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 March 31, 1997
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 May 6, 1997
Common Stock, $0.10 15,366,338 shares
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1997 1996
<S> <C> <C>
Revenues:
Gross premiums earned $ 13,380 $ 12,901
Ceded premiums earned (2,564) (3,933)
------ ------
Net premiums earned 10,816 8,968
Net investment income 2,527 2,813
Net realized investment gains 2,206 --
Other income 149 283
------ ------
Total revenues 15,698 12,064
------ ------
Losses and expenses:
Gross losses and loss adjustment expenses 10,325 8,586
Ceded losses and loss adjustment expenses (2,589) (1,915)
------ ------
Net losses and loss adjustment expenses 7,736 6,671
Policy acquisition expenses 2,929 2,539
General and administrative expenses 2,590 2,203
------ ------
Total losses and expenses 13,255 11,413
------ ------
Income from continuing operations
before provision for income taxes 2,443 651
Income tax provision 6 13
------ ------
Income from continuing operations $ 2,437 $ 638
Net loss from discontinued operations -- (81)
------ ------
Net income $ 2,437 $ 557
========== ==========
Earnings per share of Common Stock
and common equivalent share:
Income from continuing operations $ .15 $ .04
---------- ----------
Net income $ .15 $ .04
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
March 31, 1997 December 31,
(Unaudited) 1996
<S> <C> <C>
Assets:
Fixed maturities, available-for-sale at fair value
(Cost: $143,073 and $143,424) $ 140,773 $ 143,330
Equity securities, at fair value (Cost: $362 and $257) 622 2,697
Short term investments, at cost which
approximates fair value 3,937 5,528
------ ------
Total investments 145,332 151,555
Cash 1,967 1,155
Accrued investment income 1,851 2,397
Premiums and fees receivable, net of allowances
of $238 and $230 6,197 5,597
Reinsurance recoverable on paid losses, net of allowances
of $306 and $316 4,154 3,071
Reinsurance recoverable on unpaid losses, net of
allowances of $425 and $425 23,809 23,546
Prepaid reinsurance premiums 2,228 2,417
Property and equipment, net of accumulated depreciation
of $7,246 and $7,102 2,821 2,968
Deferred acquisition costs 1,395 957
Other assets 2,566 2,756
------ ------
Total assets $ 192,320 $ 196,419
=========== ===========
Liabilities and Stockholders' Equity:
Unpaid losses and loss adjustment expenses $ 116,652 $ 120,651
Unearned premiums 10,505 8,294
Reinsurance premiums payable 1,800 1,765
Funds withheld on ceded reinsurance 1,479 1,479
Other liabilities 4,939 5,377
------ ------
Total liabilities 135,375 137,566
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 15,376,994 and 15,370,894 shares;
outstanding 15,366,338 and 15,360,238 shares) 1,538 1,537
Additional paid-in capital 46,171 46,131
Net unrealized gain (loss) on available-for-sale securities (2,040) 2,346
Retained earnings 11,342 8,905
Treasury stock (Cost of 10,656 shares) (66) (66)
------ ------
Total stockholders' equity 56,945 58,853
------ ------
Total liabilities and stockholders' equity $ 192,320 $ 196,419
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1997
<S> <C>
Common stock
Balance, beginning of year $ 1,537
Exercise of options to purchase Common Stock 1
------
Balance, end of period 1,538
------
Additional paid-in capital
Balance, beginning of year 46,131
Exercise of options to purchase Common Stock 40
------
Balance, end of period 46,171
------
Net unrealized gain (loss) on available-for-sale
securities
Balance, beginning of year 2,346
Net decrease (4,386)
------
Balance, end of period (2,040)
------
Retained earnings
Balance, beginning of year 8,905
Net income 2,437
------
Balance, end of period 11,342
------
Treasury stock
Balance, beginning of year (66)
------
Balance, end of period (66)
------
Total stockholders' equity $ 56,945
=========
Common stock, shares
Balance, beginning of year 15,370,894
Exercise of options to purchase Common Stock 6,100
------
Balance, end of period 15,376,994
==========
Treasury stock, shares
Balance, beginning of year 10,656
------
Balance, end of period 10,656
======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Three
Months Ended March 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Income from continuing operations $ 2,437 $ 638
Adjustments to reconcile income from continuing operations
to net cash used in operating activities:
Net realized investment gains (2,206) --
Depreciation and amortization 240 218
Change in accrued investment income 546 594
Change in premiums and fees receivable (600) 1,591
Change in reinsurance recoverables (1,083) (1,149)
Change in reinsurance recoverable on unpaid losses (263) 3,014
Change in prepaid reinsurance premiums 189 (188)
Change in deferred acquisition costs (438) 14
Change in unpaid losses and loss adjustment expenses (3,999) (13,148)
Change in unearned premiums 2,211 209
Change in reinsurance payables and funds withheld 35 83
Other, net (302) (793)
------ ------
Net cash used in operating activities (3,233) (8,917)
------ ------
Cash flows from investing activities:
Proceeds from sales:
Fixed income maturities available-for-sale 5,633 --
Equity securities 2,159 --
Investments, matured or called:
Fixed income maturities available-for-sale 100 5,194
Investments, purchased:
Fixed income maturities available-for-sale (5,345) --
Equity securities (129) --
Proceeds from sale of property and equipment -- 56
Purchases of property and equipment (5) (15)
------ ------
Net cash provided by investing activities 2,413 5,235
------ ------
Cash flows from financing activities:
Proceeds from exercise of options to purchase Common Stock 41 --
------ ------
Net cash provided by financing activities 41 --
------ ------
Net decrease in cash and short term investments (779) (3,682)
Cash and short term investments at beginning of year 6,683 8,803
------ ------
Cash and short term investments at end of period $ 5,904 $ 5,121
======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<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 three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. 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,
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 were
16,219,909 and 16,013,221 for the three months ended March 31, 1997 and 1996,
respectively. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 establishes standards for computing and presenting earnings per
share and requires presentation of both basic earnings per share and diluted
earnings per share on the face of the income statement. SFAS 128 is effective
for financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior-period earnings per share data presented. The
adoption of SFAS 128 is not expected to have a material effect on the reported
earnings per share of the Company.
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 activities of
the trusts referred to above. For further information, reference is made to Note
11 of the Notes to Consolidated Financial Statements included in DHC's Annual
Report on Form 10-K for the year ended December 31, 1996.
<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. At March 31, 1997, NAICC had a B++ rating from A.M. Best
Company ("Best"). Such rating was confirmed by Best on May 5, 1997.
Property and Casualty Insurance Operations
Net premiums written were $13.2 million and $9 million for the three months
ended March 31, 1997 and 1996, respectively. The increase in net premiums
written in the first quarter of 1997 from the same period in 1996 is
attributable to an increase in personal and commercial automobile business,
discussed below. Net premiums earned were $10.8 million and $9 million for the
three months ended March 31, 1997 and 1996, respectively. The increase in net
premiums earned is directly related to increases in net premiums written.
In the workers' compensation line of business, net premiums written were
$4.2 million and $4 million for the three months ended March 31, 1997 and 1996,
respectively. The California workers' compensation line of business continued to
decrease during the first quarter due to continued price competition, which
decrease was offset by increases in workers' compensation business outside
California. As a result, NAICC's aggregate new business, which decreased
significantly in 1996, has essentially remained flat during the first quarter of
1997.
In the non-standard private passenger automobile line of business, net
premiums written were $7.1 million and $4 million for the three months ended
March 31, 1997 and 1996, respectively. In the first three months of 1997, the
private passenger automobile line represented 54% of total net premiums written,
up from 45% in the first three months of 1996. This increase was due in large
part to NAICC's amendment of its reinsurance agreement with a major reinsurance
company to reduce its cession of private passenger automobile business from 50%
to 25% effective January 1, 1997.
In the commercial automobile line of business, net premiums written were
$1.8 million and $1 million for the three months ended March 31, 1997 and 1996,
respectively. For the three months ended March 31, 1997, the commercial
automobile line represented 14% of total net premiums written, up from 11% for
the three months ended March 31, 1996. The increased premium is the result of
increased marketing efforts by NAICC.
Net investment income was $2.4 million and $2.7 million for the three
months ended March 31, 1997 and 1996, respectively. The decline is the result of
a decrease in NAICC's investment portfolio.
Net losses and loss adjustment expenses ("LAE") were $7.7 million and $6.7
million for the three months ended March 31, 1997 and 1996, respectively. The
resulting net loss and LAE ratios for the corresponding periods were 71.5% and
74.4%, respectively. The decrease in the net loss and LAE ratio in the first
quarter of 1997 is due to the decrease in the worker's compensation line of
business which has a higher loss and LAE expense ratio than the automobile line
of business.
Policy acquisition costs were $2.9 million and $2.5 million for the three
months ended March 31, 1997 and 1996, respectively. The increase is directly
related to the increase in net premiums earned. As a percentage of net earned
premiums, policy acquisition expenses were 27.1% and 28.3% for the three months
ended March 31, 1997 and 1996, respectively. The decrease in the policy
acquisition expense ratio in the first quarter of 1997 as compared to the same
period in 1996 is primarily the result of the increase in premium volume while
maintaining total fixed underwriting expenses of policy acquisition costs
comparable to 1996.
General and administrative expenses were $1.9 million and $1.6 million for
the three months ended March 31, 1997 and 1996, respectively. These expenses are
fixed or semi-variable in nature. The increase in 1997 is primarily attributable
to Valor Insurance Company, Inc.'s ("Valor") operations. Valor was acquired by
NAICC in June 1996.
The combined ratios (which represent a ratio of losses and expenses to net
earned premiums in a particular period) were 116% and 120% for the three months
ended March 31, 1997 and 1996, respectively. Net income from insurance
operations for the three months ended March 31, 1997 and 1996 was $3 million and
$1.1 million, respectively. Net income for the first quarter of 1997 increased
from the same period in 1996 due to the realization of gains on sales of
investments.
Cash Flow from Insurance Operations
Cash used in operations was $2.7 million and $8.4 million for the three
months ended March 31, 1997 and 1996 respectively. The decrease in cash used in
operations is primarily due to the decline in payments of losses and LAE related
to prior years and an increase in premiums written. Overall cash and invested
assets, at market value, at March 31, 1997 were $137.7 million, compared to
$142.6 million at December 31, 1996.
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. The ratio of (annualized) net written
premiums to statutory surplus was 1.2 to 1 and 1.3 to 1 for the three months
ended March 31, 1997 and 1996, respectively. 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 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 its investment portfolio and the payment of
general and administrative expenses incurred in the normal course of business.
For the three months ended March 31, 1997 and 1996, cash used in parent-only
operating activities was $518,000 and $477,000, respectively. The increase in
cash used was primarily attributable to the payment of non-recurring
compensation expense that was incurred in 1996 and is to be paid over the next
three years. For information regarding DHC's operating subsidiaries' cash flow
from operations, see "2. RESULTS OF NAICC'S OPERATIONS, Cash Flow from Insurance
Operations."
Liquidity and Capital Resources
At March 31, 1997, cash and investments of DHC were approximately $9.6
million, compared to $10 million at December 31, 1996. As described above, the
primary use of funds was the payment of general and administrative expenses in
the normal course of business. For information regarding DHC's operating
subsidiaries' liquidity and capital resources, see "2. RESULTS OF NAICC'S
OPERATIONS, Liquidity and Capital Resources."
4. AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 establishes standards for computing and presenting earnings per share
and requires presentation of both basic earnings per share and diluted earnings
per share on the face of the income statement. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of all prior-period earnings per share data presented. The
adoption of SFAS 128 is not expected to have a material effect on the reported
earnings per share of the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
NAICC is a party to various legal proceedings which are considered routine
and incidental to its business and are not material to the financial condition
and operation of its business. 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.
On March 31, 1997, DHC sold 6,100 shares of its common stock for
an aggregate purchase price of $40,793.75. The shares were sold pursuant to
Section 4(2) of the Securities Act of 1933 to four employees of DHC's former
subsidiary, Danielson Trust Company, upon the exercise of options held by such
employees.
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.
None
<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: May 15, 1997
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 FORM
10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000225648
<NAME> DANIELSON HOLDING CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 140,773
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 622
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 145,332
<CASH> 1,967
<RECOVER-REINSURE> 27,963 <F1>
<DEFERRED-ACQUISITION> 1,395
<TOTAL-ASSETS> 192,320
<POLICY-LOSSES> 116,652
<UNEARNED-PREMIUMS> 10,505
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 389
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,538
<OTHER-SE> 55,407 <F2>
<TOTAL-LIABILITY-AND-EQUITY> 192,320
10,816
<INVESTMENT-INCOME> 2,527
<INVESTMENT-GAINS> 2,206
<OTHER-INCOME> 149
<BENEFITS> 7,736
<UNDERWRITING-AMORTIZATION> 2,024
<UNDERWRITING-OTHER> 3,495
<INCOME-PRETAX> 2,443
<INCOME-TAX> 6
<INCOME-CONTINUING> 2,437
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,437
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
<RESERVE-OPEN> 97,105
<PROVISION-CURRENT> 7,736
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 1,578
<PAYMENTS-PRIOR> 10,420
<RESERVE-CLOSE> 92,843
<CUMULATIVE-DEFICIENCY> (10,120)
<FN>
<F1> Included in this caption are reinsurance recoverables on unpaid losses of
23,809 and reinsurance recoverables on paid losses of 4,154.
<F2> Included in Stockholders' Equity-Other is treasury stock of 66.
</FN>
</TABLE>
