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, 1999
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 12, 1999
- ----- -----------------------------
Common Stock, $0.10 par value 17,576,276 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share information)
(Unaudited)
For the Three For the Six
Months Ended June 30, Months Ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Gross premiums earned $ 15,030 $ 16,295 $ 30,393 $ 33,251
Ceded premiums earned (2,681) (2,723) (5,550) (5,664)
---------- ---------- ---------- ----------
Net premiums earned 12,349 13,572 24,843 27,587
Net investment income 1,876 1,935 3,783 4,274
Net realized investment gains (losses) (154) 87 (154) 124
Other income 241 243 425 421
--------- --------- --------- ---------
Total revenues 14,312 15,837 28,897 32,406
--------- --------- --------- ---------
Losses and expenses:
Gross losses and loss adjustment expenses 11,462 11,143 22,071 23,130
Ceded losses and loss adjustment expenses (3,031) (1,521) (5,168) (3,575)
---------- ---------- ---------- ----------
Net losses and loss adjustment expenses 8,431 9,622 16,903 19,555
Policyholder dividends 81 91 360 203
Policy acquisition expenses 3,269 3,285 6,600 6,602
General and administrative expenses 2,257 2,522 4,645 4,879
--------- --------- --------- ---------
Total losses and expenses 14,038 15,520 28,508 31,239
--------- --------- --------- ---------
Income before provision for income taxes 274 317 389 1,167
Income tax provision 8 10 23 53
--------- --------- --------- ---------
Net income $ 266 $ 307 $ 366 $ 1,114
========= ========= ========= =========
Earnings per share of Common Stock
Basic $ .01 $ .02 $ .02 $ .07
========= ========= ========= =========
Diluted $ .01 $ .02 $ .02 $ .07
========= ========== ========== =========
See accompanying Notes to Consolidated Financial Statements.
2
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share information)
June 30, 1999 December 31,
(Unaudited) 1998
------------ -----
Assets:
Fixed maturities, available for sale at fair value
(Cost: $111,627 and $112,131) $ 110,752 $ 114,683
Equity securities, at fair value (Cost: $19,974 and $20,129) 18,519 16,889
Short term investments, at cost which
approximates fair value 4,496 3,287
-------- ---------
Total investments 133,767 134,859
Cash 54 870
Accrued investment income 1,472 1,427
Premiums and fees receivable, net of allowances
of $ 156 and $136 10,809 9,972
Reinsurance recoverable on paid losses, net of allowances
of $374 and $374 2,866 7,714
Reinsurance recoverable on unpaid losses, net of
allowances of $619 and $559 20,419 18,187
Prepaid reinsurance premiums 1,460 1,668
Property and equipment, net of accumulated depreciation
of $7,960 and $8,322 1,869 1,930
Deferred acquisition costs 2,612 2,381
Other assets 1,724 1,887
-------- ---------
Total assets $ 177,052 $ 180,895
========== ==========
Liabilities and Stockholders' Equity:
Unpaid losses and loss adjustment expenses $ 90,987 $ 95,653
Unearned premiums 15,010 13,705
Policyholder dividends 189 181
Reinsurance premiums payable 2,764 2,143
Funds withheld on ceded reinsurance 1,504 1,442
Other liabilities 4,601 4,498
-------- ---------
Total liabilities 115,055 117,622
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 shares;
outstanding 15,576,276 shares) 1,559 1,559
Additional paid-in capital 46,673 46,673
Accumulated other comprehensive loss (2,330) (688)
Retained earnings 16,161 15,795
Treasury stock (Cost of 10,718 shares) (66) (66)
-------- ---------
Total stockholders' equity 61,997 63,273
-------- ---------
Total liabilities and stockholders' equity $ 177,052 $ 180,895
========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
(Unaudited)
Comprehensive Comprehensive
Income (Loss) for the Loss for the
Three Months Ended Six Months Ended
June 30, June 30,
June 30, 1999 1999 1998 1999 1998
------------- ---- ---- ---- ----
Common stock
Balance, beginning of year $ 1,559
------
Balance, end of period 1,559
------
Additional paid-in capital
Balance, beginning of year 46,673
------
Balance, end of period 46,673
------
Retained earnings
Balance, beginning of year 15,795
Net income 366 $ 266 $ 307 $ 366 $ 1,114
------ ----- ------ ------ -----
Balance, end of period 16,161
------
Accumulated other comprehensive loss
Balance, beginning of year (688)
Net unrealized gain (loss) on available-
for-sale securities (1) 347 (2,632) (1,642) (2,589)
---- ------- ------- -------
Other comprehensive income (loss) (1,642) 347 (2,632) (1,642) (2,589)
------- ------ ------- ------- -------
Total comprehensive income (loss) $ 613 $ (2,325) $ (1,276) $(1,475)
===== ======== ======== =======
Balance, end of period (2,330)
Treasury stock
Balance, beginning of year (66)
----
Balance, end of period (66)
Total stockholders' equity $61,997
=======
_______________________________________________________________________________
Common stock, shares
Balance, beginning of year 15,586,994
----------
Balance, end of period 15,586,994
----------
Treasury stock, shares
Balance, beginning of year 10,718
------
Balance, end of period 10,718
======
______________________________________
For the Three Months Ended For the Six Months Ended
June 30, June 30,
(1) Disclosure of reclassification amount: 1999 1998 1999 1998
---- ---- ---- ----
Unrealized holding gains (losses)
arising during the period $ 193 $(2,545) $ (1,796) $(2,465)
Less: reclassification adjustment
for net gains (losses) included in
net income (154) 87 (154) 124
------ ------- ------ -----
Net unrealized gains (losses) on securities $ 347 $(2,632) $ (1,642) $(2,589)
====== ======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
4
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
For the Six
Months Ended June 30,
1999 1998
------------- ---------
Cash flows from operating activities:
Income from continuing operations $ 366 $ 1,114
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net realized investment (gains) losses 154 (124)
Depreciation and amortization 367 369
Change in accrued investment income (45) 556
Change in premiums and fees receivable (837) (3,603)
Change in reinsurance recoverables 4,848 (515)
Change in reinsurance recoverable on unpaid losses (2,232) 1,095
Change in prepaid reinsurance premiums 208 (35)
Change in deferred acquisition costs (231) (578)
Change in unpaid losses and loss adjustment expenses (4,666) (6,573)
Change in unearned premiums 1,305 2,641
Change in reinsurance payables and funds withheld 683 1,121
Change in policyholder dividends payable 8 (144)
Other, net 162 423
-------- ---------
Net cash provided by (used in) operating activities 90 (4,253)
-------- ----------
Cash flows from investing activities:
Proceeds from sales:
Fixed income maturities available-for-sale 741 17,714
Investments, matured or called:
Fixed income maturities available-for-sale 13,726 17,189
Investments, purchased:
Fixed income maturities available-for-sale (13,950) (11,325)
Equity securities __ (19,952)
Proceeds from sale of property and equipment __ 6
Purchases of property and equipment (214) (52)
----- ----
Net cash provided by investing activities 303 3,580
-------- ---------
Net increase (decrease) in cash and short term investments 393 (673)
Cash and short term investments at beginning of period 4,157 1,818
-------- ---------
Cash and short term investments at end of period $ 4,550 $ 1,145
======= ========
See accompanying Notes to Consolidated Financial Statements.
5
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, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. 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, 1998.
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, whether or not currently exercisable. Such average shares were
15,932,147 and 15,849,466 for the three and six months ended June 30, 1999,
respectively, and 16,177,757 and 16,171,268 for the three and six months ended
June 30, 1998, 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. Such average shares were
15,576,276 for the three and six months ended June 30, 1999, and 15,576,285 and
15,576,286 for the three and six months ended June 30, 1998, 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 12 of the
Notes to Consolidated Financial Statements included in DHC's Annual Report on
Form 10-K for the year ended December 31, 1998.
4) FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS
During 1998, DHC's main operating subsidiary, National American
Insurance Company of California ("NAICC") invested approximately $10.3 million
in Japanese yen based equity securities. In order to hedge the currency risk of
these investments, during the second quarter of 1998 NAICC purchased a foreign
currency option to sell Japanese yen at a fixed price on a given date in April
1999. The foreign currency option expired in April 1999, resulting in a realized
loss of $155,000. Investments in equity securities denominated in foreign
currencies are translated into U.S. dollars using current rates of exchange and
the related translation adjustments are recorded in accumulated other
comprehensive loss
6
in stockholders' equity. For the six months ended June 30, 1999, the Company
recorded a cumulative unrealized loss on the Japanese yen based equity
securities of $802,376 which is inclusive of a cumulative gain of $536,277 as a
result of changes in foreign currency exchange rates, which is included in
accumulated other comprehensive loss in the accompanying consolidated balance
sheets.
5) STOCKHOLDERS' EQUITY
Effective April 14, 1999, the Company entered into a Stock Purchase and
Sale Agreement with Samstock, L.L.C. ("Samstock"), which agreement was assigned
with the Company's consent by Samstock to its sole member SZ Investments, L.L.C.
("SZ"), pursuant to an amendment and assignment agreement (such Purchase and
Sale Agreement, as amended and assigned, the "Purchase Agreement"). Pursuant to
the Purchase Agreement, the Company agreed to sell to SZ, for consideration of
$9 million, 2,000,000 shares of Common Stock and a four year warrant (subject to
extension in certain circumstances) to purchase an additional 2,000,000 shares
of Common Stock at $4.75 per share (subject to downward adjustment under certain
circumstances). In order to provide sufficient available shares of Common Stock
to consummate this proposed transaction, on July 20, 1999, the Registrant's
stockholders approved an amendment to the Registrant's Certificate of
Incorporation to increase the number of authorized shares of the Registrant's
common stock from 20,000,000 shares to 100,000,000 shares. The stockholders also
approved amendments to eliminate cumulative voting for Directors and to
eliminate a prohibition on issuing non-voting equity securities. The
transaction was consummated on August 12, 1999.
6) GAIN CONTINGENCIES
On June 22, 1999, the Missouri Court of Appeals reversed a decision to
award interest on claims under a plan of distribution of assets of the Mission
Reinsurance Corporation Trust (the "Trust"). The effect of the decision of the
Court of Appeals may result in the return to the Company of the surplus existing
in the Trust, which was one of the trusts that had been created in connection
with the insolvency and reorganization of Mission Insurance Group, Inc.
and its subsidiaries from which the Company emerged. Although it does not
know the specific amount of the surplus currently in the Trust, the company has
reason to believe that the surplus currently approximates $14 million.
The Missouri Department of Insurance has appealed the decision of the
Court of Appeals and the decision could be reversed. In the event the decision
is reversed and the Missouri Department of Insurance is permitted to pay
interest on claims, it is anticipated that there would be no surplus remaining
in the Trust after payment of the interest. It therefore cannot be determined
at this time when, or if, the Company would receive any proceeds from the
Trust's surplus. Accordingly, the Company has not reflected any prospect of
receiving funds from this matter as an asset on its balance sheet or as income.
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 its subsidiaries
(collectively with DHC, the "Company"). DHC, on a parent-only basis, has limited
continuing expenditures for rent and administrative expenses and derives
7
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, Year 2000 compliance or performance 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 $12.3 million and $24.8 million for the three
and six months ended June 30, 1999, compared to $13.6 million and $27.6 million
for the three and six months ended June 30, 1998. The decrease in net premiums
earned is directly related to the change in net written premiums. Net written
premiums were $13.0 million and $26.4 million for the three and six months ended
June 30, 1999, compared to $14.4 million and $30.2 million for the three and six
months ended June 30, 1998.
The overall decrease in net written premuims for 1999 over the
comparable periods in 1998 is attributable to increased competition in the
automobile lines and an increase in reinsurance coverage associated with several
new treaties that significantly reduce NAICC's workers' compensation retention.
The participant in the new treaties is a reinsurer with an A.M. Best rating of
"A-" (Excellent).
Net investment income was $1.8 million and $3.6 million for the three
and six months ended June 30, 1999, compared to $1.8 million and $4.1 million
for the three and six months ended June 30, 1998. The decline for the six
month period is reflective of a slight decrease in average portfolio yield on
bonds purchased during the twelve months ended June 30, 1999.
Net losses and loss adjustment expenses (LAE) were $8.4 million and
$16.9 million for the three and six months ended June 30, 1999, compared to $9.6
million and $19.6 million for the three and six months ended June 30, 1998. The
resulting loss and LAE ratios for the corresponding year-to-date periods were
68.0 percent and 70.9 percent, respectively for 1999 and 1998. The loss and LAE
ratio decreased in 1999 over 1998 due to the reduction of the Company's workers'
compensation retention.
Policy acquisition costs were $3.3 million and $6.6 million for the
three and six months ended in each of June 30, 1999 and 1998. As a percentage of
net premiums earned, policy acquisition expenses were 26.6 percent and 23.9
percent for the six months ended June 30, 1999 and 1998, respectively. The
increase in the policy acquisition expense ratio in 1999 is due primarily to the
overall decrease in premium volume while fixed underwriting expenses of policy
acquisition costs remained relatively constant.
Combined underwriting ratios were 110.8 percent and 108.5 percent for
the six months ended June 30, 1999 and 1998, respectively. Net income from
insurance operations for the six months ended June 30, 1999 and 1998 was $1.2
million and $2.2 million, respectively. The decrease in net income from
8
insurance operations during the first six months of 1999 compared to the
same period for 1998 is primarily attributable to a decrease in premium volume
combined with a decrease in net investment income.
CASH FLOW FROM INSURANCE OPERATIONS
Cash provided by operations was $1.0 million for the six months ended
June 30, 1999 and cash used in operations was $3.2 million for the six months
ended June 30, 1998. The decrease in cash used in operations is attributable to
the collection of previously disputed reinsurance balances in excess of $6
million during the 1999 period. Overall cash and invested assets, at market
value, at June 30, 1999 were $127.9 million, compared to $128.9 million at
December 31, 1998.
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.
The two most common measures of capital adequacy for insurance
companies are premium-to-surplus ratios (which measure current operating risk)
and reserves-to-surplus ratios (which measure financial risk related to possible
changes in the level of loss and loss adjustment expense reserves). A commonly
accepted standard net written premium-to-surplus ratio is 3 to 1, although this
varies with different lines of business. NAICC's annualized premium-to-surplus
ratio of 1.05 to 1 and 1.4 to 1 for the six months ended June 30, 1999 and 1998,
respectively, remains well under current industry standards. A commonly accepted
standard for the ratio of losses and loss adjustment expense reserves-to-surplus
is 5 to 1, compared with NAICC's ratio of 1.4 to 1 at June 30, 1999. Given these
relatively conservative financial security ratios, management is confident that
existing capital is adequate.
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, 1999 and 1998, cash used in
parent-only operating activities was $0.9 million and $1.1 million,
respectively. The decrease in cash used was primarily attributable to the timing
of certain expense payments. For information regarding DHC's operating
subsidiaries' cash flow from operations, see "RESULTS OF NAICC'S OPERATIONS,
CASH FLOW FROM INSURANCE OPERATIONS."
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, cash and investments of DHC were approximately $5.9
million, compared to $6.8 million at December 31, 1998. 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
9
operating subsidiaries' liquidity and capital resources, see "RESULTS OF
NAICC'S OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES."
4. AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for
fiscal years beginning after June 15, 1999 and establishes standards for the
reporting for derivative instruments. It requires changes in the fair value of a
derivative instrument and the changes in fair value of the assets or liabilities
hedged by that instrument to be included in income. The Company has not adopted
SFAS 133. However, the effect of adoption on the consolidated financial
statements at June 30, 1999 would not be material. In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities- Deferral
of the Effective Date of FASB Satement No. 133." This statement defers the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000.
5. YEAR 2000
The Company has undertaken a review of its systems for "Year 2000"
compliance at both the holding company and subsidiary levels. DHC has completed
an assessment of its hardware and software systems and has contacted the third
party vendors that it believes are critical to its operations. DHC believes that
it is currently Year 2000 compliant and has received assurances from its third
party vendors that they are Year 2000 compliant. However, there can be no
assurance that such assessments are correct and DHC is currently developing a
contingency plan in the event that those assessments are incorrect.
NAICC is highly dependent on electronic data processing and information
systems in its operations. NAICC has reviewed its information systems, hardware
and software operations and applications in relation to the Year 2000. NAICC
believes that its hardware and operating system software are Year 2000
compliant. NAICC also believes that it has identified substantially all of the
application software programs which require modification in order to become Year
2000 compliant and has a formal plan to correct and test the programs affected
by the conversion of a two-digit year to a four-digit year. NAICC has completed
and tested the modifications to its insurance applications and believes that
they are Year 2000 compliant. All non-insurance applications (e.g. e-mail
software, accounting software, and report archiving software) have been upgraded
and NAICC believes that they are Year 2000 compliant.
NAICC has identified the third parties it believes are material to its
operations and is continuing to monitor and, in the case of certain material
third parties, has been able to test its interface to the external systems of
these third parties and believes that they are Year 2000 compliant.
NAICC believes that it does not currently issue any insurance policies
with coverages under which claims for Year 2000 related losses or damages could
be successfully asserted. Management does not believe that material risk exists
that such claims will be made on previous policies.
NAICC is utilizing internal and external resources to meet its
deadlines for Year 2000 modifications. Management believes that the costs of
Year 2000 compliance related efforts are expected to be $200,000 for the year
ended December 31, 1999. Due to the complexities of estimating the cost of
modifying all applications to become Year 2000 compliant and the difficulties in
assessing third-party vendors' abilities to become Year 2000 compliant,
estimates are subject to and are likely to change.
10
The management of NAICC believes that its electronic data processing
and information systems will be Year 2000 compliant. However, should any
material system fail to correctly process information due to the century change,
operations could be interrupted and this could have a material adverse effect on
NAICC's results of operations.
6. 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,
1999. 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, 1998.
11
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.
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.
(a) Exhibits:
10.1 Stock Purchase and Sale Agreement dated as of April 14,
1999 between Samstock, L.L.C. and the Registrant.
10.2 Amendment No. 1, Assignment and Consent to Assignment
of Stock Purchase and Sale Agreement dated May, 7, 1999
among Samstock, L.L.C., S.Z. Investments, L.L.C. and
the Registrant.
10.3 Investment Agreement dated as of April 14, 1999
among the Registrant, Samstock, L.L.C. and Martin J.
Whitman.
10.4 Assignment and Consent to Assignment of Investment
Agreement dated May, 7, 1999 among the Registrant,
Martin J. Whitman and S.Z. Investments, L.L.C.
10.5 Letter Agreement dated April 14, 1999 between Equity
Group Investments, L.L.C. and the Registrant.
10.6 Amendment dated June 2, 1999 to letter agreement dated
April 14, 1999 between Equity Group Investments, L.L.C.
and the Registrant.
10.7 Employment Agreement dated April 14, 1999 between the
Registrant and David Barse.
10.8 Employment Agreement dated April 14, 1999 between the
Registrant and Michael Carney.
12
(b) Reports on Form 8-K:
1. The Registrant reported that it had entered into an
agreement on April 14, 1999 with Samstock, L.L.C.
pursuant to which the Registrant agreed to sell
Samstock 2,000,000 shares of common stock and a
warrant to purchase an additional 2,000,000 shares of
common stock. The Registrant subsequently reported
that Samstock had assigned its rights to its sole
member, S.Z. Investments, L.L.C. The Registrant also
reported an agreement relating to the nomination of
certain individuals to the Board of Directors and the
voting of certain shares for certain directors and an
agreement providing for Equity Group Investments,
L.L.C. to provide certain investment banking services
to the Registrant.
2. The Registrant reported that on June 22, 1999, the
Missouri Court of Appeals announced a decision in a
certain litigation that could ultimately result in the
Registrant receiving certain sums from the Missouri
Reinsurance Corporation Trust.
13
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 13, 1999
DANIELSON HOLDING CORPORATION
(Registrant)
By: /s/ DAVID BARSE
------------------------
David Barse
President & Chief Operating Officer
By: /s/ MICHAEL CARNEY
--------------------------
Michael Carney
Chief Financial Officer
14
EXHIBIT INDEX
EXHIBIT DOCUMENT PAGE
NUMBER -------- NUMBER
------ -------
10.1 Stock Purchase and Sale Agreement dated as of April 14, 17
1999 between Samstock, L.L.C. and the Registrant.
10.2 Amendment No. 1, Assignment and Consent to Assignment 72
of Stock Purchase and Sale Agreement dated May, 7, 1999
among Samstock, L.L.C., S.Z. Investments, L.L.C. and
the Registrant.
10.3 Investment Agreement dated as of April 14, 1999 75
among the Registrant, Samstock, L.L.C. and Martin J.
Whitman.
10.4 Assignment and Consent to Assignment of Investment 86
Agreement dated May, 7, 1999 among the Registrant,
Martin J. Whitman and S.Z. Investments, L.L.C.
10.5 Letter Agreement dated April 14, 1999 between Equity 89
Group Investments, L.L.C. and the Registrant.
10.6 Amendment dated June 2, 1999 to letter agreement dated 92
April 14, 1999 between Equity Group Investments, L.L.C.
and the Registrant.
10.7 Employment Agreement dated April 14, 1999 between the 93
Registrant and David Barse.
10.8 Employment Agreement dated April 14, 1999 between the 108
Registrant and Michael Carney.