<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 JUNE 30, 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 AUGUST 4, 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 For the Six
Months Ended June 30, Months Ended June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ------------ -------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums earned $ 17,170 $ 15,030 $ 33,967 $ 30,393
Ceded Premiums Earned (1,669) (2,681) (2,958) (5,550)
---------- ---------- ---------- ----------
Net premiums earned 15,501 12,349 31,009 24,843
Net investment income 2,153 1,876 4,210 3,783
Net realized investment gains (losses) 1,027 (154) 4,090 (154)
Other Income 271 241 502 425
--------- --------- --------- ---------
Total Revenues 18,952 14,312 39,811 28,897
--------- --------- --------- ---------
Losses and Expenses:
Gross losses and loss adjustment expenses 12,844 11,462 24,498 22,071
Ceded Losses and Loss Adjustment Expenses (1,506) (3,031) (1,892) (5,168)
---------- ---------- ---------- ----------
Net losses and loss adjustment expenses 11,338 8,431 22,606 16,903
Policyholder dividends 26 81 96 360
Policy acquisition expenses 4,003 3,269 7,912 6,600
General and Administrative Expenses 2,217 2,257 4,353 4,645
--------- --------- --------- ---------
Total Losses and Expenses 17,584 14,038 34,967 28,508
--------- --------- --------- ---------
Income before provision for income taxes 1,368 274 4,844 389
Income Tax Provision 44 8 85 23
--------- --------- --------- ---------
Net Income $ 1,324 $ 266 $ 4,759 $ 366
========= ========= ========= =========
Earnings Per Share of Common Stock
Basic $ .07 $ .01 $ .26 $ .02
========= ========== ========== ==========
Diluted $ .07 $ .01 $ .25 $ .02
========= ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share information)
June 30, 2000 December 31,
(UNAUDITED) 1999
----------------- --------------
<S> <C> <C>
Assets:
Fixed maturities, available for sale at fair value
(Cost: $123,215 and $113,641) $ 120,270 $ 110,841
Equity securities, at fair value (Cost: $22,007 and $20,614) 25,023 21,316
Short term investments, at cost which
approximates fair value 6,456 8,234
-------- ---------
Total Investments 151,749 140,391
Cash 42 105
Accrued investment income 1,536 1,499
Premiums and fees receivable, net of allowances
of $286 and $274 13,953 11,619
Reinsurance recoverable on paid losses, net of allowances
of $591 and $402 6,573 6,060
Reinsurance recoverable on unpaid losses, net of
allowances of $140 and $246 14,112 15,628
Prepaid reinsurance premiums 2,259 1,767
Property and equipment, net of accumulated depreciation
of $9,168 and $8,225 1,518 1,762
Deferred acquisition costs 3,129 2,522
Receivable on reinsurance treaty rescission - 11,459
Other Assets 1,722 1,940
-------- ---------
Total Assets $ 196,593 $ 194,752
========== ==========
Liabilities and Stockholders' Equity:
Unpaid losses and loss adjustment expenses $ 86,733 $ 94,934
Unearned premiums 19,703 16,239
Policyholder dividends 803 814
Reinsurance premiums payable 1,164 905
Funds withheld on ceded reinsurance 1,670 1,708
Other Liabilities 3,366 3,926
-------- ---------
Total Liabilities 113,439 118,526
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) 71 (2,098)
Retained earnings 21,809 17,050
Treasury Stock (Cost of 10,729 Shares) (66) (66)
-------- ---------
Total Stockholders' Equity 83,154 76,226
-------- ---------
Total Liabilities and Stockholders' Equity $ 196,593 $ 194,752
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(In Thousands, Except Share Amounts)
(Unaudited)
Comprehensive Comprehensive
Income for the Income (Loss) for the
Three Months Ended Six Months Ended
June 30, June 30,
JUNE 30, 2000 2000 1999 2000 1999
------------- ---- ---- ---- ----
<S> <C> <C> <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 4,759 $1,324 $266 $4,759 $ 366
------ ------ ---- ------ -------
Balance, End of Period 21,809
------
Accumulated Other Comprehensive Income (Loss)
Balance, Beginning of Year (2,098)
Net Unrealized Gain (Loss) On Available-
For-sale Securities (1) 826 347 2,169 (1,642)
---- --- ----- -------
Other Comprehensive Income (Loss) 2,169 826 347 2,169 (1,642)
----- ------ ----- ----- -------
Total Comprehensive Income (Loss) $2,150 $613 $6,928 $(1,276)
======= ==== ======= =======
Balance, End of Period 71
---------
Treasury Stock
Balance, Beginning of Year (66)
-----
Balance, End of Period (66)
-----
Total Stockholders' Equity $ 83,154
======
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
======
For the Three Months Ended For the Six Months Ended
June 30, June 30,
(1) Disclosure of Reclassification Amount: 2000 1999 2000 1999
---- ---- ---- ----
Unrealized holding gains (losses)
arising during the period $1,853 $ 193 $ 6,259 $ (1,796)
Less: reclassification adjustment
for net gains (losses )included
in net income 1,027 (154) 4,090 (154)
------- ------- ------- ---------
Net Unrealized Gains (Losses) On Securities $ 826 $ 347 $ 2,169 $ (1,642)
======= ======== ======= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
FOR THE SIX
MONTHS ENDED JUNE 30,
2000 1999
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<S> <C> <C>
Cash Flows From Operating Activities:
Income from continuing operations $ 4,759 $ 366
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized investment (gains) losses (4,090) 154
Depreciation and amortization 442 367
Change in accrued investment income (37) (45)
Change in premiums and fees receivable (2,334) (837)
Change in reinsurance recoverables (513) 4,848
Change in reinsurance recoverable on unpaid losses 1,516 (2,232)
Change in prepaid reinsurance premiums (492) 208
Change in deferred acquisition costs (607) (231)
Change in unpaid losses and loss adjustment expenses (8,201) (4,666)
Change in unearned premiums 3,464 1,305
Change in reinsurance payables and funds withheld 221 683
Change in policyholder dividends payable (11) 8
Change in receivable on reinsurance treaty rescission 11,459 --
Other, Net (434) 162
--------- ---------
Net Cash Provided by Operating Activities 5,142 90
--------- ---------
Cash Flows From Investing Activities:
Proceeds from sales:
Fixed income maturities available-for-sale 7,500 741
Equity securities 12,553 --
Investments, matured or called:
Fixed income maturities available-for-sale 12,007 13,726
Investments, purchased:
Fixed income maturities available-for-sale (29,134) (13,950)
Equity securities (9,844) --
Purchases of Property and Equipment (65) (214)
--------- --------
Net Cash Provided by (Used In) Investing Activities (6,983) 303
--------- ---------
Net increase (decrease) in cash and short term investments (1,841) 393
Cash and Short Term Investments At Beginning of Period 8,339 4,157
--------- ---------
Cash and Short Term Investments At End of Period $ 6,498 $ 4,550
======== ========
</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, 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 19,030,634 and 19,119,115 for the three and six months ended June 30, 2000,
respectively, and 15,932,147 and 15,849,466 for the three and six months ended
June 30, 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 for both the three and six months ended June 30, 2000,
and 15,576,276 for both the three and six months ended June 30, 1999.
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".
<PAGE>
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 $31.0 million for the three and
six months ended June 30, 2000, respectively, compared to $12.3 million and
$24.8 million for the three and six months ended June 30, 1999, respectively.
The increase in net premiums earned is directly related to the change in net
premiums written. Net premiums written were $17.3 million and $34.1 million for
the three and six months ended June 30, 2000, respectively, compared to $13.0
million and $26.4 million for the three and six months ended June 30, 1999,
respectively.
The overall increase in net written premiums for 2000 over the comparable
periods 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 $1.9 million and $3.7 million for the three and
six months ended June 30, 2000, respectively, compared to $1.8 million and $3.6
million for the three and six months ended June 30, 1999, respectively. The
slight growth in investment income is attributable to increased cash flow from
operations of $6.0 million over the comparable year-to-date period in 1999.
Realized gains increased by $3.7 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
$22.6 million for the three and six months ended June 30, 2000, respectively,
compared to $8.4 million and $16.9 million for the three and six months ended
June 30, 1999, respectively. The resulting loss and LAE ratios for the
corresponding year-to-date periods were 72.9 percent and 68.0 percent,
respectively for 2000 and 1999. The loss and LAE ratio increased in 2000 over
1999 due primarily to the rescission of several treaties in 1999 that increased
the Company's workers' compensation retention.
Policy acquisition costs were $4.0 million and $7.9 million for the three
and six months ended June 30, 2000, respectively, compared to $3.3 million and
$6.6 million for the three and six months ended June 30, 1999, respectively. As
a percentage of net premiums earned, policy acquisition expenses were 25.5
percent and 26.6 percent for the six months ended June 30, 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 $1.6 million and $3.1 million for
the three and six months ended June 30, 2000, respectively. General and
administrative expenses were $1.8 million and $3.6 million for the three and six
months ended June 30, 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 108.9 percent and 110.8 percent for
the six months ended June 30, 2000 and 1999, respectively. Net income from
insurance operations for the six months ended June 30, 2000 and 1999 was $5.3
million and $1.2 million, respectively. The increase in net income from
insurance operations during the first six months of 2000 compared to the same
period for 1999 is primarily attributable to realized gains, and to a lesser
extent, the increase in premium volume in our non-standard commercial automobile
line.
CASH FLOW FROM INSURANCE OPERATIONS
Cash provided by operations was $5.7 million and $1.0 million for the six
months ended June 30, 2000 and 1999, respectively. The increase in cash provided
by operations is primarily attributable to the collection of amounts due, as a
result of the rescission of the several reinsurance treaties, in excess of $11
million. Overall cash and invested assets, at market value, at June 30, 2000
were $134.0 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.
<PAGE>
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, 2000 and 1999, cash used in parent-only
operating activities was $0.6 million and $0.9 million, respectively. The
decrease in cash used in operating activities is attributable to an increase in
DHC's investment portfolio and the income it generates. 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, 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 six months ended June 30,
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.
<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 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.
On June 15, 2000, the Company held its Annual Meeting of Stockholders. At
the meeting, Richard Krenz was newly elected as director, and the term of office
of each of Martin J. Whitman, Samuel Zell, David Barse, Eugene M. Isenberg,
Joseph F. Porrino, Frank B. Ryan, Wallace O. Sellers, Stanley J. Garstka, and
William Pate continued after the meeting. In addition, the stockholders
confirmed the appointment of KPMG LLP as the independent public accountants for
the Company for the fiscal year ending December 31, 2000.
The votes with respect to each of the foregoing matters was as follows:
1. With respect to the election of directors:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
<S> <C> <C>
Martin J. Whitman 16,231,995 62,575
Samuel Zell 15,610,938 683,632
David M. Barse 16,219,329 75,241
Eugene M. Isenberg 16,232,330 62,240
Joseph F. Porrino 16,232,329 62,241
Frank B. Ryan 16,222,330 72,240
Wallace O. Sellers 16,232,329 62,241
Stanley J. Garstka 16,219,330 75,240
William Pate 15,610,946 683,624
Richard Krenz 16,222,330 72,240
</TABLE>
2. With respect to the appointment of KPMG LLP as the independent public
accountants for the Company for the fiscal year ending December 31, 2000:
FOR AGAINST ABSTAIN
Totals: 16,228,633 54,311 11,626
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Not applicable.
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 14, 2000
DANIELSON HOLDING CORPORATION
(Registrant)
BY: /S/ DAVID BARSE
--------------------------------------------
David Barse
PRESIDENT & CHIEF OPERATING OFFICER
BY: /S/ MICHAEL CARNEY
-----------------------------------
Michael Carney
CHIEF FINANCIAL OFFICER
