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 SEPTEMBER 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--------------- -------------
COMMISSION FILE NUMBER: 1-6732
DANIELSON HOLDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-6021257
(State of Incorporation) (I.R.S. Employer Identification No.)
767 THIRD AVENUE, NEW YORK, NEW YORK 10017-2023
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-0347
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------ ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 6, 2000
- ----------------------------- -------------------------------
Common Stock, $0.10 par value 18,476,254 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 FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
<
------ ------- ------- -------
REVENUES:
Gross premiums earned $ 19,025 $ 16,392 $ 52,992 $ 46,785
Ceded premiums earned (1,894) (3,130) (4,852) (8,680)
------- ------- ------- -------
Net premiums earned 17,131 13,262 48,140 38,105
Net investment income 2,318 1,924 6,528 5,707
Net realized investment gains (losses) 1,651 1 5,741 (153)
Other income 289 228 791 653
------- ------- ------- -------
TOTAL REVENUES 21,389 15,415 61,200 44,312
------- ------- ------- -------
LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses 14,827 13,237 39,325 35,308
Ceded losses and loss adjustment expenses (1,005) (4,334) (2,897) (9,502)
------- ------- ------- -------
Net losses and loss adjustment expenses 13,822 8,903 36,428 25,806
Policyholder dividends 39 338 135 698
Policy acquisition expenses 4,146 3,457 12,058 10,057
General and administrative expenses 2,056 2,209 6,409 6,854
------- ------- ------- -------
TOTAL LOSSES AND EXPENSES 20,063 14,907 55,030 43,415
------- ------- ------- -------
Income before provision for income taxes 1,326 508 6,170 897
Income tax provision 59 42 144 65
------- ------- ------- -------
NET INCOME $ 1,267 $ 466 $ 6,026 $ 832
EARNINGS PER SHARE OF COMMON STOCK
Basic $ .07 $ .03 $ .33 $ .05
======= ======= ======= =======
Diluted $ .07 $ .03 $ .32 $ .05
======= ======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
September 30, 2000 December 31,
(UNAUDITED) 1999
-------------- -----------
ASSETS:
Fixed maturities, available for sale at fair value
(Cost: $125,746 and $113,641) $123,841 $110,841
Equity securities, at fair value (Cost: $21,737 and $20,614) 23,049 21,316
Short term investments, at cost which
Approximates fair value 2,532 8,234
------- --------
TOTAL INVESTMENTS 149,422 140,391
Cash 2,794 105
Receivable for securities sold 2,366 --
Accrued investment income 1,691 1,499
Premiums and fees receivable, net of allowances
of $320 and $274 15,958 11,619
Reinsurance recoverable on paid losses, net of allowances
of $602 and $402 3,875 6,060
Reinsurance recoverable on unpaid losses, net of
allowances of $170 and $246 14,305 15,628
Prepaid reinsurance premiums 2,457 1,767
Property and equipment, net of accumulated depreciation
of $9,239 and $8,225 1,426 1,762
Deferred acquisition costs 3,512 2,522
Receivable on reinsurance treaty rescission -- 11,459
Other assets 1,595 1,940
------- --------
TOTAL ASSETS $199,401 $194,752
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses $ 86,807 $ 94,934
Unearned premiums 21,692 16,239
Policyholder dividends 732 814
Reinsurance premiums payable 1,212 905
Funds withheld on ceded reinsurance 1,666 1,708
Other liabilities 3,535 3,926
------- --------
TOTAL LIABILITIES 115,644 118,526
Preferred stock ($0.10 par value; authorized
10,000,000 shares; none issued and outstanding) -- --
Common stock ($0.10 par value; authorized
100,000,000 shares; issued 18,486,994 shares;
outstanding 18,476,254 shares and 18,476,265 shares) 1,849 1,849
Additional paid-in capital 59,491 59,491
Accumulated other comprehensive income (loss) (593) (2,098)
Retained earnings 23,076 17,050
Treasury stock (cost of 10,740 shares and 10,729 shares) (66) (66)
------- --------
TOTAL STOCKHOLDERS' EQUITY 83,757 76,226
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $199,401 $194,752
======== ========
See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
(UNAUDITED)
Comprehensive Comprehensive
Income for the Income (Loss) for the
Three Months Ended Nine Months Ended
September 30, September 30,
SEPTEMBER 30, 2000 2000 1999 2000 1999
------------------ ---- ---- ---- ----
COMMON STOCK
Balance, beginning of year $ 1,849
----------
Balance, end of period 1,849
----------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 59,491
----------
Balance, end of period 59,491
----------
RETAINED EARNINGS
Balance, beginning of year 17,050
Net income $ 6,026 $1,267 $466 $6,026 $ 832
---------- ----- --- ----- ------
Balance, end of period 23,076
----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year (2,098)
Net unrealized gain (loss) on available-
For-sale securities (1) (664) 200 1,505 (1,442)
----- --- ----- ------
Other comprehensive income (loss) 1,505 (664) 200 1,505 (1,442)
---------- ----- --- ----- ------
Total comprehensive income (loss) $ 603 $666 $7,531 (610)
===== === ===== ======
Balance, end of period (593)
----------
TREASURY STOCK
Balance, beginning of year (66)
----------
Balance, end of period (66)
----------
TOTAL STOCKHOLDERS' EQUITY $83,757
==========
COMMON STOCK, SHARES
Balance, beginning of year 18,486,994
----------
Balance, end of period 18,486,994
==========
TREASURY STOCK, SHARES
Balance, beginning of year 10,729
Purchased during period 11
----------
Balance, end of period 10,740
==========
(1) DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gains (losses)
arising during the period $ 987 $201 $7,246 $ (1,595)
Less: reclassification adjustment
for net gains (losses )included in
Net income 1,651 1 5,741 (153)
----- --- ----- ------
Net unrealized gains (losses) on securities $ (664) $200 $1,505 $(1,442)
===== === ===== =======
See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2000 1999
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,026 $ 832
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net realized investment (gains) losses (5,741) 153
Depreciation and amortization 647 553
Change in accrued investment income (192) 11
Change in premiums and fees receivable (4,339) (1,358)
Change in reinsurance recoverables 2,185 6,437
Change in reinsurance recoverable on unpaid losses 1,323 (2,994)
Change in prepaid reinsurance premiums (690) (58)
Change in deferred acquisition costs (990) (398)
Change in unpaid losses and loss adjustment expenses (8,127) (6,696)
Change in unearned premiums 5,453 2,470
Change in reinsurance payables and funds withheld 265 (300)
Change in policyholder dividends payable (82) (29)
Change in receivable on reinsurance treaty rescission 11,459 --
OTHER, NET (183) (627)
-------- --------
Net cash provided by (used in) operating activities 7,014 (2,004)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales:
Fixed income maturities available-for-sale 8,970 741
Equity securities 18,248 --
Investments, matured or called:
Fixed income maturities available-for-sale 18,541 17,523
Investments purchased:
Fixed income maturities available-for-sale (42,016) (23,810)
Equity securities (13,654) --
Purchases of property and equipment (116) (264)
-------- -------
Net cash used in investing activities (10,027) (5,810)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 9,000
------- -------
Net cash provided by financing activities -- 9,000
------- -------
Net increase (decrease) in cash and short term investments (3,013) 1,186
Cash and short term investments at beginning of year 8,339 4,157
------- -------
Cash and short term investments at end of period $ 5,326 $ 5,343
======= =======
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of
Danielson Holding Corporation ("DHC" or "Registrant") and subsidiaries
(collectively with DHC, the "Company") have been prepared in accordance with
generally accepted accounting principles. However, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. For further
information, reference is made to the Consolidated Financial Statements and
footnotes thereto included in DHC's Annual Report on Form 10-K for the year
ended December 31, 1999.
2) PER SHARE DATA
Per share data is based on the weighted average number of shares of common
stock of DHC, par value $0.10 per share ("Common Stock"), outstanding during a
particular year or other relevant period. Diluted earnings per share
computations, as calculated under the treasury stock method, include the average
number of shares of additional outstanding Common Stock issuable for stock
options and warrants, whether or not currently exercisable. Such average shares
were 18,765,650 and 18,981,847 for the three and nine months ended September 30,
2000, respectively, and 17,474,970 and 16,340,895 for the three and nine months
ended September 30, 1999, respectively. Basic earnings per share are calculated
using only the average number of outstanding shares of Common Stock and
disregarding the average number of shares issuable for stock options and
warrants. Such average shares were 18,476,261 and 18,476,263 for the three and
nine months ended September 30, 2000, respectively, and 16,663,232 and
15,942,576 for the three and nine months ended September 30, 1999, respectively.
3) INCOME TAXES
DHC files a Federal consolidated income tax return with its subsidiaries.
DHC's return includes the taxable results of certain trusts that assumed various
liabilities of certain present and former subsidiaries of DHC. These trusts are
not included on the consolidated financial statements. 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 include the taxable results of the trusts
referred to above. For further information, reference is made to Note 8 of the
Notes to Consolidated Financial Statements included in DHC's Annual Report on
Form 10-K for the year ended December 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1. GENERAL
Danielson Holding Corporation ("DHC") is organized as a holding company
with substantially all of its operations conducted by subsidiaries (collectively
with DHC, the "Company"). DHC, on a parent-only basis, has limited continuing
expenditures for rent and administrative expenses and derives revenues primarily
from investment returns on portfolio securities. Therefore, the analysis of the
Company's financial condition is generally done on an operating subsidiary
basis.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and the information in Item 3, " Qualitative and
Quantitative Disclosures About Market Risk" contain forward-looking statements,
including statements concerning capital adequacy, adequacy of reserves, goals,
future events and underlying assumptions and other statements which are other
than statements of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words "believes",
"anticipates", "expects", "intends", "plans" and similar expressions. All such
statements represent only current estimates or expectations as to future results
and are subject to risks and uncertainties which could cause actual results to
materially differ from current estimates or expectations. See "RISK FACTORS THAT
MAY AFFECT FUTURE RESULTS".
2. RESULTS OF NAICC'S OPERATIONS
The operations of DHC's principal subsidiary, National American Insurance
Company of California ("NAICC"), are primarily in specialty property and
casualty insurance.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums earned were $17.1 million and $48.1 million for the three and
nine months ended September 30, 2000, respectively, compared to $13.3 million
and $38.1 million for the three and nine months ended September 30, 1999,
respectively. Net premiums written were $18.9 million and $52.9 million for the
three and nine months ended September 30, 2000, respectively, compared to $14.2
million and $40.5 million for the three and nine months ended September 30,
1999, respectively.
The overall increase in net earned premiums and net written premiums for
2000 over the comparable periods in 1999 is attributable to increased production
and decreased reinsurance coverage associated with the rescission of a treaty
effective in 1999.
Net investment income was $2.0 million and $5.8 million for the three and
nine months ended September 30, 2000, respectively, compared to $1.8 million and
$5.4 million for the three and nine months ended September 30, 1999,
respectively. The slight growth in investment income is attributable to
increased cash flow from operations of $8.9 million over the comparable
year-to-date period in 1999. Realized gains increased by $5.6 million from the
comparable year-to-date period in 1999. The gains were recognized almost
exclusively from the sale of equity securities.
Net losses and loss adjustment expenses ("LAE") were $13.8 million and
$36.4 million for the three and nine months ended September 30, 2000,
respectively, compared to $8.9 million and $25.8 million for the three and nine
months ended September 30, 1999, respectively. The resulting loss and LAE ratios
for the corresponding year-to-date periods were 75.7 percent and 67.7 percent,
respectively for 2000 and 1999. The loss and LAE ratio increased in 2000 over
1999 due primarily to the rescission of several treaties in 1999 that increased
the Company's workers' compensation retention.
Policy acquisition costs were $4.1 million and $12.1 million for the three
and nine months ended September 30, 2000, respectively, compared to $3.5 million
and $10.0 million for the three and nine months ended September 30, 1999,
respectively. As a percentage of net premiums earned, policy acquisition
expenses were 25.1 percent and 26.4 percent for the nine months ended September
30, 2000 and 1999, respectively. The decrease in the policy acquisition expense
ratio in 2000 is due primarily to the overall increase in premium volume while
fixed underwriting expenses of policy acquisition costs remained relatively
constant.
General and administrative expenses were $1.5 million and $4.5 million for
the three and nine months ended September 30, 2000, respectively. General and
administrative expenses were $1.6 million and $5.2 million for the three and
nine months ended September 30, 1999, respectively. General and administrative
expenses decreased slightly in 2000 over 1999 due to cost reduction measures
initiated at the end of 1999.
The combined ratios (which represent a ratio of losses and expenses to net
earned premiums in a particular period) were 110.7 percent and 109.9 percent for
the nine months ended September 30, 2000 and 1999, respectively. Net income from
insurance operations for the nine months ended September 30, 2000 and 1999 was
$6.8 million and $2.1 million, respectively. The increase in net income from
insurance operations during the first nine months of 2000 compared to the same
period for 1999 is primarily attributable to realized gains, and to a lesser
extent, the increase in premium volume.
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 asssets. Cash
provided by operations was $8.2 million for the nine months ended September 30,
2000, and cash used in operations was $0.7 million for the nine months ended
September 30, 1999. The increase in cash provided by operations is primarily
attributable to the collection of amounts due, as a result of the rescission of
several reinsurance treaties, in excess of $11 million. Overall cash and
invested assets, at market value, at September 30, 2000 were $137.5 million,
compared to $122.4 million at December 31, 1999.
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 nine months ended September 30, 2000 and 1999, cash used in parent-only
operating activities was $1.2 million and $1.3 million, respectively. The
decrease in cash used in operating activities is attributable to an increase in
DHC's investment portfolio and the income it generates. For information
regarding DHC's operating subsidiaries' cash FLOW FROM OPERATIONS, SEE "2.
RESULTS OF NAICC'S OPERATIONS, CASH FLOW FROM INSURANCE OPERATIONS."
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 cash and investments of DHC, including receivables
for trades pending settlement, were approximately $17.0 million, compared to
$18.1 million at December 31, 1999. As noted above, the primary use of funds was
the payment of general and administrative expenses in the normal course of
business. For information regarding DHC's operating subsidiaries' liquidity and
CAPITAL RESOURCES, SEE "2. RESULTS OF NAICC'S OPERATIONS, LIQUIDITY AND CAPITAL
RESOURCES."
4. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As noted above, the foregoing discussion may include forward-looking
statements that involve risks and uncertainties. In addition to other factors
and matters discussed elsewhere herein, some of the important factors that, in
the view of the Company, could cause actual results to differ materially from
those discussed in the forward-looking statements include the following:
1. The insurance products sold by the Company are subject to intense
competition from many competitors, many of whom have substantially greater
resources than the Company. There can be no assurance that the Company will be
able to successfully compete and generate sufficient premium volume at
attractive prices to be profitable.
2. In order to implement its business plan, the Company has been seeking to
enter into strategic partnerships and/or make acquisitions of businesses that
would enable the Company to earn an attractive return on investment.
Restrictions on the Company's ability to issue additional equity in order to
finance any such transactions exist which could significantly affect the
Company's ability to finance any such transaction. The Company may have limited
other resources with which to implement its strategy and there can be no
assurance that any transaction will be successfully consummated.
3. The insurance industry is highly regulated and it is not possible to
predict the impact of future state and federal regulation on the operations of
the Company.
4. Unpaid losses and loss adjustment expenses ("LAE") are based on
estimates of reported losses, historical Company experience of losses reported
by reinsured companies for insurance assumed from such insurers, and estimates
based on historical Company and industry experience for unreported claims. Such
liability is, by necessity, based upon estimates which may change in the near
term, and there can be no assurance that the ultimate liability will not exceed,
or even materially exceed, such estimates.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's objectives in managing its investment portfolio are to
maximize investment income and investment returns while minimizing overall
credit risk. Investment strategies are developed based on many factors including
underwriting results, overall tax position, regulatory requirements, and
fluctuations in interest rates. Investment decisions are made by management and
approved by the Board of Directors. Market risk represents the potential for
loss due to adverse changes in the fair value of securities. The market risks
related to the Company's fixed maturity portfolio are primarily interest rate
risk and prepayment risk. The market risks related to the Company's equity
portfolio are foreign currency risk and equity price risk. There have been no
material changes to the Company's market risk for the nine months ended
September 30, 2000. For further information, reference is made to Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in DHC's Annual Report on Form 10-K for the year ended December 31,
1999.
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.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2000
DANIELSON HOLDING CORPORATION
(Registrant)
BY: /S/ DAVID BARSE
------------------------------------
David Barse
PRESIDENT & CHIEF OPERATING OFFICER
BY: /S/ MICHAEL CARNEY
-----------------------------
Michael Carney
CHIEF FINANCIAL OFFICER