<PAGE>
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, 2000
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 10, 2000
----- ---------------------------
Common Stock, $0.10 par value 18,476,265 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,
2000 1999
----- ----
REVENUES:
<S> <C> <C>
Gross premiums earned $16,797 $15,363
Ceded premiums earned (1,289) (2,869)
------ ------
Net premiums earned 15,508 12,494
Net investment income 2,057 1,906
Net realized investment gains 3,063 --
Other income 231 185
----- ----
TOTAL REVENUES 20,859 14,585
------ ------
LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses 11,654 10,609
Ceded losses and loss adjustment expenses (386) (2,137)
----- -----------
Net losses and loss adjustment expenses 11,268 8,472
Policyholder dividends 70 279
Policy acquisition expenses 3,909 3,331
General and administrative expenses 2,136 2,388
------ ------
TOTAL LOSSES AND EXPENSES 17,383 14,470
------ ------
Income before provision for income taxes 3,476 115
Income tax provision 41 14
----- ----
NET INCOME $3,435 $ 101
====== =====
EARNINGS PER SHARE OF COMMON STOCK :
Basic $ .19 $ .01
====== ======
Diluted $ .18 $ .01
====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
<TABLE>
<CAPTION>
March 31, 2000 December 31,
(UNAUDITED) 1999
--------- ---------
ASSETS:
<S> <C> <C>
Fixed maturities, available for sale at fair value
(Cost: $124,588 and $113,641) $121,547 $110,841
Equity securities, at fair value (Cost: $21,744 and $20,614) 24,030 21,316
Short term investments, at cost which
approximates fair value 7,943 8,234
-------- --------
TOTAL INVESTMENTS 153,520 140,391
Cash 20 105
Accrued investment income 1,362 1,499
Premiums and fees receivable, net of allowances
of $249 and $274 12,440 11,619
Reinsurance recoverable on paid losses, net of allowances
of $402 and $402 5,926 6,060
Reinsurance recoverable on unpaid losses, net of
allowances of $276 and $246 14,826 15,628
Prepaid reinsurance premiums 1,989 1,767
Property and equipment, net of accumulated depreciation
of $9,021 and $8,225 1,631 1,762
Deferred acquisition costs 2,789 2,522
Receivable on reinsurance treaty rescission -- 11,459
Other assets 1,772 1,940
-------- ---------
TOTAL ASSETS $196,275 $194,752
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses$ 91,117 $ 94,934
Unearned premiums 17,709 16,239
Policyholder dividends 848 814
Reinsurance premiums payable 959 905
Funds withheld on ceded reinsurance 1,677 1,708
Other liabilities 2,961 3,926
-------- --------
TOTAL LIABILITIES 115,271 118,526
Preferred stock ($0.10 par value; authorized
10,000,000 shares; none issued and outstanding) -- --
Common stock ($0.10 par value; authorized
100,000,000 shares; issued 18,486,994 shares;
outstanding 18,476,265 shares) 1,849 1,849
Additional paid-in capital 59,491 59,491
Accumulated other comprehensive income (loss) (755) (2,098)
Retained earnings 20,485 17,050
Treasury stock (Cost of 10,729 shares) (66) (66)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 81,004 76,226
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $196,275 $194,752
======== ========
</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>
Comprehensive
Income (Loss) for the
Three Months Ended MARCH 31,
MARCH 31, 2000 2000 1999
-------------- ----------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year $ 1,849
-----------
Balance, end of period 1,849
-----------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 59,491
-----------
Balance, end of period 59,491
-----------
RETAINED EARNINGS
Balance, beginning of year 17,050
Net income 3,435 $3,435 $ 101
----------- ------ -------
Balance, end of period 20,485
-----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year (2,098)
Net unrealized gain (loss) on available-for-sale securities (1) 1,343 (1,989)
------ -------
Other comprehensive income (loss) 1,343 1,343 (1,989)
----------- ------ -------
Total comprehensive income (loss) $4,778 $(1,888)
====== =======
Balance, end of period (755)
-----------
TREASURY STOCK
Balance, beginning of year (66)
-----------
Balance, end of period (66)
-----------
TOTAL STOCKHOLDERS' EQUITY $ 81,004
===========
COMMON STOCK, SHARES
Balance, beginning of year 18,486,994
-----------
Balance, end of period 18,486,994
===========
TREASURY STOCK, SHARES
Balance, beginning of year 10,729
-----------
Balance, end of period 10,729
===========
<C> <C>
2000 1999
---- ----
(1) Disclosure of reclassification amount:
Unrealized holding gains (losses)
arising during the period $4,406 $(1,989)
Less: reclassification adjustment
for net gains included in net income (3,063) --
------- -------
Net unrealized gains (losses) on securities $1,343 $(1,989)
======= =======
</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,
2000 1999
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Income from continuing operations $ 3,435 $ 101
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Net realized investment gains (3,063) --
Depreciation and amortization 229 175
Change in accrued investment income 137 (106)
Change in premiums and fees receivable (821) (338)
Change in reinsurance recoverables 135 5,025
Change in reinsurance recoverable on unpaid losses 802 1,757
Change in prepaid reinsurance premiums (222) 236
Change in deferred acquisition costs (267) (139)
Change in unpaid losses and loss adjustment expenses (3,817) (5,375)
Change in unearned premiums 1,470 646
Change in reinsurance payables and funds withheld 23 2,066
Change in policyholder dividends payable 34 50
Change in receivable on reinsurance treaty rescission 11,459 --
Other, net (845) (125)
-------- -------
Net cash provided by operating activities 8,689 3,973
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Fixed income maturities available-for-sale 7,500 5,348
Equity securities 7,700 --
Investments, matured or called:
Fixed income maturities available-for-sale 8,053 1,925
Investments, purchased:
Fixed income maturities available-for-sale (26,527) (9,857)
Equity securities (5,761) --
Purchases of property and equipment (30) (153)
-------- -------
Net cash used in investing activities (9,065) (2,737)
-------- -------
Net increase (decrease) in cash and short term investments (376) 1,236
Cash and short term investments at beginning of year 8,339 4,157
-------- --------
Cash and short term investments at end of period $ 7,963 $ 5,393
======== =======
</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, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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,
1999.
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. Diluted 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 and warrants, whether or not currently exercisable. Such average shares
were 19,206,214 and 15,731,971 for the three months ended March 31, 2000, and
1999 respectively. Basic earnings per share are calculated using only the
average number of outstanding shares of Common Stock and disregarding the
average number of shares issuable for stock options and warrants. Such average
shares were 18,476,265 and 15,576,276 for the three months ended March 31, 2000
and 1999, respectively.
3) INCOME TAXES
DHC files a Federal consolidated income tax return with its subsidiaries
and certain trusts that assumed various 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 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 8 of the
Notes to Consolidated Financial Statements included in DHC's Annual Report on
Form 10-K for the year ended December 31, 1999.
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.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and the information in Item 3, " Qualitative and
Quantitative Disclosures About Market Risk" contain forward-looking statements,
including statements concerning capital adequacy, adequacy of reserves, goals,
future events and underlying assumptions and other statements which are other
than statements of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words "believes",
"anticipates", "expects", "intends", "plans" and similar expressions. All such
statements represent only current estimates or expectations as to future results
and are subject to risks and uncertainties which could cause actual results to
materially differ from current estimates or expectations. See "RISK FACTORS THAT
MAY AFFECT FUTURE RESULTS".
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 premiums earned were $15.5 million and $12.5 million for the three
months ended March 31, 2000 and 1999, respectively. The increase in net premiums
earned is directly related to the change in net premiums written. Net premiums
written were $16.7 million and $13.4 million for the three months ended March
31, 2000 and 1999, respectively.
The overall $3.3 million increase in net written premiums for 2000 over the
comparable period in 1999 is attributable to increased production and decreased
reinsurance coverage associated with the rescission of a treaty effective in
1999.
Net investment income was $1.8 million for both the three months ended
March 31, 2000 and 1999. The average portfolio yield on bonds purchased during
the three months ended March 31, 2000 have declined slightly from the comparable
period in 1999 which offset the increase in invested assets during the quarter
ended March 31, 2000. Realized gains increased by $3.1 million from the
comparable period in 1999 due primarily to the sale of equity securities.
Net losses and loss adjustment expenses ("LAE") were $11.3 million and $8.5
million for the three months ended March 31, 2000 and 1999, respectively. The
resulting loss and LAE ratios for the corresponding periods were 72.7 percent
and 67.8 percent, respectively. The loss and LAE ratio increased in 2000 over
1999 due to the rescission of the Company's workers' compensation treaty that
was effective during 1999.
Policy acquisition costs were $3.9 million and $3.3 million for the three
months ended March 31, 2000 and 1999, respectively. As a percentage of net
premiums earned, policy acquisition expenses were 25.2 percent and 26.7 percent
for the three months ended March 31, 2000 and 1999, respectively. The decrease
in the policy acquisition expense ratio in 2000 is due primarily to the overall
increase in premium volume while fixed underwriting expenses of policy
acquisition costs remained relatively constant.
General and administrative expenses were $1.5 million and $1.8 million for
the three months ended March 31, 2000 and 1999, respectively. General and
administrative expenses decreased slightly in 2000 over 1999 due to cost
reduction measures initiated at the end of 1999.
The combined ratios (which represent a ratio of losses and expenses to net
earned premiums in a particular period) were 108.6 percent and 111.6 percent for
the three months ended March 31, 2000 and 1999, respectively. Net income from
insurance operations for the three months ended March 31, 2000 and 1999 was $3.8
million and $0.5 million, respectively. The increase in net income from
insurance operations during the first three months of 2000 compared to the same
period for 1999 is primarily attributable to realized gains of $3.1 million.
CASH FLOW FROM INSURANCE OPERATIONS
Cash provided by operations was $9.0 million and $4.2 million for the three
months ended March 31, 2000 and 1999, respectively. The increase in cash
provided by operations is attributable to the collection of a reinsurance
settlement for $11.5 million. Overall cash and invested assets, at market value,
at March 31, 2000 were $135.8 million, compared to $122.4 million at December
31, 1999.
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. 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, 2000 and 1999, cash used in parent-only
operating activities was $266,000 and $263,000, respectively. 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, 2000 cash and investments of DHC were approximately $17.8
million, compared to $18.1 million at December 31, 1999. 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. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As noted above, the foregoing discussion may include forward-looking
statements that involve risks and uncertainties. In addition to other factors
and matters discussed elsewhere herein, some of the important factors that, in
the view of the Company, could cause actual results to differ materially from
those discussed in the forward-looking statements include the following:
1.The insurance products sold by the Company are subject to intense
competition from many competitors, many of whom have substantially greater
resources than the Company. There can be no assurance that the Company will be
able to successfully compete and generate sufficient premium volume at
attractive prices to be profitable.
2.In order to implement its business plan, the Company has been seeking
to enter into strategic partnerships and/or make acquisitions of businesses that
would enable the Company to earn an attractive return on investment.
Restrictions on the Company's ability to issue additional equity in order to
finance any such transactions exist which could significantly affect the
Company's ability to finance any such transaction. The Company may have limited
other resources with which to implement its strategy and there can be no
assurance that any transaction will be successfully consummated.
3.The insurance industry is highly regulated and it is not possible to
predict the impact of future state and federal regulation on the operations of
the Company.
4.Unpaid losses and loss adjustment expenses ("LAE") are based on
estimates of reported losses, historical Company experience of losses reported
by reinsured companies for insurance assumed from such insurers, and estimates
based on historical Company and industry experience for unreported claims. Such
liability is, by necessity, based upon estimates which may change in the near
term, and there can be no assurance that the ultimate liability will not exceed,
or even materially exceed, such estimates.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company's objectives in managing its investment portfolio are to
maximize investment income and investment returns while minimizing overall
credit risk. Investment strategies are developed based on many factors including
underwriting results, overall tax position, regulatory requirements, and
fluctuations in interest rates. Investment decisions are made by management and
approved by the Board of Directors. Market risk represents the potential for
loss due to adverse changes in the fair value of securities. The market risks
related to the Company's fixed maturity portfolio are primarily interest rate
risk and prepayment risk. The market risks related to the Company's equity
portfolio are foreign currency risk and equity price risk. There have been no
material changes to the Company's market risk for the three months ended March
31, 2000. For further information, reference is made to Management's Discussion
and Analysis of Financial Condition and Results of Operations included in DHC's
Annual Report on Form 10-K for the year ended December 31, 1999.
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 AND USE OF PROCEEDS.
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.
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, 2000
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 FINANACIAL INFORMATION EXTRACTED FROM FORM
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETLY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000225648
<NAME> DANIELSON HOLDING CORPORATION
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 121,547
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,030
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 153,520
<CASH> 20
<RECOVER-REINSURE> 20,752 <F1>
<DEFERRED-ACQUISITION> 2,789
<TOTAL-ASSETS> 196,275
<POLICY-LOSSES> 91,117
<UNEARNED-PREMIUMS> 17,709
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 848
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,849
<OTHER-SE> 79,155 <F2>
<TOTAL-LIABILITY-AND-EQUITY> 196,275
15,508
<INVESTMENT-INCOME> 2,057
<INVESTMENT-GAINS> 3,063
<OTHER-INCOME> 231
<BENEFITS> 11,268
<UNDERWRITING-AMORTIZATION> 2,825
<UNDERWRITING-OTHER> 3,220
<INCOME-PRETAX> 3,476
<INCOME-TAX> 41
<INCOME-CONTINUING> 3,435
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,435
<EPS-BASIC> .19 <F3>
<EPS-DILUTED> .18 <F4>
<RESERVE-OPEN> 79,306
<PROVISION-CURRENT> 11,269
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 2,803
<PAYMENTS-PRIOR> 11,481
<RESERVE-CLOSE> 76,291
<CUMULATIVE-DEFICIENCY> (2,491)
<FN>
<F1> INCLUDES REINSURANCE RECOVERABLES ON UNPAID LOSSES OF 14,826 AND
REINSURANCE RECOVERABLES ON PAID LOSSES OF 5,926.
<F2> INCLUDES TREASURY STOCK OF 66.
<F3> REPRESENTS EARNINGS PER SHARE-BASIC.
<F4> REPRESENTS EARNINGS PERSHARE-DILUTED.
</FN>
</TABLE>
