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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____________________ TO________________
COMMISSION FILE NUMBER: 1-6732
DANIELSON HOLDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-6021257
(State of Incorporation) (I.R.S. Employer Identification No.)
767 THIRD AVENUE, NEW YORK, NEW YORK 10017-2023
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-0347
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 5, 1999
----- -------------------------------
Common Stock, $0.10 par value 17,576,265 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,
------------------- --------------------
1999 1998 1999 1998
----- ----- ----- -----
Revenues:
Gross premiums earned $ 16,392 $ 16,578 $ 46,785 $ 49,829
Ceded premiums earned (3,130) (2,705) (8,680) (8,369)
------- ------ ------- -------
Net premiums earned 13,262 13,873 38,105 41,460
Net investment income 1,924 1,977 5,707 6,251
Net realized investment gains (losses) 1 71 (153) 195
Other income 228 255 653 676
----- ------ ------- -------
Total revenues 15,415 16,176 44,312 48,582
------ ------ ------ --------
Losses and expenses:
Gross losses and loss adjustment expenses 13,237 11,343 35,308 34,473
Ceded losses and loss adjustment expenses (4,334) (1,450) (9,502) (5,025)
------- ------- ------- --------
Net losses and loss adjustment expenses 8,903 9,893 25,806 29,448
Policyholder dividends 338 137 698 340
Policy acquisition expenses 3,457 3,305 10,057 9,907
General and administrative expenses 2,209 2,236 6,854 7,115
------ ------- ------- -------
Total losses and expenses 14,907 15,571 43,415 46,810
------ ------- ------- -------
Income before provision for income taxes 508 605 897 1,772
Income tax provision 42 8 65 61
------ ------- ------- -------
Net income $ 466 $ 597 $ 832 $ 1,711
Earnings per share of Common Stock
Basic $ .03 $ .04 $ .05 $ .11
======== ========= ========= ==========
Diluted $ .03 $ .04 $ .05 $ .11
======== ========= ========= ===========
See accompanying Notes to Consolidated Financial Statements.
2
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share information)
September 30, 1999 December 31,
(Unaudited) 1998
------------------- --------------
Assets:
Fixed maturities, available for sale at fair value
(Cost: $117,683 and $112,131) $ 116,297 $ 114,683
Equity securities, at fair value (Cost: $19,974 and $20,129) 19,230 16,889
Short term investments, at cost which
approximates fair value 5,315 3,287
-------- --------
Total investments 140,842 134,859
Cash 28 870
Accrued investment income 1,416 1,427
Premiums and fees receivable, net of allowances
of $ 156 and $136 11,330 9,972
Reinsurance recoverable on paid losses, net of allowances
of $374 and $374 1,277 7,714
Reinsurance recoverable on unpaid losses, net of
allowances of $649 and $559 21,181 18,187
Prepaid reinsurance premiums 1,726 1,668
Property and equipment, net of accumulated depreciation
of $8,091 and $8,322 1,789 1,930
Deferred acquisition costs 2,779 2,381
Other assets 1,690 1,887
-------- ---------
Total assets $ 184,058 $ 180,895
======== ========
Liabilities and Stockholders' Equity:
Unpaid losses and loss adjustment expenses $ 88,957 $ 95,653
Unearned premiums 16,175 13,705
Policyholder dividends 152 181
Reinsurance premiums payable 2,266 2,143
Funds withheld on ceded reinsurance 1,019 1,442
Other liabilities 3,826 4,498
-------- ---------
Total liabilities 112,395 117,622
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 and 20,000,000 shares; issued 17,586,994
shares and 15,586,994 shares; outstanding 17,576,265
shares and 15,576,276 shares) 1,759 1,559
Additional paid-in capital 55,473 46,673
Accumulated other comprehensive loss (2,130) (688)
Retained earnings 16,627 15,795
Treasury stock (Cost of 10,729 shares and 10,718 shares) (66) (66)
--------- ---------
Total stockholders' equity 71,663 63,273
--------- ---------
Total liabilities and stockholders' equity $ 184,058 $ 180,895
========= ==========
See accompanying Notes to Consolidated Financial Statements.
3
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(In thousands, except share amounts)
(Unaudited)
Comprehensive Comprehensive
Income (Loss) for the Loss for the
Three Months Ended Nine Months Ended
September 30, September 30,
September 30, 1999 1999 1998 1999 1998
------------------ ----- ------ ----- ------
Common stock
Balance, beginning of year $ 1,559
Issuance of common stock 200
-----
Balance, end of period 1,759
Additional paid-in capital
Balance, beginning of year 46,673
Issuance of common stock 8,800
-----
Balance, end of period 55,473
------
Retained earnings
Balance, beginning of year 15,795
Net income 832 $ 466 $ 597 $ 832 $ 1,711
------ ----- -------- ------- ---------
Balance, end of period 16,627
------
Accumulated other comprehensive loss
Balance, beginning of year (688)
Other comprehensive income (loss):
Net unrealized gain (loss) on available-
for-sale securities (1) 200 (3,480) (1,442) (6,069)
--- ------- ------- -------
Other comprehensive income (loss) (1,442) 200 (3,480) (1,442) (6,069)
------- --- ------- ------- -------
Total comprehensive income (loss) $ 666 $(2,883) $ (610) $ (4,358)
===== ======= ======= =======
Balance, end of period (2,130)
-------
Treasury stock
Balance, beginning of year (66)
----
Balance, end of period (66)
----
Total stockholders' equity $71,663
=======
_______________________________________________________________________________________________________________________
Common stock, shares
Balance, beginning of year 15,586,994
Issued during period 2,000,000
---------
Balance, end of period 17,586,994
==========
Treasury stock, shares
Balance, beginning of year 10,718
Purchased during period 11
------
Balance, end of period 10,729
======
_______________________________________
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(1) Disclosure of reclassification amount: 1999 1998 1999 1998
---- ----- ----- -----
Unrealized holding gains (losses)
arising during the period $ 199 $(3,557) $ (1,289) $(6,264)
Less: reclassification adjustment
for net gains (losses) included in
net income 1 77 (153) 195
----- -------- -------- -------
Net unrealized gains (losses) on securities $ 200 $(3,480) $ (1,442) $(6,069)
===== ======== ======== =======
See accompanying Notes to Consolidated Financial Statements.
4
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
For the Nine Months
Ended September 30,
---------------------
1999 1998
----- -----
Cash flows from operating activities:
Net income $ 832 $ 1,711
Adjustments to reconcile net income to net cash
used in operating activities:
Net realized investment (gains) losses 153 (195)
Depreciation and amortization 553 525
Change in accrued investment income 11 538
Change in premiums and fees receivable (1,358) (4,424)
Change in reinsurance recoverables 6,437 (255)
Change in reinsurance recoverable on unpaid losses (2,994) 1,110
Change in prepaid reinsurance premiums (58) (347)
Change in deferred acquisition costs (398) (687)
Change in unpaid losses and loss adjustment expenses (6,696) (7,836)
Change in unearned premiums 2,470 3,402
Change in reinsurance payables and funds withheld (300) 1,891
Change in policyholder dividends payable (29) (144)
Other, net (627) (159)
----- ------
Net cash used in operating activities (2,004) (4,870)
Cash flows from investing activities: Proceeds from sales:
Fixed income maturities available-for-sale 741 20,985
Equity securities -- 4
Investments, matured or called:
Fixed income maturities available-for-sale 17,523 31,109
Investments purchased:
Fixed income maturities available-for-sale (23,810) (22,230)
Equity securities --- (19,952)
Proceeds from sale of property and equipment --- 6
Purchases of property and equipment (264) (116)
------ ------
Net cash provided by (used in) investing activities (5,810) 9,806
------- ------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 9,000 ___
------ -------
Net cash provided by financing activities 9,000 __
------ -------
Net increase in cash and short term investments 1,186 4,936
Cash and short term investments at beginning of year 4,157 1,818
------ ------
Cash and short term investments at end of period $ 5,343 $ 6,754
====== ======
See accompanying Notes to Consolidated Financial Statements.
5
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of
Danielson Holding Corporation ("DHC" or "Registrant") and subsidiaries
(collectively with DHC, the "Company") have been prepared in accordance with
generally accepted accounting principles. However, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, reference is made to the Consolidated Financial Statements and
footnotes thereto included in DHC's Annual Report on Form 10-K for the year
ended December 31, 1998.
2) PER SHARE DATA
Per share data is based on the weighted average number of
shares of common stock of DHC, par value $0.10 per share ("Common Stock"),
outstanding during a particular year or other relevant period. Diluted earnings
per share computations, as calculated under the treasury stock method, include
the average number of shares of additional outstanding Common Stock issuable for
stock options and warrants, whether or not currently exercisable. Such average
shares were 17,474,970 and 16,340,895 for the three and nine months ended
September 30, 1999, respectively, and 15,942,447 and 16,088,596 for the three
and nine months ended September 30, 1998, respectively. Basic earnings per share
are calculated using only the average number of outstanding shares of Common
Stock and disregarding the average number of shares issuable for stock options
and warrants. Such average shares were 16,663,232 and 15,942,576 for the three
and nine months ended September 30, 1999, and 15,576,276 and 15,576,283 for the
three and nine months ended September 30, 1998, respectively.
3) INCOME TAXES
DHC files a Federal consolidated income tax return with its
subsidiaries and certain trusts that assumed various liabilities of certain
present and former subsidiaries of DHC. The Company records its interim tax
provisions based upon estimated effective tax rates for the year.
The Company has made provisions for certain state and local taxes. Tax
filings for these jurisdictions do not consolidate the activities of the trusts
referred to above. For further information, reference is made to Note 12 of the
Notes to Consolidated Financial Statements included in DHC's Annual Report on
Form 10-K for the year ended December 31, 1998.
4) FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS
During 1998, DHC's main operating subsidiary, National American
Insurance Company of California ("NAICC") invested approximately $10.3 million
in Japanese yen based equity securities. In order to hedge the currency risk of
these investments, during the second quarter of 1998 NAICC purchased a foreign
currency option to sell Japanese yen at a fixed price on a given date in April
1999. The foreign currency option expired in April 1999, resulting in a realized
loss of $155,000. Investments in equity securities denominated in foreign
currencies are translated into U.S. dollars using current rates of exchange and
the related translation adjustments are recorded in accumulated other
comprehensive loss in
6
stockholders' equity.
5) STOCKHOLDERS' EQUITY
On August 12, 1999, pursuant to a Stock Purchase and Sale Agreement
with Samstock, L.L.C. ("Samstock"), which agreement was assigned with the
Company's consent by Samstock to its sole member, SZ Investments, L.L.C. ("SZ"),
pursuant to an amendment and assignment agreement (such Purchase and Sale
Agreement, as amended and assigned, the "Purchase Agreement"), the Company sold
to SZ, for consideration of $9 million, 2,000,000 shares of Common Stock and a
four year warrant (subject to extension in certain circumstances) to purchase an
additional 2,000,000 shares of Common Stock at $4.75 per share (subject to
downward price adjustment under certain circumstances). In order to provide
sufficient available shares of Common Stock for this transaction, on July 20,
1999, the Registrant's stockholders approved an amendment to the Registrant's
Certificate of Incorporation to increase the number of authorized shares of the
Registrant's common stock from 20,000,000 shares to 100,000,000 shares. The
stockholders also approved amendments to eliminate cumulative voting for
Directors and to eliminate a prohibition on issuing non-voting equity
securities.
6) GAIN CONTINGENCIES
On June 22, 1999, the Missouri Court of Appeals reversed a decision to
award interest on claims under a plan of distribution of assets of the Mission
Reinsurance Corporation Trust (the "Trust). The effect of the decision of the
Court of Appeals may result in the return to the Company of the surplus existing
in the Trust, which was one of the trusts that had been created in connection
with the insolvency and reorganization of Mission Insurance Group, Inc. and its
subsidiaries from which the Company emerged. Although it does not know the
specific amount of the surplus currently in the Trust, the Company has reason to
believe that the surplus currently approximates $14 million.
The Missouri Department of Insurance has appealed the decision of the
Court of Appeals and the decision could be reversed. In the event the decision
is reversed and the Missouri Department of Insurance is permitted to pay
interest on claims, it is anticipated that there would be no surplus remaining
in the Trust after payment of the interest. It therefore cannot be determined at
this time when, or if, the Company would receive any proceeds from the Trust's
surplus. Accordingly, the Company has not reflected any prospect of receiving
funds from this matter as an asset on its balance sheet or as income.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
1. GENERAL
Danielson Holding Corporation ("DHC") is organized as a holding company
with substantially all of its operations conducted by its subsidiaries
(collectively with DHC, the "Company"). DHC, on a parent-only basis, has limited
continuing expenditures for rent and administrative expenses and derives
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
7
forward-looking statements, including statements concerning capital adequacy,
adequacy of reserves, goals, future events, Year 2000 compliance or
performance and underlying assumptions and other statements which are other
than statements of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words "believes",
"anticipates", "expects", "intends", "plans" and similar expressions. All
such statements represent only current estimates or expectations as to
future results and are subject to risks and uncertainties which could cause
actual results to materially differ from current estimates or expectations. See
"RISK FACTORS THAT MAY AFFECT FUTURE RESULTS".
2. RESULTS OF NAICC'S OPERATIONS
The operations of DHC's principal subsidiary, National American Insurance
Company of California ("NAICC"), are primarily in specialty property and
casualty insurance.
Property and Casualty Insurance Operations
Net premiums earned were $13.3 million and $38.1 million for the three
and nine months ended September 30, 1999, compared to $13.9 million and $41.5
million for the three and nine months ended September 30, 1998. The decrease in
net premiums earned is related to the change in net written premiums and changes
in reinsurance coverages. Net written premiums were $14.2 million and $40.5
million for the three and nine months ended September 30, 1999, compared to
$14.3 million and $44.5 million for the three and nine months ended September
30, 1998.
The overall decrease in net written premuims for 1999 over the
comparable periods in 1998 is attributable to increased competition in the
automobile lines and an increase in reinsurance coverage associated with several
new treaties that significantly reduce NAICC's workers' compensation retention.
The participant in the new treaties is a reinsurer with an A.M. Best rating of
"A-" (Excellent).
Net investment income was $1.8 million and $5.4 million for the three
and nine months ended September 30, 1999, compared to $1.9 million and $5.9
million for the three and nine months ended September 30, 1998. The decline for
the nine month period is reflective of a slight decrease in average portfolio
yield on bonds purchased during the twelve months ended September 30, 1999.
Net losses and loss adjustment expenses (LAE) were $8.9 million and
$25.8 million for the three and nine months ended September 30, 1999, compared
to $9.9 million and $29.4 million for the three and nine months ended September
30, 1998. The resulting loss and LAE ratios for the corresponding year-to-date
periods were 67.7 percent and 71.0 percent, respectively for 1999 and 1998. The
loss and LAE ratio decreased in 1999 over 1998 due to the reduction of the
Company's workers' compensation retention.
Policy acquisition costs were $3.5 million and $10.0 million for the
three and nine months ended September 30, 1999, compared to $3.3 million and
$9.9 million for the three and nine months ended September 30, 1998. As a
percentage of net premiums earned, policy acquisition expenses were 26.4 percent
and 23.9 percent for the nine months ended September 30, 1999 and 1998,
respectively. The increase in the policy acquisition expense ratio in 1999 is
due primarily to the overall decrease in premium volume while fixed underwriting
expenses of policy acquisition costs remained relatively constant.
Combined underwriting ratios were 109.9 percent and 108.7 percent for
the nine months ended September 30, 1999 and 1998, respectively. Net income from
insurance operations for the nine months ended September 30, 1999 and 1998 was
$2.1 million and $3.2 million, respectively. The decrease in net income from
insurance operations during the first nine months of 1999 compared to the same
period for 1998 is primarily attributable to a decrease in premium volume
combined with a decrease in net investment income.
8
Cash Flow from Insurance Operations
Cash used in operations was $691,000 for the nine months ended
September 30, 1999 and cash used in operations was $3.3 million for the nine
months ended September 30, 1998. The decrease in cash used in operations is
attributable to the collection of previously disputed reinsurance balances in
excess of $6 million during the 1999 period. Overall cash and invested assets,
at market value, at September 30, 1999 were $126.3 million, compared to $128.9
million at December 31, 1998.
Liquidity and Capital Resources
The Company's insurance subsidiaries require both readily liquid assets
and adequate capital to meet ongoing obligations to policyholders and claimants,
as well as to pay ordinary operating expenses. The primary sources of funds to
meet these obligations are premium revenues, investment income, recoveries from
reinsurance and, if required, the sale of invested assets. NAICC's investment
policy guidelines require that all liabilities be matched by a comparable amount
of investment grade invested assets. Management of NAICC believes that NAICC has
both adequate capital resources and sufficient reinsurance to meet any
unforeseen events such as natural catastrophes, reinsurer insolvencies or
possible reserve deficiencies.
The two most common measures of capital adequacy for insurance
companies are premium-to-surplus ratios (which measure current operating risk)
and reserves-to-surplus ratios (which measure financial risk related to possible
changes in the level of loss and loss adjustment expense reserves). A commonly
accepted standard net written premium-to-surplus ratio is 3 to 1, although this
varies with different lines of business NAICC's annualized premium-to-surplus
ratio of 1.1 to 1 and 1.5 to 1 for the nine months ended September 30, 1999 and
1998, respectively, remains well under current industry standards. A commonly
accepted standard for the ratio of losses and loss adjustment expense
reserves-to-surplus is 5 to 1, compared with NAICC's ratio of 1.3 to 1 at
September 30, 1999. Given these relatively conservative financial security
ratios, management is confident that existing capital is adequate.
3. RESULTS OF DHC'S OPERATIONS
Cash Flow from Parent-Only Operations
Operating cash flow of DHC on a parent-only basis is primarily
dependent upon the rate of return achieved on its investment portfolio and the
payment of general and administrative expenses incurred in the normal course of
business. For the nine months ended September 30, 1999 and 1998, cash used in
parent-only operating activities was $1.3 million and $1.6 million,
respectively. The decrease in cash used was primarily attributable to the timing
of certain expense payments. For information regarding DHC's operating
subsidiaries' cash flow from operations, see "RESULTS OF NAICC'S OPERATIONS,
CASH FLOW FROM INSURANCE OPERATIONS."
Liquidity and Capital Resources
At September 30, 1999, cash and investments of DHC were approximately
$14.6 million, compared to $6.8 million at December 31, 1998. The increase in
cash and investments is attributable to the $9 million DHC received from the
sale of newly issued common stock, offset by 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
"RESULTS OF NAICC'S OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES."
9
4. AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for
fiscal years beginning after June 15, 1999 and establishes standards for the
reporting for derivative instruments. It requires changes in the fair value of a
derivative instrument and the changes in fair value of the assets or liabilities
hedged by that instrument to be included in income. The Company has not adopted
SFAS 133. However, the effect of adoption on the consolidated financial
statements at September 30, 1999 would not be material. In June 1999, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities- Deferral of the Effective Date of FASB Satement No. 133." This
statement defers the effective date of SFAS 133 to fiscal years beginning after
June 15, 2000.
5. YEAR 2000
The Company has undertaken a review of its systems for "Year 2000"
compliance at both the holding company and subsidiary levels. DHC has completed
an assessment of its hardware and software systems and has contacted the third
party vendors that it believes are critical to its operations. DHC believes that
it is currently Year 2000 compliant and has received assurances from its third
party vendors that they are Year 2000 compliant. However, there can be no
assurance that such assessments are correct and DHC is currently finalizing a
contingency plan in the event that those assessments are incorrect.
NAICC is highly dependent on electronic data processing and information
systems in its operations. NAICC has reviewed its information systems, hardware
and software operations and applications in relation to the Year 2000. NAICC
believes that its hardware and operating system software are Year 2000
compliant. NAICC also believes that it has identified all of the application
software programs which require modification in order to become Year 2000
compliant and has corrected and tested the programs affected by the conversion
of a two-digit year to a four-digit year. NAICC has completed and tested the
modifications to its insurance applications and believes that they are Year 2000
compliant. All non-insurance applications (e.g. e-mail software, accounting
software, and report archiving software) have been upgraded and NAICC believes
that they are Year 2000 compliant.
NAICC has identified the third parties it believes are material to its
operations and is continuing to monitor and, in the case of certain material
third parties, has been able to test its interface to the external systems of
these third parties and believes that they are Year 2000 compliant.
NAICC believes that it does not currently issue any insurance policies
with coverages under which claims for Year 2000 related losses or damages could
be successfully asserted. Management does not believe that material risk exists
that such claims will be made on previous policies.
NAICC is utilizing internal and external resources to meet its
deadlines for Year 2000 modifications. Management believes that the costs of
Year 2000 compliance related efforts are expected to be $200,000 for the year
ended December 31, 1999. Due to the complexities of estimating the cost of
modifying all applications to become Year 2000 compliant and the difficulties in
assessing third-party vendors' abilities to become Year 2000 compliant,
estimates are subject to and are likely to change.
The management of NAICC believes that its electronic data processing
and information systems will be Year 2000 compliant. However, should any
material system fail to correctly process information due to the century change,
operations could be interrupted and this could have a material adverse effect on
NAICC's results of operations.
10
6. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As noted above, the foregoing discussion may include
forward-looking statements that involve risks and uncertainties. In addition to
other factors and matters discussed elsewhere herein, some of the important
factors that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
following:
1. The insurance products sold by the Company are subject to
intense competition from many competitors, many of whom have substantially
greater resources than the Company. There can be no assurance that the Company
will be able to successfully compete and generate sufficient premium volume at
attractive prices to be profitable.
2. In order to implement its business plan, the Company has been
seeking to enter into strategic partnerships and/or make acquisitions of
businesses that would enable the Company to earn an attractive return on
investment. Restrictions on the Company's ability to issue additional equity in
order to finance any such transactions exist which could significantly affect
the Company's ability to finance any such transaction. The Company may have
limited other resources with which to implement its strategy and there can be no
assurance that any transaction will be successfully consummated.
3. The insurance industry is highly regulated and it is not
possible to predict the impact of future state and federal regulation on the
operations of the Company.
4. Unpaid losses and loss adjustment expenses ("LAE") are based on
estimates of reported losses, historical Company experience of losses reported
by reinsured companies for insurance assumed from such insurers, and estimates
based on historical Company and industry experience for unreported claims. Such
liability is, by necessity, based upon estimates which may change in the near
term, and there can be no assurance that the ultimate liability will not exceed,
or even materially exceed, such estimates.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's objectives in managing its investment portfolio
are to maximize investment income and investment returns while minimizing
overall credit risk. Investment strategies are developed based on many factors
including underwriting results, overall tax position, regulatory requirements,
and fluctuations in interest rates. Investment decisions are made by management
and approved by the Board of Directors. Market risk represents the potential for
loss due to adverse changes in the fair value of securities. The market risks
related to the Company's fixed maturity portfolio are primarily interest rate
risk and prepayment risk. The market risks related to the Company's equity
portfolio are foreign currency risk and equity price risk. There have been no
material changes to the Company's market risk for the nine months ended
September 30, 1999. For further information, reference is made to Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in DHC's Annual Report on Form 10-K for the year ended December 31,
1998.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
NAICC is a party to various legal proceedings which are considered
routine and incidental to its business and are not material to the financial
condition and operation of its business.
Item 2. Changes in Securities and Use of Proceeds.
On August 12, 1999, the Company sold, for cash consideration of
$9,000,000, 2,000,000 shares of Common Stock and a warrant to purchase an
additional 2,000,000 shares of Common Stock at an exercise price of $4.75 per
share, to SZ Investments, L.L.C. The sale was a private placement to one
institutional purchaser made pursuant to Section 4(2) of the Securities Act of
1933. The exercise price of the warrant is subject to adjustment in the event
that, among other things, payments and reserves for losses and loss adjustment
expenses relating to the Company's insurance subsidiaries' run-off environmental
liabilities exceed the reserves for such losses and loss adjustment expenses at
December 31, 1998 by more than $5,000,000 and the Company has not obtained
reinsurance for excess losses exceeding $10,000,000; provided that in no event
can the exercise price of the warrant be reduced to the lesser of $3.00 per
share or the market price of the common stock at the time of the adjustment. The
warrant will be exercisable for four years, subject to a one year extension in
the event that the exercise price would be subject to adjustment in accordance
with the previous sentence on the expiration date.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On July 20, 1999, the Company held its Annual Meeting of
Stockholders. At the meeting, Samuel Zell and William Pate were newly elected
as directors, and the term of office of each of Martin J. Whitman, David Barse,
Eugene M. Isenberg, Joseph F. Porrino, Frank B. Ryan, Wallace O. Sellers,
Stanley J. Garstka, and William W. Palmer continued after the meeting. In
addition, the stockholders approved the following proposals: 1) to amend the
Company's Certificate of Incorporation to increase the number of authorized
shares of the Commany's common stock from 20,000,000 shares to 100,000,000;
2) to amend the Company's Certificate of Incorporation to eliminate the right
of stockholders to cumulate their votes for the election of directors; 3) to
amend the Company's Certificate of Incorporation to eliminate the prohibition
on the Company issuing non-voting equity securities; and 4) to confirm the
appointment of KPMG Peat Marwick LLP as the independent public accountants for
the Company for the fiscal year ending December 31, 1999.
The votes with respect to each of the foregoing matters was as follows:
1. With respect to election of director:
Name For Withheld
Martin J. Whitman 13,695,850 234,973
Samuel Zell 13,693,198 237,625
David M. Barse 13,695,856 234,967
Eugene M. Isenberg 13,695,855 234,968
Joseph F. Porrino 13,695,852 234,971
Frank B. Ryan 13,695,853 234,970
Wallace O. Sellers 13,695,856 234,967
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Stanley J. Garstka 13,695,856 234,967
William W. Palmer 13,695,856 234,967
William Pate 13,693,199 237,624
2. With respect to the amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of the Company's common stock from
20,000,000 shares to 100,000,000 shares:
For Against Abstain
Totals: 12,985,031 936,302 9,490
3. With respect to the amendment to the Company's Certificate of Incorporation
to eliminate the right of stockholders to cumulate their votes for the election
of directors:
For Against Abstain
Totals: 8,995,608 1,247,212 11,214
4. With respect to the amendment to the Company's Certificate of Incorporation
to eliminate the prohibition on the Company issuing non-voting equity
securities:
For Against Abstain
Totals: 9,792,071 434,151 27,812
5. With respect to the appointment of KPMG Peat Marwick LLP as the independent
public accountants for the Company for the fiscal year ending December 31, 1999:
For Against Abstain
Totals: 13,765,936 97,881 67,006
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Not applicable.
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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 12, 1999
DANIELSON HOLDING CORPORATION
(Registrant)
By: /s/ DAVID BARSE
---------------------------------
David Barse
President & Chief Operating Officer
By: /s/ MICHAEL CARNEY
--------------------------------
Michael Carney
Chief Financial Officer
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