SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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, 1996
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 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 5, 1996
Common Stock, $0.10 par value 15,360,238 shares
Cover page 1 of 13
<PAGE>
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>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
REVENUES:
Gross premiums earned ........................................... $ 12,457 $ 17,647 $ 38,406 $ 61,261
Ceded premiums earned ........................................... (3,683) (3,884) (11,506) (12,195)
-------- -------- -------- --------
Net premiums earned ............................................. 8,774 13,763 26,900 49,066
Net investment income ........................................... 2,458 2,986 8,083 9,077
Net realized investment gains (losses) .......................... (3) 157 66 116
Other income .................................................... 222 529 710 1,366
-------- -------- -------- --------
TOTAL REVENUES ............................................. 11,451 17,435 35,759 59,625
------ ------ ------ ------
LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses ......................... 10,327 15,010 30,876 48,858
Ceded losses and loss adjustment expenses ......................... (3,796) (4,142) (10,884) (10,421)
-------- -------- -------- --------
Net losses and loss adjustment expenses ........................... 6,531 10,868 19,992 38,437
Policyholder dividends ............................................ - - 88 137
Policy acquisition expenses ....................................... 2,245 3,034 7,191 10,673
Expenses in connection with terminated
proposed acquisition ........................................ (471) - 1,849 -
Nonrecurring compensation ......................................... 1,272 - 1,272 -
General and administrative expenses ............................... 2,035 2,354 6,367 6,941
-------- -------- -------- --------
TOTAL LOSSES AND EXPENSES ................................... 11,612 16,256 36,759 56,188
------ ------ ------ ------
Income (loss) from continuing operations
before provision for income taxes .................................. (161) 1,179 (1,000) 3,437
Income tax provision ................................................. 17 51 36 144
-------- -------- -------- --------
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS ............................................. $ (178) $ 1,128 $ (1,036) $ 3,293
DISCONTINUED OPERATIONS:
Net income (loss) from operations .................................... 2 (260) (243) (1,033)
Loss on disposal ..................................................... (1,662) - (1,662) -
-------- -------- -------- --------
NET INCOME (LOSS) .................................................... $ (1,838) $ 868 $ (2,941) $ 2,260
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
AND COMMON EQUIVALENT SHARE:
Continuing operations ......................................... $ (.01) $ .07 $ (.07) $ .21
Discontinued operations:
Loss from operations ...................................... - (.02) (.01) (.07)
Estimated loss on disposal ................................ (.11) - (.11) -
-------- -------- -------- --------
Total ......................................................... $ (.12) $ .05 $ (.19) $ .14
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page - 2
<PAGE>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share information)
<TABLE>
September 30, 1996 December 31,
(Unaudited) 1995
----------- ----
<CAPTION>
<S> <C> <C>
ASSETS:
Fixed maturities:
Available-for-sale at fair value
(Cost: $148,978 and $166,365) ..................................................... $ 147,703 $ 171,167
Equity securities, at fair value (Cost: $256 and $256) ................................. 561 629
Short term investments, at cost which
approximates fair value ............................................................ 2,190 8,467
--------- ---------
TOTAL INVESTMENTS .................................................................. 150,454 180,263
Cash ................................................................................... 900 336
Accrued investment income .............................................................. 1,987 2,712
Premiums and fees receivable, net of allowances
of $206 and $153 ................................................................... 5,951 8,593
Reinsurance recoverable on paid losses, net of allowances
of $388 and $388 ................................................................... 3,138 1,828
Reinsurance recoverable on unpaid losses, net of
allowances of $425 and $425 ........................................................ 22,460 21,112
Prepaid reinsurance premiums ........................................................... 2,526 2,226
Property and equipment, net of accumulated depreciation
of $7,005 and $6,632 ............................................................... 3,149 3,708
Deferred acquisition costs ............................................................. 904 1,045
Excess of cost over net assets acquired ................................................ 1,709 -
Other assets ........................................................................... 846 663
Net assets of discontinued operations held for sale .................................... 2,950 4,410
--------- ---------
TOTAL ASSETS ...................................................................... $ 196,974 $ 226,896
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses ............................................. $ 114,946 $ 137,406
Unearned premiums ...................................................................... 8,150 8,563
Policyholder dividends ................................................................. 4,561 4,664
Reinsurance premiums payable ........................................................... 2,038 1,707
Funds withheld on ceded reinsurance .................................................... 1,471 1,534
Other liabilities ...................................................................... 5,093 3,201
--------- ---------
TOTAL LIABILITIES .................................................................. 136,259 157,075
Preferred stock ($0.10 par value; authorized
10,000,000 shares; none issued and outstanding) .................................... - -
Common stock ($0.10 par value; authorized
20,000,000 shares; issued 15,370,894 shares;
outstanding 15,360,238 and 15,360,255 shares) ...................................... 1,537 1,537
Additional paid-in capital ............................................................. 46,131 46,131
Net unrealized gain (loss) on available-for-sale securities ............................ (970) 5,195
Retained earnings ...................................................................... 14,083 17,024
Treasury stock (Cost of 10,656 and 10,639 shares) ...................................... (66) (66)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ......................................................... 60,715 69,821
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................... $ 196,974 $ 226,896
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page - 3
<PAGE>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands, except share amounts)
(Unaudited)
<TABLE>
September 30, 1996
------------------
<S> <C>
COMMON STOCK
Balance, beginning of year ............................................................... $ 1,537
------------
Balance, end of period ................................................................... 1,537
------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year ............................................................... 46,131
------------
Balance, end of period ................................................................... 46,131
------------
NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE
SECURITIES
Balance, beginning of year ............................................................... 5,195
Net (decrease) ........................................................................... (6,165)
------------
Balance, end of period ................................................................... (970)
------------
RETAINED EARNINGS
Balance, beginning of year ............................................................... 17,024
Net loss ................................................................................. (2,941)
------------
Balance, end of period ................................................................... 14,083
------------
TREASURY STOCK
Balance, beginning of year ............................................................... (66)
------------
Balance, end of period ................................................................... (66)
------------
TOTAL STOCKHOLDERS' EQUITY ........................................................... $ 60,715
============
COMMON STOCK, SHARES
Balance, beginning of year ............................................................... 15,370,894
----------
Balance, end of period ................................................................... 15,370,894
============
TREASURY STOCK, SHARES
Balance, beginning of year ............................................................... 10,639
Purchased during year .................................................................... 17
------------
Balance, end of period ................................................................... 10,656
============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page - 4
<PAGE>
<TABLE>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
For the Nine Months
Ended September 30,
-------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations ................................................ $ (1,036) $ 3,293
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net realized investment gains ............................................................... (66) (116)
Depreciation and amortization ............................................................... 654 1,146
Change in accrued investment income ......................................................... 725 645
Change in premiums and fees receivable ...................................................... 2,642 6,329
Change in reinsurance recoverables .......................................................... (1,310) 1,915
Change in reinsurance recoverable on unpaid losses .......................................... (1,348) (1,879)
Change in prepaid reinsurance premiums ...................................................... (300) (154)
Change in deferred acquisition costs ........................................................ 141 886
Change in unpaid losses and loss adjustment expenses ........................................ (22,460) (5,710)
Change in unearned premiums ................................................................. (413) (4,313)
Change in policyholder dividends payable .................................................... (103) (1,520)
Change in reinsurance payables and funds withheld ........................................... 268 (759)
Other, net .................................................................................. 1,045 (2,152)
-------- --------
Net cash (used in) operating activities .................................................. (21,561) (2,389)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Fixed income maturities available-for-sale ............................................... 8,038 2,136
Investments, matured or called:
Fixed income maturities held-to-maturity ................................................. - 15,468
Fixed income maturities available-for-sale ............................................... 25,945 7,732
Investments purchased:
Fixed income maturities available-for-sale ............................................... (16,547) (22,903)
Acquisition of Valor Insurance Company (net of cash and short
term investments of $1,461) .............................................................. (1,450) -
Purchases of other investments .............................................................. - (105)
Proceeds from sale of property and equipment ................................................ 110 -
Purchases of property and equipment ......................................................... (128) (316)
-------- --------
Net cash provided by investing activities ................................................ 15,968 2,012
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of stock options ................................................................ - (286)
-------- --------
Net (cash used in) financing activities .................................................. - (286)
-------- --------
Net cash (used ) by continuing operations ................................................ (5,593) (663)
Net cash (used) by discontinued operations .................................................. (120) -
-------- --------
Net decrease in cash and short term investments ............................................. (5,713) (663)
Cash and short term investments at beginning of year ........................................ 8,803 3,132
-------- --------
Cash and short term investments at end of period ............................................ $ 3,090 $ 2,469
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
Page - 5
<PAGE>
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, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. 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, 1995 and its Quarterly Report on Form 10-Q for the three
months ended June 30, 1996. Certain prior year amounts have been reclassified to
conform to current year presentation.
2) PER SHARE DATA
Earnings per share are 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 additional outstanding Common Stock issuable for stock
options, whether or not currently exercisable. Such average shares outstanding
were 15,994,838 for the three months ended September 30, 1995 and 16,014,207 for
the nine months ended September 30, 1995. Loss per share is calculated using
only the average number of outstanding shares of Common Stock and disregarding
the average number of shares issuable for stock options. Such average shares
outstanding were 15,360,252 and 15,360,254 for the three and nine months ended
September 30, 1996, respectively.
3) INCOME TAXES
DHC files a Federal consolidated income tax return with its
subsidiaries and with certain trusts that assumed various former liabilities of
certain present and former subsidiaries of DHC. The Company records its interim
tax provisions based upon estimated effective tax rates for the year.
The Company has made provisions for certain state and local franchise
taxes. Tax filings for these jurisdictions do not consolidate the activity of
the trusts referred to above. For further information, reference is made to Note
8 of the Notes to Consolidated Financial Statements included in DHC's Annual
Report on Form 10-K for the year ended December 31, 1995.
4) EXPENSES IN CONNECTION WITH TERMINATED PROPOSED ACQUISITION
On February 26, 1996, DHC signed an Agreement and Plan of Merger (the
"Merger") with Midland Financial Group, Inc. ("Midland"). On April 24, 1996, DHC
and Midland filed a joint proxy statement with the Securities and Exchange
Commission which provided for, among other things, Midland to be merged into a
subsidiary of DHC. As a result of the deaths of key executives of DHC and
Midland in the crash of TWA Flight 800, DHC and Midland signed a Termination
Agreement for the Merger on July 24, 1996, and it is DHC's intention to
deregister the shares related to the proposed Merger. The amounts expensed are
amounts paid and accrued for that relate directly to the proposed Merger and
include (without limitation) regulatory filing fees, legal expenses, accounting
expenses, printing costs, fairness opinion expenses and investment banking fees.
During the three months ended September 30, 1996, management negotiated a
reduction of certain of these expenses that had been accrued for and not yet
paid as of June 30, 1996. The discounts received from investment banking, legal,
accounting and printing vendors resulted in a credit of $471,000 for the three
months ended September 30, 1996.
Page - 6
<PAGE>
5) DISCONTINUED OPERATIONS
In September 1996, DHC's board of directors approved a plan to dispose of
its trust and fiduciary services subsidiary, Danielson Trust Company ("Danielson
Trust"). On October 10, 1996, DHC entered into an agreement with North American
Trust Company ("North American") pursuant to which DHC will sell 100% of the
common stock of Danielson Trust to North American for $3,000,000 in cash. The
sale is expected to close by December 31, 1996, subject to various conditions,
including the receipt of regulatory approvals. DHC estimates that approximately
$50,000 in professional fees and other expenses will be incurred in relation to
the sale.
Trust and Fiduciary Services is a separate segment of DHC and as a
result, the net income (loss) and loss on disposal of Danielson Trust are
reported herein as discontinued operations. The related net assets held for sale
are as follows:
<TABLE>
September 30, December 31,
1996 1995
---- ----
<CAPTION>
<S> <C> <C>
Assets:
Cash and investments ................................... $1,667 $1,800
Excess cost over net assets acquired ................... 2,525 2,753
Receivables and other assets ........................... 1,381 885
------ ------
Total assets .................................... 5,573 5,438
Liabilities:
Accrued liabilities .................................... $ 961 $1,028
Estimated loss on disposal ............................. 1,662 -
------ ------
Total liabilities ............................... 2,623 1,028
------ ------
Net Assets ...................................... $2,950 $4,410
====== ======
</TABLE>
Summarized operating results of Danielson Trust are as follows:
<TABLE>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<CAPTION>
<S> <C> <C> <C> <C>
Revenues .......................... $ 1,162 $ 1,128 $ 3,493 $ 3,401
------- ------- ------- -------
General and administrative expenses 1,160 1,388 3,736 4,434
------- ------- ------- -------
Net loss ........................... $ 2 $ (260) $ (243) $(1,033)
======= ======= ======= =======
</TABLE>
6) NONRECURRING COMPENSATION
In recognition of the deaths of C. Kirk Rhein, Jr. and William Story,
the Company has contracted to pay death benefits, monthly, over a period of
three years, commencing August 1, 1996. Such amounts were expensed in August
1996 based on their estimated present value. DHC has also contracted to pay
severance benefits over the course of one year, commencing August 1, 1996, in
connection with the resignation of certain former employees. Such amounts were
expensed in full in August 1996.
Page - 7
<PAGE>
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 returns on portfolio securities. Therefore, the analysis of the
Company's financial condition is generally done on an operating subsidiary
basis.
2. RESULTS OF NAICC'S OPERATIONS
The operations of DHC's principal subsidiary, National American
Insurance Company of California ("NAICC"), are primarily in specialty property
and casualty insurance.
Property and Casualty Insurance Operations
Net earned premiums for the three and nine months ended
September 30, 1996 were $8.8 million and $26.9 million, respectively. Net earned
premiums for the three and nine months ended September 30, 1995 were $13.8
million and $49.1 million, respectively. Net written premiums were $8.4 million
and $26.2 million for the three and nine months ended September 30, 1996,
respectively. Net written premiums were $11.8 million and $44.6 million for the
three and nine months ended September 30, 1995, respectively. The decreases in
written premiums are attributable to declines in workers' compensation business
in California, discussed below. The decreases in earned premiums are directly
related to the decline in written premiums.
Net written premiums for workers' compensation were $11.6 million and
$31.8 million for the nine months of 1996 and 1995, respectively. This decrease
is attributable to significantly increased competition in the California
workers' compensation line of business since the beginning of 1995 resulting in
pricing at rates below a level necessary to achieve an underwriting profit. It
is the policy of NAICC to underwrite business that is expected to yield an
underwriting profit. As a result, NAICC's in force new and renewal California
workers' compensation policy count decreased significantly in 1995 and continued
to decrease during 1996. The number of workers' compensation policies in force
were 2,884 and 4,840 at September 30, 1996 and 1995, respectively. While
workers' compensation premium in California continues to be very price
competitive, there are fewer insurance companies willing to price workers'
compensation insurance below a level necessary to achieve an underwriting
profit, which NAICC hopes will allow this business to stabilize. NAICC has taken
actions designed to increase its workers' compensation premium in states beyond
California, primarily in the Northwest, although there can be no assurance that
such efforts will be successful.
Page - 8
<PAGE>
Net written premiums for NAICC's non-standard private passenger
automobile insurance line of business were $11.1 million and $11.3 million for
the nine months ended September 30, 1996 and 1995, respectively. Net written
premiums in the private passenger automobile line represented 42% and 25% of
total net written premiums in the nine months ended September 30, 1996 and 1995,
respectively. NAICC continues to cede 50% of its private passenger automobile
business to a major reinsurance company under a quota reinsurance agreement.
NAICC expects modest growth in this line.
Net written premiums for NAICC's non-standard commercial automobile
program were $3.5 million and $1.5 million for the nine months ended September
30, 1996 and 1995, respectively. NAICC has placed more emphasis and resources on
marketing its non-standard commercial automobile premium program and hopes to
significantly increase its premium.
Net investment income was $7.7 million and $8.6 million for the nine
months ended September 30, 1996 and 1995, respectively. The decline is the
result of a decrease in NAICC's investment portfolio. Average invested assets
were $153.2 million and $167.5 million during the nine months ended September
30, 1996 and 1995, respectively. The investment portfolio has declined in 1996
due to the payment of losses and loss adjustment expenses related to prior years
while premium written for workers' compensation has declined.
Net losses and loss adjustment expenses ("LAE") were $20 million and
$38.4 million for the nine months ended September 30, 1996 and 1995,
respectively. The resulting net loss and LAE ratios were 74.3% and 78.3%,
respectively, in those periods. The decrease in the net loss and LAE ratio in
1996 is due to the continued shift toward automobile business which has a lower
loss and LAE ratio than the worker's compensation business.
Policy acquisition costs were $7.2 million and $10.7 million for the
nine months ended September 30, 1996 and 1995, respectively. The decrease is a
direct result of the decline in net earned premiums. As a percentage of net
earned premiums, policy acquisition expenses were 26.7% and 21.8% for the nine
months ended September 30, 1996 and 1995, respectively. The increase in the
policy acquisition expense ratio in 1996 is primarily the result of workers'
compensation premiums declining more than the fixed underwriting expenses
component of policy acquisition costs. NAICC has maintained a greater capacity
to write workers' compensation insurance and the related costs in anticipation
of more profitable pricing in the near future.
General and administrative expenses were $4.5 million and $5.2 million
for the nine months ended September 30, 1996 and 1995, respectively. These
expenses are fixed or semi-variable in nature and have declined as a result of
efforts to reduce or contain all such costs.
Policyholder dividends for the nine months ended September 30, 1996 and
1995 were $88,000, and $137,000, respectively. The decrease in policyholder
dividends is attributable to the decline in workers' compensation earned
premiums.
Net income for the three and nine months ended September 30, 1996 was
$698,000 and $3 million respectively. Net income for the three and nine months
ended September 30, 1995 was $1.5 million and $4.6 million respectively. The
combined ratios were 120% and 110.9% for the nine months ended September 30,
1996 and 1995, respectively. Net income has declined from 1995 due to the
decline in premium revenue and the decline in investment income.
Cash Flow from Insurance Operations
Cash used in operations was $18.5 million and $1.3 million for the nine
months ended September 30, 1996 and 1995 respectively. The increase in cash used
in operations is primarily due to the payment of losses and LAE related to prior
years while workers' compensation premiums written have declined. Overall cash
and invested assets, at market value, at September 30, 1996 were $143.5 million,
compared to $169.6 million at December 31, 1995.
Page - 9
<PAGE>
Liquidity and Capital Resources
The Company's insurance subsidiaries require both readily liquid assets
and adequate capital to meet ongoing obligations to policyholders and claimants,
as well as to pay ordinary operating expenses. The primary sources of funds to
meet these obligations are premium revenues, investment income, recoveries from
reinsurance and, if required, the sale of invested assets. NAICC's investment
policy guidelines require that all liabilities be matched by a comparable amount
of investment grade invested assets. Premiums written continue to be supported
by adequate statutory capital and surplus. The ratio of (annualized) net written
premiums to statutory surplus was .7 to 1 for the nine months ended September
30, 1996. Management of NAICC believes that NAICC has both adequate capital
resources and sufficient reinsurance to meet any unforeseen events such as
natural catastrophes, reinsurer insolvencies or possible reserve deficiencies.
3. RESULTS OF DANIELSON TRUST COMPANY'S OPERATIONS
The operations of DHC's Danielson Trust Company ("Danielson Trust")
subsidiary are comprised of trust and fiduciary services.
Sale of Danielson Trust
DHC has contracted to sell Danielson Trust because it was not in
management's long-term plans to remain in the Trust business and a transaction
could be effected timely and efficiently. On October 10, 1996, DHC entered into
an agreement with North American Trust Company ("North American") pursuant to
which DHC will receive $3,000,000 in cash in exchange for 100% of the common
stock of Danielson Trust. The sale is expected to close by December 31, 1996,
subject to various conditions, including the receipt of regulatory approvals.
DHC expects to realize a loss on disposal of approximately $1.7 million.
Trust and Fiduciary Services Operations
Danielson Trust's net loss from operations for the nine months ended
September 30, 1996 was $243,000, compared to a net loss of $1 million in the
same period of 1995. The net income from operations for the three months ended
September 30, 1996 was approximately $2,000 compared to a net loss from
operations of $260,000 for the same period in 1995. The decrease in net loss
during the nine months ended September 30, 1996, and the increase in net income
for the three months ended September 30, 1996, are the result of the continued
efforts of Danielson Trust to reduce staffing and data processing expenses, as
well as other operating efficiencies.
Liquidity and Capital Resources:
Danielson Trust 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 trust clients. Effective March 31, 1996, DHC
forgave the entire principal balance of a $300,000 unsecured note from Danielson
Trust and accrued interest as of January 1, 1996, and converted such amount into
additional paid-in capital of Danielson Trust. During the second quarter of
1996, DHC forgave $38,000 of receivables for expenses that were paid by DHC on
behalf of Danielson Trust and made an additional capital contribution of
$120,000. Such amounts were converted into additional paid-in-capital. As of
January 1, 1996, DHC agreed to make an additional unsecured loan to Danielson
Trust in the principal amount of $600,000, bearing interest at the rate of prime
plus 1%, and to consider making additional such loans in the aggregate amount of
$600,000 upon request of Danielson Trust. As of the date hereof, Danielson Trust
has not borrowed any amount under such loan agreement. To the extent that timing
differences exist between the collection of revenue and the actual payment of
expenses, or where revenues generated by Danielson Trust's business are
insufficient to cover its expenses or to maintain compliance with regulatory
capital requirements, the primary sources of funds to meet those obligations
would be the sale of short term investments, additional intercompany loans or
parent company capital contributions or financing provided by a third party.
Page - 10
<PAGE>
In accordance with California banking regulations, Danielson Trust has
pledged assets having a par value of $625,000 as of September 30, 1996 to the
State of California as a reserve in connection with certain types of fiduciary
appointments, the maximum amount of such reserves that may be required. 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 obligations and, as of the nine months ended September 30, 1996,
Danielson Trust was in compliance with the foregoing requirements.
4. RESULTS OF DHC'S OPERATIONS
Parent-Only Operations
Net loss for the three and nine months ended September 30, 1996
was $876,000 and $4 million, respectively, as compared to a net loss of $390,000
and $1.3 million for the three and nine months ended September 30, 1995,
respectively. The increase in net loss for the periods ended September 30, 1996
from the same periods in 1995 is primarily due to the expenses incurred as a
result of the termination of DHC's proposed Merger with Midland. Such expenses
amounted to $1.8 million. The increase in net loss is also due to an $820,000
accrual and partial payment of a death benefit for C. Kirk Rhein, Jr. and
severance benefits in connection with the resignation of certain former
employees of DHC.
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 its investment portfolio and the
payment of general and administrative expenses incurred in the normal course of
business. For the nine months ended September 30, 1996 and 1995, cash used in
parent-only operating activities was $3.1 million and $1.1 million,
respectively. The increase in cash used was primarily attributable to the
payment of expenses related to the terminated proposed Merger with Midland. Such
payments made during the nine months ended September 30, 1996 amounted to $1.8
million. For information regarding DHC's operating subsidiary's cash flow from
operations, see "2. RESULTS OF NAICC'S OPERATIONS, Cash Flow from Insurance
Operations."
Liquidity and Capital Resources
At September 30, 1996, cash and investments of the Company (excluding NAICC
and Danielson Trust) were approximately $7.8 million, compared to $11 million at
December 31, 1995. As described above, the primary use of funds was the payment
of general and administrative expenses in the normal course of business. The
decrease is also due to the payment of expenses related to the terminated
proposed Merger with Midland. For information regarding DHC's subsidiaries'
liquidity and capital resources, see "2. RESULTS OF NAICC'S OPERATIONS,
Liquidity and Capital Resources" and "3. RESULTS OF DANIELSON TRUST COMPANY'S
OPERATIONS, Liquidity and Capital Resources."
Page - 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, the
registrant filed one report on Form 8-K dated July 31, 1996,
which reported on the Registrant's termination of the Merger
with Midland and certain changes in management.
Page - 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 14, 1996
DANIELSON HOLDING CORPORATION
(Registrant)
By: /s/ DAVID BARSE
--------------------------------------------
David Barse
President & Chief Operating Officer
By: /s/ MICHAEL CARNEY
--------------------------------------------
Michael Carney
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000225648
<NAME> DANIELSON HOLDING CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 147,703
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 561
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 150,454
<CASH> 900
<RECOVER-REINSURE> 25,598<F1>
<DEFERRED-ACQUISITION> 904
<TOTAL-ASSETS> 196,974
<POLICY-LOSSES> 114,946
<UNEARNED-PREMIUMS> 8,150
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 4,561
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,537
<OTHER-SE> 59,178<F2>
<TOTAL-LIABILITY-AND-EQUITY> 196,974
26,900
<INVESTMENT-INCOME> 8,083
<INVESTMENT-GAINS> 66
<OTHER-INCOME> 710
<BENEFITS> 19,992
<UNDERWRITING-AMORTIZATION> 4,682
<UNDERWRITING-OTHER> 11,997<F3>
<INCOME-PRETAX> (1,000)
<INCOME-TAX> 36
<INCOME-CONTINUING> (1,036)
<DISCONTINUED> (1,905)<F4>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,941)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
<RESERVE-OPEN> 116,294
<PROVISION-CURRENT> 19,992
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 7,193
<PAYMENTS-PRIOR> 37,458
<RESERVE-CLOSE> 92,486<F5>
<CUMULATIVE-DEFICIENCY> (3,123)
<FN>
<F1> Included in this caption are reinsurance recoverables on unpaid losses
of 22,460 and reinsurance recoverables on paid losses of 3,138.
<F2> Included in Stockholders' Equity-Other is treasury stock of 66.
<F3> Included in this caption are expenses in connection with terminated
proposed acquisition of 1,849 and nonrecurring compensation of 1,272.
<F4> Lossfrom discontinued operations is comprised of loss from operations
of 243 and loss on disposal of the segment of 1,662.
<F5> Includes reserves of 851 of Valor Insurance Co. which
was acquired on June 24, 1996.
</FN>
</TABLE>
