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 28, 2003
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 or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
TWO NORTH RIVERSIDE PLAZA, SUITE 600
CHICAGO, IL 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 466-4030
Registrant's Telephone Number, Including Area Code:
1701 EAST MARKET STREET, JEFFERSONVILLE, IN 47130
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 12, 2003
----- ---------------------------
Common Stock, $0.10 par value 30,817,297 shares
DANIELSON HOLDING CORPORATION
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 28, 2003
PART I
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Quarters Ended March 28, 2003
and March 31, 2002 (Unaudited)......................................................................... 1
Condensed Consolidated Statements of Financial Position as of March 28, 2003 (Unaudited)
and December 27, 2002.................................................................................. 2-3
Condensed Consolidated Statement of Stockholders' Equity for the Quarter Ended
March 28, 2003 (Unaudited)............................................................................. 4
Condensed Consolidated Statements of Cash Flows for the Quarters Ended March 28, 2003
and March 31, 2002 (Unaudited)......................................................................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)....................................... 6-11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................................... 12-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 17
Item 4. Controls and Procedures........................................................................... 17
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities................................................................... 18
Item 6. Exhibits and Reports on Form 8-K.................................................................. 18
OTHER
Signatures................................................................................................. 19
Certifications............................................................................................. 20-21
Exhibit 99.1 Certification of Periodic Financial Report from CEO........................................... 22
Exhibit 99.2 Certification of Periodic Financial Report from CFO........................................... 23
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
QUARTERS ENDED
-----------------------
MARCH 28, MARCH 31,
2003 2002
---------- ----------
INSURANCE SERVICES:
OPERATING REVENUES:
Gross Premiums Earned $ 11,096 $ 20,614
Ceded Premiums Earned (744) (1,576)
---------- ----------
Net Premiums Earned 10,352 19,038
Net Investment Income 1,162 1,546
Net Realized Investment (Losses) (548) -
Other Income 110 195
---------- ----------
Total Insurance Services' Operating Revenues 11,076 20,779
---------- ----------
OPERATING EXPENSES:
Gross Losses and Loss Adjustment Expenses 10,416 15,376
Ceded Losses and Loss Adjustment Expenses (1,227) (644)
---------- ----------
Net Losses and Loss Adjustment Expenses 9,189 14,732
Policy Acquisitions Expenses 2,636 4,057
General and Administrative 1,034 1,540
---------- ----------
Total Insurance Services' Operating Expenses 12,859 20,329
---------- ----------
Operating (Loss) Income from Insurance Services (1,783) 450
---------- ----------
PARENT COMPANY:
Net Investment Income 134 63
Net Realized Investment Gains 530 -
Administrative Expenses (1,531) (550)
---------- ----------
Operating (Loss) from Parent Company (867) (487)
---------- ----------
Operating (Loss) before Provision for Income Taxes (2,650) (37)
Income Tax Provision 12 17
---------- ----------
Operating (Loss) before Equity in Net (Loss) of
Unconsolidated Marine Services Subsidiaries (2,662) (54)
Equity in Net (Loss) of Unconsolidated Marine Services Subsidiaries (55,174) -
---------- ----------
Net (Loss) $ (57,836) $ (54)
========== ==========
(LOSS) PER SHARE OF COMMON STOCK - BASIC $ (1.88) $ -
========== ==========
(LOSS) PER SHARE OF COMMON STOCK - DILUTED $ (1.88) $ -
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
1
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
MARCH 28, DECEMBER 27,
2003 2002
------------ ------------
ASSETS
PARENT COMPANY'S AND INSURANCE SERVICES' ASSETS:
Cash and Cash Equivalents $ 8,225 $ 9,939
Investments:
Fixed Maturities, Available for Sale at Fair Value (Cost: $88,542 and $84,161) 92,286 88,499
Equity Securities, Available for Sale at Fair Value (Cost: $5,606 and $6,620) 3,092 5,247
Accrued Investment Income 906 1,143
Premium and Consulting Receivables, Net of
Allowances of $1,502 and $1,623 7,337 7,638
Reinsurance Recoverable on Paid Losses, Net of
Allowances of $766 and $780 2,719 3,124
Reinsurance Recoverable on Unpaid Losses, Net of
Allowances of $221 and $206 22,453 22,057
Ceded Unearned Premiums 1,382 1,091
Properties, Net 260 382
Investments in Unconsolidated Marine Services Subsidiaries 4,128 -
Other Assets 3,457 4,370
------------ ------------
Total Parent Company's and Insurance Services' Assets 146,245 143,490
------------ ------------
PREVIOUSLY CONSOLIDATED MARINE SERVICES SUBSIDIARIES' ASSETS:
CURRENT ASSETS
Cash and Cash Equivalents - 15,244
Restricted Cash - 6,328
Accounts Receivable - 50,630
Accounts Receivable - Related Parties - 6,571
Materials and Supplies - 34,774
Other Current Assets - 27,342
------------ ------------
Total Current Assets - 140,889
PROPERTIES - Net - 654,193
PENSION ASSETS - 20,806
INVESTMENT IN UABL - 48,627
OTHER ASSETS - 26,893
------------ ------------
Total Previously Consolidated Marine Services Subsidiaries' Assets - 891,408
------------ ------------
Total Assets $ 146,245 $ 1,034,898
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
2
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
MARCH 28, DECEMBER 27,
2003 2002
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
PARENT COMPANY'S AND INSURANCE SERVICES' LIABILITIES:
Unpaid Losses and Loss Adjustment Expenses $ 94,807 $ 101,249
Unearned Premiums 11,935 10,622
Other Liabilities 6,160 3,874
------------ ------------
Total Parent Company's and Insurance Services' Liabilities 112,902 115,745
------------ ------------
PREVIOUSLY CONSOLIDATED MARINE SERVICES SUBSIDIARIES' LIABILITIES:
CURRENT LIABILITIES
Accounts Payable - 36,437
Accrued Payroll and Fringe Benefits - 16,686
Deferred Revenue - 10,835
Accrued Claims and Insurance Premiums - 26,695
Accrued Interest - 16,761
Short-Term Debt - 43,873
Current Portion of Long-Term Debt - 590,731
Other Current Liabilities - 38,768
------------ ------------
Total Current Liabilities - 780,786
LONG-TERM DEBT - 8,468
PENSION LIABILITY - 15,072
OTHER LONG-TERM LIABILITIES - 37,467
------------ ------------
Total Previously Consolidated Marine Services Subsidiaries' Liabilities - 841,793
------------ ------------
Total Liabilities 112,902 957,538
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock ($0.10 par value; authorized 10,000,000 shares; none issued - -
and outstanding)
Common Stock ($0.10 par value; authorized 150,000,000 shares; issued 3,083 3,083
30,828,093 shares; outstanding 30,817,297 shares)
Additional Paid-in Capital 117,173 117,148
Unearned Compensation (1,005) (1,132)
Accumulated Other Comprehensive Income (Loss) 1,203 (12,464)
Retained (Deficit) (87,045) (29,209)
Treasury Stock (Cost of 10,796 shares) (66) (66)
------------ ------------
Total Stockholders' Equity 33,343 77,360
------------ ------------
Total Liabilities and Stockholders' Equity $ 146,245 $ 1,034,898
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED MARCH 28, 2003
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN UNEARNED COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) INCOME (DEFICIT)
---------- ---------- ---------- ------------ ------------- ----------
Balance at December 27, 2002 30,828,093 $ 3,083 $ 117,148 $ (1,132) $ (12,464) $ (29,209)
Stock Option Compensation Expense 25
Amortization of Unearned Compensation 127
Comprehensive (Loss):
Net
Loss (57,836)
Net Unrealized (Loss) on Available for
Sale Securities (1,125)
Reclassification Adjustment for Net
Realized Gain on Available for Sale
Securities Included in Net Loss (530)
Net Reclassification Adjustment for
Amount Included in Equity in
Net Loss of Unconsolidated
Marine Services Subsidiaries 15,322
---------- ----------
Total Comprehensive Income (Loss) 13,667 (57,836)
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 28, 2003 30,828,093 $ 3,083 $ 117,173 $ (1,005) $ 1,203 $ (87,045)
========== ========== ========== ========== ========== ==========
TREASURY STOCK
----------------
SHARES AMOUNT TOTAL
------ ------- ----------
Balance at December 27, 2002 10,796 $ (66) $ 77,360
Stock Option Compensation Expense 25
Amortization of Unearned Compensation 127
----------
Comprehensive (Loss):
Net Loss (57,836)
Net Unrealized (Loss) on Available for
Sale Securities (1,125)
Reclassification Adjustment for Net
Realized Gain on Available for Sale
Securities Included in Net Loss (530)
Net Reclassification Adjustment for
Amount Included in Equity in
Net Loss of Unconsolidated
Marine Services Subsidiaries 15,322
----------
Total Comprehensive Income (Loss) (44,169)
------ ------- ----------
Balance at March 28, 2003 10,796 $ (66) $ 33,343
====== ======= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
QUARTERS ENDED
---------------------------
MARCH 28, MARCH 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net (Loss) $ (57,836) $ (54)
Adjustments to Reconcile Net (Loss) to Net Cash (Used in)
Operating Activities:
Net Loss on Investment Securities 18 -
Depreciation and Amortization 137 158
Stock Option and Unearned Compensation Expense 152 -
Interest Accretion and Amortization 28 -
Equity in Net (Loss) of Unconsolidated Marine Services Subsidiaries 55,174 -
Change in Operating Assets and Liabilities:
Accrued Investment Income 237 186
Premium and Consulting Receivables 301 2,152
Reinsurance Recoverable on Paid Losses 405 (693)
Reinsurance Recoverable on Unpaid Losses (396) 618
Prepaid Reinsurance Premiums - 488
Ceded Unearned Premiums (291) -
Other Assets 550 -
Unpaid Losses and Loss Adjustment Expenses (6,442) (2,366)
Unearned Premiums 1,313 (3,683)
Other Liabilities 2,164 (170)
Other, Net 26 696
------------ ------------
Net Cash (Used in) Operating Activities (4,460) (2,668)
------------ ------------
INVESTING ACTIVITIES
Property Additions (15) (2)
Collection of Notes Receivable from Affiliate 6,036 -
Proceeds from the Sale of Investment Securities 8,722 -
Distribution Received from Unconsolidated Marine Services Subsidiary 58 -
Matured or Called Investment Securities - 7,799
Purchase of Investment Securities (12,055) (2,515)
------------ ------------
Net Cash Provided by Investing Activities 2,746 5,282
------------ ------------
FINANCING ACTIVITIES
Proceeds from Exercise of Options to Purchase Common Stock - 18
------------ ------------
Net Cash Provided by Financing Activities - 18
------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents (1,714) 2,632
Cash and Cash Equivalents at Beginning of Period 9,939 17,866
------------ ------------
Cash and Cash Equivalents at End of Period $ 8,225 $ 20,498
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 28, 2003
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Danielson Holding Corporation ("DHC") have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals, except for
the other than temporary impairment charges discussed in Notes 3 and 9)
considered necessary for a fair presentation have been included. For further
information, refer to the consolidated financial statements and footnotes
thereto included in DHC's Annual Report on Form 10-K for the year ended December
27, 2002. Operating results for the interim period are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 2003.
DHC is a holding company whose subsidiaries consist principally of
insurance operations in the western United States, primarily California, and
American Commercial Lines LLC ("ACL"), an integrated marine transportation and
service company. ACL provides barge transportation and ancillary services
throughout the inland United States and Gulf Intracoastal Waterway Systems,
which include the Mississippi, Ohio and Illinois Rivers and their tributaries
and the Intracoastal canals that parallel the Gulf Coast. In addition, ACL
provides barge transportation services on the Orinoco River in Venezuela and the
Parana/Paraguay River System serving Argentina, Brazil, Paraguay, Uruguay and
Bolivia.
As more fully disclosed in Note 2, ACL, which was acquired on May 29,
2002, and certain of its subsidiaries filed a petition on January 31, 2003 with
the U.S. Bankruptcy Court for the Southern District of Indiana, New Albany
Division to reorganize under Chapter 11 of the U.S. Bankruptcy Code. As a result
of this filing, while DHC continues to exercise significant influence over the
operating and financial policies of ACL, it no longer maintains control of the
activities of ACL. Accordingly, DHC no longer includes ACL and its subsidiaries
as consolidated subsidiaries in DHC's financial statements. DHC's investments in
these entities are presented using the equity method effective as of the
beginning of the quarter ended March 28, 2003. DHC has direct ownership interest
in two of ACL's 50% owned subsidiaries. It owns a 5.4% interest in Global
Materials Services, LLC ("GMS") and a 50% interest in Vessel Leasing, LLC
("Vessel Leasing"). These direct ownership interests are also reported using the
equity method of accounting since DHC has the ability to exercise significant
influence over the operating and financial policies of these companies. Under
the equity method of accounting, DHC reports its share of ACL's, GMS's, and
Vessel Leasing's ("Investees") income and loss for the period based on its
ownership interest. DHC, GMS and Vessel Leasing are not guarantors of ACL's debt
nor are they liable for any of ACL's liabilities.
In addition, DHC holds all of the voting stock of Danielson Indemnity
Company ("DIND"). DIND owns 100% of the common stock of National American
Insurance Company of California, DHC's principal operating insurance subsidiary,
which owns 100% of the common stock of Valor Insurance Company, Incorporated
("Valor"). National American Insurance Company of California and its
subsidiaries are collectively referred to herein as "NAICC". The operations of
NAICC are in property and casualty insurance. NAICC writes non-standard private
passenger and commercial automobile insurance in the western United States,
primarily California.
ACL, GMS and Vessel Leasing are together referenced to herein as "Marine
Services". DHC's insurance subsidiaries are referenced to herein as "Insurance
Services".
6
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 28, 2003
(DOLLARS IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION (CONTINUED)
The December 27, 2002 consolidated financial statements include the
accounts of DHC, ACL and its consolidated subsidiaries, GMS, Vessel Leasing and
DIND and its consolidated subsidiaries. The March 28, 2003 consolidated
financial statements include the accounts of DHC and DIND and its consolidated
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. As previously mentioned, DHC's investments in ACL and its
consolidated subsidiaries, GMS and Vessel Leasing are included in the quarter
ended March 28, 2003 consolidated financial statements using the equity method
of accounting.
The accompanying consolidated statement of financial position at December
27, 2002 has been derived from the audited consolidated financial statements at
that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. Amounts on this statement have been reclassified
to conform to the March 2003 presentation.
Through June 30, 2002, DHC's reporting periods were calendar month ends.
ACL's reporting periods end on the last Friday of the month. In the third
quarter of 2002, DHC conformed its reporting periods to ACL's. These financial
statements report 2002 activity through March 31, 2002 and 2003 activity through
the last Friday in March.
NOTE 2. CHAPTER 11 FILING
During 2002 and 2003, ACL experienced a decline in barging rates, reduced
shipping volumes and excess barging capacity during a period of slow economic
growth and a global economic recession. Due to these factors, ACL's revenues and
earnings did not meet expectations and ACL's liquidity was significantly
impaired and debt covenant violations occurred. As a result, ACL was unable to
meet its financial obligations as they became due. On January 31, 2003 (the
"Petition Date"), ACL filed a petition with the U.S. Bankruptcy Court for the
Southern District of Indiana, New Albany Division (the "Bankruptcy Court") to
reorganize under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code"
or "Chapter 11") under case number 03-90305. Included in the filing are ACL,
ACL's direct parent (American Commercial Lines Holdings LLC), American
Commercial Barge Line LLC, Jeffboat LLC, Louisiana Dock Company LLC and ten
other U.S. subsidiaries of ACL (collectively with ACL, the "Debtors") under case
numbers 03-90306 through 03-90319. These cases are jointly administered for
procedural purposes before the Bankruptcy Court under case number 03-90305. The
Chapter 11 petitions do not cover any of ACL's foreign subsidiaries or certain
of its U.S. subsidiaries. Neither DCH, GMS nor Vessel Leasing filed for Chapter
11 protection and are not party to any proceedings under the Bankruptcy Code.
ACL and the other Debtors are continuing to operate their businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court. As debtors-in-possession, the Debtors may not engage in
transactions outside of the ordinary course of business without approval, after
notice and hearing, of the Bankruptcy Court. As part of the Chapter 11 cases,
the Debtors intend to develop and propose for confirmation pursuant to Chapter
11 a plan of reorganization that will restructure the operations and liabilities
of the Debtors to the extent necessary to result in the continuing viability of
ACL. A filing date for such a plan has not been determined; however, the Debtors
have the exclusive right to file a plan of reorganization at any time during the
120 day period following January 31, 2003 and have filed a motion to extend such
time period 120 days. If the exclusive filing period were to expire, other
parties, such as ACL creditors, would have the right to propose alternative
plans of reorganization.
7
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 28, 2003
(DOLLARS IN THOUSANDS)
NOTE 2. CHAPTER 11 FILING (CONTINUED)
The Debtors have entered into a debtor-in-possession Credit Facility (the
"DIP Credit Facility") that provides up to $75 million of financing. As of March
31, 2003, the Debtors have drawn $50 million, which was used to retire ACL's
Pre-Petition Receivables Facility and which continues to be used to fund the
Debtors' day-to-day cash needs. The DIP Credit Facility is secured by the same
and additional assets that collateralized ACL's Senior Credit Facilities and
Pre-Petition Receivables Facility, and bears interest, at ACL's option, at LIBOR
plus four percent or an Alternate Base Rate (as defined in the DIP Credit
Facility) plus three percent. There are also certain interest rates in the event
of a default under the facility.
The DIP Credit Facility also contains certain restrictive covenants that,
among other things, restrict the Debtors' ability to incur additional
indebtedness or guarantee the obligations of others. ACL is also required to
maintain minimum cumulative EBITDA, as defined in the DIP Credit Facility, and
limit its capital expenditures.
Certain events of default under ACL's Senior Credit Facilities, Senior
Notes, PIK Notes and Old Senior Notes have occurred subsequent to December 27,
2002, the effects of which are stayed pursuant to certain provisions of the
Bankruptcy Code.
Under Chapter 11, actions by creditors to collect claims in existence at
the filing date are stayed or deferred absent specific Bankruptcy Court
authorization to pay such pre-petition claims while the Debtors continue to
manage their businesses as debtors-in-possession and act to develop a plan of
reorganization for the purpose of emerging from these proceedings. A claims bar
date has not yet been established. The Debtors have received approval from the
Bankruptcy Court to pay or otherwise honor certain of their pre-petition
obligations, including but not limited to employee wages and certain employee
benefits, certain critical vendor payments, certain insurance and claim
obligations and certain tax obligations as a plan of reorganization is
developed.
The amount of the claims to be filed against the Debtors by their
creditors could be significantly different than the amount of the liabilities
recorded by the Debtors. The Debtors also have numerous executory contracts and
other agreements that could be assumed or rejected during the Chapter 11
proceedings. Parties affected by these rejections may file claims with the
Bankruptcy Court in accordance with the reorganization process. Under these
Chapter 11 proceedings, the rights of and ultimate payments to pre-petition
creditors, rejection damage claimants and ACL's equity investor may be
substantially altered. This could result in claims being liquidated in the
Chapter 11 proceedings at less (possibly substantially less) than 100% of their
face value, and the membership interests of ACL's equity investor, DHC, being
diluted or cancelled. The Debtors have not yet proposed a plan of
reorganization. The Debtors' pre-petition creditors and DHC will each have a
vote in the plan of reorganization.
The United States Trustee has appointed an unsecured creditors' committee.
The official committee and its legal representatives have a right to be heard on
all matters that come before the Bankruptcy Court.
8
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 28, 2003
(DOLLARS IN THOUSANDS)
NOTE 2. CHAPTER 11 FILING (CONTINUED)
The Chapter 11 process presents inherent material uncertainty; it is not
possible to determine the additional amount of claims that may arise or
ultimately be filed, or predict the length of time that the Debtors will
continue to operate under the protection of Chapter 11, the outcome of the
Chapter 11 proceedings in general, whether the Debtors will continue to operate
in their present organizational structure, or the effects of the proceedings on
the business of ACL, the other Debtors and its non-filing subsidiaries and
affiliates, or on the interests of the various creditors and equity holder. The
ultimate recovery, if any, by creditors and DHC will not be determined until
confirmation of a plan or plans of reorganization. No assurance can be given as
to what value will be ascribed in the bankruptcy proceedings to each of these
constituencies. While it cannot presently be determined, DHC believes it will
receive little or no value with respect to its equity interest in ACL.
Accordingly, after recognizing its equity in ACL's net loss for the quarter
ended March 28, 2003, DHC wrote off its remaining investment in ACL as an other
than temporary asset impairment (see Note 3).
NOTE 3. EQUITY IN INCOME AND LOSSES OF MARINE SERVICES INVESTEES
As discussed in Note 2, DHC has written off its investment in ACL during
the quarter ended March 28, 2003. The GMS and Vessel Leasing investments are not
considered by DHC to be impaired. The 2003 reported net loss includes, under the
caption "Equity in Net (Loss) of Unconsolidated Marine Services Subsidiaries",
the following components:
ACL's 2003 Reported (Loss) $(46,998)
Other Than Temporary Impairment of Remaining
Original Investment in ACL as of March 28, 2003 (8,205)
--------
Total ACL (Loss) (55,203)
GMS (Loss) (34)
Vessel Leasing Income 63
--------
Equity in Net (Loss) of Unconsolidated
Marine Services Subsidiaries $(55,174)
========
Activity in these subsidiaries for the quarter ended March 28, 2003 is as
follows:
Vessel
ACL GMS Leasing
--- --- -------
Net Revenue $139,153 $13,150 $1,152
Operating (Loss) Income (27,791) 618 680
Net (Loss) Income (46,998) (624) 126
9
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 28, 2003
(DOLLARS IN THOUSANDS)
NOTE 4. 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 the
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. Basic and fully diluted earnings per share have been
calculated using only the average number of outstanding shares of Common Stock.
Such average shares were 30,817,297 and 19,507,263 for the quarters ended March
28, 2003 and March 31, 2002, respectively. Diluted earnings per share do not
include average shares related to stock options and warrants because their
effect is anti-dilutive.
NOTE 5. REINSURANCE
NAICC cedes reinsurance on an excess of loss basis for workers'
compensation risks in excess of $500 prior to April 2000 and $200 thereafter.
For all other lines, NAICC cedes reinsurance on an excess of loss basis for
exposure excess of $250.
NOTE 6. 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 purposes. DHC
records its interim tax provisions based upon estimated effective tax rates for
the year.
DHC has made provisions for certain state and other 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 14 of the Notes to the
Consolidated Financial Statements included in DHC's Annual Report on Form 10-K
for the year ended December 27, 2002.
NOTE 7. STOCKHOLDERS' EQUITY
In connection with efforts to preserve DHC's net operating tax loss
carryforwards, DHC has imposed restrictions on the ability of holders of five
percent or more of DHC Common Stock to transfer the Common Stock owned by them
and to acquire additional Common Stock, as well as the ability of others to
become five percent stockholders as a result of transfers of Common Stock.
10
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 28, 2003
(DOLLARS IN THOUSANDS)
NOTE 8. BUSINESS SEGMENTS
Insurance Marine Corporate Total
--------- ------ --------- -----
Quarter Ended March 28, 2003:
Operating Revenues $ 11,076 $ -- $ -- $ 11,076
Segment (Loss) (1,783) -- (867) (2,650)
Equity in Net (Loss) of Unconsolidated
Marine Services Subsidiaries -- (55,174) -- (55,174)
Quarter Ended March 31, 2002:
Operating Revenues $ 20,779 $ -- $ -- $ 20,779
Segment Income (Loss) 450 -- (487) (37)
NOTE 9. INVESTMENTS
DHC's fixed maturity and equity securities portfolio is classified as
"available for sale" and is carried at fair value. Changes in fair value are
credited or charged directly to stockholders' equity as unrealized gains or
losses, respectively. "Other than temporary" declines in fair value are recorded
as realized losses in the statement of operations and the cost basis of the
security is reduced. DHC recorded an "other than temporary" decline in fair
value of its securities portfolio of $841 during the quarter ended March 28,
2003.
NOTE 10. INCENTIVE COMPENSATION PLANS
Stock-based compensation cost is measured using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") for DHC directors and
employees. The fair value based method of accounting prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") is used to measure stock-based compensation for DHC
contractors. Pro forma net loss and loss per share are disclosed below as if the
fair value based method of accounting under SFAS 123 had been applied to all
stock-based compensation awards.
Quarter Ended Quarter Ended
March 28, 2003 March 31, 2002
-------------- ---------------
Stock Option Expense Recorded...................... $ (25) $ --
=========== =======
Net (Loss) As Reported............................. $ (57,836) $ (54)
Pro Forma Compensation Expense..................... (553) (149)
----------- --------
Pro Forma Net (Loss) .............................. $ (58,389) $ (203)
=========== ========
Diluted (Loss) Per Share:
As Reported................................... $ (1.88) $ --
Pro Forma..................................... (1.90) (.01)
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Quarterly Report on Form 10-Q may constitute
"forward-looking" statements as defined in Section 27A of the Securities Act of
1933 (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934
(the "Exchange Act"), the Private Securities Litigation Reform Act of 1995 (the
"PSLRA") or in releases made by the Securities and Exchange Commission, all as
may be amended from time to time. Such forward looking statements involve known
and unknown risks, uncertainties and other important factors that could cause
the actual results, performance or achievements of Danielson Holding Corporation
("DHC") and its subsidiaries, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Statements that are not historical fact are
forward-looking statements. Forward looking statements can be identified by,
among other things, the use of forward-looking language, such as the words
"plan", "believe", "expect", "anticipate", "intend", "estimate", "project",
"may", "will", "would", "could", "should", "seeks", or "scheduled to", or other
similar words, or the negative of these terms or other variations of these terms
or comparable language, or by discussion of strategy or intentions. These
cautionary statements are being made pursuant to the Securities Act, the
Exchange Act and the PLSRA with the intention of obtaining the benefits of the
"safe harbor" provisions of such laws. DHC cautions investors that any
forward-looking statements made by DHC are not guarantees or indicative of
future performance. Important assumptions and other important factors that could
cause actual results to differ materially from those forward-looking statements
with respect to DHC, include, but are not limited to, the risks and
uncertainties affecting their businesses described in Item 1 of DHC's Annual
Report on Form 10-K for the year ended December 27, 2002 and in other securities
filings by DHC.
Although we believe that our plans, intentions and expectations reflected
in or suggested by such forward-looking statements are reasonable, actual
results could differ materially from a projection or assumption in any of our
forward-looking statements. Our future financial condition and results of
operations, as well as any forward-looking statements, are subject to change and
inherent risks and uncertainties. The forward-looking statements contained in
this 10-Q are made only as of the date hereof and DHC does not have or undertake
any obligation to update or revise any forward-looking statements whether as a
result of new information, subsequent events or otherwise, unless otherwise
required by law.
OVERVIEW AND SIGNIFICANT EVENTS
DHC is organized as a holding company with substantially all of its
current operations conducted in the Insurance Services industry. DHC also has
investments in companies engaged in the Marine Services industry which are
accounted for under the equity method.
DHC, on a parent-only basis, has continuing expenditures for
administrative expenses and derives revenues primarily from investment returns
on portfolio securities. Therefore, the analysis of DHC's financial condition is
generally done on an operating subsidiary basis. DHC possesses approximately
$605 million in tax net operating loss carryforwards. DHC's strategic and
business plan is to acquire businesses that will allow DHC to earn an attractive
return on its investments.
In May 2002, as part of DHC's implementation of its strategic plan, DHC
acquired a 100% ownership interest in American Commercial Lines, LLC ("ACL")
thereby entering into the marine transportation, construction and related
service provider businesses.
On January 31, 2003 ACL and certain of its subsidiaries and its immediate
direct parent entity, American Commercial Lines Holdings, LLC ("ACL Holdings"),
filed a petition with the U.S. Bankruptcy Court to reorganize under Chapter 11
of the U.S. Bankruptcy Code. For additional information see Note 2 in the
accompanying financial statements and DHC's Annual Report on Form 10-K for the
year ended December 27, 2002.
12
DHC owns a direct 5.4% interest in Global Materials Services, LLC ("GMS")
and a direct 50% interest in Vessel Leasing, LLC ("Vessel Leasing"). ACL owns
50% of GMS and the remaining 50% of Vessel Leasing. Neither of these two
companies filed for Chapter 11 protection. GMS is an owner and operator of
marine terminals and warehouse operations, and Vessel Leasing leases barges to
ACL's barge transportation operations which are in Chapter 11. DHC, GMS and
Vessel Leasing are not guarantors of ACL's debt nor are they liable for any of
ACL's liabilities.
As a result of the bankruptcy filing, while DHC continues to exercise
significant influence over the operating and financial policies of ACL, it no
longer maintains control of ACL. Accordingly, for the quarter ended March 28,
2003, DHC has accounted for its investments in ACL, GMS and Vessel Leasing using
the equity method of accounting. Under the equity method of accounting, DHC
reports its share of the equity investees' income or loss based on its ownership
interest.
In conjunction with the uncertainty of the outcome of the ACL bankruptcy,
DHC evaluated the carrying values of its investments in ACL, GMS and Vessel
Leasing and recorded an impairment loss for its remaining original investment in
ACL as described in Note 3 of the accompanying financial statements. No
impairment loss adjustments have been made to the carrying values of GMS and
Vessel Leasing. The carrying values of the investments in GMS and Vessel Leasing
at March 28, 2003 were $1,172 and $2,959, respectively.
RESULTS OF INSURANCE OPERATIONS
The operations of DHC's insurance subsidiary, National American Insurance
Company of California ("NAICC"), are primarily property and casualty insurance.
NAICC's objective is to underwrite business that is expected to yield an
underwriting profit. In 2001 NAICC began exiting both the workers' compensation
line of insurance in all states, and private passenger lines of insurance
outside of California. The last workers' compensation policy outside Montana was
issued in July 2001 and the last Montana workers' compensation policy was issued
in January 2002. The remaining lines of insurance written by NAICC in 2003 are
private passenger automobile in California and commercial automobile in
California and Arizona.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums earned were $10.4 million and $19.0 million for the quarters
ended March 28, 2003 and March 31, 2002, respectively. The change in net
premiums earned during those quarters was directly related to the change in net
premiums written. Net written premiums were $11.4 million and $15.8 million for
the quarters ended March 28, 2003 and March 31, 2002, respectively.
The $4.4 million decrease in net written premiums for 2003 was
attributable to a reduction in commercial and private passenger automobile
policies written and the expiration of all in force workers' compensation
policies.
Net written premiums in workers' compensation decreased by $3.6 million
during 2003 over the comparable period in 2002. The final workers' compensation
policy expired in January 2003. Net written premiums for non-standard private
passenger automobile were $5.2 million in 2003, a decrease of $1.3 million from
the comparable period in 2002. The decrease in non-standard private passenger
automobile net written premiums was due to decreased production. Net written
premiums for non-standard commercial automobile were $6.0 million in 2003, an
increase over the comparable period in 2002, by $.5 million. The increase in
commercial automobile net written premiums was due to rate increases of 13% over
the period compared. Although NAICC lifted its moratorium on new policies for
commercial automobile, effective January 1, 2003, the renewal activity over the
course of 2002 declined such that volume for the quarter ended March 28, 2003
was $.2 million less than the comparable quarter of 2002. NAICC increased rates
for commercial automobile by 10.2% for new and renewal business, effective April
1, 2003 and June 1, 2003, respectively.
13
Net investment income was $1.2 million and $1.5 million for the quarters
ended March 28, 2003 and March 31, 2002, respectively. The decrease was
attributable to reductions in both the overall portfolio yield and the cash and
invested asset base. Average fixed income portfolio yield on bonds was 5.86%
during the quarter ended March 28, 2003 compared to 6.28% as of the quarter
ended March 31, 2002. Average cash and invested assets earning interest,
exclusive of its investments in ACL, decreased by $14.2 million from the
comparable period in 2002 with an ending asset base of $96.0 million as of March
28, 2003. Realized losses were $.5 million in the current quarter and were due
to the impairment of an equity security of $.8 million, offset by a gain on the
sale of an equity security of $.3 million. No realized gains were recorded for
the comparable period in 2002.
Net losses and loss adjustment expenses ("LAE") were $9.2 million and
$14.7 million for the quarters ended March 28, 2003 and March 31, 2002,
respectively. The resulting loss and LAE ratios for the corresponding periods
were 88.8% and 77.4%, respectively. The loss and LAE ratio increased in 2003
over 2002 due to a $1.3 million adverse development of 2002 and prior accident
years in the commercial automobile line.
Policy acquisition costs were $2.6 million and $4.1 million for the
quarters ended March 28, 2003 and March 31, 2002, respectively. As a percentage
of net premiums earned, policy acquisition expenses were 25.4% and 21.3% for the
quarters ended March 28, 2003 and March 31, 2002, respectively. The increase in
the policy acquisition expense ratio in 2003 was due primarily to larger
decreases in earned premium volume than reductions in fixed underwriting
expenses.
General and administrative expenses were $1.0 million and $1.5 million for
the quarters ended March 28, 2003 and March 31, 2002, respectively. General and
administrative expenses decreased in 2003 compared to 2002 due to the
relationship of expenses supporting claims.
Combined underwriting ratios were 124.2% and 106.8% for the quarters ended
March 28, 2003 and March 31, 2002, respectively. Loss from insurance operations
for the quarter ended March 28, 2003 was $1.8 million compared with operating
income of $.4 million for the quarter ended March 31, 2002.
CASH FLOW FROM INSURANCE OPERATIONS
Cash used in operations was $4.5 million and $2.8 million for the quarters
ended March 28, 2003 and March 31, 2002, respectively. The increase in cash used
in operations was due to NAICC experiencing a condition in which claim payments
related to the lines and territories placed into run-off exceed premium receipts
from existing lines. Such negative cash flow requires the sale of invested
assets to meet obligations as they arise. Cash used in investing activities was
$5.1 million for the quarter ended March 28, 2003 compared to $5.3 million
provided by investing activities for the comparable period in 2002. The $10.4
million fluctuation in cash (used in) provided by investing activities was due
to the acquisition of fixed income securities. The primary source of cash for
investment in fixed income securities in 2003 resulted from a $4.0 million
capital contribution by DHC and early repayment of a $4.0 million promissory
note that was due to NAICC in May 2004. Overall cash and invested assets at
March 28, 2003 were $99.1 million compared to $97.3 million at December 27,
2002.
LIQUIDITY AND CAPITAL RESOURCES - INSURANCE OPERATIONS
NAICC requires both readily liquid assets and adequate capital to meet
ongoing obligations to policyholders and claimants, as well as to pay ordinary
operating expenses. NAICC 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, NAICC relies on the sale of invested
assets. NAICC's investment policy guidelines require that all loss and LAE
liabilities be matched by a comparable amount of investment grade assets. DHC
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.
14
The three most common measures of capital adequacy for insurance companies
are premium-to-surplus ratios (which measure current operating risk),
reserves-to-surplus ratios (which measure financial risk related to possible
changes in the level of loss and LAE reserves), and risk based capital
(measuring a combination of operating, financial, reinsurance, investment and
other risk factors). A commonly accepted standard for net written
premium-to-surplus ratio is 3 to 1, although this varies with different lines of
business. NAICC's annualized premium-to-statutory surplus ratio of 2.3 to 1 and
1.7 to 1 for the quarters ended March 28, 2003 and March 31, 2002, respectively,
remains well under current industry standards. A commonly accepted standard for
the ratio of losses and LAE reserves-to-statutory surplus is 5 to 1, compared
with NAICC's ratio of 4.0 to 1 at March 28, 2003.
The National Association of Insurance Commissioners provides minimum
solvency standards in the form of risk based capital requirements ("RBC"). The
RBC model for property and casualty insurance companies requires that carriers
report their RBC ratios based on their statutory annual statements as filed with
the regulatory authorities. As noted above, ACL filed for protection under
Chapter 11 of the Bankruptcy Code. As a result, it was determined for statutory
insurance accounting purposes that NAICC's investment in ACL was fully impaired.
At December 31, 2002, NAICC recognized a statutory charge to its surplus of $7.4
million. This charge, when combined with NAICC's underwriting results and
investment losses reduced its statutory surplus level below the Company Action
Level of NAICC's RBC calculation. In response to the above statutory condition,
DHC repaid the $4 million note due May 2004 to NAICC, and further contributed $4
million to NAICC to increase its statutory capital during February 2003. With
permission from the California Department of Insurance, these transactions were
recorded at December 31, 2002. As a condition to granting such permission, the
Department will require NAICC to obtain permission prior to entering into any
future loans with an affiliate. After consideration for the $8 million noted
above, NAICC's reported capital and surplus as of December 31, 2002 was above
the Company Action Level of NAICC's RBC calculation. NAICC has projected its RBC
requirement as of March 28, 2003 under the RBC model and believes that it is
above the Company Action Level of NAICC's RBC calculation.
RESULTS OF PARENT OPERATIONS
General and administrative expenses were approximately $1 million higher
during the quarter ended March 28, 2003 compared to the quarter ended March 31,
2002. This is primarily attributable to increased professional fees incurred
concerning the ACL bankruptcy as well as increased insurance costs.
CASH FLOW FROM PARENT-ONLY OPERATIONS
Operating cash flow of DHC, on a parent-only basis, is primarily dependent
on 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 quarters ended March 28, 2003, cash provided by parent-only operating
activities was a nominal amount. For the quarter ended March 31, 2002, cash
provided by parent-only operating activities was $.1 million.
During the quarter ended March 28, 2003, DHC, on a parent-only basis, had
net cash used in investing and financing activities of approximately $.2
million. An investment in an available-for-sale security was sold for proceeds
of $1.8 million and a note receivable from ACLines LLC, in the amount of $6.0
million, was repaid. DHC made an additional capital contribution of $4 million
to NAICC. Additionally, a loan due to NAICC in the amount of $4 million, plus
accrued interest was repaid.
15
LIQUIDITY AND CAPITAL RESOURCES - PARENT-ONLY OPERATIONS
On a parent-only basis, DHC's sources of funds are its investments as well
as dividends received from its subsidiaries. Various state insurance
requirements restrict the amounts that may be transferred to DHC in the form of
dividends or loans from its insurance subsidiaries without prior regulatory
approval.
At March 28, 2003 and March 31, 2002 cash and marketable security
investments of DHC, on a parent-only basis, were approximately $4.5 million and
$37.7 million, respectively. The decrease is primarily attributable to DHC
contributing its investment in ACL senior notes as part of the consideration
in its acquisition of ACL in May 2002.
EQUITY IN NET (LOSS) OF UNCONSOLIDATED MARINE SERVICES SUBSIDIARIES
As noted above, DHC accounts for its investments in Marine Services
subsidiaries under the equity method effective for the quarter ended March 28,
2003. The equity in net (loss) of unconsolidated Marine Services subsidiaries
includes DHC's share of the subsidiaries' reported net loss of $46,969, as well
as an other than temporary impairment charge of $8,205 related to the investment
in ACL.
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 DHC, could cause actual results to differ materially from those
discussed in the forward-looking statements include the following:
1. The insurance products sold by NAICC are subject to intense
competition from many competitors, many of whom have substantially
greater resources than NAICC. There can be no assurance that NAICC
will be able to successfully compete and generate sufficient premium
volume at attractive prices to be profitable.
2. 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 NAICC.
3. Unpaid losses and LAE are based on estimates of reported losses,
historical experience of losses reported by reinsured companies for
insurance assumed from such insurers, and estimates based on
historical 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.
4. NAICC is subject to certain regulatory RBC requirements. Depending
on its RBC, NAICC could be subject to four levels of increasing
regulatory intervention ranging from company action to mandatory
control. NAICC's capital is also one factor used to determine its
ability to distribute or loan funds to DHC.
5. In order to implement its business plan, DHC has been seeking to
enter into strategic partnerships and/or make acquisitions of
businesses that would enable DHC to earn an attractive return on
investment. Restrictions on DHC's ability to issue additional equity
in order to finance any such transactions exist which could
significantly affect DHC's ability to finance any such transaction.
DHC may have limited other resources with which to implement its
strategy and there can be no assurance that any transaction will be
successfully consummated.
6. One of DHC's potentially significant assets is its net operating
loss carryforwards for income tax reporting purposes. In order to
utilize the loss carryforwards, DHC must generate taxable income
which can offset such carryforwards. The loss carryforwards are also
utilized by income from certain grantor trusts that were established
as part of the Mission Insurance Group Inc. reorganization. The
carryforwards will expire if not used. The carryforwards would be
further substantially reduced if DHC were to undergo an "ownership
change" within the meaning of Section 382(g)(1) of Internal Revenue
Code. DHC will be treated as having had an "ownership change" if
there is more than a 50% increase in stock ownership during a three
year "testing period" by "5% stockholders".
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DHC'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. Market risk represents the potential for loss due to adverse
changes in the fair value of securities. The market risks related to DHC's fixed
maturity portfolio are primarily interest rate risk and prepayment risk. The
market risks related to DHC's equity portfolio are primarily equity price risk.
There have been no material changes to DHC's market risk for the quarter ended
March 28, 2003. 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 27,
2002.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Quarterly Report on Form 10-Q,
DHC carried out an evaluation, under supervision and with the participation of
DHC's management, including DHC's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of DHC's disclosure
controls and procedures as defined in Exchange Act Rules 13a-14(c) and
15d-14(c). Based upon and as of the date of that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that DHC's disclosure controls and
procedures were effective, in all material respects, to ensure that information
required to be disclosed in this Quarterly Report on Form 10-Q and DHC's other
periodic filings is recorded, processed, summarized and reported as and when
required.
There have been no significant changes in DHC's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date DHC completed its evaluation. Therefore, no corrective actions were
taken.
17
PART II
OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On December 31, 2002, American Commercial Lines LLC ("ACL") elected to
utilize the 30-day grace period with respect to the $7.7 million interest
payment due on its approximately $137.1 million in outstanding 11.25% ACL
senior notes due January 1, 2008 ("Senior Notes"), the $.3 million interest
payment due on its approximately $6.5 million in outstanding 10.25% ACL senior
notes due June 2008 ("Old Senior Notes"). This non-payment resulted in an
event of default under ACL's $335 million secured credit facility with
JPMorgan Chase Bank ("Senior Credit Facilities") and under ACL's receivables
facility ("Receivables Facility").
On January 31, 2003, prior to the expiration of the 30-day grace period
under the Senior Notes and Old Senior Notes, ACL filed for protection under
Chapter 11 of the U.S. Bankruptcy Code ("Bankruptcy Code"). The ACL bankruptcy
filing caused additional defaults under the Senior Credit Facilities, Senior
Notes, Old Senior Notes and caused default under the approximately $123.1
million outstanding 12% ACL pay-in-kind senior subordinated notes due July 1,
2008 ("PIK Notes"). The Receivables Facility was retired on January 31, 2003
with the proceeds from a debtor-in-possession financing arrangement and any
defaults under the Receivables Facility were extinguished. The effects of all
defaults under the Senior Credit Facilities, Senior Notes, Old Senior Notes
and PIK Notes are stayed pursuant to certain provisions of the Bankruptcy
Code.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibit 99.1 Certification of Periodic Financial Report from CEO and
Exhibit 99.2 Certification of Periodic Financial Report from CFO.
(b.) Reports on Form 8-K:
DHC filed Current Reports on Form 8-K as follows:
Date Description
- --------------- ------------------------------------------------------------------
January 2, 2003 Relating to ACL, a wholly owned subsidiary of DHC, submission of a
financial restructuring plan to its senior lenders.
January 23, 2003 Relating to default notices received by ACL from its senior lenders
and the provider of its receivables facility.
January 30, 2003 Relating to the appointment of Philip G. Tinkler as Chief
Financial Officer of DHC.
January 31, 2003 Relating to ACL's filing of a petition to reorganize under Chapter
11 of the U.S. Bankruptcy Code.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Danielson Holding Corporation has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DANIELSON HOLDING CORPORATION
(Registrant)
By: /s/ PHILIP G. TINKLER
-------------------------
Philip G. Tinkler
Chief Financial Officer
May 12, 2003
19
CERTIFICATIONS
I, Samuel Zell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Danielson Holding
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003
/s/ SAMUEL ZELL
-----------------------------
Samuel Zell
Chief Executive Officer
20
CERTIFICATIONS
I, Philip G. Tinkler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Danielson Holding
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 12, 2003
/s/ PHILIP G. TINKLER
-----------------------------
Philip G. Tinkler
Chief Financial Officer
21