SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 1-6732
DANIELSON HOLDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-6021257
(State of Incorporation) (I.R.S. Employer Identification No.)
767 THIRD AVENUE, NEW YORK, NEW YORK 10017-2023
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-0347
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 14, 2002
- - ----------------------------- -------------------------------
Common Stock, $0.10 par value 19,760,480 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
(Unaudited)
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------------
2002 2001
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REVENUES:
Gross premiums earned $ 20,614 $ 21,212
Ceded premiums earned (1,576) (2,070)
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Net premiums earned 19,038 19,142
Net investment income 1,668 2,329
Net realized investment gains -- 816
Other income 136 318
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TOTAL REVENUES 20,842 22,605
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LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses 15,376 16,402
Ceded losses and loss adjustment expenses (644) (1,358)
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Net losses and loss adjustment expenses 14,732 15,044
Policyholder dividends -- 42
Policy acquisition expenses 4,057 4,140
General and administrative expenses 2,090 2,455
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TOTAL LOSSES AND EXPENSES 20,879 21,681
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Income (loss) before provision for income taxes (37) 924
Income tax provision 17 37
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NET INCOME (LOSS) $ (54) $ 887
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EARNINGS PER SHARE OF COMMON STOCK
Basic $ -- $ .05
======= =======
Diluted $ -- $ .05
======= =======
See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
March 31, 2002 December 31,
(UNAUDITED) 2001
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ASSETS:
Fixed maturities, available for sale at fair value
(Cost: $125,089 and $130,397) $141,152 $136,387
Equity securities, at fair value (Cost: $12,416) 12,845 12,125
Short term investments, at cost which
approximates fair value 13,014 8,691
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TOTAL INVESTMENTS 167,011 157,203
Cash 7,484 9,175
Accrued investment income 1,362 1,548
Premiums and fees receivable, net of allowances
of $1,501 and $1,431 12,724 14,876
Reinsurance recoverable on paid losses, net of allowances
of $644 and $636 2,835 2,142
Reinsurance recoverable on unpaid losses, net of
allowances of $112 and $118 17,115 17,733
Prepaid reinsurance premiums 1,590 2,078
Property and equipment, net of accumulated depreciation
of $9,918 and $9,790 824 957
Deferred acquisition costs 2,373 2,209
Other assets 1,038 950
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TOTAL ASSETS $214,356 $208,871
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses $103,379 $105,745
Unearned premiums 17,434 21,117
Reinsurance premiums payable 757 763
Funds withheld on ceded reinsurance 1,666 1,666
Payable for securities sold but not yet purchased 2,115 2,247
Other liabilities 3,653 2,870
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TOTAL LIABILITIES 129,004 134,408
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 19,521,694 shares and 19,516,694 shares;
outstanding 19,510,898 shares and 19,505,952 shares) 1,952 1,952
Additional paid-in capital 63,133 63,115
Retained earnings 3,692 3,746
Accumulated other comprehensive income 16,641 5,716
Treasury stock (cost of 10,740 shares) (66) (66)
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TOTAL STOCKHOLDERS' EQUITY 85,352 74,463
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $214,356 $208,871
======== ========
See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)
(UNAUDITED)
Comprehensive
Income (Loss) for the
Three Months Ended
March 31,
MARCH 31, 2002 2002 2001
------------------ ---- ----
COMMON STOCK
Balance, beginning of year $ 1,952
----------
Balance, end of period 1,952
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ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year 63,115
Exercise of options to purchase Common Stock 18
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Balance, end of period 63,133
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RETAINED EARNINGS
Balance, beginning of year 3,746
Net income (54) $ (54) $ 887
---------- ------ ------
Balance, end of period $ 3,692
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year 5,716
Net unrealized gain (loss) on available-
For-sale securities (1) 10,925 (67)
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Other comprehensive income (loss) 10,925 10,925 (67)
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Total comprehensive income $10,871 $ 820
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Balance, end of period 16,641
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TREASURY STOCK
Balance, beginning of year (66)
----------
Balance, end of period (66)
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TOTAL STOCKHOLDERS' EQUITY $ 85,352
==========
COMMON STOCK, SHARES
Balance, beginning of year 19,516,694
Exercise of options to purchase Common Stock 5,000
----------
Balance, end of period 19,521,694
==========
TREASURY STOCK, SHARES
Balance, beginning of year 10,742
Purchased during period 54
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Balance, end of period 10,796
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(1) DISCLOSURE OF RECLASSIFICATION AMOUNT: 2002 2001
---- ----
Unrealized holding gains
arising during the period $ 10,925 $ 749
Less: reclassification adjustment
for net gains included in net income -- (816)
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Net unrealized gains (losses) on securities $ 10,925 $ (67)
======= =======
See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Three Months
Ended March 31,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss)from continuing operations $ (54) $ 887
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Net realized investment gains -- (816)
Depreciation and amortization 158 232
Change in accrued investment income 186 (1)
Change in premiums and fees receivable 2,152 137
Change in reinsurance recoverables (693) 221
Change in reinsurance recoverable on unpaid losses 618 294
Change in prepaid reinsurance premiums 488 16
Change in deferred acquisition costs (164) (404)
Change in unpaid losses and loss adjustment expenses (2,366) (769)
Change in unearned premiums (3,683) 1,185
Change in reinsurance payables and funds withheld (6) 144
Change in policyholder dividends payable -- 16
Other, net 696 285
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Net cash provided by (used in) operating activities (2,668) 1,427
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Equity securities -- 2,452
Investments, matured or called:
Fixed income maturities available-for-sale 7,799 5,677
Investments purchased:
Fixed income maturities available-for-sale (2,515) (3,543)
Equity securities -- (847)
Purchases of property and equipment (2) (104)
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Net cash provided by investing activities 5,282 3,635
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options to purchase Common Stock 18 630
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Net cash provided by financing activities 18 630
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Net increase in cash and short term investments 2,632 5,692
Cash and short term investments at beginning of year 17,866 12,545
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Cash and short term investments at end of period $ 20,498 $ 18,237
======== ========
See accompanying Notes to Consolidated Financial Statements.
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of Danielson
Holding Corporation ("DHC" or "Registrant") and subsidiaries (collectively with
DHC, the "Company") have been prepared in accordance with accounting principles
generally accepted in the United States of America. However, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete consolidated financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001.
2) PER SHARE DATA
Per share data is based on the weighted average number of shares of common
stock of DHC, par value $0.10 per share ("Common Stock"), outstanding during a
particular year or other relevant period. Diluted earnings per share
computations, as calculated under the treasury stock method, include the average
number of shares of additional outstanding Common Stock issuable for stock
options and warrants, whether or not currently exercisable. Such average shares
were 19,622,615 for the three months ended March 31, 2001. Average shares for
the three months ended March 31, 2002 are not included as amounts are
anti-dilutive. Basic earnings per share are calculated using only the average
number of outstanding shares of Common Stock and disregarding the average number
of shares issuable for stock options and warrants. Such average shares were
19,507,263 and 19,340,287 for the three months ended March 31, 2002 and 2001 ,
respectively.
3) INCOME TAXES
DHC files a Federal consolidated income tax return with its subsidiaries.
DHC's Federal consolidated return includes the taxable results of certain
grantor trusts established pursuant to a prior court approved reorganization to
assume various liabilities of certain present and former subsidiaries of DHC.
These trusts are not consolidated with DHC for financial statement purposes. 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 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 8 of the
Notes to Consolidated Financial Statements included in DHC's Annual Report on
Form 10-K for the year ended December 31, 2001.
4) INVESTMENTS
At March 31, 2002 the Company held $58,493,000 face amount of American
Commercial Lines LLC Senior Notes 10.25% due 6/30/08 ("ACL Notes") at a cost of
$30,025,578 and a fair value of $41,895,611, representing 49% of stockholders'
equity at March 31, 2002. As of March 31, 2002, the ACL Notes were in
default.The value of the ACL Notes at March 31, 2002 was determined using a
pricing service. Upon consummation of the potential acquisition, see Note 6, the
actual trading price of the new ACL Notes (upon which the Company is basing its
carrying valuation) may differ materially from the March 31, 2002 fair value. If
this is determined to be a better indication of the value of the ACL equity,
then the carrying amount of the ACL investment may differ materially from the
current valuation, which may have a material impact on the book value of the
Company.
5) REINSURANCE
NAICC has reinsurance under both excess of loss and quota share treaties.
NAICC ceded reinsurance on an excess of loss basis for workers' compensation
risks in excess of $500,000 prior to April 2000 and $200,000 thereafter. For
risks other than workers' compensation, NAICC cedes reinsurance on an excess of
loss basis in excess of $250,000. Prior to 2002, NAICC ceded 10% of its private
passenger automobile business on a quota share basis. Effective January 1, 2002
the quota share treaty was terminated on a run-off basis.
6) POTENTIAL ACQUISITION
On March 15, 2002 the Company entered into an agreement with American
Commercial Lines Holdings LLC ("ACL") to acquire 100 percent of the membership
interests in ACL. ACL is an integrated marine transportation and service company
operating approximately 5,100 barges and 200 towboats on the inland waterways of
North and South America. ACL transports more than 70 million tons of freight
annually. Additionally, ACL operates marine construction, repair and service
facilities and river terminals. ACL had approximately $760 million in assets and
a net accumulated deficiency of approximately $143 million at December 31, 2001.
The purchase price is expected to be approximately $81 million and will consist
of cash and the contribution to ACL of the ACL debt currently held by the
Company. In order to finance this transaction, the Company began a rights
offering to its existing shareholders, on April 19, 2002. That offering is still
pending and is scheduled to expire on May 20, 2002. For more information, see
the Registration Statement dated May 2, 2001 and the Prospectus Supplement dated
April 19, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1. GENERAL
Danielson Holding Corporation ("DHC") is organized as a holding company
with substantially all of its operations conducted by subsidiaries (collectively
with DHC, the "Company"). DHC, on a parent-only basis, has limited continuing
expenditures for rent and administrative expenses and derives revenues primarily
from investment returns on portfolio securities. Therefore, the analysis of the
Company's financial condition is generally done on an operating subsidiary
basis.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and the information in Item 3, " Qualitative and
Quantitative Disclosures About Market Risk" contain forward-looking statements,
including statements concerning capital adequacy, adequacy of reserves, goals,
future events and underlying assumptions and other statements which are other
than statements of historical facts. Such forward-looking statements may be
identified, without limitation, by the use of the words "believes",
"anticipates", "expects", "intends", "plans" and similar expressions. All such
statements represent only current estimates or expectations as to future results
and are subject to risks and uncertainties which could cause actual results to
materially differ from current estimates or expectations. See "RISK FACTORS THAT
MAY AFFECT FUTURE RESULTS".
2. RESULTS OF NAICC'S OPERATIONS
The operations of DHC's principal subsidiary, National American Insurance
Company of California ("NAICC"), are primarily in property and casualty
insurance.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Net premiums earned were $19.0 million and $19.1 million for the three
months ended March 31, 2002 and 2001, respectively. The slight decrease in net
premiums earned is only indirectly related to the change in net premiums written
in 2002, and is attributable to the run-off policies written in 2001, especially
commercial automobile. Net premiums written were $15.8 million and $20.3 million
for the three months ended March 31, 2002 and 2001, respectively.
The overall $4.5 million decrease in net written premiums for 2002 over the
comparable period in 2001 is attributable to reduced production consistent with
the decision in 2001 to exit certain lines of unprofitable business and to adopt
stricter underwriting standards, thereby limiting future production for those
lines retained.
Net written premiums in non-standard commercial automobile decreased by
$3.3 million during 2002 over the comparable period in 2001. The decrease in
commercial automobile net written premiums is due to decreased production in the
markets that NAICC serves. Net written premiums in workers' compensation
decreased by $2.9 million during 2002 over the comparable period in 2001. The
decrease in workers' compensation net written premiums is due to the 2001
decision to cease writing workers compensation. Also, net written premiums for
non-standard private passenger automobile increased during 2002 over the
comparable period in 2001 by $1.7 million. The increase in non-standard private
passenger automobile net written premiums is due to increased production in
California non-standard private passenger automobile.
Net investment income was $1.5 million and $1.9 million for the three
months ended March 31, 2002 and 2001, respectively. The decrease is attributable
to a reduction in overall portfolio yield. Average fixed income portfolio yield
on bonds, exclusive of ACL bonds currently being restructured, as of March 31,
2002, was 6.28 percent compared to 6.59 percent as of March 31, 2001. Average
fixed income portfolio yield on bonds, including ACL bonds as of March 31, 2002,
was 5.47 percent. Also, realized gains decreased by $.81 million from the
comparable period in 2001 due to reduced activity.
Net losses and loss adjustment expenses ("LAE") were $14.7 million and
$15.0 million for the three months ended March 31, 2002 and 2001, respectively.
The resulting loss and LAE ratios for the corresponding periods were 77.4
percent and 78.6 percent, respectively. The loss and LAE ratio decreased in 2002
over 2001 due to increased production of California non-standard private
passenger automobile insurance, which has a lower loss ratio than commercial
lines insurance.
Policy acquisition costs were $4.1 million for both the three months ended
March 31, 2002 and 2001, respectively. As a percentage of net premiums earned,
policy acquisition expenses were 21.3 percent and 21.6 percent for the three
months ended March 31, 2002 and 2001, respectively. The slight decrease in the
policy acquisition expense ratio in 2002 is due primarily to the slight decrease
in earned premium volume, while fixed underwriting expenses of policy
acquisition costs decreased at a similar rate.
General and administrative expenses were $1.5 million and $1.8 million for
the three months ended March 31, 2002 and 2001, respectively. General and
administrative expenses decreased slightly in 2002 over 2001 due to decreased
business activity and cost reduction measures implemented during the third and
fourth quarters of 2001.
The combined ratios (which represent a ratio of losses and expenses to net
earned premiums in a particular period) were 106.8 percent and 110.3 percent for
the three months ended March 31, 2002 and 2001, respectively. Net income from
insurance operations for the three months ended March 31, 2002 and 2001 was $0.4
million and $1.0 million, respectively. The decrease in net income from
insurance operations during the first three months of 2002 compared to the same
period for 2001 is primarily attributable to the reduction in realized gains,
and net investment income offset in part by the decrease in loss and loss
adjustment expenses and the decrease in general and administrative expenses.
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.
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, the Company relies on the sale of invested assets. Cash
used in operations was $2.8 million for the three months ended March 31, 2002.
Cash provided by operations was $1.9 million for the three months ended March
31, 2001. The decrease in cash provided by operations is attributable to the
continued payment of claims incurred in prior years coupled with reduced premium
production during 2002. Overall cash and invested assets, at fair value, at
March 31, 2002 were $136.7 million, compared to $136.4 million at December 31,
2001.
3. RESULTS OF DHC'S OPERATIONS
CASH FLOW FROM PARENT-ONLY OPERATIONS
Operating cash flow of DHC on a parent-only basis is primarily dependent
upon the rate of return achieved on its investment portfolio and the payment of
general and administrative expenses incurred in the normal course of business.
For the three months ended March 31, 2002 cash provided by parent-only operating
activities was $173,000 and for the three months ended March 31, 2001, cash used
in parent-only operating activities was $427,000. The increase in cash provided
by operations is attributable to reimbursement received from ACL for expenses
relating to the potential acquisition, that have not yet been paid as of March
31, 2002. For information regarding DHC's operating subsidiaries' cash flow from
operations, see "2. RESULTS OF NAICC'S OPERATIONS, Liquidity and Capital
Resources."
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002 cash and investments of DHC were approximately $37.7
million, compared to $29.9 million at December 31, 2001. The increase is
primarily attributable to the increase in fair value of DHC's investment in
American Commercial Lines LLC Senior Notes 10.25%, due 6/30/08 ("ACL Notes"). As
described 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."
On March 15, 2002, the Company and ACL executed a definitive
recapitalization agreement for the acquisition of ACL by the Company. ACL is an
integrated marine transportation and service company operating approximately
5,100 barges and 200 towboats on the inland waterways of North and South
America. ACL transports more than 70 million tons of freight annually.
Additionally, ACL operates marine construction, repair and service facilities
and river terminals.
The holders of more than two thirds of ACL's outstanding senior notes,
substantially all the indirect preferred and common members of ACL and the
management of ACL have agreed to support the recapitalization plan. ACL's senior
lenders have executed forbearance agreements pending the negotiation and
execution of definitive documentation relating to the amendment and restatement
of ACL's senior secured credit facility.
Under the terms of the recapitalization agreement, the Company will acquire
100% of the membership interests of American Commercial Lines Holdings LLC,
ACL's parent holding company. ACL's present indirect preferred equity holders
(that are not members of ACL management) will receive $7.0 million in cash.
ACL's management will receive approximately $1.7 million of restricted common
stock of the Company. In addition, the Company will deliver $25.0 million in
cash, which will be used to reduce borrowings under ACL's senior credit
facility, and approximately $58.5 million of ACL's outstanding senior notes to
ACL Holdings in connection with the transaction. The recapitalization is
expected to close in the second quarter of 2002.
The transaction will result in a reduction of ACL's senior secured bank
debt by $25.0 million. In addition, the parties have sought to restructure ACL's
10 1/4% senior notes due 2008 through an exchange offer and consent
solicitation. Upon the completion of the exchange offer and consent
solicitation, up to approximately $236.5 million of ACL's outstanding senior
notes (all notes held by parties other than Danielson) will be exchanged for
$120.0 million of new 11 1/4% cash pay senior notes due January 1, 2008 and
approximately $116.5 million of new 12% pay-in-kind senior subordinated notes
due July 1, 2008. ACL will also issue additional new cash pay senior notes in an
aggregate principal amount (not to exceed $20.0 million) calculated based on the
accrued and unpaid interest on its outstanding senior notes, other than those
held by Danielson, and to the extent that such accrued and unpaid interest
exceeds $20.0 million, additional pay-in-kind senior subordinated notes in an
amount calculated based on such excess would be issued in full satisfaction of
such accrued and unpaid interest.
In connection with these transactions, the Company has commenced a $43.5
million rights offering to its existing security holders, the proceeds of which
will be used to fund the Company's cash contribution for the recapitalization
and for general corporate purposes. Consummation of the recapitalization
agreement is not conditioned on the successful completion of the rights
offering. Under the terms of the rights offering, holders of the Company's
common stock are entitled to purchase additional shares of common stock, at a
subscription price of $5.00 per share, up to such holders' pro rata share of the
rights offering, and also additional unsubscribed shares, if any. Further
information concerning the rights offering is available in the Registration
Statement dated May 2, 2001 and the Prospectus Supplement dated April 19, 2002.
The exchange offer and consent solicitation have been made in reliance on a
registration exemption provided by Section 3(a)(9) under the Securities Act of
1933, conditioned on the minimum participation of 95% of the outstanding
principal amount of ACL's outstanding senior notes, as to which noteholders
holding more than two thirds of the outstanding principal amount of such notes
have agreed to tender. In the event that the exchange offer and consent
solicitation is not consummated by June 15, 2002, the recapitalization agreement
provides for the implementation of the recapitalization through a voluntary
prepackaged bankruptcy plan under Chapter 11 of the Bankruptcy Code, as to which
noteholders holding more than two thirds of the outstanding principal amount of
ACL's outstanding senior notes have agreed to accept.
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.
5. If the ACL transaction is consummated, there will be additional risks
related to the transaction and the ongoing business of the potential
subsidiaries of the Company. For further information on such potential risks,
please see the Prospectus Supplement dated April 19, 2002.
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. The Company's
investment in ACL Notes represents high yield lower grade debt. The market value
for higher yielding debt securities tends to be more sensitive to economic
conditions and individual corporate developments than those of higher rated
securities. In addition, the secondary market for these securities is generally
less liquid. There have been no material changes to the Company's market risk
for the three months ended March 31, 2002. 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, 2001. For events that occurred subsequent to March 31, 2002
reference is made to Part II Item 5. "Other Information."
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
NAICC is a party to various legal proceedings which are considered routine
and incidental to its business and are not material to the financial condition
and operation of its business. DHC is not a party to any legal proceeding which
is considered material to the financial condition and operation of its business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
See Note 6 to Consolidated Financial Statements for discussion of potential
acquisition and related rights offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
DHC filed Current Reports on Form 8-K on March 1, 2002 and March 27, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2002
DANIELSON HOLDING CORPORATION
(Registrant)
BY:/S/DAVID BARSE
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David Barse
PRESIDENT & CHIEF OPERATING OFFICER
BY:/S/MICHAEL CARNEY
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Michael Carney
CHIEF FINANCIAL OFFICER