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 June 30, 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 August 4, 1997
Common Stock, $0.10 par value 15,576,287 shares
<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>
<CAPTION>
For the Three For the Six
Months Ended June 30, Months Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Gross premiums earned $ 15,669 $ 13,048 $ 29,049 $ 25,949
Ceded premiums earned (2,957) (3,890) (5,521) (7,823)
---------- ---------- ---------- ---------
Net premiums earned 12,712 9,158 23,528 18,126
Net investment income 2,462 2,813 4,989 5,626
Net realized investment gains (losses) -- 69 2,206 69
Other income 156 204 305 487
--------- --------- --------- ---------
Total revenues 15,330 12,244 31,028 24,308
--------- --------- --------- ---------
Losses and expenses:
Gross losses and loss adjustment expenses 13,445 11,963 23,770 20,549
Ceded losses and loss adjustment expenses (4,101) (5,173) (6,690) (7,088)
---------- ---------- ---------- ---------
Net losses and loss adjustment expenses 9,344 6,790 17,080 13,461
Policy acquisition expenses 3,226 2,407 6,155 4,946
Expenses in connection with terminated
proposed acquisition -- 2,320 -- 2,320
General and administrative expenses 2,224 2,218 4,814 4,421
--------- --------- --------- ---------
Total losses and expenses 14,794 13,735 28,049 25,148
--------- --------- --------- ---------
Income (loss) from continuing operations
before provision for income taxes 536 (1,491) 2,979 (840)
Income tax provision 13 6 19 19
--------- --------- --------- ---------
Income (loss) from continuing operations $ 523 $ (1,497) $ 2,960 $ (859)
Net loss from discontinued operations -- (163) -- (244)
--------- ---------- ---------- ----------
Net income (loss) $ 523 $ (1,660) $ 2,960 $ (1,103)
========= ========== ========= ==========
Earnings (loss) per share of Common Stock
and common equivalent share:
Income (loss) from continuing operations $ .03 $ (.10) $ .18 $ (.06)
Net loss from discontinued operations -- (.01) -- (.01)
-------- ----------- --------- ----------
Net income (loss) $ .03 $ (.11) $ .18 $ (.07)
========= =========== ========== ==========
</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>
June 30, 1997 December 31,
(Unaudited) 1996
<S> <C> <C>
Assets:
Fixed maturities, available-for-sale at fair value
(Cost: $140,518 and $143,424) $ 140,040 $ 143,330
Equity securities, at fair value (Cost: $362 and $257) 629 2,697
Short term investments, at cost which
approximates fair value 1,998 5,528
-------- ---------
Total investments 142,667 151,555
Cash 1,964 1,155
Accrued investment income 2,184 2,397
Premiums and fees receivable, net of allowances
of $126 and $230 5,157 5,597
Reinsurance recoverable on paid losses, net of allowances
of $306 and $316 8,991 3,071
Reinsurance recoverable on unpaid losses, net of
allowances of $425 and $425 20,526 23,546
Prepaid reinsurance premiums 2,183 2,417
Property and equipment, net of accumulated depreciation
of $7,424 and $7,102 2,753 2,968
Deferred acquisition costs 1,749 957
Other assets 2,902 2,756
-------- ---------
Total assets $ 191,076 $ 196,419
========== ==========
Liabilities and Stockholders' Equity:
Unpaid losses and loss adjustment expenses $ 111,014 $ 120,651
Unearned premiums 11,735 8,294
Reinsurance premiums payable 2,151 1,765
Funds withheld on ceded reinsurance 1,479 1,479
Other liabilities 4,770 5,377
-------- ---------
Total liabilities 131,149 137,566
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 15,586,994 and 15,370,894 shares;
outstanding 15,576,287 and 15,360,238 shares) 1,559 1,537
Additional paid-in capital 46,780 46,131
Net unrealized gain (loss) on available-for-sale securities (211) 2,346
Retained earnings 11,865 8,905
Treasury stock (Cost of 10,707 shares and 10,656 shares) (66) (66)
--------- ---------
Total stockholders' equity 59,927 58,853
-------- ---------
Total liabilities and stockholders' equity $ 191,076 $ 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>
June 30, 1997
<S> <C>
Common stock
Balance, beginning of year $ 1,537
Exercise of options to purchase Common Stock 22
--------
Balance, end of period 1,559
--------
Additional paid-in capital
Balance, beginning of year 46,131
Exercise of options to purchase Common Stock 649
--------
Balance, end of period 46,780
--------
Net unrealized gain (loss) on available-for-sale
securities
Balance, beginning of year 2,346
Net decrease (2,557)
---------
Balance, end of period (211)
---------
Retained earnings
Balance, beginning of year 8,905
Net income 2,960
--------
Balance, end of period 11,865
--------
Treasury stock
Balance, beginning of year 66
--
Balance, end of period 66
--
Total stockholders' equity $ 59,927
========
Common stock, shares
Balance, beginning of year 15,370,894
Exercise of options to purchase Common Stock 216,100
-------
Balance, end of period 15,586,994
==========
Treasury stock, shares
Balance, beginning of year 10,656
Purchased during period 51
--------
Balance, end of period 10,707
======
</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 Six
Months Ended June 30,
1997 1996
------------- ---------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ 2,960 $ (859)
Adjustments to reconcile income (loss) from continuing
operations to net cash used in operating activities:
Net realized investment (gains) losses (2,206) (69)
Depreciation and amortization 507 382
Change in accrued investment income 213 15
Change in premiums and fees receivable 440 2,266
Change in reinsurance recoverables (5,920) (1,410)
Change in reinsurance recoverable on unpaid losses 3,020 2,961
Change in prepaid reinsurance premiums 234 (413)
Change in deferred acquisition costs (792) 78
Change in unpaid losses and loss adjustment expenses (9,637) (19,076)
Change in unearned premiums 3,441 86
Change in reinsurance payables and funds withheld 386 338
Other, net (856) 1,457
--------- ---------
Net cash used in operating activities (8,210) (14,244)
--------- ---------
Cash flows from investing activities:
Proceeds from sales:
Fixed income maturities available-for-sale 9,445 6,640
Equity securities 2,159 --
Investments, matured or called:
Fixed income maturities available-for-sale 100 8,951
Investments, purchased:
Fixed income maturities available-for-sale (6,648) (3,000)
Equity securities (129) --
Acquisition of Valor Insurance Company (net of cash and short
term investments of $1,461) -- (1,450)
Proceeds from sale of property and equipment -- 60
Purchases of property and equipment (109) (125)
--------- --------
Net cash provided by investing activities 4,818 11,076
-------- ---------
Cash flows from financing activities:
Proceeds from exercise of options to purchase Common Stock 671 --
-------- ---------
Net cash provided by financing activities 671 --
-------- ---------
Net cash used in continuing operations (2,721) (3,168)
Net cash used in discontinued operations -- (120)
-------- ----------
Net decrease in cash and short term investments (2,721) (3,288)
Cash and short term investments at beginning of year 6,683 8,803
-------- ---------
Cash and short term investments at end of period $ 3,962 $ 5,515
======= ========
</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
six months ended June 30, 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 and its Quarterly Report on Form 10-Q for the three
months ended March 31, 1997. 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 16,144,007 for the three months ended June 30, 1997 and 16,145,858 for the
six months ended June 30, 1997. 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 15,360,255 for the three and six months ended June 30, 1996.
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.
4) REINSURANCE
During April, 1997, NAICC settled a claim involving environmental
damage. NAICC paid $5.6 million in loss and loss adjustment expenses, of which
$5 million was ceded to its reinsurers. NAICC has submitted its claim for
reinsurance to its reinsurers, primarily Lloyd's of London and London market
reinsurers and is in the process of responding to their inquiries. Management
believes that its reinsurance claim is in accordance with the terms of its
reinsurance contracts and that any amount which may not ultimately be collected
will not be material.
<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 June 30, 1997, NAICC had a B++ rating from A.M. Best
Company.
Property and Casualty Insurance Operations
Net premiums written were $13.9 million and $27.1 million for
the three and six months ended June 30, 1997, respectively. Net premiums written
were $8.8 million and $17.8 million for the three and six months ended June 30,
1996, respectively. The increase in net premiums written in the first six months
of 1997 from the same period in 1996 is attributable to an increase in all lines
of business, although primarily in the non-standard automobile businesses, as
discussed below. Net premiums earned for the three and six months ended June 30,
1997 were $12.7 million and $23.5 million, respectively. Net premiums earned for
the three and six months ended June 30, 1996 were $9.2 million and $18.1
million, 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 $8.3 million and $7.9 million for the six months ended June 30, 1997 and
1996, respectively. The California workers' compensation line of business
continued to decrease during the second quarter of 1997 due to continued price
competition, which decrease was offset by increases in workers' compensation
business outside of California, primarily in Montana. As a result, NAICC's
aggregate new workers' compensation business, which decreased significantly in
1996, has essentially remained flat during the first six months of 1997.
In the non-standard private passenger automobile line of business, net
premiums written were $14.7 million and $7.7 million for the six months ended
June 30, 1997 and 1996, respectively. In the first six months of 1997, the
private passenger automobile line represented 54% of total net premiums written,
up from 43% in the first six months of 1996. This increase was due to an
increase in direct premiums written of approximately 30% as well as 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. The increase in direct written premiums is due in
part to legislation in California increasing the enforcement of mandatory
automobile liability insurance.
In the non-standard commercial automobile line of business, net
premiums written were $4.1 million and $2.2 million for the six months ended
June 30, 1997 and 1996, respectively. In the first six months of 1997, the
non-standard commercial automobile line represented 15% of total net premiums
written, up from 12% for the same period in 1996. The increased premium is the
result of increased marketing efforts by NAICC.
Net investment income was $4.7 million and $5.3 million for the six
months ended June 30, 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 $17.1 million and
$13.5 million for the six months ended June 30, 1997 and 1996, respectively. The
resulting net loss and LAE ratios for the corresponding periods were 72.6% and
74.3%, respectively. The decrease in the net loss and LAE ratio in the first six
months of 1997 is due to the continued shift toward the automobile line of
business which has a lower loss and LAE expense ratio than the workers'
compensation line of business .
<PAGE>
Policy acquisition costs were $6.2 million and $4.9 million for the six
months ended June 30, 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 26.2% and 27.3% for the six months
ended June 30, 1997 and 1996, respectively. The decrease in the policy
acquisition expense ratio in the first six months of 1997 as compared to the
same period in 1996 is primarily the result of workers' compensation premium
stabilizing while the fixed underwriting expenses of policy acquisition costs
continued to decline.
General and administrative expenses were $3.5 million and $3.1 million
for the six months ended June 30, 1997 and 1996, respectively. 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 113.6% and 119.5% for the six
months ended June 30, 1997 and 1996, respectively. Net income from insurance
operations for the three and six months ended June 30, 1997 was $1 million and
$4 million, respectively, compared to $1.2 million and $2.3 million for the same
periods in 1996. Net income for the first six months of 1997 increased from the
same period in 1996 due to the realization of gains on sales of investments and
premium growth.
Cash Flow from Insurance Operations
Cash used in operations was $7.2 million for the six months ended June
30, 1997 as compared to cash used in operations of $13 million for the six
months ended June 30, 1996. The decrease in cash used in operations is primarily
due to premium growth. However, the payment of workers' compensation losses and
LAE related to prior years while current year workers' compensation premium is
flat continues to result in a negative cash flow for that line of business.
Overall cash and invested assets, at market value, at June 30, 1997 were $134.9
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 ratios of (annualized) net written
premiums to statutory surplus were 1.37 to 1 and 0.8 to 1 for the six months
ended June 30, 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 six months ended June 30, 1997 and 1996, cash used in
parent-only operating activities was $1 million and $1.2 million, respectively.
The decrease in cash used was primarily attributable to the payment of expenses
in the first six months of 1996 related to the termination of a proposed
acquisition, offset in part by the payment of non-recurring compensation expense
in the first six months of 1997, that was incurred in 1996. 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 June 30, 1997, cash and investments of DHC were approximately $9.7
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. DHC received $671,000 in the first six months of
1997 from the exercise of stock options. For information regarding DHC's
operating subsidiaries' liquidity and capital resources, see "2. RESULTS OF
NAICC'S OPERATIONS, Liquidity and Capital Resources."
<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 June 13, 1997, DHC sold 210,000 shares of its common stock for
an aggregate purchase price of $630,000. The shares were sold pursuant to
Section 4(2) of the Securities Act of 1933 to the estate and beneficiary of
DHC's former President, upon the exercise of options held by such estate and
beneficiary.
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: August 12, 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 JUNE 30, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 140,040
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 629
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 142,667
<CASH> 1,964
<RECOVER-REINSURE> 29,517 <F1>
<DEFERRED-ACQUISITION> 1,749
<TOTAL-ASSETS> 191,076
<POLICY-LOSSES> 111,014
<UNEARNED-PREMIUMS> 11,735
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 256
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,559
<OTHER-SE> 58,368 <F2>
<TOTAL-LIABILITY-AND-EQUITY> 191,076
23,528
<INVESTMENT-INCOME> 4,989
<INVESTMENT-GAINS> 2,206
<OTHER-INCOME> 305
<BENEFITS> 17,080
<UNDERWRITING-AMORTIZATION> 4,337
<UNDERWRITING-OTHER> 6,632
<INCOME-PRETAX> 2,979
<INCOME-TAX> 19
<INCOME-CONTINUING> 2,960
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,960
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<RESERVE-OPEN> 97,105
<PROVISION-CURRENT> 17,080
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 4,671
<PAYMENTS-PRIOR> 19,026
<RESERVE-CLOSE> 90,488
<CUMULATIVE-DEFICIENCY> (10,120)
<FN>
<F1> Includes reinsurance recoverables on unpaid losses of 20,526 and
reinsurance recoverables on paid losses of 8,991.
<F2> Includes treasury stock of 66.
</FN>
</TABLE>
