, 1995 and
1994, respectively. The decrease in such premiums in 1995 is attributable to
significantly increased price competition on workers' compensation policies
issued to California employers under the open rating law which became effective
January 1, 1995, as well as reductions in the minimum rates for California
workers' compensation insurance during 1994.
Effective January 1, 1995, an open rating law in California replaced the
prior minimum rate law. Under the open rating law, each insurer independently
prices its policies with effective dates on and after January 1, 1995 based upon
rates and rating plans it files with the California Department of Insurance.
Therefore, under the open rating law, insurers compete on pricing prospectively,
in contrast to the retrospective nature of policyholder dividend plans
previously offered under the minimum rate
7
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law. In the first nine months of 1995, competition among some insurers, other
than NAICC, led to their establishing market prices which may be below the
break-even point for those insurers. NAICC has continued its previously stated
policy of not using such pricing methods. As a result, NAICC's new and renewal
policy count has decreased significantly during the first nine months of 1995.
Management of NAICC believes that prices may remain at an unprofitable level
through the end of 1996.
Net written premiums for NAICC's non-standard private passenger automobile
program were $11.3 million and $7.6 million for the nine months ended September
30, 1995 and 1994, respectively. Net written premiums for this line represented
25.3 percent and 10.7 percent of the total net written premiums for the nine
months ended September 30, 1995 and 1994, respectively. The increase in such
premiums reflects NAICC's continued expansion of this line of business. NAICC
continues to cede 50 percent of its private passenger automobile business to a
major reinsurance company under a quota share reinsurance agreement.
Net investment income was $8.6 million and $8.4 million for the nine months
ended September 30, 1995 and 1994, respectively. This reflects a modest
increase in NAICC's investment portfolio.
NAICC's premium growth continues to be supported by adequate capital and
surplus. The ratios of annualized net written premiums to surplus were 1.3 to 1
and 2.2 to 1 for the nine months ended September 30, 1995 and 1994,
respectively.
Losses and loss adjustment expenses ("LAE") were $38.4 million and $50.5
million for the nine months ended September 30, 1995 and 1994, respectively.
The resulting loss and LAE ratios were 78.3 percent and 70.5 percent,
respectively, for the nine months ended September 30, 1995 and 1994. The
increase in the loss and LAE ratio in 1995 is due to decreases in the rates
applicable to workers' compensation insurance policies previously discussed.
Policy acquisition costs for the nine months ended September 30, 1995 were
$10.7 million, reflecting a decrease of approximately $3.6 million over the
comparable period in 1994. The decrease is a direct result of the decline in
net earned premiums. As a percent of net premiums earned, policy acquisition
costs were 21.8 percent and 19.9 percent for the nine months ended September 30,
1995 and 1994, respectively. The increase in the policy acquisition expense
ratio is attributable to the shift of premium toward the non-standard automobile
line of business which has a higher acquisition expense ratio than the workers'
compensation business.
General and administrative expenses were $5.2 million and $5.1 million for
the nine months ended September 30, 1995 and 1994, respectively. These expenses
are fixed or semi-variable in nature.
Policyholder dividends for the nine months ended September 30, 1995 were
$137,000, (unchanged since the first quarter in 1995), as compared with $6.1
million during the first nine months of 1994. The decrease in policyholder
dividends is attributable to reductions in the rates for California workers'
compensation insurance.
Net income from operations for the three and nine months ended September
30, 1995 was $1.5 million and $4.6 million, respectively, compared to net income
of $1.7 million and $4.3 million, respectively, for the same periods in 1994.
The combined ratio (which represents a ratio of losses and all expenses to net
earned premiums in a particular period) has increased from 106.2 percent to
110.9 percent for the nine months ended September 30, 1994 and 1995,
respectively, and from 105.4 percent to 113.9 percent for the three months ended
September 30, 1994 and 1995, respectively. Net income is slightly higher for
the nine months ended September 30, 1995 than for the comparable period in 1994
despite the decline in premium due to offsetting reductions in related expenses,
a modest increase in investment income, and an increase in net income from
insurance consulting operations.
8
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Cash Flow from Insurance Operations
Cash flows of the insurance business may be influenced by a variety of
factors, including market trends relating to particular lines of insurance, the
insurance regulatory environment and general economic conditions. Operating
cash flow of the insurance operations may be significantly affected by the
growth or declines of written premiums, the timing of claims payments, and the
rate of return achieved on the insurance investment portfolio.
Cash (used in) provided by insurance operating activities for the nine
months ended September 30, 1995 and 1994 was ($1.3 million) and $10.4 million,
respectively. The decrease was primarily attributable to the decline in
workers' compensation premium. Because workers' compensation claims ordinarily
are paid over a period of several years, NAICC is now experiencing a situation
where current claims payments relating to prior years exceed current workers'
compensation premium. Such negative cash flow is expected to continue with the
settlement of workers' compensation claims, or until such time as management of
NAICC determines that it is appropriate to increase workers' compensation
premium. However, management of NAICC anticipates that cash flow from insurance
operations will be positively affected by growth in premium from the automobile
programs.
Liquidity and Capital Resources
The Company's insurance subsidiaries require readily liquid assets and
adequate capital both to meet ongoing obligations to policyholders and
claimants, and to pay ordinary operating expenses. The primary sources of funds
to satisfy these obligations are premium revenues, investment income, recoveries
from reinsurance and, if required, sales of invested assets. NAICC's investment
guidelines require that all liabilities be matched by a comparable amount of
investment grade invested assets. Management believes that NAICC has both
adequate capital resources and sufficient reinsurance to cover any unforeseen
events such as natural catastrophes, reinsurer insolvencies or possible adverse
development in unpaid losses and LAE.
3. RESULTS OF DANIELSON TRUST COMPANY'S OPERATIONS
The operations of DHC's Danielson Trust Company ("Danielson Trust")
subsidiary are in trust, fiduciary and custodial services. As previously
reported, on February 22, 1994, Danielson Trust acquired the assets of the
Western Trust Services ("WTS") division of Grossmont Bank. In connection with
this acquisition, Danielson Trust acquired approximately $787 million in assets
under administration, and increased the number of individual accounts under
administration by approximately 4,500. Thus, the results of Danielson Trust's
operations during the first nine months of 1995 and 1994 are not entirely
comparable, in that they relate, in part, to different assets, accounts and
lines of business. For further information, see Note 2 of the Notes to
Consolidated Financial Statements included in DHC's Annual Report for the year
ended December 31, 1994.
Trust and Fiduciary Services Operations
Total revenues of Danielson Trust were $1.1 million and $3.4 million,
respectively, for the three and nine months ended September 30, 1995, reflecting
a decrease of 11.9 percent and 6.4 percent, respectively, from the 1994
comparable periods. As noted above, revenues for the nine months ended
September 30, 1995 as compared to the nine months ended September 30, 1994, in
some instances, do not relate to equivalent operations. Revenues associated
with Danielson Trust's former parent, HomeFed Bank, ceased in 1994 as previously
anticipated. Approximately 8.8 percent of Danielson Trust's revenues for the
nine months ended September 30, 1994 were attributable to HomeFed Bank-related
business and non-recurring revenues.
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Danielson Trust's private trust unit generated fee income (excluding
private trust custodial revenues noted below and excluding any HomeFed Bank-
related revenue) of $332,000 and $943,000 for the three and nine months ended
September 30, 1995, respectively. Such private trust revenues reflected a
decrease of 33.6 percent and 27.7 percent from the comparable periods in 1994.
The decreases are attributable to non-recurring termination and other fees
received in 1994.
For the three and nine months ended September 30, 1995, the employee
benefit trust unit generated fee income of $658,000 and $2.0 million,
respectively (excluding employee benefit trust custodial revenues noted below),
representing an increase of 5.7 percent and 22.0 percent, respectively, over the
comparable periods in 1994. The increase in employee benefit trust revenues is
primarily attributable to an increase in non-recurring termination fees in 1995
from accounts being run off, as well as the recognition of the revenues
associated with the WTS acquisition in the nine month period ending September
30, 1995, as compared with only seven months of such revenues having been
recognized in the comparable 1994 period.
Fee income for all custody services provided by Danielson Trust for the
three and nine months ended September 30, 1995 was $110,000 and $401,000
respectively, reflecting a decrease of 13.5 percent and an increase of 36.6
percent, respectively, from the comparable periods in 1994. The decrease in
custody services fee income for the quarter ended September 30, 1995 is
primarily attributable to the termination of certain unprofitable accounts.
Included in fee income from custody services for the nine months ended September
30, 1995 and 1994 are revenues generated by CD (certificate of deposit)
custodial services to broker-dealers and other financial institutions, mutual
fund custody services, and employee benefit trust custody services. Fee income
for custody services are not reflected in the private trust or employee benefit
trust revenues amounts above.
Total fee income for the three and nine months ended September 30, 1995 was
$1.1 million and $3.3 million, respectively, reflecting a decrease of $150,000
and $220,000 from the comparable periods in 1994. Fee income for the first nine
months of 1995 reflects increased non-recurring termination fees offset by the
termination of certain unprofitable accounts and the cessation of fees
associated with Danielson Trust's former parent. Net investment income was
$27,000 and $90,000 for the three and nine months ended September 30, 1995,
respectively.
General and administrative expenses were $4.4 million and $3.5 million for
the nine months ended September 30, 1995 and 1994, respectively. Included in
such expenses for the period ended September 30, 1995, were expenses relating to
accelerated marketing efforts, as well as continued expenses associated with
data processing, custodial, temporary employee and depreciation charges in
connection with the accounts acquired from WTS in February 1994, compared with
only seven months of WTS-related expenses during the nine months ended September
30, 1994 and limited marketing during that period. General and administrative
expenses were $1.4 million and $1.3 million, respectively, for the three months
ended September 30, 1995 and 1994. As a result of expenses and changes
necessitated by the WTS acquisition, as well as increased marketing expenses
during the first nine months of 1995, Danielson Trust posted a $958,000 net loss
from operations for such period compared to net income of $86,000 for the nine
months ended September 30, 1994. The net loss from operations for the three
months ended September 30, 1995 was approximately $260,000 compared to net loss
of $37,000 for the same period in 1994.
Cash Flow from Trust Operations
Operating cash flow of the Company's trust operations is primarily
dependent upon fee income from trust services and investment management
services. Cash flows of the trust business also are influenced by factors
affecting the trust industry generally, including market growth, competition and
general economic conditions.
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Cash used in trust operating activities for the nine months ended September
30, 1995 and 1994 was $886,000 and $59,000, respectively. The increase in cash
used was primarily attributable to Danielson Trust's net loss from operations
for such period in 1995. Management of the trust business anticipates that cash
flow from operations may improve if sales and marketing efforts result in new
fee income-generating business, as well as through additional operating
efficiencies.
Liquidity and Capital Resources
DHC's trust subsidiary requires liquid assets to meet the working capital
needs of its continuing business. The primary source of these liquid assets are
fees charged to Danielson Trust's clients. To the extent that timing
differences exist between the collection of revenue and the actual payment of
expenses, or if revenues generated by Danielson Trust's business are
insufficient to cover its expenses, the primary sources of liquidity to meet
those obligations are the sale of short term investments held by Danielson
Trust, additional intercompany loans or financing provided by a third party.
California banking regulations require trust companies to deposit assets
with the State in connection with certain types of fiduciary appointments. In
accordance with such regulations, Danielson Trust has pledged assets having a
fair value of $605,000 as of September 30, 1995. State banking laws also
regulate the nature of trust companies' investments of contributed capital and
surplus, and generally restrict such investments to debt type investments in
which banks also are permitted to invest. In order to satisfy such regulations,
a majority of Danielson Trust's investments are in U.S. Government securities
and, for the nine months ended September 30, 1995, Danielson Trust was in
compliance with the foregoing requirements.
4. RESULTS OF DHC'S OPERATIONS
Cash Flow from Parent-Only Operations
Operating cash flow of DHC on a parent-only basis is primarily dependent
upon the rate of return achieved on the investment portfolio and the payment of
general and administrative expenses incurred in the normal course of business.
For the nine months ended September 30, 1995 and 1994, cash used in parent-only
operating activities was $1.1 million and $1.5 million, respectively. The
increase was primarily attributable to the parent-only net loss from operations
for such period in 1995, adjusted for non-cash charges such as depreciation and
amortization, and the operating working capital requirements of the holding
company's business. For information regarding the Company's operating
subsidiaries' cash flow from operations, see "2. RESULTS OF NAICC'S OPERATIONS,
Cash Flow from Insurance Operations" and "3. RESULTS OF DANIELSON TRUST
COMPANY'S OPERATIONS, Cash Flow from Trust Operations."
Liquidity and Capital Resources
For the nine months ended September 30, 1995, cash and investments of the
Company (excluding NAICC and Danielson Trust) were approximately $11.5 million.
As described above, the primary use of funds was the payment of general and
administrative expenses in the normal course of business. DHC used cash in
parent-only financing activities of approximately $286,000 for the purchase of
certain stock options from Junkyard Partners, L.P.
Current fixed maturity holdings of the Company (excluding NAICC and DTC)
are in U.S. Treasury Notes and Agency bonds. For information regarding the
Company's operating subsidiaries' liquidity and capital resources, see "2.
RESULTS OF NAICC'S OPERATIONS" and "3. RESULTS OF DANIELSON TRUST COMPANY'S
OPERATIONS."
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
NAICC and Danielson Trust are parties to various legal proceedings which
are considered routine and incidental to their respective businesses and are not
material to the financial condition and operation of those businesses. DHC is
not a party to any legal proceeding which is considered material to the
financial condition and operation of its business.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) No exhibits are required to be filed with this Report.
(b) During the quarter for which this Report is filed, Registrant filed
no reports on Form 8-K.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1995
DANIELSON HOLDING CORPORATION
(Registrant)
By: /s/ C. KIRK RHEIN, JR.
----------------------
C. Kirk Rhein, Jr.
President & Chief Executive Officer
By: /s/ MICHAEL T. CARNEY
---------------------
Michael T. Carney
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DANIELSON
HOLDING CORPORATION FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 34,787
<DEBT-CARRYING-VALUE> 139,363
<DEBT-MARKET-VALUE> 140,570
<EQUITIES> 632
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 177,217
<CASH> 671
<RECOVER-REINSURE> 26,644<F1>
<DEFERRED-ACQUISITION> 1,318
<TOTAL-ASSETS> 227,373
<POLICY-LOSSES> 140,620
<UNEARNED-PREMIUMS> 10,015
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 4,760
<NOTES-PAYABLE> 0
<COMMON> 1,537
0
0
<OTHER-SE> 63,746<F2>
<TOTAL-LIABILITY-AND-EQUITY> 227,373
49,066
<INVESTMENT-INCOME> 9,167
<INVESTMENT-GAINS> 116
<OTHER-INCOME> 4,677<F3>
<BENEFITS> 38,437
<UNDERWRITING-AMORTIZATION> 8,530
<UNDERWRITING-OTHER> 13,518
<INCOME-PRETAX> 2,404
<INCOME-TAX> 144
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,260
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<RESERVE-OPEN> 128,625
<PROVISION-CURRENT> 38,437
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 9,724
<PAYMENTS-PRIOR> 36,302
<RESERVE-CLOSE> 121,036
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>INCLUDED IN THIS CAPTION ARE REINSURANCE RECOVERABLES ON UNPAID LOSSES IN THE
AMOUNT OF 19,584 AND PREPAID REINSURANCE PREMIUMS IN THE AMOUNT OF 2,867.
<F2>INCLUDED IN STOCKHOLDERS' EQUITY-OTHER IS TREASURY STOCK IN THE AMOUNT OF (66).
<F3>INCLUDED IN THE CAPTION OTHER INCOME IS TRUST FEE INCOME IN THE AMOUNT OF 3,311.
</FN>
</TABLE>
