DANIELSON HOLDING CORP, S-3, 1996-07-05

DANIELSON HOLDING CORP
S-3, 1996-07-05
FIRE, MARINE & CASUALTY INSURANCE

Previous: FIDELITY SUMMER STREET TRUST, 497, 1996-07-05

Next: DANIELSON HOLDING CORP, S-4, 1996-07-05

<PAGE>

As filed with the Securities and Exchange Commission on July 5, 1996
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------
DANIELSON HOLDING CORPORATION
(Exact name of Registrant as specified in its charter)

DELAWARE 95-6021257
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

767 THIRD AVENUE
NEW YORK, NEW YORK 10017-2023
(212) 888-0347
(Name, address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)

---------------
LISA D. LEVEY
GENERAL COUNSEL
DANIELSON HOLDING CORPORATION
767 THIRD AVENUE
NEW YORK, NEW YORK 10017-2023
(212) 888-0347
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

---------------
Copies of communications to:
JOHN J. MCCARTHY, JR. DAVIS POLK & MICHAEL W. STAMM ANDERSON KILL OLICK &
WARDWELL 450 LEXINGTON AVENUE NEW OSHINSKY, P.C. 1251 AVENUE OF THE
YORK, NEW YORK 10017 AMERICAS NEW YORK, NEW YORK 10020-1182
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
as soon as practicable after the effective date of this Registration
Statement.
---------------
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the
following box: [_]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration for the
same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE(1)
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.10 par value.............. $85,000,000 $29,310.35
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933 for the
purpose of calculating the amount of registration fee.

---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

SUBJECT TO COMPLETION, DATED , 1996
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THE +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

PROSPECTUS
, 1996

DANIELSON HOLDING CORPORATION

COMMON STOCK

Of the shares of Common Stock $0.10 par value per share ( the "Common
Stock") being offered, shares are initially being offered for sale in the
United States and Canada by the U.S. Underwriters (the "U.S. Offering") and
shares are initially being offered for sale outside of the United States and
Canada in a concurrent offering by the International Managers (the
"International Offering" and, together with the U.S. Offering, the
"Offerings"). All of the shares of Common Stock offered hereby, are being sold
by the Company. The Common Stock is listed on the American Stock Exchange (the
"AMEX") under the symbol "DHC." On , 1996, the reported last sale price of
the Common Stock on the AMEX was per share. C. Kirk Rhein, Jr., the
Company's President and Chief Executive Officer, and James P. Heffernan, the
Company's Chief Financial Officer, will each purchase $500,000 of Common Stock
at the public offering price. See "Underwriting."

Danielson will use a substantial portion of the net proceeds of the Offerings
to finance the cash portion of the consideration to be paid in the merger of
Midland Financial Group, Inc. ("Midland") into a wholly-owned subsidiary of the
Company (the "Merger") and to make a $30 million capital contribution to such
subsidiary after the effectiveness of the Merger (the "Capital Contribution").
See "Use of Proceeds." The consummation of the Merger is a condition to the
closing of the Offerings.

IN ORDER TO AVOID AN "OWNERSHIP CHANGE" FOR FEDERAL TAX PURPOSES, DANIELSON'S
CERTIFICATE OF INCORPORATION PROHIBITS ANY PERSON FROM BECOMING A BENEFICIAL
OWNER OF 5% OR MORE OF DANIELSON'S OUTSTANDING COMMON STOCK, EXCEPT UNDER
LIMITED CIRCUMSTANCES DESCRIBED HEREIN. CONSEQUENTLY, NO PERSON MAY ACQUIRE
SHARES OF COMMON STOCK IN THE OFFERINGS IF, AFTER GIVING EFFECT TO THAT
ACQUISITION, SUCH PERSON WOULD BENEFICIALLY OWN, EITHER DIRECTLY OR INDIRECTLY,
MORE THAN SHARES OF COMMON STOCK. SEE "RISK FACTORS" BEGINNING ON PAGE
FOR A DESCRIPTION OF THIS OWNERSHIP LIMITATION AND CERTAIN OTHER FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total(3)........................................ $ $ $
</TABLE>
- --------------------------------------------------------------------------------

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $payable by the Company.
(3) The Company has granted to the U.S. Underwriters a 30-day option to
purchase up to additional shares of Common Stock at the Price to the
Public less Underwriting Discounts and Commissions, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
the Public, Underwriting Discounts and Commissions, and Proceeds to the
Company will be $ , $ and $ , respectively. See "Underwriting."

The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters and subject to various
prior conditions, including their right to reject orders in whole or in part.
It is expected that delivery of the shares of Common Stock will be made in New
York, New York, on or about , 1996.

DONALDSON, LUFKIN & JENRETTE SALOMON BROTHERS INC
SECURITIES CORPORATION
<PAGE>

FOR NORTH CAROLINA INVESTORS: THE COMMON STOCK HAS NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS DOCUMENT.
EACH NORTH CAROLINA BUYER UNDERSTANDS THAT NEITHER DANIELSON NOR ANY
SUBSIDIARY OF DANIELSON IS LICENSED AS AN INSURANCE COMPANY IN NORTH CAROLINA
NOR DO THEY MEET THE BASIC ADMISSION REQUIREMENTS FOR LICENSING AS AN
INSURANCE COMPANY IN NORTH CAROLINA.

IN CONNECTION WITH THIS OFFERING, THE U.S. UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE
COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMEX OR OTHERWISE. SUCH
STABILIZING OR MAINTENANCE, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

AVAILABLE INFORMATION

Danielson is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at its Regional Office located at:
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material may also be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Common Stock is listed for trading on the AMEX, and reports, proxy
statements and other information concerning the Company are on file for
inspection at the offices of the AMEX, 86 Trinity Place, New York, New York
10006-1881. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.

The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Common Stock offered hereby (the "Registration Statement").
This Prospectus does not contain all of the information included in the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein and filed as an exhibit to the Registration Statement are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information with respect to the Company and its
subsidiaries and the Common Stock, reference is hereby made to the
Registration Statement and the exhibits thereto which may be obtained from the
Commission in the manner set forth above.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Company's Annual Report on Form 10-K for the year ended December 31,
1995, and Quarterly Report on Form 10-Q for the quarter ended March 31, 1996,
each of which has been filed with the Commission, is hereby incorporated by
reference in and made a part of this Prospectus.

All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the Offerings shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The Company will furnish, without charge, to each person to whom this
Prospectus is delivered, upon written or oral request of such person,
including any beneficial owner, a copy of any and all of the information that
has been incorporated by reference into the Registration Statement of which
this Prospectus is a part but which has not been delivered with this
Prospectus (not including exhibits to the information that is incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that the Registration Statement incorporates by reference);
such requests should be directed to Danielson Holding Corporation, 767 Third
Avenue, New York, New York 10017-2023, Attention: Robin M. Derin.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. See
"Glossary of Selected Insurance Terms" for definitions of certain insurance
terms used herein.

Unless otherwise indicated, the information in this Prospectus assumes (i)
the U.S. Underwriters' over-allotment option will not be exercised, (ii) the
consummation of the Merger and (iii) the consummation of the Capital
Contribution. See "PRO FORMA FINANCIAL INFORMATION." All financial information
in this Prospectus is presented in accordance with generally accepted
accounting principles ("GAAP"), unless otherwise specified. Financial
information presented in accordance with statutory accounting practices ("SAP")
is identified as such. Unless the context otherwise requires, as used in this
Prospectus "Danielson" and the "Company" refer to Danielson Holding Corporation
and its consolidated subsidiaries including NAICC, "NAICC" refers to National
American Insurance Company of California and its consolidated subsidiaries, and
"Midland" refers to Midland Financial Group, Inc. and its consolidated
subsidiaries including MRIC and SRIC; "MRIC" refers to Midland Risk Insurance
Company and its consolidated subsidiaries; and "SRIC" refers to Specialty Risk
Insurance Company and its consolidated Subsidiaries; each as of the date of the
Offerings. All information concerning Midland included in this Prospectus has
been furnished by Midland or derived from information furnished by Midland.

THE COMPANY

Danielson is a holding company which, through its principal insurance
subsidiaries, NAICC and, upon the consummation of the Merger, Midland, is
engaged in specialty property and casualty insurance businesses. Danielson's
insurance subsidiaries are focused primarily on the non-standard automobile and
workers' compensation lines of business. Danielson seeks to build stockholder
value through strategic acquisitions of specialty insurance companies as well
as internal growth. In addition to its core insurance subsidiaries, Danielson
also owns a small California non-bank trust company that provides personal
trust and employee benefit trust services.

Danielson has entered into an agreement providing for the acquisition of
Midland concurrent with the closing of the Offerings. Midland will increase the
Company's presence in the non-standard automobile insurance market and
diversify the Company's business geographically. In addition, management
believes that the insurance operations it will realize savings by consolidating
certain administrative and other functions of NAICC and Midland.

Danielson is the successor to Mission Insurance Group, Inc. ("Mission"), a
company successfully restructured and reorganized through efforts that began in
1985. After the Mission restructuring and as a result of the continuing run-off
of Mission's business by trusts administered by various state regulators,
Danielson preserved a federal net operating loss carryforward (an "NOL") in
excess of $1 billion which expires over the period ending 2010. As a result of
the NOL, Danielson does not expect to pay any material federal income taxes
during the period that its NOL is available. In connection with the Merger, the
Company will recognize an increase in its paid-in-capital of approximately $150
million, reflecting the likelihood of its future utilization of a portion of
its NOL.

On a pro forma basis after giving effect to the Merger, Danielson had net
premiums written of $227.1 million and $47.3 million for the year ended
December 31, 1995 and the three months ended March 31, 1996, respectively, and
stockholders' equity of $327 million at March 31, 1996.

3
<PAGE>

Danielson's Strategy

Danielson's long-term strategy is to build stockholder value as a specialty
property and casualty insurance company while maintaining a strong capital
structure by:

Concentrating on specialty insurance lines of business: Danielson
concentrates on specialty insurance lines of business which the Company
believes provide opportunities to earn superior returns on invested
capital. Specialty insurers develop in-depth customer knowledge and are
able to market specifically tailored products to these customers. The
Company is currently a specialty writer of workers' compensation and non-
standard automobile coverages primarily in California. Danielson plans to
grow its specialty insurance lines by acquisition as well as by internal
growth. The Midland acquisition is a significant step in this strategy.

Achieving superior underwriting results: The Company's subsidiaries are
directed towards achieving superior underwriting results. Each subsidiary
is evaluated primarily on the basis of profitability rather than premium
growth or market share. Over the long-term, management believes that
superior underwriting results will be achieved through a continued
concentration on specialty insurance lines, pricing discipline and
compensation plans which reward the management team of each subsidiary, to
a large extent, based on underwriting profitability.

Growing pre-tax earnings: The availability of Danielson's NOL enables the
Company to enhance cash flow by eliminating a substantial portion of its
federal income tax liability. Consequently, Danielson's operating strategy
is to generate significant growth in pre-tax income. Danielson implements
that strategy in a number of ways. First, Danielson's policy is to reinvest
in each subsidiary a major part of that subsidiary's pre-tax income,
thereby enabling that subsidiary to increase its capital at compound growth
rates more rapidly than would otherwise be possible. Second, Danielson's
investment portfolio is invested primarily in higher-yielding taxable
securities rather than in tax exempt securities. Third, Danielson maintains
conservative financial leverage and does not incur substantial amounts of
debt.

Aligning the interests of managers and stockholders: On an aggregate
basis, directors, officers and their families beneficially own
approximately [sp2f]% of the outstanding Common Stock, pro forma for the
Merger and the Offerings. In addition, in conjunction with the Offerings,
C. Kirk Rhein, Jr., the Company's President and Chief Executive Officer and
James P. Heffernan, the Company's Chief Financial Officer, will each
purchase $500,000 of Common Stock at the public offering price. The Company
seeks further to align the interests of management and stockholders by
compensating the management team of each operating subsidiary, to a large
extent, based on the operating and financial results of such subsidiary.

NAICC

NAICC is a specialty writer of workers' compensation and non-standard
automobile insurance policies in California and other western states. NAICC
markets its workers' compensation and non-standard commercial automobile
insurance products through more than 700 independent insurance agents and
brokers, none of whom individually produces more than 5% of NAICC's gross
premiums written. NAICC markets its non-standard personal automobile insurance
through one general agent that utilizes approximately 600 independent agents.

NAICC's objective is to grow through expansion of its specialty insurance
product lines and its geographic territories. The focus of its strategy is to
provide a limited number of insurance products to certain targeted markets in a
highly efficient and profitable manner. NAICC is willing to redeploy its
capital to profitable lines

4
<PAGE>

and profitable markets if and when any specific insurance line or market
suffers excessive competition and rate deterioration. NAICC's underwriting
philosophy emphasizes profitability over premium growth and market share. In
accordance with this philosophy, NAICC sets its premiums based upon loss
experience and risk exposure rather than upon market factors.

The 46.5% decline in NAICC's workers' compensation policies in force from
1994 to 1995 demonstrates NAICC's underwriting philosophy. The profitability of
the workers' compensation line of business in California in 1992, 1993 and 1994
increased competition in that line. That competition, coupled with California's
adoption of a new "open rating" law in 1995, created a new and less profitable
pricing environment in the California workers' compensation market, and in
accordance with its underwriting philosophy, NAICC continues to price its
workers' compensation insurance in a way that NAICC expects will result in
profitable operating results. As a result, NAICC has experienced a reduction in
the number of workers' compensation policies written and net premiums written
in recent periods and has consequently redeployed a portion of its capital into
its non-standard automobile insurance business. NAICC's non- standard
automobile insurance business has grown from its inception in 1993 to $28.8
million in direct premiums written for the year ended December 31, 1995.

NAICC is rated B++ (Very Good) by A.M. Best Company ("A.M. Best"), an
independent insurance rating organization.

Midland

Midland specializes in the underwriting, marketing and servicing of non-
standard personal automobile insurance. To a lesser extent, Midland also
insures commercial automobile and related risks and coastal dwellings and
provides automobile insurance through its Auto 13 program to individuals who
file for bankruptcy protection. Midland markets its products primarily through
three major company-owned regional offices and through three independently
owned general agencies, which use approximately 8,500 independent agents
located in 20 southern and western states.

Midland's strategy is to be a low cost provider of non-standard personal
automobile insurance. Midland's management believes that the non-standard
personal automobile market provides greater opportunities for profit than other
segments of the automobile property and casualty insurance market. Midland's
management is pursuing a growth strategy that includes an underwriting and
marketing focus on selected segments of the non-standard market, particularly
the minimum liability limit insured. Midland seeks to expand primarily within
its existing markets because it believes that expansion in these markets is
more cost effective than expansion in new markets. Midland also has implemented
a direct marketing program in areas where its independent agency force is less
established.

In 1995 and the first quarter of 1996, Midland's financial results were
negatively affected by Midland's expansion of its new full coverage personal
automobile program which was marketed primarily in the states of California and
Arizona beginning in late 1994 and early 1995. Midland has taken several
significant steps in an effort to restore profitability, including: (i) the
discontinuation of the full coverage personal automobile program in California;
(ii) efforts to strengthen claims management; and (iii) the expansion of its
actuarial department which enables Midland to more closely monitor
profitability and pricing. While the first quarter of 1996 for Midland was
profitable, results continued to reflect adverse developments from the full
coverage line that was discontinued early in 1995.

Midland is rated B (Adequate) by A.M. Best. On February 27, 1996, A.M. Best
announced that it expects to upgrade Midland's rating following the Merger to
B+ (Very Good).

5
<PAGE>

THE MERGER

Danielson entered into an Agreement and Plan of Merger, dated as of February
26, 1996 (as amended, the "Merger Agreement"), which provides for the
acquisition of Midland by Danielson. The Merger Agreement provides that each
share of common stock, no par value, of Midland ("Midland Common Stock"),
issued and outstanding prior to the Effective Time will be converted in the
Merger into a right to receive consideration, consisting of a combination of
cash, Common Stock and Series A Cumulative Perpetual Preferred Stock of the
Company ("Preferred Stock"), which will have an aggregate value, based on
valuation provisions agreed upon in the Merger Agreement, equal to $14.50 (the
"Per Share Merger Price"). The total consideration which Danielson is required
to pay in the Merger (currently estimated to be $81,066,832, when valued in
accordance with the terms of the Merger Agreement and assuming 5,590,816 shares
of Midland Common Stock are outstanding at the Effective Time) will consist of
50% cash, 40% Preferred Stock (valued in accordance with the terms of the
Merger Agreement) and 10% Common Stock (valued in accordance with the terms of
the Merger Agreement), with the mix of consideration being subject to election
by Midland stockholders. Danielson has agreed to make a $30 million Capital
Contribution to Midland upon consummation of the Merger.

Danielson believes that Midland will benefit from gaining access to NAICC's
superior claims handling systems. Danielson expects that the Capital
Contribution will provide Midland the flexibility to reduce or eliminate
Midland's reliance on its quota-share reinsurance facility commencing January
1, 1997 and will enable Midland to refinance $26 million in secured bank debt
on more attractive terms, both of which are expected to improve Midland's
profitability. Due to the availability of Danielson's NOL, Midland will benefit
from repositioning its investment portfolio from tax-exempt securities to
higher-yielding taxable securities.

The operations and strategies of NAICC and Midland will remain separate and
distinct after the Merger. Certain personnel of the two operations will be
pooled, however, in order to enhance combined profitability. In addition,
senior executive officers of Danielson, Midland and NAICC will be members of an
Insurance Executive Committee, the purpose of which will be to identify and
exploit opportunities to reduce costs through joint or pooled efforts.

The Company intends to finance the cash portion of the Merger consideration
and the Capital Contribution with the net proceeds of the Offerings. At the
closing of the Offerings, and as a condition thereto, the Company will
consummate the Merger.

DANIELSON'S NOL AND DEFERRED TAX ASSET

Danielson's NOL

As of December 31, 1995, Danielson had an NOL of approximately $1.4 billion
for federal income tax purposes. This number is based upon actual federal
consolidated income tax filings for the periods through December 31, 1994 and
an estimate of the 1995 taxable loss. Some or all of the NOL may be available
to offset, for federal income tax purposes, the future taxable income, if any,
of Danielson and its wholly-owned subsidiaries. While the IRS may attempt to
challenge the amount or availability of this net operating loss in the event of
a future tax audit, management believes, based in part upon the views of its
tax advisors, that its net operating loss calculations are reasonable and that
it is reasonable to conclude that Danielson's net operating losses of in excess
of $1 billion would be available for use by Danielson. There can be no
assurance, however, that Danielson will have available for use some or all of
its NOL if such NOL is challenged on audit by the IRS and if such IRS position
is upheld in a final unappealable order of a court.

6
<PAGE>

Danielson's NOL will expire, if not used, in the following approximate
amounts in the following years (dollars in thousands):

<TABLE>
<CAPTION>
AMOUNT OF
YEAR ENDING CARRYFORWARDS
DECEMBER 31, EXPIRING
------------ -------------
<S> <C>
1998 $ 32,804
1999 203,869
2000 249,488
2001 155,768
2002 169,767
2003 196,476
2004 75,933
2005 99,961
2006 129,755
2007 44,873
2008 4,626
2009 10,938
2010 6,107
</TABLE>

Danielson's ability to utilize its NOL would be substantially reduced if
Danielson were to undergo an "ownership change" within the meaning of Section
382(g)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). In an
effort to reduce the risk of an ownership change, Danielson has imposed
restrictions on the ability of holders beneficially owning 5% or more of Common
Stock ("5% Stockholders") to transfer the Common Stock owned by them and to
acquire additional shares of Common Stock, as well as the ability of others to
become 5% Stockholders as a result of transfers of Common Stock.
Notwithstanding such transfer restrictions, there could be circumstances under
which an issuance by Danielson of a significant number of new shares of Common
Stock or other new class of equity security having certain characteristics (for
example, the right to vote or to convert into Common Stock) might result in an
ownership change under the Code. The issuance of Danielson equity securities in
the Merger and the Offerings will not effect such an ownership change.

Deferred Tax Asset

Statement of Financial Accounting Standards No.109 "Accounting For Income
Taxes" ("SFAS 109") requires corporations having an NOL or similar favorable
tax attributes to account for those tax attributes as assets. Under the asset
and liability method of accounting for income taxes required by SFAS 109, a
corporation that has an NOL should currently recognize, for financial
accounting purposes, the future federal tax savings by use of its NOL by
establishing a deferred tax asset. Deferred tax assets are valued for this
purpose using the currently enacted tax rates for the future years in which the
NOL will be available. That value is then reduced by a "valuation allowance" if
it is more likely than not that some portion of the deferred tax asset will not
be realized (for example, because of insufficient levels of future taxable
income). After recognizing a deferred tax asset, the entity records an income
tax provision on its statement of operations similar to the income tax
provision established by other taxable entities. Thereafter, the income tax
provision amortizes the deferred tax asset and does not reflect an actual cash
charge.

Danielson has accounted for deferred income taxes in accordance with the
asset and liability method since the adoption of SFAS 109 in 1993. Danielson
considered all relevant factors impacting its business operations (such as the
size of NAICC and Danielson Trust, the operating results of NAICC and Danielson
Trust and the competitive environment in which NAICC and Danielson Trust
operate) in order to determine whether the operations were more likely than not
to utilize the NOL. After consideration of all positive and negative factors
prior to consummation of the Merger, substantially the full value of the
Danielson NOL has been offset by a valuation allowance and Danielson has not
recognized any material deferred tax asset.

7
<PAGE>

Upon consummation of the Merger, Danielson will recognize a deferred tax
asset of approximately $150 million by increasing paid-in capital by that
amount. The post-Merger reduction of the valuation allowance applicable to
Danielson's deferred tax asset is based primarily on Danielson's conclusion
that it is more likely than not that the combined post-Merger business
operations will earn future taxable income during the period in which
Danielson's NOL is available. The estimate used by Danielson for this purpose
is based very significantly upon Midland's business prospects. The estimate
relating to Midland has been reviewed by Midland and is based on Midland's
estimate of its post-Merger taxable income. Some of the assumptions underlying
Danielson's estimate inevitably will not materialize, and unanticipated events
may occur which could affect Danielson's actual results, positively or
negatively. It should be noted, for example, that Danielson's estimate assumes,
as required by SFAS 109, that no additional acquisitions will be made by
Danielson during the NOL period. As stated above, a strategic objective of
Danielson is to make additional acquisitions.

Danielson's post-Merger projected future taxable income will be continuously
re-estimated as actual experience emerges. To the extent that such revised
estimates are less than previously projected, results of operations will be
adversely affected by an increase to the valuation allowance. To the extent
that such revised estimates indicate that the original NOL recognition should
have been greater than $150 million, the valuation allowance will be reduced by
a corresponding increase to paid-in capital.

THE OFFERINGS

<TABLE>
<S> <C>
Common Stock Offered
By the Company
U.S. Offering.......................... shares
International Offering................. shares
Total................................ shares
Common Stock to be outstanding
after the Offerings..................... shares (1)
Use of proceeds.......................... The net proceeds of the Offerings will
be approximately $ million. The
Company intends to use approximately
$40 million of such proceeds to
finance the cash portion of the Merger
consideration and $30 million to
finance the Capital Contribution. The
balance, if any, of such net proceeds
will be used for general corporate
purposes. See "Use of Proceeds."
AMEX symbol.............................. DHC
</TABLE>
- --------------------
(1) Excludes options outstanding on the date hereof to purchase approximately
1,271,537 shares of Common Stock at a weighted average exercise price of
$3.52. Also excludes 630,000 and 1,361,100 shares of Common Stock available
for issuance under the Company's 1990 Stock Option Plan and 1995 Stock and
Incentive Plan, respectively.

8
<PAGE>

SUMMARY HISTORICAL FINANCIAL DATA OF DANIELSON

The following selected consolidated financial data as of March 31, 1995 and
1996 and for each of the three-month periods ended March 31, 1995 and 1996 have
been derived from unaudited consolidated financial statements and include all
adjustments that Danielson considers necessary for a fair presentation of such
financial information for those periods. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of the results
that may be expected for any other interim period or for the full year. The
consolidated financial data as of December 31, 1991, 1992, 1993, 1994 and 1995
and for each of the years in the five-year period ended December 31, 1995 have
been derived from the audited consolidated financial statements of Danielson.
The data set forth below should be read in conjunction with "DANIELSON
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" included elsewhere herein and the Consolidated Financial Statements
of Danielson and related notes included elsewhere herein.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEARS ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Gross premiums written.. $64,324 $78,319 $ 95,896 $104,379 $70,949 $21,711 $13,110
Net premiums written.... 61,605 74,828 87,953 91,069 55,295 17,613 8,989
Net premiums earned..... 60,590 73,708 86,052 93,291 60,548 18,532 8,968
Net investment income... 11,520 10,107 13,302 11,853 13,161 3,093 2,839
Total revenues.......... 73,763 88,440 102,397 110,340 80,081 22,995 13,225
Pre-tax income (loss)... 376 1,984 2,821 3,248 2,436 651 570
Income before
extraordinary items.... 184 1,898 2,746 3,145 2,316 613 557
Net income.............. 184 8,046(3) 3,234(2)(3) 3,895(1) 2,316 613 557
Income per share before
extra-ordinary items... 0.01 0.13 0.17 0.20 0.14 0.04 0.03
Net income per share.... 0.01 0.53(3) 0.20(2)(3) 0.25(1) 0.14 0.04 0.03
Weighted average shares
outstanding............ 13,496,620 15,262,984 15,847,682 15,938,018 15,989,055(4) 16,048,970(4) 16,013,221(4)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
AS OF DECEMBER 31, (UNAUDITED)
------------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Invested assets......... $141,534 $161,468 $176,738 $181,763 $181,794 $181,687 $168,570
Total assets............ 198,873 216,868 234,150 240,529 227,924 237,331 210,389
Stockholders' equity.... 46,659 54,764 58,838 62,318 69,821 63,345 65,822
Book value per share.... 3.09 3.62 3.89 4.06 4.55 4.12 4.29
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEARS ENDED DECEMBER 31, (UNAUDITED)
------------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED GAAP RATIOS:
(6)
Loss ratio.............. 80.6% 78.3% 76.6% 72.3% 80.5% 77.9% 74.4%
Expense ratio........... 39.9 37.9 34.3 33.9 32.9 31.1 45.6
---------- ---------- ---------- ---------- ---------- ---------- ----------
Combined ratio (7)...... 120.5% 116.2% 110.9% 106.2% 113.4% 109.0% 120.0%
========== ========== ========== ========== ========== ========== ==========
</TABLE>
- --------------------
(1) Includes extraordinary gain from distribution from an unaffiliated trust.
(2) Includes extraordinary gains from a former subsidiary, as well as a former
trust administered by the California Department of Insurance (the
"California Department") as trustee.
(3) Includes extraordinary gain from a former trust administered by the
California Department as trustee.
(4) Reflects shares issued upon the 1994 exercise of options to purchase Common
Stock.
(5) Reflects operating ratios of Danielson's insurance subsidiaries.
(6) Includes 4.1%, (0.9%), 1.0%, 2.4% and 6.4% for the years ended December 31,
1991, 1992, 1993, 1994 and 1995, respectively, for losses and LAE incurred
related to claims arising from businesses in run-off since 1987, which
includes environmental claims.

9
<PAGE>

SUMMARY HISTORICAL FINANCIAL DATA OF MIDLAND

The following selected consolidated financial data as of March 31, 1995 and
1996 and for each of the three-month periods ended March 31, 1995 and 1996 have
been derived from unaudited consolidated financial statements and include all
adjustments that Midland considers necessary for a fair presentation of such
financial information for those periods. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of the results
that may be expected for any other interim period or for the full year. The
consolidated financial data as of December 31, 1991, 1992, 1993, 1994 and 1995
and for each of the years in the five-year period ended December 31, 1995 have
been derived from the audited consolidated financial statements of Midland. The
data set forth below should be read in conjunction with "MIDLAND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
included elsewhere herein and the Consolidated Financial Statements of Midland
and related notes included elsewhere herein.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEARS ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Gross premiums written.. $27,671 $60,927 $101,467 $152,404 $210,206 $49,083 $51,890
Net premiums written.... 12,492 24,748 76,819 151,046 171,833 48,293 38,271
Net premiums earned..... 11,878 20,571 55,272 118,218 172,394 38,787 39,064
Net investment income... 806 1,441 3,330 6,190 9,839 2,064 2,159
Total revenues.......... 13,071 25,137 64,509 131,486 193,046 42,870 44,731
Pre-tax income (loss)... 1,583 4,566 9,682 10,900 (17,510) 3,522 418
Net income (loss)....... 1,116 2,929 7,068 7,925 (10,071) 2,609 528
Net income (loss) 994 1,628 7,068 7,925 (10,071) 2,609 528
available to
stockholders...........
Net income (loss) per 0.64 0.56 1.34 1.45 (1.88) 0.48 0.10
share..................
Cash dividend per share. 0.13 0.09 -- 0.10 0.20 0.05 --
Weighted average shares 1,612,566 2,900,147 5,305,824 5,477,666 5,369,461 5,461,805 5,567,338
outstanding............
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
AS OF DECEMBER 31, (UNAUDITED)
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Invested assets......... $13,364 $49,483 $102,987 $165,895 $174,803 $150,787 $162,001
Total assets............ 20,630 76,315 148,708 221,820 283,531 219,977 279,575
Notes payable and other 1,128 286 20,000 40,000 27,000 19,000 26,000
debt...................
Mandatorily redeemable 4,805 -- -- -- -- -- --
preferred stock........
Stockholders' equity.... 6,480 39,880 50,620 57,794 48,845 60,407 50,581
Book value per share.... 4.40 9.18 9.57 10.81 9.06 11.29 9.12
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEARS ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED GAAP RATIOS:
Loss ratio.............. 62.3% 69.2% 69.9% 71.3% 88.2% 71.6% 82.3%
Expense ratio........... 29.5 23.0 23.4 25.1 26.8 23.7 23.5
--------- --------- --------- --------- --------- --------- ---------
Combined ratio.......... 91.8% 92.2% 93.3% 96.4% 115.0% 95.3% 105.8%
========= ========= ========= ========= ========= ========= =========
</TABLE>

10
<PAGE>

PRO FORMA FINANCIAL INFORMATION

The pro forma unaudited condensed consolidated financial statements reflect
the Merger and related transactions. The pro forma unaudited condensed
consolidated balance sheet was prepared assuming the Merger and related
transactions were consummated on March 31, 1996. The pro forma unaudited
condensed consolidated statement of operations for the three months ended March
31, 1996 and the year ended December 31, 1995 reflect the results of operations
of Danielson as if the Merger and related transactions were consummated as of
January 1, 1996 and 1995, respectively.

The historical information has been derived from the historical financial
statements of Danielson and Midland. The pro forma unaudited condensed
consolidated financial statements should be read in conjunction with the
historical consolidated financial statements of Danielson and Midland and the
notes thereto and the other financial information pertaining to Danielson and
Midland included elsewhere herein.

The pro forma unaudited condensed consolidated financial statements give
effect to the following: (i) the consummation of the Merger and the
transactions contemplated thereby; (ii) the consummation of the Offerings at an
assumed gross offering price per share, before underwriting discounts and
commissions, of $6.875; (iii) the Capital Contribution; (iv) the reduction of
Midland's general and administrative expenses associated with salaries of
certain executive officers; (v) an increase in Danielson's paid-in capital in
the amount of approximately $150 million attributable to the recognition of a
portion of the NOL in accordance with SFAS 109; and (vi) purchase accounting
adjustments to reflect Midland's assets and liabilities at fair value. The pro
forma unaudited condensed consolidated financial statements do not give effect
to the exercise of any over-allotment options in the Offerings.

The pro forma unaudited condensed consolidated financial statements have been
prepared under the purchase method of accounting for the Merger in accordance
with Accounting Principles Board Opinion No. 16. Under purchase accounting, the
acquired assets and liabilities of Midland are recognized at their fair value
as of the acquisition date. The purchase price, estimated to be approximately
$82 million, will be the cash and fair value of securities issued by Danielson
in the Merger, including acquisition related expenses. The consideration
payable in the Merger will be paid 50% in cash to be raised in the Offerings,
40% in Preferred Stock and 10% in Common Stock.

The pro forma unaudited condensed consolidated financial statements do not
purport to be indicative of the financial position or results of operations
which would have been achieved had the Merger been consummated as of the dates
indicated or for the periods presented and should not be construed as
representative of future financial position or results of operations. The
following pro forma material contains forward-looking statements which involve
risks and uncertainties. Actual results could differ materially from those
anticipated in such forward-looking statements as a result of certain factors,
including those set forth under "RISK FACTORS" and elsewhere in this
Prospectus. The pro forma adjustments are based upon available information and
assumptions that Danielson and Midland believe are reasonable under the
circumstances.

11
<PAGE>

DANIELSON HOLDING CORPORATION PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996
(In thousands, except share and per share information)

LOSSES AND EXPENSES
Net losses and LAE........ 6,671 32,147 -- 38,818
Policyholder dividends.... 44 -- -- 44
Policy acquisition
expenses................. 2,539 9,746 -- 12,285
General and administrative
expenses................. 3,358 1,755 (150)(1) 4,963
Goodwill amortization..... 43 36 814 (2) 893
Interest expense.......... -- 629 -- 629
---------- --------- ---- ----------

Total losses and
expenses................ 12,655 44,313 664 57,632
Income before provision
(benefit) for income tax
and minority interests... 570 418 (664) 324
Income tax provision
(benefit)................ 13 (125) 51 (3) (61)
---------- --------- ---- ----------

Income before minority
interests................ 557 543 (715) 385
Minority interests........ -- (15) -- (15)
---------- --------- ---- ----------

Net income (loss)........ 557 528 (715) 370
========== ========= ==== ==========

Net income................ 557 528 370
Less preferred dividends.. -- -- (811)
---------- --------- ---- ----------
Net income (loss)
available to common
stockholders............. $ 557 $ 528 $ (441)
========== ========= ==== ==========

Net income (loss) per
common share (4)......... $ 0.03 $ 0.10 $ (0.01)
========== ========= ==== ==========
Weighted average common
shares outstanding (4)... 16,013,221 5,567,000 29,528,310
</TABLE>
- --------------------
(1) Represents the reduction of executive salaries for the three months ended
March 31, 1996, associated with Midland personnel whose positions will be
eliminated. The absence of such personnel, including Midland's Chairman and
Vice Chairman of the Board, is assumed not to adversely impact the
operations of Midland.

(2) Represents the amortization of goodwill, using an amortization period no
greater than 15 years.

(3) Represents the tax effect of the reduction of executive salaries at a rate
of 34% (see note 1).

(4) The pro forma earnings per share data is based on the weighted average
number of shares of Common Stock and common share equivalents, including
stock options outstanding during the year, adjusted to give effect to
shares assumed to be issued in the Offerings and in the Merger as of
January 1, 1996. The pro forma net income available to common stockholders
includes dividends of $811,000 assumed to have been declared at a rate of
10% on the pro forma Preferred Sock outstanding as of January 1, 1996.

Interest income of $549,000 which is estimated to be earned on fixed maturities
purchased using the proceeds of the Offerings for the Capital Contribution and
otherwise in excess of the Merger consideration ($37,247,000 at a yield of
5.9%), is not included in the Pro Forma Unaudited Condensed Consolidated
Statement of Operations.

The elimination of expenses in the estimated amount of $99,000 relating to
Midland's status as a public company, is not included in the Pro Forma
Unaudited Condensed Consolidated Statement of Operations.

Non-recurring charges in the estimated amount of $500,000 that will be incurred
in 1996 by Midland in connection with the Merger are not included in the Pro
Forma Unaudited Condensed Consolidated Statement of Operations.

12
<PAGE>

DANIELSON HOLDING CORPORATION PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1995
(In thousands, except share and per share information)

<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED
DANIELSON MIDLAND ADJUSTMENTS PRO FORMA
(HISTORICAL) (HISTORICAL) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Net premiums earned and
policy fees............... $ 60,548 $ 183,043 -- $ 243,591
Net investment income...... 13,161 9,839 -- 23,000
Net realized investment
gains (losses)............ 208 (3) -- 205
Other income............... 6,164 167 -- 6,331
---------- --------- ------ ----------
Total revenues............ 80,081 193,046 -- 273,127
LOSSES AND EXPENSES
Losses and LAE............. 48,715 152,103 -- 200,818
Policyholder dividends..... 137 -- -- 137
Policy acquisition
expenses.................. 13,391 50,070 -- 63,461
General and administrative
expenses.................. 14,544 6,368 (600)(1) 20,312
Goodwill amortization...... 858 135 3,393 (2) 4,386
Interest expense........... -- 1,880 -- 1,880
---------- --------- ------ ----------
Total losses and expenses. 77,645 210,556 2,793 290,994
Income (loss) before
provision (benefit) for
income tax and minority
interests................. 2,436 (17,510) (2,793) (17,867)
Income tax provision
(benefit)................. 120 (7,445) 204 (3) (7,121)
---------- --------- ------ ----------
Income (loss) before
minority interests........ 2,316 (10,065) (2,997) (10,746)
Minority interests......... -- (6) -- (6)
---------- --------- ------ ----------
Net income (loss)......... $ 2,316 $ (10,071) (2,997) $ (10,752)
========== ========= ====== ==========
Net income (loss).......... $ 2,316 $ (10,071) $ (10,752)
Less preferred dividends... -- -- (3,243)
========== ========= ====== ==========
Net income (loss) available
to common stockholders.... $ 2,316 $ (10,071) $ (13,995)
========== ========= ====== ==========
Net income (loss) per
common share (4).......... $ 0.14 $ (1.88) $ (0.47)
========== ========= ====== ==========
Weighted average shares
outstanding (4)........... 15,989,055 5,369,461 29,531,669
</TABLE>
- --------------------
(1) Represents the reduction of executive salaries for the year ended December
31, 1995, associated with Midland personnel whose positions will be
eliminated. The absence of such personnel, including Midland's Chairman and
Vice Chairman of the Board, is assumed not to adversely impact the
operations of Midland.

(2) Represents the amortization of goodwill, using an amortization period no
greater than 15 years.

(3) Represents the tax effect of the reduction of executive salaries at a rate
of 34% (see note 1).

(4) The pro forma earnings per share data is based on the weighted average
number of shares of Common Stock, and common share equivalents, including
stock options outstanding during the year, adjusted to give effect to
shares assumed to be issued in the Offerings and in the Merger as of
January 1, 1995. The pro forma net income available to common stockholders
includes dividends of $3,243,000 assumed to have been declared at a rate of
10% on the pro forma Preferred Stock outstanding as of January 1, 1995.

Interest income of $2,198,000 which is estimated to be earned on fixed
maturities purchased using the proceeds of the Offerings for the Capital
Contribution and otherwise in excess of the Merger consideration ($37,247,000
at a yield of 5.9%), is not included in the Pro Forma Unaudited Condensed
Consolidated Statement of Operations.

The elimination of expenses in the estimated amount of $395,000 relating to
Midland's status as a public company, is not included in the Pro Forma
Unaudited Condensed Consolidated Statement of Operations.

13
<PAGE>

DANIELSON HOLDING CORPORATION PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
BALANCE SHEET INFORMATION MARCH 31, 1996
(In thousands, except share and per share information)

<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED
DANIELSON MIDLAND ADJUSTMENTS PRO FORMA
(HISTORICAL) (HISTORICAL) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities
available-for-sale..... $162,916 $147,163 $ 37,247 (1) $347,326
Equity securities....... 602 14,838 -- 15,440
Short-term investments.. 5,052 -- -- 5,052
-------- -------- -------- --------
Total investments...... 168,570 162,001 37,247 367,818
Cash and cash
equivalents............ 294 3,925 (611)(1) 3,608
Premiums and fees
receivable............. 7,295 38,755 -- 46,050
Reinsurance
recoverables........... 21,075 19,002 -- 40,077
Prepaid reinsurance
premium................ 2,414 21,408 -- 23,822
Deferred acquisition
costs.................. 1,031 9,440 (5,000)(2) 5,471
Excess cost over net
assets acquired........ 2,613 -- 40,682 (3) 43,295
Deferred tax asset...... -- 4,350 150,000 (4) 154,350
Other assets............ 7,097 20,694 -- 27,791
-------- -------- -------- --------
Total assets........... $210,389 $279,575 $222,318 $712,282
======== ======== ======== ========
LIABILITIES
Unpaid losses and loss
adjustment expenses.... $124,258 $107,716 -- $231,974
Unearned premiums....... 8,772 81,882 -- 90,654
Policyholder dividends.. 4,665 -- -- 4,665
Notes payable........... -- 26,000 -- 26,000
Other liabilities....... 6,872 13,396 4,585 (5) 24,853
-------- -------- -------- --------
Total liabilities...... 144,567 228,994 4,585 378,146
STOCKHOLDERS' EQUITY
Preferred Stock......... -- -- 130 (6) 130
Common Stock............ 1,537 41,625 1,354 (7) 2,891
(41,625)(3)
Additional paid-in
capital................ 46,131 1,887 266,830 (8)
(1,887)(3) 312,961
Net unrealized gain on
available-for-sale
securities............. 639 715 (715)(3) 639
Retained earnings....... 17,581 6,354 (6,354)(3) 17,581
Treasury stock.......... (66) -- -- (66)
-------- -------- -------- --------
Total stockholders'
equity................ 65,822 50,581 217,733 334,136
-------- -------- -------- --------
Total liabilities and
stockholders' equity... $210,389 $279,575 $222,318 $712,282
======== ======== ======== ========
Book value per share... $4.29 $9.12 -- $10.44
</TABLE>
- --------------------
(1) Investment in fixed maturities represents the purchase of fixed maturity
securities from proceeds of the Offerings of which $30,000,000 will be
contributed post-Merger to Midland. The changes in cash and cash
equivalents represent the estimated expenses to be incurred by Danielson in
connection with the Merger.

(2) Represents the purchase accounting adjustment to reflect the value of
business acquired.

(3) Represents the excess of cost over net assets acquired and the elimination
of the equity accounts of Midland at March 31, 1996.

(4) Represents the recording of a deferred tax asset relating to Danielson's
NOL which is recorded in connection with the Merger.

(5) Represents the recording of accruals for certain non-recurring merger
expenses contingent upon consummation of the Merger.

(6) Danielson is authorized to issue 10,000,000 shares of preferred stock, par
value $0.10 per share. Of such shares, 1,300,000 have been designated
Series A Preferred Stock. On a pro forma basis as of March 31, 1996, there
would be 1,297,069 shares of Series A Preferred Stock outstanding having an
aggregate value of $32,427,000.

14
<PAGE>

(7) Danielson is authorized to issue 40,000,000 shares of Common Stock, par
value $0.10 per share. At March 31, 1996, there were 28,913,684 shares of
Common Stock issued and 28,903,045 of such shares outstanding after giving
effect to the issuance of 13,542,790 shares of Common Stock at an assumed
value of $6.875 per share in the Offerings and in the Merger.

Midland is authorized to issue 50,000,000 shares of Midland Common Stock, no
par value. At March 31, 1996 there were 5,546,522 shares of Midland Common
Stock issued and outstanding and 5,590,816 shares (including unexercised
options for 44,294 shares) of Midland Common Stock expected to be converted
in the Merger.

(8) Represents (i) Preferred Stock issued in connection with the Merger in the
amount of $32,427,000 less par value of Series A Preferred Stock issued in
the amount of $130,000 (ii) Common Stock issued for purposes of the
Offerings and in the Merger in the amount of $93,107,000 less par value of
Common Stock issued in the amount of $1,354,000 and other direct costs of
stock issuance, including estimated underwriting fees in the amount of
$7,220,000 and (iii) the recording of a deferred tax asset in the amount of
$150,000,000 attributable to Danielson's NOL which will be recognized in
connection with the Merger.

15
<PAGE>

RISK FACTORS

The shares of Common Stock are subject to a number of material risks,
including those enumerated below. Investors should carefully consider these
risk factors together with all of the information set forth or incorporated by
reference in this Prospectus in determining whether to purchase any shares of
Common Stock. This Prospectus contains forward-looking statements which
involve risks and uncertainties. Danielson's actual results could differ
materially from those anticipated in the forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.

Holding Company Structure; Dividend Restrictions

Danielson (on a parent-only basis) currently is, and after the Merger will
continue to be, a holding company with substantially all its operations
conducted through its subsidiaries. Danielson, however, will be required to
make continuing expenditures for administrative expenses, corporate services
and dividends on the Preferred Stock. Danielson relies primarily on its
existing parent company cash and short-term investments to meet its liquidity
needs. Danielson may in the future also rely on dividends and tax sharing
payments from its subsidiaries to meet its obligations, although there can be
no assurance that such funds will be available.

Payments of future dividends by the insurance subsidiaries of Danielson are
subject to various laws and regulations which limit the amount of dividends
that can be paid without prior approval from the applicable state department
of insurance. None of NAICC, MRIC or SRIC is able to pay dividends during 1996
without prior approval of the insurance regulators of California, in the case
of NAICC, and Tennessee, in the cases of MRIC and SRIC. It is anticipated that
Midland and NAICC will be able to pay dividends based on 1996 net income, if
any. Under California and Tennessee laws, generally insurance companies may
not, without prior regulatory approval, pay dividends in excess of their
accumulated earned surplus and are further limited to the greater of (i) 10%
of the prior year's statutory surplus, and (ii) the prior year's statutory net
income. The maximum dividend amount permitted by law without prior approval is
not indicative of an insurer's actual ability to pay dividends, which may be
further constrained by business and regulatory considerations, such as the
impact of dividends on surplus which could affect an insurer's ratings, its
competitive position, the amount of premiums that it can write and its risk-
based capital ("RBC") requirements.

A prolonged material decline in insurance subsidiary profits or materially
adverse insurance regulatory developments could subject Danielson to shortages
of cash because of its resulting inability to receive dividends from its
subsidiaries.

Nature of the Business; Competition

The insurance business underwritten by Danielson is affected by many factors
such as weather conditions and economic activity that can cause fluctuations
in the results of operations. An economic downturn in the states in which
Danielson writes business could result in fewer car sales, less demand for
automobile insurance and lower policy amounts in addition to increased
workers' compensation claims. Severe adverse weather conditions could also
adversely affect Danielson's business. These factors, together with
competitive pricing, could result in increases in Danielson's loss ratios and
fluctuations in Danielson's underwriting results and net income. Many of these
factors are not subject to the control of Danielson.

Danielson competes both with large national writers and with smaller
regional companies in each state in which it operates. Certain of these
competitors are larger and have greater financial resources than Danielson. In
addition, certain competitors of Danielson in the workers' compensation line
of business have, from time to time, decreased their prices significantly to
gain market share. Danielson's growth depends on its ability to expand in the
states in which it already does business and to expand into other states.

Availability of NOL and Deferred Tax Asset

Danielson has a federal consolidated NOL expiring in the period through 2010
in an aggregate amount of approximately $1.4 billion at December 31, 1995.
Danielson expects that some or all of its consolidated NOL

16
<PAGE>

for federal income tax purposes will be available to offset future taxable
income, if any, of Danielson and thereby reduce federal income tax payments
after the time the Merger becomes effective (the "Effective Time"). The
continued availability of the NOL is premised on the conclusion that the
"principal purpose" of each of the Merger and Danielson's restructuring and
reorganization as successor to Mission is related to valid business objectives
and not to enable Danielson to utilize its NOL. The Internal Revenue Service
(the "IRS") has not examined Danielson's tax returns for the years in which
the losses giving rise to the NOL were reported. The IRS may attempt to
challenge the amount or availability of the NOL in the event of a future tax
audit of such year or years in which the NOL is utilized. A disallowance by
the IRS of all or a portion of the NOL recognized by Danielson could, if
sustained by the courts, effectively eliminate Danielson's NOL and could,
therefore, have an adverse effect on Danielson's financial condition.

Upon the consummation of the Merger and in accordance with SFAS 109,
Danielson will increase its paid-in capital by approximately $150 million to
recognize a portion of its NOL. The amount of the corresponding deferred tax
asset reflects, among other things, Danielson's best estimate, as of June
1996, of the post-Merger taxable income of Danielson, NAICC, Midland and
Danielson Trust. Some of the assumptions underlying Danielson's estimate
inevitably will not materialize, and unanticipated events may occur which
could affect Danielson's actual results, positively or negatively. Danielson
periodically reevaluates the assumptions underlying such deferred tax asset.
Any material change in these assumptions could result in a corresponding
adjustment to the deferred tax asset.

Regulation

Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The agencies
established pursuant to these state laws have broad administrative and
supervisory powers relating to the granting and revocation of licenses to
transact insurance business, regulation of trade practices, establishment of
guaranty associations, licensing of agents, approval of policy forms, premium
rate filing requirements, reserve requirements, the form and content of
required regulatory financial statements, periodic examinations of insurers'
records, capital and surplus requirements and the maximum concentrations of
certain classes of investments. These laws, in general, also require approval
of the particular insurance regulators prior to certain actions by the
insurance companies, such as the payment of dividends in excess of statutory
limitations (as discussed under "Holding Company Structure; Dividend
Restrictions" above) and certain transactions and continuing service
arrangements with affiliates. The laws of most states provide for the filing
of premium rate schedules and other information with the insurance
commissioner, either directly or through rating organizations. The
commissioner generally has powers to disapprove such filings or make changes
to the rates if they are found to be excessive, inadequate or unfairly
discriminatory. The determination of rates is based on various factors,
including loss and loss adjustment expense experience. The failure to obtain,
or delay in obtaining, the required approvals could have an adverse impact on
the operations of Danielson's insurance subsidiaries.

The National Association of Insurance Commissioners (the "Association") has
adopted the Risk-Based Capital For Insurers Model Act (the "Model Act") which
applies to property and casualty companies. The RBC formulas serve as
benchmarks for regulators to evaluate capital adequacy. The Model Act provides
for increasing levels of regulatory intervention as the ratio of an insurer's
total adjusted capital and surplus decreases relative to its RBC, culminating
with mandatory control of the operations of the insurer by the domiciliary
insurance department at the so-called "mandatory control level." The RBC
formulas became effective in 1994 for property and casualty companies. Based
on the 1995 results, all of Danielson's insurance subsidiaries meet or exceed
all minimum applicable RBC standards developed by the Association.

Adequacy of Provisions for Unpaid Losses and Loss Adjustment Expenses

The insurance subsidiaries of Danielson establish provisions to cover their
estimated liability for losses and loss adjustment expenses ("LAE") with
respect to both reported and unreported claims as of the end of each
accounting period. By their nature, such provisions for unpaid losses and LAE
do not represent an exact

17
<PAGE>

calculation of liabilities. Rather, such provisions for unpaid losses and LAE
are estimates involving management's projections as to the ultimate settlement
and administration of claims. These expectations are, in turn, based on facts
and circumstances known at the time, predictions of future events, estimates
of future trends in the severity and frequency of claims and judicial theories
of liability as well as inflation. Danielson's insurance subsidiaries
regularly review their respective reserve techniques and reserve positions and
believe that adequate provision has been made for their respective unpaid
losses and LAE. There can be no assurance that currently established
provisions for unpaid losses and LAE will prove adequate in light of
subsequent actual experience. Future earnings could be adversely impacted
should future loss development require increases in provisions for unpaid
losses and LAE previously established for prior periods.

Investment Portfolio; Effects of Changes in Interest Rates

The investment portfolios of Danielson's insurance subsidiaries include
fixed maturity securities, such as investment grade and publicly-traded
corporate debt securities. In addition, Danielson's investment portfolio
includes mortgage-backed securities, including collateralized mortgage
obligations. Certain risks are inherent in connection with fixed maturity
securities, including loss upon default and price volatility in reaction to
changes in interest rates and general market factors. Certain additional risks
are inherent with mortgage-backed securities, including the risks associated
with reinvestment of proceeds due to prepayments of such obligations in a
period of declining interest rates.

Control; 5% Limitation

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), a corporation possessing an NOL (a "loss corporation") would be
restricted in the use of its NOL if the loss corporation were to undergo an
"ownership change" within the meaning of the Code and regulations promulgated
thereunder. Danielson believes that the issuance of Danielson equity
securities in the Merger and the Offerings will not cause an ownership change
which would restrict the ability of Danielson to utilize its NOL. Danielson's
ability to issue significant amounts of Common Stock in connection with future
acquisitions, however, may be limited by such ownership change rules.

In order to avoid an ownership change and, thus, to protect Danielson's
ability to utilize its NOL, Danielson's Certificate of Incorporation contains
a stock ownership limitation (the "5% Limitation") as a restriction on the
ability of certain existing or potential stockholders to acquire securities of
Danielson. See "DESCRIPTION OF DANIELSON CAPITAL STOCK--Common Stock, Transfer
Restrictions." If such provisions for any reason do not prove adequate to
prevent an ownership change, Danielson's NOL may not be available to offset
its future taxable income. The 5% Limitation, however, may also have the
effect of preserving effective control of Danielson by its principal
stockholders and preserving the Danielson board of directors' and management's
tenure with Danielson. Danielson's Certificate of Incorporation also contains
provisions requiring Danielson to issue in Danielson's name, as escrow agent,
certificates representing shares of Common Stock that are beneficially owned
by holders of 5% or more of such stock ("5% Stockholders"), and to hold such
shares until receipt of a written request from a 5% Stockholder to transfer
such shares. Danielson may refuse such request upon the advice of its tax
counsel that such transfer would create an unreasonable risk of an "ownership
change" under Section 382 of the Code. The effect of such provisions may deter
a change in control of Danielson.

18
<PAGE>

PRICE RANGE OF COMMON STOCK AND DIVIDENDS

The Common Stock has been traded on the AMEX under the symbol "DHC" since
December 6, 1990. On June 24, 1996, there were approximately 1,674 holders of
record of Common Stock.

The following table sets forth the high and low quarterly sales prices per
share of Common Stock as reported on the AMEX Consolidated Market from and
after January 1, 1994.

<TABLE>
<CAPTION>
PRICE RANGE
OF
COMMON STOCK
-------------
HIGH LOW
------ ------
<S> <C> <C>
Year Ended December 31, 1994:
1st Quarter....................................................... 8 3/8 6 1/4
2nd Quarter....................................................... 7 6 1/4
3rd Quarter....................................................... 9 3/4 6 1/4
4th Quarter....................................................... 9 1/8 6 1/4
Year Ended December 31, 1995:
1st Quarter....................................................... 7 3/4 6 5/8
2nd Quarter....................................................... 8 6 5/8
3rd Quarter....................................................... 7 7/8 7
4th Quarter....................................................... 7 3/4 6 3/4
Year Ending December 31, 1996:
1st Quarter....................................................... 8 3/8 6 5/8
2nd Quarter through June 24, 1996................................. 8 1/4 6 3/4
</TABLE>

On June 24, 1996, the closing price of the Common Stock on the AMEX was
$7.50.

To date, no dividends have been paid or declared on Common Stock. Danielson
does not expect to declare any cash dividends on Common Stock in the
foreseeable future. Because Danielson is able to eliminate a substantial
portion of its federal income tax liability, management believes it likely
will provide stockholders a better total return by not paying cash dividends.

19
<PAGE>

CAPITALIZATION

The following table sets forth as of March 31, 1996 the actual consolidated
capitalization of the Company and the pro forma consolidated capitalization of
the Company as adjusted to give effect to the Merger and the Offerings
(assuming an offering price of $ per share). See "Use of Proceeds" for a
discussion of the application of the estimated net proceeds therefrom. This
table should be read in conjunction with "Danielson Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Company's Consolidated Financial Statements and the notes thereto appearing
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS)
-----------------------
ACTUAL AS ADJUSTED
<S> <C> <C>
Short-term debt........................................ $ -- $ --
Long-term debt......................................... -- 26,000
--------- ----------
Total debt............................................. -- 26,000
--------- ----------
Stockholders' equity:
Preferred Stock (Series A; authorized 10,000,000
shares; issued and
outstanding 1,297,069 shares)....................... -- 130
Common Stock ($0.10 par value; authorized 40,000,000
shares;
issued 27,009,232 shares; outstanding 26,998,593
shares)(1).......................................... 1,537 2,701
Additional paid-in capital........................... 46,131 313,026
Net unrealized gain on available-for-sale
securities)......................................... 639 639
Retained earnings.................................... 17,581 17,581
Treasury stock (cost of 10,639 shares)............... (66) (66)
--------- ----------
Total stockholders' equity............................. 65,822 334,011
--------- ----------
Total capitalization................................... $65,822 $360,011
========= ==========
</TABLE>
- ---------------------
(1) Does not include 630,000 and 1,501,100 shares of Common Stock available
for issuance under the Company's 1990 Stock Option Plan and 1995 Stock and
Incentive Plan, respectively.

USE OF PROCEEDS

The net proceeds of the Offerings will be approximately $ million. The
Company intends to use approximately $40 million of such proceeds to finance
the Merger and $30 million of such proceeds to finance the Capital
Contribution. The balance, if any, of such net proceeds will be used for
general corporate purposes.

20
<PAGE>

SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF DANIELSON

The following selected consolidated financial data as of March 31, 1995 and
1996 and for each of the three-month periods ended March 31, 1995 and 1996
have been derived from unaudited consolidated financial statements and include
all adjustments that Danielson considers necessary for a fair presentation of
such financial information for those periods. The results of operations for
the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for any other interim period or for the full
year. The consolidated financial data as of December 31, 1991, 1992, 1993,
1994 and 1995 and for each of the years in the five-year period ended December
31, 1995 have been derived from the audited consolidated financial statements
of Danielson. The data set forth below should be read in conjunction with
"DANIELSON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" included elsewhere herein and the Consolidated
Financial Statements of Danielson and related notes included elsewhere herein.
<TABLE>
<CAPTION>

YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1991 1992 1993 1994 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
RESULTS OF
OPERATIONS:
Gross premiums
written........ $ 64,324 $ 78,319 $ 95,846 $104,379 $ 70,949
Net premiums
written........ 61,605 74,828 87,953 91,069 55,286
Net premiums
earned......... 60,590 73,708 86,052 93,291 60,548
Net investment
income......... 11,520 10,107 13,302 11,853 13,161
Total revenues.. 73,763 88,440 102,397 110,340 80,081
Pre-tax income
(loss)......... 376 1,984 2,821 3,248 2,436
Income before
extraordinary
items.......... 184 1,898 2,746 3,145 2,316
Net income...... 184 8,046(3) 3,234(2)(3) 3,895(1) 2,316
Income per share
before
extraordinary
items.......... 0.01 0.13 0.17 0.20 0.14
Net income per
share ......... 0.01 0.53(3) 0.20(2)(3) 0.25(1) 0.14
Weighted average
shares
outstanding.... 13,496,620(4)(5) 15,262,984(4)(5) 15,847,682(4)(5) 15,938,018(4)(5) 15,989,055(4)(5)

AS OF DECEMBER 31,
1991 1992 1993 1994 1995
BALANCE SHEET
DATA:
Invested assets. $141,534 $161,468 $176,738 $181,763 $181,794
Total assets.... 198,873 216,868 234,150 240,529 227,924
Stockholders'
equity......... 46,659 54,764 58,838 62,318 69,821
Book value per
share.......... 3.09 3.62 3.89 4.06 4.55
<CAPTION>

YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995
Selected GAAP
Ratios:(6)
Loss ratio...... 80.6% 78.3% 76.6% 72.3% 80.5%
Expense ratio... 39.9 37.9 34.3 33.9 32.9
---------- ---------- ---------- ---------- ----------
Combined
ratio(7)....... 120.5% 116.2% 110.9% 106.2% 113.4%
========== ========== ========== ========== ==========
</TABLE>
- ---------------------
(1) Includes extraordinary gain from distribution from an unaffiliated trust.
(2) Includes extraordinary gains from a former subsidiary, as well as a former
trust administered by the California Department as trustee.
(3) Includes extraordinary gain from a former trust administered by the
California Department as trustee.
(4) Does not give effect to currently exercisable options to purchase shares
of Common Stock.
(5) Reflects shares issued upon the 1994 exercise of options to purchase
Common Stock.
(6) Reflects operating ratios of Danielson's insurance subsidiaries.
(7) Includes 4.1%, (0.9%), 1.0%, 2.4% and 6.4% for the years ended December
31, 1991, 1992, 1993, 1994 and 1995, respectively, for losses and LAE
incurred related to claims arising form businesses in run-off since 1987,
which includes environmental claims.

21
<PAGE>

DANIELSON MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The actual results of Danielson could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "RISK FACTORS" and elsewhere in this
Prospectus.

GENERAL

Danielson is organized as a holding company with substantially all of its
operations conducted by its subsidiaries. Danielson, on a parent-only basis,
has had limited continuing expenditures for rent and administrative expenses
and derives revenues primarily from investment return on portfolio securities.
Therefore, the analysis of Danielson's financial condition is generally done
on an operating subsidiary basis. For additional information relating to
Danielson's organization, see Note 1 of the Notes to Danielson Consolidated
Financial Statements. For matters affecting Danielson's operations by industry
segment, see Note 14 of the Notes to Danielson Consolidated Financial
Statements.

Danielson does not currently pay significant federal income tax due to the
recognition of losses from several trusts that assumed various liabilities of
certain present and former subsidiaries of Danielson. It is expected that
Danielson's 1995 consolidated federal income tax return will report a
cumulative NOL currently estimated at approximately $1.4 billion, which will
expire in various amounts, if not used, over the period ending 2010. See Note
8 of the Notes to Danielson Consolidated Financial Statements.

RESULTS OF NAICC'S OPERATIONS

The operations of Danielson's principal subsidiary, NAICC, are primarily in
specialty property and casualty insurance lines of business. At March 31,
1996, NAICC had a B++ rating from A.M. Best.

PROPERTY AND CASUALTY INSURANCE OPERATIONS

Three Months Ended March 31, 1995 compared with Three Months Ended March 31,
1996

The operating results discussed below are not necessarily indicative of the
results to be expected for the year ended December 31, 1996.

Net premiums written were $17.6 million and $9.0 million for the three
months ended March 31, 1995 and 1996, respectively. The decrease in net
premiums written in the first quarter of 1996 from the same period in 1995 is
attributable to a decline in workers' compensation business in California. Net
premiums earned were $18.5 million and $9.0 million for the three months ended
March 31, 1995 and 1996, respectively. The decrease in premiums earned is
directly related to the decrease in net premiums written.

In the workers' compensation line of business, net premiums written were
$13.3 million for the first three months of 1995 compared to $4.0 million for
that period in 1996. The decrease in the first quarter of 1996 from the same
period in 1995 is attributable to significantly increased price competition in
California. It is the policy of NAICC to underwrite business that is expected
to yield an operating profit. As a result, NAICC's new and renewal policy
counts, which decreased significantly in 1995, have continued to decrease
during the first quarter of 1996.

In the non-standard personal automobile insurance line of business, net
premiums written were $3.9 million and $4.0 million for the three months ended
March 31, 1995 and 1996, respectively. In the first three months of 1996, the
non-standard personal automobile line represented 45% of total net premiums
written, up from 22% in the first three months of 1995. NAICC continues to
cede 50% of its non-standard personal automobile business to a major
reinsurance company.

22
<PAGE>

Net investment income was $2.9 million and $2.7 million for the three months
ended March 31, 1995 and 1996, respectively. The decline in net investment
income is the result of a decrease in NAICC's invested assets in the periods.

The combined ratio (which represents a ratio of losses and expenses to net
premiums earned in a particular period) was 109% and 120% for the three months
ended March 31, 1995 and 1996, respectively.

Net losses and LAE were $14.4 million and $6.7 million for the three months
ended March 31, 1995 and 1996, respectively. The resulting net loss and LAE
ratios for the corresponding periods were 77.9% and 74.4%, respectively. The
decrease in the net loss and LAE ratio in the first quarter of 1996 is due to
the decrease in the workers' compensation line of business which has a higher
loss and LAE expense ratio than the non-standard automobile line of business.

Policy acquisition costs were $3.9 million and $2.5 million for the three
months ended March 31, 1995 and 1996, respectively. The decrease is directly
related to the decline in net premiums earned. Policy acquisition expenses as
a percent of net premiums earned were 21.1% and 28.3% for the three months
ended March 31, 1995 and 1996, respectively. The increase in the policy
acquisition expense ratio in the first quarter of 1996 as compared to the same
period in 1995 is primarily the result of a greater decline in workers'
compensation premiums than in certain underwriting expenses included in policy
acquisition costs.

General and administrative expenses were $1.7 million and $1.6 million for
the three months ended March 31, 1995 and 1996. These expenses are fixed or
semi-variable in nature.

Policyholder dividends for the three months ended March 31, 1995 were
$137,000, as compared with $44,000 during the first quarter of 1996. The
decrease in policyholder dividends is attributable to the decline in workers'
compensation premiums.

Net income from insurance operations for the three months ended March 31,
1995 and 1996 was $1.4 million and $1.1 million, respectively. Net income for
the first quarter of 1996 decreased from the same period in 1995 due to the
decline in premium revenue and investment income.

Years Ended December 31, 1993, 1994 and 1995

Net premiums written were $88.0 million, $91.1 million, and $55.3 million in
1993, 1994 and 1995, respectively. The decline in 1995 is primarily due to
significantly increased price competition on California workers' compensation
business under the open rating law which became effective January 1, 1995.

In the workers' compensation insurance line of business, net premiums
written were $79.3 million, $77.2 million and $38.2 million in 1993, 1994 and
1995, respectively. Workers' compensation net premiums written in California
were affected by three decreases of the minimum rate during the last three
years: a 7% decrease effective July 16, 1993, a 12.7% decrease effective
January 1, 1994, and a 16% decrease effective October 1, 1994. In addition,
the 1995 decrease of approximately 50.5% in the net premiums written from 1994
is attributable to significantly increased price competition in California. It
is the policy of NAICC to underwrite business that is expected to yield an
operating profit. As a result, NAICC's new and renewal policy counts decreased
significantly during 1995. At December 31, 1993 and 1994, NAICC had 7,097 and
7,183 workers' compensation policies in force, respectively, with an average
approximate annual premium size of $11,492 and $9,566 in each respective year
compared to 3,844 of such policies in force at December 31, 1995, with an
average approximate annual premium size of $6,201.

In the non-standard personal automobile insurance line of business, net
premiums written were $4.9 million, $10.5 million and $15.0 million in 1993,
1994 and 1995, respectively. NAICC commenced writing non-standard personal
automobile insurance in July 1993. The increase in such premiums reflects
NAICC's continued expansion of this line of business. NAICC had 15,419 and
20,000 non-standard personal automobile policies in

23
<PAGE>

force for the years ended December 31, 1993 and 1994, respectively, compared
to more than 29,000 policies in force in 1995, representing approximately
5.6%, 11.5% and 27.1% of NAICC's total annual net premiums written for all
lines of insurance in each of those years. NAICC cedes 50% of its non-standard
personal automobile insurance business to a major reinsurance company.

In the non-standard commercial automobile insurance line of business, net
premiums written were $1.7 million in 1993 and $2.1 million for each of the
years ended December 31, 1994 and 1995. NAICC writes non-standard commercial
automobile insurance in California, Arizona, Idaho, Nevada and Oregon. NAICC
introduced a new non-standard commercial automobile insurance program early in
1995. NAICC received approval of its non-standard commercial automobile rates
in California, its largest market, in August 1995.

Net premiums written for other commercial property and casualty insurance
were $2.1 million and $1.3 million in 1993 and 1994, respectively. NAICC
ceased writing new and renewal commercial property and casualty policies in
1994.

Net investment income was $12.6 million, $11.3 million, and $12.4 million in
1993, 1994 and 1995, respectively. Net investment income in 1994 (excluding
the recognition in 1993 of an additional $1.7 million of non-recurring
investment income in connection with the commutation of a financing
reinsurance agreement with Great American Insurance Company in 1994) increased
from 1993 primarily as a result of greater average invested assets throughout
most of 1994. The decision to exercise the commutation was made in 1993, at a
time when the 5-year U.S. Treasury interest rate (upon which the commutation
value of the agreement was dependent) had declined significantly. The decline
in this interest rate had the effect of increasing the value of the
commutation above the amount previously recorded for such asset. It was not
possible to have foreseen the level of interest rates which prompted the
decision to commute the agreement and, therefore, the increased value of the
commutation was recognized in 1993. Additionally, interest income of $1.5
million and $205,000 was recognized in 1993 and 1994, respectively,
representing the accretion of interest income for the original expected term
under the inherent interest rate in the agreement. The 1995 increase in net
investment income is primarily due to the receipt of $840,000 of interest
which had accrued on a previously unpaid reinsurance claim (the "Hughes
Claim") and was paid in December 1995 by Lloyds of London ("Lloyds"), together
with such claim. In June 1996, NAICC deposited the proceeds received from the
Hughes Claim with the United States Court of Appeals for the Ninth Judicial
Circuit, to be held in escrow pending rehearing on certain issues. Net
investment income in 1995, exclusive of the Lloyds interest payment, increased
slightly over 1994 because average invested assets throughout 1995 were
slightly greater than in 1994. The average yield on NAICC's portfolio was 7.4%
and 7.2% for the years ended December 31, 1994 and 1995, respectively. The
estimated average maturity of the portfolio is 4.9 years.

Other income was $315,000, $504,000 and $1.6 million, in 1993, 1994 and
1995, respectively. The increase in other income in 1995 is primarily due to
an increase from insurance consulting operations.

Net losses and LAE were $65.9 million in 1993 and $67.5 million in 1994,
respectively, compared to $48.7 million in 1995. The resulting loss and LAE
ratios were 76.6%, 72.3% and 80.5% in such years, respectively. The increase
in the loss and LAE ratio in 1995 was primarily in the workers' compensation
line of business due to a decline in premium rates. The loss and LAE ratio for
that line of business was 76.9% and 66.6% in 1993 and 1994, respectively, as
compared to 71.0% in 1995. The loss and LAE ratio for the non-standard
personal automobile insurance line of business was 51.8%, 71.3% and 65.8% in
1993, 1994 and 1995, respectively. The decrease in the loss and LAE ratio in
1995 was due in part to a rate increase of 6.0% in 1995.

Policy acquisition costs were $17.0 million, $18.7 million and $13.4 million
in 1993, 1994 and 1995, respectively. Policy acquisition expenses as a
percentage of net premiums earned, were 19.8% in 1993, 20.0% in 1994 and 22.1%
in 1995. Policy acquisition costs include expenses directly related to premium
volume (i.e., commissions, premium taxes, and state assessments), as well as
certain underwriting expenses which are fixed in nature. The increase in the
policy acquisition expense ratio in 1995 is primarily the result of a greater
decline in workers' compensation premiums than in the fixed underwriting
expense component of policy acquisition costs.

24
<PAGE>

General and administrative expenses were $8.1 million in 1993, $6.7 million
in 1994 and $6.4 million in 1995. Included in the general and administrative
expenses for 1993 is a partial write-off of a reinsurance recoverable and
related expenses of approximately $1.8 million relating to the Hughes Claim,
an environmental claim by Hughes Aircraft. Expenses related to the Hughes
Claim for 1995 totaled $85,000. General and administrative expenses, other
than Hughes Claim related expenses, decreased primarily as a result of cost
reductions from 1994 to 1995. For information regarding the Hughes Claim, see
Note 3 of the Notes to Danielson Consolidated Financial Statements.

Policyholder dividends of $3.6 million in 1993, $6.0 million in 1994 and
$137,000 in 1995, represent 4.2%, 6.5% and 0.2% of net premiums earned in each
respective year. The increased ratio of policyholder dividends to premiums
earned in 1994 from 1993 reflects a reduction of the policyholder dividend
accrual in 1993 for policy years prior to 1992 resulting from higher than
expected loss experience for the same period, as well as the anticipation that
workers' compensation margins and premium volumes would support increased
policyholder dividends. It was not possible to anticipate in 1994 the erosion
of profitability that occurred following the January 1, 1995 implementation of
the open rating law. The provision in 1993 also reflected a decrease in the
dividend accrual, as well as reduction for premiums earned subsequent to July
16, 1993 in response to a reduction in the workers' compensation minimum rate.
The decrease in policyholder dividends in 1995 is attributable to the decline
in workers' compensation premiums as well as a reduction in the rates at which
premiums were written in 1995. The decrease in the policyholder dividend
expense ratio in 1995 is due to the continuing decrease in rates charged for
workers' compensation insurance, to a level at which the margin for
policyholder dividends is eliminated.

Net income from insurance operations was $4.9 million in 1993 and $5.9
million in 1994, compared to $6.0 million in 1995. The increase in net income
in 1993 and 1994 is the result of relatively lower expenses on moderately
higher premiums. Net income in 1995 is comparable to net income in 1994
despite the significant decline in workers' compensation premiums because the
decline in premiums and cash flow did not yet have a significant negative
impact on the average invested assets and investment income in 1995. Net
income includes net realized gains of $473,000 in 1993, $16,000 in 1994, and
$209,000 in 1995.

CASH FLOW FROM INSURANCE OPERATIONS

Cash flows of the insurance business may be influenced by a variety of
factors, including market trends relating to particular lines of insurance,
the insurance regulatory environment, and general economic conditions.
Operating cash flow of the insurance operations may be significantly affected
by the growth or decline of net premiums written, the timing of claims
payments, and the rate of return achieved on the insurance investment
portfolio.

Three Months Ended March 31, 1995 compared with Three Months Ended March 31,
1996

Cash provided by insurance operating activities for the three months ended
March 31, 1995 was $929,000; cash used in insurance operations for the same
period in 1996 was $8.4 million. The increase in cash used in operations in
the first quarter of 1996 is primarily due to the payment of claims and claims
expense related to prior years while workers' compensation premiums written
have declined. Overall cash and invested assets, at fair value, at March 31,
1995 were $162.5 million, compared to $156.6 million at March 31, 1996.

Years Ended December 31, 1993, 1994 and 1995

Cash provided by insurance operations for the years ended December 31, 1993
and 1994 was $18.7 million and $11.3 million, respectively; cash used in
insurance operating activities for the year ended December 31, 1995 was $2.0
million. The decrease in cash provided by operations in 1994 from 1993
primarily was due to increased dividend payments to policyholders. The
decrease in cash provided by operations in 1995 is primarily due to the
decline in workers' compensation net premiums written. Because workers'
compensation claims ordinarily are paid over a period of several years, NAICC
is now experiencing a situation in which current claims payments

25
<PAGE>

relating to prior years exceed current workers' compensation premiums. Such
negative cash flow is expected to continue with the settlement of workers'
compensation claims, or until such time as management of NAICC determines that
workers' compensation premiums can be written at rates that can be expected to
achieve a profit. However, management of NAICC anticipates that cash flow from
insurance operations will increase with the growth in premiums from the
automobile programs. Overall cash and invested assets, at fair value, at
December 31, 1993 and 1994 were $164.3 million and $156.2 million,
respectively, compared to $170.0 million at December 31, 1995.

Danielson'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 all liabilities to 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
premiums-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 provisions for losses and LAE). A commonly accepted
maximum net written premiums-to-surplus ratio is 3 to 1, although this varies
with different lines of business. NAICC's 1995 premiums-to-surplus ratio of
1.2 to 1 and annualized first quarter 1996 premiums-to-surplus ratio of 1.7 to
1 remain underleveraged by current industry standards. A commonly accepted
maximum loss and LAE reserves-to-surplus ratio is 5 to 1, compared with
NAICC's 1995 ratio of 2.6 to 1 and first quarter 1996 ratio of 2.3 to 1. Given
these relatively conservative financial security ratios, management of NAICC
is confident that existing capital is adequate to support above average
premium growth from its current premium levels for the foreseeable future.

In December 1993, the Association adopted a model for the insurance industry
for determining RBC requirements. Under the Model Act, property and casualty
insurance companies are required to report their RBC ratios based on their
statutory annual statements as filed with regulatory authorities. NAICC has
calculated its RBC requirement under the Association's model, and has capital
in excess of any regulatory action reporting level.

RESULTS OF DANIELSON TRUST'S OPERATIONS

The operations of Danielson Trust are comprised of trust and fiduciary
services. Danielson's Consolidated Financial Statements include accounts and
operations of Danielson Trust for the period from March 26, 1993 through
December 31, 1993 (the "Initial Period") and for 1994 and 1995; however,
comparisons of the financial results of Danielson Trust's operations during
the Initial Period with the results of its operations for the years ended
December 31, 1994 and 1995 have been omitted as they do not relate to
equivalent time periods (nor, in many instances, to equivalent operations) and
would not provide meaningful information relating to historical trends and
financial results. Financial results relating to the Initial Period have been
provided for informational purposes only. In February 1994, Danielson Trust
acquired the assets of the Western Trust Services ("WTS") division of
Grossmont Bank. Thus, the results of Danielson Trust's operations during the
years ended December 31, 1994 and 1995 are not entirely comparable in that
they relate, in part, to different assets, accounts and lines of business. See
Note 2 of the Notes to Danielson Consolidated Financial Statements.

TRUST AND FIDUCIARY SERVICES OPERATIONS

Three Months Ended March 31, 1995 compared with Three Months Ended March 31,
1996

The operating results discussed below are not necessarily indicative of the
results to be expected for the year ending December 31, 1996.

26
<PAGE>

Total fee income was $1.1 million for each of the three month periods ended
March 31, 1995 and 1996. Fee income for the three months ended March 31, 1996,
as compared with the same period in 1995, reflects increased fees from the
retirement services and private trust lines of business offsetting decreased
custody service fees.

Net investment income was $36,000 and $26,000 for the three months ended
March 31, 1995 and 1996, respectively. Net investment income for the first
quarter of 1996 decreased from the same period in 1995 because average
invested assets during such period in 1996 were less than average invested
assets during the same period in 1995.

General and administrative expenses were $1.5 million and $1.2 million for
the three months ended March 31, 1995 and 1996, respectively. The decrease in
expenses for the first quarter of 1996 from the comparable period in 1995
reflects reduced staffing and data processing expenses, as well as other
operating efficiencies. As a result of the 1996 decrease in expenses,
Danielson Trust's net loss for the three months ended March 31, 1995 of
$395,000, decreased to a net loss of $81,000 in the same period of 1996.

Years Ended December 31, 1993, 1994 and 1995

Total fee income during the Initial Period was $2.3 million. Total fee
income for the years ended December 31, 1994 and 1995 was $4.7 million and
$4.5 million, respectively. Total fee income for 1995 reflects increased non-
recurring termination fees offset by the elimination of fees associated with
certain terminated unprofitable accounts and the cessation of fees associated
with Danielson Trust's former parent, HomeFed Bank.

HomeFed Bank-related fee income for the Initial Period was $884,000 or 37.1%
of Danielson Trust's total revenues for such period. As noted above, fee
income for the year ended December 31, 1994 as compared to the year ended
December 31, 1995, to some extent, does not relate to equivalent operations.
Fee income associated with Danielson Trust's former parent ceased in 1994 as
previously anticipated. For the year ended December 31, 1994, the run-off of
HomeFed Bank-related business of Danielson Trust generated non-recurring total
fee income of $310,000, or less than 7% of Danielson Trust's 1994 total
revenues.

Net investment income was $119,000, $131,000 and $135,000 for the Initial
Period and for the years ended December 31, 1994 and 1995, respectively.
Danielson Trust's fixed maturity holdings are primarily in U.S. Government
obligations.

General and administrative expenses were $2.4 million, $5.4 million and $6.7
million for the Initial Period and for the years ended December 31, 1994 and
1995, respectively. Expenses relating to the integration of the WTS assets and
operations substantially decreased in 1995 from 1994. However, expenses
increased overall in 1995 over 1994, including expenses relating to marketing,
data processing, system and other staffing upgrades. A non-recurring expense
of $709,000 relating to the writedown of goodwill, as well as non-recurring
expenses relating to the writedown of certain fixed assets and certain
employee staff costs, also were reflected in 1995 expenses.

Danielson Trust's net loss from operations during the Initial Period was
$70,000. As a result of expenses and changes necessitated by the WTS
acquisition, as well as increased marketing expenses during 1995, the net loss
from operations of Danielson Trust in 1995 was $2.0 million (including the
writedown of $709,000 of goodwill and $100,000 of amortization expense)
compared to a net loss from operations of $624,000 for the year ended December
31, 1994 (including $86,000 of amortization expense).

CASH FLOW FROM TRUST OPERATIONS

Operating cash flow of Danielson Trust's trust operations is primarily
dependent upon fee income from trust services. Cash flow of the trust business
also is influenced by factors affecting the trust industry generally,
including market growth, competition and general economic conditions.

27
<PAGE>

Three Months Ended March 31, 1995 compared with Three Months Ended March 31,
1996

Cash used in trust operating activities for the three months ended March 31,
1995 and 1996 was $463,000 and $178,000, respectively. The $285,000 decrease
in cash used in trust operating activities in the first quarter of 1996 from
the same period in 1995 is primarily attributable to cost reductions and
operating efficiencies. Overall cash and invested assets, at fair value, at
March 31, 1995 were $2.2 million, compared to $1.7 million at March 31, 1996.

Years Ended December 31, 1993, 1994 and 1995

Cash provided by trust operations for the Initial Period was $153,000; cash
used in trust operating activities for the years ended December 31, 1994 and
1995 was $160,000 and $825,000, respectively. The increase in cash used in
trust operations in 1995 was primarily attributable to significant costs
necessitated by the WTS acquisition as well as accelerated marketing expenses.
Management of the trust business anticipates that cash flow from operations
may improve if sales and marketing efforts result in new fee income-generating
business, as well as through additional operating efficiencies. Overall cash
and invested assets, at fair value, at December 31, 1993, 1994 and 1995 were
$2.8 million, $2.6 million and $1.8 million, respectively.

Danielson Trust requires liquid assets to meet the working capital needs of
its continuing business. The primary source of these liquid assets are fees
charged to Danielson Trust's private trust clients. [In connection with the
cessation of fee revenues derived from HomeFed Bank-related business during
the first half of 1994, as well as the incurrence by Danielson Trust since
1994 of significant costs for communications, computer equipment upgrades and
unanticipated systems conversion expenses associated with the acquisition of
the assets of WTS (see Note 2 of the Notes to Danielson Consolidated Financial
Statements), Danielson (at the parent company level) made a $300,000 unsecured
intercompany loan to Danielson Trust in 1994 in the form of a promissory
demand note, with quarterly interest payments at the annual rate of 7.75%. At
December 31, 1995, the entire principal amount of the promissory demand note
was outstanding. Effective March 31, 1996, the entire principal balance of
such note and accrued interest as of January 1, 1996 was forgiven and
converted into additional paid-in capital of Danielson Trust. As of January 1,
1996, Danielson agreed to make an additional unsecured loan to Danielson Trust
in the principal amount of $600,000, bearing interest at the rate of prime
plus 1%, and to consider making additional such loans in the aggregate amount
of $600,000 upon request of Danielson Trust. As of the date hereof, Danielson
Trust has not borrowed any amount under such loan agreement.] To the extent
that timing differences exist between the collection of revenue and the actual
payment of expenses, or where revenues generated by Danielson Trust's business
are insufficient to cover its expenses or to maintain compliance with
regulatory capital requirements, the primary sources of funds to meet those
obligations would be the sale of short-term investments, additional
intercompany loans or parent company capital contributions or financing
provided by a third party.

In accordance with California banking regulations, Danielson Trust has
pledged assets with a fair value of $611,000 as of March 31, 1996 to the State
of California as a reserve in connection with certain types of fiduciary
appointments, the maximum amount of such reserves that may be required. State
banking laws also regulate the nature of trust companies' investments of
contributed capital and surplus, and generally restrict such investments to
debt type investments in which banks also are permitted to invest. In order to
satisfy such regulations, a majority of Danielson Trust's investments are in
U.S. Government obligations and, as of March 31, 1996, Danielson Trust was in
compliance with the foregoing requirements.

On January 31, 1996, following approval of the California State Banking
Department, Danielson Trust sold substantially all of the fiduciary accounts
administered by its Santa Barbara branch to The Bank of Montecito (now known
as Montecito Bank and Trust). In connection with the sale, in January 1996,
Danielson Trust recognized a gain of $32,874.

28
<PAGE>

RESULTS OF DANIELSON'S OPERATIONS

CASH FLOW FROM PARENT-ONLY OPERATIONS

Danielson on a parent-only basis has been primarily dependent upon the
earnings achieved on its investment portfolio and the payment of general and
administrative expenses incurred in the normal course of business as the
source of operating cash flow.

Three Months Ended March 31, 1995 compared with Three Months Ended March 31,
1996

For the three months ended March 31, 1995 and 1996, cash used in parent-only
operating activities was $766,000 and $477,000, respectively. The decrease in
cash used in the first quarter of 1996 from the same period in 1995 was
primarily attributable to the receipt of interest on certain investments and
the timing of certain expense payments.

Years Ended December 31, 1993, 1994 and 1995

For the years ended December 31, 1993, 1994 and 1995, cash used in parent-
only operating activities was $2.0 million, $1.1 million and $1.7 million,
respectively. Cash used in operations are primarily attributable to the
parent-only net loss from operations for each year, adjusted for non-cash
charges such as depreciation and amortization, and the operating working
capital requirements of the holding company's business. Cash used in parent-
only operations in 1994 decreased $900,000 from 1993, cash used in parent-only
operations in 1995 increased $600,000 over 1994. The 1994 decrease resulted
primarily from an increase in parent-only cash flow from an extraordinary item
received in 1994 of $750,000. For information regarding Danielson's operating
subsidiaries' cash flow from operations, see "DANIELSON MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Results of NAICC's Operations, Cash Flow from Insurance Operations" and
"DANIELSON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Results of Danielson Trust's Operations, Cash Flow from
Trust Operations."

LIQUIDITY AND CAPITAL RESOURCES

To meet liquidity needs, Danielson relies on its cash and short-term
investments (valued at $5.3 million as of March 31, 1996 and $9.1 million as
at December 31, 1995). Danielson has no material fixed charges other than the
preferred dividends required to be paid on the Preferred Stock at the
conclusion of the Merger. Danielson anticipates that its existing cash and
short-term investments will be adequate to fund fully all holding company
expenses during the next two years.

To the extent that Danielson requires additional cash resources to meet
liquidity needs, Danielson will look to tax sharing payments and/or dividends
from its subsidiaries. In 1996, NAICC cannot pay dividends without the prior
approval of the California Department due to the existence of a $1.8 million
negative unassigned surplus. NAICC's management believes that it will not have
negative unassigned surplus in 1996 and consequently management of NAICC
believes that NAICC will be allowed to pay dividends in 1997 without prior
regulatory approval. In 1996, Midland is also required to obtain prior
approval of the Tennessee Commissioner of Commerce and Insurance (the
"Tennessee Commissioner") prior to payment of dividends due to a negative
unassigned surplus which will be eliminated upon consummation of the Merger.
See "RISK FACTORS--Regulation." For future years, Danielson will have a tax
sharing agreement under which it expects to be entitled to be paid sums that
represent the benefits received by its subsidiaries resulting from Danielson's
NOL.

DISTRIBUTION FROM TRUSTS AFTER 1990 REORGANIZATION

On December 21, 1994, Danielson received a partial distribution in the
amount of $750,000 from an unaffiliated trust that owns certain assets and
liabilities of a former subsidiary of Danielson. The partial distribution is
recorded as an extraordinary item in Danielson's 1994 Consolidated Statements
of Operations.

29
<PAGE>

Danielson has been advised that the trust is anticipated to be terminated in
the near future. Danielson does not expect that it will receive any material
amount upon termination of the trust.

On December 30, 1993, following approval of the California Superior Court,
Mission American Insurance Company ("MAIC"), a direct subsidiary of Danielson,
received a distribution of approximately $268,000 upon termination of an
unaffiliated trust formerly administered by the California Insurance
Commissioner as trustee. Such trust had assumed the liabilities and
substantially all of the assets of MAIC and a former subsidiary of Danielson.
Under the terms of the trust agreement, the trust was required to distribute
to MAIC all amounts which remained in the trust after satisfying or otherwise
resolving all claims against MAIC and such former subsidiary. The distribution
was recorded as an extraordinary item in Danielson's 1993 Consolidated
Statements of Operations. MAIC distributed such funds to Danielson following
approval of the Insurance Department. The termination of the trust had the
effect of finalizing a Superior Court-approved interim distribution by such
former trust to MAIC in 1992 of approximately $6.2 million, the proceeds of
which also were distributed to Danielson upon approval of the Insurance
Department, as well as releasing all indemnities and pledges running from MAIC
to the trust, including a pledge of 3,526,140 shares of KCP Holding Company
common stock owned by MAIC.

Also during 1993, MAIC received proceeds of $220,000 from the liquidation of
the estate of a former Texas subsidiary of Danielson. The distribution was
accounted for as an extraordinary item in Danielson's 1993 Consolidated
Statements of Operations.

AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS

In December 1994, Statement of Position 94-6, "Disclosure of Certain
Significant Risks and Uncertainties" ("SOP 94-6") was issued. SOP 94-6 is
effective with respect to financial statements for fiscal years ending after
December 15, 1995. SOP 94-6 requires Danielson to include in its financial
statements disclosures of certain risks and uncertainties relating to the
nature of its operations, the use of estimates in the preparation of financial
statements, and significant concentrations in certain aspects of Danielson's
operations. See Notes 1(J), 2, 4, 8 and 14 of the Notes to Danielson
Consolidated Financial Statements.

In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). SFAS 123 encourages all companies to adopt
the new fair value based method of accounting for stock compensation plans in
place of the intrinsic value method. In accordance with current accounting
practice, Danielson has elected to continue to use the intrinsic value method.
However, Danielson anticipates that its 1996 Consolidated Financial Statements
will include pro forma disclosures of net income and earning per share
computed as if the fair value based method had been applied. Danielson plans
to apply the provisions of SFAS 123 in its 1996 Consolidated Financial
Statements.

In November 1995, the FASB Emerging Issues Task Force issued a Special
Report, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities" (the "Special Report") permitting
companies to reassess the appropriateness of the initial classifications of
all securities held at that time and account for any resulting
reclassifications at fair value in accordance with Statement 115. The initial
application of the Special Report and any resulting one-time reclassifications
are meant to occur as of a single date between November 15, 1995 and December
31, 1995, rather than over a number of days during that period. Such
reclassification will not affect Danielson's intent to hold other debt
securities to maturity in the future. In connection with the implementation of
Statement 115, at December 1, 1995, Danielson reclassified all of its held-to-
maturity securities to the available-for-sale security category at an
amortized cost of $139.9 million. See Notes 1(B) and 6 of the Notes to
Danielson Consolidated Financial Statements.

At December 31, 1995, Danielson adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"). Upon the adoption of SFAS
121, a pre-tax impairment loss of $709,000 was reported as a component of
income from continuing operations before income taxes. See Notes 1(E) and 2 of
the Notes to Danielson Consolidated Financial Statements.

30
<PAGE>

SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF MIDLAND

The following selected consolidated financial data as of March 31, 1995 and
1996 and for each of the three-month periods ended March 31, 1995 and 1996
have been derived from unaudited consolidated financial statements and include
all adjustments that Midland considers necessary for a fair presentation of
such financial information for those periods. The results of operations for
the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for any other interim period or for the full
year. The consolidated financial data as of December 31, 1991, 1992, 1993,
1994 and 1995 and for each of the years in the five-year period ended December
31, 1995 have been derived from the audited consolidated financial statements
of Midland. The data set forth below should be read in conjunction with
"MIDLAND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" included elsewhere herein and the Consolidated
Financial Statements of Midland and related notes included elsewhere herein.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEARS ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Gross premiums written.. $27,671 $60,927 $101,467 $152,404 $210,206 $ 49,083 $ 51,890
Net premiums written.... 12,492 24,748 76,819 151,046 171,833 48,293 38,271
Net premiums earned..... 11,878 20,571 55,272 118,218 172,394 38,787 39,064
Net Investment Income... 806 1,441 3,330 6,190 9,839 2,064 2,159
Total revenues.......... 13,071 25,137 64,509 131,486 193,046 42,870 44,731
Pre-tax income (loss)... 1,583 4,566 9,682 10,900 (17,510) 3,522 418
Net income (loss)....... 1,116 2,929 7,068 7,925 (10,071) 2,609 528
Net income (loss)
available to
stockholders........... 994 1,628 7,068 7,925 (10,071) 2,609 528
Net income (loss) per
share.................. 0.64 0.56 1.34 1.45 (1.88) 0.48 0.10
Cash dividend per share. 0.13 0.09 -- 0.10 0.20 0.05 --
Weighted average shares
outstanding............ 1,612,566 2,900,147 5,305,824 5,477,666 5,369,461 5,461,805 5,567,338
<CAPTION>
AS OF MARCH 31,
AS OF DECEMBER 31, (UNAUDITED)
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Invested assets......... $13,364 $49,483 $102,987 $165,895 $174,803 $150,787 $162,001
Total assets............ 20,630 76,315 148,708 221,820 283,531 219,977 279,575
Notes payable and other
debt................... 1,128 286 20,000 40,000 27,000 19,000 26,000
Mandatorily redeemable
preferred stock........ 4,805 -- -- -- -- -- --
Stockholders' equity.... 6,480 39,880 50,620 57,794 48,845 60,407 50,581
Book value per share.... 4.40 9.18 9.57 10.81 9.06 11.29 9.12
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
YEARS ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1995 1996
SELECTED GAAP RATIOS:
Loss ratio.............. 62.3% 69.2% 69.9% 71.3% 88.2% 71.6% 82.3%
Expense ratio........... 29.5 23.0 23.4 25.1 26.8 23.7 23.5
--------- --------- --------- --------- --------- --------- ---------
Combined ratio.......... 91.8% 92.2% 93.3% 96.4% 115.0% 95.3% 105.8%
========= ========= ========= ========= ========= ========= =========
</TABLE>

31
<PAGE>

MIDLAND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The actual results of Midland could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "RISK FACTORS" and elsewhere in this
Prospectus.

The following information has been provided by Midland. The information in
this discussion and analysis is presented on the basis of GAAP.

RESULTS OF OPERATIONS

Results of Operations for the quarter ended March 31, 1995 compared to the
quarter ended March 31, 1996

Gross premiums written for the quarter ended March 31 increased by 6% from
1995 to 1996. Midland expanded certain of its programs during 1995, but
experienced unfavorable results. Certain programs have been eliminated, rate
increases have been or are being implemented and underwriting guidelines have
been tightened. As a result, for the full year Midland expects full year 1996
gross premiums written to decline as compared to 1995.

Net premiums written for the quarter ended March 31 declined by 21% from
1995 to 1996 due to the utilization of a 30% quota-share reinsurance facility
during 1996.

Fee income increased by 55% from the first quarter of 1995 to the first
quarter of 1996 due to rate increases implemented in 1995 and due to fees
generated from direct bill policies. During 1994, a large percentage of
Midland's business was agency billed business, but the accounts were
substantially converted to direct billing in late 1994 and 1995.

Losses and LAE increased by 16% for the quarter ended March 31, 1996, as
compared to the same period of 1995. This increase was mitigated by the
utilization of reinsurance during 1996. The loss ratio increased from 71.6% at
March 31, 1995, when Midland retained 98% of its premiums written to 82.3% at
March 31, 1996, net of reinsurance. Midland experienced adverse loss results
during the second half of 1995, and to a lesser extent during the first
quarter of 1996. Midland intends to continue to establish loss reserves at
more conservative levels until the full impact of the underwriting and pricing
changes made in late 1995 and early 1996 are precisely quantified.

Policy acquisition costs remained relatively flat for the first quarter of
1995 and the first quarter of 1996, after giving recognition to ceding
commission income on reinsurance. This is due to a significant decrease in the
percentage of acquisition costs being deferred, as a result of increased loss
ratios.

Operating expenses increased by 20% for the quarter ended March 31, 1996 as
compared to the quarter ended March 31, 1995 due primarily to the addition of
certain personnel and the enhancement of information technology to increase
underwriting controls.

Interest and bank charges increased by 56% from the first quarter of 1995 to
the first quarter of 1996 because the interest rate on Midland's credit
facility was increased retroactive to October 1, 1995 during the first quarter
of 1996. In addition, Midland was required to pay amendment fees of $117,500
in connection with the renegotiation of the financial covenants of the loan
during the first quarter of 1996.

Year Ended December 31, 1994 Compared to the Year Ended December 31, 1995

For the year ended December 31, 1995, Midland reported a $10.1 million net
loss. This loss resulted from adverse claims experience primarily in Arizona
and California non-standard personal automobile programs and,

32
<PAGE>

to a lesser extent, from certain commercial automobile programs. In
particular, Midland believes its full coverage automobile programs in Arizona
and California were inadequately priced.

During 1994, Midland made a decision to expand its full coverage personal
automobile programs, particularly in two of its larger markets, Arizona and
California, where it had previously written substantially liability only
coverage. This decision was based upon several factors, including: Midland was
experiencing a high cancellation rate and low retention rates on liability
only policies; Midland's competitors had reported underwriting profits from
full coverage business; and Midland had been successful in underwriting some
full coverage business in certain other states. However, this strategy proved
costly. Upon implementation of the expanded full coverage programs, Midland's
monthly premium volume increased slightly in Arizona, but doubled in
California. Gross premiums written in Arizona and California for 1994 were
$26.5 million and $24.2 million, respectively. In 1995, gross premiums written
in Arizona and California were $28.4 million and $39.4 million, respectively.
Both programs generated sharply increased claims frequency and consequently,
higher loss ratios on the full coverage business. The increased claims
frequency also presented a claims processing backlog and consequently
increased losses and LAE.

After extensive analysis, Midland concluded that it had attracted a
disproportionate share of insureds with undesirable insurance and credit
histories; market premium levels were inadequate; and in certain situations,
Midland's agents had adversely selected against it in favor of higher
incentive commissions from other carriers. Since identifying these problems,
during 1995 Midland eliminated its full coverage programs in California and
tightened controls over full coverage in Arizona to more carefully selected
risks, and in addition, terminated its relationship with certain unprofitable
agents. Enhanced underwriting procedures have been implemented in all states
in which Midland operates. In addition, rate increases have been implemented
in Florida, Georgia, Texas and Arizona since July 1995 and will be implemented
in California, Louisiana, Arkansas and Tennessee in early to mid-1996. These
actions are expected to reduce Midland's non-standard personal automobile
gross premiums written by approximately 20% in 1996.

To provide additional management controls, Midland established an internal
audit department and a claims audit team in 1995, in early 1996 hired
additional pricing analysts, and a national market analyst, and also in 1996
plans to continue to upgrade claims staff and hire a Chief Actuary for loss
reserving.

Midland also experienced a deterioration in results related to its Illinois
commercial automobile programs and determined in early 1995 to close that
branch office and terminate the Illinois program. Expenses associated with the
closing of that branch were approximately $1.0 million in 1995. Additionally,
claims experience on certain commercial automobile programs in Texas
deteriorated while pricing became very competitive. Midland decided to
eliminate those unprofitable programs as well. Commercial gross premiums
written are expected to decrease in 1996, by approximately 30% due to these
changes.

During 1995, Midland strengthened its prior year loss reserves by
approximately $11.0 million due to adverse development in both the commercial
and personal programs mentioned above and due to higher than anticipated LAE.
This adverse development was impacted by a processing backlog in the western
region claims office which occurred in the first half of 1995 related to the
Arizona and California full-coverage programs. Midland believes it has
adequately provided for the development, as well as implemented greater
controls and added sufficient claims staff to prevent any further material
adjustments to prior year reserves.

Midland's combined ratio has deteriorated during the last two years from
93.3% in 1993 to 96.4% in 1994 and 115.0% in 1995. In 1994, this was due in
part to increased loss ratios but also to increased net acquisition costs
caused by the elimination of quota-share reinsurance January 1, 1994.
Midland's loss ratio significantly increased from 71.3% in 1994 to 88.2% in
1995 due to adverse experience in the current year as well as to the adverse
development of prior years. The expense ratio increased from 25.1% in 1994 to
26.8% in 1995 due to the write-off of deferred acquisition costs associated
with discontinued programs and premium reserve deficiencies on certain
continuing lines of business together totaling approximately $5.4 million.
These increased acquisition costs were partially offset by ceding commissions
Midland received from a 30% quota-share

33
<PAGE>

reinsurance program implemented as of September 30, 1995 for its non-standard
personal automobile policies. This program was established with Kemper
Reinsurance Company ("Kemper") and included a cession of in-force and unearned
premiums as of September 30, 1995.

Overall, as compared to 1994, Midland's gross premiums written for 1995 grew
38% to $210 million and its net premiums written grew 14% to $172 million.
This growth came primarily from California, due to the implementation of new
full coverage programs, from Arkansas, where Midland appointed a new general
agency in 1995; and from growth within Tennessee, where Midland opened a new
general agency office in mid-1994.

Policy fees increased by 63% from $6.5 million in 1994 to $10.6 million in
1995, due to growth in premium volume.

Investment income increased by 59% from 1994 to 1995 as compared to 1994 due
to the investment of the $10 million obtained under Midland's credit facility
and due to the investment of operating cash generated in 1995. The value of
Midland's investment portfolio grew by $25.6 million to $162.3 million at
December 31, 1995, compared to $136.7 million at December 31, 1994.

Increases in losses and LAE were a result of Midland's growth and the
unusual matters discussed above.

While premiums earned increased by 46% in 1995 as compared to 1994, policy
acquisition costs also increased by 60%. As noted above, the expense ratio
also increased in 1995. These increases were due to the write-off of deferred
policy acquisition costs from discontinued programs and from premium reserve
deficiencies.

Operating expenses increased significantly from $3.7 million in 1994 to $6.4
million in 1995, due to Midland's continued growth and due to significant
investments in information technology systems and marketing programs.

Interest expense nearly doubled in 1995 due to the increase in average debt
outstanding related to Midland's bank credit facility through 1994.

During 1995, Midland's California and Arizona claims operations were
consolidated into a regional claims office in Arizona. This move, coupled with
adverse development in full coverage programs in that region, created a
significant backlog of claims, a resulting disruption in responsiveness and
consequently increased losses and LAE related to those programs. Midland
significantly increased its claims staff to accommodate the workload and
believes it has taken adequate measures to prevent a similar service problem
from recurring. Midland also believes it suffered no significant permanent
damage to its agency and insured relationships during the disruption of
service, due to its prior track record and due to its concentrated efforts to
rectify the problem.

Year Ended December 31, 1993 Compared to the Year Ended December 31, 1994

Gross premiums written increased by 50% from $101.5 million in 1993 to
$152.4 million in 1994. This growth came from several key states, including
Arizona, California, Florida and Georgia. Net premiums written increased 97%
to $151.1 million from $76.8 million in the prior year, due to the growth in
gross premiums written, but also to the elimination of quota-share reinsurance
effective January 1, 1994.

Policy fees increased by 37% from $4.8 million in 1993 to $6.5 million in
1994, due to the growth in premium volume.

Investment income increased by 86% from 1993 to 1994, due to the investment
of cash generated from operations, which benefited by the elimination of
quota-share reinsurance, and due to the investment of the proceeds of
Midland's $20 million credit facility. Midland was also able to take advantage
of rising interest rates with this newly invested cash as well as cash
generated from maturities in its investment portfolio.

Other income is derived from premium finance operations, which remained
fairly stable through 1994.

34
<PAGE>

Losses and LAE increased by 118% from $38.6 million in 1993 to $84.3 million
in 1994, due to the growth in premium volume and to the elimination of quota-
share reinsurance. Also, as previously announced, Midland experienced
increased claims frequency which it attributed to heavy rains in most of its
major markets during October and November, 1994, increasing the loss ratio to
80.7% for the fourth quarter, compared to 67.4% for the first nine months. The
loss ratio for the year 1993 was 69.9% compared to 71.3% in 1994.

Policy acquisition costs increased by 152% from $12.5 million in 1993 to
$31.4 million in 1994. This was directly attributable to the growth in premium
volume in that period. The expense ratio increased from 23.4% in 1993 to 25.1%
in 1994 due to the elimination of quota-share reinsurance, which generated
ceding commission income to offset acquisition costs in prior years.

Interest expense increased from $52,000 in 1993 to $970,000 in 1994 due to
outstanding debt under Midland's credit facility through 1994.

The income tax rate for 1993 and 1994 remained fairly constant at 27.1% and
27.3%, respectively, due to the continued concentration of Midland's
investment portfolio in tax-preferenced securities.

LIQUIDITY AND CAPITAL RESOURCES

The operating cash requirements of Midland relate primarily to the payment
of claims, policy acquisition costs and operating expenses. Due to the nature
of risks Midland insures, Midland's liabilities can be estimated. These
liabilities generally develop and are resolved over a period of less than
three years. Therefore, Midland generally has a predictable schedule of cash
needs. Midland manages its investment activities to maintain adequate
liquidity for operating purposes and to protect its policyholders and
stockholders (i.e., "matching" of liquidity and cash requirements). Midland's
portfolio is heavily weighted toward intermediate fixed maturity securities.
Midland generally invests in investment grade securities and has a policy of
not acquiring real estate investments. Historically, Midland has not
experienced any "mismatches" related to liquidity management and none are
anticipated. At December 31, 1994, Midland's fixed maturity securities were
classified as held-to-maturity. During 1995, Midland's Investment Committee
made a decision to liquidate and reinvest the proceeds of certain of those
securities to take advantage of higher available yields. As a result, Midland
has reclassified the entire portfolio to available-for-sale and the securities
are carried at fair value at December 31, 1995. There are no foreseeable
requirements to liquidate any investments prior to their scheduled maturities.

Midland's objective is to maintain a premiums-to-surplus ratio based on the
industry standard of a maximum of 3:1. For the year ended December 31, 1995,
the premiums-to-surplus ratio was 3:1, compared to 2.4:1 for 1994. Midland
anticipates this ratio will decrease during 1996 due to two factors. First,
Midland expects to write less premiums in 1996 as a result of its decision to
eliminate certain programs and due to rate increases already taken or
anticipated to be taken during 1996. Second, Midland will utilize its 30%
quota-share reinsurance facility on its personal automobile programs
throughout 1996. This reinsurance was obtained effective September 30, 1995.

Midland secured a $20 million permanent credit facility in December 1993,
which was utilized to expand underwriting capacity in 1994. This facility was
increased to $30 million in December 1994, with the increase being utilized to
expand underwriting capacity during 1995. At September 30, 1995, Midland
defaulted on certain financial covenants contained in the related loan
agreement. The default was not cured prior to December 31, 1995. The loan
agreement was amended, including revised financial covenants, effective March
1, 1996. Under the terms of the restated loan agreement, Midland is not
required to pay principal until June 30, 1996, and quarterly thereafter
through June 30, 1998. Interest is payable quarterly. See Note 6 and Note 15
of the Notes to Midland Consolidated Financial Statements for further
discussion.

Midland utilizes catastrophe insurance futures and options (the "CAT
contracts") to help manage Midland's risk from catastrophic losses. These CAT
contracts are traded on the Chicago Board of Trade ("CBOT") and are designed
to track insured catastrophic losses on a regional and nationwide basis. The
CAT

35
<PAGE>

contracts are indexed to loss notices as determined by Insurance Services
Office, Inc. (the "ISO") using data obtained from designated reporting
companies. The ISO considers losses reported to the designated companies as of
the end of the quarter following the loss quarter. The ISO estimates quarterly
premiums based on the most recent statutory annual statements filed by the
reporting companies. Since the premium is known and constant during the life
of the CAT contract, any changes in CAT contract prices are due entirely to
changes in the amount of reported losses. The CAT program is used by
management as a supplement to reinsurance treaties. Depending on CBOT quotes
and conditions in the traditional catastrophic reinsurance market, the
standardized nature of the CAT contracts provides management the opportunity
to "shop" for better price and coverage in specific regions that a reinsurance
company may not be able to offer in a timely fashion.

The program has been used for hedging catastrophic risk with the ISO
September Eastern contract at the CBOT. These particular contracts focus on
the Atlantic coast and gulf regions of the country. It is in certain areas of
those regions that management believes it has catastrophic exposure that is
too costly to reinsure "traditionally." The contracts are based on industry
wide loss ratios calculated by the ISO. To hedge, management purchases or
sells calls or puts at various loss ratios in order to mitigate its exposure
to loss. Therefore, if the industry is suffering from catastrophic losses, the
loss ratio increases. Midland's CAT contracts consequently reflect a profit to
offset underwriting losses. If a catastrophic event does not occur, the CAT
positions reflect a loss, but Midland's underwriting business remains
profitable. The program has performed up to management's expectations.
Midland's management will continue to explore opportunities in the CAT market.
Hedges will be made only if they provide a cost effective supplement to
traditional reinsurance.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 of the Notes to Midland Consolidated Financial Statements for the
impact of recent accounting pronouncements.

36
<PAGE>

DESCRIPTION OF BUSINESS

DANIELSON

Danielson is a holding company that is primarily engaged, through its
subsidiaries, in the workers' compensation and the non-standard personal and
commercial automobile insurance businesses. Danielson also owns a small
California non-bank trust company that provides personal trust and employee
benefit trust services. Danielson operates its subsidiaries on a decentralized
basis, allowing most operating decisions to be made at the subsidiary level.

OVERVIEW OF NAICC'S INSURANCE BUSINESS

NAICC's objective is to grow through expansion of its specialty insurance
product lines and its geographic territories in a continuing effort to build
stockholder value as a specialty insurance company. The focus of its strategy
is to provide a limited number of types of insurance products to certain
targeted markets in a highly efficient and profitable manner. NAICC is willing
to redeploy its capital to profitable lines and profitable markets if and when
any specific insurance line or market suffers excessive competition or rate
deterioration. NAICC's incentive compensation of its senior managers is based
upon the achievement of such objective and the implementation of this
strategy.

NAICC is a California corporation engaged in underwriting and marketing
workers' compensation insurance and non-standard personal and non-standard
commercial automobile insurance. NAICC markets its workers' compensation and
non-standard commercial automobile insurance products through more than 700
independent insurance agents and brokers, none of whom individually produce
more than 5% of NAICC's gross premiums written. NAICC markets its non-standard
personal automobile insurance through one general agent that utilizes
approximately 600 independent agents.

The following table sets forth NAICC's gross premiums written by state for
the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------ -------------------
1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Arizona............................ $ 2,516 $ 3,046 $ 2,532 $ 753 $ 747
California......................... 86,212 93,271 61,764 19,154 10,838
Idaho.............................. 4,083 4,582 3,318 945 727
Nevada............................. 434 449 350 27 121
Oregon............................. 2,610 3,011 2,952 828 676
Other.............................. 41 20 33 4 1
------- -------- ------- --------- ---------
Total............................ $95,896 $104,379 $70,949 $21,711 $13,110
======= ======== ======= ========= =========
</TABLE>

The following table sets forth net premiums written by line of business for
the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Line of business:
Workers' compensation... $79,269 90.1% $77,173 84.7% $38,200 69.0% $13,264 75.3% $3,999 44.5%
Non-standard automobile
Personal.............. 4,944 5.6 10,511 11.5 15,018 27.2 3,902 22.2 4,029 44.8
Commercial............ 1,748 2.0 2,065 2.3 2,023 3.7 481 2.7 960 10.7
Other................... 1,992 2.3 1,320 1.5 54 0.1 (35) (0.2) 4 0.0
------- ----- ------- ----- ------- ----- ------- ----- ------ -----
Total............... $87,953 100.0% $91,069 100.0% $55,295 100.0% $17,612 100.0% $8,992 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ====== =====
</TABLE>

37
<PAGE>

NAICC'S WORKERS' COMPENSATION INSURANCE BUSINESS

General

Workers' compensation insurance policies provide coverage for workers'
compensation and employers' liability. The workers' compensation portion of
the coverage provides for statutory benefits that employers are required to
pay to employees who are injured in the course of employment including, among
other things, temporary or permanent disability benefits, death benefits,
medical and hospital expenses and expenses of vocational rehabilitation. The
benefits payable and the duration of such benefits are prescribed by statute,
and vary with the nature and severity of the injury or disease and the wages,
occupation and age of the employee. The employers' liability portion of the
coverage provides protection to an employer for its liability for losses
suffered by its employees that are not included within the statutorily
prescribed workers' compensation coverage. Typically, workers' compensation
policies have a maximum term of one year.

At December 31, 1995, NAICC had 3,844 workers' compensation policies in
force with an average approximate annual premium size of $6,201, compared to
7,097 and 7,183 policies in force at December 31, 1993 and 1994, respectively,
with an average approximate annual premium size of $11,492 and $9,566 in each
respective year. NAICC's management believes the decrease of approximately
46.5% in the policies in force from 1994 to 1995 is attributable to
significantly increased price competition in the California workers'
compensation market. For the first quarter of 1996, NAICC continued to price
the renewals of its in-force California policies above the market level price.
In doing so, its in-force policy count continued to decrease.

In 1995, 87% of NAICC's workers' compensation direct premiums written were
in the State of California. Effective January 1, 1995, a new "open rating" law
replaced the old workers' compensation "minimum rate" law. The new open rating
law significantly changes the way in which insurance companies price workers'
compensation insurance in California. Under open rating, to obtain approval to
use any workers' compensation rates in California, an insurer is required to
file its proposed rates and rating plans with the Insurance Department. The
Insurance Department may disapprove a rate filing only if it finds that the
rates are unfairly discriminatory, could threaten the solvency of the insurer,
or could cause a single insurer, other than the California State Compensation
Insurance Fund, to control more than 20% of the market.

The profitability of the workers' compensation line of business in
California in 1992, 1993 and 1994 increased competition in that line. That
competition, coupled with California's adoption of a new "open rating" law in
1995, created a new and less profitable pricing environment in the California
workers' compensation market. Notwithstanding the change in the California
market, and in accordance with its underwriting philosophy, NAICC continues to
price its workers' compensation insurance in a way that NAICC expects will
result in profitable operating results. As a result, NAICC has experienced a
reduction in the number of workers' compensation policies written and net
premiums written in recent periods and has redeployed a portion of its capital
into its non-standard automobile insurance business. NAICC's non-standard
automobile insurance business has grown from its inception in 1993 to $28.8
million in direct premiums written for the year ended December 31, 1995.

In response to developments affecting the market for workers' compensation
insurance in California, NAICC has pursued a strategy of redeploying its
capital either in other specialty lines of insurance such as non-standard
personal automobile insurance or in the workers' compensation line in
geographic markets believed by NAICC to offer greater potential for
profitability than California. In furtherance of its strategy to write
workers' compensation insurance in markets other than California, in June
1996, NAICC acquired Valor Insurance Company, Incorporated ("Valor"), a
Montana-domiciled specialty property and casualty insurance company that
primarily writes workers' compensation insurance policies. This acquisition
will enable NAICC to market workers' compensation insurance directly to
employers in the State of Montana. Pursuant to the Stock Purchase Agreement
dated May 31, 1996 among NAICC, Valor and Keith E. Brownfield, NAICC paid
approximately $2.9 million to Valor stockholders, with an additional $500,000
payable if certain cumulative net income goals are achieved by Valor prior to
December 31, 2000.

38
<PAGE>

NAICC utilizes a proprietary premium and loss ("PAL") software application
in connection with the primary functions of data entry, reserving, calculation
of benefits and payment of expenses and benefits that NAICC believes offers an
advantage because it is stable, expandable, multi-functional and cost
effective. NAICC's PAL software automatically rates and issues policies,
endorsements and premium audits in all states and provides easy access to data
via its relational database architecture. PAL also provides automatic
reinsurance cessions of both premiums and losses.

Set forth below are certain financial ratios relating to NAICC's workers'
compensation business and a comparison of the combined ratios of NAICC's
workers' compensation business to the industry averages for the periods
indicated.

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- --------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
STATUTORY BASIS:
Loss and LAE ratio......................... 76.9% 66.6% 71.0% 77.0% 75.8%
Policyholder dividend ratio................ 5.8 12.0 4.1 3.7 1.0
Expense ratio.............................. 24.2 25.4 31.4 29.2 57.4
----- ----- ----- ------ ------
Combined ratio............................. 106.9% 104.0% 106.5% 109.9% 134.2%
===== ===== ===== ====== ======
GAAP BASIS:
Loss and LAE ratio......................... 76.9% 66.6% 71.0% 77.0% 75.8%
Policyholder dividend ratio................ 4.5 7.6 0.3 1.0 1.0
Expense ratio.............................. 25.1 26.0 32.3 28.3 55.8
----- ----- ----- ------ ------
Combined ratio............................. 106.5% 100.2% 103.6% 106.3% 132.6%
===== ===== ===== ====== ======
STATUTORY INDUSTRY AVERAGE: (1)
Combined ratio............................. 109.1% 101.4% -- -- --
===== ===== ===== ====== ======
</TABLE>
- ---------------------
(1) Source: A.M. Best statistical data (statutory basis) for workers'
compensation insurance companies. Data for 1995 and the first quarter of
1996 are not currently available.

Marketing

NAICC writes workers' compensation business primarily in the states of
California, Oregon, Arizona and Idaho through more than 700 contracted
independent agents. The agency contracts provide authority to bind coverage
within detailed underwriting guidelines set by NAICC. There are no managing
general agency contracts or general agency contracts covering NAICC's workers'
compensation insurance.

NAICC maintains five new business production offices located in Portland,
Oregon; Phoenix, Arizona; and San Francisco, Fresno and Long Beach,
California. The marketing and underwriting employees at these offices solicit
and underwrite only new applications produced by independent agents. NAICC
believes that its local presence allows it to better serve independent agents.
All other functions of policyholder service, renewal underwriting, policy
issuance, premium collection and record retention are performed centrally at
NAICC's home office in Long Beach, California.

NAICC targets employers having operations that are classified as low to
moderate hazard and that generally have payrolls under $1 million. Typically,
annual premiums for employers in this payroll category are less than $25,000.
According to the California Workers' Compensation Insurance Rating Bureau
("WCIRB"), which is the designated statistical agent for the California
Department, in California, 58% of all policyholders pay premiums that fall
within the range of $1,000 to $25,000 annually. Only approximately 10% pay
premiums greater than $25,000.

39
<PAGE>

Underwriting

NAICC maintains a disciplined approach to risk selection and pricing. In
accordance with this policy, NAICC selects each prospective policyholder based
on the characteristics of such risk and establishes premiums based on loss
experience and risk exposure. NAICC's pricing policy is not driven by market
share considerations.

Rates, rating plans, policyholder dividend plans and policy forms are
developed and filed by NAICC's underwriting personnel with the appropriate
regulatory agency in each state in which NAICC operates. NAICC relies
principally upon rates promulgated by either the WCIRB or the National Council
on Compensation Insurance, the statistical agent for other western states in
which NAICC markets insurance. Depending upon the state and NAICC's filed
rating plans, NAICC may deviate from the filed rates where warranted by the
characteristics of the risk. Individual policy rate deviations are tracked by
NAICC's PAL on-line underwriting management system.

In 1995, approximately 82% of NAICC's workers' compensation gross premiums
written and 70% of NAICC's workers' compensation policies were produced in
California. For the 1995 policy year, NAICC's workers' compensation policies
in California had an average price of 130.2% of the WCIRB filed loss and LAE
rates, sometimes referred to as "advisory pure premium rates." The California
statewide average price was 106.5% of such advisory pure premium rates.
Advisory pure premium rates are a benchmark for rate adequacy in the
California workers' compensation business.

Claims

NAICC's workers' compensation claims are received, reviewed, processed and
paid by NAICC employees located in claims service offices in Portland, Oregon;
San Francisco, California; and Long Beach, California. NAICC's claims service
personnel in NAICC's home office provide technical support and guidance to
NAICC's claims service offices and monitor all activity at the claims service
office level. All claims personnel receive training in fraud identification.
NAICC believes that it is able to obtain the best result for the employer
through the outsourcing of certain claims functions. Legal and investigative
services (including fraud investigation) are provided by independent law firms
and private investigation firms. NAICC also uses vendors to provide medical
cost savings through physician and hospital bill review, access to preferred
provider networks and large case management on an as-needed basis. NAICC
believes that it is able to competitively contain legal costs, fraud and
medical provider excesses by outsourcing these functions. Most of NAICC's
policyholders are not of sufficient size or type to make a more specialized
managed care approach to medical cost containment more cost effective.

Workers' compensation claims processing involves the issuance of numerous
checks to vendors of legal, medical and rehabilitation services, as well as to
the injured worker. The PAL claims subsystem automatically prints these checks
as well as letters of explanation to the injured worker that must accompany
each check. The claims subsystem has a diary feature which enables claims
examiners and supervisors to constantly monitor open individual claims.
Finally, the claims subsystem provides all necessary routine management
reports and also has the capability to build and run customized queries
easily. NAICC management believes this subsystem is of competitive advantage
to NAICC because it is stable, expandable, and it functions at a relatively
low cost.

NAICC'S NON-STANDARD PERSONAL AUTOMOBILE INSURANCE BUSINESS

General

NAICC currently writes non-standard personal automobile insurance only in
California. NAICC began writing non-standard personal automobile insurance in
July 1993. Non-standard risks are those segments of the driving public which
generally are not considered to be "preferred" business, such as drivers with
a record of prior accidents or driving violations, drivers involved in
particular occupations or driving certain types of

40
<PAGE>

vehicles, or those who have been non-renewed or declined by another insurance
company. Management believes that opportunities in the non-standard personal
automobile insurance market are influenced by many factors, including the
market conditions for standard automobile insurance, the assigned risk or
residual market plans of individual states and the extent to which state motor
vehicle laws are enforced.

NAICC's management believes the non-standard personal automobile insurance
market has grown due to state law enforcement agencies' stepping up
enforcement of motor vehicle laws, including drunk driving and uninsured
motorist laws. According to A.M. Best, premiums from the national non-standard
personal automobile insurance market grew at a compounded annual rate of 13%
from 1990 through 1994, the last year for which such information is available.

NAICC had 15,419 and 20,000 non-standard personal automobile policies in
force for the years ended December 31, 1993 and 1994, respectively, compared
to more than 29,000 policies in force in 1995. NAICC cedes 50% of its non-
standard personal automobile direct premiums written, direct losses and
allocated LAE to a major reinsurance company under a quota-share reinsurance
agreement.

Set forth below are certain financial ratios relating to NAICC's non-
standard personal automobile business and a comparison of the combined ratios
of NAICC's non-standard personal automobile business to the industry averages
for the periods included.

<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- --------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
STATUTORY BASIS:
Loss and LAE ratio......................... 51.8% 71.3% 65.8% 68.8% 69.2%
Expense ratio.............................. 41.3 34.1 31.3 31.1 27.3
----- ----- ----- ------ ------
Combined ratio............................. 93.1% 105.4% 97.1% 99.9% 96.5%
===== ===== ===== ====== ======
GAAP BASIS:
Loss and LAE ratio......................... 51.8% 71.3% 65.8% 68.8% 69.2%
Expense ratio.............................. 60.0 33.6 33.6 34.4 32.9
----- ----- ----- ------ ------
Combined ratio............................. 111.8% 104.9% 99.4% 103.2% 102.1%
===== ===== ===== ====== ======
STATUTORY INDUSTRY AVERAGE: (1)
Combined ratio............................. 101.7% 102.7% 104.1% -- --
===== ===== ===== ====== ======
</TABLE>
- ---------------------
(1) Source: A.M. Best, "Best's Review: By-line Underwriting Results; Auto
Private Passenger." Quarterly data are not currently available.

Marketing

NAICC markets non-standard personal automobile insurance solely through one
general agent, SCJ Insurance Services, Inc., which, in turn, markets through
600 independent agents located in California.

The characteristics of NAICC's policies in force as of December 31, 1995
define NAICC's target market. NAICC offers policy terms ranging from one month
to 12 months, approximately 56% of which are one month policies, and 35% of
which are annual policies, and the remainder are either three or six months in
term. Of NAICC's total non-standard personal automobile policies, about 95%
cover owned vehicles and 5% cover individuals who do not own an automobile.
Approximately 40% of NAICC's policyholders are ineligible for non-renewal or
cancellation under California Proposition 103. See "Regulation." About 75% of
NAICC's policies cover liability only with the remaining 25% covering both
liability and physical damage. Northern California accounted for 54% of
NAICC's net premiums written in 1995 while southern California contributed

41
<PAGE>

46% (of which 12% came from Los Angeles County). NAICC does not foresee any
significant changes in this distribution in the near term.

Underwriting

Insurers admitted in California are required to obtain prior approval of
both rates and forms for most types of insurance, including non-standard
personal automobile liability and physical damage insurance, from the
California Department before being used as part of an insurance contract in
California. NAICC periodically revises its forms and rates based upon demand
and NAICC's historical experience. NAICC's general agent has authority,
through its agency contract, to use these forms and rates to bind new and
renewal policies in accordance with NAICC's underwriting guidelines.

The general agent performs the risk selection, rating, policy and
endorsement issuance, and premium collection functions for NAICC using its own
data processing system. The general agent's computer system interfaces with
NAICC's PAL computer system and uploads all premium transactions nightly. The
general agent's system affords easy access to data through either customized
or routine management reports enabling both the management of the general
agent and NAICC to track profitability.

NAICC offers limits of liability of a maximum of: $15,000 per person and
$30,000 per accident for bodily injury liability; $10,000 for property damage
liability; automobile medical payments of a maximum of $2,000 per person;
uninsured motorists coverage of $15,000 per person; and $30,000 per accident,
and $33,000 for physical damage to any one covered automobile. NAICC does not
provide policies covering higher or excess limits of liability.

Claims

NAICC's automobile claims personnel adjust automobile claims for both
NAICC's non-standard personal and non-standard commercial automobile programs.
All of NAICC's automobile claims are handled by NAICC employees in the Long
Beach, California headquarters. Claims are reported by agents, insureds and
claimants directly to NAICC through fax or toll-free lines. Claims are
entered, reserved and assigned to NAICC front line adjusters within 24 hours.
NAICC front line adjusters are authorized to settle claims of up to $5,000 to
facilitate rapid resolution. Settlement of claims in excess of $5,000 requires
supervisory approval. NAICC adjusters assign independent appraisers from a
list of NAICC-approved firms to provide repair estimates and other general
appraisal services. The actual investigation of claims is handled primarily by
NAICC adjusters by telephone unless an in-person meeting is necessary, in
which case an independent adjuster is selected from a list approved by
management. NAICC adjusters are responsible for all aspects of claims
investigation, reserving, settlement, payment and recovery.

Each adjuster handles a pending load of 100 to 120 claims files, receiving
30 to 40 new claims per month. Although NAICC currently receives approximately
450 new claims per month, the total auto claims pending count is maintained at
approximately 1,450 pending claims which reflects NAICC's rapid resolution of
claims. Of the approximately 1,450 claims currently pending, fewer than 85 are
being litigated.

NAICC manages litigation through regular supervisory involvement. Although
NAICC assigns cases to outside counsel, NAICC's management conducts routine
file reviews, and adjusters take an active role in managing and resolving the
cases. NAICC has alternative fee arrangements with law firms in several major
cities and closely monitors bills and performance through file reviews and
litigation reports.

All claims personnel receive training in fraud identification. Claims
involving suspected fraud are referred to an in-house special investigation
unit ("SIU") adjuster who manages a detailed investigation of these claims
using outside investigative firms. When evidence of fraudulent activity is
identified, the SIU adjuster works with the various state departments of
insurance, the National Insurance Crime Bureau and local law enforcement
agencies in handling the claims.

42
<PAGE>

Claims recovery is managed by the handling claims adjuster. NAICC has a
contractual agreement with a salvage buyer in order to maintain high levels of
recovery. Subrogation is handled in-house for most claims, while difficult
claims are sent to a collection agent for follow-up on a contingent fee basis.

The auto claims group uses NAICC's PAL system which facilitates all aspects
of claims handling and management by providing (i) on-line claim and policy-
limit verification, (ii) automated claim diary system functions which support
claims supervision, (iii) assurance that expense checks are issued only to
authorized vendors under adjuster authority, (iv) information pertaining to
policyholders' claims history, and (v) form letters which may be customized at
the direction of the adjuster.

NAICC'S NON-STANDARD COMMERCIAL AUTOMOBILE INSURANCE BUSINESS

General

Automobiles used or owned by businesses that are used to further the
purposes of those businesses are classified broadly as "commercial
automobiles" for insurance purposes. The majority of automobiles owned or used
by businesses are insured under policies that provide other coverages for the
business e.g., general liability insurance. A large percentage of standard
insurers will not cover certain commercial automobiles because of the claims
experience and/or the type of the business, the use or the driver of the
automobile.

NAICC's policies in force typically cover fleets of four or fewer
automobiles. The current average annual premium of the policies in force is
approximately $3,000. About 45% of the policies provide both liability and
physical damage coverage; most of the remainder provide liability insurance
only. Businesses which are unable to insure a specific driver and businesses
having vehicles used in higher than normal hazardous activities are typical
NAICC insureds. Examples of higher hazard vehicles include sand and gravel
haulers, farm vehicles and certain short haul common carriers. NAICC does not
insure intermediate or long haul truckers, trucks hauling logs, pulp or
similar higher hazard automobiles.

Marketing

NAICC markets non-standard commercial automobile insurance through
approximately 600 independent agents located in Arizona, California, Idaho,
Nevada and Oregon. NAICC does not use any managing general agents in this line
of business, although NAICC has granted agency contracts to agents who may use
independent agents. NAICC's new business field offices support the production
of this business through the independent agents.

NAICC believes its procedures facilitate agents' production and placement of
this business with NAICC. Agents are given a diskette for use in their
personal computer containing a menu driven, DOS-based program that rates
applicants and produces a printed application for the agent. The agents have
limited authority to quote and bind policies subject to NAICC's underwriting
guidelines. Finally, all policy premiums are paid directly to NAICC,
eliminating the need for the agent to perform the collection and credit
function.

Underwriting

All data entry, final rating, underwriting and policy issuance for the non-
standard commercial automobile business is done by NAICC employees at its Long
Beach, California office. These employees also perform the premium collection
function. NAICC leases a personal computer-based application for rating,
policy issuance and direct billing that interfaces with its mainframe PAL
system. NAICC believes that this system provides an efficient means of
performing these functions.

Rates and policy forms are developed by NAICC and filed with the regulators
in each of the relevant states, depending upon each state's requirements.
NAICC contracts with a pricing actuary to assist in the rate

43
<PAGE>

evaluation, determination and filing. NAICC relies upon industry experience
tempered by its own experience in establishing rates.

The maximum non-standard commercial automobile policy limit provided by
NAICC is $1 million bodily injury and property damage combined single limit of
liability for each occurrence. NAICC retains the first $150,000 bodily injury
and property damage combined single limit of liability for each occurrence.
Losses in excess of $150,000 are ceded to reinsurers.

Claims

All of NAICC's non-standard commercial automobile claims are handled under
the direction of the NAICC claims personnel who also are in charge of the non-
standard personal automobile claims operations. The policies and procedures
outlined in the discussion of non-standard personal automobile claims applies
also to non-standard commercial automobile claims. Currently, there are fewer
than 100 such pending claims.

PROVISIONS FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

NAICC's provisions for unpaid losses and LAE are made based upon estimates
for reported losses, NAICC's historical experience of losses reported by
reinsured companies for insurance assumed, and actuarial estimates based upon
historical NAICC and industry experience for development of reported and
unreported (incurred but not reported) claims. Any changes in estimates of
ultimate liability are reflected in current operating results. Inflation is
assumed, along with other factors, in estimating future claims costs and
related liabilities. NAICC does not discount any of its loss reserves for
financial statement purposes.

The ultimate cost of claims is difficult to predict for several reasons.
Claims may not be reported until many years after they are incurred. Changes
in the rate of inflation and the legal environment have created forecasting
complications. Court decisions rendered in the time between the dates on which
a claim is reported and its resolution may dramatically increase liability.
Punitive damages awards have grown in frequency and magnitude. The courts have
imposed increasing obligations on insurance companies to defend policyholders.
As a result, the frequency and severity of claims have grown rapidly and
unpredictably.

The unpaid losses and LAE related to environmental claims are established
based upon facts currently known and the current state of the law and coverage
litigation. Liabilities are estimated for known environmental claims
(including the cost of related litigation) when sufficient information has
been developed to indicate the involvement of a specific contract of insurance
or reinsurance and management can reasonably estimate its liability.
Liabilities for unknown environmental claims or unreported environmental
claims and development of reported environmental claims are included in
NAICC's bulk unpaid losses. Management believes that the liability for unknown
or unreported environmental claims is not material based on historical
reporting experience. The liability for the development of reported
environmental claims is based on estimates of the range of potential losses
for reported environmental claims in the aggregate as well as currently
established case estimates and industry development factors for reported
claims. Estimates of liabilities are reviewed and updated continually.
Exposure exists in excess of amounts that are currently recorded and that
could be material.

Due to these factors, among others, the process used in estimating unpaid
losses and LAE cannot provide an exact result. Management of NAICC believes
that the provisions for unpaid losses and LAE are adequate to cover the net
cost of losses and LAE incurred to date; however, such liability necessarily
is based on estimates and there can be no assurance that the ultimate
liability will not exceed such estimates.

44
<PAGE>

The following table presents information on changes in the provisions for
losses and LAE of NAICC for the periods presented:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net unpaid losses and LAE at beginning of year...... $104,825 $119,223 $128,625
-------- -------- --------
Add:
Provision for losses and LAE related to:
Current year...................................... 65,157 67,131 45,592
Prior years....................................... 743 384 3,123
-------- -------- --------
Total incurred.................................. 65,900 67,515 48,715
-------- -------- --------
Less:
Loss and LAE payments for claims related to:
Current year...................................... 11,852 15,849 14,464
Prior years....................................... 39,650 42,264 46,582
-------- -------- --------
Total paid...................................... 51,502 58,113 61,046
-------- -------- --------
Net unpaid losses and LAE at end of year............ 119,223 128,625 116,294
Plus reinsurance recoverables on unpaid losses and
LAE................................................ 18,256 17,705 21,112
-------- -------- --------
Gross unpaid losses and LAE at end of year.......... $137,479 $146,330 $137,406
======== ======== ========
</TABLE>

The losses and LAE incurred in 1995 relating to prior years are primarily
attributable to claims from business written prior to 1986 that is in run-off.
Two claims from business in run-off comprise substantially all of the losses
and LAE incurred related to prior years: one being a claim for asbestos
exposure, which was settled in 1995 in the form of a policy buy back; the
other, a construction defect claim in which a court decision was contrary to
previously established case law.

NAICC has environmental claims against policies issued prior to 1980. The
principal exposure arises from excess and primary policies of business in run-
off, the obligations of which were assumed by NAICC. These excess and primary
claims are relatively few in number and have policy limits of between $50,000
and $1 million, with reinsurance generally above $50,000. NAICC also has
environmental claims primarily associated with participation in excess of loss
reinsurance contracts assumed by NAICC. These reinsurance contracts have
relatively low limits, generally less than $25,000, and estimates of unpaid
losses are based on information provided by the primary insurance company. As
of December 31, 1995, NAICC's net unpaid losses and LAE relating to
environmental claims were $4.1 million. Included in the 1995 provision for
losses and LAE occurring in prior years is $3.9 million related to claims
arising from businesses in run-off since 1987 which includes environmental
claims. Such losses and LAE increased NAICC's loss and LAE ratio for 1995 from
74.1% to 80.5%.

The following table indicates the manner in which unpaid losses and LAE at
the end of a particular year change as time passes. The first section reflects
the liability as originally reported, net of reinsurance, at the end of the
stated year. Each calendar year-end liability includes the estimated liability
for that accident year and all prior accident years relating to that
liability. The second section shows the original recorded net liability as of
the end of successive years adjusted to reflect facts and circumstances which
were subsequently discovered. The next line, cumulative deficiency, compares
the adjusted net liability amount to the net liability amount as originally
established and reflects whether the net liability as originally recorded was
adequate to cover the estimated cost of claims. The third section reflects the
cumulative amounts related to that liability that were paid, net of
reinsurance, as of the end of successive years.

45
<PAGE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net unpaid losses and
LAE at end of year...... $115,858 $ 95,272 $ 91,870 $ 97,810 $104,825 $119,223 $128,625 $116,294
Net unpaid losses and
LAE re-estimated as of:
One year later......... 120,527 100,599 92,632 94,364 105,568 119,607 131,748
Two years later........ 124,167 100,143 87,504 99,875 111,063 123,039
Three years later...... 121,081 94,954 89,844 107,945 117,756
Four years later....... 116,384 96,948 95,576 116,018
Five years later....... 118,175 101,537 102,081
Six years later........ 122,784 107,344
Seven years later...... 128,589
Cumulative deficiency... (12,731) (12,072) (10,211) (18,208) (12,931) (3,816) (3,123)
Cumulative net paid
losses and LAE as of:
One year later......... 41,767 38,165 31,162 39,131 39,650 42,264 46,582
Two years later........ 72,735 56,876 53,424 63,483 68,025 71,702
Three years later...... 86,142 71,543 66,198 81,485 88,038
Four years later....... 96,352 78,991 75,963 94,238
Five years later....... 102,385 84,980 83,704
Six years later........ 107,661 90,458
Seven years later...... 112,555
Gross unpaid losses and
LAE at end of year...... $125,391 $137,479 $146,330 $137,406
Reinsurance recoverable. 20,566 18,256 17,705 21,112
-------- -------- -------- --------
Net unpaid losses and
LAE at end of year...... 104,825 119,223 128,625 116,294
Gross unpaid losses and
LAE re-estimated
as of:
One year later......... 130,347 137,998 149,815
Two years later........ 132,201 141,737
Three years later...... 139,823
-------- -------- --------
Re-estimated reinsurance
recoverable............. 22,067 18,698 18,067
-------- -------- --------
Net unpaid losses and
LAE re-estimated........ 117,756 123,039 131,748
Gross cumulative
deficiency.............. (14,432) (4,258) (3,485)
</TABLE>

The table above ordinarily would present a ten year development of unpaid
losses and LAE; however, the loss and LAE data of NAICC relating to periods
prior to 1988 are not comparable to such data for periods subsequent to 1988.
In 1988, NAICC assumed the unpaid policyholder liabilities of MAIC for
accident years 1985, 1986 and 1987. The data subsequent to 1987 necessary to
update the unpaid losses and LAE of NAICC as of December 31, 1987 and earlier
includes loss and LAE data relating to MAIC that is not reflected in the
December 31, 1987 unpaid losses and LAE of NAICC, and such data cannot be
segregated because of the assumption of those 1985, 1986 and 1987 accident
year liabilities in 1988. The 1988 assumption of the policyholder liabilities
of MAIC was the last of a series of significant events and transactions that
resulted in, among other things, the acquisition by Danielson of a majority
ownership interest in NAICC, a change in the management of NAICC, and a
material change in the business and operations of NAICC. As a result of these
material changes, NAICC believes the table above, reflecting information
commencing in 1988, provides the most meaningful and relevant historical
analysis possible of unpaid losses and LAE of NAICC. Although NAICC continues
to receive claims relating to 1988 and earlier, the liability recorded
represents the best estimate by NAICC's management of the liability for
currently foreseeable claims.

The cumulative deficiency as of December 31, 1995 of $10.2 million, $18.2
million and $12.9 million for 1990, 1991 and 1992 of net unpaid losses and
LAE, respectively, is primarily attributable to adverse development,
subsequent to 1991, of the workers' compensation loss experience in the 1990
and 1991 loss years. The California workers' compensation industry, including
NAICC, experienced adverse development during those loss years, primarily in
Southern California, largely as a result of a significant increase in the
number of workers' compensation post-termination stress claims primarily due
to a downturn in the California economy and an increase in unemployment.
Workers' compensation reform legislation passed in July 1993, which
effectively reduced the number of successful post-termination stress claims,
as well as a decrease in unemployment in California and highly publicized
anti-fraud activity, have contributed to the significantly more

46
<PAGE>

favorable loss experience in the 1992, 1993 and 1994 loss years. In 1995,
favorable development of approximately $4.9 million in the 1992 and 1993 loss
years for workers' compensation was offset by $2.6 million of adverse
development of commercial business no longer written by NAICC and $5.4 million
of adverse development of the businesses in run-off.

Conditions and trends that have affected the development of these
liabilities in the past may not necessarily recur or have similar effects in
the future. It would not be appropriate to use this cumulative history in the
projection of future performance.

REINSURANCE

In its normal course of business and in accordance with industry practice,
NAICC reinsures a portion of its workers' compensation exposure with other
insurance companies to limit effectively its maximum loss arising out of any
one occurrence. Contracts of reinsurance do not legally discharge the original
insurer from its primary liability. In accordance with GAAP, the estimated
reinsurance receivable arising from these reinsurance contracts is reported
separately as an asset.

In 1995, NAICC retained the first $400,000 per occurrence, and in 1996
increased its retention to $500,000 per occurrence, for workers' compensation
claims. General Reinsurance Corporation ("GRC") continues to reinsure NAICC
for the difference between NAICC's net retention and $5 million per
occurrence. American Re-Insurance Company ("AmRe") continues to reinsure NAICC
for the difference between $5 million per occurrence and $10 million per
occurrence. Finally, NAICC places the remaining $90 million per occurrence, in
excess of the first $10 million per occurrence, with 18 other reinsurers.

Beginning with NAICC's commencement of its non-standard personal automobile
program in June 1993, and continuing to date, NAICC cedes 50% of its non-
standard personal automobile premiums and losses, under a treaty, on a quota-
share basis to Munich American Reinsurance Company ("MARC"). This risk sharing
is based upon a joint venture marketing effort rather than a traditional need
for reinsurance.

Non-standard commercial automobile liability insurance policies are
reinsured under a treaty with GRC. NAICC retains the first $150,000 combined
single limit of liability per occurrence for bodily injury and property
damage. The next $850,000 per occurrence in excess of NAICC's net retention is
ceded to GRC.

As of December 31, 1995, GRC and MARC were the only reinsurers that
accounted for more than 10% of NAICC's reinsurance recoverable on paid and
unpaid claims. Total premiums ceded to reinsurers by NAICC in 1995 were 22% of
gross premiums written. NAICC monitors its reinsurers by reviewing A.M. Best
reports and rating information from reinsurance intermediaries and by
analyzing financial statements of its reinsurers. At December 31, 1995, NAICC
had reinsurance recoverables on paid and unpaid claims of $10 million from GRC
and $9.8 million from MARC. Both MARC and AmRe are rated A+ by A.M. Best; GRC
is rated A++ by A.M. Best.

NAICC and its two subsidiaries participate in an intercompany pooling and
reinsurance agreement under which such subsidiaries cede 100% of their net
liability, defined to include premiums, losses and allocated LAE, to NAICC to
be combined with the net liability for policies of NAICC in formation of a
"pool." NAICC simultaneously cedes to those subsidiaries 10% of the net
liability of the pool. NAICC's subsidiaries commenced participation in the
pool in July 1993 and January 1994. The participating subsidiaries further
reimburse NAICC for executive and professional services and administrative
expenses based on designated percentages of net premiums written for each line
of business. This intercompany pooling and reinsurance agreement has been
approved by the Insurance Department.

INVESTMENTS

NAICC's investment objectives are to produce an attractive total rate of
return on a pre-tax basis while, at the same time, protecting and enhancing
policyholders' capital and surplus on a long-term basis and maintaining

47
<PAGE>

adequate liquidity for insurance operations. NAICC's investment policy
provides that no more than 5% of the investment portfolio at market value can
be invested in equity securities (other than mutual funds) and no more than
10% of the investment portfolio at market value may be invested in mutual
funds. Based on market value at March 31, 1996, 97.4% of NAICC's portfolio
consisted of investment grade fixed maturity securities, 1.6% of the portfolio
consisted of short-term investments and 1% of the portfolio consisted of
equity securities. In addition, investments in individual securities are
limited to a percentage of policyholders' capital and surplus, depending on
the security's rating and the type of security. At March 31, 1996, the fixed
maturity portfolio investments of NAICC had an average maturity of 4.2 years.

The following table sets forth a summary of Danielson's consolidated
investment portfolio as of March 31, 1996, by investment type (dollars in
thousands).

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------------
AMORTIZED FAIR
COST PERCENTAGE VALUE PERCENTAGE
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government/Agency (AAA)......... $ 63,815 39.2% $ 64,763 39.6%
Mortgage-backed (AAA)................ 62,203 38.2 61,387 37.5
Corporates (AAA to A)................ 34,369 21.1 34,419 21.0
Corporates (BBB)..................... 2,131 1.2 2,242 1.4
-------- ----- -------- ------
Subtotal-investment grade............ 162,518 99.7 162,811 99.5
Other................................ 105 0.1 105 0.1
-------- ----- -------- ------
Total fixed maturities................. 162,623 99.8 162,916 99.6
-------- ----- -------- ------
Equity securities...................... 256 0.2 602 0.4
-------- ----- -------- ------
Total.............................. $162,879 100.0 $163,518 100.00
======== ===== ======== ======
</TABLE>

The portfolio of Danielson includes mortgage-backed securities ("MBS")
representing 34.7% and 36.9% of Danielson's total portfolio at December 31,
1994 and 1995, respectively, compared to 37.5% at March 31, 1996. All MBS held
by NAICC are issued by the Federal National Mortgage Association ("Fannie
Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"), both of
which are rated "Aaa" by Moody's Investors Services. Fannie Mae and Freddie
Mac are public corporations that were created by Congress and which guarantee
the principal balance of their securities. Fannie Mae also guarantees timely
payment of principal and interest. One risk associated with MBS is the timing
of principal payments on the mortgages underlying the securities. The amount
of principal an MBS investor receives is dependent upon the amortization
schedules and termination patterns (resulting from prepayments or defaults) of
the mortgages included in the particular underlying pool of mortgages
supporting the security purchased. Although the principal is guaranteed, the
yield can vary depending upon the timing of the repayment of the principal
balance, i.e., prepayment and interest rate risk. Fannie Mae and Freddie Mac
also issue higher risk securities and true derivatives, however, these are not
the type held by NAICC. MBS may be composed of various types of bonds having
different interest rates, maturities, as well as priorities to the cash flows
of the underlying mortgages. MBS with sinking fund schedules are known as
Planned Amortization Classes ("PAC") and Targeted Amortization Classes
("TAC"). The structures of PACs and TACs attempt to increase prepayment timing
certainty, thereby minimizing prepayment and interest rate risk. MBS as well
as callable bonds, in contrast to other bonds, are more sensitive to market
value declines in a rising interest rate environment than to market value
increases in a declining interest rate environment. This is primarily because
of payors' increased incentive and ability to prepay principal and issuers'
increased incentive to call bonds in a declining interest rate environment.
NAICC's management does not believe that the inherent prepayment risk in its
portfolio is significant. However, management of NAICC believes that the
potential impact of interest rate fluctuations on Danielson's Consolidated
Financial Statements could be significant because of the greater sensitivity
of the MBS portfolio to market value declines and the classification of the
entire portfolio as available-for-sale. The following table sets forth MBS
held by NAICC as of March 31, 1996, by type of instrument (dollars in
thousands):

48
<PAGE>

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
PERCENT OF
AMORTIZED TOTAL
COST PORTFOLIO
<S> <C> <C>
Non-PAC/TAC................................................ $18,674 11.5%
PAC/TAC.................................................... 43,529 26.7
------- ----
Total MBS.................................................. $62,203 38.2%
======= ====
</TABLE>

REGULATION

Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The agencies
established pursuant to these state laws have broad administrative and
supervisory powers relating to the granting and revocation of licenses to
transact insurance business, regulation of trade practices, establishment of
guaranty associations, licensing of agents, approval of policy forms, premium
rate filing requirements, reserve requirements, the form and content of
required regulatory financial statements, periodic examinations of insurers'
records, capital and surplus requirements and the maximum concentrations of
certain classes of investments. Most states also have enacted legislation
regulating insurance holding company systems, including with respect to
acquisitions, extraordinary dividends, affiliate transactions and other
related matters. Danielson and its insurance subsidiaries have registered as a
holding company system pursuant to such legislation in California and
routinely report to other jurisdictions. The Association has formed committees
and appointed advisory groups to study and continue to formulate regulatory
promulgations on such diverse issues as the use of surplus debentures,
accounting for reinsurance transactions and the adoption of RBC requirements.
It is not possible to predict the impact of future state and federal
regulations on the operations of Danielson or its insurance subsidiaries.

NAICC is an insurance company domiciled in the State of California and is
regulated by the Insurance Department for the benefit of policyholders. The
California Department is currently conducting a routine examination of the
statutory basis financial statements of NAICC and its subsidiaries as of
December 31, 1995 and has disclosed no findings to date. The California
Insurance Code prohibits the payment, from other than accumulated earned
surplus, of stockholder dividends which exceed the greater of (i) 10% of prior
year's statutory surplus and (ii) prior year's statutory net income, without
prior approval of the Insurance Department. As a result of NAICC's negative
unassigned surplus, NAICC is not permitted to pay dividends in 1996 without
prior regulatory approval.

The California Automobile Assigned Risk Plan (the "Assigned Risk Plan")
provides state mandated minimum levels of automobile liability coverage to
drivers whose driving records, or other relevant characteristics, make it
difficult for them to obtain insurance in the voluntary market. The Assigned
Risk Plan allocates risks to all personal automobile insurers in the voluntary
market based on each insurer's proportionate share of the personal automobile
direct premiums written. Premium rates for Assigned Risk Plan are established
by the Insurance Department and, by law, these rates must be actuarially
sound. To be eligible for the Assigned Risk Plan, an applicant must first be
denied coverage by three admitted insurance carriers. The Assigned Risk Plan
rates were increased by 85% on October 1, 1990 and by 5.2% on June 1, 1995.
The combination of these factors have caused the number of drivers applying
for insurance under the Assigned Risk Plan to decline as well as reduced the
underwriting losses from the Assigned Risk Plan. The population of drivers in
the Assigned Risk Plan has declined by approximately 90% in the period from
1988 to 1995 and continued declines are anticipated. NAICC does not expect
assignments from the Assigned Risk Plan that will be material or that will
have a material adverse effect upon the profitability of this line of
business.

Prior to 1989, California automobile insurance rates, other than assigned
risk rates discussed above, were not subject to approval by any governmental
agency. In November 1988, Proposition 103, a California ballot initiative, was
passed into law. Among other things, Proposition 103 requires insurance
companies to obtain prior regulatory approval of any new rates prior to use.
Proposition 103 also requires automobile insurers to renew

49
<PAGE>

policies of good drivers as defined in Proposition 103. Proposition 103 does
not apply to the workers' compensation line of business.

A.M. BEST RATING

A.M. Best has assigned a rating of B++ (Very Good) to NAICC. A.M. Best
ratings, which range from A++ (Superior) to F (In Liquidation), reflect that
rating agency's independent opinion of a company's financial strength and
ability to meet its obligations to policyholders. Such ratings are based on a
comparative analysis of the financial condition and operating performance of
insurance companies as determined by their publicly available reports. A.M.
Best prepares its ratings for the protection of policyholders, not
securityholders.

CAPITAL ADEQUACY AND RISK-BASED CAPITAL

Several measures of capital adequacy are common in the property and casualty
industry. The two most often used are (a) premiums-to-surplus (which measures
pressure on capital from inadequate pricing), and (b) reserves-to-surplus
(which measures pressure on capital from inadequate loss and LAE reserves). A
commonly accepted maximum premiums-to-surplus ratio is 3 to 1 and a commonly
accepted maximum reserves-to-surplus ratio is 5 to 1.

The following table sets forth the consolidated premiums-to-surplus and
reserves-to-surplus ratios of NAICC (on a statutory basis):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1993 1994 1995
<S> <C> <C> <C>
Ratio of:
Premiums-to-surplus......................................... 2.1:1 2.3:1 1.2:1
Reserves-to-surplus......................................... 2.8:1 3.2:1 2.6:1
</TABLE>

Given the foregoing relatively conservative financial security ratios,
NAICC's management believes that existing capital is adequate to support above
average premium growth from its current premium levels for the foreseeable
future.

The Association has established a property and casualty RBC model as a
regulatory tool for measuring the financial strength of an insurer based upon
established minimum levels of capital and surplus.

The RBC model sets forth four levels of increasing regulatory intervention,
(1) Company Action Level (200% of an insurer's Authorized Control Level), at
which the insurer must submit to the regulator a plan for increasing such
insurer's capital, (2) Regulatory Action Level (150% of an insurer's
Authorized Control Level), at which the insurer must submit a plan for
increasing its capital to the regulator and the regulator may issue corrective
orders, (3) Authorized Control Level (a multi-step calculation based upon
information derived from an insurer's most recent filed statutory annual
statement), at which the regulator may take action to rehabilitate or
liquidate the insurer, and (4) Mandatory Control Level (70% of an insurer's
Authorized Control Level), at which the regulator must rehabilitate or
liquidate the insurer.

At December 31, 1995, the RBC of NAICC was 290% greater than the Company
Action Level. NAICC currently has no plans to take any action designed to
affect its RBC level. The Merger and the Offerings are not expected to have
any effect upon NAICC's RBC level.

DANIELSON TRUST'S BUSINESS

General

Danielson Trust is chartered by the California State Banking Department to
provide trust and fiduciary services. For the years ended December 31, 1994
and 1995, and the three months ended March 31, 1996,

50
<PAGE>

Danielson Trust had $4.8 million, $4.6 million, and $1.2 million,
respectively, of gross revenues representing 4.3%, 5.8% and 8.7% of
Danielson's consolidated revenues for $624,000, $2.0 million and $81,000,
respectively, of net loss. In March 1993 (the "Acquisition Date"), Danielson
acquired all of the common stock of Danielson Trust, which was known as
HomeFed Trust until November 13, 1993. In February 1994, Danielson Trust
acquired the assets of the Western Trust Services ("WTS") division of
Grossmont Bank. On January 31, 1996, following approval of the California
State Banking Department, Danielson Trust sold substantially all of the
fiduciary accounts administered by its Santa Barbara branch to The Bank of
Montecito (now known as Montecito Bank & Trust).

Danielson Trust's business consists of providing trust and investment
services to individuals, not-for-profit corporations and retirement service
clients, including its affiliates. In addition, since 1994 Danielson Trust has
provided custodial services for certificates of deposit to affiliated and
unaffiliated broker-dealers, as well as other custodial services to an
affiliated mutual fund. In connection with Danielson Trust's efforts to expand
its sources of business within its primary market areas, Danielson Trust has
developed enhanced product lines for its private trust and retirement services
lines of business.

The private trust unit of Danielson Trust primarily provides trust, custody
and investment management services for individuals and not-for-profit
corporations. In the performance of its private trust business, this unit may
serve in the capacities of executor, trustee, investment agent, conservator or
custodian. Danielson Trust's private trust unit generated fee income of $1.7
million, $1.3 million and $348,000 for the years ended December 31, 1994 and
1995, and the three months ended March 31, 1996, respectively.

Danielson Trust's retirement services unit (formerly known as employee
benefit trust) provides trustee, custodial, and investment management services
to corporations, typically for qualified employee benefit plans, often in the
form of defined benefit plans, 401(k) plans, or profit sharing plans.
Additionally, this unit provides cash management services to corporations
desiring short-term investments in excess of $1 million. For the years ended
December 31, 1994 and 1995 and the three months ended March 31, 1996, the
retirement services unit of Danielson Trust generated fee income of
approximately $2.3 million, $2.6 million and $652,000, respectively (excluding
retirement services custodial fee income).

In addition to custodial services associated with the private and retirement
services businesses, since 1994 Danielson Trust has provided certificate of
deposit custodial services to broker-dealers and other financial institutions.
Danielson Trust also provides custody services for an affiliated mutual fund.
Total fee income for all custody services provided by Danielson Trust for the
years ended December 31, 1994 and 1995 and the three months ended March 31,
1996 were $427,000, $537,000 and $85,000, respectively, which constituted
8.9%, 11.7% and 7.3%, respectively, of Danielson Trust's total revenue for the
comparable periods. Of that amount, fee income for CD custody services for the
years ended December 31, 1994 and 1995 and the three months ended March 31,
1996 was $339,000, $401,000 and $67,000, respectively. Approximately 1% of
Danielson Trust's total revenues in 1994 and 1995 was generated by each of its
mutual fund-related custody services and other retirement custody services,
and in the first quarter of 1996, by certain other retirement custody
services. Fee income for custody services is not reflected in the private
trust or retirement services revenue amounts referred to above.

During the first quarter of 1994, as previously anticipated, Danielson Trust
ceased providing various trust services to HomeFed Bank (Danielson Trust's
former parent prior to Danielson's acquisition of Danielson Trust) following
the sale of HomeFed Bank's branch offices by the Resolution Trust Corporation.
All of the revenues associated with such services ceased by the end of the
second quarter of 1994. For the year ended December 31, 1994, the run-off of
HomeFed Bank-related business of Danielson Trust generated non-recurring total
fee income of $310,000, or less than 7% of Danielson Trust's 1994 revenues.

51
<PAGE>

Economic Conditions

During 1995 and the first quarter of 1996, the California economy continued
to improve, resulting in increased employment statewide. The San Diego
metropolitan area experienced a significant increase in employment over 1994
and, based upon the forecasts of the University of California, San Diego
Economic Round Table, employment is predicted to continue to increase in 1996
by approximately 3% over 1995. Danielson Trust believes that the increase in
employment may result in additional funds becoming available for investment in
trust products and services, particularly retirement services products, by
corporate pension plans, as well as 401(k) participations for both new and
existing plans. Danielson Trust intends to compete actively for new business
opportunities that may develop in connection with the improvement in local
economic conditions.

Recent and anticipated consolidations among major money centers and regional
banks which are trust and fiduciary services providers in the San Diego area,
including the merger of Union Bank and The Bank of California, as well as the
merger of Wells Fargo Bank and First Interstate Bank of California, are likely
to have a significant impact on the trust and banking industries. Danielson
Trust believes that industry consolidation may provide it with the opportunity
to acquire existing trust relationships involving clients seeking a
relationship with a local trust company, rather than a much larger
institution. The industry consolidation also may increase competitive pressure
on Danielson Trust, thereby heightening the importance of cost containment,
product differentiation and development of additional services to maintain
existing clients and attract new business.

New Business

Danielson Trust has increased its efforts to expand its private trust and
retirement services business within its primary market areas through the
development and introduction of enhanced product lines in the first half of
1996. During 1995, Danielson Trust was appointed to serve as the designated
trustee for PaineWebber Incorporated ("PaineWebber") in its west coast region.
In connection with this appointment, Danielson Trust will provide trust
services to PaineWebber clients throughout California, as well as Arizona,
Colorado, Montana, Nevada, Oregon, Utah, Washington and Wyoming. Danielson
Trust intends to continue to seek additional established distribution channels
for its services. Management of Danielson Trust is hopeful that its increased
business development efforts will result in continued enhancement of Danielson
Trust's reputation as a quality provider of trust and investment services with
a strong commitment to the communities in which it operates.

EMPLOYEES

As of December 31, 1995, the number of employees of Danielson and its
consolidated subsidiaries was approximately as follows:

<TABLE>
<S> <C>
NAICC................................................................. 156
Danielson Trust....................................................... 64
Danielson (holding company only)...................................... 12
---
Total............................................................... 232
===
</TABLE>

None of these employees is covered by a collective bargaining agreement.
Danielson believes that its current staffing levels are adequate to conduct
future operations.

PROPERTIES

Danielson, at the holding company level, leases a minimal amount of space
for use as administrative and executive offices. That lease has a term of
approximately five years and is scheduled to expire in 1998. Danielson is
contemplating vacating its current leased space and leasing other office space
on substantially similar terms. Danielson believes that the space available to
it is adequate for its current and foreseeable needs.

52
<PAGE>

The Company's principal executive offices are located at 767 Third Avenue,
New York, New York 10017-2023, and its telephone number is (212) 888-0347.

NAICC's headquarters are located in a leased office facility in Long Beach,
California, pursuant to a long-term lease that is scheduled to expire in 1999.
In addition, NAICC has entered into short-term leases in connection with its
operations in various locations on the west coast of the United States. NAICC
believes that the foregoing leased facilities are adequate for NAICC's current
and anticipated future needs.

Danielson Trust's headquarters are located in a leased office facility in
San Diego, California. This lease has a term of approximately ten years, with
options to extend, and is scheduled to expire in 2004.

LEGAL PROCEEDINGS

NAICC and Danielson Trust are parties to various legal proceedings which are
considered routine and incidental to their respective insurance and trust
businesses and are not material to the financial condition and operation of
such respective businesses. For information regarding the resolution of
NAICC's claim to recover a reinsurance receivable, see Note 3 of the Notes to
Danielson Consolidated Financial Statements. Danielson, at the holding company
level, is not a party to any legal proceeding which is considered material to
the financial condition and operation of its business.

MIDLAND

The following description of the business of Midland has been derived from
information provided by Midland. At the closing of the Offerings, and as a
condition thereto, the Company will consummate the Merger.

OVERVIEW

Midland, through MRIC and SRIC, its wholly-owned property and casualty
insurance subsidiaries, specializes in the underwriting, marketing and
servicing of non-standard personal automobile insurance. To a lesser extent,
Midland also insures commercial automobile and related risks and coastal
dwellings and provides automobile insurance through its Auto 13 program to
individuals who file for bankruptcy protection.

Midland markets its products primarily through three major Midland-owned
regional offices and through three independently owned general agencies, which
use approximately 8,500 independent agents located in 20 states, predominantly
in the southern and western United States. Management believes that Midland's
relationship with its general agencies and independent agents has been an
important factor in Midland's growth during the last five years.

Midland's strategy is to be a low cost provider of non-standard personal
automobile insurance. Midland's management believes that the non-standard
personal automobile market provides greater opportunities for profit than
other segments of the automobile property and casualty insurance market.
Midland's management is pursuing a growth strategy that includes an
underwriting and marketing focus on selected segments of the non-standard
personal automobile market, particularly the minimum limit liability insured.
Midland seeks to expand primarily within its existing markets because it
believes that expansion in these markets is more cost effective than expansion
in new markets. Midland also engages in a direct marketing program in areas
where its independent agency force is not established.

53
<PAGE>

The following table sets forth gross premiums written in states where
Midland currently writes insurance policies for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- -------------------
1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Alabama......................... $ 2,858 $ 3,368 $ 4,775 $ 902 $ 1,361
Arizona......................... 21,061 26,514 28,371 8,465 7,620
Arkansas........................ 1,564 2,958 17,164 3,470 5,594
California...................... 21,386 24,180 39,365 7,080 7,588
Florida......................... 12,929 28,200 29,819 8,788 8,916
Georgia......................... 4,599 9,843 8,895 2,301 2,838
Illinois........................ 830 7,603 3,637 1,181 905
Indiana......................... -- -- 2,244 -- 907
Louisiana....................... 16,025 15,184 17,419 3,888 3,452
Mississippi..................... 188 889 4,761 753 1,426
Oklahoma........................ -- 249 1,457 320 814
Oregon.......................... 38 2,467 6,654 1,051 1,654
South Carolina.................. 2,980 1,864 1,598 335 273
Tennessee....................... 6,325 10,747 22,630 5,752 5,991
Texas........................... 3,843 3,743 5,871 802 1,064
Other........................... 566 311 1,976 349 613
-------- -------- -------- --------- ---------
Total direct premiums written. 95,192 138,120 196,636 45,437 51,016
Reinsurance assumed............. 6,275 14,284 13,570 3,646 874
-------- -------- -------- --------- ---------
Total gross premiums written.. $101,467 $152,404 $210,206 $49,083 $51,890
======== ======== ======== ========= =========
</TABLE>

The following table sets forth net premiums written by line of business for
the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Line of business:
Automobile Non-standard $65,388 85.1% $124,505 82.4% $139,549 81.4% $41,769 86.5% $31,455 82.2%
Personal (1)...........
Commercial.............. 9,533 12.4 22,762 15.1 28,239 16.4 5,724 11.9 6,065 15.9
Commercial multi-peril.. 323 0.4 1,913 1.3 2,295 1.3 439 0.9 436 1.1
Dwelling................ 1,513 2.0 1,759 1.2 1,599 0.9 335 0.7 271 0.7
Other................... 62 0.1 107 -- 151 0.1 26 -- 44 0.1
------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total net premiums $76,819 100.0% $151,046 100.0% $171,833 100.0% $48,293 100.0% $38,271 100.0%
written................
======= ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
- ---------------------
(1) Includes net premiums written in Midland's Auto 13 program.

NON-STANDARD AUTOMOBILE INSURANCE

General

Midland markets its non-standard personal and commercial automobile
insurance through agents in 20 states. Depending on the specific state, the
non-standard personal and commercial automobile insurance markets consist of
drivers who are unable to obtain coverage from standard carriers due to
undesirable or unverifiable prior driving records, no prior insurance, poor
claims experience, a desire to purchase minimum limits of liability or other
underwriting criteria or market conditions. Generally, such individuals have
fewer assets to protect than insureds who purchase standard or preferred
policies. Premium levels for non-standard risks are substantially

54
<PAGE>

higher than for standard or preferred risks. Midland focuses its multistate
sales efforts primarily on individuals, and until mid-1994, priced its
products toward liability-only business. Midland traditionally has targeted
individuals who have histories of safe driving but require non-standard
automobile insurance for other reasons. In mid-1994, with its move to more
full coverage risks, Midland attracted a broader range of insureds, including
many first-time full coverage buyers as well as many buyers with undesirable
insurance and credit histories.

Midland believes that opportunities for insurers to write non-standard
automobile insurance are influenced by many factors, including compulsory
state insurance laws, market conditions for standard automobile insurance and
state assigned risk or other residual market plans. Midland believes that the
non-standard automobile market has grown during the last five years primarily
due to regulatory changes mandating insurance in certain states and due to
standard carriers exiting certain markets. Midland also believes industry
premium growth in the immediate future will be influenced to a greater extent
by rate increases than in the past five years, due to a recent deterioration
of results for non-standard automobile carriers that it considers to be its
peers.

The Auto 13 Program

Midland offers automobile insurance to individuals who file for bankruptcy
protection (personal reorganization of debt). The Auto 13 program provides
physical damage coverage only. Midland underwrites the Auto 13 program as a
class of risks on a jurisdiction by jurisdiction basis, rather than utilizing
the underwriting criteria described elsewhere herein. This coverage protects a
creditor's security interest in a Chapter 13 debtor's automobile and
eliminates court hearings to repossess automobiles for lack of insurance,
affording judges and trustees time for other matters. Unlike its other
products, Midland markets its Auto 13 program directly to bankruptcy judges
and trustees for blanket applications to appropriate Chapter 13 debtors rather
than to individuals. During the period that an individual debtor is in
reorganization pursuant to a bankruptcy court-approved plan of reorganization,
Midland's program provides automobile physical damage insurance for the debtor
in accordance with an insurance policy approved by the bankruptcy trustee and
the bankruptcy court. This enables the debtor to continue employment in order
to satisfy the debtor's obligations under the approved plan. Midland believes
that its Auto 13 program is the only one of its kind in the United States.

Set forth below are certain financial ratios relating to Midland's business
and a comparison of the combined ratios of Midland to the industry averages
for the periods indicated.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- -------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
STATUTORY BASIS:
Loss and LAE ratio................ 69.9% 71.3% 88.2% 71.6% 82.3%
Expense ratio..................... 23.8 25.0 23.3 23.6 23.5
-------- -------- -------- ----- ------
Combined ratio.................... 93.7% 96.3% 111.5% 95.2% 105.8%
======== ======== ======== ===== ======
GAAP BASIS:
Loss and LAE ratio................ 69.9% 71.3% 88.2% 71.6% 82.3%
Expense ratio..................... 23.4 25.1 26.8 23.7 23.5
-------- -------- -------- ----- ------
Combined ratio.................... 93.3% 96.4% 115.0% 95.3% 105.8%
======== ======== ======== ===== ======
STATUTORY INDUSTRY AVERAGE: (1)
Combined ratio.................... 101.7% 102.7% 104.1% -- --
======== ======== ======== ===== ======
</TABLE>
- ---------------------
(1) Source: A.M. Best, "Best's Review: By-line Underwriting Results; Auto
Private Passenger." Quarterly data are not currently available.

55
<PAGE>

MARKETING

Midland began to focus on the non-standard personal automobile market in
1988. Gross premiums written have grown from $27.7 million in 1991 to $210.2
million in 1995 due to Midland's expansion into selected states which was
achieved by attracting key personnel with numerous agency and other
relationships and years of experience in their respective markets.

Midland markets its non-standard personal automobile products primarily
through three major Midland-owned regional offices and three independently
owned general agencies, which use approximately 8,500 independent agents in 20
states located primarily in the southern and western regions of the United
States. The general agencies owned by Midland are presently being consolidated
into the three major regional offices of Midland. The three independent
general agencies produce approximately 15% of Midland's premiums volume.

Independent insurance agents have significant influence over which insurance
companies will write insurance policies for their customers; therefore,
Midland's management views its approximately 8,500 independent insurance
agents as Midland's primary customers. Both the general agencies and, in turn,
the independent agents are compensated based on a fixed percentage of the
gross premiums written.

During 1995, Midland terminated its relationship with a number of
independent agents, primarily in California, due to the elimination of its
full coverage programs. In addition, several marginal or unprofitable agents
also were terminated.

Midland has implemented a direct marketing program for non-standard personal
automobile insurance. If successful, Midland intends to expand this program
into other geographic territories where Midland does not have a concentration
of agents. To date, no material amount of premiums have been written through
this program.

Midland's target customer is an experienced driver who desires to purchase
the minimum statutory limits of liability insurance to comply with state laws.
That insured typically has minimal personal assets and is classified by the
industry as non-standard due to a higher cancellation rate and other factors.

Midland's objective is to be a competitive provider of non-standard
automobile insurance while providing superior service to both agents and
insureds. This objective is largely accomplished through maintenance of good
agent and client relationships and computerization of certain marketing,
underwriting, control and administrative functions. Cost-effective automation
allows Midland to write a greater volume of non-standard automobile business
without significantly increasing administrative expenses and provides a system
for expeditious policy and claims processing.

Midland selects the states in which it does business and into which it plans
to expand based on several criteria in a given state, including the size of
the non-standard automobile insurance market, loss results, competition and
regulatory climate. In 1995, Midland expanded its writings in all its major
markets. Premium writings in Arkansas grew significantly in 1995, due to the
appointment of an independent general agency effective January 1, 1995 which
became Midland-owned later that same year. Premium volume in Tennessee more
than doubled in 1995 over 1994 due to increased market penetration by a
Midland-owned general agency opened in mid-1994. In addition, Midland expanded
into Indiana and Nevada during 1995. Midland eliminated certain full coverage
programs in late 1995, terminated certain agents in 1995, implemented certain
rate increases in 1995 and anticipates seeking other rate increases in 1996
and eliminated in 1995 certain of its commercial programs which had become
unprofitable. As a consequence of those actions, Midland expects its overall
gross premiums written to be reduced in 1996 by 20% to 30%, while its
profitability is enhanced.

UNDERWRITING

Midland seeks to classify non-standard personal automobile risks into
narrowly defined segments by analyzing all available underwriting criteria,
including driving records of insureds, class of driver and type of

56
<PAGE>

automobile. Midland considers many factors in determining its non-standard
personal automobile rates, including type, age and location of the vehicle,
number of vehicles per policyholder, number and type of driving violations or
accidents, deductibles and, where allowed by law, age, gender and marital
status of the insured. Midland maintains an extensive database which contains
statistical records with respect to its insureds and their driving experience
and repair costs by location, class of driver and type of automobile.
Management believes this database gives Midland the ability to be more precise
in the underwriting and pricing of its products.

A typical policyholder of Midland seeks minimum limits of liability ranging
from $25,000 to $50,000 (depending upon state regulations), with a policy term
of either six months or 12 months, and is from 25 to 55 years of age. Premiums
for such insurance are typically higher per dollar of coverage than premiums
for standard or preferred risks. Typically, Midland's insureds have fewer
assets which they desire to protect than persons who buy standard or preferred
policies.

During 1994 and early 1995, Midland significantly expanded its full coverage
insurance in California and Arizona and, due to adverse results, significantly
withdrew or eliminated this product in those states. See "PROSPECTUS SUMMARY--
Midland." The following chart presents certain historical information
regarding Midland's full coverage and liability only lines of businesses:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- -------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
MIDLAND NON-STANDARD AUTOMOBILE
INSURANCE:
Percentage of net written full
coverage............................. 40% 52% 62% 57.5% 45%
Percentage of net written liability
only................................. 60% 48% 38% 42.5% 55%
-------- -------- -------- ------ -----
Total............................... 100% 100% 100% 100% 100%
</TABLE>

In 1995, Midland's loss ratio for its full coverage business exceeded the
loss ratio for its liability only business by approximately 24 percentage
points.

Midland utilizes and continually enhances industry specific computer
software that provides its general and independent agencies with rating
capability and allows Midland to deliver prompt service while ensuring
consistency in underwriting and controls. Midland uses such integrated
computer software to automate its underwriting and rating processes. The
automated system screens insureds by comparing data on policy applications
with criteria pre-established by Midland at the point of underwriting
decisions, correctly rates and issues policies, and captures appropriate
statistics for necessary management information. The software system is custom
enhanced to address the specific requirements of Midland's target business.

Midland also extends its automated system to its general and independent
agencies in various forms and levels of integration. Depending upon the degree
of automation used by an agency, Midland provides services and support for
automated binding, underwriting, and rating of risks within the guidelines
specified as acceptable for Midland's programs. These services supply the
agency with important and pertinent information about the prospective insured,
such as the motor vehicle operation record, credit background and claims
history. The general agencies, and in certain markets independent agents, have
the authority to bind insurance coverages in accordance with procedures and
underwriting guidelines established by Midland. Midland reviews all coverages
bound by the agents promptly and decides whether to accept the insurance at
the quoted premium. Because it has established clear underwriting procedures
and guidelines and promptly reviews the underwriting decisions agents have
made, Midland considers the risks related to granting its agents binding
authority to be minimal.

CLAIMS

Insurance claims are typically investigated and settled by claims adjusters
who are on Midland's staff or affiliated with certain general agencies of
Midland. Midland currently has approximately 140 staff and affiliated claims
adjusters located in Arizona, Florida, Louisiana, Tennessee and Texas, with
average experience of

57
<PAGE>

approximately ten years. These adjusters settle in excess of 95% of Midland's
claims. The claims philosophy of Midland emphasizes timely investigations,
settlement of meritorious claims for equitable amounts, adequate reserving for
claims and control of external claims adjusting expenses. Midland believes its
claims philosophy over the last five years demonstrates its commitment to
servicing its agents and insureds and has been a major factor in the growth of
its non-standard personal automobile and other insurance programs.

Claims settlement authority levels are established for each adjuster or
manager based on such person's level of experience. Upon receipt, each claim
is reviewed and assigned to an adjuster based on its type, severity and class
of insurance. The claims department is responsible for reviewing the claim,
obtaining necessary documentation and establishing appropriate loss and
expense reserves. All claims in litigation are monitored by home office
supervisors.

PROVISIONS FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

Midland is required to maintain reserves for payment of estimated losses and
LAE for both reported claims (established for each case) and losses estimated
to have been incurred but which have not yet been reported ("IBNR"). Midland's
ultimate actual liability may be more or less than current reserve estimates.
Midland uses an independent actuary to assist in determining loss reserves.

As to reported losses, reserves are established on either a case or formula
basis depending on the type and circumstances of the loss. Case reserve
amounts are determined based on Midland's reserving practices which take into
account the type of risk, the circumstances surrounding each claim and policy
provisions relating to types of loss. Formula reserve amounts are based on
historical paid loss data for similar claims with provisions for trend changes
caused by such factors as inflation. Loss reserves are reviewed on a regular
basis and as new data becomes available, estimates are updated and
corresponding adjustments are made to loss reserves. As to IBNR, loss and loss
expense reserves are estimated based on many variables, including historical
and statistical information, inflation, legal developments, economic
conditions, general trends in claim severity and frequency and any other
factors which could affect the adequacy of loss reserves. Midland uses two
different methods for the purpose of establishing its IBNR reserves, depending
on the maturity of the line of business as to which the reserve is being
established. Those methods are the "loss ratio" method and the "counts and
averages" method. Midland's IBNR reserves are reviewed quarterly by Midland,
and at least semi-annually by an independent actuarial firm. Historically,
Midland's IBNR reserves have been established based on amounts recommended by
the independent actuaries. During 1996, Midland plans to add an in-house loss
reserve actuary whose responsibilities will include determining its IBNR
reserves. Adjustments in aggregate reserves are reflected in the operating
results of the period during which such adjustments are made. Although
management uses many resources to calculate reserves, there is no precise
method for determining the ultimate liability. Midland does not discount loss
reserves for financial statement purposes. In addition, there are no
significant differences between GAAP and statutory reserves.

58
<PAGE>

The following table presents information on changes in the reserve for
losses and LAE of Midland for the periods presented:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net unpaid losses and LAE at beginning of year........ $ 7,121 $21,653 $ 49,978
------- ------- --------
Add:
Provision for losses and LAE related to:
Current year........................................ 38,341 82,241 141,130
------- ------- --------
Prior years......................................... 287 2,070 10,973
------- ------- --------
Total incurred.................................... 38,628 84,311 152,103
Less:
Loss and LAE payments for claims related to:
Current year........................................ 17,334 39,542 73,493
Prior years......................................... 6,762 16,444 36,383
------- ------- --------
Total paid........................................ 24,096 55,986 109,876
------- ------- --------
Net unpaid losses and LAE at end of year.............. 21,653 49,978 92,205
Plus reinsurance recoverables on unpaid losses and
LAE.................................................. 13,634 6,880 12,311
------- ------- --------
Gross unpaid losses and LAE at end of year............ $35,287 $56,858 $104,516
======= ======= ========
</TABLE>

The reinsurance recoverables on paid losses and LAE were $2.7 million for
each of 1993 and 1994 and $4.9 million for 1995.

The following table sets forth the development of Midland's reserves for
unpaid losses and LAE from 1985 through 1995. "Net unpaid losses and LAE" sets
forth the estimated liability recorded at the balance sheet date for each of
the indicated years. This liability represents the estimated amount of losses
and LAE for claims arising in the current year and all prior years that are
unpaid at the balance sheet date, including losses incurred but not reported
to Midland.

The portion of the table labeled "Net unpaid losses and LAE as of one year
later" through "ten years later" shows the reestimated amount of the
previously recorded liability based on experience as of the succeeding year.
The estimate is increased or decreased as payments are made and more
information becomes known about the severity of still unpaid claims. For
example, the 1985 liability has developed a deficiency of $7,000 after ten
years, in that reestimated losses and LAE are expected to be more than the
initial estimated liability established in the 1985 financial statements.

The portion of the table labeled "Cumulative redundancy (deficiency)" shows
the cumulative redundancy or deficiency at December 31, 1995 of the reserve
estimate shown on the top line of the corresponding column. A redundancy in
reserves means that reserves established in prior years exceeded actual losses
and LAE or were reevaluated at less than the originally reserved amount. A
deficiency in reserves means that the reserves established in prior years were
less than actual losses and LAE or that the actual losses and LAE were
reevaluated at more than the originally reserved amount.

The portion of the table labeled "Cumulative net paid losses and LAE as of
one year later through ten years later" shows the cumulative loss and LAE
payments made in succeeding years for losses incurred prior to the balance
sheet date. For example, the 1991 column indicates that as of December 31,
1995, Midland had paid $2,549,000 of the currently reestimated ultimate
liability of $2,616,000 in loss and LAE. This implies that the December 31,
1995 estimate of the remaining liability for 1990 and prior years was $67,000.

59
<PAGE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net unpaid losses and
LAE at end of year..... $150 $ 894 $627 $474 $848 $1,041 $2,259 $ 7,121 $21,653 $49,978 $ 92,205
Net unpaid losses and
LAE re-estimated as of:
One year later........ 187 1,137 642 502 848 1,104 2,129 7,408 23,722 60,951
Two years later....... 171 1,023 649 492 898 1,161 2,577 7,159 26,251
Three years later..... 157 905 645 487 838 1,307 2,628 7,593
Four years later...... 158 870 647 445 892 1,309 2,616
Five years later...... 158 870 624 445 864 1,196
Six years later....... 158 862 624 418 885
Seven years later..... 157 862 624 441
Eight years later..... 157 862 624
Nine years later...... 157 862
Ten years later....... 157
Cumulative redundancy
(deficiency)........... (7) 32 3 33 (37) (155) (357) (472) (4,598) (10,973)
Cumulative net paid
losses and LAE as of:
One year later........ 122 907 606 450 790 904 1,060 4,784 16,456 36,383
Two years later....... 157 862 633 474 841 934 2,168 6,685 22,419
Three years later..... 151 870 642 481 818 1,173 2,417 7,252
Four years later...... 158 870 641 445 874 1,175 2,549
Five years later...... 158 870 624 445 846 1,196
Six years later....... 158 862 624 418 870
Seven years later..... 157 862 624 441
Eight years later..... 157 862 624
Nine years later...... 157 862
Ten years later....... 157
Gross unpaid losses and
LAE at end of year..... $16,711 $35,287 $56,858 $104,516
Reinsurance recoverable. 9,590 13,634 6,880 12,311
------- ------- ------- --------
Net unpaid losses and
LAE at end of year..... 7,121 21,653 49,978 92,205
Gross unpaid losses and
LAE re-estimated as of:
One year later........ 18,002 38,735 69,737
Two years later....... 17,014 42,741
Three years later..... 17,499
Re-estimated reinsurance
recoverable............ 9,906 16,490 8,786
------- ------- -------
Net unpaid losses and
LAE re-estimated....... 7,593 26,251 60,951
Gross cumulative
deficiency............. (788) (7,454) (12,879)
</TABLE>

60
<PAGE>

Midland has experienced a cumulative loss reserve deficiency during the past
six years. The significant deficiencies for years 1993 and 1994 relate to full
coverage personal automobile programs and certain commercial programs as more
fully discussed under "MIDLAND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

REINSURANCE

Reinsurance makes the assuming reinsurer liable to the extent of the
reinsurance ceded. However, in the event that reinsurance companies are unable
to pay their portion of the loss based on the coverage ceded, a ceding insurer
such as Midland would be responsible for the entire loss. Accordingly, the
creditworthiness of reinsurers is extremely important to Midland. Midland
believes that all amounts due from its reinsurers are collectible.

Midland currently uses excess of loss reinsurance to limit the amount of
risk retained under its policies. Through excess of loss reinsurance, Midland
limits its retention on any one risk to $87,500 for personal and $250,000 for
commercial risks. Midland's reinsurers under its excess of loss reinsurance
agreements and their respective A.M. Best's ratings are: Christiana General
Insurance Corporation rated A, Chatham Reinsurance Corporation rated B++,
Gerling Global Reinsurance Corporation rated A and The Mercantile and General
Reinsurance Company of America rated A-.

In addition, in order to alleviate surplus constraints on Midland's
operating insurance subsidiaries, effective September 30, 1995, Midland
entered into a 30% quota-share reinsurance agreement with Kemper covering its
non-standard personal automobile programs. Kemper is rated Aby A.M. Best.

Midland also purchases catastrophe insurance futures and options to help
manage Midland's risk from catastrophic losses. These contracts are traded on
the CBOT and are designed to track insured catastrophic losses on a regional
and nationwide basis. See Note 11 of the Notes to Midland Consolidated
Financial Statements.

INVESTMENTS

Midland's investment objectives are to produce an attractive total rate of
return on an after-tax basis, while protecting and enhancing policyholders'
capital and surplus on a long-term basis and maintaining adequate liquidity
for insurance operations. Midland's investment policy provides that at least
50% of Midland's portfolio must be in fixed maturity securities and no more
than 25% of admitted assets can be invested in common stock. At December 31,
1995, 89% of Midland's portfolio consisted of investment grade fixed maturity
securities and 3% of the statutory admitted assets consisted of common stock.
In addition, investments in individual securities are limited to a stated
percentage of policyholders' capital and surplus, depending on the security's
rating and the type of security. The average duration of Midland's fixed
maturities portfolio is 3.5 years. The portfolio also includes less than 1% of
MBS. At December 31, 1995, approximately 4% of the fixed maturity investments
were callable bonds. Midland retains an outside investment advisor to manage
its entire portfolio.

During September 1995, Midland's management changed its intent with respect
to securities classified as held-to-maturity and reclassified all securities
in its held-to-maturity portfolio to available-for-sale.

61
<PAGE>

The following table sets forth a summary of Midland's investment portfolio
as of March 31, 1996, by investment type (dollars in thousands):

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------------
AMORTIZED FAIR
COST PERCENTAGE VALUE PERCENTAGE
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government/Agency (AAA)......... $ 1,199 0.7% $ 1,198 0.7%
Mortgage-backed (AAA)................ 78 -- 79 --
Municipals (AAA to A)................ 66,926 41.6 67,494 41.7
Corporates (AAA to A)................ 37,158 23.1 37,190 23.0
Municipals (BBB)..................... 500 0.3 495 0.3
Corporates (BBB)..................... 36,274 22.5 36,201 22.3
-------- ----- -------- -----
Subtotal-investment grade............ 142,135 88.2 142,657 88.0
Other................................ 4,587 2.9 4,506 2.8
-------- ----- -------- -----
Total fixed maturities............... 146,722 91.1 147,163 90.8
Equity securities...................... 14,194 8.9 14,838 9.2
-------- ----- -------- -----
Total.............................. $160,916 100.0% $162,001 100.0%
======== ===== ======== =====
</TABLE>

REGULATION

Midland and its property and casualty insurance underwriting subsidiaries
("P&C Subsidiaries") are subject to the insurance laws and regulations of
Tennessee, the domiciliary state of the P&C Subsidiaries, and the laws and
regulations of the other states in which the P&C Subsidiaries are licensed to
do business. At present, the P&C Subsidiaries collectively are licensed to do
business as insurance companies ("admitted") in 20 states and are approved
non-admitted insurers in 12 states. The insurance laws and regulations, as
well as the level of supervisory authority that may be exercised by the
various state insurance departments, vary by jurisdiction, but generally grant
broad powers to supervisory agencies or state regulators to examine and
supervise insurance companies and insurance holding companies with respect to
every significant aspect of the conduct of the insurance business. These laws
and regulations generally require insurance companies to maintain minimum
standards of business conduct and solvency, meet certain financial tests, file
certain reports with regulatory authorities, including information concerning
their capital structure, ownership and financial condition, and obtain prior
approval of certain changes in control of domestic insurance companies and
their direct and indirect parents and the payment of extraordinary dividends
and distributions. In addition, these laws and regulations require approval
for certain intercompany transfers of assets and certain transactions between
insurance companies and their direct and indirect parents and affiliates, and
generally require that all such transactions have terms no less favorable than
terms that would result from transactions between parties negotiating at arms'
length. Further, many states have enacted laws which restrict an insurer's
underwriting discretion, such as the ability to terminate policies, terminate
agents or reject insurance coverage applications. These laws may adversely
affect the ability of insurance companies, including Midland, to earn a profit
on their underwriting operations.

Each P&C Subsidiary is required to file quarterly and annual statutory
financial statements in each jurisdiction in which it is licensed, and is
subject to single and aggregate risk limits and other statutory restrictions
concerning the types and quality of investments and the filing and use of
policy forms and premium rates. Additionally, the P&C Subsidiaries' accounts
and operations are subject to periodic examination by the Tennessee Insurance
Commissioner and by other state insurance regulatory authorities. The
Tennessee Insurance Commissioner is currently performing a regular examination
of the P&C Subsidiaries for the four years ended December 31, 1994, further
described in Note 12 of the Notes to Midland Consolidated Financial
Statements.

Tennessee insurance laws and regulations, including those affecting
insurance holding companies, impose restrictions on the amount of dividends
that may be paid by the P&C Subsidiaries. As a result of these laws and

62
<PAGE>

regulations, the maximum amount of dividends that a P&C Subsidiary may pay at
any time without prior regulatory approval is the greater of (a) 10% of the
prior year's statutory policyholders' surplus of such P&C Subsidiary and (b)
the prior year's statutory net income of such P&C Subsidiary less the amount
of dividends paid during the preceding 12 months.

Most states have enacted legislation regulating insurance holding companies
such as Midland. The insurance holding company laws and regulations vary by
state, but generally require an insurance holding company and its insurance
company subsidiaries licensed to do business in the state to register and file
certain reports with the regulatory authorities, including information
concerning capital structure, ownership, financial condition, certain
intercompany transactions and general business operations. State holding
company laws also require prior notice or regulatory agency approval of direct
or indirect changes in control of an insurer or its holding company and of
certain material intercompany transfers of assets within the holding company
structure. Tennessee insurance laws and regulations provide that no person may
acquire control of Midland, and thus indirect control of the P&C Subsidiaries,
without obtaining the prior approval of the Tennessee Insurance Commissioner.
Any purchaser of 10% or more of the voting stock of an insurance holding
company is deemed to have acquired control of that company and is required to
obtain the approval of the Tennessee Insurance Commissioner before
consummating such purchase.

In expanding its operations into additional states, Midland is selective. It
carefully considers the legislative and regulatory environment in each state
before commencing operations and will not do business in states where the
climate is not conducive to the operation of its business.

In December 1993, the Association approved a model RBC formula for
determining RBC requirements for property and casualty insurers. See
"DESCRIPTION OF BUSINESS--Danielson--Capital Adequacy and Risk-Based Capital."
At December 31, 1995, the RBC of Midland was 35% greater than the Company
Action Level. In light of the Capital Contribution, Midland currently has no
plans to take any action designed to affect its RBC level. On a pro forma
basis, after giving effect to the Merger, the Offerings and the Capital
Contribution, the RBC level of Midland would increase by $30 million, to 210%
of the Company Action Level.

For the year ended December 31, 1995, MRIC and SRIC failed certain of the
Association Financial Ratios from the Insurance Regulatory Information System
("IRIS").

MRIC failed the following ratios:

. Two Year Overall Operating Ratio of 103% exceeded the usual range of less
than 100%, due to adverse loss experience. See "MIDLAND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

. Investment Yields Ratio of 4.2% was less than the lower end of the usual
range (4.5%) due to MRIC's classification of its equity ownership in SRIC as
common stock and due to a significant concentration in tax preferential
securities.

. Liabilities to Liquid Assets Ratio of 106% was slightly above the upper
usual range of 105%, due to substantial increases in the year end reserves for
IBNR Losses. This test measures total liabilities against invested assets, but
excludes premiums and agents' receivable balances.

. Agents' Balances to Surplus Ratio of 54% exceeds the usual range of less
than 40% due to a significant balance of receivables on direct bill policies.
These receivables are offset by a liability for unearned premiums which is not
considered in the calculation.

SRIC failed the following ratios:

. Change in Net Writings Ratio of 63% exceeded the usual upper range limit
of 33% due to the expansion of SRIC's programs in Tennessee in 1995. Net
premiums to surplus ratio, however, is 2.16 to 1, which Midland's management
believes indicates SRIC is not excessively leveraged at current premium
levels.

63
<PAGE>

. Investment Yields Ratio of 4.5% equaled the minimum range of 4.5% due to
significant increases in invested assets in mid-1995 and due to a
concentration in tax preferential securities.

. Agents' Balances to Surplus Ratio of 47% exceeds the usual range of less
than 40% due to significant direct bill premiums receivable which are offset
by liabilities for unearned premiums.

The Association places insurers in four categories ranging from No Priority
to First Priority. MRIC has been designated as Second Priority and is subject
to much closer review by the Association, primarily due to adverse development
in prior year loss reserves. Midland's management believes that this will not
have a material adverse effect on Midland's business.

Many states require that companies writing non-standard personal automobile
insurance in that state participate in a residual market mechanism. Although
regulations vary by state, residual market mechanisms are generally designed
to provide insurance coverage for consumers who are unable to obtain insurance
in the voluntary automobile insurance market. In some states, companies
participate in the administration, profit and/or loss associated with those
consumers' policies to the extent provided by state regulations. In other
states, assigned risk pools are utilized. Assigned risk pool insureds are
assigned on a rotating basis to automobile insurers based on the individual
insurer's share of the total automobile insurance market for that state.
Insurers then issue and service those individual insurance risks assigned to
them and accept the profit or loss for those policies. Residual markets have
not had a material effect on the business or results of operations of Midland.

A.M. BEST RATING

In February 1996, A.M. Best lowered the ratings on both MRIC and SRIC to B
(Adequate), and placed the ratings under review, pending the outcome of
Midland's proposed merger with Danielson. A.M. Best has indicated that it
views the proposed transaction favorably and that A.M. Best expects to upgrade
the ratings to B+ (Very Good) if the transaction is consummated. Conversely,
A.M. Best has indicated that the ratings would be under significant downward
pressure if the transaction is not completed. A.M. Best ratings, which range
from A++ (Superior) to F (In Liquidation), reflect that rating agency's
independent opinion of a company's financial strength and ability to meet its
obligations to policyholders. Such ratings are based on a comparative analysis
of the financial condition and operating performance of insurance companies as
determined by their publicly available reports.

EMPLOYEES

At December 31, 1995 Midland employed a total of 424 employees. Neither
Midland nor any of its employees is a party to any collective bargaining
agreements and management of Midland believes employee relations are
excellent.

PROPERTIES

The corporate headquarters of Midland are located in Memphis, Tennessee,
where Midland leases approximately 32,000 square feet of office space.
Midland-owned general agencies are located in Phoenix, Arizona; Mission Viejo,
California; Dallas, Texas; Portland, Oregon; and Nashville, Tennessee. These
offices occupy an aggregate of approximately 100,000 square feet of leased
office space. Midland also leases several small Auto 13 service offices.
Midland owns no real properties and believes that its leased facilities are
adequate for its needs.

LEGAL PROCEEDINGS

64
<PAGE>

that the insurance policies violate Alabama statutes, a permanent injunction
against further implementation of the Chapter 13 automobile insurance program
in Alabama, and reimbursement of premiums received by Midland under the
Chapter 13 automobile program in Alabama. Midland and its subsidiaries denied
the material allegations of the complaint and were awarded Dismissal by
Summary Judgment in August 1995. The plaintiffs filed a motion for
reconsideration, which was denied in October 1995. The plaintiffs have
appealed this determination and no decision has been rendered to date. The
lawsuit was filed in the United States District Court for the Northern
District of Alabama, Western Division, and is presently pending in the United
States Court of Appeals, Eleventh Circuit.

In May 1995, Midland, one of its officers and one of its subsidiaries were
named in a wrongful termination lawsuit by a former employee. This lawsuit is
pending in the State of Illinois Circuit Court, Seventh Judicial Circuit. The
plaintiff seeks $200,000 in compensatory damages and $1 million in punitive
damages. The matter is in the discovery stages. Management of Midland believes
that it had valid cause for the dismissal of this employee and presently
intends to vigorously defend the case. Management of Midland believes that the
resolution of this matter will not have a material impact on Midland's
operations.

Midland and its subsidiaries are involved in asserted claims in the normal
course of business. Midland's management believes the outcome of these matters
in the aggregate will not have a material adverse effect on the consolidated
financial statements of Midland.

MANAGEMENT

The following table provides information as of June 24, 1996 regarding the
directors and executive officers of the Company:

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION WITH DANIELSON
- ---- --- ---------------------------------
<S> <C> <C>
Martin J. Whitman....... 71 Chairman of the Board, Chief Investment Officer and a Director
C. Kirk Rhein, Jr....... 43 President, Chief Executive Officer and a Director
James P. Heffernan...... 50 Chief Financial Officer and a Director
Eugene M. Isenberg...... 66 Director
Joseph F. Porrino....... 51 Director
Frank B. Ryan........... 59 Director
William R. Story........ 51 Director
Wallace O. Sellers...... 66 Director
Claudia C. Cosenza...... 32 Controller
Lisa D. Levey........... 40 General Counsel and Secretary
</TABLE>

65
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth the beneficial ownership of Common Stock as
of June 24, 1996 owned by (a) each director, (b) each executive officer, (c)
each person known by Danielson to own beneficially more than 5% of the
outstanding shares of Common Stock and (d) directors and officers as a group.
Danielson believes that, except as otherwise stated, the beneficial holders
listed below have sole voting and investment power regarding the shares
reflected as being beneficially owned by them.

<TABLE>
<CAPTION>
PRO
FORMA
AMOUNT AND NATURE OF FOR PRO FORMA
BENEFICIAL OWNERSHIP PERCENT OF CLASS (1) OFFERINGS PERCENTAGE
<S> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS
Commissioner of
Insurance of the State
of California c/o
Geoffrey A. Nicholls
Deputy Trustee Mission
Insurance Companies'
Trusts 3333 Wilshire
Boulevard 3rd Floor Los
Angeles,
CA 90010............... 1,803,235(2,3) 11.7
Martin J. Whitman c/o
Whitman Heffernan Rhein
& Co., Inc. 767 Third
Avenue New York, NY
10017- 2023............ 2,687,947(2,4,5,6) 17.3
Whitman Heffernan &
Rhein Workout Fund,
L.P. c/o WHR Management
Company, L.P. 2 Park
Place Bronxville, NY
10708.................. 1,054,996(2) 6.9
Third Avenue Value Fund,
Inc. 767 Third Avenue
New York, NY 10017-
2023................... 803,669(2) 5.2
OFFICERS AND DIRECTORS**
Martin J. Whitman....... 2,687,947(2,4,5,6) 17.3
C. Kirk Rhein, Jr....... 1,407,978(5,6,7) 9.0
James P. Heffernan...... 1,372,980(5,6) 8.8
Joseph F. Porrino....... 56,667(8) *
Frank B. Ryan........... 48,667(8) *
Eugene M. Isenberg...... 69,924(9) *
William R. Story........ 78,972(10) *
Wallace O. Sellers...... 23,333(11) *
Lisa D. Levey........... 19,700(12) *
Claudia C. Cosenza...... 1,800(13) *
All Officers and
Directors as a Group
(10 persons)........... 3,657,976(14) 22.6
</TABLE>
- ---------------------
* Percentage of shares beneficially owned does not exceed 1% of the
outstanding Common Stock.

** Paul B. Loyd, Jr. is a nominee for election to the Board of Directors of
Danielson. Mr. Loyd does not own any shares of Common Stock.

(1) Share percentage ownership is rounded to nearest tenth of 1% and reflects
the effect of dilution as a result of outstanding options to the extent
such options are, or within 60 days will become, exercisable. As of June
24, 1996 (the date as of which this table was prepared), there were
options outstanding to purchase 1,271,537 shares of Common Stock, of which
1,162,695 were exercisable on June 24, 1996, or which become exercisable
within the next 60 days. Shares underlying any option which was
exercisable on June 24, 1996, or becomes exercisable within the next 60
days are deemed outstanding only for purposes of computing the share
ownership and share ownership percentage of the holder of such option.

66
<PAGE>

(2) In accordance with provisions of Danielson's Certificate of Incorporation,
all certificates representing shares of Common Stock beneficially owned by
holders of 5% or more of Common Stock are owned of record by Danielson, as
escrow agent, and are physically held by Danielson in that capacity.

(3) Beneficially owned by the Commissioner of Insurance of the State of
California in his capacity as trustee for the benefit of holders of
certain deficiency claims against certain trusts which assumed liabilities
of certain present and former insurance subsidiaries of Danielson.

(4) Includes 373,397 shares of Common Stock beneficially owned by Carl Marks
Strategic Investments, L.P. ("CMSI"), an investment limited partnership;
803,669 shares beneficially owned by Third Avenue Value Fund, Inc.
("TAVF"), an investment company registered under the Investment Company
Act of 1940; 104,481 shares beneficially owned by Martin J. Whitman & Co.,
Inc. ("MJW&Co"), a private investment company; and 66,167 shares
beneficially owned by Mr. Whitman's wife and three adult family members.
Mr. Whitman is a minority general partner of the partnership that is the
general partner of CMSI. Mr. Whitman controls the investment adviser of
TAVF, and may be deemed to own beneficially a 5% equity interest in TAVF.
Mr. Whitman is the principal stockholder in MJW&Co, and may be deemed to
own beneficially the shares owned by MJW&Co. Mr. Whitman disclaims
beneficial ownership of the shares of Common Stock owned by CMSI, TAVF,
MJW&Co, and Mr. Whitman's family members.

(5) Includes 1,054,996 shares of Common Stock beneficially owned by Whitman
Heffernan & Rhein Workout Fund, L.P. ("WHR Fund"), an investment limited
partnership. Each of Messrs. Whitman, Heffernan and Rhein is a general
partner of the partnership that is the general partner of WHR Fund. Each
disclaims beneficial ownership of the shares owned by the WHR Fund. Does
not include 134,763 shares owned by the Employee Stock Ownership Plan and
Trust of KCP Holding Company and Subsidiaries ("ESOP"). Messrs. Heffernan
and Rhein are, with Mr. Story, the trustees of the ESOP; neither Mr.
Heffernan nor Mr. Rhein is a participant in the ESOP.

(6) Includes shares underlying currently exercisable options to purchase an
aggregate of 210,000 shares of Common Stock at an exercise price of $3.00
per share.

(7) Includes 28,184 shares of Common Stock owned by a trust, of which Mr.
Rhein serves as trustee, for the benefit of Mr. Rhein's children. Mr.
Rhein disclaims beneficial ownership of the shares of Common Stock owned
by the trust.

(8) Includes shares underlying currently exercisable options to purchase an
aggregate of 46,667 shares of Common Stock at an exercise price of $3.63
per share.

(9) Includes 20,088 shares owned by Mentor Partnership, a partnership
controlled by Mr. Isenberg, and 28 shares owned by Mr. Isenberg's wife.
Also includes shares underlying currently exercisable options to purchase
an aggregate of 46,666 shares of Common Stock at an exercise price of
$3.63 per share.

(10) Includes 36,500 shares of Common Stock beneficially owned by Mr. Story
and an aggregate of approximately 2,472 shares owned by the ESOP which
have been allocated to Mr. Story's account; does not include 132,291
additional shares owned by the ESOP but not allocated to Mr. Story's
account. Mr. Story is a participant in the ESOP and is, together with
Messrs. Heffernan and Rhein, a trustee of the ESOP. Includes shares
underlying options to purchase an aggregate of 40,000 shares of Common
Stock at an exercise price of $6.6875 per share, which become exercisable
within the next 60 days. Does not include shares underlying options to
purchase an aggregate of 40,000 shares of Common Stock at an exercise
price of $6.6875 per share which are not currently exercisable nor become
exercisable within the next 60 days.

(11) Includes shares underlying currently exercisable options to purchase an
aggregate of 13,333 shares of Common Stock at an exercise price of $7.00
per share. Does not include shares underlying options to purchase an
aggregate of 26,667 shares of Common Stock at an exercise price of $7.00
per share which are not currently exercisable nor become exercisable
within the next 60 days.

(12) Includes 100 shares of Common Stock beneficially owned by Ms. Levey's
children. Ms. Levey disclaims beneficial ownership of the shares of
Common Stock owned by her children. Includes shares underlying

67
<PAGE>

options to purchase an aggregate of 7,500 shares of Common Stock at an
exercise price of $6.6875 per share, which become exercisable within the
next 60 days. Does not include shares underlying options to purchase an
aggregate of 7,500 shares of Common Stock at an exercise price of $6.6875
per share which are not currently exercisable nor become exercisable within
the next 60 days.

(13) Includes shares underlying options to purchase an aggregate of 1,500
shares of Common Stock at an exercise price of $6.6875 per share, which
become exercisable within the next 60 days. Does not include shares
underlying options to purchase an aggregate of 1,500 shares of Common
Stock at an exercise price of $6.6875 per share which are not currently
exercisable nor become exercisable within the next 60 days.

(14) In calculating the shares owned by officers and directors as a group, the
1,054,996 shares of Common Stock owned by WHR Fund referred to in
footnote 5 above and included in the beneficial ownership amounts of each
of Messrs. Whitman, Heffernan and Rhein reflected in the table above are
counted only once in order to avoid a misleading total. In calculating
the percentage of shares owned by officers and directors as a group, the
shares of Common Stock underlying all options which are beneficially
owned by officers and directors and which are currently exercisable or
become exercisable within the next 60 days are deemed outstanding.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

All of the Company's officers, other than Martin J. Whitman, dedicate
substantially all of their professional efforts to the operations of
Danielson. The Company shares certain personnel and facilities with several
affiliated and unaffiliated companies (including M.J. Whitman, Inc., a broker-
dealer affiliated with Mr. Whitman) and certain expenses are allocated among
the various entities. M.J. Whitman, Inc. will participate in the underwriting
syndicate. See "UNDERWRITING." Personnel costs are allocated based upon actual
time spent on the Company business or upon fixed percentages of compensation.
Costs relating to office space and equipment are allocated based upon fixed
percentages. Inter-company balances are reconciled and reimbursed on a monthly
basis.

68
<PAGE>

DESCRIPTION OF DANIELSON CAPITAL STOCK

The authorized capital stock of Danielson currently consists of 30 million
shares, 20 million of which may be shares of Common Stock and 10 million of
which may be shares of preferred stock. After giving effect to the Merger and
the transactions contemplated hereby, the authorized capital stock of
Danielson will consist of 50 million shares, 40 million of which will be
shares of Common Stock and 10 million of which will be shares of preferred
stock, par value $0.10 per share, issuable in series, of which 1.3 million
shares will be designated Preferred Stock. The following description of
Danielson's capital stock does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the Delaware General
Corporation Law, Danielson's Certificate of Incorporation and the Certificate
of Designations for the Preferred Stock.

COMMON STOCK

General

The Danielson Board possesses the power to issue shares of authorized but
unissued Common Stock without further stockholder action, subject, so long as
shares of Common Stock are listed on the AMEX, to the requirements of such
exchange.

Voting Rights

Each holder of an outstanding share of Common Stock is entitled to cast one
vote for each such share registered in the name of such holder. The
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock is necessary to approve any consolidation or merger of Danielson
with or into another corporation pursuant to which shares of Common Stock
would be converted into or exchanged for any securities or other securities or
other consideration. Pursuant to the Danielson Certificate of Incorporation,
voting for directors may be cumulative if, prior to the vote, any holder of
Common Stock gives notice to Danielson of such holder's intention to vote
cumulatively.

Dividends

Subject to the rights and preferences of any outstanding preferred stock,
dividends on Common Stock are payable out of the funds of Danielson legally
available therefor when, as and if declared by the Danielson Board. However,
no dividend may be paid or set aside for payment and no distribution may be
made on Common Stock unless (i) all accrued and unpaid dividends with respect
to the Preferred Stock and any of the stock ranking on a parity with such
stock as to dividends or upon liquidation at the time such dividends are
payable have been paid or funds have been set apart for payment of such
dividends and (ii) sufficient funds have been set apart for the payment of the
dividends for the current dividend period with respect to the Preferred Stock
and any of the stock ranking on a parity with such stock as to dividends or
upon liquidation.

Rights in Liquidation

In the event Danielson is liquidated, dissolved or wound up, whether
voluntarily or involuntarily, the net assets of Danielson would be distributed
ratably among the holders of the then outstanding shares of Common Stock after
payment or provision for payment of the full preferential amounts to which the
holders of any series of preferred stock of Danielson then issued and
outstanding are then entitled.

Preemptive Rights

Shares of Common Stock do not entitle a stockholder to any preemptive rights
enabling a stockholder to subscribe for or receive shares of stock of any
class or any other securities convertible into shares of stock of any class of
Danielson.

69
<PAGE>

Trading Market

The outstanding shares of Common Stock are listed for trading on the AMEX.
The Registrar and Transfer Agent for Common Stock is Fleet National Bank.

Transfer Restrictions

Common Stock is subject to the following transfer restrictions:

1. No holder, whether record or beneficial, direct or indirect, of 5% or
more of Common Stock, whether such ownership resulted from receipt of shares
of Common Stock through a primary issuance by Danielson, or issued upon
exercise of rights to purchase shares of Common Stock granted by Danielson, or
from any other transaction or transactions, including without limitation,
secondary market acquisitions (and including specifically any holder, whether
record or beneficial, direct or indirect, who proposes to make an acquisition
of Common Stock, which after the acquisition will result in total ownership by
such holder of 5% or more of Common Stock) (a "5% Stockholder"), may purchase,
acquire or otherwise receive additional shares of Common Stock (herein
referred to as an "Acquisition") or sell, transfer, assign, pledge, encumber
or dispose of, in any manner whatsoever, any shares of Common Stock, directly
or indirectly owned by such 5% Stockholder, whether such ownership is record
or beneficial ownership (herein referred to as a "Transfer"), prior to a
determination by Danielson and its tax counsel that such transaction will not
result in or create (in conjunction with prior transactions and previously
approved subsequent transactions by any 5% Stockholder(s) and other holders of
Common Stock) an unreasonable risk of an "ownership change" of Danielson
within the meaning of Section 382(g)(1) of the Code, or any similar provisions
of superseding or additional law relating to preservation of NOL, including
specifically Treasury Regulation Section 1.382- 2T(j)(3)(i) (collectively, an
"Ownership Change" under the "Tax Law"). This 5% limitation may have the
effect of preserving effective control of Danielson by its principal
stockholders and preserving the Danielson Board of Directors' and Managements'
tenure with Danielson.

In addition, Danielson has issued stop transfer instructions to the transfer
agent for Common Stock requiring, as a condition precedent to any transfer of
Common Stock, that the transfer agent receive either: (i) a sworn affidavit
from each of the proposed transferor and transferee that it is not a 5%
Stockholder; or (ii) an opinion of tax counsel of Danielson referred to below.
Any purported transfer of shares of Common Stock in violation of the foregoing
transfer restrictions will be a nullity and of no force and effect. All
certificates representing Common Stock bear a legend setting forth the
foregoing restrictions.

2. In order to ensure compliance with such restrictions, and in order to
establish a procedure for processing requests to effect either an Acquisition
or a Transfer by any one or more 5% Stockholder(s) on a fair and equitable
basis, the following provisions apply to all 5% Stockholders;

(a) Delivery of Shares and Escrow Receipts. All shares of Common Stock which
are issuable to 5% Stockholders or which subsequently are received by a 5%
Stockholder in an Acquisition are issued in the name of "Danielson Holding
Corporation, as Escrow Agent" and are held by Danielson in escrow (the
"Escrowed Stock"). In lieu of certificates reflecting their ownership of
Common Stock, the 5% Stockholders receive an escrow receipt evidencing their
beneficial ownership of Common Stock and record ownership of the Escrowed
Stock. Escrow receipts are non-transferable. The 5% Stockholders retain full
voting and dividend rights for all Escrowed Stock.

(b) Duration of Danielson Holding the Escrowed Stock. As escrow agent,
Danielson holds all shares of Escrowed Stock until termination of the stock
escrow (the "Stock Escrow") (as provided in subsection (d) below) or, if and
to the extent that a 5% Stockholder desires to Transfer Escrowed Stock to a
non-5% Stockholder, until receipt by Danielson of a favorable opinion from its
tax counsel that the Transfer may be made without thereby resulting in an
Ownership Change under the Tax Law.

70
<PAGE>

(c) Acquisitions and Transfers. All requests by 5% Stockholders to
consummate either an Acquisition or a Transfer of Escrowed Stock, through
secondary market transactions or purchases in a primary offering by Danielson,
are treated in the order in which such requests were received, i.e., on a
"first to request, first to receive" basis. All such requests must be in
writing and delivered to Danielson at its principal executive office,
attention General Counsel, by registered mail, return receipt requested, or by
hand. In the event that Danielson's tax counsel is unable to conclude that a
requested Acquisition or Transfer can be made without an Ownership Change
under the Tax Law, then: (i) the requesting party will be so advised in
writing by Danielson; and (ii) any subsequent request by other 5% Stockholders
to effect a transaction of a type previously denied by Danielson will be
approved only after all previously denied requests (in the order denied) are
given an opportunity to consummate the previously desired transaction. In
addition, Danielson may approve any requested transaction in any order of
receipt if, in its business judgment, such transaction is in its best
interests.

(d) Termination of the Stock Escrow. The Stock Escrow will terminate upon
the first to occur of the following: (i) pursuant to an amendment to the Tax
Law, Danielson concludes that the restrictions are no longer necessary in
order to avoid a loss to Danielson and the members of the affiliated group
filing a consolidated federal income tax return with Danielson of its NOL;
(ii) the NOL of Danielson and members of the affiliated group filing a
consolidated federal income tax return with Danielson no longer are available
to Danielson, whether through passage of time, usage or disallowance; and
(iii) the Danielson Board concludes, in its business judgment, that
preservation of the NOL no longer is in the interests of Danielson and members
of the affiliated group filing a consolidated federal income tax return with
Danielson. Upon termination of the Stock Escrow, each 5% Stockholder will
receive a notice that the Stock Escrow has been terminated and, thereafter,
will receive a Common Stock certificate evidencing ownership of the previously
Escrowed Stock.

(e) Release of Danielson. Danielson is held harmless and released from any
liability to any and all 5% Stockholders arising from its actions as escrow
agent, except only for intentional misconduct. In performing its duties
Danielson is and will be entitled to rely, without any inquiry, upon the
written advice of its tax counsel and other experts engaged by Danielson. In
the event that Danielson requires further advice or comfort regarding action
to be taken by it as escrow agent, it may deposit the Escrowed Stock at issue
with a court of competent jurisdiction and make further transfers thereof in a
manner consistent with the rulings of such court.

PREFERRED STOCK

General

The Danielson Board, without further action by the stockholders, is
authorized to issue up to 10 million shares of preferred stock in one or more
series and to designate as to any such series the dividend rate, redemption
prices and terms, preferences on liquidation or dissolution, rights in the
event of a merger, consolidation, distribution or sale of assets, conversion
rights, voting rights and any other powers, preferences, and relative,
participating, optional or other special rights and qualifications,
limitations or restrictions. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of
Preferred Stock and any preferred stock of Danielson that may be issued in the
future. The Preferred Stock will rank senior to Common Stock with respect to
dividends and distribution of assets upon liquidation or winding up.

Dividends

Dividends on the Preferred Stock shall accrue and be cumulative from the
date of issuance, whether or not in any dividend period or periods there shall
be funds legally available for the payment of such dividends. Holders of
shares of Preferred Stock will be entitled to receive cumulative cash
dividends at a per share rate set in accordance with the terms of the Merger
Agreement. The dividend rate was preliminarily set on June , 1996 at % per
annum [and was reset on , 1996.] Dividends on the Preferred Stock will be
payable quarterly on the 15th day of March, June, September and December of
each year, commencing on .

71
<PAGE>

Each such dividend will be payable in arrears to holders of record as they
appear on the stock records of Danielson at the close of business on such
record dates, not less than ten days nor more than 60 days preceding the
payments dates thereof, as shall be fixed by the Danielson Board. The amount
of dividends payable on the Preferred Stock for each full dividend period
shall be computed by dividing the annual dividend rate by four. The amount of
dividends payable for the initial dividend period on the Preferred Stock, or
any other period shorter or longer than a full dividend period shall be
computed on the basis of a 360-day year consisting of twelve 30-day months.

So long as any shares of Preferred Stock are outstanding, no dividends,
except as described below, may be declared or paid or set apart for payment on
any class or series of stock of Danielson ranking, as to dividends, on a
parity with the Preferred Stock, nor shall any such shares be redeemed or
purchased by Danielson unless full cumulative dividends on the Preferred Stock
have been declared and paid or declared and a sum sufficient for the payment
thereof set apart for such payment. When dividends are not paid-in full or a
sum sufficient for such payment is not set apart on the shares of Preferred
Stock and any other class or series of stock ranking on a parity as to
dividends with the Preferred Stock, all dividends declared on the Preferred
Stock and on such other stock may be declared pro rata so that the amounts of
dividends per share declared on the Preferred Stock and on such other stock
shall in all cases bear to each other the same ratio that the accrued
dividends per share on the shares of Preferred Stock and such other stock bear
to each other.

So long as any shares of Preferred Stock are outstanding, Danielson may not
(i) declare or pay or set apart for payment any dividend or other distribution
with respect to any junior stock of Danielson or (ii) redeem or set apart
funds for the purchase, redemption or other acquisition of any junior stock,
unless (A) all accrued and unpaid dividends with respect to the Preferred
Stock and any of the stock ranking on a parity with such stock as to dividends
or upon liquidation ("Parity Stock") at the time such dividends are payable
have been paid or funds have been set apart for payment of such dividends and
(B) sufficient funds have been set apart for the payment of the dividends for
the current dividend period with respect to the Preferred Stock and any Parity
Stock.

Redemption

Shares of Preferred Stock may not be redeemed by Danielson prior to the
fifth anniversary of the Effective Time after which date the shares of such
stock will be redeemable at the option of Danielson, in whole or in part, at
any time or from time to time, out of funds legally available therefor, at a
redemption price equal to the stated value plus an amount equal to accrued and
unpaid dividends, if any, to the redemption date, whether or not earned or
declared.

If fewer than all of the shares of Preferred Stock are to be redeemed, the
shares to be redeemed shall be selected by lot or pro rata. If fewer than all
the shares represented by any certificate are redeemed, a new certificate will
be issued representing the unredeemed shares without cost to the holder
thereof. No fractional shares will be issued upon redemption, but an
adjustment in cash will be made in respect of any fraction of an unredeemed
share which would otherwise be issuable.

On and after the date fixed for redemption, provided that the redemption
price (including any accrued and unpaid dividends to the date fixed for
redemption) has been duly paid or provided for, dividends shall cease to
accrue on the Preferred Stock called for redemption, such shares shall no
longer be deemed to be outstanding and all rights of the holders of such
shares as stockholders of Danielson shall cease except the right to receive
from Danielson the redemption price without interest thereon after the
redemption date and any cash adjustment in lieu of fractional unredeemed
shares.

The provisions governing redemption of the Preferred Stock will become
inoperative if Danielson's right to redeem the Preferred Stock would cause
such stock to be treated as "other property," as such term is used in Section
356(a)(1) of the Code.

72
<PAGE>

Liquidation Preference

In the event of any liquidation, dissolution or winding up of Danielson,
whether voluntary or involuntary, before any payment or distribution of the
assets of Danielson (whether capital or surplus) shall be made to or set apart
for the holders of any class or series of stock ranking junior to Preferred
Stock, upon liquidation, dissolution or winding up, the holders of the shares
of Preferred Stock shall be entitled to receive an amount equal to the stated
value per share plus an amount equal to all dividends (whether or not earned
or declared) accrued and accumulated and unpaid thereon to the date of final
distribution to such holders; but such holders shall not be entitled to any
further payment. If, upon any liquidation, dissolution or winding up of
Danielson, the assets of Danielson, or proceeds thereof, distributable among
the holders of the shares of Preferred Stock shall be insufficient to pay in
full the preferential amount aforesaid and liquidation payments on any other
shares of stock ranking, as to liquidation, dissolution or winding up, on a
parity with the Preferred Stock, then such assets, or the proceeds thereof,
shall be distributed among the holders of shares of Preferred Stock and any
such other stock ratably in accordance with the respective amounts which would
be payable on such shares of Preferred Stock and any such other stock if all
amounts payable thereon were paid in full. Neither a consolidation or merger
of Danielson with another corporation nor a sale or transfer of all or
substantially all of Danielson's assets will be considered a liquidation,
dissolution or winding up, voluntary or involuntary, of Danielson.

Voting Rights

Except as indicated below, or except as otherwise from time to time required
by applicable law, the holders of shares of Preferred Stock will have no
voting rights.

Whenever dividends payable on Preferred Stock shall be in arrears in an
amount equal to at least six full quarterly dividends (whether or not such
arrearage occurred in consecutive periods) on shares of Preferred Stock then
outstanding, the number of directors of Danielson will be increased by two and
the holders of Preferred Stock, voting together as a class with the holders of
any other class or series of Parity Stock upon which the same voting rights
have been conferred and are exercisable, will have the right to elect two
additional directors to the Danielson Board at Danielson's next annual meeting
of stockholders to serve until the next such meeting, and at each subsequent
annual meeting to serve until the next such meeting, until all such dividends
on such series have been paid-in full. At elections of such directors during
such period, each holder of Preferred Stock shall be entitled to one vote per
share. Upon any termination of the right of the holders of such series to vote
for directors as provided above, the term of office of all directors then in
office, elected by such series, shall terminate immediately.

The approval of two-thirds of the outstanding shares of Preferred Stock
shall be required in order to amend the Certificate of Incorporation of
Danielson to affect materially and adversely the rights, preferences or voting
powers of the holders of such series of stock or to authorize, create, issue
or increase the authorized or issued amount of, any class of stock having
rights senior or superior with respect to dividends and upon liquidation to
such series; provided, however, that any increase in the amount of authorized
preferred stock or the creation and issuance of other series of preferred
stock, or any increase in the amount of authorized shares of such series or of
any other series of preferred stock, in each case ranking on a parity with or
junior to the Preferred Stock with respect to the payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall
require the approval of a majority of the outstanding shares of Preferred
Stock and any other series of preferred stock ranking junior to or on a parity
with Preferred Stock.

No approval by the holders of Preferred Stock is required for the creation
of an issue of stock ranking prior to the Preferred Stock as to dividends or
the distribution of assets upon liquidation, dissolution or winding up if
notice of redemption is given and the proceeds of the sale of such new issue
of stock are used to retire or redeem any or all of the outstanding Preferred
Stock.

73
<PAGE>

No Sinking Fund

Preferred Stock will not be subject to the operation of any mandatory
purchase, retirement or sinking fund.

Trading Market

Danielson has agreed to use its best efforts to cause the shares of
Preferred Stock to be approved for listing on the AMEX, NYSE or NASDAQ.

74
<PAGE>

CERTAIN U.S. TAX CONSIDERATIONS

NET OPERATING LOSS CARRYFORWARDS OF DANIELSON

Danielson currently reports a federal consolidated NOL of approximately $1.4
billion, which is expected to be available to offset future taxable income of
Danielson's consolidated post-Merger group (except, to the extent attributable
to certain "recognized built-in gains" of Midland), subject to expiration at
different intervals.

Continued availability of the NOL is subject to the rules of Section 382 of
the Code, which generally restricts NOL utilization after an "ownership
change" (generally a more than 50% increase in stock ownership during a 3-year
"testing period" by "5% stockholders" of a "loss corporation" measured by
value, but not including in the definition of stock ownership so-called
"straight preferred" such as the Preferred Stock). While the Merger and the
Offerings will result in a substantial increase in percentage holdings of
Common Stock by 5% stockholders, they (in conjunction with other relevant
increases by other 5% stockholders) will not, in the opinion of Anderson Kill
Olick & Oshinsky, P.C., result in an ownership change (even if the U.S.
Underwriters' over-allotment option is exercised in full). Danielson's
Certificate of Incorporation also contains restrictions on transfer and
acquisition designed to prevent an involuntary ownership change (although such
restrictions cannot prevent an involuntary ownership change in all
circumstances). Moreover, no assurance can be given that a voluntary ownership
change may not occur in the future should Danielson's management conclude it
is in the best interests of Danielson. In the event of an ownership change,
the amount of Danielson's NOL that could be utilized in any taxable year would
be generally limited to the value of Danielson's stock on the date of the
ownership change multiplied by the applicable federal "long-term tax-exempt
rate" as defined in Section 382(f) of the Code (plus any unused amounts from
prior years).

Continued availability of the NOL is also premised on the conclusion, based
in part on certain representations of Danielson management, that the
"principal purpose" for both of the Merger and Danielson's restructuring and
reorganization as successor to Mission is related to valid business objectives
and not to enable Danielson to utilize its NOL. There can, however, be no
assurance that the IRS will not challenge Danielson in this regard. If any
such challenge were successful, Danielson's NOL could be lost.

FEDERAL TAX CONSIDERATIONS APPLICABLE TO NON-U.S. HOLDERS OF COMMON STOCK

The following discussion addresses certain United States federal income and
estate tax consequences of the ownership and disposition of Common Stock by
Non-U.S. Holders. In general, a "Non-U.S. Holder" is any person holding Common
Stock other than (i) a citizen or resident of the United States, (ii) a
corporation (a "U.S. corporation") or partnership (a "U.S. partnership")
created or organized in the United States or under the laws of the United
States or of any State, or (iii) an estate or trust whose income is included
in gross income for United States federal income tax purposes regardless of
its source. This summary is based on provisions of the Code, Treasury
Regulations promulgated thereunder and administrative and judicial
interpretations as of the date hereof, all of which are subject to change,
including changes with retroactive effect. This summary does not address all
aspects of federal income and estate taxation that may be relevant to Non-U.S.
Holders in light of their particular circumstances and does not address U.S.
state and local or non-U.S. tax consequences or, except as specifically noted,
the effects of any tax treaties the United States has concluded with other
countries.

Proposed United States Treasury Regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, would affect the United States
taxation of dividends paid to a Non-U.S. Holder on Common Stock. The Proposed
Regulations are proposed generally to be effective with respect to dividends
paid after December 31, 1997, subject to certain transition rules. The
discussion below is not intended to be a complete
discussion of the provisions of the Proposed Regulations, and prospective
investors are urged to consult their tax advisors with respect to the effect
the Proposed Regulations would have if adopted.

THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION.
ACCORDINGLY, EACH PROSPECTIVE NON-U.S. HOLDER IS URGED TO CONSULT A TAX
ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL TAX

75
<PAGE>

CONSEQUENCES OF HOLDING AND DISPOSING OF COMMON STOCK, AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY UNITED STATES STATE, LOCAL
OR OTHER NON-UNITED STATES TAXING JURISDICTION.

DIVIDENDS

Subject to the discussion below, dividends paid to a Non-U.S. Holder of
Common Stock generally will be subject to withholding of United States federal
income tax at a 30% rate unless such rate is reduced by an applicable income
tax treaty. For purposes of determining whether tax is to be withheld at a 30%
rate or at a reduced rate as specified by an income tax treaty, the Company
ordinarily will presume that dividends paid to an address in a foreign country
are paid to a resident of such country absent knowledge that such presumption
is not warranted.

Under the Proposed Regulations, to obtain a reduced rate of withholding
under a treaty, a Non-U.S. Holder would be required to provide an IRS Form W-8
certifying such Non-U.S. Holder's entitlement to benefits under a treaty. The
Proposed Regulations would also provide special rules to determine whether,
for purposes of determining the applicability of a tax treaty, dividends paid
to a Non-U.S. Holder that is an entity should be treated as paid to the entity
or to those holding an interest in that entity.

Dividends that are effectively connected with a Non-U.S. Holder's conduct of
a trade or business in the United States (or, if an applicable treaty so
provides, are attributable to a permanent establishment maintained by a Non-
U.S. Holder in the United States) are generally subject to United States
federal income tax at regular rates and are not generally subject to
withholding if the Non-U.S. Holder files a valid Form 4224 with the payor. A
non-United States corporation receiving effectively connected dividends may
also, under certain circumstances, be subject to an additional "branch profits
tax" which is imposed, under certain circumstances, at a 30% rate (or such
lower rate as may be applicable under an income tax treaty) of the non-United
States corporation's effectively connected earnings and profits, subject to
certain adjustments.

Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax
withheld. A similar report is sent to the holder. Pursuant to tax treaties or
certain other agreements, the IRS may make its reports available to tax
authorities in the recipient's country of residence.

Dividends paid to a Non-U.S. Holder at an address within the United States
may be subject to backup withholding imposed at a rate of 31% if the Non-U.S.
Holder fails to establish that it is entitled to an exemption or fails to
provide a correct taxpayer identification number and certain other
information.

GAIN ON DISPOSITION OF COMMON STOCK

Except as described below, a Non-U.S. Holder generally will not be subject
to United States federal income tax with respect to gain realized on a sale or
other disposition of Common Stock unless (i) the gain is effectively connected
with such holder's United States trade or business (or, if an applicable
treaty so provides, is attributable to a permanent establishment maintained by
the Non-U.S. Holder in the United States); (ii) in the case of certain Non-
U.S. Holders who are non-resident alien individuals and hold the Common Stock
as a capital asset, such individuals are present in the United States for 183
or more days in the taxable year of the disposition and certain other
conditions are met; (iii) the Non-U.S. Holder is subject to tax pursuant to
the provisions of the Code regarding the taxation of United States
expatriates; or (iv) the Company is or has been a "United States real property
holding corporation" within the meaning of Section 897(c)(2) of the Code at
any time within the shorter of the five-year period preceding such disposition
or such holder's holding period. Danielson is not, and
does not anticipate becoming, a United States real property holding
corporation. However, no assurance can be given that Danielson will not be a
United States real property holding corporation when a Non-U.S. Holder sells
its shares of Common Stock.

FEDERAL ESTATE TAXES

In general, an individual Non-U.S. Holder who is treated as the owner of, or
has made certain lifetime transfers of, an interest in the Common Stock will
be required to include the value thereof in such individual's

76
<PAGE>

gross estate for United States federal estate tax purposes, and may be subject
to United States federal estate tax unless an applicable estate tax treaty
provides otherwise.

UNITED STATES INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

Under current United States federal income tax law, information reporting
and backup withholding imposed at a rate of 31% will apply to the proceeds of
a disposition of Common Stock effected by or through a United States office of
a broker unless the disposing holder certifies as to its non-United States
status or otherwise establishes an exemption. Generally, United States
information reporting and backup withholding will not apply to a payment of
disposition proceeds where the transaction is effected outside the United
States through a non-United States office of a non-United States broker.
However, United States information reporting requirements (but not backup
withholding) will apply to a payment of disposition proceeds where the
transaction is effected outside the United States by or through an office
outside the United States of a broker that is either (i) a United States
person, (ii) a foreign person which derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States or (iii) a "controlled foreign corporation" for United States federal
income tax purposes, and the broker fails to maintain documentary evidence
that the holder is a Non-U.S. Holder and that certain conditions are met, or
that the holder otherwise is entitled to an exemption.

The Proposed Regulations would, if adopted, alter the foregoing rules in
certain respects. Among other things, the Proposed Regulations would provide
certain presumptions under which a Non-U.S. Holder would be subject to backup
withholding and information reporting in the absence of certification from the
holder as to non-United States status.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding and information reporting results in an overpayment
of taxes, a refund may be obtained, provided that the required information is
furnished to the IRS.

77
<PAGE>

UNDERWRITING

Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the U.S. underwriters named below (the "U.S.
Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation
("DLJSC") and Salomon Brothers Inc are acting as representatives (the "U.S.
Representatives"), and the international managers named below (the
"International Managers" and together with the U.S. Underwriters, the
"Underwriters"), for whom DLJSC and Salomon Brothers International Limited are
acting as representatives (the "International Representatives" and, together
with the U.S. Representatives, the "Representatives"), have severally agreed
to purchase from the Company an aggregate of shares of Common Stock. The
number of shares of Common Stock that each Underwriter has agreed to purchase
is set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER
OF
U.S. UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
---------
Salomon Brothers Inc..................................................
---------
U.S. Offering Subtotal..............................................
=========
<CAPTION>
NUMBER
OF
INTERNATIONAL MANAGERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
---------
Salomon Brothers International Limited................................
---------
International Offering Subtotal.....................................
---------
Total.............................................................
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions. If any shares of Common Stock are purchased by
the Underwriters pursuant to the Underwriting Agreement, all such shares
(other than shares covered by the over-allotment option described below) must
be purchased. The offering price and underwriting discounts and commissions
per share of Common Stock for the U.S. Offering and the International Offering
will be identical.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.

The Underwriters have advised the Company that they propose to offer the
shares of Common Stock included in the Offerings directly to the public at the
price set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to
exceed $ per share of Common Stock. The Underwriters may allow, and such
dealers may re-allow, discounts not in excess of $ per share of Common
Stock to any other Underwriter and certain other dealers.

The Company has granted to the U.S. Underwriters an option to purchase up to
an aggregate of additional shares of Common Stock, at the public offering
price set forth on the cover page of this Prospectus net of underwriting
discounts and commissions, solely to cover over-allotments. Such option may be
exercised in whole or in part at any time and from time to time within 30 days
after the date of this Prospectus. To the extent that the U.S. Underwriters
exercise such option, each of the U.S. Underwriters will be committed, subject
to certain conditions, to purchase a number of option shares proportionate to
such U.S. Underwriter's initial commitment as indicated in the preceding
table.

78
<PAGE>

The Company and each STOCKHOLDER have agreed, subject to certain limited
exceptions, not to offer, sell, contract to sell, grant any option to
purchase, or otherwise dispose of, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for shares of
Common Stock or in any other manner transfer all or a portion of, the economic
consequences associated with the ownership of the Common Stock except to the
Underwriters, for a period of 180 days after the date of this Prospectus,
without the prior written consent of the Representatives; provided, however,
the Company may, in its discretion, grant options to members of its management
and the management of its subsidiaries during such 180 day period pursuant to
any employer or director stock-based plans.

Pursuant to an Agreement Between U.S. Underwriters and International
Managers, each U.S. Underwriter has represented and agreed that, with respect
to the shares of Common Stock included in the U.S. Offering and with certain
exceptions, (a) it is not purchasing any shares of Common Stock for the
account of anyone other than a U.S. or Canadian Person (as defined below) and
(b) it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares of Common Stock or distribute this Prospectus outside
of the U.S. or Canada or to anyone other than a U.S. or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each International Manager has represented and agreed that, with
respect to the shares of Common Stock included in the International Offering
and with certain exceptions, (a) it is not purchasing any shares of Common
Stock for the account of any U.S. or Canadian Person and (b) it has not
offered or sold, and will not offer to sell, directly or indirectly, any
shares of Common Stock or distribute this Prospectus within the U.S. or Canada
or to any U.S. or Canadian Person. The foregoing limitations do not apply to
stabilization transactions and to certain other transactions among the
International Managers and the U.S. Underwriters. As used herein, "U.S. or
Canadian Person" means any resident of the U.S. or Canada or any corporation,
pension, profit-sharing or other trust or other entity organized under or
governed by the laws of the U.S. or Canada or of any political subdivision
thereof (other than a branch located outside the U.S. or Canada of any U.S. or
Canadian Person) and includes any U.S. or Canadian Person, and "U.S." means
the United States of America, its territories, its possessions and all areas
subject to its jurisdiction.

Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the
International Managers of any number of shares of Common Stock to be purchased
pursuant to the Underwriting Agreement as may be mutually agreed. The per
share price and currency of settlement of any shares of Common Stock so sold
shall be the public offering price set forth on the cover page of this
Prospectus, in U.S. dollars, less an amount not greater than the per share
amount of the concession to the dealers set forth above.

Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each U.S. Underwriter has represented that it has not offered or
sold, and has agreed not to offer or sell, any shares of Common Stock,
directly or indirectly, in Canada in contravention of the securities laws of
Canada or any province or territory thereof and has represented that any offer
of shares of Common Stock in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of
Canada in which such offer is made. Each U.S. Underwriter has further agreed
to send to any dealer who purchases from it any shares of Common Stock a
notice stating in substance that, by purchasing such shares, such dealer
represents and agrees that it has not offered or sold, and will not offer or
sell, directly or indirectly, any of such shares in Canada or to or for the
benefit of any resident of Canada in contravention of the securities law of
Canada or any province or territory thereof and that any offer of shares of
Common Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in
which such offer is made, and that such dealer will deliver to any other
dealer to whom it sells any of such shares a notice to the foregoing effect.

Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each International Manager has represented that (i) it has not
offered or sold and for the period of six months following the date of this
Prospectus will not offer or sell any shares of Common Stock to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which do not constitute an

79
<PAGE>

offer to the public in the United Kingdom for the purposes of the Public
Offers of Securities Regulations 1995 (the "Regulations"); (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 of Great Britain and the Regulations with respect to
anything done by it in relation to the shares of Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the issue of the shares of Common Stock to a person
who is of a kind described in Article 8 of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) (No. 2) Order 1995 of Great Britain
or is a person to whom such document may otherwise lawfully be issued or
passed on.

[Certain U.S. Underwriters and International Managers and their affiliates,
including DLJ, which will receive a $600,000 fee in connection with the
Merger, have provided investment or commercial banking services to the Company
in the past and may do so in the future.]

The Common Stock is listed on the AMEX under the symbol "DHC."

The Underwriters have reserved for sale up to $1 million worth of Common
Stock (approximately shares,) for purchase by C. Kirk Rhein, Jr. the
Company's President and Chief Executive Officer and James P. Heffernan the
Company's Chief Financial Officer, shares of Common Stock for certain
individuals, including employees of the Company and its subsidiaries and
members of their immediate families, who have an interest in purchasing such
shares in the Offerings. The Underwriters have advised the Company that the
price per share for such shares will be [the public offering price set forth
on the cover page]. The number of shares of Common Stock available for sale to
the general public in the Offerings will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares of Common Stock not so
purchased will be offered by the Underwriters to the general public on the
same basis as the other shares of Common Stock offered hereby. Messrs. Rhein
and Heffernan will be prohibited from selling, pledging, assigning,
hypothecating or transferring the shares purchased in the Offerings for a
period of three months following the effective date of the Offerings.

LEGAL MATTERS

Certain legal matters and the validity of the shares of Common Stock will be
passed upon for the Company by Anderson Kill Olick & Oshinsky, P.C. Certain
legal matters will be passed upon for the Underwriters by Davis Polk &
Wardwell. Michael W. Stamm, Esq., a member of Anderson Kill Olick & Oshinsky,
P.C., owns shares of Common Stock.

EXPERTS

The consolidated financial statements and related financial statement
schedules of Midland as of December 31, 1994 and 1995 and for each of the
years in the three-year period ended December 31, 1995 have been included
herein and in the Registration Statement, in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP contains an explanatory
paragraph that refers to Midland's adoption of Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities" in 1994.

The consolidated financial statements and related financial statement
schedules of Danielson as of December 31, 1994 and 1995 and for each of the
years in the three-year period ended December 31, 1995 have been included
herein and in the Registration Statement, in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP contains an explanatory
paragraph that refers to Danielson's adoption in 1995 of Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of in 1995."

80
<PAGE>

GLOSSARY OF SELECTED INSURANCE TERMS

Admitted insurer or
insurance carrier............ A company licensed by a state insurance
regulatory authority to do business as an
insurer.

Assumed reinsurance.......... Insurance or reinsurance transferred from
another insurance entity.

Cede......................... To transfer to an insurer or a reinsurer all or
a part of the insurance or reinsurance written
by an insurance or reinsurance entity.

Combined ratio............... A combination of the expense ratio and the loss
ratio. A combined ratio below 100% generally
indicates profitable underwriting without
consideration of investment income. A combined
ratio over 100% generally indicates
unprofitable underwriting without
consideration of investment income.

Direct premiums written...... Premiums on policies written by an insurer,
excluding premiums for reinsurance assumed by
an insurer.

Expense ratio................ Under statutory accounting practices ("SAP"),
the ratio of underwriting expenses to net
premiums written. Under generally accepted
accounting principles ("GAAP"), the ratio of
underwriting expenses to premiums earned.

Gross or net premiums
earned....................... The portion of gross or net premiums written
applicable to the expired period of policies.

Gross premiums written....... The sum of direct premiums written and assumed
reinsurance.

Incurred but not reported
("IBNR")..................... Losses estimated to have been incurred but
which are not yet reported to the insurer.

Incurred losses.............. For a given period, the sum of losses paid plus
the change in unpaid losses and LAE.

Insurance risks: preferred,
standard, non-standard....... Categories of underwriting classifications for
risk selection and pricing. The
classifications consider the loss experience,
the degree of hazard and loss frequency.
Preferred risks have an absence of prior
losses, low degrees of hazard, and/or low loss
frequency potential. Standard risks have
average loss experience, moderate degrees of
hazard and/or moderate loss frequency
potential. Non-standard risks generally have
above average loss experience, a higher degree
of hazard and/or higher loss frequency
potential.

Loss adjustment expenses
("LAE")...................... The expenses of settling claims, including
legal and other fees and claims settlement
costs.

Loss ratio................... The ratio of incurred losses to premiums
earned.

Net premiums written......... The portion of direct premiums written and
assumed reinsurance retained by an insurer
(i.e., after deducting premiums on business
ceded).

81
<PAGE>

Policy acquisition costs..... Agents' or brokers' commissions, premium taxes,
marketing and certain underwriting expenses
directly associated with the production of
business.

Premiums-to-surplus ratio.... Ratio of the most recent twelve months'
statutory net premiums written divided by the
policyholders' capital and surplus at the end
of the period.

Quota-share reinsurance...... A reinsurance agreement under which an insurer
cedes to a reinsurer a specified percentage of
each risk within a defined category of
insurance business written by the insurer and
conveys to the reinsurer a similar percentage
of the premium applicable thereto.

Reinsurance.................. An agreement whereby an insurer cedes to
another insurer all or a portion of the risk
insured and conveys/pays to that other insurer
a portion of the premium paid by the insured.
Reinsurance makes the assuming reinsurer
liable to the extent of the coverage ceded.
However, in the event the reinsurer is unable
to pay its portion of the loss based on the
coverage ceded, the ceding insurer would be
responsible for the entire loss.

Reserves..................... Estimated liabilities established for statutory
reporting purposes by an insurer to reflect
the estimated cost of claims payments and the
related expenses that an insurer will
ultimately be required to pay, net of
reinsurance.

Reserves-to-surplus ratio.... Ratio of loss and loss expense reserves for
statutory reporting purposes divided by the
policyholders' capital and surplus.

Retention.................... The amount or portion of risk which an insurer
retains for its own account (i.e., for which
the insurer remains primarily liable).

SAP or statutory basis....... Statutory accounting practices ("SAP") provide
for recording transactions and preparing
financial statements in accordance with the
rules and procedures prescribed or permitted
by state statute or regulatory authorities.

Statutory or policyholders'
capital and surplus..........
Under SAP, the sum remaining after all
liabilities are subtracted from all admitted
assets.

Underwriting................. The process whereby an insurer reviews
applications submitted for insurance coverage
and determines whether it will accept all or
part of the coverage being requested and what
the applicable premiums and terms should be.
Underwriting also includes an ongoing review
of existing policies and their pricing.

Underwriting expenses........ The aggregate of policy acquisition expenses
and general and administrative expenses
attributable to underwriting operations.

Underwriting profit (loss)... The excess (deficiency) resulting from the
difference between premiums earned and the sum
of incurred losses, LAE and underwriting
expenses.

Unpaid losses and loss
adjustment expenses ("LAE")..
Estimated liabilities established by an insurer
to reflect the estimated cost of claims
payments and the related LAE in respect of
insurance it has written, gross of
reinsurance.

82
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
DANIELSON HOLDING CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS OF DANIELSON HOLDING CORPORATION
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995.............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994 and 1995...................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995...................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995...................................... F-6
Notes to Consolidated Financial Statements............................. F-7

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF DANIELSON HOLDING
CORPORATION
Consolidated Balance Sheets at December 31, 1995 and March 31, 1996
(Unaudited)........................................................... F-28
Consolidated Statements of Operations for the three months
ended March 31, 1995 and March 31, 1996 (Unaudited)................... F-29
Consolidated Statements of Cash Flows for the three months
ended March 31, 1995 and March 31, 1996 (Unaudited)................... F-30
Consolidated Statement of Stockholders' Equity for the
three months ended March 31, 1996 (Unaudited)......................... F-31
Notes to the Consolidated Financial Statements (Unaudited)............. F-32

MIDLAND FINANCIAL GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS OF MIDLAND FINANCIAL GROUP, INC.
Independent Auditors' Report........................................... F-33
Consolidated Balance Sheets at December 31, 1994 and 1995.............. F-34
Consolidated Statements of Income (Loss) for the years ended
December 31, 1993, 1994 and 1995...................................... F-35
Consolidated Statements of Changes in Stockholders' Equity for the
years ended
December 31, 1993, 1994 and 1995...................................... F-36
Consolidated Statements of Cash Flow for the years ended
December 31, 1993, 1994 and 1995...................................... F-37
Notes to Consolidated Financial Statements............................. F-38

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF MIDLAND FINANCIAL
GROUP, INC.
Condensed Consolidated Balance Sheets at December 31, 1995 and March
31, 1996
(Unaudited)........................................................... F-53
Condensed Consolidated Statements of Income for the three months
ended March 31, 1995 and March 31, 1996 (Unaudited)................... F-54
Condensed Consolidated Statement of Cash Flows for the three months
ended March 31, 1995 and March 31, 1996 (Unaudited)................... F-55
Notes to the Condensed Consolidated Financial Statements (Unaudited)... F-56
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Danielson Holding Corporation:

We have audited the accompanying consolidated balance sheets of Danielson
Holding Corporation and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Danielson
Holding Corporation and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.

As described in Note 1 of the Notes to Consolidated Financial Statements, in
1995 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of."

KPMG Peat Marwick LLP

New York, New York
February 26, 1996

F-2
<PAGE>

DANIELSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS:
Fixed maturities:
Available-for-sale at fair value (Cost: $33,020 and
$167,773)............................................... $ 32,450 $172,595
Held-to-maturity at amortized cost (Fair value: $134,843
and $0)................................................. 145,331 --
Equity securities at fair value (Cost: $256 and $256)...... 548 629
Other investments at fair value (Cost: $256 and $0)........ 250 --
Short term investments, at cost which approximates fair
value..................................................... 3,184 8,570
-------- --------
TOTAL INVESTMENTS...................................... 181,763 181,794
Cash....................................................... 342 605
Accrued investment income.................................. 2,903 2,718
Premiums and fees receivable, net of allowances of $323 and
$157...................................................... 17,061 8,826
Reinsurance recoverable on paid losses, net of allowances
of $675 and $388.......................................... 6,108 1,828
Reinsurance recoverable on unpaid losses, net of allowances
of $425 and $425.......................................... 17,705 21,112
Prepaid reinsurance premiums............................... 2,713 2,226
Property and equipment, net of accumulated depreciation of
$5,807 and $6,849......................................... 5,174 4,159
Deferred acquisition costs................................. 2,204 1,045
Excess of cost over net assets acquired.................... 3,513 2,657
Other assets............................................... 1,043 954
-------- --------
TOTAL ASSETS........................................... $240,529 $227,924
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses................. $146,330 $137,406
Unearned premiums.......................................... 14,328 8,563
Policyholder dividends..................................... 6,280 4,664
Reinsurance premiums payable............................... 1,679 1,707
Funds withheld on ceded reinsurance........................ 1,810 1,534
Other liabilities.......................................... 7,784 4,229
-------- --------
TOTAL LIABILITIES...................................... 178,211 158,103
Preferred Stock ($0.10 par value; authorized 10,000,000
shares; none issued and outstanding)...................... -- --
Common Stock ($0.10 par value; authorized 20,000,000
shares; issued 15,370,894 shares and 15,370,894 shares;
outstanding 15,360,270 shares and 15,360,255 shares)...... 1,537 1,537
Additional paid-in capital................................. 46,417 46,131
Net unrealized gain (loss) on available-for-sale
securities................................................ (278) 5,195
Retained earnings.......................................... 14,708 17,024
Treasury stock (Cost of 10,624 shares and 10,639 shares)... (66) (66)
-------- --------
TOTAL STOCKHOLDERS' EQUITY............................. 62,318 69,821
-------- --------
Commitments and contingencies..............................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $240,529 $227,924
======== ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-3
<PAGE>

DANIELSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Gross premiums earned......................... $ 91,836 $106,552 $ 76,688
Ceded premiums earned......................... (5,784) (13,261) (16,140)
-------- -------- --------
Net premiums earned........................... 86,052 93,291 60,548
Trust fee income.............................. 2,264 4,646 4,475
Net investment income......................... 13,302 11,853 13,161
Net realized investment gains (Note 6)........ 462 24 208
Other income.................................. 317 526 1,689
-------- -------- --------
TOTAL REVENUES.............................. 102,397 110,340 80,081
-------- -------- --------
LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses..... 74,398 82,025 63,543
Ceded losses and loss adjustment expenses..... (8,498) (14,510) (14,828)
-------- -------- --------
Net losses and loss adjustment expenses....... 65,900 67,515 48,715
Policyholder dividends........................ 3,615 6,043 137
Policy acquisition expenses................... 16,993 18,677 13,391
General and administrative expenses........... 12,835 14,792 15,402
Interest expense.............................. 233 65 --
-------- -------- --------
TOTAL LOSSES AND EXPENSES................... 99,576 107,092 77,645
-------- -------- --------
Income before provision for income tax and ex-
traordinary item[s]............................ 2,821 3,248 2,436
Income tax provision............................ 75 103 120
-------- -------- --------
Income before extraordinary item[s]............. 2,746 3,145 2,316
Extraordinary item[s] (Note 13)............... 488 750 --
-------- -------- --------
NET INCOME...................................... $ 3,234 $ 3,895 $ 2,316
======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK AND COMMON
EQUIVALENT SHARE:
Income before extraordinary item[s]........... $ 0.17 $ 0.20 $ 0.14
Extraordinary item[s]......................... 0.03 0.05 --
-------- -------- --------
NET INCOME...................................... $ 0.20 $ 0.25 $ 0.14
======== ======== ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-4
<PAGE>

DANIELSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year....................... $ 1,511 $ 1,511 $ 1,537
Exercise of options to purchase Common Stock..... -- 26 --
------- ------- -------
Balance, end of year............................. 1,511 1,537 1,537
------- ------- -------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year....................... 45,669 45,669 46,417
Exercise of options to purchase Common Stock..... -- 748 --
Retirement of stock options...................... -- -- (286)
------- ------- -------
Balance, end of year............................. 45,669 46,417 46,131
------- ------- -------
NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE
SECURITIES
Balance, beginning of year....................... 15 855 (278)
Net unrealized gain on the date of
reclassification of
available-for-sale securities (Note 6).......... -- -- 2,880
Net increase (decrease).......................... 840 (1,133) 2,593
------- ------- -------
Balance, end of year............................. 855 (278) 5,195
------- ------- -------
RETAINED EARNINGS
Balance, beginning of year....................... 7,579 10,813 14,708
Net income....................................... 3,234 3,895 2,316
------- ------- -------
Balance, end of year............................. 10,813 14,708 17,024
------- ------- -------
TREASURY STOCK
Balance, beginning of year....................... (10) (10) (66)
Purchased during year............................ -- (56) --
------- ------- -------
Balance, end of year............................. (10) (66) (66)
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY..................... $58,838 $62,318 $69,821
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
COMMON STOCK, SHARES
Balance, beginning of year.................. 15,112,984 15,112,984 15,370,894
Exercise of options to purchase Common
Stock...................................... -- 257,910 --
---------- ---------- ----------
Balance, end of year........................ 15,112,984 15,370,894 15,370,894
========== ========== ==========
TREASURY STOCK, SHARES
Balance, beginning of year.................. 2,726 2,733 10,624
Purchased during year....................... 7 7,891 15
---------- ---------- ----------
Balance, end of year........................ 2,733 10,624 10,639
========== ========== ==========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-5
<PAGE>

DANIELSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 3,234 $ 3,895 $ 2,316
Adjustments to reconcile net income to net cash
provided by
(used in) operating activities:
Net realized investment gains.................. (462) (24) (208)
Depreciation and amortization.................. 1,783 1,952 2,455
Change in other invested asset................. (3,104) (205) --
Change in accrued investment income............ 434 (702) 185
Change in premiums and fees receivable......... (787) 1,889 8,235
Change in reinsurance recoverables............. 1,014 (2,883) 4,280
Change in reinsurance recoverable on unpaid
losses........................................ 2,310 551 (3,407)
Change in prepaid reinsurance premiums......... (2,159) (48) 487
Change in deferred acquisition costs........... (7) (8) 1,159
Change in unpaid losses and loss adjustment
expenses...................................... 12,088 8,851 (8,924)
Change in unearned premiums.................... 4,060 (2,174) (5,765)
Change in policyholder dividends payable....... (1,042) (3,501) (1,616)
Change in reinsurance payables and funds
withheld...................................... 91 60 (248)
Other, net..................................... (571) 2,355 (3,437)
-------- -------- --------
Net cash provided by (used in) operating
activities.................................. 16,882 10,008 (4,488)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Fixed income maturities...................... 242 -- --
Fixed income maturities available-for-sale... -- 3,239 8,194
Equity securities............................ -- 14 --
Other investments............................ -- -- 433
Investments, matured or called:
Fixed income maturities held-to-maturity..... 27,421 24,551 5,875
Fixed income maturities available-for-sale... -- 3,937 23,732
Investments purchased:
Fixed income maturities held-to-maturity..... (51,204) (32,906) (835)
Fixed income maturities available-for-sale... -- (25,119) (26,455)
Equity securities............................ (5) -- --
Other investments............................ -- (250) (105)
Purchases of property and equipment............ (637) (907) (416)
Proceeds of other invested asset............... -- 19,531 --
-------- -------- --------
Net cash provided by (used in) investing
activities.................................. (24,183) (7,910) 10,423
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of Danielson Trust (net of cash
acquired of $208)............................. (4,403) -- --
Acquisition of Western Trust Services.......... -- (2,505) --
Paydown of bank loan........................... (1,000) (2,250) --
Capital lease obligation....................... (180) (96) --
Change in loans to trust accounts.............. (147) 165 --
Purchase of treasury stock..................... -- (56) --
Retirement of stock options.................... -- -- (286)
Proceeds of exercise of options to purchase
Common Stock.................................. -- 774 --
-------- -------- --------
Net cash (used in) financing activities...... (5,730) (3,968) (286)
-------- -------- --------
Net increase (decrease) in cash and short term
investments..................................... (13,031) (1,870) 5,649
Cash and short term investments at beginning of
year............................................ 18,427 5,396 3,526
-------- -------- --------
CASH AND SHORT TERM INVESTMENTS AT END OF YEAR... $ 5,396 $ 3,526 $ 9,175
======== ======== ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-6
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1993, 1994 AND 1995

1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FORMATION AND ORGANIZATION

Danielson Holding Corporation ("DHC") is a holding company organized under
the General Corporation Law of the State of Delaware. DHC owns all of the
voting stock of Mission American Insurance Company ("MAIC"). MAIC owns 100% of
the voting stock of KCP Holding Company ("KCP"), Danielson Indemnity Company
and Danielson Reinsurance Corporation. KCP owns 100% of the common stock of
National American Insurance Company of California ("NAICC"), DHC's principal
operating insurance subsidiary. NAICC owns 100% of the common stock of
Danielson Insurance Company ("DIC") and Danielson National Insurance Company
("DNIC"). In March 1993, DHC acquired 100% of the common stock of Danielson
Trust Company ("Danielson Trust"). See also Note 2 "ACQUISITION OF DANIELSON
TRUST COMPANY." For a description of the Company's operations by industry
segment, see Note 14 "BUSINESS SEGMENTS."

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation

The accompanying Consolidated Financial Statements of DHC and subsidiaries
(collectively with DHC, the "Company") have been prepared in accordance with
generally accepted accounting principles. All material transactions among
consolidated companies are eliminated. Certain prior year amounts have been
reclassified to conform with the current year's financial statement
presentation.

B. Investments

The Company classifies its debt and equity securities in one of three
categories: trading, available-for-sale or held-to-maturity. Securities which
are classified as "trading" are bought and held principally for sale in the
near term. Securities which are classified as "held-to-maturity" are
securities which the Company has the ability and intent to hold until
maturity. All other securities, which are not classified as either trading or
held-to-maturity, are classified as "available-for-sale."

Fixed maturities classified as available-for-sale are recorded at fair
value. Fixed maturities classified as held-to-maturity are recorded at
amortized cost, adjusted for the amortization or accretion of premiums or
discounts. Amortization and accretion of premiums and discounts on
collateralized mortgage obligations are adjusted for principal paydowns and
changes in expected maturities. Net unrealized gains or losses on fixed
maturities classified as available-for-sale are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
Transfers of securities between categories are recorded at fair value at the
date of transfer. Net unrealized gains or losses associated with transfers of
fixed maturities classified as held-to-maturity to fixed maturities classified
as available-for-sale are recorded as a separate component of stockholders'
equity. The net unrealized gains or losses on fixed maturities included in the
separate component of stockholders' equity for fixed maturities transferred
from the classification of available-for-sale to held-to-maturity are
amortized into earnings over the remaining life of the security as an
adjustment to yield in a manner consistent with the amortization or accretion
of premium or discount on the associated security. The Company does not hold
any fixed maturities that are classified as trading. In December 1995, the
Company reclassified its entire held-to-maturity portfolio to available-for-
sale under a one-time provision permitted by the Financial Accounting
Standards Board. No deferred tax benefit or liability has been provided for
unrealized appreciation and depreciation due to the anticipated availability
of the Company's net operating tax loss carryforwards.

F-7
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

A decline in the market value of any available-for-sale or held-to-maturity
security below cost which is deemed to be other than temporary is charged to
earnings, resulting in the establishment of a new cost basis for such
security.

Premiums and discounts of fixed maturities that are classified as held-to-
maturity securities are amortized or accreted based on the effective interest
method. Dividend and interest income are recognized when earned. The cost of
securities sold is determined using the specific identification method.

Equity securities are stated at fair value, and any increase or decrease
from cost is reflected in stockholders' equity as unrealized gain or loss.

Short term investments are stated at cost which approximates fair value.
Investments having an original maturity of three months or less from the time
of purchase have been classified as "short term investments."

C. Property-Casualty Insurance Accounting

1. Revenue Recognition

Earned premium income is recognized ratably over the contract period of an
insurance policy. A liability is established for unearned insurance premiums
representing the portion of premiums that is applicable to the unexpired terms
of policies in force. Premiums earned include an estimate for earned but
unbilled workers' compensation premiums. Premiums earned but unbilled and
included in premiums receivable were $2.7 million and $1.9 million at December
31, 1994 and 1995, respectively.

2. Unpaid Losses and Loss Adjustment Expenses

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. Management
believes that the provisions for unpaid losses and LAE are adequate to cover
the cost of losses and LAE incurred to date. However, 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 such
estimates.

3. Reinsurance

In the normal course of business, the Company seeks to reduce the loss that
may arise from catastrophes or other events which cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance enterprises or reinsurers.

The Company accounts for its reinsurance contracts which provide
indemnification by reducing premiums earned by the amounts paid to the
reinsurer and establishing recoverable amounts for paid and unpaid losses and
LAE ceded to the reinsurer. Amounts recoverable from reinsurers are estimated
in a manner consistent with the claim liability associated with the reinsured
policy. The Company accounts for its reinsurance contracts having limited risk
as financing agreements by establishing deposits for the premiums. Contracts
pursuant to which it is not reasonably possible that the reinsurer may realize
a significant loss from the insurance risk generally do not meet conditions
for reinsurance accounting and are accounted for as deposits. For the years
ended December 31, 1994 and 1995, the Company had no reinsurance contracts
which were accounted for as financing agreements. See Note 3 "REINSURANCE."

F-8
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

4. Deferred Acquisition Costs

Deferred acquisition costs, consisting principally of commissions and
premium taxes paid at the time of issuance of a policy, are deferred and
amortized over the period during which the related premiums are earned.
Deferred acquisition costs are limited to the estimated future profit, based
on the anticipated losses and LAE (based on historical experience),
maintenance costs, policyholder dividends, and anticipated investment income.
The amortization of deferred acquisition costs charged to operations in 1993,
1994 and 1995 was $14.8 million, $13.7 million and $9.1 million, respectively.

5. Policyholder Dividends

Policyholder dividends represent management's estimate of amounts to be paid
on participating policies which share in positive underwriting results, based
on the type of policy plan. Participating policies represent approximately
75%, 79% and 34% of direct written premiums for the years ended December 31,
1993, 1994 and 1995, respectively. An estimated provision for policyholder
dividends is accrued during the period in which the related premium is earned.
These estimated dividends do not become legal liabilities unless and until
declared by the Board of Directors of NAICC.

D. Trust Accounting

Trust fee income is earned as services are rendered. Trust fees may be based
upon either a flat fee or the cost or market value of assets under
administration. The Consolidated Financial Statements of the Company do not
include the fiduciary assets of Danielson Trust.

E. Excess of Cost Over Net Assets Acquired

Until December 31, 1995, the excess of the acquisition cost over the net
assets of businesses acquired (goodwill) was being amortized using the
straight-line method over a period of 25 years. Recoverability of goodwill is
evaluated when a change in circumstances or events indicates that the carrying
amount of such asset may not be recoverable. As of January 1, 1996, the
Company changed its estimated amortization period for existing balances of
previously recorded goodwill from 25 years to 15 years. The amortization of
goodwill over a period of 15 years will result in an annual charge to
operations of approximately $177,000. The amortization of goodwill charged to
operations in 1994 and 1995 was approximately $134,000 and $147,000,
respectively. See Note 2 "ACQUISITION OF DANIELSON TRUST COMPANY."

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121") in 1995. Under SFAS 121,
long-lived assets, certain identifiable intangibles and goodwill related to
such assets to be held and used by an entity are required to be reviewed for
impairment whenever events or changes in circumstance indicate that the
carrying amount of such asset may not be recoverable. SFAS 121 requires that
recoverability be based on estimated future cash flows (undiscounted and
without interest charges) expected to result from the use of the asset and its
eventual disposition. An impairment loss is recognized if the sum of the
expected future cash flows in each of the anticipated carrying years is less
than the carrying amount of such asset, in which case the basis in such asset
is reduced to its fair value. The 1995 net operating losses of Danielson Trust
required the Company to assess the recoverability and amortization of goodwill
associated with the original acquisition of Danielson Trust and the subsequent
acquisition of the WTS assets. Based upon this assessment, the Company has
valued Danielson Trust at slightly in excess of one times the annual revenues.
At December 31, 1995, the effect on the Company of its adoption of SFAS 121
was to reduce the carrying amount of the remaining goodwill by $709,000, to
$2.7 million. The writedown is included in general and administrative
expenses.

F-9
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

F. Property and Equipment

Property and equipment, which include data processing hardware and software
and leasehold improvements, are carried at historical cost less accumulated
depreciation. Depreciation of property and equipment is provided over the
estimated useful lives of the respective assets. Leasehold improvements are
amortized on a straight-line basis over the estimated useful lives of the
assets or over the term of the leases, whichever is shorter. The useful lives
of all property and equipment range from three to 12 years.

G. Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and the respective tax
bases thereof. Deferred tax assets and liabilities are measured using enacted
tax rates which are expected to apply to taxable income in the years in which
those temporary differences are anticipated to be recovered or settled, and
are limited, through a valuation allowance, to the amount realizable. See Note
8 "INCOME TAXES."

H. 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
each year. 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, whether or not currently exercisable.
Such average shares were 15,847,682, 15,938,018 and 15,989,055 for the years
ended December 31, 1993, 1994 and 1995, respectively.

I. Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying values of the Company's cash and short term investments
approximate fair value because of the short term maturity of those
investments. The fair values of the Company's debt security instruments and
equity security investments are based on quoted market prices as of December
31, 1995. The fair value of all other financial instruments approximates their
respective carrying value. See Note 6 "INVESTMENTS."

J. Use of Estimates

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Therefore, actual results could differ from such
estimates.

2) ACQUISITION OF DANIELSON TRUST COMPANY

In March 1993, DHC completed the acquisition of 100% of the common stock of
Danielson Trust Company ("Danielson Trust") from a subsidiary of the
Resolution Trust Corporation. Danielson Trust formerly was known, prior to
November 13, 1993, as HomeFed Trust. Danielson Trust is a California
corporation that has been chartered by the California State Banking Department
to provide trust and fiduciary services since 1977. The operations of
Danielson Trust include private trust, retirement services (formerly known as
employee benefit trust) and custodial services.

F-10
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

The acquisition of Danielson Trust has been accounted for as a purchase; the
purchase price of $4.6 million paid by DHC for the Danielson Trust stock,
including legal fees and other related acquisition expenses, was allocated to
the identifiable net assets of Danielson Trust based upon their estimated
relative fair values. In connection with the acquisition, DHC acquired net
assets with a fair value of $3.4 million. Approximately $1.2 million of cost
in excess of net assets acquired was recorded in connection with the purchase
and, through December 31, 1995, was being amortized using the straight-line
method over 25 years. In February 1994, Danielson Trust completed the
acquisition of the assets of the Western Trust Services ("WTS") division of
Grossmont Bank, for a purchase price of $2.5 million which, prior to January
1, 1996, was being amortized over a period of 25 years. As of January 1, 1996,
the Company changed its estimated period of amortization for existing balances
of previously recorded goodwill from a period of 25 years to a period of 15
years.

3) REINSURANCE

Reinsurance is the transfer of risk, by contract, from one insurance company
to another for consideration (premium). Reinsurance contracts do not relieve
an insurance company of its obligations to policyholders. The failure of
reinsurers to honor their obligations could result in losses to NAICC;
consequently, allowances are established for amounts which are deemed
uncollectable. NAICC evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic
regions, activities, or economic characteristics of the reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies.

NAICC cedes reinsurance on an excess of loss basis for workers' compensation
risks in excess of $400,000 and generally for all other risks in excess of
$150,000. NAICC also cedes 50% of its personal automobile business on a quota
share basis. The effect of reinsurance on premiums written reflected in the
Company's Consolidated Financial Statements is as follows (dollars in
thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Direct........................................ $95,896 $104,379 $ 70,949
Ceded......................................... (7,943) (13,310) (15,654)
------- -------- --------
Net premium................................. $87,953 $ 91,069 $ 55,295
======= ======== ========
</TABLE>

As of December 31, 1995, NAICC had paid $5.5 million in losses and LAE
relating to an environmental claim filed by Hughes Aircraft (the "Hughes
Claim"). The Hughes Claim alleged that environmental damages occurred
continuously over a period of approximately 34 years. NAICC assumed a general
liability policy issued to Hughes Aircraft for three of those years. The
Hughes Claim liability is reinsured in each of such three years under various
contracts involving numerous reinsurance companies; of the $5.3 million ceded,
$5.2 million was disputed by the reinsurers. NAICC commenced arbitration
proceedings relating to $2.9 million and litigation proceedings relating to
$2.3 million in order to collect amounts due NAICC. In April 1993, the
arbitration proceedings were concluded and NAICC was awarded $684,000. NAICC
received payment of the entire amount of the arbitration award by January
1994. In December 1995, the litigation proceedings were concluded and NAICC
received payment of the $2.3 million at issue in such proceedings plus
$840,000 of accumulated interest thereon.

In March 1994, NAICC received $19.5 million of commutation value under an
Excess of Loss Agreement with Great American Insurance Company ("GAIC")
entered into in 1988. Under that agreement, GAIC agreed to provide $26 million
of reinsurance coverage for the ultimate net aggregate losses and allocated
LAE relating

F-11
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

to policyholder liabilities on business written by MAIC after March 31, 1985
that NAICC assumed from MAIC. The agreement included timing restrictions on
the reinsurance payments to be made by GAIC to NAICC. Because of the limited
amount of risk transferred, this transaction was accounted for as a financing
agreement and, at December 31, 1993, the $11 million premium payment by NAICC
to GAIC, together with accrued interest of $8.3 million, was classified as an
"other invested asset." In accordance with the terms of the agreement, NAICC
exercised the commutation provision in January 1994. The decision to exercise
the commutation was made in 1993, at a time when the 5-year U.S. Treasury
interest rate (upon which the commutation value of the agreement was
dependent) had declined significantly. The decline in this interest rate had
the effect of increasing the value of commutation over the amount previously
recorded for such asset. It was not possible to have foreseen the level of
interest rates which prompted the decision to commute the agreement and,
therefore, the increased value of the commutation, in the amount of $1.7
million, was recognized in 1993. Additionally, interest income of $1,504,000
and $205,000 was recognized in 1993 and 1994, respectively, representing the
accretion of interest income for the original expected term and under the
inherent interest rate in the agreement.

As of December 31, 1995, General Reinsurance Corporation ("GRC") and Munich
American Reinsurance Company ("MARC") were the only reinsurers that comprised
more than 10% of NAICC's reinsurance recoverable on paid and unpaid claims. At
December 31, 1995, NAICC had reinsurance recoverables on paid and unpaid
claims of $10 million from GRC and $9.8 million from MARC.

4) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

The following chart summarizes the activity in NAICC's liability for unpaid
losses and LAE during the three most recent fiscal years (dollars in
thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Net unpaid losses and LAE at beginning of year.. $104,825 $119,223 $128,625
-------- -------- --------
Add:
Provision for losses and LAE related to:
Current year.................................. 65,157 67,131 45,592
Prior years................................... 743 384 3,123
-------- -------- --------
Total incurred.................................. 65,900 67,515 48,715
-------- -------- --------
Less:
Loss and LAE payments for claims related to:
Current year.................................. 11,852 15,849 14,464
Prior years................................... 39,650 42,264 46,582
-------- -------- --------
Total paid...................................... 51,502 58,113 61,046
-------- -------- --------
Net unpaid losses and LAE at end of year........ 119,223 128,625 116,294
Plus reinsurance recoverables on unpaid losses
and LAE........................................ 18,256 17,705 21,112
-------- -------- --------
Gross unpaid losses and LAE at end of year...... $137,479 $146,330 $137,406
======== ======== ========
</TABLE>

The losses and LAE incurred in 1995 relating to prior years are primarily
attributable to claims from business which is in run-off. Two claims comprise
substantially all of the losses and LAE incurred related to

F-12
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

prior years: one being a claim for asbestosis exposure, which was settled in
1995 in the form of a policy buy back; the other, a construction defect claim
in which a court decision was contrary to previously established case law.

NAICC has claims relating to environmental cleanup against policies issued
prior to 1980 which are currently in run-off. The principal exposure arises
from direct excess and primary policies of business in run-off, the
obligations of which were assumed by NAICC. These excess and primary claims
are relatively few in number and have policy limits of between $50,000 and $1
million, with reinsurance generally above $50,000. NAICC also has
environmental claims primarily associated with participation in excess of loss
reinsurance contracts assumed by NAICC. These reinsurance contracts have
relatively low limits, generally less than $25,000, and estimates of unpaid
losses are based on information provided by the primary insurance company.

The unpaid losses and LAE related to environmental cleanup are established
based upon facts currently known and the current state of the law and coverage
litigation. Liabilities are estimated for known claims (including the cost of
related litigation) when sufficient information has been developed to indicate
the involvement of a specific contract of insurance or reinsurance and
management can reasonably estimate its liability. Liabilities for unknown
claims and development of reported claims are included in NAICC's bulk unpaid
losses. The liability for unknown or unreported claims is not estimated to be
material based on historical reporting experience. The liability for the
development of reported claims is based on estimates of the range of potential
losses for reported claims in the aggregate as well as currently established
case estimates and industry development factors for reported claims. Estimates
of liabilities are reviewed and updated continually and exposure exists in
excess of amounts which are currently recorded which could be material.
However, management of NAICC does not expect that liabilities associated with
these types of claims will result in a material adverse effect on future
liquidity or financial position. Liabilities such as these are based upon
estimates and there can be no assurance that the ultimate liability will not
exceed such estimates. Additionally, significant uncertainty exists about the
outcome of coverage litigation which can impact current estimates. As of
December 31, 1995, NAICC's net unpaid losses and LAE relating to environmental
claims were $4.1 million.

5) REGULATION, DIVIDEND RESTRICTIONS AND STATUTORY SURPLUS

DHC's insurance subsidiaries are regulated by various states and prepare
their financial statements in accordance with statutory accounting principles.
NAICC prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the California Department of
Insurance (the "Insurance Department"). Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners (the "Association"), as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. As of December
31, 1994 and 1995, DHC's operating insurance subsidiaries reported statutory
capital and surplus of $39.7 million and $44.9 million, respectively. The
combined statutory net income for DHC's operating insurance subsidiaries, as
reported to the regulatory authorities for the years ended December 31, 1993,
1994 and 1995, was $2.8 million, $2.2 million and $4.8 million, respectively.
The Insurance Department is currently conducting a routine examination of the
statutory basis financial statements of NAICC, DNIC and DIC as of December 31,
1995 and has disclosed no findings to date.

In December 1993, the Association adopted a model for determining the risk
based capital ("RBC") requirements for property and casualty insurance
companies. Under the RBC model, property and casualty insurance companies are
required to report their RBC ratios based on their latest statutory annual
statements as filed with the regulatory authorities. NAICC has calculated its
RBC requirement under the Association's model, and has capital in excess of
any regulatory action or reporting level.

F-13
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The agencies
established pursuant to these state laws have broad administrative and
supervisory powers relating to the granting and revocation of licenses to
transact insurance business, regulation of trade practices, establishment of
guaranty associations, licensing of agents, approval of policy forms, premium
rate filing requirements, reserve requirements, the form and content of
required regulatory financial statements, periodic examinations of insurers'
records, capital and surplus requirements and the maximum concentrations of
certain classes of investments. Most states also have enacted legislation
regulating insurance holding company systems, including with respect to
acquisitions, extraordinary dividends, the terms of affiliate transactions and
other related matters. DHC and its insurance subsidiaries have registered as a
holding company system pursuant to such legislation in California and
routinely report to other jurisdictions. The Association has formed committees
and appointed advisory groups to study and formulate regulatory proposals on
such diverse issues as the use of surplus debentures, accounting for
reinsurance transactions and the adoption of RBC requirements. It is not
possible to predict the impact of future state and federal regulation on the
operations of the Company.

Under the California Insurance Code, NAICC is prohibited from paying, other
than from accumulated earned surplus, shareholder dividends which exceed the
greater of net income or 10% of statutory surplus without prior approval of
the Insurance Department. As a result of NAICC's negative unassigned surplus,
NAICC is not permitted to pay dividends in 1996 without prior regulatory
approval.

DHC's trust subsidiary, Danielson Trust, is regulated by the California
Banking Department (the "Banking Department"). Danielson Trust is required by
state banking law to report its financial position to the Banking Department
on a quarterly basis, and to maintain compliance with regulatory capital
requirements. State banking law, and through March 1995 the terms of the
Department's approval of DHC's acquisition of Danielson Trust, restrict the
amount of dividends that Danielson Trust may transfer to DHC without prior
regulatory approval. The Banking Department performs an examination, in each
24-month period, of the trust company's financial statements for the most
recently completed fiscal year. The most recent such State examination of
Danielson Trust was performed as of September 30, 1994. The examination had no
effect on the financial position of Danielson Trust.

6) INVESTMENTS

In compliance with state insurance and banking laws and regulations,
securities with a fair value of approximately $94.6 million and $119.6 million
at December 31, 1994 and 1995, respectively, were on deposit with various
states or governmental regulatory authorities. In addition, at December 31,
1994 and 1995, respectively, investments with a fair value of $5.4 million and
$4.7 million were held in trust or as collateral under the terms of certain
reinsurance treaties and letters of credit; short term investments of $133,000
in each of the years ended December 31, 1994 and 1995 are pledged to
regulatory authorities and are restricted as to use.

Net realized investment gains (losses) in 1993, 1994 and 1995 were as
follows (dollars in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities........................ $473 $20 $130
Equity securities....................... -- 4 --
Other investments....................... -- -- 78
Other................................... (11) -- --
---- --- ----
Net realized gain..................... $462 $24 $208
==== === ====
</TABLE>

F-14
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

Gross realized gains relating to fixed maturities were $473,000, $36,000 and
$217,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
There were no gross realized losses relating to fixed maturities for the year
ended December 31, 1993. Gross realized losses relating to fixed maturities
were $16,000 and $87,000 for the years ended December 31, 1994 and 1995,
respectively. There were neither gross realized gains nor gross realized
losses relating to equity securities for the years ended December 31, 1993 and
1995. Gross realized gains relating to equity securities were $4,000 for the
year ended December 31, 1994. There were neither gross realized gains nor
gross realized losses relating to other investments for the years ended
December 31, 1993 and 1994. Gross realized gains relating to other investments
were $78,000 for the year ended December 31, 1995.

Net investment income for the past three years was as follows (dollars in
thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Fixed maturities.................................. $ 9,862 $11,616 $12,442
Equity securities................................. -- -- --
Short term investments............................ 362 216 219
Other, net........................................ 3,164 247 899
------- ------- -------
Total investment income......................... 13,388 12,079 13,560
Less: Investment expense.......................... 86 226 399
------- ------- -------
Net investment income........................... $13,302 $11,853 $13,161
======= ======= =======
</TABLE>

There were no investments with a carrying value greater than 10% of
stockholders' equity as of December 31, 1994 or 1995.

F-15
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

The amortized cost, unrealized gains, unrealized losses and fair value at
December 31, 1994 and 1995, respectively, for available-for-sale and held-to-
maturity securities, categorized by type of security, were as follows (dollars
in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------
COST OR
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Investments classified as
available-for-sale:
Fixed maturities:
U.S. Government/Agency.......... $ 22,300 $ 1 $ 321 $ 21,980
Corporate....................... 10,720 -- 250 10,470
-------- ------ ------- --------
Total fixed maturities........ 33,020 1 571 32,450
Equity securities................. 256 292 -- 548
-------- ------ ------- --------
Total available-for-sale.......... $ 33,276 $ 293 $ 571 $ 32,998
======== ====== ======= ========
Fixed maturities classified as
held-to-maturity:
U.S. Government/Agency.......... $ 33,864 $ 76 $ 885 $ 33,055
Mortgage-backed................. 64,558 2 6,556 58,004
Corporate....................... 46,909 158 3,283 43,784
-------- ------ ------- --------
Total held-to-maturity............ $145,331 $ 236 $10,724 $134,843
======== ====== ======= ========
<CAPTION>
DECEMBER 31, 1995
----------------------------------------
COST OR
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Investments classified as
available-for-sale:
Fixed maturities:
U.S. Government/Agency.......... $ 54,865 $1,854 $ 4 $ 56,715
Mortgage-backed................. 62,342 1,536 272 63,606
Corporate....................... 50,566 1,729 21 52,274
-------- ------ ------- --------
Total fixed maturities........ 167,773 5,119 297 172,595
Equity securities................. 256 373 -- 629
-------- ------ ------- --------
Total available-for-sale.......... $168,029 $5,492 $ 297 $173,224
======== ====== ======= ========
</TABLE>

Fixed maturities of the Company include mortgage-backed securities ("MBS")
representing 34.7% and 36.9% of the Company's total fixed maturities at
December 31, 1994 and 1995, respectively. All MBS held by the Company are
issued by the Federal National Mortgage Association ("Fannie Mae") or the
Federal Home Loan Mortgage Corporation ("Freddie Mac"), both of which are
rated "Aaa" by Moody's Investors Services. MBS and callable bonds, in contrast
to other bonds, are more sensitive to market value declines in a rising
interest rate environment than to market value increases in a declining
interest rate environment. This is primarily because of payors' increased
incentive and ability to prepay principal and issuers' increased incentive to
call bonds in a declining interest rate environment. NAICC's management does
not believe that the inherent prepayment risk in its portfolio is significant.
However, management of NAICC believes that the potential impact of the
interest rate risk on the Company's Consolidated Financial Statements could be
significant because of the greater sensitivity of the MBS portfolio to market
value declines and the classification of the entire portfolio as available-
for-sale. The Company has no MBS concentrations in any geographic region.

F-16
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

In November 1995, the Financial Accounting Standards Board Emerging Issues
Task Force issued a Special Report, "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities" (the
"Special Report") permitting companies to effect a one-time reclassification
of all securities held at that time. At December 1, 1995, the Company
reclassified all held-to-maturity securities to the available-for-sale
security category. The amortized cost of the fixed maturities that were
transferred was $139.9 million. Upon the adoption of the Special Report,
unrealized gains of $2.9 million were reported as a component of stockholders'
equity with no effect on the Company's earnings. The purpose of the Company's
reclassification was to provide it with increased flexibility both to respond
to changes in market conditions which could affect asset and liability
matching and cash flow and to effect changes in investment policy guidelines
in response to changes in business conditions. Pursuant to the Special Report,
the reclassifications from the held-to-maturity category in connection with
the one-time reassessment do not affect the Company's intent to hold other
debt securities to maturity in the future.

The following reflects the change in net unrealized gain (loss) on
available-for-sale securities included as a separate component of
stockholders' equity (dollars in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1993 1994 1995
---- ------- ------
<S> <C> <C> <C>
Fixed maturities...................................... $457 $(1,027) $5,392
Equity securities..................................... 383 (106) 81
---- ------- ------
Total............................................. $840 $(1,133) $5,473
==== ======= ======
</TABLE>

The expected maturities of fixed maturities and equity securities, by
amortized cost and fair value, at December 31, 1995, are shown below. Expected
maturities may differ from contractual maturities due to borrowers' having the
right to call or prepay their obligations with or without call or prepayment
penalties. Expected maturities of mortgage-backed securities are estimated
based upon the remaining principal balance, the projected cash flows and the
anticipated prepayment rates of each security (dollars in thousands):

<TABLE>
<CAPTION>
AMORTIZED FAIR
MATURITY COST VALUE
-------- --------- --------
<S> <C> <C>
Available-for-sale:
One year or less..................................... $ 28,177 $ 28,386
Over one year to five years.......................... 72,763 76,417
Over five years to ten years......................... 65,844 66,725
More than ten years.................................. 989 1,067
-------- --------
Total fixed maturities............................. $167,773 $172,595
======== ========
</TABLE>

7) STOCKHOLDERS' EQUITY

DHC is authorized to issue 20,000,000 shares of common stock, par value
$0.10 per share ("Common Stock"), and 10,000,000 shares of preferred stock,
par value $0.10 per share. As of December 31, 1995, there were 15,370,894
shares of Common Stock issued and 15,360,255 such shares outstanding (after
giving effect to the issuance of 257,910 shares of Common Stock in connection
with the exercise of stock options on December 29, 1994), and no shares of
preferred stock issued and outstanding; the remaining 10,639 shares issued but
not outstanding are held as treasury stock. For additional information about
the Company's Stock Option Plans, including options granted in January 1996,
see Note 10 "EMPLOYEE BENEFITS AND STOCK OPTION PLANS." In connection with
efforts to preserve the Company's net operating tax loss carryforwards,

F-17
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

DHC has imposed restrictions on the ability of holders of 5% or more of DHC
Common Stock to transfer the Common Stock owned by them and to acquire
additional Common Stock, as well as the ability of others to become 5%
stockholders as a result of transfers of Common Stock. See Note 8 "INCOME
TAXES."

In March 1994, DHC commenced an odd-lot tender offer (the "Odd-Lot Tender
Offer") for shares of its Common Stock owned beneficially or of record by
holders of fewer than 100 shares on the record date, March 25, 1994. The Odd-
Lot Tender Offer, which originally was scheduled to expire on April 29, 1994,
was extended twice, and expired on June 10, 1994. A total of 7,885 shares of
Common Stock were tendered to, and acquired by, DHC in connection with the
Odd-Lot Tender Offer. Under the terms of the Odd-Lot Tender Offer, the
purchase price paid by DHC was $7.00 per odd-lot share, for an aggregate
purchase price of $55,195. The reacquired shares are retained by DHC as
treasury stock.

8) INCOME TAXES

DHC files a Federal consolidated income tax return with its subsidiaries,
including certain subsidiaries that were the grantors of certain trusts that
assumed various liabilities of certain present and former subsidiaries of DHC.

As of December 31, 1995, the Company has a consolidated net operating loss
carryforward of approximately $1.4 billion for Federal income tax purposes.
This number is based upon actual Federal consolidated income tax filings for
the periods through December 31, 1994 and an estimate of the 1995 taxable
loss. The net operating loss carryforward will expire in various amounts, if
not used, between 1998 and 2010. The Internal Revenue Service ("IRS") may
attempt to challenge the amount of this net operating loss in the event of a
future tax audit. Management believes, based in part upon the views of its tax
advisors, that its net operating loss calculations are reasonable and that it
is reasonable to conclude that the Company's net operating losses of in excess
of $1 billion would be available for use by the Company. These tax loss
attributes are currently fully reserved, for valuation purposes, on the
Company's financial statements. The Company considers all relevant factors
impacting its business operations (such as the size of NAICC and Danielson
Trust, the operating results of NAICC and Danielson Trust and the competitive
environment in which NAICC and Danielson Trust operate) in order to determine
whether the operations are more likely than not to utilize the NOLs. The
amount of the deferred tax asset considered realizable could be increased in
the near term if estimates of future taxable income during the carryforward
period are increased. See Note 7 "STOCKHOLDERS' EQUITY" for a description of
certain restrictions on the transfer of Common Stock.

At December 31, 1995, KCP reflected net operating tax loss carryforwards of
$31 million for Federal income tax purposes, distinct from the consolidated
net operating tax loss carryforwards of DHC. KCP's carryforwards arise from
its filing, prior to 1992, of a consolidated Federal income tax return
separately from DHC. The net operating tax loss carryforwards of KCP will
expire, if not used, between 2002 and 2005.

F-18
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

The Company's net operating tax loss carryforwards (including carryforwards
attributable to KCP) will expire, if not used, in the following amounts in the
following years (dollars in thousands):

<TABLE>
<CAPTION>
AMOUNT OF
YEAR ENDING CARRYFORWARD
DECEMBER 31, EXPIRING
------------ ------------
<S> <C>
1998 $ 32,804
1999 203,869
2000 249,488
2001 155,768
2002 169,767
2003 196,476
2004 75,933
2005 99,961
2006 129,755
2007 44,873
2008 4,626
2009 10,938
2010 6,107
----------
$1,380,365
==========
</TABLE>

The Company has made provisions for certain state and local taxes. Tax
filings for these jurisdictions do not consolidate the activity of the trusts
referred to above, and reflect preparation on a separate company basis.

Tax expense consists of the following amounts (dollars in thousands):

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax.......................................... $-- $-- $--
State and local............................................. 75 103 120
---- ---- ----
Total................................................... $ 75 $103 $120
==== ==== ====
</TABLE>

The following reflects a reconciliation of Federal income tax expense
computed by applying the applicable Federal income tax rate of 34% for 1993,
1994 and 1995, as compared to the provision for Federal income taxes (dollars
in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense............... $ 959 $ 1,104 $ 828
Change in valuation allowance................. 2,951 904 1,819
Increase in net operating losses from grantor
trusts....................................... (3,973) (2,104) (2,891)
State and local tax expense................... 75 103 120
Amortization of goodwill...................... 59 46 303
Other, net.................................... 4 50 (59)
------- ------- -------
Total income tax expense...................... $ 75 $ 103 $ 120
======= ======= =======
</TABLE>

F-19
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1994 and 1995, respectively, are
presented as follows (dollars in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Deferred tax assets
Loss reserve discounting............. $ 9,558 8,820
Unearned premiums.................... 790 431
Net operating loss carryforwards..... 466,077 469,324
Allowance for doubtful accounts...... 481 330
Policyholder dividends............... 2,135 1,586
Other................................ 17 (8)
--------- ---------
Total gross deferred tax asset....... 479,058 480,483
Less: Valuation allowance............ (478,309) (478,362)
--------- ---------
Total deferred tax asset............. $ 749 $ 2,121
--------- ---------
Deferred tax liabilities
Deferred acquisition costs........... 749 355
Unrealized gains on available-for-
sale securities..................... -- 1,766
--------- ---------
Total deferred tax liabilities....... 749 2,121
--------- ---------
Net deferred tax asset............... $ -- $ --
========= =========
</TABLE>

9) BANK LOAN

During the first quarter of 1994, KCP paid down the outstanding balance of
an unsecured Term Credit Agreement ("Bank Loan") having a principal amount of
$4 million and having an interest rate of the higher of the prime rate plus
2.5% or the Federal Funds Rate plus 1.5%. The Bank Loan was entered into in
connection with the acquisition by DHC as of December 31, 1991 of the
remaining shares of KCP that it did not already own. The fair value of the
Bank Loan was considered to be its carrying value due to the variable nature
of the interest rate. Total interest expense paid in cash on the Bank Loan was
$201,000 and $14,000 in 1993 and 1994, respectively.

10) EMPLOYEE BENEFIT AND STOCK OPTION PLANS

1990 Stock Option Plan

The 1990 Stock Option Plan (the "1990 Plan") of DHC is a non-qualified stock
option plan which is intended to attract, retain and provide incentives to key
employees of DHC by offering them an opportunity to acquire or increase a
proprietary interest in DHC. Options under the 1990 Plan may be granted to
existing officers or employees of DHC for, in the aggregate, the purchase of
up to 1,260,000 shares of Common Stock (all subject to adjustment in
connection with events affecting the capitalization of DHC). No options were
granted under the 1990 Plan during 1990. On March 13, 1991, options to
purchase 210,000 shares were granted to each of Messrs. Whitman, Heffernan and
Rhein, all of whom are Directors and officers of DHC. The exercise price for
all options granted on March 13, 1991 is $3.00 per share, the arithmetic
average of the closing prices of the Common Stock on the American Stock
Exchange for the 30 days prior to the date of grant. The options expire ten
years after the date of grant and became exercisable in equal annual
installments commencing on the first anniversary thereof and on each of the
next two anniversaries thereafter. An additional 630,000 options were granted
outside the 1990 Plan as of that date to Junkyard Partners, L.P. ("Junkyard
Partners"), upon the same terms as those granted

F-20
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

on that date under the 1990 Plan. After giving effect to the options granted
outside the 1990 Plan to Junkyard Partners (and excluding options granted to
non-employee Directors, described below), DHC has issued options to purchase
1,260,000 shares of Common Stock, the total number of options which may be
granted under the 1990 Plan. In order to prevent additional dilution, the
Compensation Committee of the Board of Directors of DHC (the "Committee"), on
September 16, 1991, resolved that it intends to refrain from granting any
additional options under the 1990 Plan in excess of the 630,000 options
currently outstanding under the 1990 Plan. During 1994, Junkyard Partners
transferred 257,910 of its 630,000 options to one of its limited partners. On
December 29, 1994, DHC issued 257,910 restricted shares of Common Stock upon
the exercise of such transferred options. In connection therewith, DHC
received a total exercise price of $773,730. Effective May 19, 1995, DHC
purchased 69,453 of the remaining 372,090 options to purchase Common Stock
owned by Junkyard Partners. The options were exercisable at the time of such
purchase and otherwise would have expired on March 13, 2001. The aggregate
purchase price paid by DHC for the options was approximately $286,500, which
was equal to the difference between the closing price of Common Stock on May
19, 1995 ($7.125 per share) the effective date of such purchase, and the
exercise price of such options ($3.00 per share), or $4.125 per share. As of
December 31, 1995, Junkyard Partners continued to own 302,637 options to
purchase shares of Common Stock, and Messrs. Whitman, Heffernan and Rhein
continued to own their options, all of which are currently exercisable.

DHC also was authorized by the terms of its Plan of Reorganization to grant
to non-employee Directors of DHC, outside the 1990 Plan, options to purchase
140,000 shares of Common Stock (subject to adjustment in events affecting the
capitalization of DHC). On September 16, 1991, DHC granted to each of Mr.
Porrino and Dr. Ryan, both of whom are unaffiliated Directors of DHC, options
to purchase 46,667 shares of Common Stock and granted to Mr. Isenberg, also an
unaffiliated Director of DHC, options to purchase 46,666 shares of Common
Stock. The exercise price of all such options is $3.63, the arithmetic average
of the closing prices of the Common Stock on the American Stock Exchange for
the 30 days prior to the date of grant. These options expire ten years after
the date of grant and become exercisable in three equal annual installments
commencing on the first anniversary of the date of grant and on each of the
next two anniversaries thereafter. As of December 31, 1995, all of the options
granted outside the 1990 Plan, all of which are currently exercisable,
remained unexercised.

1995 Stock and Incentive Plan

The 1995 Stock and Incentive Plan (the "1995 Plan") is a qualified plan
which provides for the grant of any or all of the following types of awards:
stock options, including incentive stock options and non-qualified stock
options; stock appreciation rights, whether in tandem with stock options or
freestanding; restricted stock; incentive awards; and performance awards. The
purpose of the 1995 Plan is to enable DHC to provide incentives to increase
the personal financial identification of key personnel with the long term
growth of the Company and the interests of DHC's stockholders through the
ownership and performance of DHC's Common Stock, to enhance the Company's
ability to retain key personnel, and to attract outstanding prospective
employees and Directors. The 1995 Plan became effective as of March 21, 1995.
No incentive stock options may be granted under the 1995 Plan after March 21,
2005. The 1995 Plan will remain in effect until all awards have been satisfied
or expired. The 1995 Plan is administered by the Committee. The aggregate
number of shares of Common Stock which may be issued under the 1995 Plan, or
as to which stock appreciation rights or other awards may be granted, may not
exceed 1,700,000, of which a maximum of 1,500,000 shares may relate to awards
to eligible individuals (including employee Directors) and a maximum of
200,000 shares may relate to awards to non-employee Directors (all subject to
adjustment in the event of stock dividends, stock splits, reorganizations,
mergers and other events affecting the capitalization of DHC, and subject to
acceleration in the event of changes in control or ownership of DHC). The
maximum number of shares of Common Stock that may be subject to options, stock
appreciation rights, restricted stock awards, performance awards or incentive
awards

F-21
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

granted under the 1995 Plan to any one individual during any calendar year
cannot exceed 125,000 shares in any calendar year (subject to adjustment in
the event of stock dividends, stock splits and certain other events). On April
25, 1995, options to purchase 40,000 shares automatically were granted under
the 1995 Plan to Mr. Sellers upon his election as a Director of DHC. The
exercise price for such options is $7.00 per share (the mean of the high and
low prices of the Common Stock on the American Stock Exchange on the date of
grant). The options expire ten years after the date of grant and become
exercisable in three equal annual installments commencing on the first
anniversary thereof and on each of the next two anniversaries thereafter. None
of the options granted to Mr. Sellers is currently exercisable; however,
13,333 such options will become exercisable on April 25, 1996. On January 15,
1996, options to purchase an aggregate of 158,900 shares of Common Stock were
granted under the 1995 Plan to certain officers and employees of the Company.
Among the recipients of such options were Ms. Cosenza and Ms. Levey, who are
officers of DHC, who were granted options to acquire 3,000 shares and 15,000
shares respectively, and Mr. Story, who is a member of DHC's Board of
Directors, who received a grant of options to acquire 80,000 shares. The
exercise price for all of such options is $6.6875 per share (the mean of the
high and low prices of the Common Stock on the American Stock Exchange on the
date of the grant). The options expire ten years after the date of grant. None
of the options is currently exercisable. The options become exercisable at
various times, depending upon the holder of the options. Continued employment
with the Company is a condition to all of the January 1996 options.

Employee Benefit Plans

KCP maintains an Employee Stock Ownership Plan ("ESOP") of KCP and
Subsidiaries covering all of its employees. Effective April 1, 1993, Danielson
Trust became a participating employer, and its employees were admitted as
additional participants in the ESOP. The ESOP originally acquired common stock
of KCP in February 1990, financed by a loan from KCP in the principal amount
of $998,000 bearing interest at an annual rate of 10%. Shares of DHC Common
Stock were substituted for the KCP stock held by the ESOP as of December 31,
1991. At December 31, 1995, the principal balance due from the ESOP under such
loan was $323,000. The loan, which is guaranteed by KCP, is collateralized by
the Common Stock held by the ESOP. As the debt is repaid, shares are released
from collateral and allocated to employees. All of the shares of Common Stock
held by the ESOP are deemed to be outstanding for earnings per share
computations. KCP has elected to include the value of the Common Stock
allocated annually to participants under the ESOP in the calculation of its
matching contribution to the KCP and Subsidiaries Salary Deferred Plan and
Trust ("401(k) Plan"). Prior to July 1, 1995, the participating employers
contributed 50% of the first 6% of employee-contributed compensation to the
401(k) Plan; effective July 1, 1995, Danielson Trust reduced its maximum
contribution to the 401(k) Plan to 50% of the first 4% of employee-contributed
compensation. The shares of Common Stock owned by the ESOP as of December 31,
1994 and 1995, respectively, were as follows:

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Allocated shares........................................... 83,948 94,714
Unreleased shares.......................................... 59,309 40,049
------- -------
Total.................................................. 143,257 134,763
======= =======
</TABLE>

KCP maintains a non-contributory defined benefit pension plan (the "Pension
Plan") covering substantially all of its employees. Effective April 1, 1993,
Danielson Trust was admitted as an additional employer participant in the
Pension Plan. Effective May 15, 1995 (the "Curtailment Date"), Danielson Trust
froze its participation in the Pension Plan, which is deemed to constitute a
curtailment event under Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Plans." The plan curtailment resulted in a
loss to the Company of $78,678. Danielson Trust

F-22
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

continues to be obligated to make pension plan contributions in respect of
interest on account balances in the Pension Plan as of the Curtailment Date;
however, it will not make any other contributions to, nor will any additional
employees of Danielson Trust be admitted as participants in, the Pension Plan
after the Curtailment Date. Benefits under the Pension Plan are based on an
employee's years of service and average final compensation. The funding policy
of the Pension Plan provides for the participating employers to contribute the
minimum pension costs equivalent to the amount required under the Employee
Retirement Income Security Act of 1974 and the Internal Revenue Code. Vested
benefits under the Pension Plan are fully funded. Any liability associated
with the Pension Plan is reflected in the Company's Consolidated Financial
Statements.

The following table sets forth the Pension Plan's funded status at December
31, 1994 and 1995, valued at January 1, 1995 and 1996, respectively (dollars
in thousands):

<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefits obligation, including vested
benefits of $963 for 1994 and $1,529 for 1995.......... $1,070 $ 1,904
====== =======
Projected benefit obligation.............................. $1,312 $ 2,478
Plan assets at fair value, primarily U.S. Government and
government agency obligations............................ 1,105 1,293
------ -------
Projected benefit obligation in excess of plan assets... (207) (1,185)
Unrecognized net (gain) loss.............................. (55) 807
Unrecognized prior service cost........................... 273 83
Adjustment required to recognize minimum liability........ -- (316)
------ -------
(Accrued) prepaid pension cost.......................... $ 11 $ (611)
====== =======
</TABLE>

Net pension costs for the years ended December 31, 1993, 1994 and 1995
include the following components:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Service cost........................... $ 219 $ 286 $ 243
Interest cost.......................... 67 100 156
Actual (return) loss on plan assets.... (100) 130 (201)
Net amortization and deferral.......... 35 (199) 131
----- ----- -----
Net pension cost..................... $ 221 $ 317 $ 329
===== ===== =====
</TABLE>

The Pension Plan's assets consist of U.S. Government obligations, registered
equity mutual funds and insured certificates of deposit. The average discount
rate used in determining the actuarial present value of the projected benefit
obligation was 8.25% and 7.25% for 1994 and 1995, respectively. The projected
long term rate of return on assets was 7% for each of 1994 and 1995. The
average rate of compensation increase used in determining the actuarial
present value of the projected benefit obligation was 3% for 1994 and 4.5% for
1995.

KCP maintains the 401(k) Plan in which all employees of KCP and, since April
1, 1993, Danielson Trust, are eligible to participate. Under the 401(k) Plan,
employees may elect to contribute up to 12% of their eligible compensation to
a maximum dollar amount allowed by the IRS. As noted above, prior to July 1,
1995, the

F-23
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

participating employers contributed 50% of the first 6% of employee-
contributed compensation; however, effective July 1, 1995, Danielson Trust
reduced its maximum contribution to 50% of the first 4% of Danielson Trust
employee-contributed compensation. The participating employers have opted to
include the value of the Common Stock allocated annually to participants under
the ESOP in the calculation of their matching contribution. In 1993, 1994 and
1995, the employers' matching obligation to the 401(k) Plan was satisfied
through ESOP shares, cash and forfeitures totaling $157,000, $156,000 and
$211,000, respectively, in value.

11) LEASES

DHC and its subsidiaries and affiliates have entered into various non-
cancelable operating lease arrangements for office space and data processing
equipment. The terms of the operating leases vary from three to ten years and
generally contain renewal options and escalation clauses based on increases in
operating expenses and other factors. Rent expense under operating leases was
$1.6 million for each of the years ended 1993 and 1994 and $1.5 million for
the year ended December 31, 1995.

At December 31, 1995, future net minimum operating lease rental payment
commitments were as follows (dollars in thousands):

<TABLE>
<CAPTION>
MINIMUM OPERATING LEASE
YEAR ENDING DECEMBER 31, RENTAL PAYMENTS
------------------------ -----------------------
<S> <C>
1996............................................ $1,870
1997............................................ 1,837
1998............................................ 1,098
1999............................................ 813
2000 and thereafter............................. 1,258
------
Total commitments............................. $6,876
======
</TABLE>

12) COMMITMENTS AND CONTINGENCIES

NAICC is involved in litigation relating to losses arising from insurance
contracts in the normal course of business which are provided for under
"unpaid losses and loss adjustment expenses." NAICC also is involved in other
litigation pertaining to general corporate matters and claims settlement
practices. Danielson Trust is involved in litigation in the normal course of
business. DHC is not involved in any material litigation. While litigation is
by nature uncertain, management, based in part on advice from counsel,
believes that the ultimate outcome of these actions will not have a material
adverse effect on the consolidated financial condition of DHC.

13) DISTRIBUTIONS RECEIVED BY THE COMPANY

On December 21, 1994, DHC received a partial distribution in the amount of
$750,000 from an unaffiliated trust that owns certain assets and liabilities
of a former subsidiary of DHC. The partial distribution is recorded as an
extraordinary item in the Company's 1994 Consolidated Statements of
Operations. DHC has been advised that the trust is anticipated to be
terminated in the near future. DHC does not anticipate that any amount it may
receive upon termination of the trust will be material.

On December 30, 1993, following approval of the California Superior Court,
MAIC received a distribution of approximately $268,000 upon termination of an
unaffiliated trust formerly administered by the California Insurance
Commissioner as trustee. Such trust had assumed the liabilities and
substantially all of the assets of MAIC and a former subsidiary of DHC. Under
the terms of the trust agreement, the trust was required to

F-24
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

distribute to MAIC all amounts which remained in the trust after satisfying or
otherwise resolving all claims against MAIC and such former subsidiary. The
distribution was recorded as an extraordinary item in the Company's 1993
Consolidated Statements of Operations. MAIC distributed such funds to DHC
following approval of the California Insurance Department (the "Insurance
Department"). The termination of the trust had the effect of finalizing a
Superior Court-approved interim distribution by such former trust to MAIC in
1992 of approximately $6.2 million, the proceeds of which also were
distributed to DHC upon approval of the Insurance Department, as well as
releasing all indemnities and pledges running from MAIC to the trust,
including a pledge of 3,526,140 shares of KCP common stock owned by MAIC.

Also during 1993, MAIC received proceeds of $220,000 from the liquidation of
the estate of a former Texas subsidiary of DHC. The distribution was accounted
for as an extraordinary item in the Company's 1993 Consolidated Statements of
Operations.

14) BUSINESS SEGMENTS

The Company operates in two industry segments: Insurance Services and Trust
and Fiduciary Services. The operations of DHC's primary insurance subsidiary,
NAICC, are in property and casualty insurance. NAICC writes workers'
compensation and non-standard automobile insurance in the western United
States, primarily California. NAICC writes approximately 87% of its insurance
in California. Personal automobile direct written premiums of $8.4 million,
$20 million and $28.8 million and net earned premiums of $2.4 million, $10.3
million and $15.2 million for the years ended December 31, 1993, 1994 and
1995, respectively, were produced through one general agent of NAICC. The
operations of DHC's trust subsidiary, Danielson Trust, consist of providing
private trust, retirement and custodial services, primarily in Southern
California. The accounts and operations of Danielson Trust as of and
subsequent to March 26, 1993, when DHC acquired all of the common stock of
Danielson Trust, are reflected in the Company's Consolidated Financial
Statements. The Company's Corporate operations consist of corporate staff and
treasury functions.

Total revenue by industry segment includes revenues from unaffiliated
customers as reported in the Company's consolidated income statement. Revenue
earned at the Corporate level is primarily dependent upon the rate of return
achieved on its investment portfolio.

Capital expenditures at the Corporate level include both the purchase price
of $4.6 million paid by DHC in March 1993 in its acquisition of the Danielson
Trust stock, including legal fees and other related acquisition expenses, and
the February 1994 acquisition by Danielson Trust of the assets of the WTS
division of Grossmont Bank for a purchase price of $2.5 million.

Identifiable assets are those assets, by industry, that are used in the
Company's operations in such industry. Corporate assets are composed
principally of cash and marketable securities.

Intersegment sales are not material to any of the Company's business
segments.

F-25
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

Summarized financial data for each of the Company's business segments is set
forth below:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1993 1994 1995
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Insurance Operations............................. $ 99,416 $105,098 $74,759
Trust Operations................................. 2,384 4,795 4,623
Corporate........................................ 597 447 699
-------- -------- -------
Total........................................ $102,397 $110,340 $80,081
======== ======== =======
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS
Insurance Operations............................. $ 4,528 $ 5,978 $ 6,090
Trust Operations................................. (68) (611) (2,033)
Corporate........................................ (1,639) (2,119) (1,621)
-------- -------- -------
Total........................................ $ 2,821 $ 3,248 $ 2,436
======== ======== =======
CAPITAL EXPENDITURES
Insurance Operations............................. $ 424 $ 540 $ 298
Trust Operations................................. 178 367 79
Corporate........................................ 4,646 2,505 39
-------- -------- -------
Total........................................ $ 5,248 $ 3,412 $ 416
======== ======== =======
DEPRECIATION AND AMORTIZATION OF NON-INVESTMENT
ASSETS
Insurance Operations............................. $ 1,113 $ 1,133 $ 1,133
Trust Operations................................. 48 201 1,083
Corporate........................................ 37 41 43
-------- -------- -------
Total........................................ $ 1,198 $ 1,375 $ 2,259
======== ======== =======
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1994 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Insurance Operations.................................. $219,839 $211,427
Trust Operations...................................... 7,541 5,438
Corporate............................................. 13,149 11,059
-------- --------
Total............................................. $240,529 $227,924
======== ========
</TABLE>

15) SUBSEQUENT EVENT

On February 26, 1996, DHC entered into a merger agreement pursuant to which
DHC will acquire all of the outstanding stock of Midland Financial Group, Inc.
("Midland") in a merger transaction. The purchase price will be 1.6 times the
1995 year end book value of Midland. As part of the transaction, DHC will make
a $30 million capital contribution to Midland at the closing. The
consideration to be received by the Midland shareholders will be paid 50% in
cash, 40% in DHC non-convertible preferred stock having a market dividend
rate, and 10% in Common Stock to be valued based upon a trading average prior
to the closing date. DHC

F-26
<PAGE>

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

DECEMBER 31, 1993, 1994 AND 1995

expects to finance the cash portion of the purchase price and the $30 million
capital contribution with the net proceeds of an underwritten public offering
of Common Stock to raise approximately $80 million, which is expected to close
concurrently with the acquisition. The DHC public offering will be made as
soon as possible and currently is anticipated to occur during the second
quarter of 1996.

Midland is engaged primarily in non-standard automobile insurance and
related activities in 16 states located primarily in the southern and western
United States.

The closing of the transaction is subject to various conditions, including
approvals by the stockholders of both companies, the receipt of regulatory
approvals, and financing. No assurance can be given that the conditions to the
transaction can be satisfied or that the transaction will be completed.

F-27
<PAGE>

DANIELSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Fixed maturities, available-for-sale at fair value
(Cost: $167,773 and $162,623)........................ $172,595 $162,916
Equity securities, at fair value (Cost: $256 and
$256)................................................ 629 602
Short term investments, at cost which approximates
fair value........................................... 8,570 5,052
-------- --------
TOTAL INVESTMENTS................................... 181,794 168,570
Cash.................................................. 605 294
Accrued investment income............................. 2,718 2,140
Premiums and fees receivable, net of allowances of
$157 and $184........................................ 8,826 7,295
Reinsurance recoverable on paid losses, net of
allowances of $388 and $388.......................... 1,828 2,977
Reinsurance recoverable on unpaid losses, net of
allowances of $425 and $425.......................... 21,112 18,098
Prepaid reinsurance premiums.......................... 2,226 2,414
Property and equipment, net of accumulated
depreciation of $6,849 and $6,871.................... 4,159 3,850
Deferred acquisition costs............................ 1,045 1,031
Excess of cost over net assets acquired............... 2,657 2,613
Other assets.......................................... 954 1,107
-------- --------
TOTAL ASSETS........................................ $227,924 $210,389
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses............ $137,406 $124,258
Unearned premiums..................................... 8,563 8,772
Policyholder dividends................................ 4,664 4,665
Reinsurance premiums payable.......................... 1,707 1,832
Funds withheld on ceded reinsurance................... 1,534 1,492
Other liabilities..................................... 4,229 3,548
-------- --------
TOTAL LIABILITIES................................... 158,103 144,567
Preferred stock ($0.10 par value; authorized
10,000,000 shares; none issued and outstanding)...... -- --
Common stock ($0.10 par value; authorized 20,000,000
shares; issued 15,370,894 shares; outstanding
15,360,255 shares)................................... 1,537 1,537
Additional paid-in capital............................ 46,131 46,131
Net unrealized gain on available-for-sale securities.. 5,195 639
Retained earnings..................................... 17,024 17,581
Treasury stock (Cost of 10,639 shares)................ (66) (66)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.......................... 69,821 65,822
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $227,924 $210,389
======== ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-28
<PAGE>

DANIELSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
----------------
1995 1996
------- -------
<S> <C> <C>
REVENUES:
Gross premiums earned..................................... $22,391 $12,901
Ceded premiums earned..................................... (3,859) (3,933)
------- -------
Net premiums earned....................................... 18,532 8,968
Trust fee income.......................................... 1,076 1,085
Net investment income..................................... 3,093 2,839
Other income.............................................. 294 333
------- -------
TOTAL REVENUES.......................................... 22,995 13,225
------- -------
LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses................. 16,895 8,586
Ceded losses and loss adjustment expenses................. (2,450) (1,915)
------- -------
Net losses and loss adjustment expenses................... 14,445 6,671
Policyholder dividends.................................... 137 44
Policy acquisition expenses............................... 3,930 2,539
General and administrative expenses....................... 3,832 3,401
------- -------
TOTAL LOSSES AND EXPENSES............................... 22,344 12,655
------- -------
Income before provision for income taxes.................... 651 570
Income tax provision........................................ 38 13
------- -------
NET INCOME.................................................. $ 613 $ 557
======= =======
EARNINGS PER SHARE OF COMMON STOCK AND COMMON EQUIVALENT
SHARE...................................................... $ .04 $ .03
======= =======
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-29
<PAGE>

DANIELSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 613 $ 557
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 536 298
Change in accrued investment income................... 253 578
Change in premiums and fees receivable................ 1,688 1,531
Change in reinsurance recoverables.................... 1,357 (1,149)
Change in reinsurance recoverable on unpaid losses.... (125) 3,014
Change in prepaid reinsurance premiums................ (239) (188)
Change in deferred acquisition costs.................. 67 14
Change in unpaid losses and loss adjustment expenses.. (1,565) (13,148)
Change in unearned premiums........................... (680) 209
Change in policyholder dividends payable.............. (391) 1
Change in reinsurance payables and funds withheld..... 538 83
Other, net............................................ (2,352) (895)
--------- ----------
Net cash (used in) operating activities............. (300) (9,095)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Fixed income maturities available-for-sale............ 997 --
Investments, matured or called:
Fixed income maturities held-to-maturity.............. 483 --
Fixed income maturities available-for-sale............ 2,932 5,194
Investments, purchased:
Fixed income maturities held-to-maturity.............. (170) --
Fixed income maturities available-for-sale............ (4,224) --
Proceeds of sale of branch office assets................ -- 71
Proceeds of sale of property and equipment.............. -- 60
Purchases of property and equipment..................... (90) (59)
--------- ----------
Net cash provided by (used in) investing
activities......................................... (72) 5,266
--------- ----------
Net decrease in cash and short term investments....... (372) (3,829)
Cash and short term investments at beginning of year.. 3,776 9,175
--------- ----------
Cash and short term investments at end of period...... $ 3,404 $ 5,346
========= ==========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-30
<PAGE>

DANIELSON HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
COMMON STOCK
Balance, beginning of year..................................... $ 1,537
----------
Balance, end of period......................................... 1,537
----------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year..................................... 46,131
----------
Balance, end of period......................................... 46,131
----------
NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES
Balance, beginning of year..................................... 5,195
Net (decrease)................................................. (4,556)
----------
Balance, end of period......................................... 639
----------
RETAINED EARNINGS
Balance, beginning of year..................................... 17,024
Net income..................................................... 557
----------
Balance, end of period......................................... 17,581
----------
TREASURY STOCK
Balance, beginning of year..................................... (66)
----------
Balance, end of period......................................... (66)
----------
TOTAL STOCKHOLDERS' EQUITY................................... $ 65,822
==========
COMMON STOCK, SHARES
Balance, beginning of year..................................... 15,370,894
----------
Balance, end of period......................................... 15,370,894
==========
TREASURY STOCK, SHARES
Balance, beginning of year..................................... 10,639
----------
Balance, end of period......................................... 10,639
==========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-31
<PAGE>

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 three
months ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. 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, 1995.

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. 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,
whether or not currently exercisable. Such average number of shares were
16,048,970 and 16,013,221 for the three months ended March 31, 1995 and 1996,
respectively.

3) INCOME TAXES

DHC files a Federal consolidated income tax return with its subsidiaries and
with certain trusts that assumed various former 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 franchise taxes.
The amount of these provisions is not material to the Consolidated Financial
Statements. Tax filings for these jurisdictions do not consolidate the
activity 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, 1995.

F-32
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Midland Financial Group, Inc.:

We have audited the consolidated balance sheets of Midland Financial Group,
Inc. and subsidiaries as of December 31, 1994 and 1995 and the related
consolidated statements of income (loss), changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of
Midland's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Midland
Financial Group, Inc. and subsidiaries as of December 31, 1994 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.

As discussed in note 1, Midland adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" in 1994.

KPMG Peat Marwick LLP

Memphis, Tennessee
March 22, 1996, except as to note 12,
which is dated May 31, 1996

F-33
<PAGE>

MIDLAND FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS:
Cash and equivalents........................................ $ 29,196 $ 12,479
Investment securities (note 3):
Held to maturity:
Fixed maturities, at amortized cost (fair value
$122,953).............................................. 129,287 --
Available for sale:
Equity securities, at fair value (cost $5,877 and
$13,039 respectively).................................. 5,533 13,408
Fixed maturities, at fair value (amortized cost $1,981
and $146,637, respectively)............................ 1,879 148,916
-------- --------
Total investments..................................... 136,699 162,324
Receivables:
Agents and insureds....................................... 17,252 39,741
Premium finance contracts................................. 1,523 365
Reinsurance--direct....................................... 9,624 17,165
assumed............................................. 1,241 654
Prepaid reinsurance premium............................... 561 21,207
Accrued investment income................................. 2,244 2,296
Deferred policy acquisition costs......................... 15,148 9,617
Equity investments in nonconsolidated companies........... 424 293
Furniture and equipment, at cost, net of accumulated
depreciation of $1,085 and $1,979, respectively.......... 2,518 3,398
Notes receivable (note 9)................................. 2,256 2,158
Deferred income taxes (note 7)............................ 1,042 3,813
Income taxes recoverable.................................. -- 5,414
Other assets.............................................. 2,092 2,607
-------- --------
$221,820 $283,531
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses (notes 4 and 5).. $ 56,858 $104,516
Unearned premiums (note 5)--direct.......................... 55,901 77,311
assumed..................................................... 6,479 5,162
Due to reinsurers (note 5).................................. -- 7,946
Notes payable (note 6)...................................... 40,000 27,000
Other liabilities........................................... 4,788 12,751
-------- --------
164,026 234,686
-------- --------
Stockholders' equity (note 13):
Common stock, no par value.
Authorized 50,000,000 shares; 5,344,222 and 5,389,022
shares issued, respectively.............................. 39,258 39,420
Additional paid-in capital................................ 1,887 1,887
Retained earnings......................................... 16,943 5,796
Unrealized appreciation (depreciation) of securities
available for sale, net.................................. (294) 1,742
-------- --------
57,794 48,845
Commitments and contingencies (notes 5, 10 and 11)
$221,820 $283,531
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-34
<PAGE>

MIDLAND FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(DOLLARS IN THOUSANDS--EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums earned (note 5).................... $ 55,272 $ 118,218 $ 172,394
Policy fees................................. 4,748 6,491 10,649
Investment income (note 2).................. 3,330 6,190 9,839
Net realized investment gains (losses)(note
3)......................................... 698 42 (3)
Other income................................ 461 545 167
---------- ---------- ----------
64,509 131,486 193,046
---------- ---------- ----------
EXPENSES:
Losses and loss adjustment expenses (notes 4
and 5)..................................... 38,628 84,311 152,103
Policy acquisition costs.................... 12,494 31,431 50,070
Operating expenses.......................... 3,547 3,745 6,368
Interest.................................... 52 970 1,880
Amortization of intangible assets........... 106 129 135
---------- ---------- ----------
54,827 120,586 210,556
Income (loss) before provision for income
taxes and equity interest................ 9,682 10,900 (17,510)
Provision for income taxes (benefit) (note
7)........................................... 2,620 2,980 (7,445)
---------- ---------- ----------
Income (loss) before equity interests....... 7,062 7,920 (10,065)
Equity interests.............................. 6 5 (6)
---------- ---------- ----------
Net income (loss)........................... $ 7,068 $ 7,925 $ (10,071)
========== ========== ==========
PER SHARE DATA:
Net income (loss)........................... $ 1.34 $ 1.45 $ (1.88)
========== ========== ==========
Weighted average common shares outstanding.. 5,305,824 5,477,666 5,369,461
========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-35
<PAGE>

MIDLAND FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
-------------------
SHARES
ISSUED ADDITIONAL UNREALIZED
AND PAID-IN RETAINED APPRECIATION
OUTSTANDING AMOUNT CAPITAL EARNINGS (DEPRECIATION) TOTAL
----------- ------- ---------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1992................... 4,346,123 $35,392 $1,887 $ 2,483 $ 118 $ 39,880
Net income.............. -- -- -- 7,068 -- 7,068
Warrants exercised...... 872,505 3,429 -- -- -- 3,429
Options exercised....... 70,686 231 -- -- -- 231
Appreciation of equity
securities............. -- -- -- -- 12 12
--------- ------- ------ -------- ------ --------
Balances at December 31,
1993................... 5,289,314 39,052 1,887 9,551 130 50,620
Net income.............. -- -- -- 7,925 -- 7,925
Cash dividends paid
($.10 per share)....... -- -- -- (533) -- (533)
Options exercised....... 14,000 46 -- -- -- 46
Warrants exercised...... 40,908 160 -- -- -- 160
Change in fair value of
securities available
for sale net of tax of
$231................... -- -- -- -- (424) (424)
--------- ------- ------ -------- ------ --------
Balances at December 31,
1994................... 5,344,222 39,258 1,887 16,943 (294) 57,794
Net (loss).............. -- -- -- (10,071) -- (10,071)
Cash dividends paid
($.20 per share)....... -- -- -- (1,076) -- (1,076)
Options exercised....... 44,800 162 -- -- -- 162
Change in fair value of
securities available
for sale net of tax of
$1,058................. -- -- -- -- 2,036 2,036
--------- ------- ------ -------- ------ --------
Balances at December 31,
1995................... 5,389,022 $39,420 $1,887 $ 5,796 $1,742 $ 48,845
========= ======= ====== ======== ====== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-36
<PAGE>

MIDLAND FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 7,068 $ 7,925 $(10,071)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Net realized (gains) losses on securities....... (698) (42) 3
Gain on disposal of fixed assets................ -- -- (33)
Depreciation.................................... 353 550 894
Amortization of intangibles..................... 139 351 285
Amortization of discounts and premiums.......... 264 673 529
Deferred taxes.................................. (249) (526) (3,828)
Changes in assets and liabilities:
Agent and insured receivables, net.............. (2,089) (10,983) (22,489)
Reinsurance receivables......................... (7,414) 12,826 (27,600)
Premium finance receivables..................... (256) (716) 1,158
Accrued interest receivable..................... (545) (1,085) (52)
Deferred policy acquisition costs............... (5,541) (8,062) 5,531
Other assets.................................... (677) (527) (868)
Unpaid losses and loss adjustment expenses...... 18,576 21,571 47,658
Unearned premiums............................... 24,176 23,505 20,093
Due to reinsurers............................... (2,246) (8) 7,946
Other liabilities............................... 1,582 430 7,461
Income taxes.................................... 100 593 (5,854)
-------- -------- --------
Net cash provided by operating activities........ 32,543 46,475 20,763
-------- -------- --------
Cash flows from investing activities:
Maturities and calls of securities
--held to maturity.............................. 1,145 4,985 3,260
--available for sale............................ -- 251 1,909
Sales of securities
--held to maturity.............................. 13,820 3,160 --
--available for sale............................ -- 5,720 15,274
Purchases of securities
--held to maturity.............................. (42,824) (67,139) (29,356)
--available for sale............................ -- (7,884) (13,208)
Investments in nonconsolidated companies......... 572 (14) 131
Fixed asset additions............................ (1,104) (1,414) (2,071)
Fixed asset disposals............................ -- -- 329
Investment in insurance programs................. (342) (404) 68
-------- -------- --------
Net cash used in investing activities............ (28,733) (62,739) (23,664)
-------- -------- --------
Cash flows from financing activities:
Notes payable to banks........................... 20,000 30,000 10,000
Note receivable from sale of equity investment... (405) 72 91
Notes receivable from others..................... (1,674) (249) 7
Proceeds from exercise of common stock warrants.. 3,429 160 --
Proceeds from issuance of common stock options... 231 46 162
Repayment of debt................................ (286) (10,000) (23,000)
Dividend to stockholders......................... -- (533) (1,076)
Payments received on notes from stockholders..... 94 -- --
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... 21,389 19,496 (13,816)
-------- -------- --------
Net increase (decrease) in cash and equivalents.. 25,199 3,232 (16,717)
Cash and equivalents:
Beginning of year............................... 765 25,964 29,196
-------- -------- --------
End of year..................................... $ 25,964 $ 29,196 $ 12,479
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................................ $ 4 $ 936 $ 1,378
Income taxes.................................... 3,020 2,739 2,225
Noncash investing and financing activities:
Transfers to securities available for sale...... -- -- 149,190
Unrealized gain (loss) on securities available
for sale....................................... -- (655) 3,094
</TABLE>
See accompanying notes to consolidated financial statements.

F-37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1993, 1994 AND 1995

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Midland
Financial Group, Inc. (the "Company") and its subsidiaries, except Agents'
Financial Services, Inc. a 40% owned affiliate ("AFS"). Midland's investment
in AFS is carried at cost plus its equity in the undistributed earnings since
date of acquisition. All significant intercompany transactions have been
eliminated.

In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and expenses
for the period then ended.

Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the liability for unpaid loss
and loss adjustment expense and the recoverability of deferred policy
acquisition costs. In connection with the determination of these items,
management uses actuarial projections, historical data and current business
conditions to formulate estimates, including assumptions related to the
ultimate cost to settle claims. These estimates by their nature are subject to
uncertainties for various reasons. Midland's results of operations and
financial condition could be adversely affected should the ultimate payments
required to settle claims be materially in excess of the reserves currently
provided.

Nature of Operations

Midland writes non-standard personal automobile insurance and commercial
automobile insurance for small businesses through six Company-owned and three
independent general agencies. These general agencies market Midland's products
through approximately 8,500 independent insurance agents in 20 states,
primarily in the southeastern and southwestern regions of the United States.
During 1995, Midland wrote a significant amount of business in Arizona,
California and Florida representing 13%, 19% and 14%, respectively, of gross
written premiums.

The nature of the non-standard automobile insurance business is such that
Midland can from time to time, experience abnormally high levels of claims
payouts in the event of unusual weather and other conditions, such as heavy
rain, hail, wind storms and flooding. Midland utilizes both quota share and
excess of loss reinsurance coverage and catastrophic reinsurance options to
limit its exposure on these risks.

Increasing public interest in the availability and affordability of
insurance has prompted legislative, regulatory and judicial activity in
several states. This includes efforts to contain insurance prices, restrict
underwriting practices and risk classifications, mandate rate reductions and
refunds and generally expand regulation affecting the insurance industry.
These regulatory and judicial activities could impact Midland's premium
volume.

Midland manages its credit risk on its investment securities by maintaining
a highly-diversified investment portfolio with limited concentrations in any
given region or industry. Interest rate risk is managed through a combination
of highly liquid debt instruments purchased with an original maturity of three
months or less or fixed maturity securities with an average contractual
maturity of approximately 5 years.

Premiums and Policy Fees

Premiums, net of amounts ceded to reinsurers, are recognized as income
ratably over the terms of the policies. Unearned premiums represent premiums
applicable to the unexpired terms of the policies.

F-38
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

Midland operates six general agencies which receive non-refundable fees for
processing policy applications. Such income is recognized when the effort is
completed, generally in the month received.

Reinsurance

In the normal course of business, Midland seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liability associated with
the reinsured policy.

Deferred Policy Acquisition Costs

The costs of selling policies (principally commissions and premium taxes)
are deferred and reduced by the amount recovered from reinsurers through
ceding commissions. The net acquisition costs deferred are amortized to
expense over the periods in which the related premiums are earned. In
addition, during 1995, Midland wrote off approximately $5.4 million of these
costs related to premium reserve deficiencies. Anticipated losses and loss
adjustment expenses and investment earnings, based on past experience, are
considered in determining the recoverable acquisition costs to be deferred.

Net deferred policy acquisition costs were (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period................... $ 1,545 $ 7,086 $ 15,148
Acquisition costs deferred..................... 18,035 39,493 44,539
Amortized to expense during the period......... (12,494) (31,431) (50,070)
-------- -------- --------
Balance, end of period......................... $ 7,086 $ 15,148 $ 9,617
======== ======== ========
</TABLE>

Unpaid Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses includes
reported and incurred but not reported losses and loss adjustment expenses.

Losses and loss adjustment expenses include the estimated costs of
investigating and settling unpaid losses. Such amounts are determined on the
basis of claims adjusters' evaluations and other estimates, and accordingly,
there can be no assurance that the ultimate liability will not vary from such
estimates.

Investment Securities

Effective January 1, 1994, Midland adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115). Under SFAS No. 115, fixed maturity securities for
which a company has the ability and management has the positive intent to hold
to maturity are classified as held to maturity securities and are reported at
amortized cost. Fixed maturity and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and are reported at fair value, with unrealized gains and
losses included in earnings. Fixed maturity and equity securities not
classified as either held to maturity securities or trading securities are
classified as available for sale securities and are reported at fair value,
with unrealized gains and losses (net of deferred taxes) charged or credited
as a separate component of stockholders' equity.

F-39
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

During September 1995, Company management changed its intent with respect to
securities classified as held to maturity and reclassified all securities in
its held to maturity portfolio to available for sale. The transfer had no
impact on earnings. However, a $1.6 million fair value adjustment was
recorded, resulting in a net $1 million increase in stockholders' equity, net
of tax. Realized gains and losses on the sale of investments are recognized in
the determination of net income or loss on the basis of specific
identification. Amortization of premiums and accretion of discounts are
computed using the interest method. Changes in the valuation of securities
which are considered other than temporary are recorded as losses in the period
recognized.

Income Taxes

Midland files a consolidated federal income tax return with its wholly-owned
subsidiaries.

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Depreciation

Depreciation on furniture and equipment is provided on a straight-line basis
over the estimated useful lives of the assets (three to seven years).

Cash Equivalents

Midland considers all highly liquid debt instruments purchased with an
original maturity at acquisition of three months or less to be cash
equivalents.

Earnings per Share

Earnings per common share are based on the weighted average number of common
shares outstanding, including common stock equivalents, during the periods
presented. Outstanding options and warrants are considered common stock
equivalents at that point where the market price exceeds the option price. The
resultant effect on earnings per share is calculated using the treasury stock
method. At December 31, 1995, these common stock equivalents were anti-
dilutive.

Fair Value Disclosures

The following methods were used to estimate the fair value of each class of
financial instruments for which it was practicable to estimate that value.
Fixed maturities and equity securities are valued using quoted market prices,
if available. If a quoted market price is not available, fair value is
estimated using quoted market prices of similar securities. Due to the
relatively short-term nature of cash, short-term investments, accounts
receivable, and accounts payable, their carrying amounts are reasonable
estimates of fair value. Fair value of long-term debt is approximately equal
to its recorded value. The fair value of Catastrophe Insurance Contracts is
determined based on the settlement price on the date of valuation as
determined by the exchange on which the contract was traded.

Recent Accounting Pronouncements

SFAS No. 121 "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of," issued in March, 1995, provides guidance
for recognition of impairment losses related to long-

F-40
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

lived assets, and certain intangibles and related goodwill. The Statement is
effective for fiscal years beginning after December 15, 1995.

SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in
October, 1995, and provides for a fair value method of accounting for stock-
based compensation arrangements rather than the intrinsic value method now
followed. Adoption of the fair value method for purposes of preparing basic
financial statements is not required although disclosure or the effect of such
adoption is. The Statement is effective for options awarded after December 15,
1995.

Management believes the adoption of the above-mentioned statements will not
have a material impact on Midland's consolidated financial statements.

Reclassifications

Certain items in the prior years' financial statements have been
reclassified to conform with the 1995 presentation.

(2) INVESTMENT INCOME

Components of investment income were as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities................................. $ 2,837 $ 5,318 $ 7,699
Equity securities................................ 194 164 607
Call options on U.S. Treasury Notes.............. -- 359 (361)
Cash and cash equivalents........................ 299 349 1,894
-------- -------- --------
Investment income.............................. $ 3,330 $ 6,190 $ 9,839
======== ======== ========
</TABLE>

(3) INVESTMENT SECURITIES

Realized and unrealized investment gains and losses were as follows (in
thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
---------------- --------
<S> <C> <C> <C>
Realized gains:
Fixed maturities............................... $ 104 $ 7 $ 764
Equity securities.............................. 965 530 227
------- -------- -------
Total gains.................................. 1,069 537 991
------- -------- -------
Realized losses:
Fixed maturities............................... 138 45 42
Equity securities.............................. 233 450 10
Catastrophe Insurance Contracts................ -- -- 942
------- -------- -------
Total Losses................................. 371 495 994
------- -------- -------
Net realized securities gains (losses)......... $ 698 $ 42 $ (3)
======= ======== =======
Change in unrealized gains (losses):
Fixed maturities............................... $ 1,272 $ (7,812) $ 8,715
======= ======== =======
Equity securities.............................. $ 12 $ (931) $ 713
======= ======== =======
</TABLE>

F-41
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

The amortized cost and estimated fair value of securities follow (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Obligations of the U.S. Government
and its agencies................... $ 1,521 $ -- $ 70 $ 1,451
Obligations of states and political
subdivisions....................... 85,749 15 3,200 82,564
Corporate notes and debentures...... 3,667 9 189 3,487
Redeemable preferred stock.......... 38,350 1 2,900 35,451
-------- ------ ------- --------
$129,287 $ 25 $ 6,359 122,953
-------- ------ ------- --------
AVAILABLE FOR SALE:
Corporate notes and debentures...... 1,730 21 120 1,631
Redeemable preferred stock.......... 251 -- 3 248
Equity securities................... 5,877 145 489 5,533
-------- ------ ------- --------
7,858 166 612 7,412
-------- ------ ------- --------
$137,145 $ 191 $ 6,971 $130,365
======== ====== ======= ========
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Obligations of the U.S. Government
and its agencies................... $ 1,207 $ 8 $ -- $ 1,215
Obligations of states and political
subdivisions....................... 83,838 1,536 108 85,266
Corporate notes and debentures...... 19,722 125 37 19,810
Redeemable preferred stock.......... 41,870 1,064 309 42,625
Equity securities................... 13,039 483 114 13,408
-------- ------ ------- --------
$159,676 $3,216 $ 568 $162,324
======== ====== ======= ========
</TABLE>

The amortized cost and estimated fair value of fixed maturities by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties (in thousands).

<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
AVAILABLE FOR SALE:
Due in one year or less................................. $ 18,838 $ 18,858
Due after one year through five years................... 70,525 71,056
Due after five years through ten years.................. 37,938 39,242
Due after ten years..................................... 19,336 19,760
-------- --------
$146,637 $148,916
======== ========
</TABLE>

Proceeds from sales of securities during 1993 were $13,820,000. Gross gains
of $1,069,000 and gross losses of $371,000 were realized in 1993. In 1994,
held to maturity securities with an amortized cost of $3,163,000 were sold
resulting in realized losses of $3,000. All sales from the held to maturity
portfolio in 1994 were made

F-42
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

within three months of the contractual maturity of the security. Proceeds from
sales of securities available for sale during 1994 were $5,720,000. Gross
gains of $537,000 and gross losses of $492,000 were realized on those sales.
Proceeds from sales of securities available for sale during 1995 were
$15,274,000. Gross gains of $991,000 and gross losses of $52,000 were realized
on these sales.

Investments in fixed maturities on deposit with various regulatory bodies as
required by law are as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1994 1995
------ ------
<S> <C> <C>
Arkansas Commissioner of Insurance............................ $ 50 $ 50
California Commissioner of Insurance.......................... -- 200
Georgia Commissioner of Insurance............................. 25 25
Louisiana Commissioner of Insurance........................... 70 140
Nevada Commissioner of Insurance.............................. 250 250
New Mexico Department of Insurance............................ 375 375
Oklahoma Commissioner of Insurance............................ 100 100
South Carolina Department of Insurance........................ 650 650
Tennessee Department of Insurance............................. $1,675 $2,025
------ ------
$3,195 $3,815
====== ======
</TABLE>

Investments in securities of a single issuer aggregating more than 10% of
stockholders' equity follow (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1994 1995
------ ------
<S> <C> <C>
Shelby County, TN.............................................. $5,895 $6,670
Metro Nashville, Davidson County, TN........................... 5,733 6,570
Memphis, TN Electric System.................................... 4,575 5,206
</TABLE>

F-43
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

(4) UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Midland's consulting actuary has determined that Midland's liability for
unpaid losses and loss adjustment expenses is 2% less than the actuary's
selected ultimate liability and falls within an acceptable range of actuarial
estimates.

The following table presents information on changes in the reserve for
losses and loss adjustment expenses of Midland for the periods presented (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Reserve for losses and loss adjustment expenses at
beginning of year................................ $16,711 $35,287 $ 56,858
Less reinsurance recoverables on unpaid losses and
loss adjustment expenses......................... 9,590 13,634 6,880
------- ------- --------
Net reserves for losses and loss adjustment
expenses at beginning of year.................... 7,121 21,653 49,978
Add:
Provision for losses and loss adjustment
expenses occurring:
Current year.................................. 38,341 82,241 141,130
Prior years................................... 287 2,070 10,973
------- ------- --------
Total....................................... 38,628 84,311 152,103
Less:
Loss and loss adjustment expense payments for
claims occurring:
Current year.................................. 17,334 39,542 73,493
Prior years................................... 6,762 16,444 36,383
------- ------- --------
Total....................................... 24,096 55,986 109,876
------- ------- --------
Net reserve for losses and loss adjustment
expenses at end of year.......................... 21,653 49,978 92,205
Plus reinsurance recoverables on unpaid losses and
loss adjustment expenses......................... 13,634 6,880 12,311
------- ------- --------
Reserve for losses and loss adjustment expenses at
end of year...................................... $35,287 $56,858 $104,516
======= ======= ========
</TABLE>

The reinsurance recoverables on paid losses and loss adjustment expenses are
$2,762, $2,744 and $4,854 for 1993, 1994, and 1995, respectively.

During 1995, Midland strengthened its prior year loss reserves by
approximately $11.0 million due to adverse development in both the commercial
and personal programs and due to higher than anticipated LAE. This adverse
development was impacted by a processing backlog in the western region claims
office which occurred in the first half of 1995 related to the Arizona and
California full-coverage programs.

(5) REINSURANCE

During 1993 the wholly-owned property and casualty insurance subsidiaries of
Midland maintained "quota share" reinsurance agreements whereby a portion of
premiums written, incurred losses and loss adjustment

F-44
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

expenses were ceded to other insurance companies. These quota-share
reinsurance agreements were not utilized in 1994. At September 30, 1995, these
subsidiaries entered into a 30% quota share agreement with Kemper Reinsurance
Company, including a cession of unearned premiums as of that date. This
agreement provides reinsurance on Midland's personal automobile programs,
which generally are for mandatory limits of liability and other coverages of
no more than $25,000 per person and $50,000 per accident for bodily injury,
and in the range of $10,000 to $20,000 for property damage.

The commercial and coastal dwelling programs of Midland provide property and
liability limits of up to $1,000,000. Through excess of loss reinsurance,
Midland limits its retention on any one risk to $375,000.

Under reinsurance agreements, in the event that the reinsuring company is
unable to pay its portion of the loss based on the coverage ceded, Midland
would be responsible for the entire loss. Midland evaluates the financial
viability of its reinsurers on a regular basis and has no reason to believe
that these reinsurers will be unable to pay their portion of the loss based on
the coverage ceded.

Amounts ceded under all reinsurance agreements were as follows (in
thousands)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Premiums written.................................. $ 24,648 $ 1,359 $ 38,372
Premiums earned................................... 25,461 10,801 17,719
Losses and loss adjustment expenses incurred...... 18,936 7,279 14,770
Unearned premiums................................. 9,996 554 21,207
Unpaid losses and loss adjustment expenses........ 13,634 6,880 12,311
</TABLE>

(6) NOTES PAYABLE AND OTHER DEBT

Components of notes payable were as follows (in thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Short-term borrowings from bank; 8.5% interest;
Repaid January 1995...................................... $20,000 --
Bank credit facility, $30 million, secured by subsidiary
operations:
Fixed portion of borrowings; 7.11% interest.............. 10,000 --
Floating portion of borrowings; LIBOR + 2.25% (8.5% at
December 31, 1995)...................................... 10,000 $27,000
------- -------
$40,000 $27,000
======= =======
</TABLE>

At September 30, 1995, Midland defaulted on certain financial covenants
related to the bank credit facility, due to generating a net loss from
operations. Midland has since been unable to cure the default. On January 25,
1996, Midland signed an agreement with the lender to change the entire
facility to a floating interest rate equivalent to 8.5% retroactive to October
1, 1995. In addition, Midland paid a $67,500 amendment fee and the lender
fixed the facility at $27 million decreasing with future principal payments.

Effective March 1, 1996, the loan agreement was restructured, with the
payment of an additional $50,000 fee. The floating rate was adjusted to LIBOR
+ 3.25% through June 30, 1996 and LIBOR + 3.50% thereafter.

In anticipation of the completion of Midland's proposed merger with
Danielson Holding Corporation, further discussed at Note 15, "Subsequent
Events," the lender has agreed to waive a principal payment

F-45
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

scheduled for March 31, 1996. Principal is payable quarterly thereafter
through June 1, 1998. Interest is payable quarterly March 31, 1996 through
June 30, 1998.

(7) INCOME TAXES

The components of income tax expense (benefit) are as follows (in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 2,705 $ 3,311 $ (3,845)
State.......................................... 164 195 228
------- ------- --------
2,869 3,506 (3,617)
Deferred:
Federal........................................ (226) (528) (3,695)
State.......................................... (23) 2 (133)
------- ------- --------
(249) (526) (3,828)
------- ------- --------
Total............................................ $ 2,620 $ 2,980 $ (7,445)
======= ======= ========
</TABLE>

Income tax expense differs from the amounts computed by applying the federal
income tax rates to income before income taxes and equity interests due to the
following (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Tax expense at statutory rate................... $ 3,292 $ 3,715 $ (5,953)
State taxes (net of federal deduction).......... 93 129 63
Dividend received deduction..................... (172) (343) (661)
Tax exempt interest............................. (562) (802) (1,180)
Other, net...................................... (31) 281 286
------- ------- --------
$ 2,620 $ 2,980 $ (7,445)
======= ======= ========
</TABLE>

F-46
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994, respectively, are presented below in thousands:

<TABLE>
<CAPTION>
1994 1995
------- -------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Unearned premiums...................................... $ 4,327 $ 4,244
Discounted losses...................................... 1,957 3,407
Unrealized securities losses........................... 151 --
Deferred compensation.................................. -- 253
Net operating loss carryforwards....................... -- 248
Other.................................................. 253 192
------- -------
Total gross deferred tax asset....................... 6,688 8,344
Less valuation allowance............................. -- --
------- -------
Net deferred tax assets.............................. 6,688 8,344
Deferred tax liabilities:
Deferred acquisition costs............................. (5,301) (3,324)
Equipment, principally due to differences in deprecia-
tion.................................................. (95) (194)
Unrealized securities gains............................ -- (906)
Other.................................................. (250) (107)
------- -------
Total gross deferred tax liability................... (5,646) (4,531)
------- -------
Net deferred tax asset............................... $ 1,042 $ 3,813
------- -------
</TABLE>

Based upon the level of historical taxable income and projections for future
taxable income over periods which the deferred tax assets are deductible,
management believes it is more likely than not Midland will realize the
benefits of the deductible differences at December 31, 1995.

(8) RELATED PARTY TRANSACTIONS

During 1993, 1994 and 1995, Midland paid fees of $201,000, $324,000, and
$351,000, respectively, to an investment company which has certain
stockholders and directors that are also stockholders and directors of
Midland.

Midland has a line of credit to an affiliate which bears interest at prime
plus 3%. Balances outstanding related to this line of credit were $1.3 million
and $1.2 million at December 31, 1994 and 1995, respectively.

(9) EMPLOYEE BENEFIT AND INCENTIVE PLANS

In April, 1989, Midland adopted a nonqualified incentive stock option plan
for officers and key employees. The plan provided for the granting of options
to purchase up to 154,000 shares of common stock of Midland at prices not less
than fair market value, as determined by the Board of Directors, on the date
options are granted. The options vest ratably over a 5 year period and are
exercisable up to 10 years from the dates of grant. In connection with the
granting of an option, Midland also granted a companion stock appreciation
right ("SAR"). The SAR gives the employee the right to surrender for
cancellation all or part of the shares covered by the option, to the extent
such option is exercisable. In the event of surrender, an employee is entitled
to receive payment of up to 100% of the option exercise price. Options with
related SAR's were granted as follows: 1989, 59,486 shares at $3.26 per share;
1990, 42,000 shares at $3.32; and 1991, 42,000 at $3.71. During 1993, options
to purchase 70,686 shares were exercised for a total of $231,000. During 1994,
options to purchase 14,000 shares

F-47
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

were exercised for a total of $46,410. During 1995, options to purchase 44,800
shares were exercised for a total of $162,000.

In November, 1992, the plan was frozen with the simultaneous adoption of a
long-term incentive plan for officers and directors. The remaining options
available for grant under the previous plan were combined with new options
available for grant for a total of 136,514 options available. In 1993 and in
1995, the stockholders approved share increases in the number of shares
available under this plan totalling 500,000. Options under the 1992 plan are
granted at the fair market value at the date of grant, vest over varying
periods at the discretion of the committee, and expire 10 years from the date
of grant. Options to purchase 129,500 shares were granted in 1992 at an option
price of $14 per share. Options to purchase 222,000 shares were granted in
1993 at prices from $20.25 to $21.625. Options to purchase 35,000 shares were
granted in 1994 at an option price of $14.75. Options to purchase 157,000
shares were granted in 1995 at prices from $9.50 per share to $18.75 per
share. No options have been exercised with respect to the plan.

Midland has a defined contribution plan (Savings Plan) intended to be a
qualified plan under Section 401(a) and 401(k) of the Internal Revenue Code.
Eligible participants include all officers and employees with six months of
service. Employee contributions (up to 15% of defined compensation) are
matched 50% by Midland up to a limit of 2.5% of the participant's
compensation. The participants vest in Midland's matched contributions in
equal increments over a four-year period. Matching expense related to the
savings plan for the years ended December 31, 1993, 1994 and 1995 were
approximately $84,000, $120,883, and $99,700, respectively.

In 1994, Midland adopted a deferred compensation plan under which certain
employees may defer up to 25% of their compensation and its directors may
defer 100% of their compensation. Midland matches 100% of the employee
deferrals up to 10% of their compensation in years in which Midland's net
income reaches certain levels. Amounts deposited into these plans are
unsecured liabilities of Midland. The total liability included in accrued
premium taxes and other expenses for these plans at December 31, 1995 and 1994
was $979,174 and $373,485, respectively. The contribution matching expense
related to the plan for the year ended December 31, 1994 was $114,698. Due to
the net loss for the year ended December 31, 1995, Midland was not required to
match employee contributions. In connection with the administration of this
plan, Midland has purchased Company-owned life insurance policies insuring the
lives of certain directors, officers and key employees. The purpose of these
policies is to fund the payment of benefits to the participants.

(10) LEGAL PROCEEDINGS

In August 1994, Midland and three of its wholly owned subsidiaries were
named in a civil lawsuit on behalf of two Chapter 13 debtors and as putative
representatives of a plaintiff's class challenging the validity of the Chapter
13 automobile insurance program in Alabama. The plaintiffs sought
certification of a class, a declaration that the insurance policies violate
Alabama statutes, a permanent injunction against further implementation of the
Chapter 13 automobile insurance program in Alabama, and reimbursement of
premiums received by Midland under the Chapter 13 automobile program in
Alabama. Midland and its subsidiaries denied the material allegations of the
complaint and were awarded Dismissal by Summary Judgement in August 1995. The
plaintiffs filed a motion for reconsideration which was denied in October
1995. The plaintiffs have appealed this determination and no decision has been
rendered to date.

F-48
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

Midland and its subsidiaries are involved in asserted claims in the normal
course of business. Management believes the outcome of these matters in the
aggregate will not have a material adverse effect on the consolidated
financial statements of Midland.

(11) COMMITMENTS AND CONTINGENT LIABILITIES

Catastrophe Insurance Contracts

Midland utilizes catastrophe insurance futures and options (CAT contracts)
to help manage Midland's risk from catastrophic losses. These CAT contracts
are traded on the Chicago Board of Trade and are designed to track insured
catastrophic losses on a regional and nationwide basis. The CAT contracts are
indexed to loss notices as determined by Insurance Services Office, Inc. (ISO)
using data obtained from designated reporting companies. ISO considers losses
reported to the designated companies as of the end of the quarter following
the loss quarter. ISO estimates quarterly premiums based on the most recent
statutory annual statements filed by the reporting companies. Since the
premium is known and constant during the life of the CAT contract, any changes
in CAT contract prices are due entirely to changes in the amount of reported
losses.

The CAT program is used by management as a supplement to reinsurance
treaties. Depending on CBOT quotes and conditions in the traditional
catastrophic reinsurance market, the standardized nature of the CAT contracts
provides management the opportunity to "shop" for better price and coverage in
specific regions that a reinsurance company may not be able to offer in a
timely fashion.

The program has been used to reduce Midland's exposure to catastrophic risk
with the ISO September Eastern contract at the CBOT. These particular
contracts focus on the Atlantic coast and gulf regions of the country. It is
in certain areas of those regions that management believes it has catastrophic
exposure that is too costly to reinsure "traditionally". The contracts are
based on industry wide loss ratio calculated by the ISO. Management purchases
or sells calls or puts at various loss ratios to be long the loss ratio. This
way, if the industry is suffering from catastrophic losses the loss ratio will
increase. Management believes that gains in the value of the CAT contracts
resulting from catastrophic losses will offset underwriting losses. Should the
value of the contracts decline as a result of lower industry losses,
Management believes that the effect will be offset by lower underwriting
losses.

During 1995, Midland wrote 384 contracts with a $9.6 million notional value,
purchased 272 contracts with a $6.8 million notional value, and terminated 193
contracts with a $4.8 million notional value. Midland realized gains of
$855,000 on terminated contracts during 1995. At December 31, 1995, Midland
had unrealized losses of $1.8 million on open contracts. The contracts are
carried at fair value at December 31, 1995. The table below summarizes the
open futures and options positions and the owned options at December 31, 1995:

<TABLE>
<CAPTION>
PREMIUM
NUMBER OF NOTIONAL STRIKE EXPIRATION RECEIVED FAIR
CONTRACTS AMOUNT PRICE DATE (PAID) VALUE
--------- ----------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Call options..... 129 $ 3,225,000 70 4/30/96 $ (261,064) $ --
Put options...... 12 300,000 70 4/30/96 93,627 184,500
Call options..... 184 4,600,000 50 4/30/96 581,555 --
Futures.......... 138 3,450,000 70 4/30/96 (2,415,000) 389,970
--- ----------- ----------- --------
463 $11,575,000 $(2,000,882) $574,470
=== =========== =========== ========
</TABLE>

Leases

Midland and its subsidiaries lease office space under noncancellable
operating leases expiring through the year 2006. Rent expense under the leases
was approximately $460,000, $669,000, and $930,000 for the years

F-49
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

ended December 31, 1993, 1994 and 1995, respectively. Future rental
commitments under noncancellable operating leases aggregate approximately
$5,632,000 at December 31, 1995 and are payable as follows (in thousands):

<TABLE>
<S> <C>
1996............................................................... $1,294
1997............................................................... 1,262
1998............................................................... 769
1999............................................................... 405
2000............................................................... 326
2001 and beyond.................................................... 1,576
------
$5,632
======
</TABLE>

(12) REGULATORY EXAMINATION

The State of Tennessee Department of Commerce and Insurance (The Examiners)
have completed the fieldwork in connection with their regular examination of
Midland Risk Insurance Company (MRIC) and Specialty Risk Insurance Company
(SRIC) as of December 31, 1994 and issued their report of findings. The
Examiners have questioned the admissibility of certain of the assets of MRIC
and SRIC, including MRIC's $9 million equity investment in SRIC, for statutory
capital purposes. The aggregate amount of assets whose admissibility the
Examiners questioned was approximately $10 million and $9.6 million at
December 31, 1995 and 1994, respectively. Midland's management has responded
to the Examiner's report and indicated that they believe the assets should be
admitted for statutory capital purposes. In addition, MRIC and SRIC continue
to prepare financial statements for statutory reporting purposes, which admit
the assets questioned by the Examiners. Midland is unable to determine the
outcome, if any, of the matters raised by the Examiners. However, management
believes that the affect of not admitting such assets would not materially
impact Midland's operations because the resulting impact on Midland's risk-
based capital position and capital adequacy ratio is not expected to affect
Midland's ability to continue its anticipated level of premium writings.

F-50
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

(13) STATUTORY CAPITAL AND SURPLUS

Statutory accounting practices for insurance companies differ somewhat from
generally accepted accounting principles. Reconciliations of statutory capital
and surplus and income, as determined using statutory accounting principles,
to the amounts included in the accompanying financial statements is as
follows:

<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1994 1995
-------- --------
<S> <C> <C>
Combined statutory capital and surplus.................. $ 62,558 $ 56,588
GAAP adjustments:
Deferred policy acquisition costs..................... 15,148 9,617
Unrealized appreciation on fixed maturities........... -- 1,957
Deferred income taxes................................. (5,549) 4,051
Other................................................. 345 760
-------- --------
GAAP stockholders' equity........................... 72,502 72,973
Noninsurance company adjustments:
Note payable.......................................... (20,000) (27,000)
Other................................................. 5,292 2,872
-------- --------
Stockholders' equity as presented herein............ $ 57,794 $ 48,845
======== ========
<CAPTION>
YEAR ENDED
------------------
1994 1995
-------- --------
<S> <C> <C>
Combined statutory net income (loss).................... 2,068 (9,617)
GAAP adjustments:
Deferred policy acquisition costs..................... 7,159 (5,292)
Deferred income taxes................................. (2,727) 3,200
-------- --------
GAAP net income..................................... 6,500 (11,709)
Noninsurance company adjustments........................ 1,425 1,638
-------- --------
Net income (loss) as presented herein................. $ 7,925 $(10,071)
======== ========
</TABLE>

MRIC cannot declare dividends in excess of the greater of 10% of statutory
capital and surplus or the net income for the preceding fiscal year unless
approval is obtained from the Tennessee Department of Insurance. In addition,
MRIC is required by the State of Tennessee to maintain statutory capital and
surplus of at least $2,000,000.

F-51
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1993, 1994 AND 1995

(14) QUARTERLY FINANCIAL DATA (UNAUDITED)

Presented below is unaudited quarterly financial information for 1994 and
1995. The information has been restated for the effect of reclassifying
securities in the held to maturity portfolio to the available for sale
portfolio during the third quarter of 1995 (see Note 1).

<TABLE>
<CAPTION>
1994
------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total income.............................. $ 24,359 $ 32,153 $ 36,199 $ 38,775
Total expenses............................ 21,126 28,600 32,287 38,573
Net income................................ 2,258 2,454 2,637 576
Net income per share...................... .41 .45 .48 .11
<CAPTION>
1995
------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total investments
--held to maturity...................... $139,330 $144,102 -- --
--available for sale.................... 8,793 8,828 $160,203 $162,324
Total assets.............................. 219,977 254,276 287,438 283,531
Total stockholders' equity................ 60,407 63,206 58,111 48,845
Total income.............................. 42,870 50,691 55,321 44,164
Total expenses............................ 39,348 47,066 64,554 60,530
Net income (loss)......................... 2,609 2,795 (5,723) (9,752)
Net income (loss) per share............... .48 .51 (1.05) (1.81)
</TABLE>

(15) SUBSEQUENT EVENTS

On February 9, 1996, Midland's Board of Directors suspended the policy
adopted in August, 1994 of paying a quarterly dividend on its common stock.

On February 26, 1996, Midland entered into an Agreement and Plan of Merger
with Danielson Holding Corporation. The merger will be accounted for by the
purchase method of accounting. The Agreement calls for holders of Midland's
stock to receive consideration of 1.6 times audited book value at December 31,
1995, in a combination of cash, preferred stock and common stock. Midland
anticipates completion of the merger during the second quarter of 1996.

Effective March 1, 1996, Midland entered into an Amended and Restated Loan
Agreement with its lender, SunTrust Bank of Nashville. This agreement provides
for principal payments quarterly June 30, 1996 through June 30, 1998 and
interest payments quarterly March 31, 1996 through June 30, 1998. The loan
agreement includes new financial covenants, with which management expects to
comply.

F-52
<PAGE>

MIDLAND FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED

BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DEC. 31, MARCH 31,
1995 1996
-------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and equivalents....................................... $ 12,479 $ 3,925
Investments available for sale at fair value:
Equity securities........................................ 13,408 14,838
Fixed maturities......................................... 148,916 147,163
-------- --------
162,324 162,001
Receivables:
Agents and insureds...................................... 39,741 38,473
Finance contracts receivable............................. 365 282
Reinsurance receivables--direct.......................... 17,165 18,570
--assumed................................................ 654 432
Prepaid reinsurance premium................................ 21,207 21,408
Accrued investment income.................................. 2,296 2,067
Deferred policy acq. costs................................. 9,617 9,440
Net furniture, equip, fixtures............................. 3,398 3,334
Notes receivable........................................... 2,158 2,743
Subsidiary investments..................................... 293 2,267
Deferred income taxes...................................... 3,813 4,350
Income taxes recoverable................................... 5,414 5,624
Other assets............................................... 2,607 4,659
-------- --------
Total Assets........................................... $283,531 $279,575
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses................. $104,516 $107,716
Unearned premiums and fees--direct......................... 77,311 78,710
- --assumed.................................................. 5,162 3,172
Due to reinsurers.......................................... 7,946 3,473
Notes payable and other debt............................... 27,000 26,000
Accrued premium taxes and other expenses................... 12,751 9,923
-------- --------
Total Liabilities...................................... 234,686 228,994
-------- --------
Common stock............................................... 39,420 41,625
Additional paid-in capital................................. 1,887 1,887
Retained earnings.......................................... 5,796 6,354
Unrealized depr. on equity................................. 1,742 715
Total Stockholders' Equity............................. 48,845 50,581
-------- --------
Total Liabilities and Stockholders' Equity........... $283,531 $279,575
======== ========
</TABLE>

F-53
<PAGE>

MIDLAND FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Gross premiums written.................................. $ 49,083 $ 51,890
========= =========
Net premiums written.................................... $ 48,293 $ 38,271
========= =========
Income:
Premiums earned....................................... $ 38,787 $ 39,064
Commissions and policy fees........................... 1,983 3,080
Investment income..................................... 2,064 2,159
Net realized investment gains......................... (30) 407
Other income.......................................... 66 21
--------- ---------
42,870 44,731
--------- ---------
Expenses:
Losses and loss adjustment expenses................... 27,786 32,147
Policy acquisition costs.............................. 9,671 9,746
Operating expenses.................................... 1,458 1,755
Interest.............................................. 402 629
Amortization of intangible assets..................... 31 36
--------- ---------
39,348 44,313
--------- ---------
Income before provision for income taxes and equity in-
terests................................................ 3,522 418
Provision for income taxes.............................. 879 (125)
--------- ---------
Income before equity interests.......................... 2,643 543
Equity interests........................................ 34 15
--------- ---------
Net income.............................................. $ 2,609 $ 528
========= =========
Net income per common share............................. $ .48 $ .10
========= =========
Weighted average common shares outstanding.............. 5,462 5,567
========= =========
</TABLE>

F-54
<PAGE>

MIDLAND FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Net cash flows from operating activities................... $ 6,094 $ (6,376)
-------- --------
Cash flows from investing activities:
Sales of investments..................................... 73 27,439
Purchases of investments................................. (11,346) (28,913)
Other.................................................... (135) (78)
-------- --------
Net cash used by investing activities.................... (11,408) (1,552)
-------- --------
Cash flows from financing activities:
Exercise of warrants and options......................... 28 --
Repayment of debt........................................ (21,000) (1,000)
Other.................................................... (246) 374
-------- --------
Net cash used by financing activities.................... (21,218) (626)
-------- --------
Cash, beginning of period.................................. 29,196 12,479
-------- --------
Cash, end of period........................................ $ 2,664 $ 3,925
======== ========
</TABLE>

F-55
<PAGE>

MIDLAND FINANCIAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the accounting policies in effect as of
December 31, 1995 as set forth in the annual consolidated financial
statements of Midland Financial Group, Inc. (the "Company"), of such date.
In the opinion of Management, all adjustments necessary for a fair
presentation of the condensed consolidated financial statements have been
included. Certain 1995 amounts have been reclassified to conform with the
1996 presentation. The results of operations for the three-month period
ended March 31, 1996, are not necessarily indicative of the results to be
expected for the full year.

The computations of earnings per share are based upon the weighted average
number of common shares outstanding during each period adjusted for the
assumed exercise of all outstanding stock options using the treasury stock
method (5,462,000 and 5,567,000 for the three months ended March 31, 1995
and 1996, respectively).

F-56
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESEN-
TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICI-
TATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED
IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Selected Consolidated Historical Financial Data of Danielson.............. 9
Selected Consolidated Historical Financial Data of Midland................ 10
Pro Forma Financial Information........................................... 11
Risk Factors.............................................................. 16
Price Range of Common Stock and Dividends................................. 19
Capitalization............................................................ 20
Use of Proceeds........................................................... 20
Selected Consolidated Historical Financial Data of Danielson.............. 21
Danielson Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 22
Selected Consolidated Historical Financial Data of Midland................ 31
Midland Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 32
Description of Business................................................... 37
Management................................................................ 65
Principal Stockholders.................................................... 66
Certain Relationships and Related Transactions............................ 68
Description of Danielson Capital Stock.................................... 69
Certain U.S. Tax Considerations........................................... 75
Underwriting.............................................................. 78
Legal Matters............................................................. 80
Experts................................................................... 80
Glossary of Selected Insurance Terms...................................... 81
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

DANIELSON HOLDING CORPORATION

COMMON STOCK

----------------

PROSPECTUS

----------------

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SALOMON BROTHERS INC

, 1996

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the expenses payable by the Registrant in
connection with this Registration Statement. All of such expenses are
estimates, other than the filing fees payable to the Securities and Exchange
Commission ("SEC") and the National Association of Securities Dealers, Inc.
("NASD").

<TABLE>
<S> <C>
SEC Registration Fee................................................... *
NASD Fee............................................................... *
AMEX Listing Fee....................................................... *
Printing and Engraving Expenses........................................ *
Legal Fees and Expenses................................................ *
Accounting Fees and Expenses........................................... *
Blue Sky Fees and Expenses............................................. *
Miscellaneous.......................................................... *
----
Total.................................................................. $ *
====
</TABLE>
- ---------------------
* To be completed by amendment

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Bylaws provide that the Company shall indemnify and hold
harmless, to the fullest extent which it is empowered to do unless prohibited
from doing so by the Delaware General Corporation Law, as it exists or may
hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than said law permitted the corporation to provide
prior to such amendment), any person who was or is a party or is threatened to
be made a party to or is otherwise involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she was a director or officer of the Company, or
while a director or officer of the Company, is or was serving at the request
of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise, including
service with respect to an employee benefit plan, against all expense,
liability and loss (including attorneys' fees, judgements, fines, ERISA
exercise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such person in connection therewith and that such
indemnification shall continue as to any such person who has ceased to be a
director or officer, and shall inure to the benefit of such person's heirs,
executors and administrators; provided, however, that except with respect to
proceedings to enforce indemnification rights, the Company shall indemnify any
such person in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Company's Board of Directors.

Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interest of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful; and further that a corporation may
indemnify such person against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted

II-1
<PAGE>

in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper. To
the extent that a director, officer, employee or agent of a corporation has
been successful on the merits or otherwise in defense of any such action, suit
or proceeding, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.

The Bylaws further provide that the Company shall indemnify any such person
seeking indemnification in connection with a proceeding initiated by such
person only if such proceeding was authorized by the board of directors of the
Company, except that it shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to the Company) that the claimant has not met the
standards of conduct (as set forth above) which make it permissible under the
Delaware General Corporation Law for the Company to indemnify the claimant for
the amount claimed, but the burden of such defense shall be on the Company.

The Bylaws further provide that the right to indemnification shall be a
contract right and shall include the right to be paid by the Company for the
expenses incurred in defending any such proceeding in advance of its final
disposition unless otherwise determined by the board of directors of the
Company in the specific case upon receipt of an undertaking by or on behalf of
the director or officer to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by the Company;
and that such expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the board of directors of the
Company deems appropriate. The rights conferred in the Bylaws to
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition are not exclusive of any other right which
any person may have or hereafter acquire under any statute, provision of the
certificate of incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.

Section 102 of the Delaware General Corporation Law allows a corporation to
eliminate or limit the personal liability of a director of a corporation to
the corporation or to any of its stockholders for monetary damage for a breach
of fiduciary duty as a director, except in the case where the director (i)
breaches such person's duty of loyalty to the corporation or its stockholders,
(ii) fails to act in good faith, engages in intentional misconduct or
knowingly violates a law, (iii) authorizes the payment of a dividend or
approves a stock purchase or redemption in violation of Section 174 of the
Delaware General Corporation Law or (iv) obtains an improper personal benefit.
Article Tenth of the Company's Certificate of Incorporation includes a
provision which eliminates directors' personal liability to the fullest extent
permitted under the Delaware General Corporation Law.

The Company maintains insurance covering its directors and officers against
certain liabilities incurred by them in their capacities as such, including
among other things, certain liabilities under the Securities Act of 1933, as
amended.

ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
EXHIBITS
<C> <C> <S>
*1.1 -- Form of Underwriting Agreement.
*5.1 -- Opinion of Anderson Kill Olick & Oshinsky, P.C.
*5.2 -- Opinion of Davis Polk & Wardwell.
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBITS
<C> <C> <S>
*8.1 -- Opinion of Anderson Kill Olick & Oshinsky, P.C.
*15.1 -- Letter re: unaudited interim financial information
Consent of Anderson Kill Olick & Oshinsky, P.C.--See Exhibits
23.1 -- 5.1 and 8.1.
23.2 -- Consent of Davis Polk & Wardwell--See Exhibit 5.2.
23.3 -- Consent of KPMG Peat Marwick LLP.
23.4 -- Consent of KPMG Peat Marwick LLP.
24.1 -- Power of Attorney (see page II-4).
</TABLE>
- ---------------------
* To be filed by amendment.

ITEM 17. UNDERTAKINGS

(1) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

(2) The undersigned Registrant hereby undertake that, insofar as
indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, such Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in such Act and will be governed
by the final adjudication of such issue.

(3) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective.

(4) The undersigned Registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(5) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the Prospectus, to each person to whom the Prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the Prospectus, to deliver, or
cause to be delivered to each person to whom the Prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the Prospectus to provide such interim financial information.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of New York, State of New York, on this
day of , 1996.

DANIELSON HOLDING CORPORATION

/s/ C. Kirk Rhein, Jr.
By:----------------------------------
C. Kirk Rhein, Jr.
President, Chief Executive
Officer and Director

The registrant and each person whose signature appears below constitutes and
appoints C. Kirk Rhein, Jr. and Lisa D. Levey, and any agent for service named
in this Registration Statement and each of them, his, her or its true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him, her or it and in his, her, or its name, place and
stead, in any and all capacities, to sign and file (i) any and all amendments
(including post-effective amendments) to this Registration Statement, with all
exhibits thereto, and other documents in connection therewith, and (ii) a
registration statement, and any and all amendments thereto, relating to the
offering covered hereby filed pursuant to Rule 462(b) under the Securities Act
of 1933, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he, she, or it
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her or its
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE

/s/ C. Kirk Rhein, Jr. President, Chief Executive Officer and
Director (principal executive officer)
July 3, 1996

C. Kirk Rhein, Jr.

/s/ James P. Heffernan Chief Financial Officer and Director
(principal financial officer)
July 3, 1996

James P. Heffernan

/s/ Claudia C. Cosenza Controller (principal accounting officer)
July 3, 1996

Claudia C. Cosenza

/s/ Martin J. Whitman Chairman of the Board, Chief Investment
Officer and Director
July 3, 1996

Martin J. Whitman

/s/ Joseph F. Porrino Director July 3, 1996

Joseph F. Porrino

Director , 1996

Frank B. Ryan

II-4
<PAGE>

SIGNATURE TITLE DATE

Director , 1996
-----------------------------
Eugene M. Isenberg

/s/ William R. Story Director July 3, 1996
-----------------------------
William R. Story

Director , 1996
-----------------------------
Wallace O. Sellers

II-5

<PAGE>

EXHIBIT 23.3

The Board of Directors
Danielson Holding Corporation:

The audits referred to in our report dated February 26, 1996, included the
related financial statement schedules as of December 31, 1994 and 1995, and
for each of the years in the three-year period ended December 31, 1995,
included in the registration statement. These financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.

We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.

/s/ KPMG Peat Marwick LLP

New York, New York
July 3, 1996

<PAGE>

EXHIBIT 23.4

The Board of Directors
Midland Financial Group, Inc.:

The audits referred to in our report dated March 22, 1996, except Note 12,
which is dated May 31, 1996, included the related financial statement
schedules as of December 31, 1994 and 1995, and for each of the years in the
three-year period ended December 31, 1995, included in the registration
statement. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.

We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.

As discussed in Note 1 to the consolidated financial statements, Midland
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," in 1994.

/s/ KPMG Peat Marwick LLP

Memphis, Tennessee
July 2, 1996