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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 1-6732
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
DANIELSON HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-6021257
(State of incorporation) (I.R.S. Employer Identification No.)
767 Third Avenue, New York, New York 10017-2023
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-0347
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $0.10 par value . . . . . . American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 13, 1996, the aggregate market value of the registrant's voting stock
held by non-affiliates was $91,072,428.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 13, 1996
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Common Stock, $0.10 par value 15,360,255 shares
The following documents have been incorporated by reference herein:
1995 Annual Report to Stockholders, as indicated herein (Parts I and II)
[COVER PAGE 1 OF 101 PAGES / EXHIBIT INDEX ON PAGES 34-36]
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Danielson Holding Corporation ("DHC" or "Registrant") is a holding
company incorporated in Delaware. DHC is continuing to grow by acquisition, as
a corporation having separate subsidiaries (collectively with DHC, the
"Company") offering a variety of insurance, trust and investment management and
other financial service products. The largest subsidiary of DHC is its
indirectly wholly-owned California insurance company, National American
Insurance Company of California ("NAICC"). NAICC writes workers' compensation,
non-standard private passenger and commercial automobile insurance in the
western United States, primarily California.
DHC also owns a California trust company subsidiary, Danielson Trust
Company ("Danielson Trust"), which formerly was known, prior to November 13,
1993, as HomeFed Trust. In February 1994, Danielson Trust acquired the assets
of the Western Trust Services ("WTS") division of Grossmont Bank. See Note 2 of
the Notes to Consolidated Financial Statements.
As part of DHC's ongoing corporate strategy, DHC has continued to seek
ways to acquire or start-up profitable businesses and/or to expand into the
financial services business in a manner that will both complement its existing
operations and enable DHC to earn an attractive return on investment. Most
recently, DHC has entered into an agreement to acquire, by merger, Midland
Financial Group, Inc. ("Midland"). See Note 15 of the Notes to Consolidated
Financial Statements. DHC retains cash and investments at the holding company
of $11 million.
The Company has reported, as of the beginning of its 1995 tax year,
aggregate consolidated net operating tax loss carryforwards ("NOLs") for Federal
income tax purposes of approximately $1.4 billion. These losses will start to
expire in 1998 unless utilized prior thereto. See Note 8 of the Notes to
Consolidated Financial Statements.
DESCRIPTION OF BUSINESSES
Set forth below is a description of the business operations of each
industry segment for which financial information, as at December 31, 1995, is
presented in the Company's Consolidated Financial Statements incorporated by
reference in this Report. Such industry segments are Insurance and Trust
Services.
INSURANCE BUSINESS
DHC's wholly-owned subsidiary, NAICC, is a California corporation engaged
in writing workers' compensation, non-standard and commercial automobile
insurance. NAICC is an indirect wholly-owned subsidiary of DHC. NAICC's
immediate parent corporation is KCP Holding Company ("KCP"). NAICC is the
immediate parent of Danielson National Insurance Company ("DNIC") and Danielson
Insurance Company ("DIC"). KCP is wholly-owned by Mission American Insurance
Company ("MAIC") which, in turn, is wholly-owned by DHC.
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NAICC's lines of business are described below.
Workers' Compensation Insurance
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 which are not included within the statutorily prescribed workers'
compensation coverage. NAICC issues policies having a maximum term of one year.
Net written premiums for workers' compensation were $38.2 million, $77.2
million and $79.3 million in 1995, 1994 and 1993, respectively. NAICC writes
workers' compensation business primarily in the states of California, Oregon,
Arizona and Idaho through approximately 650 independent property and casualty
insurance agents and brokers. NAICC does not write workers' compensation
business through managing general agents and no independent agent produces more
than 4.5 percent of the total premium. At December 31, 1995, NAICC had 3,871
workers' compensation policies in force with an average estimated annual premium
size of $10,200, compared to 7,253 and 7,161 such policies in force at December
31, 1994 and 1993, respectively, with an average estimated annual premium size
of $11,300 and $12,000 in each respective year. The 1995 decrease of
approximately 50.5 percent in the net written premium from 1994 is attributable
to significantly increased price competition in California. In 1995, 87 percent
of NAICC's workers' compensation business was in the state of California.
In July 1993, the California legislature passed several bills reforming
the State's workers' compensation system. In connection with this reform, cost
savings from favorable loss experience resulting from reform legislation,
stabilization of the California economy, and highly-publicized anti-fraud
activity were passed along to employers in the form of minimum rate decreases.
Thus, at the direction of the California Department of Insurance (the "Insurance
Department"), the minimum rate was decreased by seven percent, 12.7 percent and
16 percent effective in July 1993, January 1994 and October 1994, respectively.
In addition, effective January 1, 1995, a new "open rating" law replaced
the old workers' compensation "minimum rate" law. The new open rating law
provides for a significant change in the way insurance companies price workers'
compensation insurance in California. Although the Workers' Compensation
Insurance Rating Bureau of California (the "Bureau") is still the designated
statistical agent for the Insurance Department and will continue to accumulate
statewide loss and remuneration data, under the new law the Bureau now only
promulgates advisory pure premium rates instead of final rates. Pure premium
rate is the loss and loss adjustment expense ("LAE") portion of the final rate
charged. Non-loss related expenses constitute the other portion of the final
rate charged.
An insurer establishes its own final rates prospectively based on pure
premium rates promulgated by the Bureau and/or from its own experience. An
insurer may establish the pure premium portion of its rates below the Bureau's
advisory pure premium rates. The pure premium rates are then increased to
provide for non-loss related expenses, which are based solely upon that
company's experience and expectation. Non-loss related expenses include items
such as commissions to agents, general and administrative expenses and premium
taxes. To obtain approval to use any workers' compensation rates in California,
an insurer is required to file its proposed rates 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 (the "State Fund"), to control more than 20 percent of the
market.
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The favorable loss experience of the 1992, 1993 and 1994 loss years, and
the elimination of the minimum rate law have created a new and highly
competitive environment in the California workers' compensation market. NAICC
has filed premium rates with the Insurance Department which are based on the
pure premium rates promulgated by the Bureau. NAICC's management believes that
the pure premium rates promulgated by the Bureau will best reflect NAICC's
actual loss costs and LAE. NAICC continues its policy to underwrite policies at
prices which are expected to achieve an underwriting profit. Consequently,
management of NAICC believes that its premium volume has decreased because
competitors are willing to price policies using pure premium rates which are
below the average pure premium rates promulgated by the Bureau. However, it is
the view of NAICC's management that NAICC will continue to partially offset its
decline in workers' compensation premium by increasing its participation in
other markets.
NAICC competes with both the State Fund and more than 300 other companies
writing workers' compensation insurance in California. In 1994, the most recent
year for which information is available, the State Fund wrote approximately $1.4
billion in premiums, which represented approximately 18.1 percent of the insured
California workers' compensation market. No single company wrote in excess of
$500 million in workers' compensation premiums in California in 1994. NAICC,
which has a market share of approximately one percent of the insured market,
does not believe that it is a dominant writer of workers' compensation insurance
in California.
Because of the existence of the State Fund, California does not require
licensed insurers to participate in any involuntary pools or assigned risk plans
for workers' compensation insurance. California, like other states, has a post
insolvency guarantee fund, the California Insurance Guarantee Association, to
protect policyholders of insolvent insurance companies. Under current law, the
maximum amount that can be assessed against any insurer for this purpose in any
one year is one percent of its net direct premiums written in the preceding
year. These assessments are passed through to all policyholders. There were no
such assessments for the 1994 policy year.
Non-Standard Private Passenger Automobile Insurance
NAICC began writing non-standard private passenger automobile insurance
in California in July 1993. NAICC writes this business through a general agent
which utilizes over 600 sub-agents to obtain applications for policies. The
selection of policyholders is governed by underwriting guidelines established by
NAICC. 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 vehicles, or those who have been non-
renewed or declined by another insurance company.
Generally, non-standard premium rates are higher than standard premium
rates and policy limits are lower than typical policy limits. NAICC's private
passenger automobile policies provide maximum coverage up to $15,000 per person,
$30,000 per accident for liability for bodily injury and $10,000 per accident
for liability for property damage. NAICC also writes physical damage coverage
for up to $33,000 per vehicle. NAICC's management believes that it may enhance
its underwriting as a result of refinement of various risk profiles, thereby
dividing the non-standard insurance market into more defined segments which can
be adequately priced.
For the 1995 calendar year, NAICC billed $28.8 million in direct written
premiums and, at December 31, 1995, NAICC had 29,000 private passenger
automobile policies in force, compared to 20,000 and 15,419 policies in force in
1994 and 1993, respectively. In 1995, NAICC's non-standard private passenger
automobile business represented approximately 40.6 percent of its total direct
premiums written and 27.2 percent of total net premiums written, respectively.
NAICC cedes 50 percent of its non-standard private passenger automobile direct
written premium, direct losses and allocated LAE to a major reinsurance company
under a quota share reinsurance agreement.
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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 private passenger automobile insurers in the
voluntary market based on each insurer's proportionate share of the private
passenger automobile direct written premiums. Premium rates for assigned risk
business 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 8.5 percent on October 1, 1990
and by 5.2 percent on June 1, 1995. The combination of these events have caused
the number of drivers applying for insurance to the Assigned Risk Plan to
decline as well as to reduce the underwriting losses from assigned risk
business. The population of drivers in the Assigned Risk Plan has declined by
approximately 90 percent in the period from 1988 to 1995 and continued declines
are anticipated. NAICC does not expect assignments which will be material nor
should they 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 by the California voters. Among other things, Proposition 103
requires insurance companies to obtain prior regulatory approval of any new
rates prior to use. Proposition 103 does not apply to workers' compensation.
Proposition 103 also requires automobile insurers to renew policies of good
drivers as defined in Proposition 103.
The rates for NAICC's California non-standard private passenger
automobile policies are subject to Proposition 103. NAICC filed for and
received approval to adjust its rates effective December 1, 1994. The average
overall effect was to increase liability premium rates by 7.7 percent and to
decrease physical damage premium rates by 8.5 percent, for an overall weighted
average increase of five percent. Rating factors also were adjusted to reflect
NAICC's experience in each classification of driver in each territory in
California. In December 1995, NAICC filed to decrease liability premium rates
by 0.1 percent, and to increase physical damage premium rates by 21.8 percent as
well as certain other minor plan changes. Such rate filing was approved in
February 1996. Management of NAICC believes that the new rates will continue to
be competitive and yield a profit for NAICC.
Commercial Automobile Insurance
In March 1995, NAICC commenced a non-standard commercial automobile
program in Arizona, Idaho, Nevada and Oregon. In August 1995, NAICC began
writing non-standard commercial automobile insurance in California. Direct
written premiums for commercial automobile insurance were $2.3 million in each
of 1995 and 1994. NAICC intends to continue to market this program in
California, as well as Arizona, Idaho, Nevada and Oregon to independent agents
through its field marketing staff in those states.
Commercial Property-Casualty Insurance
The commercial property and casualty market has been highly competitive
and has offered limited profit potential since 1987. As a result, NAICC ceased
writing this business in 1994.
Combined Ratio
NAICC had a combined ratio of 113.4 percent, 106.2 percent and 110.9
percent for 1995, 1994 and 1993, respectively. These ratios compare to an
overall national industry average for workers' compensation insurers of 101.4
percent for the 1994 year, the most recent year for which such information is
available. For additional information regarding the foregoing statistics, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, 2. RESULTS OF NAICC'S OPERATIONS."
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Losses and Loss Adjustment Expenses
NAICC's unpaid losses and loss adjustment expenses ("LAE") represent the
estimated indemnity cost and LAE necessary to cover the ultimate net cost of
investigating and settling claims. Such estimates are 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 claim costs and related
liabilities. NAICC does not discount any of its loss reserves.
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 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.
NAICC has claims relating to environmental cleanup against policies
issued prior to 1980 which are currently in run-off. 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 $1,000,000, with
reinsurance generally above $500,000. 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 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.
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 loss expenses 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.
(continued on following page)
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Analysis of Losses and Loss Adjustment Expenses
The following table provides a reconciliation of NAICC's net
unpaid losses and LAE (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1995 1994 1993
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<S> <C> <C> <C>
Net unpaid losses and LAE at January 1 $128,625 $119,223 $104,825
-------- -------- --------
Losses and LAE:
Provision for losses and LAE for
claims occurring in current year....... 45,592 67,131 65,157
Increase (decrease) in estimated
losses and LAE for claims
occurring in prior years............... 3,123 384 743
-------- -------- --------
Total incurred 48,715 67,515 65,900
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Losses and LAE payments for
claims occurring during:
Current year (14,464) (15,849) (11,852)
Prior years............................ (46,582) (42,264) (39,650)
-------- -------- --------
Total paid (61,046) (58,113) (51,502)
-------- -------- --------
Net unpaid losses and LAE at
December 31 $116,294 $128,625 $119,223
Plus: reinsurance recoverables........ 21,112 17,705 18,256
-------- -------- --------
Gross unpaid losses and LAE at
December 31 $137,406 $146,330 $137,479
======== ======== ========
</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 from
business in run-off comprise substantially all of the losses and LAE incurred
related to 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.
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 line 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 are later
discovered. The next line, cumulative (deficiency) or redundancy, 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 which were paid, net of
reinsurance, as of the end of successive years.
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Analysis of Net Losses and Loss Adjustment Expense ("LAE") Development (dollars
in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
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1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- -------- -------- ---------
<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) redundancy (12,731) (12,072) (10,211) (18,208) (12,931) (3,816) (3,123)
Cumulative net amounts paid 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 137,479 146,330 137,406
Reinsurance recoverable 18,256 17,705 21,112
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Net unpaid losses and LAE at end of year 119,223 128,625 116,294
Gross unpaid losses and LAE
re-estimated - latest 141,737 149,815
Re-estimated reinsurance recoverable -
latest 18,698 18,067
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Net unpaid losses and LAE re-estimated 123,039 131,748
- latest
Gross cumulative (deficiency) redundancy (4,258) (3,485)
</TABLE>
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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 which 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 which resulted in, among other
things, the acquisition by DHC 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 affecting NAICC, 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 related to 1988 and earlier,
the liability recorded represents the best estimate by NAICC's management of the
liability for currently foreseeable claims.
The net cumulative deficiency as of December 31, 1995 of $10.2 million,
$18.2 million and $12.9 million for 1990, 1991 and 1992 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 of 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 significantly more 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 other ongoing business lines and loss
years as well as $5.4 million of adverse development of the businesses in run-
off. As stated above, the losses and LAE reflected in the tables above are
reduced both for amounts ceded to other insurers and other recoveries.
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.
Ceded Reinsurance and Reinsurance with Affiliates
In its normal course of business in accordance with industry practice,
NAICC reinsures a portion of its 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 generally accepted accounting principles,
estimated reinsurance receivables arising from these contracts of reinsurance
are reported separately as assets. NAICC retains the first $400,000 of each
workers' compensation loss and has purchased reinsurance for up to $99.6 million
in excess of its retention, of which the first $9.6 million is placed with two
major reinsurance companies and the remaining $90 million is provided by 18
other companies. NAICC cedes 50 percent of its non-standard private passenger
automobile direct written premium, direct losses and LAE to a major reinsurance
company under a quota share reinsurance agreement. Premiums for reinsurance
ceded by NAICC in 1995 were 22 percent of written premiums for the period.
As of December 31, 1995, General Reinsurance Corporation ("GRC") and Munich
American Reinsurance Company ("MARC") were the only reinsurers that comprised
more than ten percent of NAICC's reinsurance recoverables on paid and unpaid
claims. NAICC monitors all reinsurers by reviewing A.M. Best and Company ("A.M.
Best") reports and rating information from reinsurance intermediaries and
analyzing financial statements. 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 GRC and MARC had an A.M. Best rating of "A++." See Note 3 of
the Notes to Consolidated Financial Statements for further information on
reinsurance.
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NAICC and its subsidiaries participate in an intercompany pooling and
reinsurance agreement under which DIC and DNIC cede 100 percent 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 DIC and DNIC ten percent of the net liability of
the pool. DNIC and DIC commenced participation in the pool in July 1993 and
January 1994, respectively. DIC and DNIC 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
California Department of Insurance (the "Insurance Department").
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. 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 National Association of Insurance Commissioners (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 risk based capital ("RBC") requirements. It is not possible to predict the
impact of future state and federal regulation on the operations of DHC 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
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. The California Insurance Code
prohibits the payment, from other than accumulated earned surplus, of
shareholder dividends which exceed the greater of net income or ten percent 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.
Capital Adequacy and Risk Based Capital
Several measures of capital adequacy are common in the property-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; 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,
------------------------
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Ratio of:
Premiums-to-surplus 1.2:1 2.3:1 2.1:1
Reserves-to-surplus 2.6:1 3.2:1 2.8:1
</TABLE>
-10-
<PAGE>
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.
In December 1993, the Association adopted a model for determining the 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 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.
TRUST BUSINESS
Danielson Trust Company ("Danielson Trust") is chartered by the California
State Banking Department to provide trust and fiduciary services. Danielson
Trust is located in San Diego, California. Prior to January 31, 1996, Danielson
Trust also maintained a branch office in Santa Barbara, California. In March
1993 (the "Acquisition Date"), DHC 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. In connection with the sale, in January 1996, Danielson Trust
recognized a gain of $32,874.
The accounts and operations of Danielson Trust subsequent to and as of the
Acquisition Date are reflected in the Company's Consolidated Financial
Statements; however, comparisons of the financial results of Danielson Trust's
operations for the years ended December 31, 1995 and 1994 with the results of
its operations during the partial 1993 period have been omitted as they do not
relate to equivalent periods (nor, in some instances, to equivalent operations)
and would not provide meaningful information relating to historical trends and
financial results. The results of Danielson Trust's operations during the years
ended 1995 and 1994 are not entirely comparable in that they relate, in part, to
different assets, accounts and lines of business. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 3. RESULTS OF
DANIELSON TRUST COMPANY'S OPERATIONS."
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. See "Custody Services." 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. See "New Business and Capital
Resources."
In January 1995, Danielson Trust announced the appointment of A. Vincent
Siciliano as its President and Chief Executive Officer. The appointment became
effective on February 6, 1995.
Danielson Trust's lines of business are described below.
-11-
<PAGE>
Private Trust
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 has increased its marketing support of the private
trust business, including the development of an enhanced product line.
Danielson Trust plans to offer investment management services provided by
regionally and nationally known investment managers. The company also intends
to introduce customized trust, investment and financial planning, utilizing a
variety of individualized asset allocation models designed to achieve clients'
particular investment objectives. The company also intends to simplify and
clarify the performance measurement process in portfolio management reporting.
Danielson Trust anticipates that it will introduce such new services, together
with an expansion of its client calling program and increased efforts to involve
local professionals in the referral process, by the first quarter of 1996.
Danielson Trust's private trust unit generated fee income of $1.3 million and
$1.7 million for the years ended December 31, 1995 and 1994, respectively.
Retirement Services
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. Danielson Trust is
strengthening its commitment to the retirement services business with the
development of an enhanced product line for this market which it anticipates
introducing late in the second quarter of 1996. Danielson Trust has designed a
bundled retirement services product offering prospective retirement services
clients a variety of investment management, administrative and consulting
services for employee benefit plans of every size, including third party
recordkeeping and an employee education component. Danielson Trust believes
that such diversity of investment advisory, fiduciary and consulting services
for employee benefit plans also will enhance the company's ability to satisfy
customized client service requirements. For the years ended December 31, 1995
and 1994, the retirement services unit of Danielson Trust generated fee income
of approximately $2.6 million and $2.3 million, respectively (excluding
retirement services custodial revenues). See "Business Related to Former
Parent."
Custody Services
In addition to custodial services associated with the private and
retirement services businesses, since 1994 Danielson Trust has provided
certificate of deposit (CD) 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, 1995 and 1994 were $537,000 and
$427,000, respectively, which constituted 11.7 percent and 8.9 percent,
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,
1995 and 1994 was $401,000 and $339,000, respectively. Approximately one
percent of Danielson Trust's total revenues in 1995 and 1994 was generated by
each of mutual fund-related custody services and other retirement custody
services. Fee income for custody services are not reflected in the private
trust or retirement services revenue amounts referred to above.
Business Related to Former Parent
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 DHC'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 seven percent of Danielson Trust's 1994
revenues.
-12-
<PAGE>
New Business and Capital Resources
Historically, Danielson Trust has generated new business from direct
marketing efforts of Danielson Trust's officers, referrals from independent
professionals, and referrals from and captive business of its former parent
company, HomeFed Bank. As noted above, the HomeFed Bank-related appointments
ceased entirely during 1994. Virtually all of Danielson Trust's new business
during 1995 and 1994 (apart from business associated with the acquisition of
WTS) resulted from client and professional referrals, as well as from Danielson
Trust's marketing efforts.
Danielson Trust has increased its marketing efforts to expand Danielson
Trust's private trust and retirement services business within its primary market
areas with the development of enhanced product lines which it anticipates will
be introduced by the second quarter of 1996. See "Private Trust" and
"Retirement Services" above. Danielson Trust also is in the process of
implementing various marketing initiatives which commenced in 1994, including
systematic calling programs to identified business sectors within the San Diego
area, a bi-monthly local radio program and a business expansion initiative
involving medical groups. During 1995, Danielson Trust was appointed to serve
as the designated trustee for PaineWebber in its west coast region. In
connection with this appointment, Danielson Trust will provide trust services to
PaineWebber investment executives and their clients throughout California, as
well as Arizona, Colorado, Montana, Nevada, Oregon, Utah, Washington and
Wyoming. Danielson Trust intends to seek out additional such 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 San Diego community.
In connection with the sale of its Santa Barbara branch, Danielson Trust
has entered into a servicing agreement with The Bank of Montecito pursuant to
which Danielson Trust provides investment management and operational services
with respect to the accounts that were sold. Management of Danielson Trust
believes that the fee income it anticipates to be generated by such servicing
agreement, together with fee income from retained Santa Barbara accounts, will
partially replace the amount of fee income previously generated by the former
branch office. The former Santa Barbara branch generated fee income of
approximately $200,000 for each of the years ended December 31, 1995 and 1994,
which is included in the private trust and retirement services fee income
previously noted. Danielson Trust continues to maintain a trust services
referral arrangement with San Diego National Bank, whereby each cooperates in
order to offer each company's clients access to services that are not provided
by the separate companies.
The market for Danielson Trust's business is highly competitive and
competition is based primarily upon such factors as price and service. Several
of Danielson Trust's competitors are affiliated with large financial
institutions and, accordingly, enjoy the benefits of referrals from such
institutions. Among the types of financial institutions with which Danielson
Trust competes are banks, brokerage firms, insurance companies and mutual funds.
Liquidity and Capital Resources
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 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 Consolidated Financial Statements), DHC 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 percent. At December 31, 1995, the entire principal amount of the
promissory demand note was outstanding. Danielson Trust is servicing such
interest payments from fee revenues generated by its operations. DHC intends to
refrain from making demand for payment of principal until such time as Danielson
-13-
<PAGE>
Trust has sufficient capital to make such payment. As of January 1, 1996, DHC
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 one percent, and
to consider making additional such loans in the aggregate amount of $600,000
upon the 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,
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 $603,000 to the State as a reserve in
connection with certain types of fiduciary appointments, which is 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
December 31, 1995, Danielson Trust was in compliance with the foregoing
requirements.
HOLDING COMPANY BUSINESS
DHC is a holding company incorporated under the General Corporation Law of
the State of Delaware. As of December 31, 1995, DHC had the following material
assets and no material liabilities:
(i) ownership of its MAIC subsidiary, an insurance holding company that
owns, directly or indirectly, all of the stock of NAICC, DNIC, DIC,
and two licensed insurance subsidiaries which are expected to
commence writing insurance lines in the future;
(ii) ownership of 100 percent of the stock of Danielson Trust; and
(iii) approximately $11 million in cash and investments.
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.
The Company 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 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.
-14-
<PAGE>
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.
Tax Loss Carryforward
As of December 31, 1995, the Company had 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.
Some or all of the carryforward may be available to it to offset, for Federal
income tax purposes, the future taxable income, if any, of DHC and its wholly-
owned subsidiaries. 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 amount of the deferred asset considered realizable could be
increased in the near term if estimates of future taxable income during the
carryforward period are increased.
The Company's net operating tax loss carryforwards will expire, if not
used, in the following approximate amounts in the following years (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ending Amount of 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>
The Company's ability to utilize its net operating tax loss
carryforwards would be substantially reduced if DHC were to undergo an
"ownership change" within the meaning of Section 382(g)(1) of the Internal
Revenue Code. In an effort to reduce the risk of an ownership change, DHC has
imposed restrictions on the ability of holders of five percent or more of common
stock of DHC, par value $0.10 per share ("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 five percent stockholders as a result of transfers
of Common Stock. Notwithstanding such transfer restrictions, there could be
circumstances under which an issuance by DHC 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 Internal Revenue Code. See Note 7
of the Notes to the Consolidated Financial Statements for a description of
certain restrictions on the transfer of Common Stock.
-15-
<PAGE>
DHC's Business Plan and Development
DHC's business plan is to grow by making strategic acquisitions that
are expected to contribute higher than average returns for our stockholders. 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 percent in cash, 40 percent in DHC non-convertible preferred stock
having a market dividend rate, and ten percent in Common Stock to be valued
based upon a trading average prior to the closing date. DHC 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. DHC anticipates that operating management of Midland will remain
with the business following the merger.
Management of DHC believes that both Midland and DHC will benefit from
operating synergies and efficiencies between the two companies' businesses and
operations. DHC anticipates that the transaction will have many positive
effects for the acquired company, including particularly providing support for
Midland's Best's ratings at the time of closing. In addition, DHC believes that
the availability of DHC's $1.4 billion net operating tax loss carryforward will
enable Midland to enhance its results through a shift in its investment
portfolio to higher yielding instruments, as well as by offsetting Midland's
pre-tax operating income. Management of DHC currently contemplates that DHC
will recognize the book value of a portion of its approximately $1.4 billion net
operating tax loss carryforward in conjunction with the merger.
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.
As previously described, in March 1993, DHC completed the acquisition
of the common stock of Danielson Trust from a subsidiary of the Resolution Trust
Corporation. In February 1994, DHC's trust subsidiary, Danielson Trust,
completed the acquisition of the assets of the Western Trust Services ("WTS")
division of Grossmont Bank. See Note 2 of the Notes to Consolidated Financial
Statements.
EMPLOYEES
As of December 31, 1995, the number of employees of DHC and its
consolidated subsidiaries was approximately as follows:
<TABLE>
<S> <C>
NAICC 156
Danielson Trust 64
DHC (holding company only) 12
---
Total 232
===
</TABLE>
None of these employees is covered by any collective bargaining agreement. DHC
believes that the staffing levels are adequate to conduct future operations.
-16-
<PAGE>
ITEM 2. PROPERTIES.
DHC leases a minimal amount of space for use as administrative and
executive offices. DHC's lease has a term of approximately five years which is
scheduled to expire in 1998. DHC believes that the space available to it is
adequate for DHC's current and foreseeable needs.
NAICC's headquarters are located in a leased office facility in Rancho
Dominguez, California, pursuant to a long term lease which 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 which
is scheduled to expire in 2004, with options to extend. Prior to January 31,
1996, Danielson Trust maintained a branch office in Santa Barbara, California.
On January 31, 1996, following approval of the California State Banking
Department, Danielson Trust sold its Santa Barbara branch to The Bank of
Montecito which assumed the lease of that branch office. In addition, in
connection with the acquisition of the WTS assets and during the process of
integrating such assets into Danielson Trust's operations, from February 22,
1994 through July 31, 1994, Danielson Trust also occupied office space that was
previously occupied by WTS, pursuant to a short term sublease with Grossmont
Bank. Danielson Trust believes that its existing leased premises are adequate
for Danielson Trust's current and foreseeable needs. See Note 11 of the Notes
to Consolidated Financial Statements.
ITEM 3. 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
Consolidated Financial Statements. DHC is not a party to any legal proceeding
which is considered material to the financial condition and operation of its
business. See Note 12 of the Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-17-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
"Stock Market Prices" on page 98 of DHC's 1995 Annual Report to
Stockholders (included as an exhibit hereto) is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Consolidated Financial Data" on page 60 of DHC's 1995 Annual
Report to Stockholders (included as an exhibit hereto) is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 61 through 72 of DHC's 1995 Annual Report to
Stockholders (included as an exhibit hereto) is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of DHC and its subsidiaries,
together with the Notes thereto, and "Quarterly Financial Data," included
on pages 73 through 76, 77 through 96, and 98, respectively, of DHC's
1995 Annual Report to Stockholders (included as an exhibit hereto), are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-18-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS.
The Directors of DHC are listed on the following pages with brief
statements of their principal occupation and other information. A listing of
the Directors' and officers' beneficial ownership of Common Stock appears on
subsequent pages under the heading "Item 12. "Security Ownership of Certain
Beneficial Owners and Management." All of the Directors were elected to their
present terms of office by the stockholders at the Annual Meeting of
Stockholders of DHC held on April 25, 1995. The term of office of each Director
continues until the election of Directors to be held at the next Annual Meeting
of Stockholders or until his successor has been elected. There is no family
relationship between any Director and any other Director or executive officer of
DHC. The information set forth below concerning the Directors has been
furnished by such Directors to DHC.
<TABLE>
<CAPTION> DIRECTOR
DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
- -------- --- -------------------- --------
<S> <C> <C> <C>
Martin J. Whitman 71 Chairman of the Board and 1990
Chief Investment Officer of
DHC; Managing Director of
Whitman Heffernan Rhein &
Co., Inc.
C. Kirk Rhein, Jr. 43 Chief Executive Officer and 1990
President of DHC; Managing
Director of Whitman Heffernan
Rhein & Co., Inc.
James P. Heffernan 50 Chief Financial Officer of 1990
DHC; Managing Director of
Whitman Heffernan Rhein &
Co., Inc.
Eugene M. Isenberg 66 Chairman of the Board and 1990
Chief Executive Officer of
Nabors Industries, Inc.
Joseph F. Porrino 51 Executive Vice President of 1990
the New School for Social
Research
Frank B. Ryan 59 Professor of Mathematics and 1990
Computational and Applied
Mathematics at Rice University
William R. Story 50 President and Chief Executive 1990
Officer of KCP Holding
Company and National American
Insurance Company of
California
Wallace O. Sellers 66 Director of Enhance Financial 1995
Services Group, Inc.
</TABLE>
-19-
<PAGE>
Mr. Whitman, Chairman of the Board, Chief Investment Officer and a
Director of DHC, is a Managing Director of Whitman Heffernan Rhein & Co., Inc.
("WHR"), an investment and financial advisory firm which he founded with Messrs.
Heffernan and Rhein during the first quarter of 1987. Since 1974, Mr. Whitman
has been the President and controlling stockholder of M.J. Whitman & Co., Inc.
(now known as Martin J. Whitman & Co., Inc.) ("MJW&Co") which, until August
1991, was a registered broker-dealer. From August 1994 to December 1994, Mr.
Whitman served as the Managing Director of M.J. Whitman, L.P. ("MJWLP"), then a
registered broker-dealer which succeeded to the broker-dealer business of
MJW&Co. Since January 1995, Mr. Whitman has served as the Chairman and Chief
Executive Officer (and, until June 1995, as President) of M.J. Whitman, Inc.
("MJW"), which succeeded at that time to MJWLP's broker-dealer business. Also
since January 1995, Mr. Whitman has served as the Chairman and Chief Executive
Officer of M.J.Whitman Holding Corp. ("MJWHC"), the parent of MJW and other
affiliates. Since March 1990, Mr. Whitman has been the Chairman of the Board,
Chief Executive Officer and a Director (and, since January 1991, the President)
of Third Avenue Value Fund, Inc. ("TAVF"), an investment company registered
under the Investment Company Act of 1940. Until April 1994, Mr. Whitman also
served as the Chairman of the Board, Chief Executive Officer and a Director of
Equity Strategies Fund, Inc., previously a registered investment company. Since
March 1991, Mr. Whitman has served as a Director of Nabors Industries, Inc., a
publicly-traded company. Mr. Whitman also serves as a Director of DHC's
subsidiaries, including National American Insurance Company of California
("NAICC"), KCP Holding Company ("KCP") and Danielson Trust Company ("Danielson
Trust"). Mr. Whitman co-authored the book The Aggressive Conservative Investor.
------------------------------------
Mr. Whitman is a Distinguished Faculty Fellow in Finance at the Yale University
School of Management. Mr. Whitman graduated from Syracuse University magna cum
laude in 1949 with a Bachelor of Science degree and received his Masters degree
in Economics from the New School for Social Research in 1956. Mr. Whitman is a
Chartered Financial Analyst.
Mr. Rhein is President, Chief Executive Officer and a Director of DHC.
He also is a Managing Director of WHR and was, prior to April 1987, a partner in
the law firm of Anderson Kill Olick & Oshinsky, P.C. Mr. Rhein specialized in
corporate transactions and securities law during his law practice. Since March
1991, Mr. Rhein has served as a Director and, since May 1991, as Vice Chairman
of Reading & Bates Corporation, a publicly-traded company listed on the New York
Stock Exchange. Mr. Rhein also serves as a Director of DHC's subsidiaries,
including NAICC, KCP and Danielson Trust. Mr. Rhein graduated from the College
of Wooster with a Bachelor of Arts degree. In 1976, Mr. Rhein received his Juris
Doctor degree from Columbia University School of Law.
Mr. Heffernan is Chief Financial Officer and a Director of DHC. From
1990 through March 1996, Mr. Heffernan served as Chief Investment Officer of
DHC. He also is a Managing Director of WHR. Prior to April 1987, he was a
partner of Anderson Kill Olick & Oshinsky, P.C. During his law practice, Mr.
Heffernan concentrated in the area of bankruptcy law and reorganizations. Since
May 1993, Mr. Heffernan has served as a Director of The Columbia Gas System,
Inc., a publicly-traded company listed on the New York Stock Exchange.
Beginning in February 1995, Mr. Heffernan has served as Chairman of the Board of
Herman's Sporting Goods, Inc., a retail sporting goods chain. Mr. Heffernan also
serves as a Director of DHC's subsidiaries, including NAICC, KCP and Danielson
Trust. Mr. Heffernan graduated with a Bachelor of Arts degree from LeMoyne
College in 1967 and received his Juris Doctor degree from Fordham University Law
School in 1970.
Mr. Isenberg, since 1987, has been Chairman and Chief Executive Officer
of Nabors Industries, Inc., a publicly-traded oil and gas drilling company
listed on the American Stock Exchange. Mr. Isenberg is a member of the Board of
Directors of Continental Mortgage Investors (an equipment leasing and photo
finishing business) and a Managing Partner of EMI Capital Associates, Ltd. (a
manager of private investments and assets). Mr. Isenberg graduated from the
University of Massachusetts magna cum laude in 1950 with a Bachelor of Arts
degree in Economics and from Princeton University in 1952 with a Masters degree
in Economics.
Mr. Porrino has been Executive Vice President of the New School for
Social Research since September 1991. Prior to that time, Mr. Porrino was a
partner in the New York law firm of Putney, Twombly, Hall & Hirson,
concentrating his practice in the area of labor law. Mr. Porrino received a
Bachelor of Arts degree from Bowdoin College in 1966, and was awarded a Juris
Doctor degree from Fordham University School of Law in 1970.
-20-
<PAGE>
Dr. Ryan, since August 1990, has been a Professor of Mathematics and
Computational and Applied Mathematics at Rice University. Since March 1996, Dr.
Ryan has served as a Director of Sequoia Systems, Inc., a computer systems
company, the capital stock of which is traded on National Association of
Securities Dealers Automated Quotation. Since March 1995, Dr. Ryan has served
as a Director of America West Airlines, Inc., a publicly-traded company listed
on the New York Stock Exchange. From August 1990 to February 1995, Dr. Ryan
also served as Vice President-External Affairs at Rice University. For two
years ending August 1990, Dr. Ryan was the President and Chief Executive Officer
of Contex Electronics Inc., a subsidiary of Buffton Corporation, the capital
stock of which is publicly traded on the American Stock Exchange. Prior to
that, and beginning in 1977, Dr. Ryan was a Lecturer in Mathematics at Yale
University, where he was also the Associate Vice President in charge of
institutional planning. Dr. Ryan obtained a Bachelor of Arts degree in Physics
in 1958 from Rice University, a Masters degree in Mathematics from Rice in 1961,
and a Doctorate in Mathematics from Rice in 1965.
Mr. Story, since September 1991, has been President and Chief Executive
Officer of NAICC and KCP. Prior to that time, Mr. Story was President and Chief
Operating Officer of NAICC, with which he has been employed since 1987. Before
that time, Mr. Story held underwriting and executive positions with Mission
American Insurance Company, Prudential Reinsurance Company, and The Hartford.
Mr. Story also serves as a Director of KCP, NAICC and Danielson Trust. Mr.
Story received a Bachelor of Arts degree in Business from the University of
Northern Iowa in 1968 and holds the designations of Chartered Property and
Casualty Underwriter, and Associate in Risk Management (IIA).
Mr. Sellers is a Director of Enhance Financial Group, Inc. ("Enhance
Group"), a financial services corporation the capital stock of which is publicly
traded on the New York Stock Exchange. Until December 31, 1994, Mr. Sellers was
the President and Chief Executive Officer of Enhance Group, from its inception
in 1986, as well as its principal subsidiaries, Enhance Reinsurance Company and
Asset Guaranty Insurance Company, from their inceptions in 1986 and 1988,
respectively. From 1987 to 1994, Mr. Sellers served as a Director, and from
1992 to 1993 as the Chairman, of the Association of Financial Guaranty Insurors
in New York. From 1990 through 1994, Mr. Sellers served on the Board of
Directors of EIC Corporation Ltd. and Exporters Insurance Company Ltd., both of
Bermuda. Mr. Sellers was a Director and, in 1990, Chairman, of the Foreign
Credit Insurance Association from 1990 through 1994. From 1990 through 1994,
Mr. Sellers was a Director of Van-American Insurance Company in Lexington,
Kentucky. From 1982 through 1991, Mr. Sellers was a member of the Board of
Directors of Financial News Network in Santa Monica, California. From 1985
through 1990, Mr. Sellers was a Director of Intex Holdings (Bermuda) Limited.
Mr. Sellers served on the Board of Directors of The Learning Channel in
Washington, DC. Mr. Sellers received a Bachelor of Arts degree in Economics,
Anthropology and Archaeology form the University of New Mexico in 1951 and a
Masters degree in Economics from New York University ("NYU") in 1956. Mr.
Sellers also is a Doctoral candidate at the NYU Graduate School of Business
Administration. Mr. Sellers attended the Advanced Management Program at Harvard
University in 1975. Mr. Sellers is a Chartered Financial Analyst.
-21-
<PAGE>
EXECUTIVE OFFICERS.
The executive officers of DHC are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION WITH REGISTRANT
- ---- --- ----------------------------------
<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
Lisa D. Levey 39 General Counsel and Secretary
Claudia C. Cosenza 32 Controller
</TABLE>
For additional information about Messrs. Whitman, Heffernan and Rhein,
see "Directors" above.
Ms. Levey has been the General Counsel and Secretary of DHC since January
1991. Ms. Levey also has served as General Counsel and Secretary of Danielson
Trust since March 1993, of NAICC since 1992, and of WHR since 1991. Prior to
January 1991, Ms. Levey was a partner with the law firm of Anderson Kill Olick &
Oshinsky, P.C. specializing in commercial transactions. Ms. Levey graduated
magna cum laude with a Bachelor of Arts degree from the University of
Pennsylvania in 1978 and received her Juris Doctor degree from New York
University School of Law in 1981.
Ms. Cosenza has been Controller of DHC since April 1992. Prior to that
time, Ms. Cosenza was a Senior Accountant with DHC. In addition, since June
1990, Ms. Cosenza has served as Controller of Martin J. Whitman & Co., Inc.
(which formerly was known as MJW&Co.) and various affiliated entities. From
June 1990 through 1993, Ms. Cosenza also served as Controller of MJWLP. Ms.
Cosenza graduated from Adelphi University in 1985 with a Bachelor of Business
Administration degree in Accounting. Ms. Cosenza is a Certified Public
Accountant.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires DHC's
Directors and executive officers, and persons who own more than ten percent of a
registered class of the DHC's equity securities, to file with the Securities and
Exchange Commission and the American Stock Exchange initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of DHC. Officers, Directors and greater than ten percent stockholders are
required by Federal securities regulations to furnish DHC with copies of all
Section 16(a) forms they file.
To DHC's knowledge, based solely upon review of the copies of such
reports furnished to DHC and written representations that no other reports were
required, except for one Form 3 and one Form 4 with respect to Ms. Cosenza
(involving one transaction) and one Form 3 with respect to Mr. Sellers (not
involving any transaction), all Section 16(a) filing requirements applicable to
DHC's officers, Directors and greater than ten percent beneficial owners were
complied with for the fiscal year ended December 31, 1995.
-22-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table presents certain information
relating to compensation paid by DHC for services rendered in 1995 by the Chief
Executive Officer and the three other executive officers of DHC as of the last
day of the fiscal year whose cash compensation for such year exceeded $100,000.
Only those columns which call for information applicable to DHC or the
individuals named for the periods indicated have been included in such table.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------
AWARDS
-----------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY /a/ BONUS /b/ OPTIONS
($) ($) (#)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
C. Kirk Rhein, Jr. 1995 $200,000 -0- -0-
President & Chief Executive Officer 1994 $ 75,000 -0- -0-
1993 $ 75,000 $100,000 -0-
- ---------------------------------------------------------------------------------------------------
James P. Heffernan 1995 $200,000 -0- -0-
Chief Financial Officer 1994 $ 75,000 -0- -0-
1993 $ 75,000 $100,000 -0-
- ---------------------------------------------------------------------------------------------------
Martin J. Whitman 1995 $200,000 -0- -0-
Chairman of the Board & Chief 1994 $ 75,000 -0- -0-
Investment Officer 1993 $ 75,000 $100,000 -0-
- ---------------------------------------------------------------------------------------------------
Lisa D. Levey 1995 $158,675 /c/ $100,000 /c/ -0-
General Counsel & Secretary 1994 $125,175 /c/ $100,000 /c/ -0-
1993 $131,325 /c/ $100,000 /c/ -0-
- --------------------------------------------------------------------------------------------------
</TABLE>
For information regarding compensation paid during 1995 by NAICC to Mr.
Story, who is a member of the Board of Directors, see "Item 13. Certain
Relationships and Related Transactions" below.
- ----------
/a/ Amounts shown indicate cash compensation earned and received by executive
officers in the year shown. Executive officers also participate in DHC group
health insurance.
/b/ Amounts shown indicate bonuses earned, if any, with respect to services to
DHC in the fiscal year shown whether or not paid in such fiscal year.
/c/ Amounts shown reflect portion of compensation allocated to DHC based upon
percentage of time spent in connection with DHC matters.
-23-
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table presents certain information relating to the value of
unexercised stock options as of the end of 1995, on an aggregated basis, owned
by the Chief Executive Officer and the three other executive officers of DHC as
of the last day of the fiscal year whose cash compensation for such year
exceeded $100,000. None of such officers who owned options to purchase Common
Stock during 1995 exercised any of such options during 1995. Only those tabular
columns which call for information applicable to DHC or the named individuals
have been included in such table.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
(#) ($)
----------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
C. Kirk Rhein, Jr. 210,000 /1/ -0- $787,500 /2/ -0-
President & Chief
Executive Officer
James P. Heffernan 210,000 /1/ -0- $787,500 /2/ -0-
Chief Financial Officer
Martin J. Whitman 210,000 /1/ -0- $787,500 /2/ -0-
Chairman of the Board &
Chief Investment Officer
Lisa D. Levey -0- -0- -0- -0-
General Counsel and
Secretary
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, none of the persons who served as members of the
Compensation Committee of DHC's Board of Directors also was, during that year or
previously, an officer or employee of DHC or any of its subsidiaries or had any
other relationship requiring disclosure herein.
- ----------
/1/ As previously disclosed, these options were granted March 13, 1991 under the
1990 Stock Option Plan and are currently exercisable at an exercise price of
$3.00 per share (which equals 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.
Options to purchase 70,000 shares of Common Stock became exercisable on each
of March 13, 1992, March 13, 1993 and March 13, 1994.
/2/ The value of unexercised in-the-money options, whether or not exercisable,
equals the difference between the fair market value of such options at
fiscal year-end (i.e., the closing price of the Common Stock on the American
Stock Exchange on December 31, 1995, namely, $6-3/4) and the exercise price
of such options (i.e., 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, March 13, 1990, namely, $3.00).
-24-
<PAGE>
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of DHC's (the
"Committee"), during 1995, was comprised of three independent (i.e., non-
employee) Directors. The Committee provided the following report on executive
compensation during 1995 as required by applicable securities regulations:
"The Committee's goal continues to be to structure compensation in a way
that will attract and retain highly qualified executives who will conduct the
business of the Company in a manner that will maximize stockholder values.
Toward that end, the Committee seeks to reward effective executive performance
with reference to the Company's achievements, and each individual executive's
contribution to those successes, each year.
DHC does not require its officers to own any amount of Common Stock, nor
does DHC maintain a stock retention policy for officers. However, it is the
Committees's belief that the substantial voluntary stock ownership position of
DHC's executive officers is an extremely strong indication of the alignment of
its officers' interest with that of DHC's stockholders.
For the first time since the inception of the Company's operations in
August 1990, the annual base salary of each of C. Kirk Rhein, Jr., the Chief
Executive Officer of DHC, Martin J. Whitman, the Chairman of the Board and Chief
Investment Officer of DHC, and James P. Heffernan, the Chief Financial Officer
of DHC, was raised, from its prior level of $75,000 to $200,000. As the
Committee has noted in prior Reports, the historic reason for setting and
maintaining low cash compensation has been those executives' collective desire
not to take significant cash out of the Company in the form of executive
compensation at the very early stages of the Company's development. However, the
Committee believed it was necessary to acknowledge in a tangible manner these
executives' unstinting efforts on the Company's behalf over its first five years
of operations and, therefore, the Committee increased those individuals' base
salary.
The three executives' primary goal in 1995 was to identify a suitable
acquisition candidate for the Company. To accomplish this objective, Messrs.
Rhein, Whitman and Heffernan devoted a substantial portion of their time
evaluating numerous potential strategic opportunities -- reviewing materials,
following up introductions, meeting with candidates' management. At the time of
this writing, their efforts appear to have been worthwhile, in light of the
Company's public announcement of its February 26, 1996 agreement to acquire
Midland Financial Group, Inc. in a merger transaction. The Committee is
confident that DHC's executive management will direct all of their abilities
towards consummation of the transaction, including a public offering of DHC's
Common Stock to raise the cash portion of the purchase price, as well as the
capital contribution to be made to Midland at closing. Notwithstanding their
apparent success in achieving their 1995 corporate objective, Messrs. Rhein,
Whitman and Heffernan felt it would be premature to accept any bonus or other
compensation for 1995 beyond their base salary described above. The Committee
notes that there are no employment contracts between DHC and any of its
executive officers.
The Committee recommended an increase in the 1995 base salary of Lisa D.
Levey, DHC's General Counsel and Secretary, from $150,000 to $175,000.
This was the first change in Ms. Levey's base salary since she joined the
Company in 1991. The base compensation of $158,675 paid to Ms. Levey in 1995
reflects the Company's allocated portion of her total base salary amount, based
upon the percentage of Ms. Levey's time actually devoted to Company matters. In
addition to base salary, pursuant to the Committee's recommendation, the Company
paid a $100,000 cash bonus to Ms. Levey with respect to 1995. In arriving at the
bonus amount, the Committee reviewed Ms. Levey's overall performance as well as
her achievement of specific goals identified jointly by DHC's executive
management and Ms. Levey early in 1995. As part of this evaluation, the
Committee considered a variety of Ms. Levey's accomplishments in 1995, including
the development of DHC's 1995 Stock and Incentive Plan (the "1995 Plan") adopted
at the last annual meeting of stockholders, and her involvement in a variety of
legal matters relating to Danielson Trust Company,
-25-
<PAGE>
including in connection with its integration of the Western Trust Services
assets acquired in 1994, as well as with respect to the sale of its Santa
Barbara branch to The Bank of Montecito, which closed in January 1996. Ms. Levey
was one of the recipients of stock options granted by the Committee in January
1996 pursuant to the 1995 Plan, noted below.
During 1995, the Committee did not make any stock-based compensation
grants under DHC's 1995 Plan. However, in keeping with the Committee's
view, shared by management of the Company, of the value of non-cash compensation
both to motivate performance and reward the creation of long term stockholder
value, on January 15, 1996, the Committee granted an aggregate of 158,900
options under the 1995 Plan to certain executives and employees of DHC's
(other than Messrs. Rhein, Whitman and Heffernan) and its subsidiaries, NAICC
and Danielson Trust. The exercise price of such options is $6.6875 (the mean of
the high and low prices of the Common Stock on the American Stock Exchange on
the date of grant). These awards will be described in detail in the 1996
Committee Report. The Committee also notes that, in accordance with the terms
of the 1995 Plan, Wallace O. Sellers received an automatic grant of 40,000
options upon his election as a Director of DHC at the last annual
meeting of stockholders on April 25, 1995.
The Committee does not rely upon quantitative measures or other
measurable objective indicia, such as earnings or specifically weighted factors
or compensation formulae, in reaching compensation determinations. Rather, since
DHC at the parent-company level is simply a holding company operation having
only a small group of executives responsible for numerous and diverse areas of
the Company's business and management, and given the high level of awareness
each executive has of the others' activities and contributions, the Committee
evaluates executive performance and reaches compensation decisions based, in
part, upon the recommendations of DHC's executives. The Committee also reviews
quantitative and comparative compensation data and, in some instances, analyses
provided by an independent consulting firm to assist it in reaching its
compensation determinations.
Finally, the Committee notes that Section 162(m) of the Internal Revenue
Code, in most circumstances, limits to $1 million the deductibility of
compensation, including stock-based compensation, paid to top executives by
public companies. None of the 1995 compensation paid to the executive officers
named in the Summary Compensation Table exceeded the threshold for deductibility
under Section 162(m). See "EXECUTIVE COMPENSATION -- Summary Compensation
Table" above. There were no awards under the 1995 Plan during 1995. However,
the 1995 Plan is intended to comply with Section 162(m) and, therefore, awards
under that Plan are anticipated to qualify for the corporate tax deduction."
THE COMPENSATION COMMITTEE:
Joseph F. Porrino
Frank B. Ryan
Wallace O. Sellers
-26-
<PAGE>
PERFORMANCE GRAPH
The following graph sets forth a comparison of the semiannual percentage
change in Registrant's cumulative total stockholder return on the Common Stock
with the Standard & Poor's 500 Stock Index/*/ and the AMEX Industrial
(Financial) Index/**/. The foregoing cumulative total returns are computed
assuming (i) an initial investment of $100, and (ii) the reinvestment of
dividends at the frequency with which dividends were paid during the applicable
years. DHC has never paid any dividend on shares of Common Stock. The graph
below reflects comparative information for the five fiscal years of DHC
beginning with the close of trading on December 31, 1990 and ending December 29,
1995. The foregoing information is presented in tabular format immediately
following the graphic presentation. The stockholder return reflected below is
not necessarily indicative of future performance.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
DANIELSON HOLDING AMEX FINANCIAL STANDARD & POOR'S 500
(date) CORPORATION SUB-INDEX STOCK INDEX
----------------- -------------- ---------------------
<S> <C> <C> <C>
12/31/90 $100.00 $100.00 $100.00
06/30/91 137.50 122.06 112.40
12/31/91 129.17 127.19 126.31
06/30/92 95.83 131.16 123.60
12/31/92 120.83 142.51 131.95
06/30/93 220.83 146.05 136.43
12/31/93 275.00 153.14 141.25
06/30/94 220.83 150.60 134.54
12/31/94 254.17 138.73 139.08
06/30/95 262.50 158.25 164.97
12/31/95 229.17 181.26 186.52
</TABLE>
- ---------
/*/ The Standard & Poor's 500 Stock Index is a capitalization-weighted index
of 500 stocks designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
/**/ The AMEX Industrial (Financial) Index ("AIFI") is maintained by the
American Stock Exchange ("AMEX"). As described by the AMEX, the AIFI is one of
eight industrial subindexes of the AMEX Market Value Index, which is a
capitalization-weighted index reflecting the performance of AMEX-traded common
shares, American Depositary Receipts and warrants.
-27-
<PAGE>
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 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. See "Item 10. Directors and Executive Officers of the
Registrant, Compensation of Directors." 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.
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 DHC and the interests of DHC's stockholders through the ownership and
performance of DHC's Common Stock, to enhance DHC's ability to retain key
personnel, and to attract outstanding prospective employees and Directors.
-28-
<PAGE>
The 1995 Plan 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.
Any stock option granted in the form of an incentive stock option must satisfy
the applicable requirements of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). Awards may be made to the same person on more than one
occasion and may be granted singly, in combination, or in tandem as determined
by the Committee. The 1995 Plan is 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. Other than participating
in formula awards, no member of the Committee shall be eligible to participate
in the 1995 Plan while serving on the Committee. The Board of Directors intends
that each member of the Committee shall be a "Disinterested Person" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and an "Outside Director" within the meaning of Section 162(m)
of the Code; provided, however, that a Director who is a "Disinterested Person"
within the meaning of the Exchange Act will be treated as satisfying the
requirements of an "Outside Director" until the first meeting of stockholders at
which Directors are to be elected that occurs after July 1, 1994 or such later
date as may be permissible under the Code or regulations promulgated thereunder.
Subject to the terms of the 1995 Plan, the Committee has authority to select
personnel to receive awards, to determine the timing, form, amount or value and
terms of grants and awards, and the conditions and restrictions, if any, subject
to which grants and awards will be made and become payable under the 1995 Plan,
and to construe the 1995 Plan and to prescribe rules and regulations with
respect to the administration of the 1995 Plan, except that only executive
officers of DHC and its subsidiaries, as designated by the Committee, may be
entitled to incentive stock awards under the 1995 Plan. The selection of
participants from eligible personnel, other than members of the Committee, is
within the discretion of 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 granted under the 1995 Plan to an 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 within the next 60 days (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 DHC and its subsidiaries, NAICC and Danielson Trust. 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 the 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. The options become
exercisable at various times, depending upon the holder of the options.
Continued employment with DHC or its subsidiaries is a condition to all of the
foregoing options. For information regarding compensation paid during 1995 by
NAICC to Mr. Story, see "Item 13. Certain Relationships and Related
Transactions" below.
The Registrant has no incentive compensation plans, employment agreements
or other benefit plans, other than medical and similar plans available to all
employees.
-29-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock
as of March 13, 1996 of (a) each Director, (b) each executive officer, and (c)
each person known by DHC to own beneficially more than five percent of the
outstanding shares of Common Stock. DHC 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>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF CLASS /1/
-------------------- --------------------
<S> <C> <C>
PRINCIPAL STOCKHOLDERS
Commissioner of Insurance 1,803,235 /2,3/ 11.7
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
Martin J. Whitman 2,687,947 /2,4,5,6/ 17.3
c/o Whitman Heffernan Rhein & Co., Inc.
767 Third Avenue
New York, NY 10017-2023
Whitman Heffernan & Rhein Workout 1,054,996 /2/ 6.9
Fund, L.P.
c/o WHR Management Company, L.P.
2 Park Place
Bronxville, NY 10708
Third Avenue Value Fund, Inc. 803,669 /2/ 5.2
767 Third Avenue
New York, NY 10017-2023
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 56,666 /8/ *
Frank B. Ryan 48,666 /8/ *
Eugene M. Isenberg 69,924 /9/ *
</TABLE>
(continued on following page)
-30-
<PAGE>
<TABLE>
<CAPTION>
OFFICERS AND DIRECTORS AMOUNT AND NATURE OF
(continued) BENEFICIAL OWNERSHIP PERCENT OF CLASS /1/
- ---------------------- -------------------- --------------------
<S> <C> <C>
William R. Story 38,972 /10/ *
Wallace O. Sellers 23,333 /11/ *
Lisa D. Levey 12,200 /12/ *
Claudia C. Cosenza 300 /13/ *
All Officers and Directors
as a Group (11 persons) 3,608,974 /14/ 22.4
</TABLE>
* Percentage of shares beneficially owned does not exceed one percent of the
outstanding Common Stock.
/1/ Share percentage ownership is rounded to nearest tenth of one percent 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 March 13,
1996 (the date as of which this table was prepared), there were exercisable
options outstanding to purchase 1,085,970 shares of Common Stock. Shares
underlying any option which was exercisable on March 13, 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.
/2/ In accordance with provisions of DHC's Certificate of Incorporation, all
certificates representing shares of Common Stock beneficially owned by holders
of five percent or more of Common Stock are owned of record by DHC, as escrow
agent, and are physically held by DHC 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 DHC.
/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; 103,428
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 five percent
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.
-31-
<PAGE>
/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. Does not include shares underlying options to purchase an
aggregate of 80,000 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 options to purchase an aggregate of 13,333
shares of Common Stock at an exercise price of $7.00 per share, which become
exercisable within the next 60 days. 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. Does not include shares underlying options to
purchase an aggregate of 15,000 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.
/13/ Does not include shares underlying options to purchase an aggregate of
3,000 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.
/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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
William R. Story, a Director of DHC, is the President and Chief
Executive Officer of NAICC. During 1995, Mr. Story received from NAICC cash
compensation of $250,000, as well as non-cash compensation in the approximate
aggregate amount of $14,020 (in respect of various business-related expenses
including group term life insurance). NAICC paid a $200,000 bonus to Mr. Story
in 1996 with respect to 1995 services. NAICC does not anticipate paying any
other compensation or bonus to Mr. Story or any other Director or officer of DHC
in 1996 with respect to 1995 services. In addition, NAICC in 1995 made a
contribution to a pension plan in which
-32-
<PAGE>
Mr. Story participates. The amount of such contribution allocable to the
account of Mr. Story is approximately $7,500. Further, NAICC in 1995 made a
contribution to the 401(k) plan and ESOP account of such individual in the
aggregate amount of $4,620. As noted above, in January 1996, Mr. Story received
80,000 options to acquire Common Stock under DHC's 1995 Stock and Incentive
Plan. See "Item 11. Executive Compensation, 1995 Stock and Incentive Plan."
-33-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements -- see Index to Financial Statements and
Financial Statement Schedules appearing on Page F-1.
(2) Financial Statement Schedules -- see Index to Financial
Statements and Financial Statement Schedules appearing on Page F-1.
(3) Exhibits:
EXHIBIT NO./1/ NAME OF EXHIBIT
- ----------- ---------------
Plan of Acquisition:
-------------------
2.1 * Agreement and Plan of Merger dated as of February 26, 1996 among
Midland Financial Group, Inc., Danielson Holding Corporation and
Mission Sub E, Inc. (Filed with Report on Form 8-K dated March
1, 1996, Exhibit 2.1.)
Organizational Documents:
------------------------
3.1 * Certificate of Incorporation of Registrant.
3.2 * Bylaws of Registrant.
Material Contracts--Miscellaneous:
---------------------------------
10.1 * Stock Sale Agreement dated as of January 27, 1993 between
Nationwide Capital Corporation and Danielson Holding Corporation.
(Filed with Report on Form 10-K dated March 26, 1993, Exhibit
10.16.)
10.2 * Deposit Escrow Agreement dated as of January 19, 1993 among
Nationwide Capital Corporation, Danielson Holding Corporation and
Mission Valley Escrow. (Filed with Report on Form 10-K dated
March 26, 1993, Exhibit 10.17.)
10.3 * Guarantee Agreement dated as of March 26, 1993 between Resolution
Trust Corporation, in its capacity as conservator of HomeFed
Bank, and Danielson Holding Corporation. (Filed with Report on
Form 10-K dated March 26, 1993, Exhibit 10.18.)
10.4 * Guarantee Agreement dated as of March 26, 1993 between Resolution
Trust Corporation, in its corporate capacity, and Danielson
Holding Corporation. (Filed with Report on Form 10-K dated March
26, 1993, Exhibit 10.19.)
- ----------
/1/ Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
-34-
<PAGE>
EXHIBIT NO./1/ NAME OF EXHIBIT
- ----------- ---------------
10.5 * Asset Purchase Agreement dated as of December 31, 1993 by and
among Grossmont Bank, Donald A. Levi, Murray R. Steeg and
Danielson Trust Company. (Filed with Report on Form 10-K dated
March 18, 1994, Exhibit 10.20.)
10.6 * Amendment No. 1 dated as of February 16, 1994 to Asset Purchase
Agreement dated as of December 31, 1993 by and among Grossmont
Bank, Donald A. Levi, Murray R. Steeg and Danielson Trust
Company. (Filed with Report on Form 10-K dated March 18, 1994,
Exhibit 10.21.)
10.7 * Amendment No. 2 dated as of February 17, 1994 to Asset Purchase
Agreement dated as of December 31, 1993 by and among Grossmont
Bank, Donald A. Levi, Murray R. Steeg and Danielson Trust
Company. (Filed with Report on Form 10-K dated March 18, 1994,
Exhibit 10.22.)
10.8 * Consulting Services Agreement dated as of February 22, 1994
between Danielson Trust Company and Tenney-Levi Corporation.
(Filed with Report on Form 10-K dated March 18, 1994, Exhibit
10.23.)
10.9 * Consulting Services Agreement dated as of February 22, 1994
between Danielson Trust Company and Murray R. Steeg. (Filed with
Report on Form 10-K dated March 18, 1994, Exhibit 10.24.)
10.10 * Agreement dated as of February 22, 1994 between Grossmont Bank
and Danielson Trust Company. (Filed with Report on Form 10-K
dated March 18, 1994, Exhibit 10.25.)
Material Contracts--Executive Compensation Plans and
----------------------------------------------------
Arrangements:
------------
10.11 * 1990 Stock Option Plan. (Filed with Report on Form 8-K dated
September 4, 1990, Exhibit 10.8.)
10.12 * 1995 Stock and Incentive Plan. (Included as Exhibit A to Proxy
Statement filed on March 30, 1995.)
Annual Report to Security-Holders:
---------------------------------
13.1 1995 Annual Report of Danielson Holding Corporation. (To be
included herewith at page 49.)
Powers of Attorney:
------------------
24.1 Powers of Attorney executed by certain directors of Danielson
Holding Corporation. (Filed herewith at page 101.)
Financial Data Schedule:
-----------------------
27.1 Financial Data Schedule for Article 7 Registrant (Insurance
Company). (Filed electronically herewith.)
- ----------
/1/ Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
-35-
<PAGE>
Miscellaneous:
-------------
99.1 * Press Release dated February 27, 1996. (Filed with Report on
Form 8-K dated March 1, 1996, Exhibit 99.1.)
(b) Reports on Form 8-K filed during the quarter ended December 31, 1995:
Not applicable.
- ----------
/1/ Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
-36-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Danielson Holding Corporation has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
DANIELSON HOLDING CORPORATION
(Registrant)
By /S/ C. KIRK RHEIN, JR.
------------------------------------
C. Kirk Rhein, Jr.
President and Chief Executive
Officer
Date: March 19, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of Danielson
Holding Corporation and in the capacities and on the dates indicated.
Date: March 19, 1996 By /S/ C. KIRK RHEIN, JR.
------------------------------------
C. Kirk Rhein, Jr.
President and Chief Executive
Officer and a Director
Date: March 19, 1996 By /S/ MARTIN J. WHITMAN
------------------------------------
Martin J. Whitman
Chairman of the Board and Chief
Investment Officer and a Director
Date: March 19, 1996 By /S/ JAMES P. HEFFERNAN
------------------------------------
James P. Heffernan
Chief Financial Officer and a
Director
Date: March 19, 1996 By /S/ CLAUDIA C. COSENZA
------------------------------------
Claudia C. Cosenza
Controller
Date: March 19, 1996 By /S/ WILLIAM R. STORY
------------------------------------
William R. Story
Director
-37-
<PAGE>
Date: March 19, 1996 By /S/ JOSEPH F. PORRINO
------------------------------------
Joseph F. Porrino
Director
Date: March 19, 1996 By /S/ FRANK B. RYAN
------------------------------------
Frank B. Ryan
Director
Date: March 19, 1996 By
------------------------------------
Eugene M. Isenberg
Director
Date: March 19, 1996 By /S/ WALLACE O. SELLERS
------------------------------------
Wallace O. Sellers
Director
-38-
<PAGE>
DANIELSON HOLDING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page Number
-----------
Independent Auditors' Report......................................... F-2
Danielson Holding Corporation and Consolidated Subsidiaries:
Statements of Operations - For the years ended December 31,
1995, 1994 and 1993.............................................. *
Balance Sheets - December 31, 1995 and 1994........................ *
Statements of Stockholders' Equity - For the years ended
December 31, 1995, 1994 and 1993................................. *
Statements of Cash Flows - For the years ended December 31,
1995, 1994 and 1993.............................................. *
Schedule I - Summary of Investments - Other than Invest-
ments in Related Parties.......................... S-1
Schedule II - Condensed Financial Information of the
Registrant........................................ S-2-4
Schedule IV - Reinsurance......................................... S-5
Schedule V - Valuation and Qualifying Accounts................... S-6
Schedule III - Supplemental Information Concerning Property-Casualty
and VI Insurance Operations................................ S-7
Schedules other than those listed above are omitted because either they are
not applicable or not required or the information required is included in the
Company's Consolidated Financial Statements.
- ----------
* Incorporated by reference to DHC's 1995 Annual Report to Stockholders.
-39-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Danielson Holding Corporation:
Under date of February 26, 1996, we reported on the consolidated balance
sheets of Danielson Holding Corporation and subsidiaries as of December 31, 1995
and 1994, 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, as contained in the 1995 annual report to stockholders.
These consolidated financial statements and our report thereon are incorporated
by reference in the annual report on Form 10-K for the year 1995. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedules as listed in the
accompanying index. 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.
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."
/S/ KPMG PEAT MARWICK LLP
----------------------------
KPMG Peat Marwick LLP
New York, New York
February 26, 1996
-40-
<PAGE>
SCHEDULE I
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN
RELATED PARTIES
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------
Cost or Fair Amount Reflected on
Amortized Cost Value Balance Sheet
-------------- -------- -------------------
<S> <C> <C> <C>
Fixed maturities classified as
available-for-sale:
U.S. Government/Agency $ 54,865 $ 56,715 $ 56,715
Mortgage-backed 62,342 63,606 63,606
Corporate 50,566 52,274 52,274
-------- -------- --------
Total fixed maturities 167,773 172,595 172,595
-------- -------- --------
Equity securities:
Common stocks 256 629 629
-------- -------- --------
Total equity securities 256 629 629
-------- -------- --------
Short term investments 8,570 8,570 8,570
-------- -------- --------
Total investments $176,599 $181,794 $181,794
======== ======== ========
</TABLE>
-41-
<PAGE>
SCHEDULE II
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Net investment income $ 675 $ 435 $ 597
Net realized investment losses (2) - -
Other income 26 12 -
------- ------- -------
TOTAL REVENUES 699 447 597
------- ------- -------
EXPENSES:
Employee compensation and benefits 1,442 1,118 1,182
Professional fees 221 751 429
Other general and administrative fees 657 697 625
------- ------- -------
TOTAL EXPENSES 2,320 2,566 2,236
------- ------- -------
Income (loss) before provision for
income taxes (1,621) (2,119) (1,639)
Income tax provision 36 40 54
------- ------- -------
Loss before equity in net income of
subsidiaries (1,657) (2,159) (1,693)
Equity in net income of subsidiaries 3,973 5,304 4,927
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 2,316 3,145 3,234
Extraordinary item - 750 -
------- ------- -------
NET INCOME $ 2,316 $ 3,895 $ 3,234
======= ======= =======
</TABLE>
-42-
<PAGE>
SCHEDULE II, CONTINUED
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)
BALANCE SHEETS
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- ---------
<S> <C> <C>
ASSETS:
Cash $ 18 $ 51
Fixed maturities:
Available-for-sale at fair value
(Cost: $10,487 and $12,794) 10,530 12,736
Short term investments, at cost which approximates
fair value 466 165
------- --------
TOTAL CASH AND INVESTMENTS 11,014 12,952
Investment in subsidiaries 58,289 48,944
Accrued investment income 175 176
Other assets 626 576
------- --------
TOTAL ASSETS $70,104 $62,648
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 283 $ 330
------- --------
Total liabilities 283 330
------- --------
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 15,360,255 shares and 15,360,270 shares) 1,537 1,537
Additional paid-in capital 46,131 46,417
Net unrealized gain (loss) on available-for-sale securities 5,195 (278)
Retained earnings 17,024 14,708
Treasury stock (Cost of 10,639 shares and 10,624 shares) (66) (66)
------- --------
TOTAL STOCKHOLDERS' EQUITY 69,821 62,318
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $70,104 $62,648
======= ========
</TABLE>
-43-
<PAGE>
SCHEDULE II, CONTINUED
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,316 $ 3,895 $ 3,234
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net realized investment losses 2 - -
Depreciation and amortization 86 125 (46)
Equity in net (income) of subsidiaries (3,973) (5,304) (4,927)
Increase (decrease) in accrued expenses (47) 56 (47)
Other, net (79) 209 (238)
-------- -------- --------
Net cash (used in) operating activities (1,695) (1,019) (2,024)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased:
Fixed income maturities available-for-sale (10,787) (12,933) -
Fixed income maturities held-to-maturity - - (8,592)
Proceeds from sales:
Fixed income maturities available-for-sale 1,837 7,026 -
Investments, matured or called
Fixed income maturities available-for-sale 11,210 - -
Fixed income maturities held-to-maturity - 8,430 -
Change in accrued investment income 1 (127) 36
-------- -------- --------
Net cash provided by (used in)
investing activities 2,261 2,396 (8,556)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of Danielson Trust Company - - (4,611)
Acquisition of Western Trust Services - (2,505) -
Proceeds from exercise of options
to purchase Common Stock - 774 -
Retirement of stock options (286) - -
Purchase of treasury stock - (56) -
Dividend received from subsidiary - - 668
Change in receivable from subsidiary (12) (344) (137)
Return of capital from subsidiaries - (2) 133
-------- -------- --------
Net cash (used in) financing activities (298) (2,133) (3,947)
-------- -------- --------
Net increase (decrease) in cash and
short term investments 268 (756) (14,527)
Cash and short term investments at
beginning of year 216 972 15,499
-------- -------- --------
CASH AND SHORT TERM INVESTMENTS AT
END OF YEAR $ 484 $ 216 $ 972
======== ======== ========
</TABLE>
-44-
<PAGE>
SCHEDULE IV
DANIELSON HOLDING CORPORATION
REINSURANCE
(in thousands)
<TABLE>
<CAPTION>
CEDED EARNED ASSUMED EARNED PERCENTAGE
GROSS EARNED TO OTHER FROM OTHER NET EARNED OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
-------------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Property and liability
insurance premiums $76,688 $16,140 $ - $ 60,548 -
======= ======= ======== ======== =========
Year Ended December 31, 1994:
Property and liability
insurance premiums $106,552 $13,261 $ - $ 93,291 -
======== ======= ======== ======== =========
Year Ended December 31, 1993:
Property and liability
insurance premiums $ 91,768 $ 5,784 $ 68 $ 86,052 -
======== ======= ======== ======== =========
</TABLE>
-45-
<PAGE>
SCHEDULE V
DANIELSON HOLDING CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT
BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
------------------- ---------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for premiums
and fees receivable $ 323 $ 117 $ - $ 283 $ 157
========== ========== ======== ======= ========
Allowance for uncollectable
reinsurance on paid losses $ 675 $ - $ - $ 287 $ 388
========== ========== ======== ======= ========
Allowance for uncollectable
reinsurance on unpaid losses $ 425 $ - $ - $ - $ 425
========== ========== ======== ======= ========
</TABLE>
-46-
<PAGE>
SCHEDULES III AND VI
DANIELSON HOLDING CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION AND SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
RESERVES DISCOUNT
FOR UNPAID FROM
CLAIMS AND RESERVES OTHER
AFFILIATION DEFERRED CLAIM FOR POLICY CLAIMS
WITH ACQUISITION ADJUSTMENT UNPAID UNEARNED AND BENEFITS NET EARNED INVESTMENT
REGISTRANT COSTS EXPENSES CLAIMS PREMIUMS PAYABLE PREMIUMS INCOME
------------ ------------- ------------ ---------- --------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Property-Casualty
Entities:
AS OF AND FOR THE YEAR
ENDED 12/31/95 $ 1,045 $137,406 $ - $ 8,563 $ - $60,548 $12,351
======= ======== ======== ======= ======= ======= =======
As of and for the year
ended 12/31/94 $ 2,204 $146,330 $ - $14,328 $ - $93,291 $11,287
======= ======== ======== ======= ======= ======= =======
As of and for the year
ended 12/31/93 $ 2,196 $137,479 $ - $16,502 $ - $86,052 $12,587
======= ======== ======== ======= ======= ======= =======
CLAIMS AND CLAIM
AFFILIATION ADJUSTMENT EXPENSES AMORTIZATION OTHER PAID CLAIMS
WITH INCURRED RELATED TO OF DEFERRED OPERATING AND CLAIM NET WRITTEN
REGISTRANT CURRENT YEAR PRIOR YEARS ACQUISITION COSTS EXPENSES ADJUSTMENT EXPENSES PREMIUMS
----------- ------------ ----------- ----------------- --------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated
Property-Casualty
Entities:
AS OF AND FOR THE YEAR
ENDED 12/31/95 $ 45,592 $ 3,123 $ 9,089 $ 4,302 $ 61,046 $ 55,295
======== ======== ======== ======= ======== ========
As of and for the year
ended 12/31/94 $ 67,131 $ 384 $ 13,724 $ 4,953 $ 58,113 $ 91,069
======== ======== ======== ======= ======== ========
As of and for the year
ended 12/31/93 $ 65,157 $ 743 $ 14,812 $ 2,181 $ 51,502 $ 87,953
======== ======== ======== ======= ======== ========
</TABLE>
-47-
<PAGE>
EXHIBITS
-48-
<PAGE>
EXHIBIT 13.1
[DHC's 1995 Annual Report to Stockholders is included with
this Form 10-K solely for convenience of reference. Except for
those portions of DHC's 1995 Annual Report to Stockholders which
are expressly incorporated by reference in this Form 10-K, such
Annual Report to Stockholders is not to be deemed "filed" with
the Securities and Exchange Commission and is not to be
considered part of this Form 10-K.]
-49-
<PAGE>
EXHIBIT 13.1, continued
[OUTSIDE FRONT COVER]
=====================
[Danielson Holding Corporation
1995 Annual Report]
[cover graphics
+ text]
-50-
<PAGE>
EXHIBIT 13.1, continued
[INSIDE FRONT COVER]
====================
Danielson Holding Corporation
operates financial services businesses
in the areas of insurance and
trust and investment management.
Danielson Holding Corporation's business plan is to grow by making strategic
acquisitions that are expected to contribute higher than average returns for our
stockholders. Management will seek both acquisitions that will contribute to
growth of existing subsidiaries, as well as acquisitions that represent a new
business venture for the Company. This is a stockholder oriented strategy of
seeking total return.
CONTENTS PAGE
- -------- ----
Danielson Holding Corporation [51]
Financial Highlights [52]
To Our Stockholders [53]
National American Insurance Company of California [56]
Danielson Trust Company [58]
Selected Consolidated Financial Data [60]
Management's Discussion and Analysis of
Financial Condition and Results of Operations [61]
Consolidated Statements of Operations [73]
Consolidated Balance Sheets [74]
Consolidated Statements of Stockholders' Equity [75]
Consolidated Statements of Cash Flows [76]
Notes to Consolidated Financial Statements [77]
Independent Auditors' Report [97]
Responsibility for Financial Reporting [97]
Quarterly Financial Data [98]
Stock Market Prices [98]
Corporate Information [99]
-51-
<PAGE>
EXHIBIT 13.1, continued
[PAGE 1]
========
DANIELSON HOLDING CORPORATION AND CONSOLIDATED SUBSIDIARIES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
As of and for the years ended December 31,
------------------------------------------
(In thousands, except share and per share amounts) 1995 1994 1993
- ---------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Earned premiums........................................ $ 60,548 $ 93,291 $ 86,052
Total revenues......................................... $ 80,081 $ 110,340 $ 102,397
Income before extraordinary item[s].................... $ 2,316 $ 3,145 $ 2,746
Net income............................................. $ 2,316 $ 3,895 $ 3,234
Net cash provided by (used in) continuing
operating activities................................. $ (4,488) $ 10,008 $ 16,882
Income per share of Common Stock before
extraordinary item[s]................................ $ 0.14 $ 0.20 $ 0.17
Net income per share of Common Stock................... $ 0.14 $ 0.25 $ 0.20
Combined ratio......................................... 113.4% 106.2% 110.9%
BALANCE SHEET AND OTHER DATA
Total investments...................................... $ 181,794 $ 181,763 $ 176,738
Policyholder liabilities............................... $ 150,633 $ 166,938 $ 163,762
Stockholders' equity................................... $ 69,821 $ 62,318 $ 58,838
Book value per share of Common Stock................... $ 4.55 $ 4.06 $ 3.89
Debt................................................... $ - $ - $ 2,250
Debt as a percentage of stockholders' equity........... - - 3.82%
Common Stock price range
High................................................. $ 8 $ 9-3/4 $ 8-7/8
Low.................................................. $ 6-5/8 $ 6-1/4 $ 3-3/8
Shares of Common Stock outstanding at year end......... 15,360,255 15,360,270 15,110,251
Employees of continuing operations at year end......... 232 264 230
</TABLE>
-52-
<PAGE>
EXHIBIT 13.1, continued
[PAGE 2/3]
==========
To Our Stockholders:
The inside front cover of our Annual Report sets forth our corporate
objective, namely "[T]O GROW BY MAKING STRATEGIC ACQUISITIONS THAT ARE EXPECTED
TO CONTRIBUTE HIGHER THAN AVERAGE RETURNS FOR OUR STOCKHOLDERS. MANAGEMENT WILL
SEEK BOTH ACQUISITIONS THAT WILL CONTRIBUTE TO GROWTH OF EXISTING SUBSIDIARIES,
AS WELL AS ACQUISITIONS THAT REPRESENT A NEW BUSINESS VENTURE FOR THE
COMPANY...." We believe that our recently announced agreement to acquire
Midland Financial Group, Inc. (Midland) will prove to be a significant step
toward completing our corporate objective. The closing of the Midland
transaction is subject to a number of conditions, including obtaining
stockholder approval at a Danielson Holding Corporation (DHC) 1996 stockholders'
meeting.
1995, otherwise, was a year of significant challenge for both our
insurance subsidiary, National American Insurance Company of California (NAICC),
and our trust subsidiary, Danielson Trust Company (Danielson Trust). NAICC
performed well in a nearly suicidal market by refusing to engage in the cut-
throat competition that characterized the 1995 California workers' compensation
market. Again, we were impressed by our management at NAICC. Danielson Trust
also used 1995 as a year to retrench and reconfigure its business. While the
trust operations posted a disappointing loss of $1.2 million (excluding a
writedown of goodwill and amortization expense), we believe that the steps taken
by the new management at Danielson Trust should generate month to month
profitability in 1996 and real profitability in ensuing years. The NAICC and
Danielson Trust operations are reviewed in detail in the operations review
portion of this Annual Report.
During 1995, we reviewed numerous acquisition candidates for DHC and did
not find many that appeared to be a good fit. DHC's stockholders deserve not
just any acquisition, but also a good company, a strategic direction, and the
promise of a good platform for future growth. We suffered the frustration of
coming close on a number of potentially good acquisitions but none came close to
fruition before we signed the Midland merger agreement. We will work to close
the Midland transaction expeditiously, perhaps as early as the second quarter of
this year. Midland appears to be an excellent fit with NAICC. The combined
insurance operations will give those operations critical mass as well as a
coherent direction for DHC. Stated another way, when Midland is approved,
financed and closed, we believe that DHC will have achieved sufficient size and
will be sufficiently well financed so that future attractive acquisitions of
larger companies should become more viable.
NAICC
-----
During 1995, California workers' compensation insurers competed head-to-
head under the new open rating law without benefit of the prior years' minimum
rate laws. This competition can be expected to result in large operating losses
to those companies that led the charge and a further weakening of the weak
companies. NAICC was unwilling to participate in the frenzy, deciding instead
to cut back its written premiums in this line of business in order to live for a
better day. In 1994, NAICC wrote $71.9 million of written premiums in
California workers' compensation, while only writing $32.6 million of written
premiums in this line in 1995. NAICC redeployed some of its capital to the non-
standard automobile insurance market, increasing its direct written premiums
from $20 million in 1994 for this line to $28.8 million in 1995. This strategy
permitted NAICC to post net income of $5.7 million for 1995 compared with net
income of $6 million in 1994, when the California workers' compensation market
hit its historic peak. This net income was earned on net earned premiums of
$60.5 million in 1995, compared with $93.3 million in 1994.
-53-
<PAGE>
EXHIBIT 13.1, continued
[PAGE 2/3]
==========
NAICC intends to maintain a disciplined approach to insurance
underwriting. Management of NAICC approaches the property and casualty
insurance business as a relatively flexible undertaking where, within limits, a
pool of capital can be redeployed from less promising to more promising areas.
NAICC's objective is to earn a fair return on investment on a long term basis.
If a specific line becomes less than adequately profitable, NAICC should write a
different line. To execute this strategy, an insurance company must have good
data processing systems and sound managers. We have that at NAICC.
One benefit that we did not expect to receive from the NAICC redeployment
was the acquisition possibilities in the non-standard automobile insurance
business. Midland has recently experienced underwriting losses in this line of
business in California and Arizona. It appears likely that the management of
NAICC will be able to help Midland's management solve certain of the underlying
problems, provided, of course, that the transaction closes. We believe that the
market for this insurance product line may further consolidate and DHC should be
well-positioned to make additional acquisitions.
Danielson Trust
---------------
During 1995, our new management of Danielson Trust continued to address
problems associated with the integration of the Western Trust business added in
1994 as well as the lack of a coherent marketing program. The difficult truth
is that the Western Trust acquisition did not produce according to the hopes of
the former trust management. Equally, it became absolutely clear that the trust
company could not grow at a meaningful rate without a broader based distribution
system, and that this distribution system would have to be found by an
acquisition or alliance.
Trust company management appears to have succeeded in beginning to
address the distribution problem. During 1995, Danielson Trust signed an
agreement with PaineWebber Incorporated to market Danielson Trust's products to
their clients. This alliance already has delivered significant new business for
the trust company and we expect good results from this relationship. To put the
matter in a context, during the first two months of 1995, Danielson Trust logged
in $7,600 of new business. During the same period of 1996, the trust company
realized $30,700 of new fee business, a portion of which was attributable to its
alliance with PaineWebber.
As noted above, in 1995, Danielson Trust lost $1.2 million (excluding a
writedown of goodwill and amortization expense). Much of this loss stemmed from
problems of integrating and maintaining the business of Western Trust Services.
While the trust company's management has reduced expenses, we expect that the
operations will not be significantly profitable unless and until the trust
company grows its revenue. Danielson Trust's clients deserve a high level of
service and Danielson Trust's management will not permit any expense cut to the
disadvantage of our subsidiary's clientele. Therefore, we do not expect a quick
fix, but instead look for profitability toward the end of 1996 as more new
business is developed.
Midland
-------
The Midland acquisition proposal will be described in detail in a proxy
statement we expect will be mailed to you shortly. Suffice to say at this
juncture, we obviously believe that we have found a high quality company, run by
honest and hard working people. We believe the Midland management will fit in
very well with the managers at NAICC. We will look for more Midland type
acquisitions in the future.
-54-
<PAGE>
EXHIBIT 13.1, continued
[PAGE 2/3]
==========
Finally, this year we would like to recommend Paul B. Loyd, Jr. for
election to the Board of Directors of DHC. Paul is a man of extraordinary
accomplishments and abilities.
/S/ MARTIN J. WHITMAN
--------------------------------------
MARTIN J. WHITMAN
Chairman of the Board
and Chief Investment Officer
/S/ C. KIRK RHEIN, JR.
--------------------------------------
C. KIRK RHEIN, JR.
President and Chief Executive Officer
/S/ JAMES P. HEFFERNAN
--------------------------------------
JAMES P. HEFFERNAN
Chief Financial Officer
March 19, 1996
[PHOTO OF MESSRS. WHITMAN, RHEIN & HEFFERNAN; caption of names]
-55-
<PAGE>
EXHIBIT 13.1, continued
[PAGE 4]
========
NATIONAL AMERICAN INSURANCE COMPANY OF CALIFORNIA
In 1995, National American Insurance Company of California (NAICC) achieved
our essential goal--to underwrite insurance that offers a reasonable expectation
of an underwriting profit. There were no surprises for NAICC in 1995. Direct
written premiums for the year fell 32.1% from its all time high of $104.4
million in 1994 to $70.9 million in 1995. Workers' compensation premium
finished the year at $39.8 million, or $40.6 million below 1994; property and
casualty premium rose 29.6% over 1994 to $31.1 million.
The good news is that our workers' compensation direct written premiums
declined. In 1994 we wrote about $71.9 million in direct written premiums in
California; in 1995 direct written premiums fell by 55% to $32.6 million. There
are plenty of indications that the market average policy premium is 15% to 25%
below breakeven in California (though not NAICC's) and therein lies the primary
reason for the premium decline. We expected that we would be out of step with
the competition in California in 1995 when the rating law changed which allowed
insurers to file and use their own rates and rating plans. If the decline in
rates had been supported by a decline in claims and claims handling expenses, we
believe that our volume would have declined less because our prices would have
been more competitive. But underlying expenses have not declined. In fact, the
rate making statistics support higher average rates, not lower ones. We believe
that the price level will shift upward within the next 12 months, hopefully
affording our California agents an opportunity to sell a price-competitive NAICC
workers' compensation policy once again.
Apart from California, our agents also produced workers' compensation
insurance for us in Idaho, Oregon, and Arizona. Direct written premiums there
declined 15.3% to $7.2 million in 1995, partially because of rate decreases and
partially due to competition from other California insurers' moving their
capacity to other states. While underwriting profits have been and should
continue to be the norm for us in these states, it is doubtful that premium
volume will increase in the next year. This will not be the case with the
automobile line of business.
The 29.6% increase in property and casualty insurance premium for NAICC in
1995 was due to a 44.3% increase in our California non-standard private
passenger automobile insurance program. Direct written premium for this program
was $28.8 million in 1995. Our success with the non-standard auto program is
directly tied to NAICC's responsive claim service coupled with a diligent anti-
fraud effort, as well as to the sales and underwriting effort of our exclusive
independent general agent. Our general agent markets this program through its
network of more than 500 independent California agents. We anticipate that
premium growth in this line will continue, though at a more modest pace in the
future.
Finally, the 1995 direct written premiums from our commercial automobile
insurance program stayed even with 1994 at about $2.3 million. We introduced a
new non-standard commercial automobile insurance program in Arizona and Oregon
early in 1995 without any real increase in production. In California, rates and
forms were filed and approved, and the program was launched in August 1995.
Current indications are that our independent agents will sell several times the
1995 premium volume in 1996.
As always, we are grateful for the opportunity to serve our policyholders,
agents, employees, stockholders, and our many business partners. Thank you for
supporting NAICC.
-56-
<PAGE>
EXHIBIT 13.1, continued
[PAGE 5]
========
[NAICC - PHOTO]
"NAICC's success with our non-standard auto program is directly tied to our
responsive claim service, diligent anti-fraud efforts, and the sales and
underwriting effort of our exclusive independent general agent."
-57-
<PAGE>
EXHIBIT 13.1, continued
[PAGE 6]
========
DANIELSON TRUST COMPANY
The new senior management team at Danielson Trust worked hard in 1995 to
overcome continued challenges from the prior year and to position the company
for future profitability. To do this, the company needed to rationalize certain
cost centers and develop a broader marketing system.
The company completed the integration of the Western Trust Services (WTS)
accounts and assets that were acquired in 1994, with the unhappy realization
that increased systems and administrative costs attendant to that business, as
well as the disappointing quality of the assets acquired, significantly reduced
the anticipated benefits of the transaction. During 1995, Danielson Trust's new
management team took decisive action by eliminating unprofitable lines of
business, terminating unprofitable accounts, and streamlining systems and
staffing. By year end, these actions had their desired effect of stabilizing
Danielson Trust's operations.
Danielson Trust's marketing and sales efforts gained sharp focus in 1995. In
addition to changing our marketing approach and staffing, during 1995 the
company successfully negotiated with PaineWebber Incorporated to select
Danielson Trust to serve as the trustee for PaineWebber's entire west coast
region. In that capacity, Danielson Trust provides trust and fiduciary
services to PaineWebber clients in California and the surrounding states. This
appointment has given Danielson Trust a valuable new distribution system for its
investment products and services. The company intends to seek additional
established distribution channels to supplement Danielson Trust's other
marketing efforts.
Danielson Trust ended 1995 with a net loss of $1.2 million (excluding a
writedown of goodwill and amortization expense). Contributing to the loss were
a writedown of fixed assets, additional staff costs and related expenses, costs
attendant to the WTS integration and increased marketing expenses. As a result
of the receipt in 1994 of non-recurring termination fees associated with the
company's termination of certain unprofitable private trust accounts, fee income
from that line of business decreased in 1995 to $1.3 million. Termination fees
received in 1995 relating to the closure of unprofitable retirement services
(formerly known as employee benefit trust) accounts resulted in an increase in
fee income for this line in 1995 to $2.6 million. New business in 1995
contributed to a marked increase in custody services fee income, to $537,000.
Danielson Trust believes that it has solved the former operational problems
which prevented the company from being profitable during 1995. For 1996 and
beyond, the company's undivided attention will be on increasing revenues.
Through the development of new products and services, and an enhanced marketing
strategy designed to heighten Danielson Trust's visibility in the marketplace,
Danielson Trust believes it is advantageously positioned to compete in an
increasingly consolidated industry and to continue to offer high quality
services to new and existing clients. While predictions are difficult, 1996 is
expected to be a significantly better year for Danielson Trust, although the
company is not likely to begin to earn a reasonable return on capital employed
until 1997 and subsequent years.
-58-
<PAGE>
EXHIBIT 13.1, continued
[PAGE 7]
========
[Danielson Trust - PHOTO]
"Danielson Trust believes it is advantageously positioned to compete in an
increasingly consolidated industry and to continue to offer high quality
services to new and existing clients."
-59-
<PAGE>
EXHIBIT 13.1, continued
[PAGE 8]
========
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data of Danielson Holding Corporation and
its subsidiaries should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations, included elsewhere in this
Report. For matters affecting the Company's operations by industry segment, see
Note 14 of the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
(In thousands, except share and YEARS ENDED DECEMBER 31,
per share amounts) 1995 1994 1993 1992 1991
- --------------------------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
A. RESULTS OF OPERATIONS
Total revenues $ 80,081 $ 110,340 $ 102,397 $ 88,440 $ 73,763
Income before extraordinary
item[s] $ 2,316 $ 3,145 $ 2,746 $ 1,898 $ 184
Net income $ 2,316 $ 3,895 /1/ $ 3,234 /2,3/ $ 8,046 /3/ $ 184
Income per share of
Common Stock before
extraordinary item[s] $ 0.14 $ 0.20 $ 0.17 $ 0.13 $ 0.01
Net income per share of
Common Stock $ 0.14 $ 0.25 /1/ $ 0.20 /2,3/ $ 0.53 /3/ $ 0.01
B. BALANCE SHEET DATA
Invested assets $ 181,794 $ 181,763 $ 176,738 $ 161,468 $ 141,534
Total assets $ 227,924 $ 240,529 $ 234,150 $ 216,868 $ 198,873
Unpaid losses and loss
adjustment expenses $ 137,406 $ 146,330 $ 137,479 $ 125,391 $ 119,334
Stockholders' equity $ 69,821 $ 62,318 $ 58,838 $ 54,764 $ 46,659
Shares of Common Stock
outstanding 15,360,255 /4,5/ 15,360,270 /4,5/ 15,110,251 /4/ 15,110,258 /4/ 15,112,984 /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 Insurance Commissioner as trustee.
3 Includes extraordinary gain from a former trust administered by the California
Insurance Commissioner 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.
-60-
<PAGE>
EXHIBIT 13.1, continued
[PAGES 9-36]
============
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. GENERAL
Danielson Holding Corporation ("DHC") is organized as a holding
company with substantially all of its operations conducted by subsidiaries
(collectively with DHC, the "Company"). DHC, on a parent-only basis, has
limited continuing expenditures for rent and administrative expenses and derives
revenues primarily from investment return on portfolio securities. Therefore,
the analysis of the Company's financial condition is generally best done on an
operating subsidiary basis. For additional information relating to the
Company's organization, see Note 1 of the Notes to Consolidated Financial
Statements. For matters affecting the Company's operations by industry segment,
see Note 14 of the Notes to Consolidated Financial Statements.
The Company does not currently pay Federal income tax due to the
recognition of losses from several trusts that assumed various liabilities of
certain present and former subsidiaries of DHC. It is expected that the 1995
consolidated Federal income tax return will report a cumulative net operating
loss carryforward currently estimated at approximately $1.4 billion, which will
expire in various amounts, if not used, between 1998 and 2010. See Note 8 of
the Notes to Consolidated Financial Statements.
2. RESULTS OF NAICC'S OPERATIONS
The operations of DHC's principal subsidiary, National American
Insurance Company of California ("NAICC"), are primarily in property and
casualty insurance. At December 31, 1995, NAICC had a "B++" rating from A.M.
Best Company, a nationally recognized rating agency of insurance companies.
Property and Casualty Insurance Operations
Net written premiums were $55.3 million, $91.1 million, and $88
million in 1995, 1994 and 1993, 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, and NAICC's decision to allow premiums to decline in this market.
Net written premiums for the workers' compensation line of business
were $38.2 million, $77.2 million and $79.3 million in 1995, 1994 and 1993,
respectively. The 1995 decrease of approximately 50.5 percent in the net written
premium from 1994 is attributable to significantly increased price competition
in California. Competition among some insurers, other than NAICC, led to their
establishing market prices which may be below the breakeven point. It is the
policy of NAICC to underwrite business that is expected to yield an underwriting
profit. As a result, NAICC's new and renewal policy counts decreased
significantly during 1995. In addition, workers' compensation written premiums
in California were affected by three decreases of the minimum rate during the
last two years: a 16 percent decrease effective October 1, 1994, a 12.7 percent
decrease effective January 1, 1994, and a seven percent decrease effective July
16, 1993. At December 31, 1995, NAICC had 3,871 workers' compensation policies
in force with an average estimated annual premium size of $10,200, compared to
7,253 and 7,161 such policies in force at December 31, 1994 and 1993,
respectively, with an average estimated annual premium size of $11,300 and
$12,000 in each respective year.
-61-
<PAGE>
EXHIBIT 13.1, continued
Net written premiums were $15 million, $10.5 million and $4.9 million in
1995, 1994 and 1993, respectively, for the non-standard private passenger
automobile insurance program. NAICC commenced writing non-standard private
passenger automobile insurance in July 1993. The increase in such premiums
reflects NAICC's continued expansion of this line of business. NAICC had more
than 29,000, private passenger automobile policies in force for the year ended
December 31, 1995, compared to 20,000 and 15,419 policies in force in 1994 and
1993, respectively, representing approximately 27.1 percent, 11.5 percent and
5.6 percent of NAICC's total annual net premiums written for all lines of
insurance in each of those years. NAICC cedes 50 percent of its private
passenger automobile insurance business to a major reinsurance company pursuant
to a 50 percent quota share reinsurance agreement.
Net written premiums for commercial automobile insurance were $2.1 million
for each of the years ended December 31, 1995 and 1994 and $1.7 million in 1993.
NAICC writes 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 rates in
California, its largest market, in August 1995.
Net written premiums for other commercial property and casualty insurance
were $1.3 million and $2.1 million in 1994 and 1993, respectively. NAICC ceased
writing new and renewal commercial property and casualty policies in 1994.
Net investment income was $12.4 million, $11.3 million, and $12.6 million
in 1995, 1994 and 1993, respectively. The increase in net investment income is
primarily due to $840,000 of interest received in December 1995 from Lloyds of
London ("Lloyds") in connection with an unpaid reinsurance claim. Net
investment income in 1995, exclusive of the Lloyd's interest payment, increased
slightly over 1994 because average invested assets throughout 1995 were slightly
greater than in 1994. As of December 31, 1995 and 1994, the average yield on
NAICC's portfolio was 7.2 percent and 7.4 percent, respectively. The estimated
average maturity of the portfolio is 4.9 years. 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 $205,000 and $1,504,000
was recognized in 1994 and 1993, respectively, representing the accretion of
interest income for the original expected term under the inherent interest rate
in the agreement.
Other income was $1.6 million, $504,000 and $315,000 in 1995, 1994 and
1993, respectively. The increase in other income in 1995 is primarily due to an
increase from insurance consulting operations.
Combined ratios were 113.4 percent, 106.2 percent and 110.9 percent in
1995, 1994 and 1993, respectively. The combined ratio represents a ratio of
losses and all expenses to net earned premiums in a particular period. The
increase in the combined ratio in 1995 reflects an increase in the workers'
compensation loss ratio as well as a decline in premium volume without a
corresponding decline in expenses. The improvement of the combined ratio in
1994 primarily was due to favorable loss experience in the workers' compensation
line and a growth in premium.
Net losses and loss adjustment expenses ("LAE") were $48.7 million in 1995,
compared to $67.5 million in 1994 and $65.9 million in 1993. The resulting loss
and LAE ratios were 80.5 percent, 72.3 percent and 76.6 percent 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
-62-
<PAGE>
EXHIBIT 13.1, continued
was 71 percent in 1995 as compared to 65.6 percent and 76.9 percent in 1994 and
1993, respectively. The loss and LAE ratio for the private passenger automobile
insurance line of business was 65.8 percent, 69.9 percent and 64.3 percent in
1995, 1994 and 1993, respectively. The decrease in the loss and LAE ratio in
1995 was due to a rate increase of 6 percent in 1995.
Policy acquisition costs were $13.4 million, $18.7 million and $17 million
in 1995, 1994 and 1993, respectively. Policy acquisition expenses as a
percentage of net premiums earned were 22.1 percent in 1995, 20 percent in 1994
and 19.8 percent in 1993. 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 premium than
in the fixed underwriting expense component of policy acquisition costs.
General and administrative expenses were $6.4 million in 1995, $6.7 million
in 1994 and $8.1 million in 1993. Included in the general and administrative
expenses for 1993 is a reinsurance recoverable write-off and related expenses of
approximately $1.8 million relating to an environmental claim by Hughes Aircraft
(the "Hughes Claim"). 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
Consolidated Financial Statements.
Policyholder dividends of $137,000 in 1995, $6 million in 1994 and $3.6
million in 1993, represent 0.2 percent, 6.5 percent and 4.2 percent of net
earned premiums in each respective year. The decrease in policyholder dividends
in 1995 is attributable to the decline in workers' compensation premium 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. The
increased ratio of policyholder dividends as a percentage of earned premiums 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 open
rating. The provision in 1993 also reflected a decrease in the dividend
accrual, as well as for premiums earned subsequent to July 16, 1993 in response
to a reduction in the workers' compensation minimum rate.
Net income from insurance operations in 1995 was $6 million, compared to
$5.9 million in 1994 and $4.9 million in 1993. Net income in 1995 is comparable
to net income in 1994 despite the significant decline in workers' compensation
premium because the decline in premium and cash flow did not yet have a
significant negative impact on the average invested assets and investment income
in 1995. The increase in net income in 1994 and 1993 is the result of
relatively lower expenses on moderately higher premiums. Net income includes
net realized gains of $209,000 in 1995, $16,000 in 1994, and $473,000 in 1993.
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 written premiums, the timing of claims payments, and the
rate of return achieved on the insurance investment portfolio.
-63-
<PAGE>
EXHIBIT 13.1, continued
Cash used in insurance operating activities for the year ended December 31,
1995 was $2 million; cash provided by insurance operations for the years ended
December 31, 1994 and 1993 was $11.3 million and $18.7 million, respectively.
The decrease in cash provided by operations in 1995 is primarily due to the
decline in workers' compensation written premiums. Because workers'
compensation claims ordinarily are paid over a period of several years, NAICC is
now experiencing a situation in which current claims payments relating to prior
years exceed current workers' compensation premium. 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
premium 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 premium from the automobile
programs. The decrease in cash provided by operations in 1994 from 1993
primarily was due to increased dividend payments to policyholders. Overall cash
and invested assets, at fair value, at December 31, 1995 were $170 million,
compared to $156.2 million and $164.3 million at December 31, 1994 and 1993,
respectively.
Liquidity and Capital Resources
The Company's insurance subsidiaries require both readily liquid assets and
adequate capital to meet ongoing obligations to policyholders and claimants, as
well as to pay ordinary operating expenses. The primary sources of funds to
meet these obligations are premium revenues, investment income, recoveries from
reinsurance and, if required, the sale of invested assets. NAICC's investment
policy guidelines require 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 premium-to-surplus ratios (which measure current operating risk) and
reserves-to-surplus ratios (which measure financial risk related to possible
changes in the level of loss and LAE reserves). A commonly accepted maximum net
written premium-to-surplus ratio is 3 to 1, although this varies with different
lines of business. NAICC's 1995 premium-to-surplus ratio of 1.2 to 1 remains
underleveraged by current industry standards. A commonly accepted maximum loss
and LAE reserves-to-surplus ratio is 5 to 1, compared with NAICC's ratio of 2.6
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 National Association of Insurance Commissioners (the
"Association") adopted a model for the insurance industry for determining risk
based capitalization ("RBC") requirements. Under the RBC model, 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 or reporting level.
3. RESULTS OF DANIELSON TRUST COMPANY'S OPERATIONS
The operations of DHC's Danielson Trust Company ("Danielson Trust")
subsidiary are comprised of trust and fiduciary services. The Consolidated
Financial Statements of the Company include accounts and operations of Danielson
Trust for 1995, 1994 and for the period from March 26, 1993 through December 31,
1993 (collectively, the "Initial Period"); however, comparisons of the financial
results for the years ended December 31, 1995 and 1994 of Danielson Trust's
operations with the results of its operations during the Initial Period 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.
-64-
<PAGE>
EXHIBIT 13.1, continued
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,
1995 and 1994 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
Consolidated Financial Statements.
Trust and Fiduciary Services Operations
Total fee income for the years ended December 31, 1995 and 1994 was $4.5
million and $4.7 million, respectively. 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. Fee income during the
Initial Period was $2.3 million.
As noted above, fee income for the year ended December 31, 1995 as compared
to the year ended December 31, 1994, 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 then seven percent
of Danielson Trust's 1994 total revenues. HomeFed Bank-related fee income for
the Initial Period was $884,000 or 37.1 percent of Danielson Trust's total
revenues for such Period. All HomeFed Bank-related fee income is excluded from
the fee income amounts for private trust, retirement services (formerly known as
employee benefit trust) and custody services described below.
Danielson Trust's private trust unit generated fee income of $1.3 million
and $1.7 million for the years ended December 31, 1995 and 1994, respectively.
Private trust fee income during the Initial Period was $941,000. The 1995
private trust fee income reflected a 20.7 percent decrease from 1994, resulting
from non-recurring termination and other fees received in 1994.
For the years ended December 31, 1995 and 1994, the retirement services
unit of Danielson Trust generated fee income of $2.6 million and $2.3 million,
respectively (excluding retirement services custodial fee income noted below).
During the Initial Period, the retirement services unit generated fee income of
$439,000. The increase in retirement services fee income in 1995 is primarily
attributable to an increase in non-recurring termination fees received in 1995,
as well as the recognition of a full year of fee income associated with the WTS
acquisition in 1995, as compared with only ten months of such fee income having
been recognized in 1994.
Fee income for all custody services provided by Danielson Trust for the
years ended December 31, 1995 and 1994 was $537,000 and $427,000, respectively.
The 25.8 percent increase in custody service fee income in 1995 over 1994 is
primarily attributable to an increase in fees from new business in 1995, certain
non-recurring termination fees, as well as the recognition of a full year of fee
income associated with the WTS acquisition in 1995, as compared with only ten
months of such fee income having been recognized in 1994. The fee income from
custody services for the years ended December 31, 1995 and 1994 was primarily
composed of revenues from CD (certificate of deposit) custodial services to
broker-dealers and other financial institutions of $401,000 and $339,000,
respectively. Approximately one percent of Danielson Trust's total 1995 and
1994 revenues was from each of mutual fund-related custody services and other
retirement custody services. There was no custodial fee income in 1994
attributable to Danielson Trust's former parent, whereas fees from custody
services related to HomeFed Bank generated all such fee income in the Initial
Period.
Net investment income was $135,000, $131,000 and $119,000 for the years
ended December 31, 1995 and 1994 and the Initial Period, respectively.
Danielson Trust's fixed maturity holdings are primarily in U.S. Government
obligations.
-65-
<PAGE>
EXHIBIT 13.1, continued
General and administrative expenses were $6.7 million, $5.4 million and
$2.4 million for the years ended December 31, 1995 and 1994 and the Initial
Period, 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.
As a result of expenses and changes necessitated by the WTS acquisition, as
well as increased marketing expenses during the year, the net loss from
operations of Danielson Trust in 1995 was $2 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). The net loss from operations during the
Initial Period was $70,000.
Cash Flow from Trust Operations
Operating cash flow of the Company's trust operations is primarily
dependent upon fee income from trust services. Cash flows of the trust business
also are influenced by factors affecting the trust industry generally, including
market growth, competition and general economic conditions.
Cash used in trust operating activities for the years ended December 31,
1995 and 1994 was $825,000 and $160,000, respectively; cash provided by trust
operations for the Initial Period was $153,000. 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, 1995, 1994 and 1993 were
$1.8 million, $2.6 million and $2.8 million, respectively.
Liquidity and Capital Resources
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 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 Consolidated Financial Statements),
DHC 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 percent. At December 31, 1995, the entire principal amount
of the promissory demand note was outstanding. Danielson Trust is servicing
such interest payments from fee revenues generated from its operations. DHC
intends to refrain from making demand for payment of principal until such time
as Danielson Trust has sufficient capital to make such payment. As of January
1, 1996, DHC 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 one
percent, 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, parent company capital contributions or financing provided by a third
party.
-66-
<PAGE>
EXHIBIT 13.1, continued
Historically, Danielson Trust has generated new business from direct
marketing efforts of Danielson Trust's officers, referrals from independent
professionals, and referrals from and captive business of its former parent's
company, HomeFed Bank. As noted above, the HomeFed Bank-related appointments
ceased entirely during 1994. In addition, since 1994 Danielson Trust has
provided CD (certificate of deposit) custodial services to affiliated and
unaffiliated broker-dealers, as well as other custodial services to an
affiliated mutual fund. Virtually all of Danielson Trust's new business during
1995 and 1994 (apart from business associated with the acquisition of WTS)
resulted from client and professional referrals, as well as from Danielson
Trust's marketing efforts. Danielson Trust is hopeful that significant growth
opportunities will be recognized in the near term through the development of
enhanced product lines, continued operating efficiencies and a general
improvement in the local economy.
In accordance with California banking regulations, Danielson Trust has
pledged assets with a fair value of $603,000 to the State 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
December 31, 1995, Danielson Trust was in compliance with the foregoing
requirements.
4. THE COMPANY'S INVESTMENTS
The amount and type of certain of the Company's investments are
regulated by California insurance and banking laws and regulations. The
Company's investment portfolio is composed primarily of fixed maturities and is
weighted heavily toward investment grade short and medium term securities. The
Company does not invest in high yield low investment grade securities. See
Notes 1(I) and 6 of the Notes to Consolidated Financial Statements.
The following table sets forth a summary of the Company's investment
portfolio at December 31, 1995, by investment grade (dollars in thousands):
<TABLE>
<CAPTION>
COST FAIR VALUE
-------- ----------
<S> <C> <C>
Investment by investment grade:
Fixed maturities
U.S. Government/Agency $ 54,865 $ 56,715
Mortgage-backed 62,342 63,606
Corporates (AAA to A) 48,324 49,869
Corporates (BBB) 2,137 2,300
Subtotal-investment grade 167,668 172,490
Other 105 105
Total fixed maturities 167,773 172,595
Equity securities 256 629
-------- --------
Total $168,029 $173,224
======== ========
</TABLE>
Fixed maturities of the Company include mortgage-backed securities ("MBS")
representing 36.9 percent and 34.7 percent of the Company's total fixed
maturities at December 31, 1995 and 1994, 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. Fannie Mae and Freddie Mac are
public corporations that were created by Acts of Congress and which guarantee
the principal balance of their securities. Fannie Mae also guarantees timely
payment of principal
-67-
<PAGE>
EXHIBIT 13.1, continued
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 the Company. 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 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 pre-payment 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 following
table sets forth MBS held by the Company at December 31, 1995, by type of
instrument (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
AMORTIZED PERCENT OF Amortized Percent of
COST TOTAL Cost Total
----------------------------------------------
<S> <C> <C> <C> <C>
Non-PAC/TAC $18,679 30% $18,697 29%
PAC/TAC 43,663 70% 45,861 71%
------- --- ------- ---
$62,342 100% $64,558 100%
======= === ======= ===
</TABLE>
5. RESULTS OF DHC'S OPERATIONS
Cash Flow from Parent-Only Operations
Operating cash flow of DHC on a parent-only basis is primarily dependent upon
the rate of return achieved on its investment portfolio and the payment of
general and administrative expenses incurred in the normal course of business.
For the years ended December 31, 1995, 1994 and 1993, cash used in parent-only
operating activities was $1.7 million, $1.1 million and $2 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 1995
increased $600,000 over 1994; cash used in parent-only operations in 1994
decreased $900,000 from 1993. 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 the Company's operating subsidiaries' cash
flow from operations, see "2. RESULTS OF NAICC'S OPERATIONS, Cash Flow from
Insurance Operations" and "3. RESULTS OF DANIELSON TRUST COMPANY'S OPERATIONS,
Cash Flow from Trust Operations."
Liquidity and Capital Resources
For the year ended December 31, 1995, cash and investments of the Company
(excluding NAICC and Danielson Trust) were approximately $11 million. As
previously described, the primary use of funds was the payment of general and
administrative expenses in the normal course of business. In addition, DHC used
cash in the amount of approximately $286,000 for the purchase in 1995 of certain
options to acquire 69,453 shares of DHC Common Stock from Junkyard Partners,
L.P.
-68-
<PAGE>
EXHIBIT 13.1, continued
DHC's sources of funds are its investments as well as dividends received from
its subsidiaries. Various state insurance and banking law requirements restrict
the amounts that may be transferred to DHC in the form of dividends from its
insurance and trust company subsidiaries without prior regulatory approval. As
a result of NAICC's having negative unassigned surplus, NAICC is not permitted
to pay dividends in 1996 without prior regulatory approval. Danielson Trust was
prohibited from making any distributions to DHC for a period of two years after
the Acquisition Date (until March 1995). As a result of Danielson Trust's
accumulated deficit in 1995, Danielson Trust is not permitted to pay dividends
in 1996 without prior written consent of the State Banking Department. See Note
5 of the Notes to Consolidated Financial Statements.
Current fixed maturity holdings of the Company (excluding NAICC and Danielson
Trust) are in U.S. Treasury obligations and Agency bonds. For information
regarding the Company's operating subsidiaries' liquidity and capital resources,
see "2. RESULTS OF NAICC'S OPERATIONS, Liquidity and Capital Resources." and "3.
RESULTS OF DANIELSON TRUST COMPANY'S OPERATIONS, Liquidity and Capital
Resources."
6. ECONOMIC CONDITIONS
Insurance Business. Effective January 1, 1995, the workers' compensation
------------------
"minimum rate" law in California was eliminated and replaced with a new "open
rating" law. This new open rating law significantly changed the way insurance
companies price workers' compensation insurance in California from previous
years. Under the new open rating law, the Workers' Compensation Insurance
Rating Bureau of California (the "Bureau") is the designated statistical agent
for the California Department of Insurance (the "Insurance Department") and
continues to accumulate state wide loss and remuneration data. However, instead
of promulgating final rates, the Bureau now only promulgates advisory pure
premium rates. The pure premium rate is the loss and LAE portion of the final
rate charged. Individual insurers may accept the Bureau pure premium rates or
develop their own. Non-loss related expenses make up the other portion of the
final rate charged. The Bureau does not make an advisory filing for the non-
loss expense portion of the final rate.
In 1995, 87 percent of NAICC's workers' compensation business was in the state
of California. The favorable loss experience of the 1992, 1993 and 1994 loss
years and the elimination of the minimum rate law have created a new and highly
competitive environment in the California workers' compensation market. NAICC
has filed premium rates with the Insurance Department which are based on the
pure premium rates promulgated by the Bureau, which NAICC's management believes
best reflects NAICC's actual loss costs and LAE. It continues to be the policy
of NAICC to underwrite policies at prices which are expected to achieve an
underwriting profit. Consequently, management of NAICC believes that its
premium volume in the near term may continue to decrease because competitors may
continue to be willing to price policies using pure premium rates which are
below the average pure premium rates promulgated by the Bureau. NAICC plans to
continue to increase its participation in other markets in order to offset a
portion of the decline in workers' compensation premium.
An improving economy is a usually favorable environment in which to write
workers' compensation business because claim frequency tends to decline with
increasing employment and payrolls. Premium assessments are based upon payroll.
The California economy is experiencing an economic recovery evidenced by
improving employment statistics. There also is evidence that fewer prominent
insurers are willing to compete as aggressively on price which may lead to a
higher overall price level at which NAICC believes it can profitably compete.
Trust Business. During 1995, 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 three
percent over 1995. Danielson
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<PAGE>
EXHIBIT 13.1, continued
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 consolidations among major money centers and regional banks which are
trust and fiduciary services providers in the San Diego area, including the
proposed merger of Union Bank and The Bank of California, as well as the
approved 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 this 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 "mega-bank".
The industry consolidation also will 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.
The decline in interest rates throughout 1995 had a positive effect on the
investment industry's performance during the year. The above average
performance of most equity and fixed income funds during 1995 resulted in
increased fee income based on asset market values and fees for promotional
expenses. As reflected in the table of annualized total returns below, strong
stock and bond markets have contributed to Danielson Trust's ability to provide
its investment clients with investment performance competitive with market
indices. However, there can be no assurance that interest rates will continue
to decline, that the stock and bond market will continue to rise, nor that
Danielson Trust's investments will continue to perform positively.
Danielson Trust's investment performance for 1995, as measured by the
company's Equity and Fixed Income Funds scheduled below, was highly competitive
with industry averages. As noted below, the Standard & Poor's 500 Stock Index
("S&P 500") in 1995 achieved a 37.5 percent increase over 1994. Danielson
Trust's portfolio is more risk-averse than the S&P 500 and, therefore, did not
reach the same levels as the S&P 500.
-70-
<PAGE>
EXHIBIT 13.1, continued
The investment performance on an annualized total return basis for Danielson
Trust's common trust funds for one, three and five years, and comparative market
data, are as follows (Danielson Trust's funds marked with an asterisk (*)):
<TABLE>
<CAPTION>
ANNUALIZED TOTAL RETURNS
1-YEAR 3-YEAR 5-YEAR
-------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
EQUITY FUNDS:
*PRIVATE TRUST COMMON STOCK FUND 29.4% 16.0% 15.1%
*EMPLOYEE BENEFIT TRUST EQUITY FUND 29.1% 14.7% 16.1%
Standard & Poor's 500 Stock Index 37.5% 15.3% 16.5%
FIXED INCOME FUNDS:
*PRIVATE TRUST INTERMEDIATE GOV'T FUND 10.2% - -
*EMPLOYEE BENEFIT TRUST INTERMEDIATE GOV'T FUND 10.1% - -
Lehman Bros. Mutual Fund 1-5 year U.S. Treasury 12.7% - -
*PRIVATE TRUST FIXED INCOME FUND 20.8% 7.6% 9.5%
*EMPLOYEE BENEFIT TRUST FIXED INCOME FUND 18.9% 7.1% 9.0%
*CHARITABLE POOLED INCOME FUND 19.0% 8.0% 9.2%
Salomon 7-10 year AAA/AA Corp. Bond Index 23.4% 9.8% 11.3%
Lehman Bros. Corp. Bond Index 22.2% 9.6% 11.2%
*PRIVATE TRUST MUNICIPAL BOND 12.8% 6.4% 7.5%
Lehman Bros. 7 year Municipal Bond Index 14.1% 7.0% 8.1%
</TABLE>
7. 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 the Company 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 the Company's
operations. See Notes 1(J), 2, 4, 8 and 14 of the Notes to Consolidated
Financial Statements.
In October 1995, the 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, the Company has elected to continue
to use the intrinsic value method. However, the Company 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. The Company plans to apply the provisions of SFAS 123 in its 1996
Consolidated Financial Statements.
In November 1995, the Financial Accounting Standards Board ("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-
-71-
<PAGE>
EXHIBIT 13.1, continued
time reclassifications is 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 the Company's intent to hold
other debt securities to maturity in the future. In connection with the
implementation of Statement 115, at December 1, 1995, the Company 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 Consolidated Financial Statements.
At December 31, 1995, the Company 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 Consolidated Financial Statements.
-72-
<PAGE>
EXHIBIT 13.1, continued
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
REVENUES:
Gross premiums earned $ 76,688 $106,552 $ 91,836
Ceded premiums earned (16,140) (13,261) (5,784)
-------- -------- --------
Net premiums earned 60,548 93,291 86,052
Trust fee income 4,475 4,646 2,264
Net investment income 13,161 11,853 13,302
Net realized investment gains (Note 6) 208 24 462
Other income 1,689 526 317
-------- -------- --------
TOTAL REVENUES 80,081 110,340 102,397
-------- -------- --------
LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses 63,543 82,025 74,398
Ceded losses and loss adjustment expenses (14,828) (14,510) (8,498)
-------- -------- --------
Net losses and loss adjustment expenses 48,715 67,515 65,900
Policyholder dividends 137 6,043 3,615
Policy acquisition expenses 13,391 18,677 16,993
General and administrative expenses 15,402 14,792 12,835
Interest expense - 65 233
-------- -------- --------
TOTAL LOSSES AND EXPENSES 77,645 107,092 99,576
-------- -------- --------
Income before provision for income tax
and extraordinary item[s] 2,436 3,248 2,821
Income tax provision 120 103 75
-------- -------- --------
Income before extraordinary item[s] 2,316 3,145 2,746
Extraordinary item[s] (Note 13) - 750 488
-------- -------- --------
NET INCOME $ 2,316 $ 3,895 $ 3,234
======== ======== ========
EARNINGS PER SHARE OF COMMON STOCK
AND COMMON EQUIVALENT SHARE:
Income before extraordinary item[s] $ 0.14 $ 0.20 $ 0.17
Extraordinary item[s] - 0.05 0.03
-------- -------- --------
NET INCOME $ 0.14 $ 0.25 $ 0.20
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-73-
<PAGE>
EXHIBIT 13.1, continued
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS:
Fixed maturities:
Available-for-sale at fair value (Cost: $167,773 and $33,020) $172,595 $ 32,450
Held-to-maturity at amortized cost
(Fair value: $0 and $134,843) - 145,331
Equity securities at fair value (Cost: $256 and $256) 629 548
Other investments at fair value (Cost: $0 and $256) - 250
Short term investments, at cost which approximates fair value 8,570 3,184
-------- ---------
TOTAL INVESTMENTS 181,794 181,763
Cash 605 342
Accrued investment income 2,718 2,903
Premiums and fees receivable, net of allowances
of $157 and $323 8,826 17,061
Reinsurance recoverable on paid losses, net of allowances
of $388 and $675 1,828 6,108
Reinsurance recoverable on unpaid losses,
net of allowances of $425 and $425 21,112 17,705
Prepaid reinsurance premiums 2,226 2,713
Property and equipment, net of accumulated depreciation
of $6,849 and $5,807 4,159 5,174
Deferred acquisition costs 1,045 2,204
Excess of cost over net assets acquired 2,657 3,513
Other assets 954 1,043
-------- ---------
TOTAL ASSETS $227,924 $240,529
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses $137,406 $146,330
Unearned premiums 8,563 14,328
Policyholder dividends 4,664 6,280
Reinsurance premiums payable 1,707 1,679
Funds withheld on ceded reinsurance 1,534 1,810
Other liabilities 4,229 7,784
-------- --------
TOTAL LIABILITIES 158,103 178,211
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 15,360,255 shares and 15,360,270 shares) 1,537 1,537
Additional paid-in capital 46,131 46,417
Net unrealized gain (loss) on available-for-sale securities 5,195 (278)
Retained earnings 17,024 14,708
Treasury stock (Cost of 10,639 shares and 10,624 shares) (66) (66)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 69,821 62,318
-------- --------
Commitments and contingencies
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $227,924 $240,529
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-74-
<PAGE>
EXHIBIT 13.1, continued
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amoun
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year $ 1,537 $ 1,511 $ 1,511
Exercise of options to purchase Common Stock - 26 -
----------- ----------- -----------
Balance, end of year 1,537 1,537 1,511
----------- ----------- -----------
ADDITIONAL CAPITAL PAID-IN
Balance, beginning of year 46,417 45,669 45,669
Exercise of options to purchase Common Stock - 748 -
Retirement of stock options (286) - -
----------- ----------- -----------
Balance, end of year 46,131 46,417 45,669
----------- ----------- -----------
NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE
SECURITIES
Balance, beginning of year (278) 855 15
Net unrealized gain on the date of reclassification
of available-for-sale securities (Note 6) 2,880 - -
Net increase (decrease) 2,593 (1,133) 840
----------- ----------- -----------
Balance, end of year 5,195 (278) 855
----------- ----------- -----------
RETAINED EARNINGS
Balance, beginning of year 14,708 10,813 7,579
Net income 2,316 3,895 3,234
----------- ----------- -----------
Balance, end of year 17,024 14,708 10,813
----------- ----------- -----------
TREASURY STOCK
Balance, beginning of year (66) (10) (10)
Purchased during year - (56) -
----------- ----------- -----------
Balance, end of year (66) (66) (10)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ 69,821 $ 62,318 $ 58,838
=========== =========== ===========
COMMON STOCK, SHARES
Balance, beginning of year 15,370,894 15,112,984 15,112,984
Exercise of options to purchase Common Stock - 257,910 -
----------- ----------- -----------
Balance, end of year 15,370,894 15,370,894 15,112,984
=========== =========== ===========
TREASURY STOCK, SHARES
Balance, beginning of year 10,624 2,733 2,726
Purchased during year 15 7,891 7
----------- ----------- -----------
Balance, end of year 10,639 10,624 2,733
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-75-
<PAGE>
EXHIBIT 13.1, continued
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,316 $ 3,895 $ 3,234
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net realized investment gains (208) (24) (462)
Depreciation and amortization 2,455 1,952 1,783
Change in other invested asset - (205) (3,104)
Change in accrued investment income 185 (702) 434
Change in premiums and fees receivable 8,235 1,889 (787)
Change in reinsurance recoverables 4,280 (2,883) 1,014
Change in reinsurance recoverable on unpaid losses (3,407) 551 2,310
Change in prepaid reinsurance premiums 487 (48) (2,159)
Change in deferred acquisition costs 1,159 (8) (7)
Change in unpaid losses and loss adjustment expenses (8,924) 8,851 12,088
Change in unearned premiums (5,765) (2,174) 4,060
Change in policyholder dividends payable (1,616) (3,501) (1,042)
Change in reinsurance payables and funds withheld (248) 60 91
Other, net (3,437) 2,355 (571)
-------- -------- --------
Net cash provided by (used in) operating activities (4,488) 10,008 16,882
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Fixed income maturities - - 242
Fixed income maturities available-for-sale 8,194 3,239 -
Equity securities - 14 -
Other investments 433 - -
Investments, matured or called:
Fixed income maturities held-to-maturity 5,875 24,551 27,421
Fixed income maturities available-for-sale 23,732 3,937 -
Investments purchased:
Fixed income maturities held-to-maturity (835) (32,906) (51,204)
Fixed income maturities available-for-sale (26,455) (25,119) -
Equity securities - - (5)
Other investments (105) (250) -
Purchases of property and equipment (416) (907) (637)
Proceeds of other invested asset - 19,531 -
-------- -------- --------
Net cash provided by (used in) investing activities 10,423 (7,910) (24,183)
-------- -------- --------
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 - (2,250) (1,000)
Capital lease obligation - (96) (180)
Change in loans to trust accounts - 165 (147)
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 (286) (3,968) (5,730)
-------- -------- --------
Net increase (decrease) in cash and short term investments 5,649 (1,870) (13,031)
Cash and short term investments at beginning of year 3,526 5,396 18,427
-------- -------- --------
CASH AND SHORT TERM INVESTMENTS AT END OF YEAR $ 9,175 $ 3,526 $ 5,396
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-76-
<PAGE>
EXHIBIT 13.1, continued
DANIELSON HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
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
percent of the voting stock of KCP Holding Company ("KCP"), Danielson Indemnity
Company and Danielson Reinsurance Corporation. KCP owns 100 percent of the
common stock of National American Insurance Company of California ("NAICC"),
DHC's principal operating insurance subsidiary. NAICC owns 100 percent of the
common stock of Danielson Insurance Company ("DIC") and Danielson National
Insurance Company ("DNIC"). In March 1993, DHC acquired 100 percent 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 of the Notes to Consolidated
Financial Statements.
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.
-77-
<PAGE>
EXHIBIT 13.1, continued
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 $1.9 million and $2.7 million at December
31, 1995 and 1994, 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,
1995 and 1994, the Company had no reinsurance contracts which were accounted for
as financing agreements. See Note 3 "REINSURANCE."
-78-
<PAGE>
EXHIBIT 13.1, continued
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 1995, 1994
and 1993 was $9.1 million, $13.7 million and $14.8 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 34 percent, 79 percent and 75 percent of direct written premiums
for the years ended December 31, 1995, 1994 and 1993, 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 1995 and 1994
was approximately $147,000 and $134,000, 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.
-79-
<PAGE>
EXHIBIT 13.1, continued
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 15,989,055, 15,938,018 and 15,847,682 for the years ended
December 31, 1995, 1994 and 1993, 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 percent 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.
-80-
<PAGE>
EXHIBIT 13.1, continued
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 percent of its private passenger
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,
1995 1994 1993
--------- ---------- ---------
<S> <C> <C> <C>
Direct $ 70,949 $104,379 $95,896
Ceded (15,654) (13,310) (7,943)
-------- -------- -------
Net premium $ 55,295 $ 91,069 $87,953
======== ======== =======
</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 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
-81-
<PAGE>
EXHIBIT 13.1, continued
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 $205,000 and $1,504,000 was recognized in 1994
and 1993, 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 ten percent 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,
-----------------------------------
1995 1994 1993
---------- ---------- -----------
<S> <C> <C> <C>
Net unpaid losses and LAE at January 1 $128,625 $119,223 $104,825
-------- -------- --------
Incurred related to:
Current year 45,592 67,131 65,157
Prior years 3,123 384 743
-------- -------- --------
Total incurred 48,715 67,515 65,900
-------- -------- --------
Paid related to:
Current year (14,464) (15,849) (11,852)
Prior years (46,582) (42,264) (39,650)
-------- -------- --------
Total paid (61,046) (58,113) (51,502)
-------- -------- --------
Net unpaid losses and LAE at
December 31 116,294 128,625 119,223
Plus: reinsurance recoverables 21,112 17,705 18,256
-------- -------- --------
Gross unpaid losses and LAE at
December 31 $137,406 $146,330 $137,479
======== ======== ========
</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 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.
-82-
<PAGE>
EXHIBIT 13.1, continued
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 $1,000,000, with
reinsurance generally above $500,000. 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 is 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, 1995 and 1994, DHC's
operating insurance subsidiaries reported statutory capital and surplus of $44.9
million and $39.7 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, 1995, 1994 and 1993, was $4.8
million, $2.2 million and $2.8 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.
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
-83-
<PAGE>
EXHIBIT 13.1, continued
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 ten percent 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 $119.6 million and $94.6 million
at December 31, 1995 and 1994, respectively, were on deposit with various states
or governmental regulatory authorities. In addition, at December 31, 1995 and
1994, respectively, investments with a fair value of $4.7 million and $5.4
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, 1995 and 1994 are pledged to regulatory
authorities and are restricted as to use.
Net realized investment gains (losses) in 1995, 1994 and 1993 were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1995 1994 1993
----- ----- ------
<S> <C> <C> <C>
Fixed maturities $ 130 $ 20 $ 473
Equity securities - 4 -
Other investments 78 - -
Other - - (11)
----- ----- -----
Net realized gain $ 208 $ 24 $ 462
===== ===== =====
</TABLE>
Gross realized gains relating to fixed maturities were $217,000, $36,000
and $473,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Gross realized losses relating to fixed maturities were $87,000 and $16,000 for
the years ended December 31, 1995 and 1994, respectively. There were no gross
realized losses relating to fixed maturities for the year ended December 31,
1993. There were neither gross realized
-84-
<PAGE>
EXHIBIT 13.1, continued
gains nor gross realized losses relating to equity securities for the years
ended December 31, 1995 and 1993. Gross realized gains relating to equity
securities were $4,000 for the year ended December 31, 1994. Gross realized
gains relating to other investments were $78,000 for the year ended December 31,
1995. There were neither gross realized gains nor gross realized losses
relating to other investments for the years ended December 31, 1994 and 1993.
Net investment income for the past three years was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Fixed maturities $12,442 $11,616 $ 9,862
Equity securities - - -
Short term investments 219 216 362
Other, net 899 247 3,164
------- ------- -------
Total investment income 13,560 12,079 13,388
Less: Investment expense 399 226 86
------- ------- -------
Net investment income $13,161 $11,853 $13,302
======= ======= =======
</TABLE>
During 1995, all of the securities held by the Company were income
producing.
There were no investments with a carrying value greater than ten percent of
stockholders' equity as of December 31, 1995 or 1994.
The amortized cost, unrealized gains, unrealized losses and fair value at
December 31, 1995 and 1994, 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, 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>
-85-
<PAGE>
EXHIBIT 13.1, continued
<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
======== ==== ======= ========
</TABLE>
Fixed maturities of the Company include mortgage-backed securities ("MBS")
representing 36.9 percent and 34.7 percent of the Company's total fixed
maturities at December 31, 1995 and 1994, 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 pre-payment 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.
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.
-86-
<PAGE>
EXHIBIT 13.1, continued
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,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities $5,392 $(1,027) $ 457
Equity securities 81 (106) 383
------ ------- -----
$5,473 $(1,133) $ 840
====== ======= =====
</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, DHC has imposed
restrictions on the ability of holders of five percent 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 five percent
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
and certain trusts that assumed various liabilities of certain present and
former subsidiaries of DHC.
-87-
<PAGE>
EXHIBIT 13.1, continued
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 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.
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>
Year Ending Amount of 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>
1995 1994 1993
------ ----- -----
<S> <C> <C> <C>
Federal income tax $ - $ - $ -
State and local 120 103 75
------ ----- -----
$ 120 $ 103 $ 75
====== ===== =====
</TABLE>
-88-
<PAGE>
EXHIBIT 13.1, continued
The following reflects a reconciliation of Federal income tax expense
computed by applying the applicable Federal income tax rate of 34 percent for
1995, 1994 and 1993, as compared to the provision for Federal income taxes
(dollars in thousands):
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense $ 828 $ 1,104 $ 959
Change in valuation allowance 1,819 904 2,951
Increase in net operating losses from the trusts (2,891) (2,104) (3,973)
State and local tax expense 120 103 75
Amortization of goodwill 303 46 59
Other, net (59) 50 4
------- ------- -------
Total income tax expense $ 120 $ 103 $ 75
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1995 and 1994, respectively, are
presented as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 December 31, 1994
------------------- ------------------
<S> <C> <C>
Deferred tax assets
Loss reserve discounting $ 8,820 $ 9,558
Unearned premiums 431 790
Net operating loss carryforwards 469,324 466,077
Allowance for doubtful accounts 330 481
Policyholder dividends 1,586 2,135
Other (8) 17
-------- ---------
Total gross deferred tax asset 480,483 479,058
Less: Valuation allowance (478,362) (478,309)
---------
Total deferred tax asset $ 2,121 $ 749
-------- ---------
Deferred tax liabilities
Deferred acquisition costs 355 749
Unrealized gains on
available-for-sale securities 1,766 -
-------- ---------
Total deferred tax liabilities 2,121 749
-------- ---------
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
percent or the Federal Funds Rate plus 1.5 percent. 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 $14,000
and $201,000 in 1994 and 1993, respectively.
-89-
<PAGE>
EXHIBIT 13.1, continued
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 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 thirty 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
-90-
<PAGE>
EXHIBIT 13.1, continued
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 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 connection with 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 granted under the 1995 Plan to any one individual 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, including Mr. Story, who is an
affiliated director of DHC. 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. 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 ten percent. 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 DHC 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 percent of the first six percent 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 percent of the first four percent of
employee-contributed compensation. The shares of Common Stock owned by the ESOP
as of December 31, 1995 and 1994, respectively, were as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Allocated shares........ 94,714 83,948
Unreleased shares....... 40,049 59,309
------- -------
134,763 143,257
======= =======
</TABLE>
-91-
<PAGE>
EXHIBIT 13.1, continued
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 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, 1995 and 1994, valued at January 1, 1996 and 1995, respectively (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Acccumulated benefits obligation, including vested
benefits of $1,529 for 1995 and $963 for 1994 $ 1,904 $1,070
======= ======
Projected benefit obligation $ 2,478 $1,312
Plan assets at fair value, primarily U.S. Government
and government agency obligations 1,293 1,105
------- ------
Projected benefit obligation in excess of plan assets (1,185) (207)
Unrecognized net (gain) loss 807 (55)
Unrecognized prior service cost 83 273
adjustment required to recognize minimum liability (316) -
------- ------
(Accrued) prepaid pension cost $ (611) $ 11
======= ======
</TABLE>
Net pension costs for the years ended December 31, 1995, 1994 and 1993
include the following components:
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------
1995 1994 1993
----- ------- ------
<S> <C> <C> <C>
Service cost $ 243 $ 286 $ 219
Interest cost 156 100 67
Actual (return) loss on plan assets (201) 130 (100)
Net amortization and deferral 131 (199) 35
----- ------- ------
Net pension cost $ 329 $ 317 $ 221
===== ======= ======
</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 7.25 percent and 8.25 percent for 1995 and 1994,
respectively. The projected long term rate of return on assets was seven
percent for each of 1995 and 1994. The average rate of compensation increase
used in determining the actuarial present value of the projected benefit
obligation was 4.5 percent for 1995 and three percent for 1994.
-92-
<PAGE>
EXHIBIT 13.1, continued
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 percent of their eligible
compensation to a maximum dollar amount allowed by the IRS. As noted above,
prior to July 1, 1995, the participating employers contributed 50 percent of the
first six percent of employee-contributed compensation; however, effective July
1, 1995, Danielson Trust reduced its maximum contribution to 50 percent of the
first four percent 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 1995, 1994 and 1993, the employers' matching
obligation to the 401(k) Plan was satisfied through ESOP shares, cash and
forfeitures totaling $211,000, $156,000 and $157,000, 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 for
the year ended December 31, 1995 was $1.5 million, and $1.6 million for each of
the years ended 1994 and 1993.
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.
-93-
<PAGE>
EXHIBIT 13.1, continued
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 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 percent of
its insurance in California. Private passenger automobile direct written
premiums of $28.8 million, $20 million and $8.4 million and net earned premium
of $15.2 million, $10.3 million and $2.4 million for the years ended December
31, 1995, 1994 and 1993, 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.
-94-
<PAGE>
EXHIBIT 13.1, continued
Summarized financial data for each of the Company's business segments
is set forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1995 1994 1993
- ------------------------ ------- -------- --------
<S> <C> <C> <C>
REVENUES
Insurance Operations $74,759 $105,098 $ 99,416
Trust Operations 4,623 4,795 2,384
Corporate 699 447 597
------- -------- --------
Total $80,081 $110,340 $102,397
======= ======== ========
</TABLE>
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS
<TABLE>
<S> <C> <C> <C>
Insurance Operations $ 6,090 $ 5,978 $ 4,528
Trust Operations (2,033) (611) (68)
Corporate (1,621) (2,119) (1,639)
------- ------- -------
Total $ 2,436 $ 3,248 $ 2,821
======= ======= =======
CAPITAL EXPENDITURES
Insurance Operations $ 298 $ 540 $ 424
Trust Operations 79 367 178
Corporate 39 2,505 4,646
------- ------- -------
Total $ 416 $ 3,412 $ 5,248
======= ======= =======
</TABLE>
DEPRECIATION AND AMORTIZATION OF NON-INVESTMENT ASSETS
<TABLE>
<S> <C> <C> <C>
Insurance Operations $1,133 $1,133 $1,113
Trust Operations 1,083 201 48
Corporate 43 41 37
------ ------ ------
Total $2,259 $1,375 $1,198
====== ====== ======
</TABLE>
AS OF DECEMBER 31, 1995 AND 1994
--------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Insurance Operations $211,427 $219,839
Trust Operations 5,438 7,541
Corporate 11,059 13,149
-------- --------
Total $227,924 $240,529
======== ========
</TABLE>
-95-
<PAGE>
EXHIBIT 13.1, continued
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 percent in cash, 40
percent in DHC non-convertible preferred stock having a market dividend rate,
and ten percent in Common Stock to be valued based upon a trading average prior
to the closing date. DHC 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.
-96-
<PAGE>
EXHIBIT 13.1, continued
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, 1995 and 1994, 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 consolidated 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, 1995 and 1994, 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."
/S/ KPMG PEAT MARWICK LLP
-----------------------------
New York, New York
February 26, 1996
RESPONSIBILITY FOR FINANCIAL REPORTING
The Consolidated Financial Statements of Danielson Holding Corporation and
subsidiaries are the responsibility of the Company's management, and have been
prepared in accordance with generally accepted accounting principles. To help
ensure the accuracy and integrity of its financial data, the Company maintains a
strong system of internal controls designed to provide reasonable assurances
that assets are safeguarded and that transactions are properly executed and
recorded. The internal control system and compliance therewith are monitored by
the Company's financial management.
The Consolidated Financial Statements have been audited by the Company's
independent auditors, KPMG Peat Marwick LLP. The independent auditors, whose
appointment by the Board of Directors was ratified by the Company's
stockholders, express their opinion on the fairness of presentation, in all
material respects, of the Company's Consolidated Financial Statements based on
procedures which they consider to be sufficient to form their opinion.
The Audit Committee of the Board of Directors meets periodically with
representatives of KPMG Peat Marwick LLP and the Company's financial management
to review accounting, internal control, auditing and financial reporting
matters.
-97-
<PAGE>
EXHIBIT 13.1, continued
QUARTERLY FINANCIAL DATA
(unaudited)
The following table presents unaudited quarterly financial data for the years
ended December 31, 1995 and 1994. In the opinion of management, all adjustments
necessary to present fairly the results of operations for such periods are
reflected. Total revenues and net income include gains on sales of investments.
Net income for the fourth quarter 1995 includes the writedown of $709,000 of
goodwill. See Note 1(E) of the Notes to Consolidated Financial Statements.
Results for the quarter ended December 31, 1994 include an extraordinary item of
approximately $750,000, or $0.05 per share, respectively, from distributions
received by the Company. See Note 13 of the Notes to Consolidated Financial
Statements. Quarterly financial results are not necessarily indicative of the
results that may be expected for the year and, hence, caution should be used in
drawing conclusions from quarterly consolidated results.
<TABLE>
<CAPTION>
(In thousands, except First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter
- ------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1995:
Total revenues $22,995 $21,447 $18,563 $17,076
Net income 613 779 868 56
Net income per share .04 .05 .05 .00
1994:
Total revenues $28,273 $27,422 $29,059 $25,586
Income before
extraordinary item 916 688 1,206 335
Net income 916 688 1,206 1,085
Income per share before
extraordinary item .06 .04 .08 .02
Net income per share .06 .04 .08 .07
</TABLE>
STOCK MARKET PRICES
Danielson Holding Corporation Common Stock is listed and traded on the
American Stock Exchange (symbol: DHC). On March 8, 1996, there were
approximately 1,682 holders of record of Common Stock.
The following table sets forth the high, low and closing stock prices
of DHC's Common Stock for the last two years, as reported on the
American Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
1995 1994
----- -----
High Low Close High Low Close
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter 7-3/4 6-5/8 6-5/8 8-3/8 6-1/2 6-5/8
Second Quarter 8 6-5/8 7-7/8 7 6-1/4 6-5/8
Third Quarter 7-3/4 7 7-1/2 9-3/4 6-3/8 9
Fourth Quarter 7-5/8 6-3/4 6-7/8 9-1/8 6-1/4 7-5/8
</TABLE>
-98-
<PAGE>
EXHIBIT 13.1, continued
[INSIDE BACK COVER]
=================
<TABLE>
<S> <C> <C>
CORPORATE OFFICERS BOARD OF DIRECTORS ANNUAL STOCKHOLDERS'
MEETING will be held
MARTIN J. WHITMAN JAMES P. HEFFERNAN at the New York
Chairman of the Board and Chief Financial Officer, Marriott East Side
Chief Investment Officer Danielson Holding Hotel in New York City
Corporation at 10:00 a.m. on May
C. KIRK RHEIN, JR. 22, 1996
President and EUGENE M. ISENBERG
Chief Executive Officer Chairman of the Board FORM 10-K
and Chief Executive A copy of Danielson's
JAMES P. HEFFERNAN Officer, Nabors Form 10-K as filed with
Chief Financial Officer Industries, Inc. the Securities and
Exchange Commission may
LISA D. LEVEY JOSEPH F. PORRINO be obtained without
General Counsel and Executive Vice charge by writing to:
Secretary President, New School
for Social Research Danielson Holding
CLAUDIA C. COSENZA Corporation
Controller C. KIRK RHEIN, JR. 767 Third Avenue -
President and Chief Fifth Floor
Executive Officer, New York, NY 10017-2023
Danielson Holding Attention: Robin M.
Corporation Derin
Investor Relations
FRANK B. RYAN
Professor of Mathematics STOCK TRANSFER AGENT
and Computational and AND REGISTRAR
Applied Mathematics, Fleet National Bank
Rice University RI MO-0199
111 Westminster Street
WALLACE O. SELLERS Providence, RI 02903
Director, Enhance 401/278-5095
Financial Services
Group, Inc. INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
WILLIAM R. STORY KPMG Peat Marwick LLP
President and Chief 345 Park Avenue
Executive Officer, New York, NY 10154
National American
Insurance Company of
California
MARTIN J. WHITMAN
Chairman of the Board
and Chief Investment
Officer, Danielson
Holding Corporation
</TABLE>
-99-
<PAGE>
EXHIBIT 13.1, continued
[OUTSIDE BACK COVER]
==================
DANIELSON HOLDING CORPORATION
767 Third Avenue - Fifth Floor
New York, New York 10017-2023
212/888-0347
-100-
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned,
an officer or a director, or both, of Danielson Holding Corporation (the
"Company"), does hereby constitute and appoint James P. Heffernan, Lisa D.
Levey, C. Kirk Rhein, Jr., and Martin J. Whitman, or any of them, his or her
true and lawful attorneys or attorney and agents or agent with full power and
authority on his or her behalf to sign his or her name in such capacity to the
Company's Annual Report on Form 10-K for the fiscal year ending December 31,
1995, substantially in the form distributed to him or her at the meeting of the
Board of Directors of the Company held on March 19, 1996, with all appropriate
exhibits thereto, and any and all amendments thereto, and other necessary or
appropriate Forms or statements, to be filed with the Securities and Exchange
Commission, under the Securities Exchange Act of 1934.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 19th day of March 1996.
/S/ MARTIN J. WHITMAN
------------------------------------
Martin J. Whitman
/S/ C. KIRK RHEIN, JR.
------------------------------------
C. Kirk Rhein, Jr.
/S/ JAMES P. HEFFERNAN
------------------------------------
James P. Heffernan
/S/ WILLIAM R. STORY
------------------------------------
William R. Story
/S/ JOSEPH F. PORRINO
------------------------------------
Joseph F. Porrino
/S/ FRANK B. RYAN
------------------------------------
Frank B. Ryan
------------------------------------
Eugene M. Isenberg
/S/ WALLACE O. SELLERS
------------------------------------
Wallace O. Sellers
-101-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DANIELSON
HOLDING CORPORATION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 172,595
<DEBT-CARRYING-VALUE> 172,595
<DEBT-MARKET-VALUE> 172,595
<EQUITIES> 629
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 181,794
<CASH> 605
<RECOVER-REINSURE> 22,940<F1>
<DEFERRED-ACQUISITION> 1,045
<TOTAL-ASSETS> 227,924
<POLICY-LOSSES> 137,406
<UNEARNED-PREMIUMS> 8,563
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 4,664
<NOTES-PAYABLE> 0
1,537
0
<COMMON> 0
<OTHER-SE> 68,284<F2>
<TOTAL-LIABILITY-AND-EQUITY> 227,924
60,548
<INVESTMENT-INCOME> 13,161
<INVESTMENT-GAINS> 208
<OTHER-INCOME> 6,164<F3>
<BENEFITS> 48,715
<UNDERWRITING-AMORTIZATION> 9,089
<UNDERWRITING-OTHER> 19,704
<INCOME-PRETAX> 2,436
<INCOME-TAX> 120
<INCOME-CONTINUING> 2,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,316
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<RESERVE-OPEN> 128,625
<PROVISION-CURRENT> 45,592
<PROVISION-PRIOR> 3,123
<PAYMENTS-CURRENT> 14,464
<PAYMENTS-PRIOR> 46,582
<RESERVE-CLOSE> 116,294
<CUMULATIVE-DEFICIENCY> 3,123
<FN>
<F1>Included in this caption are reinsurance recoverables on unpaid losses of
21,112 and reinsurance recoverables on paid losses of 1,828.
<F2>Included in "Stockholders' Equity-Other" is treasury stock of 66.
<F3>Included in the caption "Other Income" is trust fee income of 4,475.
</FN>
</TABLE>
