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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, 1996 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 (ZIP CODE)
OFFICES)
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:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
<S> <C>
Common Stock, $0.10 par value................... American Stock Exchange
</TABLE>
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 20, 1997, the aggregate market value of the registrant's voting
stock held by non-affiliates was $100,584,806.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MARCH 20, 1997
----- -----------------------------
<S> <C>
Common Stock, $0.10 par value 15,360,238 shares
</TABLE>
The following documents have been incorporated by reference herein:
1996 Annual Report to Stockholders, as indicated herein (Parts I and II)
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Danielson Holding Corporation ("DHC" or "Registrant") is a holding company
incorporated in Delaware, having separate subsidiaries (collectively with DHC,
the "Company") offering a variety of insurance products and, until recently,
trust and investment management services. It is DHC's intention to continue to
grow by developing business partnerships and making strategic acquisitions.
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.
Until December 31, 1996, DHC also owned 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 division of
Grossmont Bank. On December 31, 1996, DHC consummated the sale of Danielson
Trust to North American Trust Company. See Note 5 of the Notes to Consolidated
Financial Statements.
As part of DHC's ongoing corporate strategy, DHC has continued to seek ways
to acquire profitable businesses and/or to expand its presence in the
financial services industry in a manner that will both complement its existing
operations and enable DHC to earn an attractive return on investment. During
1996, DHC entered into an agreement to acquire, by merger, Midland Financial
Group, Inc. ("Midland"). As a result of the crash of TWA Flight 800, in which
the President of DHC, the President of NAICC and the President of Midland were
killed, the proposed merger with Midland was terminated by the mutual consent
of DHC and Midland. See Note 3 of the Notes to Consolidated Financial
Statements.
On January 15, 1997, DHC entered into a letter of intent with The
Progressive Corporation ("Progressive") pursuant to which it was proposed that
DHC sell to Progressive 11 million newly issued shares of Common Stock of DHC
for consideration having a value of $6.60 per share. Progressive would then
have owned a 42% interest in DHC. On March 10, 1997, Progressive informed DHC
that, for "internal Progressive reasons", it was terminating its discussions
with DHC.
DHC retained cash and investments at the holding company level of $10.1
million at December 31, 1996. Total book liabilities of DHC at the same date
were $785,000.
The Company will report, as of the end of its 1996 tax year, aggregate
consolidated net operating tax loss carryforwards ("NOLs") for Federal income
tax purposes of approximately $1.34 billion. These losses will start to expire
in 1998 unless utilized prior thereto. See Note 11 of the Notes to
Consolidated Financial Statements.
DESCRIPTION OF BUSINESSES
Set forth below is a description of the business operations of the Company's
insurance services business.
DHC's wholly-owned subsidiary, NAICC, is a California corporation engaged in
writing workers' compensation, non-standard private passenger and commercial
automobile insurance in the western states, primarily California. NAICC is a
third tier subsidiary of DHC. NAICC's immediate parent corporation is KCP
Holding Company ("KCP"). 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
GENERAL
Workers' compensation insurance policies provide coverage for workers'
compensation benefits and employer's liability. The workers' compensation
portion of the coverage provides for statutory benefits which 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 for 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 employer's
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. Policies are issued
having a term of no more than one year.
At December 31, 1996, NAICC had approximately 2,579 workers' compensation
policies in force with an approximate average annual premium size of $5,344,
compared to 3,844 and 7,183 policies in force with approximate average annual
premium sizes of $6,201 and $9,566 at December 31, 1995 and 1994,
respectively. NAICC's management believes the decrease in the policies in
force in 1996 is attributable to significant price competition in the
California workers' compensation market. In 1996, NAICC continued to price the
renewals of its in-force California workers' compensation policies above the
market level price. In doing so, its in-force policy count continued to
decrease.
In 1996, approximately 54 percent of NAICC's workers' compensation net
premiums written were in the State of California. Effective January 1, 1995, a
new "open rating" law replaced the old workers' compensation "minimum rate"
law. The new open rating law significantly changed the way in which insurance
companies price workers' compensation insurance in California. Under open
rating, to obtain approval to use any workers' compensation rates in
California, an insurer is required to file its proposed rates and rating plans
with the California Department of Insurance (CDI). The CDI may disapprove a
rate filing only if it finds that the rates are unfairly discriminatory, could
threaten the solvency of the insurer, or could cause a single insurer, other
than the California State Compensation Insurance Fund, to control more than
20% of the market.
In response to developments affecting the market for workers' compensation
insurance in California, NAICC has pursued a strategy of re-deploying its
capital either in other specialty lines of insurance such as non-standard
automobile insurance or in the workers' compensation line in geographic
markets believed by NAICC to have greater potential for profitability than
California. In furtherance of its strategy to write workers' compensation
insurance in markets other than California, in June 1996, NAICC acquired Valor
Insurance Company, Incorporated ("Valor"), a Montana-domiciled specialty
insurance company that writes workers' compensation insurance policies. This
acquisition has enabled NAICC to market workers' compensation insurance
directly to employers in the State of Montana.
Net written premiums for workers' compensation were $16.8 million, $38.2
million, and $77.2 million, in 1996, 1995, and 1994, respectively.
MARKETING
NAICC writes workers' compensation insurance 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 agencies or general
agencies and no independent agent produces more than 4.5 percent of the total
premiums. The agency contracts provide authority to bind coverage within
detailed underwriting guidelines set by NAICC. Valor markets workers'
compensation insurance directly to Montana employers principally through
contacts of its President. All business is produced and serviced through its
home office in Billings, Montana.
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NAICC maintains five new business production offices located in Portland,
Oregon, Phoenix, Arizona and San Francisco, Fresno, and Long Beach, California.
The marketing and underwriting employees at these offices solicit and
underwrite only new applications produced by independent agents. NAICC believes
that its local presence allows it to better serve policyholders and independent
agents. All other functions of policyholder service, renewal underwriting,
policy issuance, premium collection and record retention are performed
centrally at NAICC's home office in Long Beach, California.
NAICC targets employers having operations that are classified as low to
moderate hazard and that generally have payrolls under $1 million. Typically,
annual premiums for employers in this payroll category are less than $25,000.
Valor writes workers' compensation for employers of a wide range of hazard
classifications, from banks to construction businesses, and targets the larger
employers in the state of Montana.
UNDERWRITING
NAICC maintains a disciplined approach to risk selection and pricing. In
accordance with this policy, NAICC selects each prospective policyholder based
on the characteristics of such risk and establishes premiums based on loss
experience and risk exposure. NAICC's pricing policy is not driven by market
share considerations.
Rates, rating plans, policyholder dividend plans and policy forms are
developed and filed by NAICC's underwriting personnel with the appropriate
regulatory agency in each state in which NAICC operates. NAICC relies
principally upon rates promulgated by either the Workers' Compensation
Insurance Rating Bureau (WCIRB) or the National Council on Compensation
Insurance, the statistical agent for other western states in which NAICC
markets insurance.
NAICC retains the first $500,000 of each workers' compensation loss and has
purchased reinsurance for up to $99.5 million in excess of its retention, the
first $4.5 million of which is placed with a major reinsurance company and the
remaining $95 million of which is provided by 16 other companies.
CLAIMS
Workers' compensation claims are received, reviewed, processed and paid by
NAICC employees located in claims service offices in Portland, Oregon and Long
Beach, California. Most of NAICC's policyholders are not of sufficient size or
type to make a more specialized managed care approach to medical cost
containment more cost effective.
NON-STANDARD PRIVATE PASSENGER AUTOMOBILE INSURANCE
GENERAL
NAICC began writing non-standard private passenger automobile insurance in
California in July, 1993. NAICC writes this business through a general agent
which uses over 700 sub-agents to obtain applications for policies.
Policyholder selection is governed by underwriting guidelines established by
NAICC. Non-standard risks are those segments of the driving public which
generally are not considered "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 of 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
coverages for up to $33,000 per vehicle. NAICC's management believes that it
may achieve underwriting success as a result of refinement of various risk
profiles, thereby dividing the non-standard market into more defined segments
which can be adequately priced.
The California Automobile Assigned Risk Plan (CAARP) provides state mandated
minimum levels of automobile liability coverage to drivers whose driving
records, or other relevant characteristics, make it difficult
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for them to obtain insurance in the voluntary market. NAICC does not expect to
receive a material number of assignments arising from its non-standard private
passenger automobile business and does not believe that the assignments will
have a material adverse effect upon the profitability of this line of
business.
Net written premiums were $14.5 million, $15 million and $10.5 million in
1996, 1995 and 1994, respectively, for the non-standard private passenger
automobile program. Until January 1, 1997, NAICC ceded 50 percent of its
private passenger automobile business to a major reinsurance company under a
quota share reinsurance agreement, at which time the agreement was amended to
reduce the ceding percentage to 25 percent.
UNDERWRITING
Insurers admitted in California are required to obtain prior approval of
both rates and forms for most types of insurance, including non-standard
personal automobile liability and physical damage insurance, from the CDI
before being used as part of an insurance contract in California. NAICC
periodically revises its forms and rates based upon demand and NAICC's
historical experience. NAICC's general agent has authority through its agency
contract, to use these forms and rates to bind new and renewal policies in
accordance with NAICC's underwriting guidelines.
CLAIMS
All automobile claims are handled by employees of NAICC at its home office
in Long Beach, California. Claims are reported by agents, insureds and
claimants directly to NAICC. Claims involving suspected fraud are referred to
an in-house special investigation unit ("SIU") adjuster who manages a detailed
investigation of these claims using outside investigative firms. When evidence
of fraudulent activity is identified, the SIU adjuster works with the various
state departments of insurance, the National Insurance Crime Bureau and local
law enforcement agencies in handling the claims.
COMMERCIAL AUTOMOBILE INSURANCE
GENERAL
Automobiles used or owned by businesses that are used to further the
purposes of those businesses are classified broadly as "commercial
automobiles" for insurance purposes. The majority of automobiles owned or used
by businesses are insured under policies that provide other coverages for the
business, such as commercial multi-peril insurance. Standard insurers,
however, often will not cover certain commercial automobiles because of the
claims experience and/or the type of the business, or the use or the driver of
the automobile.
Businesses which are unable to insure a specific driver and businesses
having vehicles not qualifying for commercial multi-peril insurance are
typical NAICC insureds. Examples of these risks include drivers with more than
one moving violation, one and two vehicle accounts, and specialty haulers,
such as sand and gravel, farm vehicles and certain short haul common carriers.
NAICC does not insure long haul truckers, trucks hauling logs, gasoline or
similar higher hazard operations.
NAICC's policies in force typically cover fleets of four or fewer
automobiles. The current average annual premium of the policies in force is
approximately $3,000. Approximately 45% of the policies provide both liability
and physical damage coverage; most of the remainder provide liability
insurance only.
Net written premiums for commercial automobile were $4.8 million in 1996 and
$2.1 million in each of 1995 and 1994. NAICC has increased its production
efforts in commercial automobile by adding marketing representatives to this
line as well as a vice president of marketing, which resulted in appointments
of approximately fifty new agents in the last nine months of 1996. The
increased marketing emphasis in this line is expected to result in a
significant increase in premium in 1997 and 1998.
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MARKETING
NAICC markets non-standard commercial automobile insurance through
approximately 600 independent agents located in Arizona, California, Idaho,
Nevada, Oregon and Utah. NAICC does not use any managing general agents in
this line of business, although NAICC has granted agency contracts to agents
who may use sub-agents. NAICC's new business field offices support the
production of this business through the independent agents.
UNDERWRITING
Rates and policy forms are developed by NAICC and filed with the regulators
in each of the relevant states, depending upon each state's requirements.
NAICC relies upon industry experience tempered by its own experience in
establishing rates.
The maximum non-standard commercial automobile policy limit provided by
NAICC is $1 million bodily injury and property damage combined single limit of
liability for each occurrence. NAICC retains the first $150,000 bodily injury
and property damage combined single limit of liability for each occurrence.
Losses in excess of $150,000, per occurrence, are ceded to its reinsurers.
CLAIMS
All non-standard commercial automobile claims are handled under the
direction of the NAICC home office claims personnel who also handle the non-
standard personal automobile claims operations.
COMBINED RATIO
Combined underwriting ratios were 136.7 percent , 113.4 percent and 106.2
percent in 1996, 1995 and 1994, respectively. The increase in the combined
ratio in 1996 is due to the provision for additional losses and allocated loss
adjustment expenses associated with NAICC's run-off businesses, which
represents 27.3 percent of the combined ratio in 1996. 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.
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--Property and Casualty Insurance
Operations" and Note 7 of the Notes to Consolidated Financial Statements.
LOSSES AND LOSS ADJUSTMENT EXPENSES
NAICC's unpaid losses and loss adjustment expenses ("LAE") represent the
estimated indemnity cost and loss adjustment expenses necessary to cover the
ultimate net cost of investigating and settling claims. Such estimates are
based upon estimates for reported losses, historical company experience of
losses reported by reinsured companies for insurance assumed, and actuarial
estimates based upon historical company and industry experience for
development of reported and unreported claims (incurred but not reported). 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 may dramatically increase liability in the time
between the dates on which a claim is reported and its resolution. 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 for environmental clean-up against policies issued prior to
1980 and 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 in 1985. These direct excess and primary claims
are relatively
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few in number and have policy limits of between $50,000 and $1,000,000, with
reinsurance generally above $50,000. NAICC also has environmental claims
arising associated with participations 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 clean-up 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 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, or even materially exceed, such estimates.
NAICC is involved in litigation related to certain environmental claims
which have some significant uncertainties. Such uncertainties include
difficulties in predicting the outcome of judicial decisions as case law
evolves regarding liability exposure, insurance coverage and interpretation of
policy language with respect to environmental claims. While the outcome of
such litigation cannot be determined at this time, such litigation, net of
liabilities established therefor and giving effect to reinsurance, is not
expected to have a material adverse effect on the future liquidity or
financial position of NAICC. As of December 31, 1996 and 1995, NAICC's net
unpaid losses and LAE relating to environmental claims were approximately
$13.4 million and $4.1 million, respectively.
Due to the factors discussed above and others, the process used in
estimating unpaid losses and loss adjustment expenses cannot provide an exact
result. Management believes that the provisions for unpaid losses and loss
adjustment expenses are adequate to cover the net cost of losses and loss
adjustment expenses incurred to date; however, such liability is necessarily
based on estimates and there can be no assurance that the ultimate liability
will not exceed, or even materially exceed, such estimates.
Analysis of Losses and Loss Adjustment Expenses
The following table provides a reconciliation of NAICC's unpaid losses and
loss adjustment expenses (LAE) (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net unpaid losses and LAE at January 1.......... $116,294 $128,625 $119,223
Net unpaid losses acquired with Valor Insurance
Company........................................ 403 -- --
-------- -------- --------
116,697 128,625 119,223
Incurred related to:
Current year.................................. 26,979 45,592 67,131
Prior years................................... 10,120 3,123 384
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Total incurred.............................. 37,099 48,715 67,515
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Paid Related to:
Current year.................................. (10,559) (14,464) (15,849)
Prior years................................... (46,132) (46,582) (42,264)
-------- -------- --------
Total paid...................................... (56,691) (61,046) (58,113)
-------- -------- --------
Net unpaid losses and LAE at December 31........ $ 97,105 $116,294 $128,625
Plus: reinsurance recoverables................ 23,546 21,112 17,705
-------- -------- --------
Gross unpaid losses and LAE at December 31...... $120,651 $137,406 $146,330
======== ======== ========
</TABLE>
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The losses and LAE incurred related to prior years is attributable to claims
from businesses which are in run-off. In 1996, management of NAICC strengthened
the unpaid losses and allocated loss adjustment expenses (ALAE) of pre-1980
businesses assumed by NAICC in 1985 and which are in run-off. NAICC increased
these run-off claim liabilities by $10 million. The pre-1980 run-off
liabilities include claims relating to environmental clean-up for policies
issued prior to 1970. NAICC increased its bulk unpaid liabilities related to
these claims, principally the unpaid ALAE, as it has become evident that the
legal costs associated with these claims would be significantly greater than
previously anticipated. As of December 31, 1996, NAICC's net unpaid losses and
LAE relating to environmental claims was approximately $13.4 million.
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 comprising that liability. The
second section shows the original recorded net liability as of the end of
successive years adjusted to reflect facts and circumstance 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 or redundant. The third section
reflects the cumulative amounts related to that liability that were paid, net
of reinsurance, as of the end of successive years.
Analysis of Net Losses and Loss Adjustment Expense Development (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <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 $97,105
Net unpaid losses and
LAE re-estimated as of:
One year later........ 120,527 100,599 92,632 94,364 105,568 119,607 131,748 126,414
Two years later....... 124,167 100,143 87,504 99,875 111,063 123,039 141,602
Three years later..... 121,081 94,954 89,844 107,945 117,756 136,735
Four years later...... 116,384 96,948 95,576 116,018 138,877
Five years later...... 118,175 101,537 102,081 136,269
Six years later....... 122,784 107,344 119,107
Seven years later..... 128,589 122,985
Eight years later..... 143,585
Cumulative (deficiency)
redundancy............. (27,727) (27,713) (27,237) (38,459) (34,052) (17,512) (12,977) (10,120)
Cumulative net amounts
paid as of:
One year later........ 41,767 38,165 31,162 39,131 39,650 42,264 46,582 46,132
Two years later....... 72,735 56,876 53,424 63,483 68,025 71,702 80,515
Three years later..... 86,142 71,543 66,198 81,485 88,038 95,525
Four years later...... 96,352 78,991 75,963 94,238 106,431
Five years later...... 102,385 84,980 83,704 108,923
Six years later....... 107,661 90,458 95,199
Seven years later..... 112,555 100,559
Eight years later..... 121,724
</TABLE>
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The following table reflects the same information as the preceding table
gross of reinsurance (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross unpaid Losses and LAE at end of
year.................................. $120,651 $137,406 $146,330 $137,479
Gross unpaid Losses and LAE re-
estimated as of:
One year later....................... 149,416 149,815 137,898
Two years later...................... 161,731 141,737
Three years later.................... 158,263
Gross cumulative deficiency: (12,010) (15,401) (20,784)
Gross cumulative amount paid as of:
One year later....................... 54,901 53,798 53,634
Two years later...................... 92,991 88,930
Three years later.................... 116,605
</TABLE>
The cumulative deficiency as of December 31, 1995 on a net basis of $10.1
million is due to the strengthening of the unpaid losses and ALAE of pre-1980
businesses assumed by NAICC in 1985 and which are in run-off. NAICC increased
these run-off claim liabilities in 1996 by $10 million. The pre-1980 run-off
liabilities include claims relating to environmental clean-up for policies
issued prior to 1970.
The cumulative deficiency on a net basis of $34 million and $38.5 million as
of December 31, 1992 and 1991, respectively, is also attributable to adverse
development of 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. The adverse development
was the result of a significant increase in frequency in workers' compensation
claims that was brought on by a downturn in the California economy, an
increase in unemployment and a dramatic increase in stress and post-
termination claims. The adverse development in 1990 and 1991 was significantly
offset by favorable loss experience and development in the 1992, 1993 and 1994
loss years.
Conditions and trends that have affected the development of these
liabilities in the past may not necessarily recur in the future. It would not
be appropriate to use this cumulative history in the projection of future
performance.
The analysis of net losses and LAE above would ordinarily 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 prior 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. As stated above, the losses and
loss adjustment expenses reflected in the tables above are reduced both for
amounts ceded to other insurers and for other recoveries.
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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 so as to
effectively limit its maximum loss arising out of any one occurrence. Contracts
of reinsurance do not legally discharge the original insurer from its primary
liability. Estimated reinsurance receivables arising from these contracts of
reinsurance are, in accordance with generally accepted accounting principles,
reported separately as assets. Premiums for reinsurance ceded by NAICC in 1996
were 29.4 percent of written premiums.
As of December 31, 1996, General Reinsurance Corporation (GRC), Munich
American Reinsurance Company (MARC), and Lloyd's of London (Lloyd's) were the
only reinsurers that comprised more than 10 percent of NAICC's reinsurance
recoverable on paid and unpaid claims. NAICC monitors all reinsurers, by
reviewing A.M. Best reports and ratings, information obtained from reinsurance
intermediaries and analyzing financial statements. At December 31, 1996, NAICC
had reinsurance recoverables on paid and unpaid claims of $7.7 million , $7.9
million, and $4.1 million from GRC, MARC, and Lloyd's respectively. GRC and
MARC had an A.M. Best rating of A++ and A+, respectively. The paid and unpaid
recoverable amounts ceded to Lloyd's relate to business in run-off and assumed
by NAICC. NAICC believes that Equitas has authority to respond on behalf of all
of the syndicates underlying the reinsurance contracts with Lloyd's. See Note 6
of the Notes to Consolidated Financial Statements for further information on
reinsurance.
NAICC and two of its subsidiaries participate in an inter-company pooling and
reinsurance agreement under which Danielson Insurance Company (DICO) and
Danielson National Insurance Company (DNIC) cede 100% of their net liability,
defined to include premiums, losses and allocated loss adjustment expenses, to
NAICC to be combined with the net liability for policies of NAICC in formation
of a "Pool". NAICC simultaneously cedes to DICO and DNIC 10% of the net
liability of the Pool. DNIC commenced participation in July, 1993 and DICO
commenced participation in January 1994. Additionally, both DICO and DNIC
reimburse NAICC for executive services, professional services, and
administrative expenses based on designated percentages of net premiums written
for each line of business.
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 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, 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
acquisitions, extraordinary dividends, the terms of affiliate transactions and
other related matters. The Company and its insurance subsidiaries have
registered as holding company systems pursuant to such legislation in
California and routinely report to other jurisdictions. The National
Association of Insurance Commissioners 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 risk-based capital requirements. It is not
possible to predict the impact of future state and federal regulation on the
operations of the Company or its insurance subsidiaries.
NAICC is an insurance company domiciled in the State of California and is
regulated by the California Department of Insurance for the benefit of
policyholders. The California Insurance Code does not permit the payment of
shareholder dividends that exceed the greater of net income or 10% of statutory
surplus and such dividends can only be paid out of accumulated earned surplus
without prior approval from the Insurance Commissioner. Because it has negative
unassigned surplus, NAICC is not able to pay dividends in 1997 without prior
regulatory approval.
10
<PAGE>
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 loss adjustment
expense reserves). A commonly accepted maximum premiums-to-surplus ratio is 3
to 1; commonly accepted reserves-to-surplus ratios range from 3-5 to 1.
The following table shows the consolidated premiums-to-surplus and reserves-
to-surplus ratios of NAICC (on a statutory basis):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Ratio of:
Premiums-to-surplus........................... .9:1 1.2:1 2.3:1
Reserves-to-surplus........................... 2.1:1 2.6:1 3.2:1
</TABLE>
Given the foregoing relatively conservative financial security ratios,
NAICC's management believes that existing capital is adequate to support
continued higher than industry average premium growth for the foreseeable
future.
At December 31, 1996, NAICC had unusual resulting values for four of the
Insurance Regulatory Information System tests. The unusual resulting values
all result from the strengthening of unpaid losses and ALAE of the businesses
in run-off and the decline in written premiums.
A model for determining the risk-based capital ("RBC") requirements for
property and casualty insurance companies was adopted in December 1993.
Insurance companies are required to report their RBC ratios based on their
1994 annual statements. NAICC has calculated its RBC requirement under the
most recent RBC model and it has sufficient capital in excess of any
regulatory action level. The Company believes that RBC is the most appropriate
indicator of potential regulatory oversight.
The RBC model sets forth four levels of increasing regulatory intervention:
(1) Company Action Level (200% of an insurer's Authorized Control Level) at
which the insurer must submit to the regulator a plan for increasing such
insurer's capital; (2) Regulatory Action Level (150% of an insurer's
Authorized Control Level), at which the insurer must submit a plan for
increasing its capital to the regulator and the regulator may issue corrective
orders; (3) Authorized Control Level (a multi-step calculation based upon
information derived from an insurer's most recent filed statutory annual
statement), at which the regulator may take action to rehabilitate or
liquidate the insurer; and (4) Mandatory Control Level (70% of an insurer's
Authorized Control Level), at which the regulator must rehabilitate or
liquidate the insurer.
At December 31, 1996, the RBC of NAICC was 263% greater than the Company
Action Level.
HOLDING COMPANY BUSINESS
DHC is a holding company incorporated under the General Corporation Law of
the State of Delaware. As of December 31, 1996, 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; and
(ii) approximately $10.1 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
11
<PAGE>
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.
FORMER TRUST BUSINESS
In March 1993, DHC acquired all of the common stock of Danielson Trust
(which was known as HomeFed Trust until November 13, 1993), a trust company
chartered by the California State Banking Department to provide trust and
fiduciary services and located in San Diego, California. In February 1994,
Danielson Trust acquired the assets of the Western Trust Services 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.
Danielson Trust's business consisted 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
provided custodial services for certificates of deposit to affiliated and
unaffiliated broker-dealers, as well as other custodial services to an
affiliated mutual fund.
On December 31, 1996, DHC consummated the sale of Danielson Trust to North
American Trust Company for $3 million in cash and recognized a loss of $1.2
million on disposal.
TAX LOSS CARRYFORWARD
As of December 31, 1996, the Company had a consolidated net operating loss
carryforward of approximately $1.34 billion for Federal income tax purposes.
This number is based upon Federal consolidated income tax losses for the
periods through December 31, 1995 and an estimate of the 1996 taxable loss.
Some or all of the carryforward may be available 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 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............................................ 155,762
2002............................................ 146,394
2003............................................ 77,736
2004............................................ 70,000
2005............................................ 104,763
2006............................................ 92,235
2007............................................ 87,298
2008............................................ 31,688
2009............................................ 40,405
2010............................................ 24,177
2011............................................ 20,169
</TABLE>
12
<PAGE>
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 the 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 10 of the Notes to the Consolidated Financial Statements for a
description of certain restrictions on the transfer of Common Stock.
DHC'S BUSINESS PLAN AND DEVELOPMENT
DHC's business plan is to grow by developing business partnerships and
making strategic acquisitions that are expected to contribute higher than
average returns for its stockholders. On February 26, 1996, DHC entered into a
merger agreement pursuant to which DHC would have acquired all of the
outstanding stock of Midland in a merger transaction. As described earlier,
the proposed merger was terminated by mutual consent of DHC and Midland in
July, 1996 due to the loss of several key executives in the crash of TWA
Flight 800.
On January 15, 1997, DHC entered into a letter of intent with Progressive
pursuant to which it was proposed that DHC sell to Progressive 11 million
newly issued shares of Common Stock of DHC for consideration having a value of
$6.60 per share. Progressive would then have owned a 42% interest in DHC. On
March 10, 1997, Progressive informed DHC that, for "internal Progressive
reasons", it was terminating its discussions with DHC.
EMPLOYEES
As of December 31, 1996, the number of employees of DHC and its consolidated
subsidiaries was approximately as follows:
<TABLE>
<S> <C>
NAICC............................................................... 141
DHC (holding company only).......................................... 11
---
Total........................................................... 152
===
</TABLE>
None of these employees is covered by a collective bargaining agreement. DHC
believes that the staffing levels are adequate to conduct future operations.
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.
See Note 14 of the Notes to Consolidated Financial Statements.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
NAICC is a party to various legal proceedings which are considered routine
and incidental to its insurance business and are not material to the financial
condition and operation of such business. DHC is not a party to any legal
proceeding which is considered material to the financial condition and
operation of its business. See Note 15 of the Notes to Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
"Stock Market Prices" on page 32 of DHC's 1996 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 6 of DHC's 1996 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 7 through 12 of DHC's 1996 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 13
through 16, 17 through 30, and 32, respectively, of DHC's 1996 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.
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 occupations 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 September 17, 1996. 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.
14
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR
DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
-------- --- -------------------- --------
<S> <C> <C> <C>
Martin J. Whitman..... 72 Chairman of the Board and Chief Executive 1990
Officer of DHC
David M. Barse........ 34 President and Chief Operating Officer of 1996
DHC
Eugene M. Isenberg.... 67 Chairman of the Board and Chief Executive 1990
Officer of Nabors Industries, Inc.
Joseph F. Porrino..... 52 Executive Vice President of the New School 1990
for Social Research
Frank B. Ryan......... 60 Professor of Mathematics and Computational 1990
and Applied Mathematics at Rice University
Wallace O. Sellers.... 67 Vice Chairman and Director of Enhance 1995
Financial Services Group, Inc.
Anthony G. Petrello... 42 President and Chief Operating Officer of 1996
Nabors Industries, Inc.
Stanley J. Garstka.... 53 Deputy Dean and Professor in the Practice 1996
of Management at Yale University School of
Management
Timothy C. Collins.... 40 Chief Executive Officer and Senior Managing 1996
Director of Ripplewood Holdings LLC
</TABLE>
Mr. Whitman is the Chairman of the Board, Chief Executive Officer and a
Director of DHC. 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, and EQSF Advisers, Inc. ("EQSF"), TAVF's
investment adviser. 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. Mr. Whitman is a
Managing Director of Whitman Heffernan Rhein & Co., Inc. ("WHR"), an
investment and financial advisory firm which he founded with James P.
Heffernan and C. Kirk Rhein, Jr. during the first quarter of 1987. Since March
1991, Mr. Whitman has served as a Director of Nabors Industries, Inc., a
publicly-traded company. From March 1993 through February 1996, Mr. Whitman
served as a director of Herman's Sporting Goods, Inc., a retail sporting goods
chain, which filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code on April 26, 1996. Mr. Whitman also serves as a Director of
the Company's subsidiaries, including National American Insurance Company of
California ("NAICC") and KCP Holding Company ("KCP"). 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. Barse has been the President, Chief Operating Officer and a Director of
DHC since July 1996 and a director of NAICC since August 1996. Since June
1995, Mr. Barse has been the President of each of MJW and MJWHC. Since April
1995, he has been an Executive Vice President and Chief Operating Officer of
TAVF and
15
<PAGE>
EQSF. Mr. Barse joined the predecessors of MJW and MJWHC in December 1991 as
General Counsel. Mr. Barse was previously an attorney with the law firm of
Robinson Silverman Pearce Aronsohn & Berman LLP. Mr. Barse received a Bachelor
of Arts in Political Science from George Washington University in 1984 and a
Juris Doctor from Brooklyn Law School in 1987.
Mr. Isenberg, since 1987, has been Chairman and Chief Executive Officer of
Nabors Industries, Inc. ("Nabors"), a publicly-traded oil and gas drilling
company listed on the American Stock Exchange ("AMEX"). Beginning in 1996, Mr.
Isenberg commenced his term as a Governor of the AMEX. From 1969 to 1982,
Mr. Isenberg was Chairman of the Board and principal stockholder of Genimar
Inc., a steel trading and building products manufacturing company. From 1955
to 1968, Mr. Isenberg was employed in various management capacities with the
Exxon Corp. Mr. Isenberg graduated from the University of Massachusetts 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.
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 NASDAQ. 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
AMEX. 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. Sellers is Vice-Chairman and 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. Mr. Sellers received a
Bachelor of Arts degree from the University of New Mexico in 1951 and a
Masters degree in Economics from New York University in 1956. Mr. Sellers
attended the Advanced Management Program at Harvard University in 1975 and is
a Chartered Financial Analyst.
Mr. Petrello has been the President and Chief Operating Officer of Nabors
since 1992 and has been a director of Nabors and a member of the Executive
Committee of its board of directors since 1991. Mr. Petrello was formerly a
partner with the law firm Baker & McKenzie, which he had been with since 1979.
In 1986, Mr. Petrello was named Managing Partner of Baker & McKenzie's New
York Office and served in that capacity until 1991 when he resigned as a
partner in such law firm. Mr. Petrello continues as Of Counsel to Baker &
McKenzie. Mr. Petrello received a Bachelor of Science degree and a Masters
degree from Yale University in 1976 and a Juris Doctor from Harvard University
in 1979.
Mr. Garstka has been Deputy Dean at the Yale University School of Management
(the "Yale School of Management") since November, 1995 and has been a
Professor in the Practice of Management at the Yale School of Management since
1988. Mr. Garstka was the Acting Dean of the Yale School of Management from
August 1994 to October 1995, and an Associate Dean of the Yale School of
Management from 1984 to 1994.
16
<PAGE>
Mr. Garstka has served on the Board of Trustees of MBA Enterprises Corps, a
non-profit organization, since 1991 and on the Board of Trustees of The Foote
School in New Haven, Connecticut since 1995. From 1988 to 1990, Mr. Garstka
served as a director of Vyquest, Inc., a publicly-traded company listed on the
AMEX. Mr. Garstka was a Professor in the Practice of Accounting from 1983 to
1988, and an Associate Professor of Organization and Management from 1978 to
1983, at the Yale School of Management. Mr. Garstka has also authored numerous
articles on accounting and mathematics. Mr. Garstka received a Bachelor of
Arts degree in Mathematics from Wesleyan University in Middletown, Connecticut
in 1966, a Masters degree in Industrial Administration in 1968 from Carnegie
Mellon University and a Doctorate in Operations Research in 1970 from Carnegie
Mellon University.
Mr. Collins has been the Chief Executive Officer and Senior Managing
Director of Ripplewood Holdings LLC, a private investment firm, since October
1995. From January 1990 to September 1995, Mr. Collins was the Senior Managing
Director of Onex Investment Corp., a private investment firm. Since April
1994, Mr. Collins has been a director of Scotsman Industries, Inc., a
publicly-traded company listed on the New York Stock Exchange. Mr. Collins is
also a director of Dayton Superior Corporation (NYSE) and is a trustee of
DePauw University. Mr. Collins received a Bachelor of Arts degree in
Philosophy from DePauw University in 1978, and a Masters in Private and Public
Management from the Yale School of Management in 1982.
Executive Officers
The executive officers of DHC are as follows:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITION WITH REGISTRANT
---- --- ----------------------------------
<S> <C> <C>
Martin J. Whitman............ 72 Chairman of the Board, Chief Executive Officer
and a Director
President, Chief Operating Officer and a
David M. Barse............... 34 Director
Michael T. Carney............ 43 Chief Financial Officer and Treasurer
Ian M. Kirschner............. 41 General Counsel and Secretary
</TABLE>
For additional information about Messrs. Whitman and Barse, see "Directors"
above.
Mr. Carney was the Chief Financial Officer ("CFO") of the Company from
August 1990 until March 1996 and has been the CFO of the Company and a
director of NAICC since August 1996. Since 1990, Mr. Carney has served as
Treasurer and CFO of TAVF and EQSF and, since 1989, as CFO of WHR, as well as
MJW&Co., and MJW and MJWHC and their predecessors. From 1990 through April
1994, Mr. Carney also served as CFO of Carl Marks Strategic Investments, L.P.;
and from 1989 through April 1994, Mr. Carney served as Treasurer and CFO of
Equity Strategies Fund. From 1988 to 1989, Mr. Carney was the Director of
Accounting of Smith New Court, Carl Marks, Inc., and, from 1986 to 1988, Mr.
Carney served as the Controller of Carl Marks & Co., Inc. Mr. Carney graduated
from St. John's University in 1981 with a Bachelor of Science degree in
Accounting.
Mr. Kirschner has been the General Counsel and Secretary of DHC since August
1996. Mr. Kirschner has also served as General Counsel and Secretary of MJWHC
and MJW since January 1996 and of TAVF and EQSF since January 1997. From
February 1993 to June 1995, Mr. Kirschner was a Vice President, the General
Counsel and Secretary of 2 I Inc., a then NASDAQ Small-Cap listed holding
company. Mr. Kirschner has been practicing law since 1979, and was Of Counsel
to Morgan, Lewis & Bockius, from October, 1990 to October, 1992. Mr. Kirschner
obtained a Bachelor of Arts degree from the State University of New York at
Binghamton in 1976 and a Juris Doctor from Boston University School of Law in
1979.
Section 16(a) Beneficial Ownership Reporting Compliance
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
17
<PAGE>
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 with respect to Mr. Collins (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 on a timely basis for the fiscal year ended December 31, 1996.
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 1996 by the Chief
Executive Officer, the former Chief Executive Officer and two other former
executive officers of DHC whose cash compensation for such year exceeded
$100,000. No other executive officers of DHC received compensation in excess of
$100,000 for fiscal year 1996. Only those columns which call for information
applicable to DHC or the individuals named for the periods indicated have been
included in such table.
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
--------------------- ------------
AWARDS
------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY(A) BONUS(B) OPTIONS COMPENSATION
POSITION YEAR ($) ($) (#) ($)
------------------ ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Martin J. Whitman....... 1996 $200,000 -0- -0-
Chairman of the Board &
Chief Executive 1995 $200,000 -0- -0-
Officer 1994 $ 75,000 $100,000 -0-
C. Kirk Rhein, Jr. ..... 1996 $116,667 -0- -0-
President & Chief
Executive Officer(c) 1995 $200,000 -0- -0-
1994 $ 75,000 $100,000 -0-
James P. Heffernan...... 1996 $116,667 -0- -0- $83,333
Chief Financial
Officer(d) 1995 $200,000 -0- -0-
1994 $ 75,000 $100,000 -0-
Lisa D. Levey........... 1996 $114,960 -0- 15,000 $72,917
General Counsel &
Secretary(e) 1995 $158,675(f) $100,000(f) -0-
1994 $125,175(f) $100,000(f) -0-
</TABLE>
- --------
(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) Mr. Rhein was President and Chief Executive Officer until his death in the
crash of TWA Flight 800 on July 17, 1996. Annual Compensation reflects
compensation paid through that date. For information regarding additional
payments made to the estate of Mr. Rhein, see Item 13. "Certain
Relationships and Related Transactions."
(d) Mr. Heffernan was the Chief Financial Officer until his resignation on July
29, 1996. At that time, Mr. Heffernan entered into an employment agreement
with DHC pursuant to which he was paid the amount set forth under All Other
Compensation during 1996.
18
<PAGE>
(e) Ms. Levey was the General Counsel and Secretary until her resignation on
July 31, 1996. Ms. Levey entered into a severance agreement with DHC
pursuant to which she was paid the amount set forth under All Other
Compensation during 1996.
(f) Amounts shown reflect portion of compensation allocated to DHC based upon
percentage of time spent in connection with DHC matters.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table presents certain information relating to the grants of
stock options made during 1996 to the named executive officers of DHC. The
options were granted under DHC's 1995 Stock and Incentive Plan. Pursuant to
rules of the Securities and Exchange Commission, the table also shows the
value of the options granted at the end of the option term (through October
31, 1997) if the stock price were to appreciate annually by 5% and 10%,
respectively. There is no assurance that the stock price will appreciate at
the rates shown in the table. Only those tabular columns which call for
information applicable to DHC or the named individuals have been included in
such table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------- ----------------------
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL
OPTIONS/ OPTIONS/SARS
SARS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Martin J. Whitman....... -0-
C. Kirk Rhein, Jr....... -0-
James P. Heffernan...... -0-
Lisa D. Levey........... 15,000 0.94 $6.6875 10/31/97* 9,185 18,768
</TABLE>
- --------
* In connection with the termination of her employment, the expiration date of
the options granted to Ms. Levey, which would otherwise have terminated
three months after the date of termination, was extended to October 31,
1997.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table presents certain information relating to the value of
unexercised stock options as of the end of 1996, on an aggregated basis, owned
by the named executive officers of DHC as of the last day of the fiscal year.
None of such officers who owned options to purchase Common Stock during 1996
exercised any of such options during 1996. Only those tabular columns which
call for information applicable to DHC or the named individuals have been
included in such table.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
END AT FISCAL YEAR-END
(#) ($)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Martin J. Whitman........... 210,000 -0- $420,000 -0-
C. Kirk Rhein, Jr........... 210,000 -0- $420,000 -0-
James P. Heffernan.......... 210,000 -0- $420,000 -0-
Lisa D. Levey............... 15,000 -0- -0- -0-
</TABLE>
19
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, 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.
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, 1997 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
of the State of
California
c/o Geoffrey A. 1,803,235/2/,/3/ 11.7
Nicholls.................
Deputy Trustee
Mission Insurance
Companies' Trusts
3333 Wilshire Boulevard--
3rd Floor
Los Angeles, CA 90010
Martin J. Whitman......... 2,321,024/2/,/4/,/5/,/6/ 14.9
c/o Danielson Holding
Corporation
767 Third Avenue
New York, NY 10017-2023
James P. Heffernan........ 1,372,980/2/,/5/,/6/ 8.8
c/o WHR Management
Company, L.P.
2 Park Place
Bronxville, NY 10708
Whitman Heffernan & Rhein 1,054,996/2/ 6.9
Workout Fund, L.P. ......
c/o WHR Management
Company, L.P.
2 Park Place
Bronxville, NY 10708
Third Avenue Value Fund, 803,669/2/ 5.2
Inc. ....................
767 Third Avenue
New York, NY 10017-2023
OFFICERS AND DIRECTORS
Martin J. Whitman......... 2,321,024/2/,/4/,/5/,/6/ 14.9
David M. Barse............ 17,582/7/ *
Joseph F. Porrino......... 56,666/8/ *
Frank B. Ryan............. 48,666/8/ *
Eugene M. Isenberg........ 69,924/9/ *
Wallace O. Sellers........ 36,666/1//0/ *
Anthony G. Petrello....... 0/1//1/ *
Stanley J. Garstka........ 11,008/1//1/ *
Timothy C. Collins........ 0/1//1/ *
Michael T. Carney......... 17,582/7/ *
Ian M. Kirschner.......... 4,000/1//2/ *
All Officers and Directors
as a Group (11 persons).. 2,583,118/1//3/ 16.3
</TABLE>
20
<PAGE>
- --------
* 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, 1997 (the date as of which this table was prepared), there were
exercisable options outstanding to purchase 1,257,084 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 803,669 shares beneficially owned by Third Avenue Value Fund,
Inc. ("TAVF"), an investment company registered under the Investment
Company Act of 1940; 104,481 shares beneficially owned by Martin J.
Whitman & Co., Inc. ("MJW&Co"), a private investment company; and 72,641
shares beneficially owned by Mr. Whitman's wife and three adult family
members. 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 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 and Heffernan 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.
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 shares underlying options to purchase an aggregate of 17,582
shares of Common Stock at an exercise price of $5.6875 per share, which
become exercisable within the next 60 days. Does not include shares
underlying options to purchase an aggregate of 32,418 shares of Common
Stock at an exercise price of $5.6875 per share which are not currently
exercisable nor become exercisable within the next 60 days.
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 shares underlying options to purchase an aggregate of 26,666
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 13,334 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.
11 Does not include shares underlying options to purchase an aggregate of
40,000 shares of Common Stock at an exercise price of $5.50 per share
which are not currently exercisable nor become exercisable within the next
60 days.
12 Includes shares underlying options to purchase an aggregate of 2,500
shares of Common Stock at an exercise price of $5.6875 per share, which
become exercisable within the next 60 days. Does not include shares
underlying options to purchase an aggregate of 2,500 shares of Common
Stock at an exercise price of $5.6875 per share which are not currently
exercisable nor become exercisable within the next 60 days.
13 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.
21
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In recognition of the death of C. Kirk Rhein, Jr., while serving as
President and Chief Executive Officer of DHC, DHC intends to pay to Mr.
Rhein's widow, as a death benefit, Mr. Rhein's 1996 base salary through July
31, 1999.
In recognition of the death of William R. Story, a former Director of DHC
and the former President and Chief Executive Officer of NAICC while serving as
such, NAICC paid to Mr. Story's widow, as a death benefit, Mr. Story's base
salary through December 31, 1996 and intends to pay to her $200,000 in each of
1997 and 1998. NAICC has also transferred to Mr. Story's widow ownership of a
1995 Lexus automobile which was owned by NAICC and had been used by Mr. Story
as an officer of NAICC.
Effective as of July, 29, 1996, DHC entered into an Employment Agreement
with James P. Heffernan, then the Chief Financial Officer of the Company,
which provides for DHC's continued employment of Mr. Heffernan through July
31, 1999. Mr. Heffernan will have the duties and responsibilities assigned to
him by, and will report directly to, the Chief Executive Officer of DHC. Mr.
Heffernan will receive a salary of $200,000 per year through the term of such
agreement and is entitled to participate in all DHC employee benefit plans and
programs.
Lisa D. Levey resigned as an officer of DHC effective August 1, 1996. In
connection with Ms. Levey's resignation, DHC entered into a Severance
Agreement with Ms. Levey which provides that during the period through July
31, 1997, Ms. Levey will receive her 1996 annual base salary and will
participate, at DHC's expense, in DHC's employee benefit plans.
DHC shares certain personnel and facilities with several affiliated and
unaffiliated companies (including M.J. Whitman, Inc., a broker-dealer of which
Mr. Whitman is the Chairman and Chief Executive Officer and Mr. Barse is the
President and Chief Operating Officer), and certain expenses are allocated
among the various entities. Personnel costs are allocated based upon actual
time spent on DHC's business or upon fixed percentages of compensation. Costs
relating to office space and equipment are allocated based upon fixed
percentages. Inter-company balances are reconciled and reimbursed on a monthly
basis.
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 Consolidated Financial Statements
and Financial Statement Schedules appearing on Page F-1.
(2) Financial Statement Schedules--see Index to Consolidated Financial
Statements and Financial Statement Schedules appearing on Page F-1.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. (1) NAME OF EXHIBIT
--------------- ---------------
<C> <S>
Organizational Documents:
3.1* Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
</TABLE>
- --------
(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.
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. (1) NAME OF EXHIBIT
--------------- ---------------
<C> <S>
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.)
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.)
10.11* Stock Sale Agreement dated October 10, 1996 between Danielson
Holding Corporation and North American Trust Company. (Filed
with Report on Form 8-K dated December 31, 1996, Exhibit
10.1.)
10.12* Assignment and Assumption Agreement dated December 31, 1996 by
and between North American Trust Company, North American
Fiduciary Services, Inc. and Danielson Holding Corporation.
(Filed with Report on Form 8-K dated December 31, 1996,
Exhibit 10.2.)
10.13* Merger Agreement dated December 31, 1996 by and among North
American Trust Company, North American Fiduciary Services,
Inc., Danielson Trust Company and Danielson Holding
Corporation. (Filed with Report on Form 8-K dated December
31, 1996, Exhibit 10.3.)
Material Contracts--Executive Compensation Plans and
Arrangements:
10.14* 1990 Stock Option Plan. (Filed with Report on Form 8-K dated
September 4, 1990, Exhibit 10.8.)
10.15* 1995 Stock and Incentive Plan. (Included as Exhibit A to Proxy
Statement filed on March 30, 1995.)
</TABLE>
- --------
(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.
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. (1) NAME OF EXHIBIT
--------------- ---------------
<C> <S>
Annual Report to Security-Holders:
13.1 1996 Annual Report of Danielson Holding Corporation. (To be
included herewith.)
Subsidiaries:
21 Subsidiaries of Danielson Holding Corporation. (Filed
herewith.)
27 Financial Data Schedule (Filed herewith.)
</TABLE>
- --------
(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.
(b) During the quarter ended December 31, 1996 for which this Report is
filed, DHC filed one report on Form 8-K dated December 31, 1996 with respect
to the consummation of the sale of Danielson Trust Company.
24
<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/ Martin J. Whitman
---------------------------------
Martin J. Whitman
Chairman and Chief Executive Officer
Date: March 27, 1997
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 27, 1997
By: /s/ Martin J. Whitman
---------------------------------
Martin J. Whitman
Chairman of the Board and Chief
Executive Officer and a Director
Date: March 27, 1997
By: /s/ David M. Barse
---------------------------------
David M. Barse
President and Chief Operating
Officer
and a Director
Date: March 27, 1997
By: /s/ Michael T. Carney
---------------------------------
Michael T. Carney
Chief Financial Officer
Date: March 27, 1997
By: /s/ Joseph F. Porrino
---------------------------------
Joseph F. Porrino
Director
Date: March 27, 1997
By: /s/ Frank B. Ryan
---------------------------------
Frank B. Ryan
Director
Date: March 27, 1997
By: /s/ Eugene M. Isenberg
---------------------------------
Eugene M. Isenberg
Director
25
<PAGE>
Date: March 27, 1997
By: /s/ Wallace O. Sellers
---------------------------------
Wallace O. Sellers
Director
Date: March 27, 1997
By: /s/ Anthony G. Petrello
---------------------------------
Anthony G. Petrello
Director
Date: March 27, 1997
By: /s/ Stanley J. Garstka
---------------------------------
Stanley J. Garstka
Director
Date: March 27, 1997
By: /s/ Timothy C. Collins
---------------------------------
Timothy C. Collins
Director
26
<PAGE>
DANIELSON HOLDING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Independent Auditors' Report....................................... F-2
Danielson Holding Corporation and Consolidated Subsidiaries:
Statements of Operations--For the years ended December 31, 1996,
1995 and 1994................................................... *
Balance Sheets--December 31, 1996 and 1995....................... *
Statements of Stockholders Equity--For the years ended December
31, 1996, 1995 and 1994......................................... *
Statements of Cash Flows--For the years ended December 31, 1996,
1995 and 1994................................................... *
Schedule I--Summary of Investments--Other than Investments 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 and VI--Supplemental Information Concerning
Property--Casualty Insurance Operations......................... S-7
</TABLE>
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 1996 Annual Report to Stockholders.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Danielson Holding Corporation:
Under date of February 28, 1997, we reported on the consolidated balance
sheets of Danielson Holding Corporation and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, as contained in the 1996 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
1996. 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 5 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 28, 1997
F-2
<PAGE>
SCHEDULE I
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
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.......... $ 50,381 $ 51,003 $ 51,003
Mortgage-backed................. 54,691 53,877 53,877
Corporate....................... 38,352 38,450 38,450
-------- -------- --------
Total fixed maturities........ 143,424 143,330 143,330
-------- -------- --------
Equity securities:
Common stocks................... 257 2,697 2,697
-------- -------- --------
Total equity securities....... 257 2,697 2,697
-------- -------- --------
Short term investments............ 5,528 5,528 5,528
-------- -------- --------
Total investments........... $149,209 $151,555 $151,555
======== ======== ========
</TABLE>
S-1
<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,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net investment income.................... $ 534 $ 675 $ 435
Net realized investment losses........... (1) (2) --
Other income............................. -- 26 12
---------- ---------- ----------
Total revenues......................... 533 699 447
---------- ---------- ----------
Expenses:
Employee compensation and benefits....... 1,201 1,442 1,118
Professional fees........................ 288 221 751
Expenses in connection with terminated
proposed acquisition.................... 1,849 -- --
Nonrecurring compensation................ 820 -- --
Other general and administrative fees.... 684 657 697
---------- ---------- ----------
Total expenses......................... 4,842 2,320 2,566
---------- ---------- ----------
Loss before provision for income taxes..... (4,309) (1,621) (2,119)
Income tax provision....................... 3 36 40
---------- ---------- ----------
Loss before equity in net income of
subsidiaries.............................. (4,312) (1,657) (2,159)
Equity in net income (loss) of
subsidiaries.............................. (3,807) 3,973 5,304
---------- ---------- ----------
Income (loss) before extraordinary item.... (8,119) 2,316 3,145
Extraordinary item....................... -- -- 750
---------- ---------- ----------
Net income (loss).......................... $ (8,119) $ 2,316 $ 3,895
========== ========== ==========
</TABLE>
S-2
<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,
----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS:
Cash....................................................... $ 75 $ 18
Fixed maturities:
Available-for-sale at fair value (Cost: $7,026 and
$10,487)................................................ 7,025 10,530
Short term investments, at cost which approximates fair
value..................................................... 3,000 466
------- -------
TOTAL CASH AND INVESTMENTS............................... 10,100 11,014
Investment in subsidiaries................................. 49,167 58,289
Accrued investment income.................................. 131 175
Other assets............................................... 240 626
------- -------
TOTAL ASSETS............................................. $59,638 $70,104
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities.......................................... $ 785 $ 283
------- -------
TOTAL LIABILITIES........................................ 785 283
------- -------
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 46,131
Net unrealized gain (loss) on available-for-sale
securities................................................ 2,346 5,195
Retained earnings.......................................... 8,905 17,024
Treasury stock (Cost of 10,639 shares and 10,624 shares)... (66) (66)
------- -------
TOTAL STOCKHOLDERS' EQUITY............................... 58,853 69,821
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $59,638 $70,104
======= =======
</TABLE>
S-3
<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,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ (8,119) $ 2,316 $ 3,895
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized investment losses........... 1 2 --
Depreciation and amortization............ (60) 86 125
Equity in net (income) loss of
subsidiaries............................ 3,807 (3,973) (5,304)
Increase (decrease) in accrued expenses.. 502 (47) 56
Other, net............................... 9 (79) 209
---------- ---------- ----------
Net cash used in operating activities.. (3,860) (1,695) (1,019)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased:
Fixed income maturities available-for-
sale.................................... (10,584) (10,787) (12,933)
Fixed income maturities held-to-
maturity................................ -- -- --
Proceeds from sales:
Fixed income maturities available-for-
sale.................................... 5,542 1,837 7,026
Investments, matured or called
Fixed income maturities available-for-
sale.................................... 8,585 11,210 --
Fixed income maturities held-to-
maturity................................ -- -- 8,430
Acquisition of Western Trust Services.... -- -- (2,505)
Net proceeds from sale of Danielson Trust
Company................................. 2,968 -- --
Change in accrued investment income...... 45 1 (127)
---------- ---------- ----------
Net cash provided by (used in)
investing activities.................. 6,556 2,261 (109)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options to
purchase Common Stock................... -- -- 774
Retirement of stock options.............. -- (286) --
Purchase of treasury stock............... -- -- (56)
Change in receivable from subsidiary..... 353 (12) (344)
Additional capital contributed to
subsidiaries............................ (458) -- --
Return of capital from subsidiaries...... -- -- (2)
---------- ---------- ----------
Net cash provided by (used in)
financing activities.................. (105) (298) 372
---------- ---------- ----------
Net increase (decrease) in cash and short
term investments.......................... 2,591 268 (756)
Cash and short term investments at
beginning of year......................... 484 216 972
---------- ---------- ----------
Cash and short term investments at end of
year...................................... $ 3,075 $ 484 $ 216
========== ========== ==========
</TABLE>
S-4
<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,
1996:
Property and liability
insurance premiums..... $ 52,066 $15,441 $-- $36,625 --
======== ======= ==== ======= ===
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 --
======== ======= ==== ======= ===
</TABLE>
S-5
<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.... $153 $ 66 $ 43 $ 32 $230
==== ==== ==== ==== ====
Allowance for
uncollectable
reinsurance on paid
losses................. $388 $-- $-- $ 72 $316
==== ==== ==== ==== ====
Allowance for
uncollectable
reinsurance on unpaid
losses................. $425 $-- $-- $-- $425
==== ==== ==== ==== ====
</TABLE>
S-6
<PAGE>
SCHEDULES III AND VI
DANIELSON HOLDING CORPORATION
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
AFFILIATION DEFERRED RESERVES FOR UNPAID DISCOUNT FROM POLICYCLAIMS
WITH ACQUISITION CLAIMS AND CLAIM RESERVES FOR UNEARNED AND BENEFITS NET EARNED INVESTMENT
REGISTRANT COSTS ADJUSTMENT EXPENSES UNPAID CLAIMS PREMIUMS PAYABLE PREMIUMS INCOME
----------- ----------- ------------------- ------------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Property-Casualty
Entities:
As of and for the year
ended 12/31/96......... $ 957 $120,651 $-- $ 8,294 -- $36,625 $10,121
====== ======== ==== ======= === ======= =======
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
====== ======== ==== ======= === ======= =======
</TABLE>
<TABLE>
<CAPTION>
CLAIMS AND CLAIM
ADJUSTMENT EXPENSES
AFFILIATION INCURRED RELATED TO AMORTIZATION OTHER PAID CLAIMS
WITH ------------------------ 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 12/31/96......... $26,979 $10,120 $ 6,239 $3,668 $56,691 $36,136
======= ======= ======= ====== ======= =======
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
======= ======= ======= ====== ======= =======
</TABLE>
S-7
<PAGE>
DANIELSON HOLDING CORPORATION
1996 Annual Report
<PAGE>
DANIELSON HOLDING CORPORATION
IS A DEBT-FREE HOLDING COMPANY
WHOSE SUBSIDIARIES ARE INVOLVED IN
FINANCIAL SERVICES AND INSURANCE
Danielson Holding Corporation's business plan is to grow by developing business
partnerships and making strategic acquisitions that are expected to contribute
higher than average returns for our stockholders. Management seeks transactions
that will contribute to the growth of its existing insurance subsidiaries, as
well as transactions that represent new business ventures for the Company.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
As of and for the years ended December 31,
--------------------------------------------
(In thousands, except share and per share amounts and employees) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Earned premiums.............................................................. $ 36,625 $ 60,548 $ 93,291
Total revenues............................................................... $ 48,704 $ 75,458 $105,545
Income (loss) from continuing operations before extraordinary item........... $ (6,240) $ 4,349 $ 3,769
Net income (loss)............................................................ $ (8,119) $ 2,316 $ 3,895
Net cash provided by (used in) continuing operating activities............... $(26,949) $ (3,663) $ 10,173
Income (loss) from continuing operations per share of
Common Stock before extraordinary item...................................... $ (0.41) $ 0.27 $ 0.24
Net income (loss) per share of Common Stock.................................. $ (0.53) $ 0.14 $ 0.25
Combined ratio............................................................... 136.7% 113.4% 106.2%
=========================================================================================================================
BALANCE SHEET AND OTHER DATA
Total investments............................................................ $151,555 $180,263 $179,141
Policyholder liabilities..................................................... $129,352 $150,633 $166,938
Stockholders' equity......................................................... $ 58,853 $ 69,821 $ 62,318
Book value per share of Common Stock......................................... $ 3.83 $ 4.55 $ 4.06
Common Stock price range
High....................................................................... $ 8 3/8 $ 8 $ 9 3/4
Low........................................................................ $ 4 3/4 $ 6 5/8 $ 6 1/4
Shares of Common Stock outstanding at year end............................... 15,360,238 15,360,255 15,360,270
Employees of continuing operations at year end............................... 152 168 202
</TABLE>
1
<PAGE>
T O O U R S T O C K H O L D E R S:
1996 was a year of significant change for Danielson Holding Corporation (DHC).
The loss of Kirk Rhein and Bill Story was tragic. Both Kirk, who was a Director
of DHC and President and Chief Executive Officer, and Bill, who also was a DHC
Director and CEO of DHC's principal subsidiary, National American Insurance
Company of California (NAICC), were passengers on the fatal July 17 flight of
TWA 800. We miss them not only as wise leaders but also as friends. Our
heartfelt sympathy goes out to their families and loved ones.
Subsequent to the TWA crash, we jointly assumed responsibility for DHC -
Martin Whitman as Chief Executive Officer and David Barse as Chief Operating
Officer. Michael Carney was also added to the post of Chief Financial Officer.
With deliberate speed, we undertook a number of actions:
1. Following the deaths of Kirk and Bill, as well as Charles H. Gray, III,
Midland Financial Group's ("Midland") President and Chief Operating Officer, the
proposed transaction under which Midland was to be acquired by DHC was
terminated on July 24, 1996 by mutual agreement of DHC and Midland. Expenses and
severance costs related to the above circumstances amounted to $3.1 million and
were included in the net loss for 1996.
2. We expanded the DHC Board of Directors. David Barse, Timothy Collins,
Stanley Garstka and Anthony Petrello, joined the Board. James Heffernan left the
Board.
3. We sold DHC's entire interest in Danielson Trust Company (DTC) for cash in a
transaction which closed on December 31, 1996. DTC was, in theory, a terrific
financial services vehicle; an independent trust company, serving the very
attractive San Diego, California market. DTC could have been highly profitable
for DHC if any appreciable amount of client funds could have been accumulated
and put under management. The most attractive part of the personal trust
business is probably best described as "money management with hand holding."
However, DTC was never able to attract appreciable money management funds. We at
DHC never proved to be much help to DTC. DTC had become a distraction. DHC
realized a $1.2 million loss on the disposition of DTC, which was included in
the net loss for 1996.
4. Under the able leadership of Jim Clary and his team, NAICC was stabilized
after July 17. California workers' compensation business, where rates remain
soft, continued, in effect, to be limited only to business where we were
confident we could generate a profit. NAICC continued to pursue non-standard
automobile writings in California; net premiums written in non-standard auto
were $19.3 million in 1996. Beginning in 1997, NAICC will be cutting its quota
share reinsurance arrangements in half on the non-standard private passenger
auto, which will increase the net premiums written in that product line. The
acquisition of Valor Insurance Company, a writer of workers' compensation in
Montana, became an important and profitable part of NAICC s effort to expand its
premium base in 1996.
At year end, NAICC made a determination to strengthen its pre-1980 accident
year unpaid losses and allocated loss adjustment expenses for its businesses in
run-off by $10 million. Management at
2
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
DHC believes this decision to be prudent and in line with NAICC's attempts not
only to narrow its business focus to profitable business, but also to strengthen
its balance sheet in preparation for our efforts on the transaction front.
5. After July 17, in addition to spending time reviewing our operating
subsidiaries, we spent almost all of our available time seeking transactions
which we believed would enhance value for DHC stockholders on a long-term,
sustainable basis. We literally screened dozens of proposals and made a number
of proposals on our own; hardly a week went by when we were not involved in one,
or more, preliminary negotiations up until the date, January 15, 1997, that a
proposed transaction with The Progressive Corporation (Progressive) was
announced publicly. The proposed transaction with Progressive would have
resulted in DHC selling 11 million new shares of DHC Common Stock to Progressive
for a consideration having a value of $6.60 per share. Progressive would then
have owned a 42% interest in DHC. On March 10, 1997, Progressive informed us
that for "internal Progressive reasons" it was terminating its discussions with
DHC. This was a disappointment to DHC. Nonetheless, we have already begun the
process of reviewing alternative transaction opportunities and believe we are
even better prepared to move expeditiously toward consummating a successful
transaction which is in the best interests of DHC stockholders.
Thank you for your support in 1996. The year could not have been more
troubled, yet we enter 1997 believing that DHC and NAICC are solidly situated
and, with skill, in a position to build solid, long-term value for the DHC
stockholder.
Sincerely,
/s/ Martin J. Whitman
Martin J. Whitman
Chairman of the Board &
Chief Executive Officer
/s/ David M. Barse
David M. Barse
President & Chief Operating Officer
[PHOTO OF DAVID M. BARSE, MICHAEL T. CARNEY, AND MARTIN J. WHITMAN APPEARS HERE]
(left) David M. Barse
President & Chief Operating Officer
(center) Michael T. Carney
Chief Financial Officer & Treasurer
(seated) Martin J. Whitman
Chairman of the Board & Chief Executive Officer
3
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NATIONAL AMERICAN INSURANCE COMPANY OF CALIFORNIA
In 1996, National American Insurance Company of California (NAICC) achieved
one of our essential goals - to underwrite insurance that offers a reasonable
expectation of an underwriting profit. Direct written premiums for the year fell
27.8% from $70.9 million in 1995 to $51.2 million in 1996. Workers' compensation
premiums finished the year at $17.4 million, down from $39.8 million in 1995.
Property and casualty premiums increased 8.7% over 1995 to $33.8 million.
The reduction in written premiums in 1996 is a result of management's decision
not to compete in the California workers' compensation open rating environment
at rates well below the break-even point. In 1994, NAICC wrote $71.9 million in
California workers' compensation premiums. This fell 55% to $32.6 million in
1995, the first year of open rating, and to $9.4 million in 1996. NAICC fully
expected not to be a factor in the California workers' compensation market for
the first couple of years of open rating. Due to recent developments in the
California marketplace, we believe there could be upward movement of the rates
over the next twelve months. Once this happens, NAICC will explore the
possibility of providing profitable California workers' compensation business
for its producers.
NAICC agents also produced workers' compensation business in Arizona, Idaho
and Oregon. Direct written premiums declined 13.9% to $6.2 million in 1996,
primarily due to rate reductions in Idaho and Oregon over the past two years and
partially due to California companies entering these markets seeking new
workers' compensation business. While underwriting profits have been and should
continue to be the norm, we are expecting a slight increase in volume over the
next year.
Direct written premiums for the non-standard private passenger automobile
business were $28.2 million in 1996, down 2.1% from 1995. The slight decrease
was due to increased competition and a mid-year rate increase in the physical
damage rates, which hurt production for several months. NAICC's continued
success in non-standard automobile is directly attributable to our claims
service, diligent anti-fraud efforts and to our general agent. We expect to see
growth in this line of business in 1997.
Finally, the direct written premiums from our non-standard commercial
automobile insurance program increased from $2.3 million in 1995 to $5.5 million
for 1996. This was the first full year of the commercial auto program in
Arizona, California, Idaho, Nevada and Oregon. We expect part of our growth over
the next couple of years to come from our commercial auto program, primarily due
to introducing the program in all the states in which we do business and
increasing the marketing emphasis our branches have given the program.
In closing, we want to express our personal thanks and gratitude to all the
agents, business associates and employees that have supported NAICC during this
very difficult year.
4
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
FINANCIAL TABLE OF CONTENTS
---------------------------
<TABLE>
<S> <C>
Selected Consolidated Financial Data.........................................6
Management's Discussion and Analysis of
Financial Condition and Results of Operations...............................7
Consolidated Statements of Operations.......................................13
Consolidated Balance Sheets.................................................14
Consolidated Statements of Stockholders' Equity.............................15
Consolidated Statements of Cash Flows.......................................16
Notes to Consolidated Financial Statements..................................17
Independent Auditors' Report................................................31
Responsibility for Financial Reporting......................................31
Quarterly Financial Data....................................................32
Stock Market Prices.........................................................32
</TABLE>
5
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
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.
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except share and per --------------------------------------------------------------------------------
share amounts) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A. Results of Operations
Total revenues.................................. $ 48,704 $ 75,458 $105,545 $100,013 $88,440
Income (loss) from continuing operations before
extraordinary items............................ $ (6,240)/1,2/ $ 4,349 $ 3,769 $ 2,816 1,898
Net loss from discontinued
operations..................................... $ (633)/3/ $ (2,033)/3/ (624)/3/ (70)/3/ --
Loss on disposal of
discontinued operations........................ $ (1,246)/3/ -- -- -- --
Net income (loss)............................... $ (8,119)/1,2,3/ $ 2,316/3/ $ 3,895/3,4/ $ 3,234/3,5,6/ $ 8,046/6/
Income (loss) from continuing operations
per share of Common Stock before
extraordinary items............................ $ (0.41)/1,2/ $ 0.27 $ 0.24 $ 0.18 $ 0.13
Net loss from discontinued operations per share
of Common Stock................................ $ (0.04)/3/ $ (0.13)/3/ $ (0.04)/3/ $ ( 0.01)/3/ --
Loss on disposal of discontinued operations per
share of Common Stock.......................... $ (0.08)/3/ -- -- -- --
Net income (loss) per
share of Common Stock.......................... $ (0.53)/1,2,3/ $ 0.14/3/ $ 0.25/3,4/ $ 0.20/3,5,6/ $ 0.53/6/
=================================================================================================================================
B. Balance Sheet Data
Invested assets................................. $151,555 $ 180,263 $179,141 $174,125 $141,534
Total assets.................................... $196,419 $ 226,896 $239,410 $233,809 $198,873
Unpaid losses and loss
adjustment expenses............................ $120,651 $ 137,406 $146,330 $137,479 $125,391
Stockholders equity............................ $ 58,853 $ 69,821 $ 62,318 $ 58,838 $ 54,764
Shares of Common Stock
outstanding.................................... 15,360,238/7,8/ 15,360,255/7,8/ 15,360,270/7,8/ 15,110,251/7/ 15,110,258/7/
</TABLE>
1 Includes expenses incurred in connection with the terminated proposed merger
with Midland Financial Group, Inc. and non-recurring compensation expenses of
death benefits and severance pay.
2 Includes $10 million increase in provision for pre-1980 accident year losses
and loss adjustment expenses relating to run-off businesses and $4 million
reduction in policyholder dividend accrual.
3 In 1996, DHC sold 100% of the common stock of Danielson Trust Company.
Accordingly, Danielson Trust's results are reported herein as discontinued
operations and are included in net income (loss).
4 Includes extraordinary gain from distribution from an unaffiliated trust.
5 Includes extraordinary gains from a former subsidiary, as well as a former
trust administered by the California Insurance Commissioner as trustee.
6 Includes extraordinary gain from a former trust administered by the
California Insurance Commissioner as trustee.
7 Does not give effect to currently exercisable options to purchase shares of
Common Stock.
8 Reflects shares issued upon the 1994 exercise of options to purchase Common
Stock.
6
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------
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.
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 Company's 1996
consolidated Federal income tax return will report a cumulative net operating
loss carryforward currently estimated at approximately $1.3 billion, which will
expire in various amounts, if not used, between 1998 and 2011. See Note 11 of
the Notes to Consolidated Financial Statements.
Results of NAICC's Operations
The operations of the Company's principal subsidiary, National American
Insurance Company of California (NAICC), are primarily in property and casualty
insurance.
Property and Casualty Insurance Operations
Net written premiums were $36.1 million, $55.3 million and $91.1 million in
1996, 1995 and 1994, respectively. The declines in 1996 and 1995 are primarily
due to the significant reductions of written premiums in the California workers'
compensation line of insurance. Net premiums earned were $36.6 million, $60.5
million, and $93.3 million in 1996, 1995 and 1994, respectively. The decreases
in earned premiums are directly related to the change in written premiums.
Net written premiums for workers' compensation were $16.8 million, $38.2
million, and $77.2 million in 1996, 1995 and 1994, respectively. These decreases
are attributable to significantly increased competition in California resulting
in pricing for a significant part of the market at rates well below a level
necessary to achieve a profit. It has been and will continue to be the policy of
NAICC only to underwrite business that is expected to yield an underwriting
profit. Consequently, the new and renewal policy counts of NAICC continued to
decline in 1996. At December 31, 1996, NAICC had approximately 2,579 workers'
compensation policies in force with an approximate average annual premium size
of $5,344 compared to 3,844 and 7,183 policies in force with approximate average
annual premium sizes of $6,201 and $9,566, respectively, at December 31, 1995
and 1994, respectively. In 1996 and 1995, 54 percent and 87 percent of NAICC's
workers' compensation business, respectively, was in the state of California.
Net written premiums were $14.5 million, $15 million and $10.5 million in
1996, 1995 and 1994, respectively, for the non-standard private passenger
automobile line of insurance. Until January 1, 1997, NAICC ceded 50 percent of
its private passenger automobile business to a major reinsurance company under a
quota share reinsurance agreement, which was then amended to reduce the ceding
percentage to 25 percent. For the year ended December 31, 1996, private
passenger automobile insurance represented approximately 55.1 percent and 40.0
percent of NAICC's total 1996 direct and net written premiums, respectively, as
compared to 40.6 percent and 27.1 percent of NAICC's total direct and net
written premiums, respectively, for the year ended December 31, 1995.
NAICC writes non-standard commercial automobile insurance in California,
Arizona, Idaho, Nevada and Oregon. Net written premiums for non-standard
commercial automobile insurance were $4.8 million in 1996 and $2.1 million in
each of 1995 and 1994. NAICC has increased its production efforts in commercial
automobile insurance by adding marketing representatives to this line, as well
as a vice president of marketing, which resulted in appointments of
approximately fifty new agents in the last nine months of 1996. The increased
marketing emphasis in this line is expected to result in a significant increase
in premiums in 1997 and 1998.
Net investment income was $10.1 million, $12.4 million, and $11.3 million in
1996, 1995 and 1994, respectively. Net investment income declined as average
invested assets declined in 1996. The increase in net investment income in 1995
was due primarily to interest of $840,000 received in December, 1995 from
Lloyd's of London (Lloyd's) related to an unpaid reinsurance claim. Net
investment income in 1995, exclusive of the interest payment from Lloyd's,
increased slightly over 1994 because the average invested assets throughout 1995
were slightly higher than the average invested assets throughout 1994. The
average yield on NAICC's portfolio was 7.2 percent as of December 31, 1996 and
1995. The estimated average maturity of the portfolio as of December 31, 1996 is
4 years.
7
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------
(continued)
In 1996 and 1995, operations used cash of $23.1 million and $2 million,
respectively, as compared to providing cash of $11.3 million in 1994. The cash
used in operations in 1996 and 1995 was primarily due to the decline in workers'
compensation written premiums while claims from the workers' compensation line,
which are generally paid out over several years, continued to be paid and
settled. Overall cash and invested assets, stated at market, were $142.6 million
at December 31, 1996 as compared to $170 million at December 31, 1995.
Net losses and loss adjustment expenses (LAE) were $37.1 million, $48.7
million and $67.5 million in 1996, 1995 and 1994, respectively. The resulting
net loss and LAE ratios were 101.3 percent, 80.5 percent and 72.3 percent in
1996, 1995 and 1994, respectively. The increase in the loss ratio in 1996 was
due primarily to a decision by management of NAICC to strengthen the unpaid
losses and allocated loss adjustment expenses (ALAE) of pre-1980 businesses
assumed by NAICC in 1985 and which are in run-off. NAICC increased these run-off
claim liabilities by $10 million. The pre-1980 run-off liabilities include
claims relating to environmental clean-up for policies issued prior to 1970.
NAICC increased its bulk unpaid liabilities related to these claims, principally
the unpaid ALAE, as it has become evident that the legal costs associated with
these claims would be significantly greater than previously anticipated. The net
loss and LAE ratio, exclusive of the additional losses and ALAE associated with
NAICC's run-off businesses, was 74 percent. Net unpaid losses and LAE relating
to environmental claims were approximately $13.4 million at December 31, 1996.
The increase in the net loss and LAE ratio in 1995 was primarily in the
workers' compensation line of business. The net loss and LAE ratios for the
workers' compensation line of business were 75.0 percent, 76.8 percent and 65.6
percent in 1996, 1995 and 1994, respectively. The net loss and LAE ratios for
the private passenger automobile line of business were 69.9 percent, 65.8
percent and 69.9 percent in 1996, 1995 and 1994, respectively. The net loss and
LAE ratios for the commercial automobile line of business were 71.8 percent and
71.7 percent in 1996 and 1995, respectively.
Policy acquisition costs were $9.9 million, $13.4 million and $18.7 million
in 1996, 1995 and 1994, respectively. As a percentage of net premiums earned,
policy acquisition expenses were 27.1 percent, 22.1 percent and 20.0 percent in
1996, 1995 and 1994, respectively. 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 1996 and 1995 was due in
part to the shift of premium toward the automobile lines of business, which
generally have a higher commission rate, and in part to the larger decline of
workers' compensation premiums than the decline of fixed underwriting expenses
of policy acquisition costs.
General and administrative expenses were $6.6 million, $6.4 million and $6.7
million in 1996, 1995 and 1994, respectively. The decrease in general and
administrative expenses in 1995 is attributable to staff reductions made in
response to the decrease in written premiums.
The policyholder dividend accrual was reduced in 1996 by $4 million in excess
of dividends paid, as compared to increases of $137,000 in 1995 and $6 million
in 1994 exclusive of payment of dividends. The decrease in the policyholder
dividend accrual in 1996, as well as the decrease in policyholder dividend
expense in 1995, were due to the decline in workers' compensation premium in
California as well as a reduction in the rates at which premiums were written in
1995. As the California workers' compensation premium volume declined, the board
of directors of NAICC deferred the declaration and payment of California
policyholder dividends in hopes that NAICC could increase its volume profitably
in the near term. In December, 1996, the board of directors of NAICC passed a
resolution that it would not pay any further policyholder dividends on
California workers' compensation policies written prior to January 1, 1995. This
decision was based on the significant decline in premium volume, which has
declined to a point such that the underwriting profit derived from California
workers' compensation is not sufficient to cover fixed costs associated with the
line of business and produce a profit. The decrease in the policyholder dividend
expense ratio in 1995 was due to the continuing decrease in rates charged for
workers' compensation insurance to a level where the margin for policyholder
dividends is eliminated.
Combined underwriting ratios were 136.7 percent, 113.4 percent and 106.2
percent in 1996, 1995 and 1994, respectively. The increase in the combined ratio
in 1996 is due to the provision for additional losses and ALAE associated with
NAICC's run-off businesses, which represents 27.3 percent of the combined ratio
in 1996. 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.
8
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
In 1996, the insurance operations had a loss of $1.9 million as compared to
net income from operations of $6.0 million and $5.9 million in 1995 and 1994,
respectively. The net loss in 1996 was due to the provision for losses and ALAE
in the run-off businesses of $10 million partially offset by the $4 million
reduction of the policyholder dividend accrual. Net income in 1995 was
comparable to net income in 1994 despite the significant decline in workers'
compensation premiums because the decline in premiums and cash flow had not yet
had a significant negative impact on the average invested assets and investment
income. Net income includes net realized gains on investments of $500,000,
$209,000 and $16,000 for 1996, 1995 and 1994, 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, maturities and, if required, the sale of invested assets. NAICC's
investment policy guidelines require that all liabilities be matched by a
comparable amount of investment grade assets. Management believes that NAICC has
both adequate capital resources and sufficient reinsurance to meet any
unforeseen events such as natural catastrophes, reinsurer insolvencies, or
possible reserve deficiencies.
The two most common measures of capital adequacy for insurance companies are
premium-to-surplus ratios (which measure current operating risk) and reserves-
to-surplus ratios (which measure financial risk related to possible changes in
the level of loss and loss adjustment expense reserves). A commonly accepted net
written premium-to-surplus ratio is 3 to 1, although this varies with different
lines of business. NAICC's 1996 premium-to-surplus ratio of 0.9 to 1 remains
under leveraged by current industry standards. The maximum industry standard of
loss and loss adjustment expense reserves-to-surplus ratio is 5 to 1, compared
with NAICC's ratio of 2.1 to 1. Given these relatively conservative financial
security ratios, management is confident that existing capital is adequate to
support continued higher than industry average premium growth for the
foreseeable future.
The National Association of Insurance Commissioners (NAIC), in response to
growing concerns about the financial health of insurance companies, adopted the
"Solvency Policing Agenda for 1990" which outlined several areas for
strengthening state regulation in order to head off federal regulation. One of
these areas was the development of a model for the insurance industry for
determining risk-based capital (RBC) requirements.
The RBC model for property and casualty insurance companies was adopted in
December 1993 and companies are 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 RBC model of the NAIC, and has capital
in excess of any regulatory action or reporting level.
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 reflect the net loss of Danielson Trust for 1996, 1995
and 1994 as discontinued operations. See Note 5 of the Notes to Consolidated
Financial Statements.
Sale of Danielson Trust
On December 31, 1996, DHC sold Danielson Trust because it was not in
management's long-term plans to remain in the trust business and a transaction
could be effected timely and efficiently. DHC received $3 million in cash in
exchange for 100% of the common stock of Danielson Trust. DHC realized a loss on
disposal of $1.2 million.
Trust and Fiduciary Services Operations
Danielson Trust's net loss from operations for the year ended December 31,
1996 was $633,000, compared to a net loss of $2 million (including the writedown
of $709,000 of goodwill) and $624,000 for the years ended December 31, 1995 and
1994 respectively. The decrease in net loss in 1996 was the result of efforts of
Danielson Trust to reduce staffing and data processing expenses, as well as
other operating efficiencies. The increase in net loss in 1995 from 1994 was the
result of expenses and changes necessitated by Danielson Trust's acquisition of
Western Trust Services ("WTS"), the goodwill writedown, as well as increased
marketing expenses during 1995.
9
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------
(continued)
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, DHC
made a $300,000 unsecured intercompany loan to Danielson Trust in 1994 in the
form of a demand promissory note, with quarterly interest payments at the annual
rate of 7.75 percent. On March 31, 1996, DHC forgave the entire principal
balance of the note and accrued interest as of January 1, 1996, and converted
such amount into additional paid-in-capital of Danielson Trust. During the
second quarter of 1996, DHC made an additional capital contribution of $120,000
to Danielson Trust. 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. Danielson Trust did not borrow 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. As a result of the sale, the obligations of DHC to
Danielson Trust were terminated.
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, 1996, 1995 and 1994, cash used in parent-only
operating activities was $3.8 million, $1.7 million and $1.1 million,
respectively. Cash used in operations is 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 1996
increased $2.1 million over 1995; cash used in parent-only operations in 1995
increased $600,000 over 1994. The 1996 increase in cash used was primarily
attributable to the payment of expenses related to the terminated proposed
merger with Midland Financial Group, Inc. See Note 3 of the Notes to
Consolidated Financial Statements. Such payments made during the year ended
December 31, 1996 amounted to $1.8 million. The Company also incurred $1.3
million of non-recurring compensation of which $820,000 was related to the
parent. Of the parent-only expense, $111,000 was paid in 1996. The remaining
balance will be paid over the next three years. See Note 4 of the Notes to
Consolidated Financial Statements. For information regarding the Company's
operating subsidiaries' cash flow from operations, see "RESULTS OF NAICC'S
OPERATIONS, Property and Casualty Insurance Operations."
Liquidity and Capital Resources
For the year ended December 31, 1996, cash and investments of DHC were
approximately $10 million. As previously described, the primary use of funds was
the payment of general and administrative expenses in the normal course of
business. The funds were also used for the payment of expenses related to the
terminated proposed merger with Midland. In addition, DHC received $3 million
cash from North American Trust Company for the sale of Danielson Trust. See Note
5 of the Notes to Consolidated Financial Statements.
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 1997 without prior regulatory approval. Danielson Trust was
prohibited from making any distributions to DHC for a period of two years after
the date it was acquired (until March 1995). As a result of Danielson Trust's
accumulated deficit in 1995, Danielson Trust was not permitted to pay
10
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
dividends in 1996 without prior written consent of the State Banking Department.
See Note 8 of the Notes to Consolidated Financial Statements.
Current fixed maturity holdings of DHC are in U.S. Treasury obligations,
asset-backed securities and Agency bonds. For information regarding the
Company's operating subsidiaries' liquidity and capital resources, see "RESULTS
OF NAICC'S OPERATIONS, Liquidity and Capital Resources" and "RESULTS OF
DANIELSON TRUST COMPANY'S OPERATIONS, Liquidity and Capital Resources."
The Company's Investments
The amount and type of certain of the Company's investments are regulated by
California insurance 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(B) and 9 of the Notes to
Consolidated Financial Statements.
The following table sets forth a summary of the Company's investment portfolio
at December 31, 1996, by investment grade (dollars in thousands):
<TABLE>
<CAPTION>
Cost Fair Value
- ----------------------------------------------------------------
<S> <C> <C>
Investment by investment grade:
Fixed maturities
U.S. Government/Agency.............. $ 50,381 $ 51,003
Mortgage-backed..................... 54,691 53,877
Corporates (AAA to A)............... 36,240 36,255
Corporates (BBB).................... 2,112 2,195
----------------------
Total fixed maturities............ 143,424 143,330
Equity securities..................... 257 2,697
----------------------
Total............................. $143,681 $146,027
======================
</TABLE>
Fixed maturities of the Company include Mortgage-Backed Securities (MBS)
representing 37.6 percent and 37.2 percent of total fixed maturities at December
31, 1996 and December 31, 1995, respectively. All MBS held by the Company are
issued by the Federal National Mortgage Association (FNMA) or the Federal Home
Loan Mortgage Corporation (FHLMC), which are both rated Aaa by Moody's Investors
Services. Both FNMA and FHLMC are corporations that were created by Acts of
Congress. FNMA and FHLMC guarantee the principal balance of their securities.
FNMA guarantees timely payment of principal and interest.
One of the risks associated with MBS is the timing of principal payments on
the mortgages underlying the securities. The principal an investor receives
depends upon amortization schedules and the termination pattern (resulting from
prepayments or defaults) of the individual mortgages included in the underlying
pool of mortgages. The principal is guaranteed but the yield and cash flow can
vary depending on the timing of the repayment of the principal balance.
Securities that have an amortized cost greater than par, which are backed by
mortgages that repay faster (or slower) than expected, will incur a decrease (or
increase) in yield. Those securities that have an amortized cost lower than par
that repay faster (or slower) than expected will generate an increase (or
decrease) in yield. The degree to which a security is susceptible to changes in
yield is influenced by the difference between its amortized cost and par, the
relative sensitivity to repayment of the underlying mortgages backing the
securities in a changing interest rate environment, and the repayment priority
of the securities in the overall securitization structure. NAICC attempts to
limit repayment risk by purchasing MBS whose costs are below or do not
significantly exceed par, and by primarily purchasing structured securities with
repayment protection to provide a more certain cash flow to the investor. There
are various types of bonds that may comprise a MBS and they can have differing
interest rates and maturities, as well as priorities to the cash flows of the
underlying mortgages or assets. 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 the certainty of the timing of
prepayment and thereby minimize the prepayment and interest rate risk.
MBS, as well as callable bonds, have a greater sensitivity to market value
declines in a rising interest rate environment than to market value increases in
a declining interest rate environment. This is primarily due to the ability and
the incentive of the payor to prepay the principal or the issuer to call the
bond in a declining interest rate scenario.
NAICC's MBS by type of instrument are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------
Amortized Percent of Amortized Percent of
Cost Total Cost Total
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-PAC/TAC......... $18,649 34% $18,679 30%
PAC/TAC............. 36,042 66% 43,663 70%
--------------------------------------------------
$54,691 100% $62,342 100%
==================================================
</TABLE>
11
Danielson Holding Corporation and Subsidiaries
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------
(continued)
Management of NAICC believes that the interest and prepayment risks generally
inherent in MBS are not significant in the portfolio at December 31, 1996.
ECONOMIC CONDITIONS
The California workers' compensation "minimum rate" law was eliminated
effective January 1, 1995, and replaced with a new "open rating" law. The open
rating law provided for a major change in the way insurance companies price
workers' compensation insurance in California from previous years. The Workers'
Compensation Insurance Rating Bureau of California (WCIRB) is the designated
statistical agent for the California Department of Insurance (CDI) and
accumulates state-wide loss and remuneration data. The WCIRB promulgates
advisory pure premium rates, instead of promulgating final rates as was its
purpose under the minimum rate law. Pure premium rate is the loss and loss
adjustment expense portion of the final rate charged. Non-loss related expenses
make up the other portion of the final rate charged. The WCIRB does not make an
advisory filing for the non-loss expense portion of the final rate.
In 1996, 54 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 has created a new and
fiercely competitive environment in the California workers' compensation market.
NAICC has filed premium rates with the CDI which are based on the pure premium
rates promulgated by the WCIRB. NAICC management believes that the pure premium
rates promulgated by the WCIRB best reflect NAICC's actual loss costs and loss
adjustment expenses. It continues to be the policy of NAICC to underwrite
policies at prices which are expected to achieve an underwriting profit.
Consequently, premium volume in workers' compensation has decreased because
competitors are willing to price policies using pure premium rates which are
significantly below the average pure premium rates promulgated by the WCIRB.
NAICC plans to continue to increase its participation in other markets to offset
a portion of the decline in California workers' compensation premium.
AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board 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. The Company has elected to continue to use the
intrinsic value method, and accordingly, has included pro forma disclosures of
net income and earnings per share computed as if the fair value based method had
been applied. See Note 13 of the Notes to Consolidated Financial Statements.
12
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S
----------------------------------------------------------
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Gross premiums earned..................... $ 52,066 $ 76,688 $106,552
Ceded premiums earned..................... (15,441) (16,140) (13,261)
----------------------------------
Net premiums earned....................... 36,625 60,548 93,291
Net investment income..................... 10,655 13,026 11,722
Net realized investment gains............. 499 207 16
Other income.............................. 925 1,677 516
----------------------------------
Total revenues.......................... 48,704 75,458 105,545
----------------------------------
Losses and expenses:
Gross losses and loss adjustment
expenses................................. 53,697 63,543 82,025
Ceded losses and loss adjustment
expenses................................. (16,598) (14,828) (14,510)
----------------------------------
Net losses and loss adjustment expenses... 37,099 48,715 67,515
Policyholder dividends.................... (4,000) 137 6,043
Policy acquisition expenses............... 9,907 13,391 18,677
Expenses in connection with terminated
proposed acquisition..................... 1,849 -- --
Nonrecurring compensation................. 1,272 -- --
General and administrative expenses....... 8,799 8,746 9,386
Interest expense.......................... -- -- 65
----------------------------------
Total losses and expenses............... 54,926 70,989 101,686
----------------------------------
Income (loss) from continuing operations
before provision for income tax and
extraordinary item......................... (6,222) 4,469 3,859
Income tax provision........................ 18 120 90
----------------------------------
Income (loss) from continuing operations
before extraordinary item.................. (6,240) 4,349 3,769
Discontinued operations:
Net loss from operations.................. (633) (2,033) (624)
Loss on disposal.......................... (1,246) -- --
----------------------------------
Income (loss) before extraordinary item..... (8,119) 2,316 3,145
Extraordinary item........................ -- -- 750
----------------------------------
Net income (loss)........................... $ (8,119) $ 2,316 $ 3,895
==================================
Earnings (loss) per share of Common Stock
and common equivalent share:
Income (loss) from continuing operations
before extraordinary item.................. $ (0.41) $ 0.27 $ 0.24
Discontinued operations:
Loss from operations...................... (0.04) (0.13) (0.04)
Loss on disposal.......................... (0.08) -- --
----------------------------------
Income (loss) before extraordinary item..... (0.53) 0.14 0.20
Extraordinary item........................ -- -- 0.05
----------------------------------
Net income (loss)........................... $ (0.53) $ 0.14 $ 0.25
==================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
C O N S O L I D A T E D B A L A N C E S H E E T S
----------------------------------------------
<TABLE>
<CAPTION> December 31,
----------------------
(In thousands, except share and per share information) 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Fixed maturities:
Available-for-sale at fair value (Cost: $143,424 and $166,365) ........... $ 143,330 $ 171,167
Equity securities at fair value (Cost: $257 and $256) ...................... 2,697 629
Short term investments, at cost which approximates fair value .............. 5,528 8,467
------------------------
Total investments ...................................................... 151,555 180,263
Cash ....................................................................... 1,155 336
Accrued investment income .................................................. 2,397 2,712
Premiums and fees receivable, net of allowances of $230 and $153 ........... 5,597 8,593
Reinsurance recoverable on paid losses, net of allowances of $316 and $388 . 3,071 1,828
Reinsurance recoverable on unpaid losses, net of allowances of $425 and $425 23,546 21,112
Prepaid reinsurance premiums ............................................... 2,417 2,226
Property and equipment, net of accumulated depreciation of $7,102 and $6,632 2,968 3,708
Deferred acquisition costs ................................................. 957 1,045
Other assets ............................................................... 2,756 663
Net assets of discontinued operations ...................................... - 4,410
------------------------
Total assets ........................................................... $ 196,419 $ 226,896
========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses ................................. $ 120,651 $ 137,406
Unearned premiums .......................................................... 8,294 8,563
Policyholder dividends ..................................................... 407 4,664
Reinsurance premiums payable ............................................... 1,765 1,707
Funds withheld on ceded reinsurance ........................................ 1,479 1,534
Other liabilities .......................................................... 4,970 3,201
------------------------
Total liabilities ...................................................... 137,566 157,075
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 15,360,238 shares and 15,360,255 shares) .................... 1,537 1,537
Additional paid-in capital ................................................. 46,131 46,131
Net unrealized gain on available-for-sale securities ....................... 2,346 5,195
Retained earnings .......................................................... 8,905 17,024
Treasury stock (Cost of 10,656 shares and 10,639 shares) ................... (66) (66)
------------------------
Total stockholders' equity ............................................. 58,853 69,821
------------------------
Commitments and contingencies
Total liabilities and stockholders' equity ............................. $ 196,419 $ 226,896
========================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------
(In thousands, except share amounts) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock
Balance, beginning of year ............................... $ 1,537 $ 1,537 $ 1,511
Exercise of options to purchase Common Stock ............. -- -- 26
------------------------------------------------
Balance, end of year ..................................... 1,537 1,537 1,537
------------------------------------------------
Additional paid-in capital
Balance, beginning of year ............................... 46,131 46,417 45,669
Exercise of options to purchase Common Stock ............. -- -- 748
Retirement of stock options .............................. -- (286) --
------------------------------------------------
Balance, end of year ..................................... 46,131 46,131 46,417
------------------------------------------------
Net unrealized gain (loss) on available-for-sale securities
Balance, beginning of year ............................... 5,195 (278) 855
Net unrealized gain on the date of reclassification
of available-for-sale securities ....................... -- 2,880 --
Net increase (decrease) .................................. (2,849) 2,593 (1,133)
------------------------------------------------
Balance, end of year ..................................... 2,346 5,195 (278)
------------------------------------------------
Retained earnings
Balance, beginning of year ............................... 17,024 14,708 10,813
Net income (loss) ........................................ (8,119) 2,316 3,895
------------------------------------------------
Balance, end of year ..................................... 8,905 17,024 14,708
------------------------------------------------
Treasury stock
Balance, beginning of year ............................... (66) (66) (10)
Purchased during year .................................... -- -- (56)
------------------------------------------------
Balance, end of year ..................................... (66) (66) (66)
------------------------------------------------
Total stockholders' equity ........................... $58,853 $69,821 $62,318
================================================
- ---------------------------------------------------------------------------------------------------------------------
Common stock, shares
Balance, beginning of year ............................... 15,370,894 15,370,894 15,112,984
Exercise of options to purchase Common Stock ............. -- -- 257,910
------------------------------------------------
Balance, end of year ..................................... 15,370,894 15,370,894 15,370,894
================================================
Treasury stock, shares
Balance, beginning of year ............................... 10,639 10,624 2,733
Purchased during year .................................... 17 15 7,891
------------------------------------------------
Balance, end of year ..................................... 10,656 10,639 10,624
================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------
(In thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations ................................ $ (6,240) $ 4,349 $ 3,769
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by (used in) operating activities:
Net realized investment gains ....................................... (499) (207) (16)
Depreciation and amortization ....................................... 920 1,360 1,752
Change in other invested asset ...................................... - - (205)
Change in accrued investment income ................................. 412 175 (705)
Change in premiums and fees receivable .............................. 3,504 8,010 2,056
Change in reinsurance recoverables .................................. (1,065) 4,280 (2,883)
Change in reinsurance recoverable on unpaid losses .................. (1,155) (3,407) 551
Change in prepaid reinsurance premiums .............................. 80 487 (48)
Change in deferred acquisition costs ................................ 97 1,159 (8)
Change in unpaid losses and loss adjustment expenses ................ (18,886) (8,924) 8,851
Change in unearned premiums ......................................... (569) (5,765) (2,174)
Change in policyholder dividends payable ............................ (4,257) (1,616) (3,501)
Change in reinsurance payables and funds withheld ................... (382) (248) 60
Extraordinary item .................................................. - - 750
Other, net .......................................................... 1,091 (3,316) 1,924
------------------------------------
Net cash provided by (used in) operating activities ............... (26,949) (3,663) 10,173
------------------------------------
Cash flows from investing activities:
Proceeds from sales:
Fixed income maturities available-for-sale ............................ 12,668 7,464 3,089
Equity securities ..................................................... 351 - 14
Other investments ..................................................... - 433 -
Investments, matured or called:
Fixed income maturities held-to-maturity .............................. - 4,890 23,228
Fixed income maturities available-for-sale ............................ 29,821 23,157 3,937
Investments purchased:
Fixed income maturities held-to-maturity .............................. - - (31,851)
Fixed income maturities available-for-sale ............................ (19,463) (25,881) (25,019)
Other investments ..................................................... - (105) (250)
Acquisition of Western Trust Services ................................... - - (2,505)
Acquisition of Valor Insurance Company (net of cash
and short-term investments of $1,461) ................................. (1,450) - -
Net proceeds from sale of Danielson Trust Company ....................... 2,968 - -
Purchases of property and equipment ..................................... (32) (338) (540)
Proceeds from sale of property and equipment ............................ 86 - -
Proceeds from other invested asset ...................................... - - 19,531
------------------------------------
Net cash provided by (used in) investing activities ............... 24,949 9,620 (10,366)
------------------------------------
Cash flows from financing activities:
Paydown of bank loan .................................................... - - (2,250)
Capital lease obligation ................................................ - - (96)
Purchase of treasury stock .............................................. - - (56)
Retirement of stock options ............................................. - (286) -
Proceeds from exercise of options to purchase
Common Stock .......................................................... - - 774
------------------------------------
Net cash used in financing activities ............................. - (286) (1,628)
------------------------------------
Net cash provided by (used in) continuing operations ...................... (2,000) 5,671 (1,821)
Net cash used in discontinued operations .................................. (120) - (338)
------------------------------------
Net increase (decrease) in cash and short term investments ................ (2,120) 5,671 (2,159)
Cash and short term investments at beginning of year ...................... 8,803 3,132 5,291
------------------------------------
Cash and short term investments at end of year ............................ $ 6,683 $ 8,803 $ 3,132
====================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------
December 31, 1996, 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, Danielson National Insurance Company, and Valor
Insurance Company, Incorporated ("Valor"). See also Note 2 "ACQUISITION OF VALOR
INSURANCE COMPANY." In March 1993, DHC acquired 100 percent of the common stock
of Danielson Trust Company ("Danielson Trust"). On December 31, 1996, DHC sold
100 percent of the common stock of Danielson Trust. See also Note 5
"DISCONTINUED OPERATIONS."
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 71 percent of its insurance in California. Private
passenger automobile direct written premiums of $28.2 million, $28.8 million and
$20 million and net earned premium of $14.5 million, $15.2 million and $10.3
million for the years ended December 31, 1996, 1995 and 1994, respectively, were
produced through one general agent of NAICC.
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 have been 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 liability has been
provided for unrealized appreciation due to the anticipated availability of the
Company's net operating tax loss carryforwards.
A decline in the market value of any 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.
17
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------
December 31, 1996, 1995, and 1994
(continued)
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. Revenue Recognition
Earned premium income is recognized ratably over the contract period of an
insurance policy based on estimated annual premiums. A liability is established
for unearned insurance premiums representing the portion of premiums received
that is applicable to the unexpired terms of policies in force. Premiums earned
include an estimate for earned but unbilled premiums. Premiums earned but
unbilled and included in premiums receivable were $480,000 and $1.9 million at
December 31, 1996 and 1995, respectively.
D. 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.
See Note 7 "Unpaid Losses and Loss Adjustment Expenses."
E. 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.
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, 1996 and 1995, the Company had no reinsurance contracts
which were accounted for as deposits. See Note 6 "REINSURANCE."
F. 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 1996, 1995 and 1994 was $6.2 million,
$9.1 million and $13.7 million, respectively.
G. 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 6
percent, 34 percent and 79 percent of direct written premiums for the years
ended December 31, 1996, 1995 and 1994, 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. No dividends were declared
and unpaid as of December 31, 1996.
18
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
H. 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.
I. 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 11
"INCOME TAXES."
J. 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 and 15,938,018 for the years ended December 31,
1995 and 1994, respectively. Loss per share is calculated using only the average
number of outstanding shares of Common Stock and disregarding the average number
of shares issuable for stock options. Such average shares outstanding were
15,360,250 for the year ended December 31, 1996.
K. 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, 1996. The fair
value of all other financial instruments approximates their respective carrying
value. See Note 9 "INVESTMENTS."
L. 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 of 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.
M. Stock Incentive Compensation Plans
The Company measures stock-based compensation cost using the intrinsic value
based method of accounting prescribed by APB Opinion 25. Accordingly, the
Company discloses pro forma net income and earnings per share as if the fair
value based method of accounting prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation had been
applied. See Note 13 "EMPLOYEE BENEFIT AND STOCK OPTION PLANS."
2) ACQUISITION OF VALOR INSURANCE COMPANY
On June 24, 1996, NAICC completed the acquisition of 100% of the outstanding
common stock of Valor Insurance Company, Incorporated ("Valor") for $2.9 million
in cash. Valor is a property and casualty insurance company domiciled in the
state of Montana and writes workers' compensation insurance in Montana. The
acquisition of Valor has been accounted for as a purchase. The purchase price
was allocated to the identifiable net assets of Valor based upon the estimated
relative fair values thereof. In connection with the acquisition, NAICC acquired
net assets with a fair value of approximately $1.1 million, resulting in $1.8
million of cost in excess of net assets acquired. This amount, which is included
in other assets at December 31, 1996, is being amortized over 10 years.
3) EXPENSES IN CONNECTION WITH TERMINATED PROPOSED ACQUISITION
On February 26, 1996, DHC signed an Agreement and Plan of Merger (the
"Merger") with Midland Financial Group, Inc. ("Midland") which provided for,
among other
19
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
December 31, 1996, 1995, and 1994
(continued)
things, Midland to be merged into a subsidiary of DHC. On April 24, 1996, DHC
and Midland filed a joint proxy statement with the Securities and Exchange
Commission with respect to the Merger and DHC filed registration statements with
respect to securities proposed to be issued in connection with the Merger. As a
result of the deaths of key executives of the Company and Midland in the crash
of TWA Flight 800, DHC and Midland signed a Termination Agreement for the Merger
on July 24, 1996. DHC deregistered the shares related to the proposed Merger.
The amounts expensed are amounts paid that relate directly to the proposed
Merger and include (without limitation) regulatory filing fees, legal expenses,
accounting expenses, printing costs, fairness opinion expenses and investment
banking fees.
4) NONRECURRING COMPENSATION
In recognition of the deaths of C. Kirk Rhein, Jr. and William Story, the
Company has contracted to pay death benefits, monthly, over a period of three
years, commencing August 1, 1996. Such amounts were expensed in August 1996
based on their estimated present value. DHC has also contracted to pay severance
benefits over the course of one year, commencing August 1, 1996, in connection
with the resignation of certain former employees. Such amounts were expensed in
full in August 1996.
5) DISCONTINUED OPERATIONS
On December 31, 1996, DHC sold 100% of the common stock of Danielson Trust
to North American Trust Company for $3 million in cash. The sale resulted in a
loss of $1.2 million.
Trust and Fiduciary Services was a separate segment of the Company and as a
result, the net loss and loss on disposal of Danielson Trust are reported herein
as discontinued operations. Summarized operating results of Danielson Trust are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
For the years ended
December 31,
--------------------------
1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues .................................... $3,493 $4,623 $4,795
General and administrative
expenses ................................ 4,126 6,656 5,419
--------------------------
Net loss .................................... $ (633) $(2,033) $ (624)
==========================
</TABLE>
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 assets may not be recoverable. The 1995 net operating losses of
Danielson Trust required the Company to assess the recoverability and
amortization of goodwill associated with Danielson Trust. Based upon this
assessment, the Company reduced the carrying amount of the remaining goodwill by
$709,000, to $2.7 million. The writedown is included in the net loss from
discontinued operations.
6) 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.
20
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
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 ceded 50 percent of its private passenger automobile
business on a quota share basis. Effective January 1, 1997, the quota share
agreement was amended to reduce the cessation rate to 25 percent. 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,
----------------------------------
1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
Direct...................... $ 51,201 $ 70,949 $104,379
Ceded....................... (15,065) (15,654) (13,310)
---------------------------------
Net premium................. $ 36,136 $ 55,295 $ 91,069
=================================
</TABLE>
In March 1994, NAICC received a $19.5 million commutation value under an
Excess of Loss Agreement with Great American Insurance Company ("GAIC") entered
into in 1988. 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. In
accordance with the terms of the agreement, NAICC exercised the commutation
provision in January, 1994. Interest income of $205,000 was recognized in 1994
representing the accretion of interest income under the original expected term
and inherent interest rate in the agreement.
As of December 31, 1996, General Reinsurance Corporation ("GRC"), Munich
American Reinsurance Company ("MARC") and Lloyd's of London ("Lloyd's") were the
only reinsurers that comprised more than 10 percent of NAICC's reinsurance
recoverable on paid and unpaid claims. At December 31, 1996, NAICC had
reinsurance recoverables on paid and unpaid claims of $7.7 million, $7.9 million
and $4.1 million from GRC, MARC and Lloyd's, respectively. Both GRC and MARC had
an A.M. Best rating of A+ or better.
7) 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,
----------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net unpaid losses and
LAE at January 1.................... $116,294 $128,625 $119,223
Net unpaid losses acquired
with Valor.......................... 403 - -
--------------------------------
116,697 128,625 119,223
--------------------------------
Incurred related to:
Current year........................ 26,979 45,592 67,131
Prior years......................... 10,120 3,123 384
--------------------------------
Total incurred........................ 37,099 48,715 67,515
--------------------------------
Paid related to:
Current year........................ (10,559) (14,464) (15,849)
Prior years......................... (46,132) (46,582) (42,264)
--------------------------------
Total paid............................ (56,691) (61,046) (58,113)
--------------------------------
Net unpaid losses and
LAE at December 31.................. 97,105 116,294 128,625
Plus: reinsurance
recoverables........................ 23,546 21,112 17,705
--------------------------------
Gross unpaid losses and
LAE at December 31.................. $120,651 $137,406 $146,330
================================
</TABLE>
The losses and LAE incurred related to prior years is attributable to claims
from businesses which are in run- off. In 1996, NAICC strengthened the unpaid
losses and allocated loss adjustment expenses ("ALAE") of pre-1980 businesses
assumed by NAICC in 1985 and which are in run-off. NAICC increased these run-
off claim liabilities by $10 million. The pre-1980 run-off liabilities include
claims relating to environmental clean-up for policies issued prior to 1970.
NAICC increased its bulk unpaid liabilities related to these claims,
principally the unpaid ALAE, as it has become evident that the legal costs
associated with these claims would be significantly greater than previously
anticipated.
21
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------
December 31, 1996, 1995, and 1994
(continued)
The principal exposure from these claims arises from direct excess and primary
policies of businesses 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 $50,000. NAICC also has environmental claims primarily associated with
participation in excess of loss reinsurance contracts assumed by NAICC. These
reinsurance contracts have relatively low limits, generally less than $25,000,
and estimates of unpaid losses are based on information provided by the primary
insurance company.
The unpaid losses and LAE related to environmental cleanup 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 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.
NAICC is involved in litigation related to certain environmental claims which
have some significant uncertainties. Such uncertainties include difficulties in
predicting the outcome of judicial decisions as case law evolves regarding
liability exposure, insurance coverage and interpretation of policy language
with respect to environmental claims. While the outcome of such litigation
cannot be determined at this time, such litigation, net of liabilities
established therefor and giving effect to reinsurance, is not expected to have a
material adverse effect on the future liquidity or financial position of NAICC.
As of December 31, 1996 and 1995, NAICC's net unpaid losses and LAE relating to
environmental claims were approximately $13.4 million and $4.1 million,
respectively.
8) 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. The Company has not applied any
permitted accounting practices in its statutory financial statements. As of
December 31, 1996 and 1995, DHC's operating insurance subsidiaries reported
statutory capital and surplus of $41.4 million and $44.9 million, respectively.
The combined statutory net income (loss) for DHC's operating insurance
subsidiaries, as reported to the regulatory authorities for the years ended
December 31, 1996, 1995 and 1994, was $(5.6) million, $4.8 million and $2.2
million, respectively. The Insurance Department has examined the statutory basis
financial statements of NAICC through December 31, 1995. No adjustments were
made to the statutory basis financial statements of NAICC or its subsidiaries.
The Montana Department of Insurance is currently conducting an examination of
the statutory basis financial statements of Valor as of December 31, 1995.
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
22
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
laws have broad administrative and supervisory powers relating to the granting
and revocation of licenses to transact insurance business, regulation of trade
practices, establishment of guaranty associations, licensing of agents, approval
of policy forms, premium rate filing requirements, reserve requirements, the
form and content of required regulatory financial statements, periodic
examinations of insurers' records, capital and surplus requirements and the
maximum concentrations of certain classes of investments. Most states also have
enacted legislation regulating insurance holding company systems, including with
respect to acquisitions, extraordinary dividends, the terms of affiliate
transactions and other related matters. DHC and its insurance subsidiaries have
registered as a holding company system pursuant to such legislation in
California and routinely report to other jurisdictions. The Association has
formed committees and appointed advisory groups to study and formulate
regulatory proposals on such diverse issues as the use of surplus debentures,
accounting for reinsurance transactions and the adoption of RBC requirements. It
is not possible to predict the impact of future state and federal regulation on
the operations of the Company.
Under the California Insurance Code, NAICC is prohibited from paying, other
than from accumulated earned surplus, shareholder dividends which exceed the
greater of net income or 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 1997 without prior regulatory
approval.
9) INVESTMENTS
In compliance with state insurance laws and regulations, securities with a
fair value of approximately $85 million, $119 million and $94 million at
December 31, 1996, 1995 and 1994, respectively, were on deposit with various
states or governmental regulatory authorities. In addition, at December 31, 1996
and 1995, respectively, investments with a fair value of $4.3 million and $4.7
million were held in trust or as collateral under the terms of certain
reinsurance treaties and letters of credit.
Net realized investment gains in 1996, 1995 and 1994 were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------
1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities................... $ 148 $ 129 $ 12
Equity securities.................. 351 - 4
Other investments.................. - 78 -
---------------------
Net realized gain................ $ 499 $ 207 $ 16
=====================
</TABLE>
Gross realized gains relating to fixed maturities were $171,000, $213,000 and
$28,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Gross realized losses relating to fixed maturities were $23,000, $84,000 and
$16,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Gross realized gains relating to equity securities were $351,000 for the year
ended December 31, 1996, and $4,000 for the year ended December 31, 1994 and
there were no gross realized losses relating to equity securities in either
year. There were neither gross realized gains nor gross realized losses relating
to equity securities for the year ended December 31, 1995. Gross realized gains
relating to other investments were $78,000 for the year ended December 31, 1995
and there were no gross realized losses relating to other investments in that
year. There were neither gross realized gains nor gross realized losses relating
to other investments for the years ended December 31, 1996 and 1994.
Net investment income for the past three years was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------
1996 1995 1994
-------------------------
<S> <C> <C> <C>
Fixed maturities....................... $10,852 $12,320 $11,488
Short term investments................. 243 206 208
Other, net............................. 8 899 252
-------------------------
Total investment income.............. 11,103 13,425 11,948
Less: Investment expense............... 448 399 226
=========================
Net investment income................ $10,655 $13,026 $11,722
=========================
</TABLE>
23
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
Notes to Consolidated Financial Statements
----------------------
December 31, 1996, 1995, and 1994
(continued)
Other investment income in 1995 includes interest of $840,000 received in
December 1995 relating to a previously disputed reinsurance recoverable.
During 1996, 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, 1996, 1995 or 1994.
The amortized cost, unrealized gains, unrealized losses and fair value at
December 31, 1996 and 1995, categorized by type of security, were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------
Cost or
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government/Agency........... $ 50,381 $ 686 $ 64 $ 51,003
Mortgage-backed.................. 54,691 384 1,198 53,877
Corporate........................ 38,352 444 346 38,450
------------------------------------------
Total fixed maturities...... 143,424 1,514 1,608 143,330
Equity securities.................. 257 2,440 -- 2,697
------------------------------------------
Total available-for-sale........... $143,681 $3,954 $1,608 $146,027
==========================================
<CAPTION>
December 31, 1995
------------------------------------------
Cost or
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government/Agency........... $ 67,401 $2,027 $ 6 $ 69,422
Mortgage-backed.................. 62,342 1,536 272 63,606
Corporate........................ 36,622 1,536 19 38,139
------------------------------------------
Total fixed maturities...... 166,365 5,099 297 171,167
Equity securities.................. 256 373 -- 629
------------------------------------------
Total available-for-sale........... $166,621 $5,472 $ 297 $171,796
==========================================
</TABLE>
Fixed maturities of the Company include mortgage-backed securities ("MBS")
representing 37.6 percent and 37.2 percent of the Company's total fixed
maturities at December 31, 1996 and 1995, respectively. All MBS held by the
Company are issued by the Federal National Mortgage Association ("Fannie Mae")
or the Federal Home Loan Mortgage Corporation ("Freddie Mac"), both of which are
rated Aaa by Moody's Investors Services. MBS and callable bonds, in contrast to
other bonds, are more sensitive to market value declines in a rising interest
rate environment than to market value increases in a declining interest rate
environment. This is primarily because of payors' increased incentive and
ability to prepay principal and issuers' increased incentive to call bonds in a
declining interest rate environment. NAICC's management does not believe that
the inherent 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.
24
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
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,
---------------------------
1996 1995 1994
- --------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities................ $(4,916) $ 5,392 $(1,027)
Equity securities............... 2,067 81 (106)
---------------------------
$(2,849) $ 5,473 $(1,133)
===========================
</TABLE>
The expected maturities of fixed maturities, by amortized cost and fair
value, at December 31, 1996, 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........................ $ 22,899 $ 23,043
Over one year to five years............. 66,529 67,490
Over five years to ten years............ 53,019 51,752
More than ten years..................... 977 1,045
-------------------
Total fixed maturities $143,424 $143,330
===================
</TABLE>
10) 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, 1996, there were 15,370,894 shares of Common
Stock issued and 15,360,238 such shares outstanding and no shares of preferred
stock issued and outstanding; the remaining 10,656 shares issued but not
outstanding are held as treasury stock. For additional information about the
Company's Stock Option Plans, see Note 13 "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 11 "INCOME TAXES."
11) 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.
As of December 31, 1996, the Company has a consolidated net operating loss
carryforward of approximately $1.3 billion for Federal income tax purposes. This
number is based upon Federal consolidated income tax losses for the periods
through December 31, 1995 and an estimate of the 1996 taxable loss. The net
operating loss carryforward will expire in various amounts, if not used, between
1998 and 2011. 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 would be available
25
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
Notes to Consolidated Financial Statements
----------------------
December 31, 1996, 1995, and 1994
(continued)
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 10 "STOCKHOLDERS EQUITY" for a description of certain restrictions on
the transfer of Common Stock.
At December 31, 1996, KCP reflected net operating tax loss carryforwards of
$31 million for Federal income tax purposes, which arose 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 by KCP,
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............... 155,762
2002............... 146,394
2003............... 77,736
2004............... 70,000
2005............... 104,763
2006............... 92,235
2007............... 87,298
2008............... 31,688
2009............... 40,405
2010............... 24,177
2011............... 20,169
----------
$1,336,788
==========
</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>
For the years ended
December 31,
----------------------------
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Federal income tax........................... $-- $ -- $--
State and local.............................. 18 120 90
---------------------------
$18 $120 $90
===========================
</TABLE>
The following reflects a reconciliation of income tax expense computed by
applying the applicable Federal income tax rate of 34 percent to continuing
operations for 1996, 1995 and 1994, as compared to the provision for income
taxes (dollars in thousands):
<TABLE>
<CAPTION>
For the years ended
December 31,
--------------------------------
1996 1995 1994
--------------------------------
<S> <C> <C> <C>
Computed "expected" tax
expense............................... (2,115) $ 1,519 $ 1,312
Change in valuation allowance.......... 3,754 1,819 904
Increase in net operating
losses from the trusts................ (1,755) (3,291) (2,266)
State and local tax expense............ 18 120 90
Other, net............................. 116 (47) 50
--------------------------------
Total income tax expense............... $ 18 $ 120 $ 90
================================
</TABLE>
26
Danielson Holding Corporation and Subsidiaries
<PAGE>
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1996 and 1995, respectively, are
presented as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Loss reserve discounting ......................... $ 7,124 $ 8,820
Unearned premiums ................................ 400 431
Net operating loss carryforwards ................ 454,508 447,650
Allowance for doubtful accounts ................. 330 330
Policyholder dividends ........................... 138 1,586
Non-recurring compensation ....................... 354 --
Capital loss carryforwards ....................... 893 --
Other ............................................ 96 (8)
------------------------
Total gross deferred tax asset ................... 463,843 458,809
Less: Valuation allowance ........................ (462,720) (456,688)
------------------------
Total deferred tax asset ......................... $ 1,123 $ 2,121
========================
Deferred tax liabilities
Deferred acquisition costs ....................... 325 355
Unrealized gains on available-for-sale securities 798 1,766
========================
Total deferred tax liabilities ................... 1,123 2,121
------------------------
Net deferred tax asset ........................... $ -- $ --
========================
</TABLE>
12) 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
in 1994.
13) 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. Options under and outside the 1990 Plan
may be granted for, in the aggregate, the purchase of up to 2,030,000 shares of
Common Stock.
On March 13, 1991, options to purchase an aggregate of 630,000 shares were
granted with an exercise price of $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. 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. 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
27
Danielson Holding Corporation and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements
----------------------
December 31, 1996, 1995, and 1994
(continued)
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.
On September 16, 1991, DHC granted, outside the 1990 Plan, options to
purchase an aggregate of 140,000 shares of Common Stock with an exercise price
of $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. On
this date, the Compensation Committee of the Board of Directors of DHC resolved
that it intended to refrain from granting any additional options under the 1990
Plan.
As of December 31, 1996, 1,072,637 options granted under and outside the 1990
Plan were exercisable and unexercised. All options expire ten years after the
date of grant.
1995 Stock and Incentive Plan
The 1995 Stock and Incentive Plan (the "1995 Plan") is a qualified plan which
provides for the grant of any or all of the following types of awards: stock
options, including incentive stock options and non-qualified stock options;
stock appreciation rights, whether in tandem with stock options or freestanding;
restricted stock; incentive awards; and performance awards. The purpose of the
1995 Plan is to enable DHC to provide incentives to increase the personal
financial identification of key personnel with the long term growth of the
Company and the interests of DHC's stockholders through the ownership and
performance of DHC's Common Stock, to enhance the Company's ability to retain
key personnel, and to attract outstanding prospective employees and Directors.
The 1995 Plan became effective as of March 21, 1995. No incentive stock options
may be granted under the 1995 Plan after March 21, 2005. The 1995 Plan will
remain in effect until all awards have been satisfied or expired. The 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.
On April 25, 1995, options to purchase 40,000 shares were granted under the
1995 Plan. 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).
On January 15, 1996, options to purchase an aggregate of 158,900 shares of
Common Stock were granted under the 1995 Plan. The exercise price for 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 grant).
On September 17, 1996, options to purchase an aggregate of 120,000 shares of
Common Stock were granted under the 1995 Plan. The exercise price for such
options is $5.50 per share (the mean of the high and low prices of the Common
Stock on the American Stock Exchange on the date of grant). On September 19,
1996, options to purchase an aggregate of 125,000 shares of Common Stock were
granted under the 1995 Plan. The exercise price for such options is $5.6875
per share (the mean of the high and low prices of the Common Stock on the
American Stock Exchange on the date of grant).
On December 17, 1996, options to purchase an aggregate of 35,000 shares of
Common Stock were granted under the 1995 Plan. The exercise price for all of
such options is $4.9375 per share (the mean of the high and low prices of the
Common Stock on the American Stock Exchange on the date of grant).
As of December 31, 1996, 147,233 options granted under the 1995 Plan were
exercisable. No options were exercised in 1996. Options granted under the 1995
Plan generally become exercisable over three years and expire ten years after
the date of grant.
The Company applies APB Opinion 25 and Related Interpretations in accounting
for the Stock Option Plans. Accordingly, no compensation cost has been
recognized. Had compensation cost been determined based on the fair value at the
grant date of the options consistent with the method of SFAS Statement 123, the
net income (loss) and earnings (loss)
28
Danielson Holding Corporation and Subsidiaries
<PAGE>
per share would have been reduced to (increased to) the pro forma amounts
indicated below (dollars in thousands except per share amounts):
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------
Net income (loss)
<S> <C> <C>
As reported........................... $(8,119) $2,316
Pro forma............................. (8,621) 2,275
Earnings (loss) Per Share
As reported........................... $ (0.53) $ 0.14
Pro forma............................. (0.56) 0.14
</TABLE>
The fair value of the option grants are estimated as of the date of grant
using the Black-Scholes option pricing model with the following assumptions:
dividend yield of 0% per annum; an expected life of approximately 8 years;
expected volatility of 36%; and a risk free interest rate of 6%. The pro forma
effect on net income (loss) for 1996 and 1995 may not be representative of the
effects on net income (loss) for future years.
Employee Benefit Plans
KCP maintains an Employee Stock Ownership Plan ("ESOP") of KCP and
Subsidiaries covering all of its employees. 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, 1996, the principal balance due from the ESOP
under such loan was $186,035. 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"). The participating employers contributed
50 percent of the first six percent of employee-contributed compensation to the
401(k) Plan. The shares of Common Stock owned by the ESOP as of December 31,
1996 and 1995, respectively, were as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Allocated shares........................ 101,299 94,714
Unreleased shares....................... 20,528 40,049
-------------------
121,827 134,763
===================
</TABLE>
KCP maintains a non-contributory defined benefit pension plan (the "Pension
Plan") covering substantially all of its employees. 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, as amended, and the
Internal Revenue Code of 1986, as amended. 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, 1996 and 1995, valued at January 1, 1997 and 1996, respectively (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefits obligation,
including vested benefits of $1,608
for 1996 and $1,529 for 1995......................... $1,921 $ 1,904
==================
Projected benefit obligation.............................. $1,921 $ 2,478
Plan assets at fair value................................. 1,517 1,293
------------------
Projected benefit obligation in excess
of plan assets........................................ (404) (1,185)
Unrecognized net (gain) loss.............................. (68) 807
Unrecognized prior service cost........................... 74 83
Adjustment required to recognize minimum
liability................................................ (6) (316)
------------------
(Accrued) prepaid pension cost........................... $ (404) (611)
==================
</TABLE>
29
Danielson Holding Corporation and Subsidiaries
<PAGE>
Notes to Consolidated Financial Statements
----------------------
December 31, 1996, 1995, and 1994
(continued)
Net pension costs for the years ended December 31, 1996, 1995 and 1994
include the following components:
<TABLE>
<CAPTION>
For the years ended
December 31,
---------------------
1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost.................................... $ 237 $ 243 $ 286
Interest cost................................... 128 156 100
Actual (return) loss on plan assets............. (106) (201) 130
Net amortization and deferral................... 23 131 (199)
---------------------
Net pension cost.............................. $ 282 $ 329 $ 317
=====================
</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 7.5 percent and 7.25 percent for 1996 and 1995, respectively. The
projected long term rate of return on assets was seven percent for each of 1996
and 1995. The average rate of compensation increase used in determining the
actuarial present value of the projected benefit obligation was 4.5 percent for
1996 and 1995.
KCP maintains the 401(k) Plan in which all employees of KCP 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 1996, 1995 and
1994, the employers' matching obligation to the 401(k) Plan was satisfied
through ESOP shares, cash and forfeitures totaling $242,000, $211,000 and
$156,000, respectively, in value.
14) 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 generally contain renewal options
and escalation clauses based on increases in operating expenses and other
factors. Rent expense under operating leases was $1.1 million for the year ended
December 31, 1996 and $1.2 million for each of the years ended 1995 and 1994.
At December 31, 1996, future net minimum operating lease rental payment
commitments were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ending Minimum Operating Lease
December 31, Rental Payments
- ------------------------------------------------------------------
<S> <C>
1997..................................... $1,584
1998..................................... 852
1999..................................... 570
2000..................................... 4
------
Total commitments........................ $3,010
======
</TABLE>
15) 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
relating to environmental claims as well as general corporate matters. 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 position of DHC.
16) 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 Statement of Operations.
DHC has been advised that this trust is anticipated to be terminated in the near
future. DHC does not anticipate that any amount it may receive upon termination
of this trust will be material.
30
Danielson Holding Corporation and Subsidiaries
<PAGE>
Independent Auditors' Report
------------------------
The Board of Directors and Stockholders
Danielson Holding Corporation
We have audited the accompanying consolidated balance sheets of Danielson
Holding Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Danielson
Holding Corporation and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As described in Note 5 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 28, 1997
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.
31
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
QUARTERLY FINANCIAL DATA
----------------------
(unaudited)
The following table presents unaudited quarterly financial data for the years
ended December 31, 1996 and 1995. 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.
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>
First Second Third Fourth
(In thousands, except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
1996:
<S> <C> <C> <C> <C>
Total revenues from continuing operations.................... $12,064 $ 12,244 $ 11,451 $12,945
Income (loss) from continuing operations..................... 638 (1,497)/1/ (178)/1,2/ (5,203)/3/
Net loss from discontinued operations........................ (81)/4/ (163)/4/ (389)/4/ --
Net loss on disposal of Danielson Trust...................... -- -- (1,271) 25
Income (loss) per share from continuing operations........... .04 (.10)/1/ (.01)/1,2/ (.34)/3/
Net loss per share from discontinued operations.............. -- (.01)/4/ (.03)/4/ --
Net loss per share on disposal of Danielson Trust............ -- -- (.08) --
1995:
Total revenues from continuing operations.................... $21,883 $ 20,286 $ 17,435 $15,854
Net income from continuing operations........................ 1,008 1,107 1,128 1,106
Net loss from discontinued operations........................ (395)/4/ (328)/4/ (260)/4/ (1,050)/4,5/
Net income per share from continuing operations.............. .06 .07 .07 .07
Net loss per share from discontinued operations.............. (.02)/4/ (.02)/4/ (.02)/4/ (.07)/4,5/
</TABLE>
1 Includes expenses incurred in connection with the terminated proposed merger
with Midland Financial Group, Inc.
2 Includes non-recurring compensation expenses of death benefits and severance
pay.
3 Includes $10 million increase in provision for pre-1980 accident year losses
and LAE relating to run-off businesses and $4 million reduction in
policyholder dividend accrual.
4 In 1996, DHC sold 100% of the common stock of Danielson Trust. Accordingly,
Danielson Trust's results are reported herein as discontinued operations and
are included in net income (loss).
5 Includes the writedown of $709,000 of goodwill.
STOCK MARKET PRICES
-----------------------
Danielson Holding Corporation Common Stock is listed and traded on the
American Stock Exchange (symbol: DHC). On March 12, 1997, there were
approximately 1,616 holders of record of Common Stock.
The following table sets forth the high, low and closing stock prices of the
Company's Common Stock for the last two years, as reported on the American Stock
Exchange Composite Tape.
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------
High Low Close High Low Close
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter............ 8 3/8 6 5/8 7 5/8 7 3/4 6 5/8 6 5/8
Second Quarter........... 8 1/4 6 1/4 6 11/16 8 6 5/8 7 7/8
Third Quarter............ 7 5 1/4 5 1/2 7 3/4 7 7 1/2
Fourth Quarter........... 5 5/8 4 3/4 5 7 5/8 6 3/4 6 7/8
</TABLE> ---------------------------------------------------
32
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
[DHC'S 1996 ANNUAL REPORT TO STOCKHOLDERS IS
INCLUDED WITH THIS FORM 10-K SOLELY FOR
CONVENIENCE OF REFERENCE. EXCEPT FOR THOSE
PORTIONS OF DHC'S 1996 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.]
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF DANIELSON HOLDING CORPORATION
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
---- ----------------------
<S> <C>
Mission American Insurance Company.................. California
SUBSIDIARIES OF MISSION AMERICAN INSURANCE COMPANY
KCP Holding Company................................. Delaware
Danielson Indemnity Company......................... Missouri
Danielson Reinsurance Corporation................... Missouri
SUBSIDIARIES OF KCP HOLDING COMPANY
Kramer Capital Consultants, Inc. ................... New York
National American Insurance Company of California... California
SUBSIDIARIES OF NATIONAL AMERICAN INSURANCE COMPANY
OF CALIFORNIA
Valor Insurance Company, Incorporated............... Montana
Danielson Insurance Company......................... California
Danielson National Insurance Company................ California
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 143,330
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,697
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 151,555
<CASH> 1,155
<RECOVER-REINSURE> 26,617<F1>
<DEFERRED-ACQUISITION> 957
<TOTAL-ASSETS> 196,419
<POLICY-LOSSES> 120,651
<UNEARNED-PREMIUMS> 8,294
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 407
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,537
<OTHER-SE> 57,316<F2>
<TOTAL-LIABILITY-AND-EQUITY> 196,419
36,625
<INVESTMENT-INCOME> 10,655
<INVESTMENT-GAINS> 499
<OTHER-INCOME> 925
<BENEFITS> 37,099
<UNDERWRITING-AMORTIZATION> 6,239
<UNDERWRITING-OTHER> 15,588<F3>
<INCOME-PRETAX> (6,222)
<INCOME-TAX> 18
<INCOME-CONTINUING> (6,240)
<DISCONTINUED> (1,879)<F4>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,119)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
<RESERVE-OPEN> 116,294
<PROVISION-CURRENT> 26,979
<PROVISION-PRIOR> 10,120
<PAYMENTS-CURRENT> 10,559
<PAYMENTS-PRIOR> 46,132
<RESERVE-CLOSE> 97,105<F5>
<CUMULATIVE-DEFICIENCY> (10,119)
<FN>
<F1>INCLUDED IN THIS CAPTION ARE REINSURANCE RECOVERABLES ON UNPAID LOSSES OF
23,546 AND REINSURANCE RECOVERABLES ON PAID LOSSES OF 3,071.
<F2>INCLUDED IN STOCKHOLDERS' EQUITY-OTHER IS TREASURY STOCK OF 66.
<F3>INCLUDED IN THIS CAPTION ARE EXPENSES IN CONNECTION WITH TERMINATED PROPOSED
ACQUISITION OF 1,849 AND NONRECURRING COMPENSATION OF 1,272.
<F4>LOSS FROM DISCONTINUED OPERATIONS IS COMPRISED OF LOSS FROM OPERATIONS OF 633
AND LOSS ON DISPOSAL OF THE SEGMENT OF 1,246.
<F5>INCLUDES RESERVES OF 403 OF VALOR INSURANCE CO. WHICH WAS ACQUIRED ON JUNE 24,
1996.
</FN>
</TABLE>
