SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A (NO. 1)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
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 by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
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 NOVEMBER 7, 1994
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Common Stock, $0.10 par value 15,102,360 shares
Cover page 1 of 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1. GENERAL
Danielson Holding Corporation ("DHC" or "Registrant") is organized as a
holding company with substantially all of its operations conducted by
subsidiaries. DHC, on a parent-only basis, has limited continuing expenditures
for rent and administrative expenses, and derives revenues primarily from
investment return on portfolio securities. Therefore, the analysis of the
financial condition of DHC and subsidiaries (collectively with DHC, the
"Company") is generally best done on an operating subsidiary basis.
2. RESULTS OF NAICC'S OPERATIONS
The operations of the DHC's primary subsidiary, National American Insurance
Company of California ("NAICC"), are primarily in property and casualty
insurance.
Property and Casualty Insurance Operations
Net written premiums for the three and nine months ended September 30, 1994
were $23.7 million and $70.8 million, respectively. Net written premiums
increased 7.6 percent and 12.7 percent over the 1993 comparable periods. Earned
premiums for the three and nine months ended September 30, 1994 increased
approximately $3.6 million and $10.4 million, or 17.1 percent over the
comparable periods in 1993. These increases are attributable both to continued
controlled growth in California workers' compensation, NAICC's principal line of
business, and to the non-standard private passenger automobile insurance line
that NAICC began writing in California in July 1993.
Net written premiums for workers' compensation were $60.5 million and $58.3
million for the nine months ended September 30, 1994 and 1993, respectively,
representing 85.5 percent and 93.0 percent, respectively, of total net written
premiums for all lines of insurance in those periods. Inforce policies
increased by 4 percent resulting in the slight increase in premium. Premium
growth has been impacted by two mandated minimum rate reductions in California.
The regulated workers' compensation minimum rates in California were reduced by
7 percent effective July 16, 1993 and 12.7 percent effective January 1, 1994.
It is anticipated that future workers' compensation net written premium may be
further affected by the mandated 16 percent reduction in the minimum rates
applicable to new and renewal policies effective October 1, 1994, and to the
unexpired portion of policies which were effective on and after January 1, 1994.
As part of the reform legislation passed in California in 1993, the workers'
compensation "minimum rate" law was replaced with a new "open rating" law to be
effective January 1, 1995. No further reductions in the minimum rate are
expected prior to that time, and, under the "open rating" law, insurers will be
permitted to use adequate rates determined by them upon filing with the
California Department of Insurance.
Net written premiums for the non-standard private passenger automobile
program were $7.6 million for the nine months ended September 30, 1994,
representing 10.7 percent of total net written premiums for all lines of
insurance written by NAICC. NAICC cedes 50 percent of its non-standard private
passenger automobile business to a major reinsurance company under a quota share
reinsurance agreement.
NAICC's premium growth continues to be supported by adequate capital and
surplus. The ratios of annualized net written premiums to surplus were 2.2 to 1
for the nine month periods ended September 30, 1994 and 1993.
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Losses and loss adjustment expenses ("LAE") for the three and nine months
ended September 30, 1994 were $16.8 million and $50.5 million, respectively.
The respective loss ratios for the nine months ended September 30, 1994 and 1993
were 70.5 percent and 77.4 percent. The decrease in the loss and LAE ratio
results from a lower loss ratio in the workers' compensation line of business as
compared to the prior year.
Policyholder dividends for the three and nine months ended September 30,
1994 were $2.5 million and $6.1 million, respectively, representing an increase
of $1.5 million and $3.3 million over the comparable periods in 1993. The
respective policyholder dividend ratios for the nine months ended September 30,
1994 and 1993 were 8.6 percent and 4.5 percent, respectively. The increase in
policyholder dividends for the 1992 and 1993 policy years is offset by, and
results from, favorable loss experience in those policy years.
Policy acquisition costs for the nine months ended September 30, 1994 were
$14.3 million, an increase of approximately $2.7 million over the comparable
period in 1993. As a percent of net premiums earned, policy acquisition costs
were 19.9 percent and 18.9 percent for the nine months ended September 30, 1994
and 1993, respectively. Policy acquisition costs (i.e., commissions, premium
taxes and state assessments), which are directly related to premium volume, are
higher for the private passenger automobile line of business than for the
workers' compensation line of business.
General and administrative expenses for the nine months ended September 30,
1994 were $5.1 million, a decrease of approximately $1.4 million or 21.2 percent
over the comparable period in 1993. This decrease in general and administrative
expenses relates primarily to the write off of a reinsurance recoverable and
related expenses of $1.3 million in 1993.
Net income from operations for the three and nine months ended September
30, 1994 increased to $1.7 million and $4.3 million, respectively, compared to
net income of $1.2 million and $2.6 million, respectively, for the same periods
in 1993. The combined ratio has decreased from 111.8 percent to 106.2 percent
for the nine months ended September 30, 1993 and 1994, respectively, and from
112.9 percent to 105.4 percent for the three months ended September 30, 1993 and
1994, respectively. The increase in net income and the decrease in the combined
ratio is primarily due to a lower loss ratio in the workers' compensation line.
Liquidity and Capital Resources
DHC's insurance subsidiaries require readily liquid assets and adequate
capital both to meet ongoing obligations to policyholders and claimants, and to
pay ordinary operating expenses. The primary sources of funds to satisfy these
obligations are premium revenues, investment income, recoveries from reinsurance
and, if required, sales of invested assets. NAICC's investment policy
guidelines require that all liabilities be matched by a comparable amount of
investment grade invested assets. Management believes that NAICC has both
adequate capital resources and sufficient reinsurance to cover any unforeseen
events such as natural catastrophes, reinsurer insolvencies or possible reserve
deficiencies.
Regulation
Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The agencies
established pursuant to these state laws have broad administrative and
supervisory authority. Most states also have enacted legislation regulating
insurance holding company systems, including acquisitions, extraordinary
dividends, the terms of affiliate transactions and other related matters. DHC
and its insurance subsidiaries have registered as holding company systems
pursuant to such legislation in California and routinely report to other
jurisdictions. NAICC is an insurance company domiciled in the State of
California and is regulated by
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the California Department of Insurance for the benefit of policyholders. Under
California insurance regulations, a California insurance company may not pay
shareholder dividends to its parent company within any 12 month period in an
amount which exceeds the greater of 10 percent of the insurer's policyholders'
surplus as of the preceding December 31, or 100 percent of its net income for
the preceding calendar year, and may only pay dividends from accumulated
unassigned surplus, without prior regulatory approval. NAICC has a negative
unassigned surplus amount and, therefore, may not pay shareholder dividends
without prior regulatory approval.
3. RESULTS OF DANIELSON TRUST COMPANY'S OPERATIONS
Danielson Trust Company ("DTC") is chartered by the California State
Banking Department to provide trust and fiduciary services. DTC was acquired
by, and became a subsidiary of, DHC on March 26, 1993 (the "DTC Acquisition
Date"). The following discussion includes information relating to the third
quarter in 1993; financial information relating to DTC for the period from the
DTC Acquisition Date through September 30, 1993, has been omitted as it does not
provide meaningful information relating to historical trends and financial
results.
DTC, including its Western Trust Services ("WTS") division, primarily
serves two markets: private trusts and employee benefit trusts.
Private Trust
The private trust unit of DTC primarily provides trust, custody and
investment advisory services for individuals and not-for-profit corporations.
In the performance of its private trust business, the unit may serve as an
executor, trustee, investment agent, conservator or custodian. The private
trust unit (excluding WTS) generated revenues of $413,000 and $1.1 million for
the three and nine months ended September 30, 1994. The increase in revenues
for the current quarter represents a net increase of 40.5 percent over revenues
for the comparable quarter in 1993. These increases are attributable to both
certain non-recurring items and fees from new business.
Employee Benefit Trust
DTC's employee benefit trust unit provides trustee, custodial and
investment management services to corporations. These appointments ordinarily
are qualified employee benefit plans which take the form of defined benefit,
401(k) or profit sharing plans. This unit also provides cash management
services to corporations desiring short term investments in excess of $500,000.
For the three and nine months ended September 30, 1994, the employee benefit
trust unit (excluding WTS) generated revenues of $217,000 and $718,000,
respectively, representing a decrease in the current quarter of 24.4 percent
over the comparable quarter in 1993. This decrease is attributable to the
cessation of certain services formerly provided by DTC to HomeFed Bank (DTC's
former parent entity prior to DHC's acquisition of DTC). These eliminated
revenues are not included in "Business Related to Former Parent".
Western Trust Services Division
As previously reported, on February 22, 1994 (the "WTS Acquisition Date"),
DTC, through DHC, acquired the assets of the Western Trust Services ("WTS")
division of Grossmont Bank. WTS revenue primarily is generated from employee
benefit trust appointments. The WTS division of DTC is responsible for the
administration of over $787 million in fiduciary assets. Revenues attributable
to WTS for the three months ended September 30, 1994 and for the period from the
WTS Acquisition Date through September 30, 1994 were $620,000 and $1.4 million,
respectively.
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Business Related to Former Parent
DTC traditionally provided various trust services to HomeFed Bank (DTC's
former parent entity prior to DHC's acquisition of DTC), including serving as
trustee for Individual Retirement Account (IRA) and Keogh plans offered to the
public through HomeFed Bank's branch offices. These appointments ceased during
the first quarter of 1994. During the nine months ended September 30, 1994,
retirement plan fee revenues were $258,000. This revenue is not reflected in
the private trust or employee benefit trust revenue amounts referred to above.
General and Administrative Expenses
General and administrative expenses for the nine months ended September 30,
1994 were $3.5 million, of which approximately $1.9 million were related to
compensation and benefits.
Liquidity and Capital Resources
As previously reported, as of June 30, 1994, all of the WTS assets and
related employees were integrated into DTC's operations. Non-recurring expenses
relating to such integration ceased during the third quarter of 1994.
Management of DTC believes that the operations of DTC will generate sufficient
liquidity to support DTC's expanded operations.
DTC requires liquid assets to meet the working capital needs of its
continuing business. Fees charged to DTC's trust clients are the primary source
of these liquid assets. To the extent that timing differences may exist between
the collection of revenue and the actual payment of expenses, short term
investments may be liquidated to provide an additional source of funds.
California banking regulations require all trust companies to deposit assets
with the State as a reserve in connection with certain types of fiduciary
appointments. In accordance with such regulations, DTC has pledged $600,000,
the maximum amount of such reserves that may be required. State banking laws
also regulate the nature of trust companies' investments of contributed capital
and surplus. Generally, these regulations restrict such investments to debt
type investments in which banks also are permitted to invest. In order to
satisfy such regulations, a majority of DTC's investments are in U.S. Government
securities. As of September 30, 1994, DTC was in compliance with the foregoing
regulatory requirements.
4. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
For the nine months ended September 30, 1994, cash and investments of the
Company (excluding NAICC and DTC) stated at cost decreased by 25 percent to
$12.3 million. The primary uses of funds were the payment by DHC of the $2.5
million purchase price in connection with the acquisition by DTC of the assets
of WTS, and general and administrative expenses incurred in the normal course of
business.
Current fixed maturity holdings of DHC (excluding NAICC and DTC) are in
U.S. Treasury notes and mortgage-backed securities. For information regarding
operating subsidiaries' liquidity and capital resources, see "2. RESULTS OF
NAICC'S OPERATIONS" and "3. RESULTS OF DANIELSON TRUST COMPANY'S OPERATIONS."
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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: November 15, 1995
DANIELSON HOLDING CORPORATION
(Registrant)
By: /s/ C. KIRK RHEIN, JR.
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C. Kirk Rhein, Jr.
President & Chief Executive Officer
By: /s/ MICHAEL T. CARNEY
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Michael T. Carney
Chief Financial Officer
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