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, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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
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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, 2001
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Common Stock, $0.10 par value 19,505,954 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 MONTHS
ENDED MARCH 31,
-------------------------------
2001 2000
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REVENUES:
Gross premiums earned $ 21,212 $ 16,797
Ceded premiums earned (2,070) (1,289)
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Net premiums earned 19,142 15,508
Net investment income 2,329 2,057
Net realized investment gains 816 3,063
Other income 318 231
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TOTAL REVENUES 22,605 20,859
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LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses 16,402 11,654
Ceded losses and loss adjustment expenses (1,358) (386)
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Net losses and loss adjustment expenses 15,044 11,268
Policyholder dividends 42 70
Policy acquisition expenses 4,140 3,909
General and administrative expenses 2,455 2,136
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TOTAL LOSSES AND EXPENSES 21,681 17,383
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Income before provision for income taxes 924 3,476
Income tax provision 37 41
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NET INCOME $ 887 $ 3,435
EARNINGS PER SHARE OF COMMON STOCK
Basic $ .05 $ .19
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Diluted $ .05 $ .18
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See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
March 31, 2001 December 31,
(UNAUDITED) 2000
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ASSETS:
Fixed maturities, available for sale at fair value
(Cost: $121,245 and $123,667) $122,960 $123,213
Equity securities, at fair value (Cost: $24,532 and $25,064) 21,686 24,454
Short term investments, at cost which
Approximates fair value 13,156 6,463
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TOTAL INVESTMENTS 157,802 154,130
Cash 5,081 6,082
Accrued investment income 1,783 1,782
Premiums and fees receivable, net of allowances
of $688 and $588 15,418 15,555
Reinsurance recoverable on paid losses, net of allowances
of $626 and $623 3,799 4,020
Reinsurance recoverable on unpaid losses, net of
allowances of $30 and $101 20,347 20,641
Prepaid reinsurance premiums 2,613 2,629
Property and equipment, net of accumulated depreciation
of $8,910 and $8,748 1,256 1,325
Deferred acquisition costs 4,069 3,665
Other assets 1,631 1,648
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TOTAL ASSETS $213,799 $211,477
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses $ 99,261 $100,030
Unearned premiums 24,392 23,207
Policyholder dividends 380 364
Reinsurance premiums payable 1,774 1,630
Funds withheld on ceded reinsurance 1,666 1,666
Other liabilities 3,546 3,250
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TOTAL LIABILITIES 131,019 130,147
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 19,516,694 shares and 19,306,694 shares;
outstanding 19,505,954 shares and 19,295,954 shares) 1,952 1,931
Additional paid-in capital 63,058 62,449
Accumulated other comprehensive income (loss) (1,131) (1,064)
Retained earnings 18,967 18,080
Treasury stock (cost of 10,740 shares) (66) (66)
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TOTAL STOCKHOLDERS' EQUITY 82,780 81,330
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $213,799 $211,477
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See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
(UNAUDITED)
Comprehensive
Income (Loss) for the
Three Months Ended
March 31,
MARCH 31, 2001 2001 2000
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COMMON STOCK
Balance, beginning of year $ 1,931
Exercise of options to purchase Common Stock 21
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Balance, end of period 1,952
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ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 62,449
Exercise of options to purchase Common Stock 609
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Balance, end of period 63,058
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RETAINED EARNINGS
Balance, beginning of year 18,080
Net income 887 $ 887 $3,435
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Balance, end of period $ 18,967
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year (1,064)
Net unrealized gain (loss) on available-
For-sale securities (1) (67) 1,343
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Other comprehensive income (loss) (67) (67) 1,343
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Total comprehensive income (loss) $ 820 $4,778
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Balance, end of period (1,131)
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TREASURY STOCK
Balance, beginning of year (66)
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Balance, end of period (66)
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TOTAL STOCKHOLDERS' EQUITY $82,780
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COMMON STOCK, SHARES
Balance, beginning of year 19,306,694
Exercise of options to purchase Common Stock 210,000
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Balance, end of period 19,516,694
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TREASURY STOCK, SHARES
Balance, beginning of year 10,740
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Balance, end of period 10,740
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(1) DISCLOSURE OF RECLASSIFICATION AMOUNT: 2001 2000
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Unrealized holding gains (losses)
arising during the period $ (883) $ (1,720)
Less: reclassification adjustment
for net gains included in net income (816) (3,063)
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Net unrealized gains (losses) on securities $ (67) $ 1,343
See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months
Ended March 31,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 887 $ 3,435
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized investment gains (816) (3,063)
Depreciation and amortization 232 229
Change in accrued investment income (1) 137
Change in premiums and fees receivable 137 (821)
Change in reinsurance recoverables 221 135
Change in reinsurance recoverable on unpaid losses 294 802
Change in prepaid reinsurance premiums 16 (222)
Change in deferred acquisition costs (404) (267)
Change in unpaid losses and loss adjustment expenses (769) (3,817)
Change in unearned premiums 1,185 1,470
Change in reinsurance payables and funds withheld 144 23
Change in policyholder dividends payable 16 34
Change in receivable on reinsurance treaty rescission -- 11,459
OTHER, NET 285 (845)
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Net cash provided by (used in) operating activities 1,427 8,689
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Fixed income maturities available-for-sale -- 7,500
Equity securities 2,452 7,700
Investments, matured or called:
Fixed income maturities available-for-sale 5,677 8,053
Investments purchased:
Fixed income maturities available-for-sale (3,543) (26,527)
Equity securities (847) (5,761)
Purchases of property and equipment (104) (30)
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Net cash used in investing activities 3,635 9,065
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options to purchase Common Stock 630 --
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Net cash provided by financing activities 630 --
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Net increase (decrease) in cash and short term investments 5,692 (376)
Cash and short term investments at beginning of year 12,545 8,339
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Cash and short term investments at end of period $ 18,237 $ 7,963
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See accompanying Notes to Consolidated Financial Statements.
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 accounting principles
generally accepted in the United States of America. However, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America 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, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. 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, 2000. Certain prior year
amounts have been reclassified to conform with the current year's financial
statement presentation.
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 19,622,615 and 19,206,214 for the three months ended March 31, 2001, and
2000 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 19,340,287 and 18,476,265 for the three months ended March 31, 2001
and 2000 , respectively.
3) INCOME TAXES
DHC files a Federal consolidated income tax return with its subsidiaries.
DHC's Federal consolidated return includes the taxable results of certain
grantor trusts established pursuant to a prior court approved reorganization to
assume various liabilities of certain present and former subsidiaries of DHC.
These trusts are not consolidated with DHC for financial statement puposes. 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, 2000.
4) AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, NAICC was required to record its statutory
amounts pursuant to the Accounting Practices and Procedures Manual issued by the
National Association of Insurance Commissioners ("SSAPs"). The effect of
adoption of the SSAPs did not have a material effect on NAICC's statutory
surplus.
5) SUBSEQUENT EVENT
Since the end of the quarter, the Company has purchased a distressed debt
security that represents approximately 14% of the total assets of the Company.
This security was purchased with available cash through broker dealers and other
market participants trading these securities. See Part II, Item 5. "Other
Information."
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 property and casualty
insurance.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums earned were $19.1 million and $15.5 million for the three
months ended March 31, 2001 and 2000, respectively. The increase in net premiums
earned is directly related to the change in net premiums written. Net premiums
written were $20.3 million and $16.7 million for the three months ended March
31, 2001 and 2000, respectively.
The overall $3.6 million increase in net written premiums for 2001 over the
comparable period in 2000 is attributable to increased production in commercial
lines.
Net investment income was $1.9 million and $1.8 million for the three
months ended March 31, 2001 and 2000, respectively. The average fixed income
portfolio yield on bonds as of March 31, 2001 was 6.59 percent compared to 6.67
percent as of March 31, 2000. The decrease in portfolio yield was offset by an
increase in invested assets of $0.5 million. Realized gains decreased by $2.3
million from the comparable period in 1999 due to reduced sales of equity
securities.
Net losses and loss adjustment expenses ("LAE") were $15.0 million and
$11.3 million for the three months ended March 31, 2001 and 2000, respectively.
The resulting loss and LAE ratios for the corresponding periods were 78.6
percent and 72.7 percent, respectively. The loss and LAE ratio increased in 2001
over 2000 due to the growth in our commercial automobile program which has
higher loss ratios than private passenger automobile.
Policy acquisition costs were $4.1 million and $3.9 million for the three
months ended March 31, 2001 and 2000, respectively. As a percentage of net
premiums earned, policy acquisition expenses were 21.6 percent and 25.2 percent
for the three months ended March 31, 2001 and 2000, respectively. The decrease
in the policy acquisition expense ratio in 2001 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 $1.8 million and $1.5 million for
the three months ended March 31, 2001 and 2000, respectively. General and
administrative expenses increased slightly in 2001 over 2000 due to increased
premium volume.
The combined ratios (which represent a ratio of losses and expenses to net
earned premiums in a particular period) were 110.3 percent and 108.6 percent for
the three months ended March 31, 2001 and 2000, respectively. Net income from
insurance operations for the three months ended March 31, 2001 and 2000 was $1.0
million and $3.8 million, respectively. The decrease in net income from
insurance operations during the first three months of 2001 compared to the same
period for 2000 is primarily attributable to the reduction in realized gains of
$2.3 million.
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 Company meets both its short-term and long-term liquidity requirements
through operating cash flows that include premium receipts, investment income
and reinsurance recoveries. To the extent operating cash flows do not provide
sufficient cash flow, the Company relies on the sale of invested assets. Cash
provided by operations was $1.9 million and $9.0 million for the three months
ended March 31, 2001 and 2000, respectively. The decrease in cash provided by
operations is attributable to the collection of a reinsurance settlement for
$11.5 million in 2000. Overall cash and invested assets, at market value, at
March 31, 2001 were $141.2 million, compared to $139.2 million at December 31,
2000. The Company believes that its liquidity needs will continue to be met
through the same sources in the future.
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, 2001 and 2000, cash used in parent-only
operating activities was $427,000 and $266,000, 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, 2001 cash and investments of DHC were approximately $21.7
million, compared to $21.0 million at December 31, 2000. As described above, the
primary use of funds was the payment of general and administrative expenses in
the normal course of business. DHC received $630,000 in March of 2001 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."
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, 2001. 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, 2000. For events that
occurred subsequent to March 31, 2001, reference is made to Part II, Item 5.
"Other Information".
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.
Since the end of the quarter, in a series of open market transactions, the
Company has purchased an amount of a publicly traded distressed/high yield bond
issue which now represents approximately 14% of the total assets of the Company.
This security was purchased with available cash through broker dealers and other
market participants trading these securities. None of the parties from whom
purchases were made are affiliated in any way with the Company. All purchases
were made at prevailing market prices. The Company believes that these
securities offer an attractive yield and should increase the return on the
Company's current investment portfolio, provided there is no money default. The
market value for distressed debt tends to be more sensitive to economic
conditions and individual corporate developments than those of higher rated
securities. In addition, the secondary market for these bonds is generally less
liquid.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None
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, 2001
DANIELSON HOLDING CORPORATION
(Registrant)
BY:/S/DAVID BARSE
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David Barse
PRESIDENT & CHIEF
OPERATING OFFICER
BY:/S/MICHAEL CARNEY
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Michael Carney
CHIEF FINANCIAL OFFICER