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, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
COMMISSION FILE NUMBER 1-6732
DANIELSON HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-6021257
(State of incorporation) (I.R.S. Employer Identification No.)
767 Third Avenue, New York, New York 10017-2023
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-0347
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock, $0.10 par value............... American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: None
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 21, 2000, the aggregate market value of the registrant's voting
stock held by non-affiliates was $78,576,069.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 21, 2000
----- -----------------------------
Common Stock, $0.10 par value 18,476,265 shares
The following documents have been incorporated by reference herein:
1999 Annual Report to Stockholders, as indicated herein (Parts I and II)
<PAGE>
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. It is DHC's intention
to grow by developing business partnerships and making strategic acquisitions.
As part of DHC's ongoing corporate strategy, DHC has continued to seek
acquisition opportunities which will both complement its existing operations and
enable DHC to earn an attractive return on investment. The largest subsidiary of
DHC is its indirectly wholly-owned California insurance company, National
American Insurance Company of California (together with its subsidiaries,
"NAICC"). NAICC writes non-standard and preferred private passenger and
commercial automobile, homeowners' and workers' compensation insurance in the
western United States, primarily California.
DHC had cash and investments at the holding company level of $18.1 million
at December 31, 1999. Total liabilities of DHC at the same date were $306,000.
The Company will report, as of the end of its 1999 tax year, aggregate
consolidated net operating tax loss carryforwards ("NOLs") for Federal income
tax purposes of approximately $1.16 billion. These losses will expire over the
course of the next 20 years unless utilized prior thereto. See Note 8 of the
Notes to Consolidated Financial Statements.
DESCRIPTION OF BUSINESSES
Set forth below is a description of the business operations of the
Company's insurance services business.
DHC's wholly-owned subsidiary, NAICC, is a California corporation engaged
in writing non-standard and preferred private passenger and commercial
automobile, homeowners' and workers' compensation 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.
GENERAL
NAICC began writing non-standard private passenger automobile insurance in
California in July, 1993, in Oregon and Washington in April, 1998 and in Arizona
in 1999. NAICC writes its California business through one general agent that
uses over 700 sub-agents to obtain applications for policies. The Oregon,
Washington and Arizona business is written directly through thirty-seven
appointed independent agents. Policyholder selection is governed by underwriting
guidelines established by NAICC. NAICC began writing non-standard commercial
automobile insurance in 1995 through independent agents. 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 management believes that it is able to achieve underwriting success
through refinement of various risk profiles, thereby dividing the non-standard
market into more defined segments which can be adequately priced.
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<PAGE>
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. Businesses which are unable to insure a specific driver
and businesses having vehicles not qualifying for commercial multi-peril
insurance are typical NAICC commercial automobile policyholders. 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. The typical NAICC commercial automobile
policy covers fleets of four or fewer vehicles. NAICC does not insure long-haul
truckers, trucks hauling logs, gasoline or similar higher hazard operations. The
current average annual premium of the policies in force is approximately $2,700.
Net written premiums were $29.7 million, $27.9 million and $29.8 million in
1999, 1998 and 1997, respectively for all private passenger automobile programs.
Net written premiums were $21.9 million, $26.3 million and $29.8 million in
1999, 1998 and 1997, respectively, for the non-standard private passenger
automobile program. Until January 1, 1999, NAICC ceded 25 percent of its
California non-standard private passenger automobile business to a major
reinsurance company under a quota share reinsurance agreement. Effective January
1, 1999, the ceding percentage was reduced to 10%. NAICC's Oregon and Washington
non-standard automobile, California preferred automobile, and its commercial
automobile businesses as are reinsured on an excess of loss basis, where the
company retains the first $250,000 ($150,000 during 1997).
The decrease in California non-standard private passenger automobile
premiums in 1999 was due to increased competition in the California marketplace
and a 9% rate reduction taken during 1999. Part of the decrease in its
California non-standard automobile business continues to be offset by the
expansion of NAICC's non-standard automobile business into Oregon and
Washington, and the offering of a preferred automobile program in California.
Net written premiums for preferred automobile were $7.8 million and $1.6 million
in 1999 and 1998, respectively.
Net written premiums for commercial automobile were $12.6 million, $13.5
million and $8.8 million in 1999, 1998 and 1997, respectively. The slight
decrease in 1999 is attributable to increased competition and selected rate
increases in specific markets.
NAICC writes workers' compensation insurance in California and four other
western states. Workers' compensation insurance policies provide coverage 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. Policies are issued having a term of no
more than one year. NAICC's premium volume in workers' compensation has declined
significantly in California since 1995 when a new "open rating" law replaced the
old workers' compensation "minimum rate" law and fierce price competition
immediately followed. Net written premiums for workers' compensation were $13.1
million, $17.2 million, and $17.2 million, in 1999, 1998, and 1997,
respectively. In response to developments affecting the market for workers'
compensation insurance in California, NAICC has pursued a strategy of
aggressively seeking business 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.
NAICC does not write any business through managing general agents. Its
California non-standard private passenger automobile program, representing 25.2%
of net written premiums, is produced through one general agent, and its
preferred private passenger automobile program, representing 13.9% of net
written premiums, is produced through another general agent.
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<PAGE>
UNDERWRITING
Insurers admitted in California are required to obtain approval from the
California Department of Insurance of rates and/or forms prior to being used.
Many of the states in which NAICC does business have similar requirements. 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
its own, as well as industry experience, in establishing rates.
Private passenger automobile policy limits vary by state. In California,
non-standard policies provide maximum coverage up to $15,000 per person, $30,000
per accident for liability and bodily injury and $10,000 per accident for
property damage. In Arizona, Oregon and Washington, non-standard policies
provide minimum coverage of $25,000 per person, $50,000 per accident for
liability and bodily injury and $10,000 per accident for property damage, and
can provide coverage to a maximum of $250,000 per person, $500,000 per accident
for liability and bodily injury and $25,000 per accident for property damage. In
general, preferred policies provide coverage to a maximum of $250,000 per
person, $500,000 per accident for liability and bodily injury and $25,000 per
accident for property damage. 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. Effective January 1,
1998, NAICC retains the first $250,000 bodily injury and property damage
combined single limit of liability for each occurrence, with losses in excess of
$250,000, per occurrence, being ceded to its reinsurers. Prior to 1998, NAICC
retained $150,000.
Workers' compensation rates, rating plans, policyholder dividend plans and
policy forms are developed and filed 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 in
California or the National Council on Compensation Insurance, the statistical
agent for other western states in which NAICC markets insurance. 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.
NAICC retains the first $500,000 of each workers' compensation loss and has
purchased reinsurance for up to $49.5 million in excess of its retention, the
first $9.5 million of which are placed with two major reinsurance companies,
with the remaining $40 million being provided by 16 other companies. In January
1999 NAICC entered into a workers' compensation reinsurance agreement with
Reliance Insurance Company (the "Reliance Agreement") with a term of two years.
The Reliance Agreement provided excess of loss coverage down to $10,000 and a
20% quota share below the excess retention resulting in a maximum net loss to
NAICC of $18,000 per claim. In the fourth quarter of 1999, NAICC executed an
agreement to rescind the Reliance Agreement. The terms of the rescission include
the return of amounts paid by NAICC during the nine month period the Reliance
Agreement was active plus a settlement fee to terminate the Reliance Agreement.
NAICC recognized a gain of $8,317,000 in the fourth quarter as a result of this
rescission.
MARKETING
NAICC maintains five new business production offices located in Portland,
Oregon, Phoenix, Arizona and San Ramon, 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 currently markets its non-standard private passenger automobile
insurance in California through one general agent. NAICC writes non-standard
private passenger automobile insurance directly through 21 independent agents in
Oregon and Washington. NAICC also began a preferred private passenger automobile
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program in California in February 1998 which is marketed through a second
general agent. NAICC markets its non-standard commercial automobile insurance
through approximately 800 independent agents located in Arizona, California,
Idaho, Nevada, Oregon, Utah and Washington.
NAICC writes workers' compensation business primarily in the states of
California, Oregon, Arizona, Idaho and Montana through more than 650 independent
agents. The agency contracts provide authority to bind coverage within specific
underwriting guidelines set by NAICC. Valor markets workers' compensation
insurance to Montana employers. All business is produced and serviced through
its home office in Billings, Montana. NAICC targets employers having operations
that are classified as low to moderate hazard and that generally have payrolls
under $1 million. Typically, annual premium 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.
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") which manages a detailed investigation of
these claims using outside investigative firms. When evidence of fraudulent
activity is identified, the SIU works with the various state departments of
insurance, the National Insurance Crime Bureau and local law enforcement
agencies in handling the claims.
Workers' compensation claims are received, reviewed and processed by NAICC
employees located in claims service offices in 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.
The California Automobile Assigned Risk Plan provides for state mandated
minimum levels of automobile liability coverage to drivers whose driving
records, or other relevant characteristics, make it difficult for them to obtain
insurance coverage in the voluntary market. NAICC does not expect to receive a
material number of assignments arising from this program and does not believe
that the assignments will have a material adverse effect on its profitability.
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 1970 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 few in number and have policy limits of between $50,000 and
$1,000,000, with reinsurance generally above
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<PAGE>
$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 loss and LAE related to environmental cleanup is established
considering 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. Estimates for unknown claims
and development of reported claims are included in NAICC's loss and LAE. The
liability for development of reported claims is based on estimates of the range
of potential losses for reported claims in the aggregate. Estimates of
liabilities are reviewed and updated continually and there is the potential that
NAICC's exposure could be materially in excess of amounts that are currently
recorded. 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. However, 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. As of December 31, 1999 and 1998,
NAICC's net unpaid losses and LAE relating to environmental claims were
approximately $8.3 million and $10.8 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
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.
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<PAGE>
ANALYSIS OF LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of NAICC's unpaid losses and
LAE (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net unpaid losses and LAE at January 1 $77,466 $ 85,762 $ 97,105
Incurred related to:
Current year 43,301 39,131 37,142
Prior years 2,491 - 940
---------- ----------- -----------
Total incurred 45,792 39,131 38,082
---------- ----------- -----------
Paid Related to:
Current year (16,527) (16,169) (13,729)
Prior years (27,425) (31,258) (35,696)
---------- ----------- -----------
Total paid (43,952) (47,427) (49,425)
---------- ----------- -----------
Net unpaid losses and LAE at
December 31 79,306 77,466 85,762
Plus: reinsurance recoverables on unpaid
losses 15,628 18,187 20,185
---------- ----------- -----------
Gross unpaid losses and LAE at
December 31 $ 94,934 $ 95,653 $ 105,947
========== =========== ===========
</TABLE>
The losses and LAE incurred related to prior years is attributable to both
claims from lines of business which are in run-off, and its workers'
compensation line. NAICC strengthened the unpaid losses and allocated loss
adjustment expenses ("ALAE") of pre-1995 businesses written by NAICC from 1988
through 1994 since it has become evident that the legal costs associated with
those claims would be greater than previously anticipated. NAICC also increased
its bulk unpaid liabilities related to workers' compensation policies, as it has
become evident that the legal costs associated with these claims would be
greater than previously anticipated.
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 circumstances that 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.
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<TABLE>
<CAPTION>
Analysis of Net Losses and Loss Adjustment Expense ("LAE") Development (dollars in thousands):
YEAR ENDED DECEMBER 31
----------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net unpaid losses and LAE at end of
year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 95,272 $91,870 $ 97,810 $104,825 $119,223 $128,625 $116,294 $97,105 $ 85,762 $ 77,466 $79,306
Net unpaid losses and LAE re-
estimated as of:
One year later 100,599 92,632 94,364 105,658 119,607 131,748 126,414 98,045 85,762 79,957
Two years later 100,143 87,504 99,875 111,063 123,039 141,602 126,796 97,683 85,684
Three years later 94,954 89,844 107,945 117,756 136,735 141,787 127,621 98,545
Four years later 96,948 95,576 116,018 138,877 140,076 144,491 129,792
Five years later 101,537 102,081 136,269 142,423 142,537 146,827
Six years later 107,344 119,107 139,493 144,457 144,556
Seven years later 122,985 121,161 141,467 145,370
Eight Years later 124,749 122,664 142,031
Nine Years later 125,801 122,814
Ten Years later 125,801
Cumulative (deficiency) redundancy (30,529) (30,944) (44,221) (40,545) (25,333) (18,202) (13,498) (1,440) 78 (2,491)
Cumulative net amounts paid as of:
One year later 38,165 31,162 39,131 39,650 42,264 46,582 46,132 35,696 31,317 43,090
Two years later 56,876 53,424 63,483 68,025 71,702 80,515 74,543 54,815 43,855
Three years later 71,543 66,198 81,485 88,038 95,525 101,726 90,818 63,290
Four years later 78,991 75,963 94,238 106,431 110,163 114,424 97,900
Five years later 84,980 83,704 108,923 118,136 119,474 119,310
Six years later 90,458 95,199 118,397 125,218 122,296
Seven years later 100,559 102,886 124,569 126,362
Eight years later 107,630 107,726 125,256
Nine years later 111,735 108,277
Ten years later 111,956
</TABLE>
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<PAGE>
The following table reflects the same information as the preceding table gross
of reinsurance (dollars in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gross unpaid losses and LAE at end of year: $ 137,479 $ 146,330 $ 137,406 $120,651 $ 105,947 $ 95,653 $ 94,934
Gross unpaid losses and LAE re-estimated as of:
One year later 137,898 149,815 149,416 121,787 107,060 99,314
Two years later 141,737 161,731 150,106 121,335 106,543
Three years later 158,263 162,246 150,815 122,369
Four years later 162,697 165,111 153,509
Five years later 165,077 168,045
Six years later 167,702
Gross cumulative deficiency: (30,223) (21,715) (16,103) (1,718) (596) (3,661)
Gross cumulative amount paid as of:
One year later 53,634 53,798 54,901 47,835 36,542 55,245
Two years later 88,930 92,991 92,422 21,794 56,948
Three years later 116,605 122,095 110,498 37,092
Four years later 138,924 136,448 124,153
Five years later 148,928 146,803
Six years later 157,196
Gross unpaid losses and LAE latest re-estimate 167,702 168,045 153,509 122,369 106,543 99,314
Reinsurance recoverable latest re-estimate 23,146 21,218 23,718 23,824 20,860 19,357
------------------------------------------------------------------
Net unpaid losses and LAE latest re-estimate 144,556 146,287 129,792 98,545 85,684 79,957
------------------------------------------------------------------
</TABLE>
The cumulative deficiency as of December 31, 1995 on a net basis of $13.5
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 by $10 million in 1996. 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 $40.5 million and $44.2 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
workers' compensation loss experience and development in the 1992 through 1995
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.
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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 1999 were 14.8 percent of written premiums.
As of December 31, 1999, General Reinsurance Corporation (GRC), American
Reinsurance Company (ARC), 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, 1999, NAICC
had reinsurance recoverables on paid and unpaid claims of $7.3 million , $3.1
million, and $4.0 million from GRC, ARC, and Lloyd's respectively. GRC and ARC
had an A.M. Best rating of A+ or better. 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 2 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 an
extraordinary shareholder dividend without prior approval from the Insurance
Commissioner. Dividends are considered extraordinary if they exceed the greater
of net income or 10% of statutory surplus as of the prior December 31. To the
extent that NAICC's unassigned surplus, as defined for dividend purposes,
remains negative, NAICC will be prohibited from paying any shareholder dividends
during 2000 without prior regulatory approval.
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RISK-BASED CAPITAL
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 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, 1999, the RBC of NAICC was 288% greater than the Company
Action Level. NAICC currently has no plans to take any action designed to
significantly affect its RBC level.
HOLDING COMPANY BUSINESS
DHC is a holding company incorporated under the General Corporation Law of
the State of Delaware. As of December 31, 1999, 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, DICO,
Valor, and two licensed insurance subsidiaries which are expected to
commence writing insurance lines in the future; and
(ii) approximately $18.1 million in cash and investments.
TAX LOSS CARRYFORWARD
At the close of 1999, the Company had a consolidated net operating loss
carryforward of approximately $1.16 billion for Federal income tax purposes.
This number is based upon Federal consolidated income tax losses for the periods
through December 31, 1998 and an estimate of the 1999 taxable results. 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.
-10-
<PAGE>
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):
Year Ending Amount of Carryforwards
DECEMBER 31, EXPIRING
------------ --------
2000 $253,098
2001 155,806
2002 142,982
2003 60,849
2004 69,947
2005 106,225
2006 92,355
2007 89,790
2008 31,688
2009 39,689
2010 23,600
2011 19,755
2012 38,255
2019 40,078
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.
STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Item 1 to the Report on Form 10-K, together with Items 2, 3, 7, and 8,
contain forward-looking statements, including statements concerning plans,
capital adequacy, adequacy of reserves, utilization of tax losses, goals, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. Such forward-looking statements may
be identified, without limitation, by the use of the words "believes",
"anticipates", "expects", "intends", "plans" and other similar expressions. All
such statements represent only current estimates or expectations as to future
results and are subject to risks and uncertainties which could cause actual
results to materially differ from current estimates or expectations. See "RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS" in Item 7 for further information
concerning certain of those risks and uncertainties.
EMPLOYEES
As of December 31, 1999, the number of employees of DHC and its
consolidated subsidiaries was approximately as follows:
NAICC 127
DHC (holding company only) 11
---
Total 138
-11-
<PAGE>
None of these employees is covered by any 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 2003. 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 five-year lease which is scheduled to
expire in 2004. 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 10 of the Notes to Consolidated Financial Statements.
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.
Danielson Reinsurance Corporation ("Danielson Re"), an indirect wholly
owned subsidiary of DHC (the "Registrant"), is the grantor of the Mission
Reinsurance Corporation Trust (the "Trust"). The Trust was one of several
created in connection with the insolvency and reorganization of Mission
Insurance Group, Inc. and its subsidiaries from which the Company emerged. In
connection with the liquidation of the Trust by the Missouri Department of
Insurance (the "Insurance Department"), a surplus existed from which the
Insurance Department sought to pay interest to the claimants of the Trust. DHC
challenged the Insurance Department's plan to pay interest in the Circuit Court
of Jackson County, Missouri, which is overseeing the liquidation of the Trust,
arguing that any surplus belonged to Danielson Re as the grantor of the Trust.
The Circuit Court upheld the plan and DHC appealed that decision.
On June 22, 1999, the Missouri Court of Appeals reversed the decision of
the Circuit Court and remanded the matter to the Circuit Court, ruling that no
interest can be paid to claimants of insolvent insurance companies under the
Missouri Insurance Code. As a result of that decision, Danielson Re would have
been entitled to any surplus remaining in the Trust after payment of all claims
and expenses of the Trust, which was believed to approximate $14 million. The
Insurance Department appealed the decision of the Court of Appeals to the
Missouri Supreme Court, which reversed the decision of the Court of Appeals. As
a result, the Insurance Department is permitted to pay interest on claims, and
it is anticipated that there will be no surplus remaining in the Trust after
payment of the interest.
See Note 11 of the Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-12-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
"Stock Market Prices" on page 26 of DHC's 1999 Annual Report to
Stockholders (included as an exhibit hereto) is incorporated herein by
reference.
On December 29, 1999, the Company sold, for aggregate cash
consideration of $4,162,500, 900,000 newly issued shares of Common
Stock. The sale was a private placement to 18 accredited investors made
pursuant to Regulation D under the Securities Act of 1933. Brokerage
commissions of $54,000 were paid to M.J. Whitman, Inc., an affiliate of
DHC, in connection with the placement of certain of those shares by
M.J. Whitman, Inc.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Consolidated Financial Data" on page 2 of DHC's 1999 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 3 through 8 of DHC's 1999 Annual Report
to Stockholders (included as an exhibit hereto) is incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
"Market Risk" on pages 5 through 7 of DHC's 1999 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 9 through 12, 13 through 24, and 26, respectively, of
DHC's 1999 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.
-13-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS.
The Directors of DHC are listed on the following pages with brief
statements of their principal 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 July 20, 1999. 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.
DHC, Martin J. Whitman and SZ Investments, LLC ("SZ") have entered into an
agreement pursuant to which, as long as SZ continues to directly or indirectly
own at least 1,000,000 shares of Common Stock, (i) SZ will have the right to
continue to nominate two members of DHC's Board of Directors (which nominees
were Samuel Zell and William Pate) and (ii) Mr. Whitman has agreed to vote and
use his best efforts to cause to be voted the shares of Common Stock owned or
controlled by him in favor of SZ's designees. In addition, SZ has agreed that,
so long as Mr. Whitman directly or indirectly owns 500,000 shares of Common
Stock and Mr. Whitman continues to be affiliated with Third Avenue Funds and
Whitman Heffernan & Rhein Workout Fund, L.P. in the same or substantially
similar manner as his current affiliation (so long as such entities continue to
exist), SZ will vote the shares owned by it for the election of Mr. Whitman and
one other designee of Mr. Whitman (which nominee was David Barse).
The information set forth below concerning the Directors has been furnished
by such Directors to DHC.
<TABLE>
<CAPTION>
DIRECTOR
DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
- -------- --- -------------------- -----
<S> <C> <C>
Martin J. Whitman 75 Chief Executive Officer of the Company 1990
David M. Barse 37 President and Chief Operating Officer of the 1996
Company
Samuel Zell 58 Chairman of Equity Group Investments, L.L.C. 1999
Eugene M. Isenberg 70 Chairman of the Board and Chief Executive 1990
Officer of Nabors Industries, Inc.
Joseph F. Porrino 55 Counselor to the President of New School 1990
University; Senior Consultant, Powers Global
Strategies, LLC
Frank B. Ryan 63 Professor of Mathematics at Rice University 1990
Wallace O. Sellers 70 Vice Chairman and Director of Enhance Financial 1995
Services Group, Inc.
-14-
<PAGE>
Stanley J. Garstka 56 Deputy Dean and Professor in the Practice of 1996
Management at Yale University School of
Management
William Pate 36 Director of Mergers and Acquisitions of Equity 1999
Group Investments, L.L.C.
</TABLE>
Mr. Whitman is the Chief Executive Officer and a Director of the Company.
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, until June 1995, as President and until July 1999 as Chief Executive
Officer) 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, until July 1999 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
Trustee (and, from January 1991 to May 1998, the President) of Third Avenue
Trust and its predecessor, Third Avenue Value Fund, Inc. (together with its
predecessor, "Third Avenue Trust"), an open-end management investment company
registered under the Investment Company Act of 1940 (the "40 Act") and
containing three investment series of which he is a trustee. Since July 1999,
Mr. Whitman has been the Chairman of the Board, Chief Executive Officer and a
Trustee of Third Avenue Variable Series Trust ("Variable Trust"), an open-end
management investment company registered under the 40 Act and containing one
investment series. Since March 1990, Mr. Whitman has been Chairman of the Board
and Chief Executive Officer (and, until February 1998, the President) of EQSF
Advisers, Inc. ("EQSF"), the investment adviser of Third Avenue Trust and
Variable Trust. 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 helped to found during the first quarter of 1987 and
which ceased operations in December, 1996. Since March 1991, Mr. Whitman has
served as a Director of Nabors Industries, Inc. ("Nabors"), a publicly-traded
oil and gas drilling company listed on the American Stock Exchange ("AMEX").
Since August, 1997, Mr. Whitman has served as a director of Tejon Ranch Co., an
agricultural and land management company listed on the New York Stock Exchange
("NYSE"). 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 and is the author of VALUE INVESTING: A
BALANCED APPROACH. Mr. Whitman is a Distinguished Faculty Fellow in Finance at
the Yale University School of Management ("Yale 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
the Company since July 1996 and a director of NAICC since August 1996. Since
June 1995, Mr. Barse has been the President (and, since July 1999, Chief
Executive Officer) of each of MJW and MJWHC. From April 1995 until May 1998 and
February 1998, respectively, he was an Executive Vice President and Chief
Operating Officer of Third Avenue Trust and EQSF, at which times he assumed the
position of President. Since July 1999, Mr. Barse has been the President and
Chief Operating Officer of Variable Trust. 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.
-15-
<PAGE>
Mr. Zell is the Chairman of the Board of the Company. Mr. Zell is Chairman
of Equity Group Investments, L.L.C. ("EGI"), an investment company since 1999
and had been Chairman of the Board of Equity Group Investments, Inc. for more
than five years. Mr. Zell is also Chairman of the Board of American Classic
Voyages Co., a provider of overnight cruises in the United States; Anixter
International Inc., a distributor of electrical and cable products; Capital
Trust, Inc., a specialized finance company; Chart House Enterprises, Inc., an
owner and operator of restaurants, Davel Communications, Inc., an operator of
pay telephones in the United States, and Manufactured Home Communities, an
equity real estate investment trust ("REIT") primarily focused on manufactured
home communities. Mr. Zell is Chairman of the Board of Trustees of Equity Office
Properties Trust, an equity REIT primarily focused on office buildings and
Equity Residential Properties Trust, an equity REIT primarily focused on
multifamily residential properties. He is a director of Ramco Energy plc, an
independent oil company in the United Kingdom.
Mr. Isenberg, since 1987, has been Chairman and Chief Executive Officer of
Nabors. Beginning in 1996, Mr. Isenberg commenced his term as a Governor of the
AMEX. In 1998, Mr. Eisenberg became a Director of the National Association of
Securities Dealers, Inc. and NASDAQ. 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 the Counselor to the President of New School
University (the "New School") since February, 1998 and was the Executive Vice
President of the New School from September 1991 to February, 1998. Mr. Porrino
is also Senior Consultant to Powers Global Strategies, LLC, a government
relations and strategic planning firm. 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 at Rice
University (currently on leave). Since November, 1996, Dr. Ryan has served as a
Director of Siena Holdings, Inc., a real estate and health management company,
the capital stock of which is traded over-the-counter. Since March 1996, Dr.
Ryan has served as a Director of Texas Micro Inc., a computer systems company,
the capital stock of which is traded on NASDAQ. Until 1998, Dr. Ryan served as a
Director of America West Airlines, Inc., a publicly-traded company listed on the
NYSE, and now continues as an advisory director. 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 NYSE. 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. Garstka has been Deputy Dean at 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
-16-
<PAGE>
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.
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. Pate has served as a director of Mergers and Acquisitions for EGI or
its predecessor since February 1994. Mr. Pate serves on the Board of Directors
of CNA Surety Corporation. Prior to February 1994, Mr. Pate was an associate at
Credit Suisse First Boston.
EXECUTIVE OFFICERS.
The executive officers of DHC are as follows:
NAME AGE PRINCIPAL POSITION WITH REGISTRANT
- ---- --- ----------------------------------
Martin J. Whitman 75 Chief Executive Officer and a Director
David M. Barse 37 President, Chief Operating Officer
and a Director
Michael T. Carney 46 Chief Financial Officer and Treasurer
Ian M. Kirschner 44 General Counsel and Secretary
For additional information about Messrs. Whitman and Barse, see "DIRECTORS"
above.
Mr. Carney was the Chief Financial Officer ("CFO") of DHC 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
Third Avenue Trust and EQSF and, since 1989, as CFO of MJW&Co., and MJW and
MJWHC and their predecessors. Since July 1999, Mr. Carney has served as
Treasurer and CFO of Variable Trust. From 1990 through April 1994, Mr. Carney
also served as CFO of Carl Marks Strategic Investments, L.P.; from 1989 through
December, 1996 Mr. Carney served as CFO of WHR; 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, of Third Avenue Trust and EQSF since January
1997 and of Variable Trust since July 1999. 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.
-17-
<PAGE>
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 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 4 with respect to each of Mr. Pate, Mr. Barse, Mr.
Carney and Mr. Kirschner, each of which was filed within two days of the
required filing date, and one Form 4 with respect to SZ Investments, LLC not
involving a transaction, all Section 16(a) filing requirements applicable to
DHC's officers, Directors and greater than ten percent beneficial owners were
complied with for the fiscal year ended December 31, 1999.
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 1999 by the Chief
Executive Officer and each other executive officer of DHC who had cash
compensation for such year in excess of $100,000. Only those columns which call
for information applicable to DHC or the individual named for the periods
indicated have been included in such table.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------- ------------
AWARDS
------------
SECURITIES
UNDERLYING ALL OTHER
YEAR SALARY (a) BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) (#) ($)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Martin J. Whitman 1999 $ 200,000 -0- -0- -0-
CHAIRMAN OF THE BOARD & CHIEF EXECUTIVE OFFICER 1998 $ 200,000 -0- -0- -0-
1997 $ 200,000 -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------
David M. Barse 1999 $ 75,000 $ 80,000 50,000 -0-
PRESIDENT AND CHIEF OPERATING OFFICER 1998 $ 75,000 -0- 50,000 -0-
1997 $ 75,000 -0- 50,000 -0-
- ----------------------------------------------------------------------------------------------------------------
Michael Carney 1999 $ 75,000 $ 40,000 25,000 -0-
TREASURER AND CHIEF FINANCIAL OFFICER 1998 $ 75,000 -0- 35,000 -0-
1997 $ 75,000 -0- 35,000 -0-
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table presents certain information relating to the
grants of stock options made during 1999 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
- --------
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.
-18-
<PAGE>
the options granted at the end of the option term 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 FOR
INDIVIDUAL GRANTS OPTION TERM
- ----------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/ GRANTED TO
SARS EMPLOYEES IN EXERCISE OR EXPIRATION
GRANTED FISCAL YEAR BASE PRICE DATE
NAME (#)(1) ($/Sh) 5%($) 10%($)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Martin J. Whitman -0- - - - - -
- -----------------------------------------------------------------------------------------------------
David M. Barse 50,000 35.1 5.3125 12/8/09 167,050 423,338
- -----------------------------------------------------------------------------------------------------
Michael Carney 25,000 17.5 5.3125 12/8/09 83,525 211,669
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) One-half of these options become exercisable on June 8, 2000 and one-third
of the balance of the options become exercisable on each of the first
three anniversaries of the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table presents certain information relating to the value of
unexercised stock options as of the end of 1999, on an aggregated basis, owned
by the named executive officers of DHC as of the last day of the fiscal year.
Such officers did not exercise any of such options during 1999. Only those
tabular columns which call for information applicable to DHC or the named
individuals have been included in such table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
(#) ($)
- ----------------------------------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Martin J. Whitman 210,000 -0- $ 577,500 -0-
- ----------------------------------------------------------------------------------------------
David M. Barse 150,000 50,000 $ 107,812.50 $ 21,875
- ----------------------------------------------------------------------------------------------
Michael Carney 120,000 25,000 $ 76,406.25 $ 10,937.50
- ----------------------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF DIRECTORS
During 1999, each Director who was not an officer or employee of the
Company or its subsidiaries received compensation of $2,500 for each Board
meeting attended, whether in person or by telephone. For attendance at Board
meetings during 1999, each of Mr. Porrino, Dr. Ryan, Mr. Garstka, Mr. Sellers,
and Mr. Isenberg received $12,500 and each of Mr. Zell and Mr. Pate received
$5,000, plus, in each case, reimbursement of
-19-
<PAGE>
reasonable expenses. Directors who are officers or employees of the Company or
its subsidiaries receive no fees for service on the Board. No attendance fee is
paid to any Directors with respect to any committee meetings.
AGREEMENTS WITH EXECUTIVE OFFICERS
Effective April 14, 1999, the Company entered into written two-year
employment agreements with David Barse, President, and Michael Carney, Chief
Financial Officer. The agreements provide for the payment of base salary to each
of Mr. Barse and Mr. Carney of not less than $75,000. If either executive
officer's employment is terminated by the Company without cause (as defined),
the Company is required to pay to him an amount equal to the balance of his base
salary for the remainder of the term of the agreement plus, if he received a
bonus with respect to the prior fiscal year, an amount equal to that bonus (or
pro-rated portion thereof).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, 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 21, 2000 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
SZ Investments, LLC 4,002,568 (2)(3) 19.5
2 N. Riverside Plaza
Chicago, IL 60606
Commissioner of Insurance 1,803,235 (2)(4) 9.8
of the State of California
c/o Richard Krenz
Chief of Staff
Mission Insurance Companies' Trusts
3333 Wilshire Boulevard - 3rd Floor
Los Angeles, CA 90010
Martin J. Whitman 2,321,941 (2)(5)(6)(7) 12.4
c/o Danielson Holding Corporation
767 Third Avenue
New York, NY 10017-2023
James P. Heffernan 1,372,980 (2)(6)(7) 7.3
RR 1, Box 31D
Millbrook, NY 12545
</TABLE>
-20-
<PAGE>
Whitman Heffernan & Rhein Workout 1,054,996 (2) 5.7
Fund, L.P.
c/o WHR Management Company, L.P.
RR 1, Box 31D
Millbrook, NY 12545
OFFICERS AND DIRECTORS
Martin J. Whitman 2,321,941 (2)(5)(6)(7) 12.4
David M. Barse 150,000 (8) *
Samuel Zell 4,002,568 (9) 19.5
Joseph F. Porrino 56,667 (10) *
Frank B. Ryan 48,667 (10) *
Eugene M. Isenberg 69,924 (11) *
Wallace O. Sellers 50,000 (12) *
Stanley J. Garstka 51,008 (13) *
William Pate 20,000 *
Michael Carney 120,000 (14) *
Ian M. Kirschner 21,500 (15) *
All Officers and Directors
as a Group (11 persons) 6,912,275 (16) 32.6
- -----------------------------
* 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 and warrants
to the extent such options and warrants are, or within 60 days will become,
exercisable. As of March 21, 2000 (the date as of which this table was
prepared), there were exercisable options outstanding to purchase 1,572,717
shares of Common Stock and an exercisable warrant to purchase 2,002,568 shares
of Common Stock. Shares underlying any option or warrant which was exercisable
on March 21, 2000 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 or warrant.
(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 the Common Stock are owned of record by DHC, as
escrow agent, and are physically held by DHC in that capacity.
(3) Includes shares underlying a Warrant to purchase 2,002,568 shares of Common
Stock at an exercise price of $4.74391 per share.
-21-
<PAGE>
(4) 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 the Company.
(5) Includes 803,669 shares beneficially owned by Third Avenue Value Fund
("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 73,558 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 and
Mr. Whitman's family members.
(6) 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.
(7) 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.
(8) Includes shares underlying currently exercisable options to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $5.6875 per
share, 50,000 shares of Common Stock at an exercise price of $7.0625 per share,
and 50,000 shares of Common Stock at an exercise price of $3.65625 per share.
Does not include shares underlying options to purchase an aggregate of 50,000
shares of Common Stock at an exercise price of $5.3125 per share which are not
currently exercisable nor become exercisable within the next 60 days.
(9) Includes 2,000,000 shares of Common Stock owned by SZ Investments, L.L.C.
("SZ"), a company controlled by Mr. Zell, and 2,002,568 shares of Common Stock
issuable upon exercise of a Warrant owned by SZ.
(10) 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.
(11) 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.
(12) Includes shares underlying currently exercisable options to purchase an
aggregate of 40,000 shares of Common Stock at an exercise price of $7.00 per
share.
(13) Includes shares underlying currently exercisable options to purchase an
aggregate of 40,000 shares of Common Stock at an exercise price of $5.50 per
share.
(14) Includes shares underlying currently exercisable options to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $5.6875 per
share, 35,000 shares of Common Stock at an exercise price of $7.0625 per share,
and 35,000 shares of Common Stock at an exercise price of $3.65625 per share.
Does not include shares underlying options to purchase an aggregate of 25,000
shares of Common Stock at an exercise price of $5.3125 per share which are not
currently exercisable nor become exercisable within the next 60 days.
(15) Includes shares underlying currently exercisable options to purchase an
aggregate of 5,000 shares of Common Stock at an exercise price of $5.6875 per
share, 5,000 shares of Common Stock at an exercise price of $7.0625 per share
and 10,000 shares of Common Stock at an exercise price of $3.65625 per share.
Does not include shares underlying options to purchase an aggregate of 10,000
shares of Common Stock at an exercise price of $5.3125 per
-22-
<PAGE>
share which are not currently exercisable nor become exercisable within the next
60 days.
(16) In calculating the percentage of shares owned by officers and Directors as
a group, the shares of Common Stock underlying all options which are
beneficially owned by officers and Directors and which are currently exercisable
or become exercisable within the next 60 days are deemed outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 Mr. Barse is the President and Chief Executive
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.
In connection with the purchase of Common Stock by SZ, DHC has entered into
a non-exclusive investment advisory agreement with Equity Group Investments, LLC
("EGI"), a company controlled by Mr. Zell, pursuant to which EGI has agreed to
provide, at the request of DHC, certain investment banking services to the
Company in connection with potential transactions. In the event that any
transaction is consummated for which the Acquisition Committee of DHC's Board of
Directors determines that EGI provided material services, DHC will pay to EGI a
fee in the amount of 1% of the consideration paid by DHC in connection with such
transaction. Mr. Zell and Mr. Pate are members of the Acquisition Committee,
along with Mr. Whitman and Mr. Barse. DHC has also agreed to reimburse, upon
request, EGI's out-of-pocket expenses related to the investment advisory
agreement.
-23-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements -- see Index to 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:
EXHIBIT NO. (1) NAME OF EXHIBIT
- --------------- ---------------
ORGANIZATIONAL DOCUMENTS:
------------------------
3.1 Restated Certificate of Incorporation of Registrant.
(To be included herewith at page 37)
3.2 Bylaws of Registrant.
(To be included herewith at page 41)
MATERIAL CONTRACTS--MISCELLANEOUS:
---------------------------------
10.1 * Stock Purchase and Sale Agreement dated as of April 14,
1999 between Samstock, L.L.C. and Danielson Holding
Corporation. (Filed with Report on Form 10-Q dated June
30, 1999, Exhibit 10.1.)
10.2 * Amendment No. 1, Assignment and Consent to Assignment of
Stock Purchase and Sale Agreement dated May 7, 1999 among
Samstock, L.L.C., S.Z. Investments, L.L.C. and Danielson
Holding Corporation. (Filed with Report on Form 10-Q dated
June 30, 1999, Exhibit 10.2.)
10.3 * Investment Agreement dated as of April 14, 1999 among
Danielson Holding Corporation, Samstock, L.L.C. and Martin
J. Whitman. (Filed with Report on Form 10-Q dated June 30,
1999, Exhibit 10.3.)
10.4 * Assignment and Consent to Assignment of Investment
Agreement dated May 7, 1999 among Danielson Holding
Corporation, Martin J. Whitman and S.Z. Investments,
L.L.C.. (Filed with Report on Form 10-Q dated June 30,
1999, Exhibit 10.4.)
10.5 * Letter Agreement dated April 14, 1999 between Equity Group
Investments, L.L.C. and Danielson Holding Corporation.
(Filed with Report on Form 10-Q dated June 30, 1999,
Exhibit 10.5.)
10.6 * Amendment dated June 2, 1999 to letter agreement dated
April 14, 1999 between Equity Group Investments, L.L.C. and
Danielson Holding Corporation. (Filed with Report on Form
10-Q dated June 30, 1999, Exhibit 10.6.)
-24-
<PAGE>
MATERIAL CONTRACTS--EXECUTIVE COMPENSATION PLANS AND
ARRANGEMENTS:
--------------------------------------------------------------
10.7 * 1990 Stock Option Plan. (Filed with Report on Form 8-K dated
September 4, 1990, Exhibit 10.8.)
10.8 * 1995 Stock and Incentive Plan. (Included as Exhibit
A to Proxy Statement filed on March 30, 1995.)
10.9 * Employment Agreement dated April 14, 1999 between
Danielson Holding Corporation and David Barse.
(Filed with Report on Form 10-Q dated June 30, 1999,
Exhibit 10.7.)
10.10 * Employment Agreement dated April 14, 1999 between
Danielson Holding Corporation and Michael Carney.
(Filed with Report on Form 10-Q dated June 30, 1999,
Exhibit 10.8.)
- -------------
(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.
ANNUAL REPORT TO SECURITY-HOLDERS:
---------------------------------
13.1 1999 Annual Report of Danielson Holding Corporation.
(To be included herewith at page 51.)
SUBSIDIARIES:
------------
21 * Subsidiaries of Danielson Holding Corporation. (Filed with
Report on Form 10-K for the fiscal year ended December 31,
1996, Exhibit 21.)
CONSENT OF EXPERTS
------------------
23 Consent of KPMG, LLP.
(To be included herewith at page 80)
(b) During the quarter ended December 31, 1999 for which this Report is
filed, DHC filed no reports on Form 8-K.
-25-
<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
Chief Executive Officer
Date: March 27, 2000
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, 2000 By /s/ MARTIN J. WHITMAN
-----------------------------------
Martin J. Whitman
Chief Executive Officer and a
Director
Date: March 27, 2000 By /s/ DAVID M. BARSE
-----------------------------------
David M. Barse
President and Chief Operating
Officer and a Director
Date: March 27, 2000 By /s/ MICHAEL T. CARNEY
-----------------------------------
Michael T. Carney
Chief Financial Officer
Date: March 27, 2000 By /s/ SAMUEL ZELL
-----------------------------------
Samuel Zell
Chairman of the Board Director
Date: March 27, 2000 By /s/ JOSEPH F. PORRINO
-----------------------------------
Joseph F. Porrino
Director
Date: March 27, 2000 By /s/ FRANK B. RYAN
-----------------------------------
Frank B. Ryan
Director
-26-
<PAGE>
Date: March 27, 2000 By /s/ EUGENE M. ISENBERG
-----------------------------------
Eugene M. Isenberg
Director
Date: March 27, 2000 By /s/ WALLACE O. SELLERS
-----------------------------------
Wallace O. Sellers
Director
Date: March 27, 2000 By /s/ STANLEY J. GARSTKA
-----------------------------------
Stanley J. Garstka
Director
Date: March 27, 2000 By /s/ WILLIAM PATE
-----------------------------------
William Pate
Director
-27-
<PAGE>
<TABLE>
<CAPTION>
DANIELSON HOLDING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE NUMBER
<S> <C>
Independent Auditors' Report.............................................................................. F-2
Danielson Holding Corporation and Consolidated Subsidiaries:
Statements of Operations - For the years ended December 31, 1999, 1998 and 1997.................. *
Balance Sheets - December 31, 1999 and 1998........................................................... *
Statements of Stockholders' Equity - For the years ended December 31, 1999, 1998 and 1997 *
Statements of Cash Flows - For the years ended December 31, 1999, 1998 and 1997...................... *
Schedule II - Condensed Financial Information of the Registrant.................................... S-1-3
Schedule V - Valuation and Qualifying Accounts.................................................... S-4
Schedule III - Supplemental Information Concerning Property-Casualty
and VI Insurance Operations................................................................. S-5
</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 1999 Annual Report to Stockholders.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Danielson Holding Corporation:
Under date of March 7, 2000, we reported on the consolidated balance
sheets of Danielson Holding Corporation and subsidiaries as of December 31, 1999
and 1998, 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, 1999, as contained in the 1999 annual report to stockholders. These
consolidated financial statements and our report thereon are included in the
annual report on Form 10-K for the year 1999. 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.
/S/ KPMG LLP
----------------------------
KPMG LLP
New York, New York
March 7, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)
STATEMENTS OF OPERATIONS
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Net investment income $ 504 $ 429 $ 538
Net realized investment gains 3 2
--------- --------- ---------
TOTAL REVENUES 507 429 540
--------- --------- ---------
EXPENSES:
Employee compensation and benefits 1,251 1,177 1,170
Professional fees 379 427 426
Other general and administrative fees 536 611 615
--------- --------- ---------
TOTAL EXPENSES 2,166 2,215 2,211
--------- --------- ---------
Loss before provision for
income taxes (1,659) (1,786) (1,671)
Income tax provision 78 25 26
--------- --------- ---------
Loss before equity in net income of
subsidiaries (1,737) (1,811) (1,697)
Equity in net income of subsidiaries 2,992 4,112 6,286
--------- --------- ---------
NET INCOME $ 1,255 $ 2,301 $ 4,589
========= ========= =========
</TABLE>
S-1
<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,
-------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS:
Cash $ 103 $ 45
Fixed maturities:
Available-for-sale at fair value
(Cost: $11,513 and $6,684 ) 11,505 6,713
Equity securities (Cost: $560 and $0) 531 --
Short term investments, at cost which approximates
fair value 5,961 40
----------- -----------
TOTAL CASH AND INVESTMENTS 18,100 6,798
Investment in subsidiaries 58,146 56,500
Accrued investment income 85 60
Other assets 201 208
----------- -----------
TOTAL ASSETS $ 76,532 $ 63,566
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 306 $ 293
----------- -----------
TOTAL LIABILITIES 306 293
Preferred Stock ($0.10 par value; authorized 10,000,000
shares; none issued and outstanding) -- --
Common Stock ($0.10 par value; authorized 100,000,000
shares and 20,000,000 shares; issued 18,486,994
shares and 15,586,994 shares; outstanding
18,476,265 shares and 15,576,276 shares) 1,849 1,559
Additional paid-in capital 59,491 46,673
Accumulated other comprehensive income (loss) (2,098) (688)
Retained earnings 17,050 15,795
Treasury stock (Cost of 10,729 shares and 10,718 shares) (66) (66)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 76,226 63,273
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 76,532 $ 63,566
=========== ===========
</TABLE>
S-2
<PAGE>
SCHEDULE II, CONTINUED
<TABLE>
<CAPTION>
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,255 $ 2,301 $ 4,589
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized investment gains (3) -- (2)
Change in accrued investment income (25) 2 69
Depreciation and amortization (79) (252) (57)
Equity in net income of subsidiaries (2,992) (4,112) (6,286)
Decrease in accrued expenses (1) (132) (411)
Other, net (15) (13) 56
-------- --------- ---------
Net cash used in operating activities (1,860) (2,206) (2,042)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased:
Fixed income maturities available-for-sale (12,723) (11,215) (8,001)
Equity securities (560) -- --
Proceeds from sales:
Fixed income maturities available-for-sale 741 3,412 951
Investments, matured or called
Fixed income maturities available-for-sale 7,273 10,037 5,562
Purchases of property and equipment (1) (52) --
-------- --------- ---------
Net cash provided by (used in)
investing activities (5,270) 2,182 (1,488)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options
to purchase Common Stock -- -- 671
Retirement of stock options -- -- (107)
Proceeds from issuance of Common Stock 13,109 -- --
-------- --------- ---------
Net cash provided by
financing activities 13,109 -- 564
-------- --------- ---------
Net increase (decrease) in cash and
short term investments 5,979 (24) (2,966)
Cash and short term investments at
beginning of year 85 109 3,075
-------- --------- ---------
CASH AND SHORT TERM INVESTMENTS AT
END OF YEAR $ 6,064 $ 85 $ 109
======== ========= =========
</TABLE>
S-3
<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
------------------- ------------ -------------- ---------- -------------
Allowance for premiums
and fees receivable
For the year ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1997 $ 230 $ 53 $ 20 $ 124 $ 179
========= ========= ========= ======== =======
1998 $ 179 $ 29 $ -- $ 72 $ 136
========= ========= ========= ======== =======
1999 $ 136 $ 444 $ -- $ 306 $ 274
========= ========= ========= ======== =======
Allowance for uncollectable
reinsurance on paid losses
For the year ended December 31,
1997 $ 316 $ 65 $ -- $ 7 $ 374
========= ========= ========= ======== =======
1998 $ 374 $ -- $ -- $ -- $ 374
========= ========= ========= ======== =======
1999 $ 374 $ 28 $ -- $ -- $ 402
========= ========= ========= ======== =======
Allowance for uncollectable
reinsurance on unpaid losses
For the year ended December 31,
1997 $ 425 $ 74 $ -- $ -- $ 499
========= ========= ========= ======== =======
1998 $ 499 $ 60 $ -- $ -- $ 559
========= ========= ========= ======== =======
1999 $ 559 $ -- $ -- $ 313 $ 246
========= ========= ========= ======== =======
</TABLE>
S-4
<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 POLICY CLAIMS
WITH ACQUISITION CLAIMS AND CLAIM RESERVES FOR UNEARNED AND BENEFITS NET EARNED INVESTMENT
REGISTRANT COSTS ADJUSTMENT EXPENSES UNPAID CLAIMS PREMIUMS PAYABLE PREMIUMS INCOME
---------- ----- ------------------- ------------- -------- ------- -------- ------
Consolidated
Property-Casualty
Entities:
<S> <C> <C> <C> <C> <C> <C> <C>
AS OF AND FOR THE YEAR
ENDED 12/31/99 $2,522 $ 94,934 $ - $ 16,239 - $ 54,040 $ 7,273
====== ========== ======== ======== ======== ======== =========
As of and for the year
ended 12/31/98 $2,381 $ 95,653 $ - $ 13,705 - $ 55,411 $ 7,745
====== ========== ======== ======== ======== ======== =========
As of and for the year
ended 12/31/97 $1,550 $ 105,947 $ - $ 10,249 - $ 53,069 $ 9,272
====== ========== ======== ======== ======== ======== =========
CLAIMS AND CLAIM
AFFILIATION ADJUSTMENT EXPENSES AMORTIZATION OTHER PAID CLAIMS
WITH INCURRED RELATED TO OF DEFERRED OPERATING AND CLAIM NET WRITTEN
REGISTRANT CURRENT YEAR PRIOR YEARS ACQUISITION COSTS EXPENSES ADJUSTMENT EXPENSES PREMIUMS
---------- ------------ ----------- ----------------- --------- ------------------- --------
Consolidated
Property-Casualty
Entities:
AS OF AND FOR THE YEAR
ENDED 12/31/99 $ 43,301 $ 2,491 $10,070 $ 3,794 $43,952 $ 56,605
======== ======= ======= ======= ======= ========
As of and for the year
ended 12/31/98 $ 39,131 $ - $ 9,899 $ 3,401 $47,427 $ 58,880
======== ======= ======= ======= ======= ========
As of and for the year
ended 12/31/97 $ 37,142 $ 940 $10,063 $ 3,278 $49,425 $ 55,760
======== ======= ======= ======= ======= ========
</TABLE>
S-5
RESTATED
CERTIFICATE OF INCORPORATION
OF
DANIELSON HOLDING CORPORATION
It is hereby certified that:
1. The present name of the corporation (hereinafter called the
"Corporation") is Danielson Holding Corporation, which is the name under which
the Corporation was originally incorporated; and the date of filing the original
certificate of incorporation of the Corporation with the Secretary of the State
of Delaware was April 16, 1992.
2. The certificate of incorporation of the Corporation is hereby
amended by (i) striking out Section 4.1 thereof and by substituting in lieu
thereof new Section 4.1 which is set forth in the Restated Certificate of
Incorporation hereinafter provided for, (ii) striking out Article SIXTH thereof,
(iii) striking out Article SEVENTH thereof, and (iv) renumbering Articles
EIGHTH, NINTH, TENTH, and ELEVENTH as Articles SIXTH, SEVENTH, EIGHTH, and NINTH
respectively.
3. The provisions of the certificate of incorporation of the
Corporation as heretofore amended and/or supplemented, and as herein amended,
are hereby restated and integrated into the single instrument which is
hereinafter set forth, and which is entitled Restated Certificate of
Incorporation of Danielson Holding Corporation without any further amendment
other than the amendments herein certified and without any discrepancy between
the provisions of the certificate of incorporation as heretofore amended and
supplemented and the provisions of the said single instrument hereinafter set
forth.
4. The amendment and the restatement of the certificate of
incorporation herein certified have been duly adopted by the stockholders in
accordance with the provisions of Sections 228, 242, and 245 of the General
Corporation Law of the State of Delaware.
5. The certificate of incorporation of the Corporation, as amended and
restated herein, shall at the effective time of this restated certificate of
incorporation, read as follows:
"Restated
Certificate of Incorporation
of
Danielson Holding Corporation
FIRST. The name of the Corporation (the "Corporation") is Danielson
Holding Corporation.
<PAGE>
SECOND. The address of the Corporation's registered office in the State
of Delaware is 15 North Street, City of Dover, County of Kent, Delaware 19901
and the name of the Corporation's registered agent at such address is National
Corporate Research, Ltd.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH. 4.1 The Corporation is authorized to issue two classes of
shares designated "Preferred Stock" and "Common Stock", respectively. The total
number of shares of capital stock the Corporation is authorized to issue is
110,000,000. The number of shares of Preferred Stock authorized to be issued is
10,000,000 and the number of shares of Common Stock authorized to be issued is
100,000,000. The par value of each share in each class is $.10.
4.2. The Preferred Stock may be divided into such number of series as
the Board of Directors may determine. Subject to the provisions of Section 4.3,
the Board of Directors is authorized to determine and alter the rights, powers
(including voting powers), preferences, privileges and restrictions granted to
and imposed upon the Preferred Stock or any series thereof with respect to any
wholly unissued series of Preferred Stock, and to fix the number of shares of
any series of Preferred Stock andthe designation of any such series of Preferred
Stock and any other relative, participating, optional or other special powers,
preferences, rights, and the qualifications, limitations or restrictions
thereof, all as shall be determined from time to time by the Board of Directors
and shall be stated in the resolution or resolutions providing for the issuance
of such Preferred Stock. The Board of Directors, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any series subsequent to the issue of shares of that
series.
4.3 The rights, powers, preferences, privileges and restrictions
granted to and imposed upon Preferred Stock or any series thereof which is to be
issued to any holder of 1% or more of the outstanding shares of Common Stock or
to any officer, director or "affiliate" of the Corporation must be approved by
the stockholders of the Corporation prior to the issuance thereof. The term
"affiliate" means a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Corporation. The term "person" means an individual, a corporation, a
partnership, an association, a joint stock company, a trust, an unincorporated
organization, or any other entity.
FIFTH. The Common Stock of the Corporation shall be subject to the
following transfer restrictions:
5.1. No holder, whether record or beneficial, direct or indirect, of 5%
or more of Common Stock of the Corporation, whether such ownership resulted from
receipt of shares of Common Stock through a primary issuance by the Corporation,
or issued upon exercise of rights to purchase shares of Common Stock granted by
the Corporation, or from any other transaction or transactions, including
without limitation, secondary market acquisitions (and including specifically
any holder, whether record or beneficial, direct or indirect, who proposes to
make
<PAGE>
an acquisition of Common Stock of the Corporation, which after the acquisition
will result in total ownership by such holder of 5% or more of the Common Stock
of the Corporation) ("5% Stockholder"), may purchase, acquire or otherwise
receive additional shares of Common Stock (herein referred to as an
"Acquisition") or sell, transfer, assign, pledge, encumber or dispose of, in any
matter whatsoever, any shares of Common Stock, directly or indirectly owned by
such 5% Stockholder, whether such ownership is record or beneficial ownership
(herein referred to as a "Transfer"), prior to a determination by the
Corporation and its tax counsel that such transaction will not result in or
create (in conjunction with prior transactions and previously approved
subsequent transactions by any 5% Stockholder(s) and other holders of Common
Stock) an unreasonable risk of an "ownership change" of this corporation within
the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code"), or any similar provisions of superseding or
additional law relating to preservation of net operating loss ("NOL") carry
forwards, including specifically Treasury Regulation section 1.382-2T(j)(3)(i)
(collectively, an "Ownership Change" under the "Tax Law").
In addition, the Corporation will issue stop transfer instructions to
the transfer agent for Common Stock requiring, as a condition precedent to any
transfer of Common Stock, that the transfer agent receive either: (i) a sworn
affidavit from each of the proposed transferor and transferee that it is not a
5% Stockholder; or (ii) an opinion of tax counsel of the Corporation referred to
in Section 5.2 below. Any purported transfer of shares of Common Stock in
violation of the foregoing transfer restrictions will be a nullity and of no
force and effect. All certificates representing Common Stock will bear a legend
setting forth the foregoing restrictions.
5.2. In order to ensure compliance with this Article FIFTH, and in
order to establish a procedure for processing requests to effect either an
Acquisition or a Transfer by any one or more 5% Stockholder(s) on a fair and
equitable basis, the following provisions shall apply to all 5% Stockholders:
(a) Delivery of Shares and Escrow Receipts. All shares of Common
Stock which are issuable to 5% Stockholders or which subsequently are received
by a 5% Stockholder in an Acquisition will be issued in the name of "Danielson
Holding Corporation, as Escrow Agent" and will be held by the Corporation in
escrow (the "Escrowed Stock"), in accordance with the provisions of this Section
5.2 (the "Stock Escrow"). In lieu of certificates reflecting their ownership of
Common Stock, the 5% Stockholders will receive an escrow receipt evidencing
their beneficial ownership of Common Stock and record ownership of the Escrowed
Stock. Escrow receipts will be non-transferable. The 5% Stockholders will retain
full voting and dividend rights for all Escrowed Stock.
(b) Duration of the Corporation Holding the Escrowed Stock. As
escrow agent, the Corporation will hold all shares of Escrowed Stock until
termination of the Stock Escrow (as provided in subsection (d) below) or, if and
to the extent that a 5% Stockholder desires to Transfer Escrowed Stock to a
non-5% Stockholder, until receipt by the Corporation of a favorable opinion from
its tax counsel that the Transfer may be made without thereby resulting in an
Ownership Change under the Tax Law.
<PAGE>
(c) Acquisitions and Transfers. All requests by 5% Stockholders
to consummate either an Acquisition or a Transfer of Escrowed Stock, through
secondary market transactions or purchases in a primary offering by the
Corporation, will be treated in the order in which such requests were received
i.e., on a "first to request, first to receive" basis. All such requests must be
in writing and delivered to the Corporation at its principal executive office,
attention General Counsel, by registered mail, return receipt requested, or by
hand. In the event that the Corporation's tax counsel is unable to conclude that
a requested Acquisition or Transfer can be made without an Ownership Change
under the Tax Law, then: (i) the requesting party will be so advised in writing
by the Corporation; and (ii) any subsequent request by other 5% Stockholders to
effect a transaction of a type previously denied by this corporation will be
approved only after all previously denied requests (in the order denied) are
given an opportunity to consummate the previously desired transaction. In
addition, the Corporation may approve any requested transaction in any order of
receipt if, in its business judgment, such transaction is in its best interests.
(d) Termination of the Stock Escrow. The Stock Escrow will
terminate upon the first to occur of the following: (i) pursuant to an amendment
to the Tax Law, the Corporation concludes that the restrictions are no longer
necessary in order to avoid a loss to the Corporation and the members of the
affiliated group filing a consolidated federal income tax return with the
Corporation of its NOL carry forwards; (ii) the NOL carry forwards of the
Corporation and members of the affiliated group filing a consolidated federal
income tax return with the Corporation no longer are available to the
Corporation, whether through passage of time, usage or disallowance; and (iii)
the Board of Directors of the Corporation concludes, in its business judgment,
that preservation of the NOL carry forwards no longer is in the interests of the
Corporation and members of the affiliated group filing a consolidated federal
income tax return with this corporation. Upon termination of the Stock Escrow,
each 5% Stockholder will receive a notice that the Stock Escrow has been
terminated and, thereafter, will receive a Common Stock certificate evidencing
ownership of the previously Escrowed Stock.
(e) Release of the Corporation. The Corporation will be held
harmless and released from any liability to any and all 5% Stockholders arising
from its actions as escrow agent, except only for intentional misconduct. In
performing its duties the Corporation will be entitled to rely, without any
inquiry, upon the written advice of its tax counsel and other experts engaged by
the Corporation. In the event that the Corporation requires further advice or
comfort regarding action to be taken by it as escrow agent, it may deposit the
Escrowed Stock at issue with a court of competent jurisdiction and make further
transfers thereof in a manner consistent with the rulings of such court.
SIXTH. The Board of Directors shall have power to make, amend and repeal
the Bylaws of the Corporation. Any Bylaws made by the Board of Directors under
the powers conferred hereby may be amended or repealed by the Board of Directors
or by the stockholders. The Corporation may, in its Bylaws, confer powers upon
its Board of Directors in addition to the foregoing and in addition to the
powers and authorities expressly conferred upon the Board of Directors by
applicable law.
SEVENTH. To the full extent permitted by the General Corporation Law of
the State of Delaware as presently or hereafter in effect, no Director of the
Corporation shall be personally
<PAGE>
liable to the Corporation or its stockholder for or with respect to any acts or
omissions in the performance of his or her duties as a Director of the
Corporation. Any repeal or modification of this Article SEVENTH shall not
adversely affect any right or protection of a Director of the Corporation
existing immediately prior to such repeal or modification.
EIGHTH. Each person who is or was a Director or officer of the
Corporation, or while serving as a Director or officer of the Corporation is or
was serving at the request of the Board of Directors or an officer of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including the heirs,
executors, administrators or estate of such person), shall be indemnified by the
Corporation to the full extent permitted by the General Corporation Law of the
State of Delaware or any other applicable law as presently or hereafter in
effect. The Corporation may, by action of the Board of Directors, provide
indemnification to other employees and agents of the Corporation with the same
scope and effect as the foregoing indemnification of Directors and officers. The
right of indemnification provided in this Article EIGHTH shall not be exclusive
of any other rights to which any person seeking indemnification may otherwise be
entitled, and shall be applicable to matters otherwise within its scope
irrespective of whether such matters arose or arise before or after the adoption
of this Article EIGHTH. Without limiting the generality or the effect of the
foregoing, the Corporation may adopt Bylaws, or enter into one or more
agreements with any person, which provide for indemnification greater or
different than that provided in this Article EIGHTH. Notwithstanding anything
contained in this Certificate of Incorporation to the contrary, the amendment,
repeal or adoption of any provisions inconsistent with this Article EIGHTH shall
require the affirmative vote of the holders of at least 80% of the stock
entitled to vote, voting together as a single class. Any amendment repeal or
adoption of any provision inconsistent with this Article EIGHTH shall not
adversely affect any right or protection existing hereunder immediately prior to
such amendment repeal or adoption.
NINTH. The Corporation shall not be governed by Section 203 of the
General Corporation Law of the State of Delaware as it may be amended from time
to time."
Danielson Holding Corporation
Signed on JULY 20, 1999 By:________________________________
-------------- Name
Title:
40
----------------------
AMENDED AND RESTATED
BYLAWS
OF
DANIELSON HOLDING CORPORATION
A DELAWARE CORPORATION
----------------------
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
DANIELSON HOLDING CORPORATION
(herinafter, the "Corporation")
ARTICLE I.
OFFICES
SECTION 1.1 REGISTERED OFFICE. The registered office of the Corporation
shall be established and maintained at the office of National Corporate
Research, Ltd., in the City of Dover, in the County of Kent, in the State of
Delaware, and said corporation shall be the registered agent of the Corporation
in charge thereof.
SECTION 1.2. OTHER OFFICES. The Corporation may have other offices,
either within or without the State of Delaware, at such place or places as the
Board of Directors may from time to time appoint or the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1. ANNUAL MEETINGS. Annual meetings of stockholders for the
purpose of electing directors and of transacting such other business as may be
stated in the notice of the meeting, shall be held at such place, either within
or without the State of Delaware, and at such time and date as the Board of
Directors, by resolution, shall determine and as set forth in the notice of the
meeting.
If the date of the annual meeting shall fall upon a legal holiday, the
meeting shall be held on the next succeeding business day. At each annual
meeting, the stockholders entitled to vote shall elect a Board of Directors and
they may transact such other corporate business as shall be stated in the notice
of the meeting.
SECTION 2.2. VOTING. Each stockholder entitled to vote in accordance
with the terms of the Certificate of Incorporation and in accordance with the
provisions of these Bylaws shall be entitled to one vote, in person or by proxy,
for each share of stock entitled to vote held by such stockholder, but no proxy
shall be voted after three years from its date unless such proxy provides for a
longer period. Upon the demand of any stockholder, the vote for directors and
the vote upon any question before the meeting, shall be by ballot. All elections
for directors shall be decided by plurality vote; all other questions shall be
decided by majority vote except as otherwise provided by the Certificate of
Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at the ensuing
election, arranged in alphabetical order, with the address of each, and the
number of shares held by each, shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 2.3. QUORUM. Except as otherwise required by law, by the
Certificate of Incorporation or by these Bylaws, the presence, in person or by
proxy, of stockholders holding a majority of the outstanding shares of
<PAGE>
each class of stock of the Corporation entitled to vote shall constitute a
quorum at all meetings of the stockholders. In the absence of a quorum, a
majority in interest of the stockholders entitled to vote thereat, present in
person or by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until the requisite
amount of stock entitled to vote shall be present. At any such adjourned meeting
at which the requisite amount of stock entitled to vote shall be represented,
any business may be transacted which might have been transacted at the meeting
as originally noticed; but only those stockholders entitled to vote at the
meeting as originally noticed shall be entitled to vote at any adjournment or
adjournments thereof.
SECTION 2.4. SPECIAL MEETINGS. Special meetings of the stockholders for
any purpose may be held at any time upon call of the Chairman of the Board, if
any, the President, the Secretary, or a majority of the Board of Directors, at
such time and place as may be stated in the notice. A special meeting of the
stockholders may be called by the President or the Secretary upon the written
request, stating time, place, and the purpose or purposes of the meeting of
stockholders who together own of record a majority of the outstanding stock of
all classes entitled to vote at such meeting.
SECTION 2.5. NOTICE OF MEETINGS. Written notice, stating the place,
date and time of the meeting, and the general nature of the business to be
considered, shall be given by the President, any Vice President, the Secretary
or an Assistant Secretary to each stockholder entitled to vote thereat at his
address as it appears on the records of the Corporation, not less than ten nor
more than sixty days before the date of the meeting. No business other than that
stated in the notice shall be transacted at any meeting without the unanimous
consent of all the stockholders entitled to vote thereat.
SECTION 2.6. ACTION WITHOUT MEETING. Unless otherwise provided by the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
and shall be delivered to the Corporation by delivery to its registered office
in the State of Delaware, its principal place of business, or an officer or
agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
SECTION 2.7. ADJOURNMENT. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
ARTICLE III.
DIRECTORS
SECTION 3.1. NUMBER AND TERM OF OFFICE. The business, property, and
affairs of the Corporation shall be managed by or under the direction of a Board
of Directors. The number of directors shall be from six (6) to eleven (11). The
number of directors shall be fixed at ten (10) until changed by an amendment to
this Bylaw duly adopted by the Board of Directors or the stockholders. The
directors shall be elected at the annual meeting of the stockholders, and each
director shall serve (subject to the provisions of Sections 3.2, 3.3, and 3.4 of
these Bylaws) until the next annual meeting of stockholders and his respective
successor shall be elected and shall qualify. Directors need not be
stockholders.
2
<PAGE>
SECTION 3.2. RESIGNATIONS. Any director, member of a committee or other
officer may resign at any time. Such resignation shall be made in writing, and
shall take effect at the time specified therein, and if no time be specified, at
the time of its receipt by the President or Secretary. The acceptance of a
resignation shall not be necessary to make it effective.
SECTION 3.3. VACANCIES. If the office of any director, member of a
committee or other officer becomes vacant, the remaining directors in office,
though less than a quorum by a majority vote, may appoint any qualified person
to fill such vacancy, who shall hold office for the unexpired term and until his
successor shall be duly chosen.
SECTION 3.4 REMOVAL. Except as hereinafter provided, any director or
directors may be removed either for or without cause at any time by the
affirmative vote of the holders of a majority of all the shares of stock
outstanding and entitled to vote, at a special meeting of the stockholders
called for the purpose and the vacancies thus created may be filled, at the
meeting held for the purpose of removal, by the affirmative vote of a majority
in interest of the stockholders entitled to vote.
SECTION 3.5. INCREASE OF NUMBER OF DIRECTORS. The number of directors
may be increased by amendment of these Bylaws by the affirmative vote of a
majority of the directors, though less than a quorum, or, by the affirmative
vote of a majority in interest of the stockholders, at the annual meeting or at
a special meeting called for that purpose, and by like vote the additional
directors may be chosen at such meeting to hold office until the next annual
election and until their successors are elected and qualify.
SECTION 3.6. POWERS. The Board of Directors shall exercise all of the
powers of the Corporation except such as are by law, or by the Certificate of
Incorporation of the Corporation or by these Bylaws, conferred upon or reserved
to the stockholders.
SECTION 3.7. COMMITTEES. The Board of Directors may, by resolution or
resolutions passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member of
such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, or in these Bylaws, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it; but no such committee shall have
the power or authority in reference to amending the Certificate of Incorporation
of the Corporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending the Bylaws of the Corporation; and, unless the resolution, these
Bylaws, or the Certificate of Incorporation expressly so provides, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
SECTION 3.8. MEETINGS. The newly elected directors may hold their first
meeting for the purpose of organization and the transaction of business, if a
quorum is present, immediately after the annual meeting of the stockholders; or
the time and place of such meeting may be fixed by consent in writing of all the
directors.
Regular meetings of the Board of Directors may be held without notice
at such place and time as shall be determined from time to time by the Board.
Special meetings of the Board of Directors shall be held at such time
and place as shall be designated in the notice of the meeting whenever called by
the Chairman of the Board, if any, the President, or by a majority of the
directors then in office.
SECTION 3.9. TELEPHONE MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may
3
<PAGE>
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
SECTION 3.10. QUORUM. A majority of the directors shall constitute a
quorum for the transaction of business. If at any meeting of the Board there
shall be less than a quorum present, a majority of those present may adjourn the
meeting from time to time until a quorum is obtained, and no further notice
thereof need be given other than by announcement at the meeting which shall be
so adjourned.
SECTION 3.11. COMPENSATION. Directors shall not receive any stated
salary for their services as directors or as members of committees, but by
resolution of the Board a fixed fee and expenses of attendance may be allowed
for attendance at each meeting. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity as an
officer, agent or otherwise, and receiving compensation therefore.
SECTION 3.12. ACTION WITHOUT MEETING. Any action required or permitted
to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting, if a written consent thereto is signed
by all members of the Board, or of such committee as the case may be, and such
written consent is filed with the minutes of proceedings of the Board or
committee.
ARTICLE IV.
OFFICERS
SECTION 4.1. OFFICERS. The officers of the Corporation shall be a
President, a Chief Financial Officer, and a Secretary, all of whom shall be
elected by the Board of Directors and who shall hold office until their
successors are elected and qualified. In addition, the Board of Directors may
elect a Chairman (who need not be an officer of the Corporation), a Chief
Executive Officer, a Chief Operating Officer, a Chief Investment Officer, one or
more Vice-Presidents, a General Counsel and such Assistant Secretaries and
Assistant Treasurers as they may deem proper. None of the officers of the
Corporation need be directors. The officers shall be elected at the first
meeting of the Board of Directors after each annual meeting. Any person may hold
at one time two or more offices.
SECTION 4.2. OTHER OFFICERS AND AGENTS. The Board of Directors may
appoint such other officers and agents as it may deem advisable, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the Board of Directors.
SECTION 4.3. CHAIRMAN OF THE BOARD. The directors may elect one of
their members to be chairman of the Board of Directors (the "Chairman"). The
Chairman shall preside at all meetings of the Board of Directors and shall have
and perform such other duties as from time to time may be assigned to him by the
Board of Directors, who shall determine whether or not the Chairman shall be an
officer of the Corporation.
SECTION 4.4. CHIEF EXECUTIVE OFFICER. If appointed by the Board of
Directors, the Chief Executive Officer shall be the chief executive officer of
the Corporation and shall have the general powers and duties of supervision and
management usually invested in a Chief Executive Officer of a corporation. He
shall preside at all meetings of the stockholders if present thereat, and in the
absence or non-election of the Chairman of the Board of Directors, at all
meetings of the Board of Directors, and shall have general supervision,
direction and control of the business of the Corporation.
SECTION 4.5. PRESIDENT. The President shall be the chief operating
officer of the Corporation. The President shall have the general powers and
duties of supervision and management usually vested in the office of President
of a corporation. In the absence or non-election of the Chief Executive Officer,
the President shall have the general powers and duties of the Chief Executive
Officer. Except as the Board of Directors shall authorize the execution thereof
in some other manner, he shall execute bonds, mortgages, and other contracts on
behalf of the Corporation, and shall cause the seal to be affixed to any
instrument requiring it and when so affixed the seal shall be
4
<PAGE>
attested by the signature of the Secretary or the Chief Financial Officer or an
Assistant Secretary or an Assistant Treasurer.
SECTION 4.6. VICE-PRESIDENT. Each Vice-President shall have such powers
and shall perform such duties as shall be assigned to him by the directors.
SECTION 4.7. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
have the custody of the corporate funds and securities and shall keep full and
accurate account of receipts and disbursements in books belonging to the
Corporation. He shall deposit all moneys and other valuables in the name and to
the credit of the Corporation in such depositories as may be designated by the
Board of Directors.
The Chief Financial Officer shall disburse the funds of the Corporation
as may be ordered by the Board of Directors, the Chief Executive Officer, if
any, or the President, taking proper vouchers for such disbursements. He shall
render to the Chief Executive Officer, if any, the President and the Board of
Directors at the regular meetings of the Board of Directors, or whenever they
may request it, an account of all his transactions as Chief Financial Officer
and of the financial condition of the Corporation. If required by the Board of
Directors, he shall give the Corporation a bond for the faithful discharge of
his duties in such amount and with such surety as the board shall prescribe.
SECTION 4.8. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and directors, and all other notices
required by law or by these Bylaws, and in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chief Executive Officer, if any, the President, or by the directors, or
stockholders, upon whose requisition the meeting is called as provided in these
Bylaws. He shall record all the proceedings of the meetings of the Corporation
and of the directors in a book to be kept for that purpose, and shall perform
such other duties as may be assigned to him by the directors, the Chief
Executive Officer, if any, or the President. He shall have the custody of the
seal of the Corporation and shall affix the same to all instruments requiring
it, when authorized by the directors, the Chief Executive Officer, if any, or
the President, and attest the same.
SECTION 4.9. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant
Treasurers and Assistant Secretaries, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the directors.
ARTICLE V
CAPITAL STOCK
SECTION 5.1. CERTIFICATES OF STOCK. Certificates of stock, signed by
the Chairman or Vice-Chairman of the Board of Directors or Chief Executive
Officer, if they be elected, President or Vice President, and the Chief
Financial Officer or an Assistant Treasurer, or Secretary or an Assistant
Secretary, shall be issued to each stockholder certifying the number of shares
owned by him in the Corporation. Any of or all the signatures may be facsimiles.
SECTION 5.2. LOST CERTIFICATES. A new certificate of stock may be
issued in the place of any certificate theretofore issued by the Corporation,
alleged to have been lost or destroyed, and the directors may, in their
discretion, require the owner of the lost or destroyed certificate, or his legal
representatives, to give the Corporation a bond, in such sum as they may direct,
not exceeding double the value of the stock, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss of
any such certificate, or the issuance of any such new certificate.
SECTION 5.3. TRANSFER OF SHARES. The shares of stock of the Corporation
shall be transferable only upon its books by the holders thereof in person or by
their duly authorized attorneys or legal representatives, and upon such transfer
the old certificates shall be surrendered to the Corporation by the delivery
thereof to the person in charge of the stock and transfer books and ledgers, or
to such other person as the directors may designate, by whom they shall be
canceled, and new certificates shall thereupon be issued. A record shall be made
of each transfer and
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whenever a transfer shall be made for collateral security, and not absolutely,
it shall be so expressed in the entry of the transfer.
SECTION 5.4. STOCKHOLDERS RECORD DATE. In order that the Corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders, or to receive payment of any dividend or other distribution or
allotment of any rights or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date on which the resolution fixing the record date is adopted and
which record date shall not be more than sixty (60) nor less than ten (10) days
before the date of any meeting of stockholders, nor more than sixty (60) days
prior to the time for such other actions hereinbefore described; PROVIDED,
HOWEVER, that if no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held, and, for
determining stockholders entitled to receive payment of any dividend or other
distribution or allotment of rights or to exercise any rights of change,
conversion or exchange of stock or for any other purpose, the record date shall
be at the close of business on the day on which the Board of Directors adopts a
resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
PROVIDED, HOWEVER, that the Board of Directors may fix a new record date for the
adjourned meeting.
In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date, which shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall be not more than ten (10) days after the date upon which
the resolution fixing the record date is adopted. If no record date has been
fixed by the Board of Directors and no prior action by the Board of Directors is
required by the Delaware General Corporation Law, the record date shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation in the manner prescribed by
Article II, Section 2.6 hereof. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by the Delaware
General Corporation Law with respect to the proposed action by written consent
of the stockholders, the record date for determining stockholders entitled to
consent to corporate action in writing shall be at the close of business on the
day on which the Board of Directors adopts the resolution taking such prior
action.
SECTION 5.5. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds legally available
therefore at any regular or special meeting, declare dividends upon the capital
stock of the Corporation as and when they deem expedient. Before declaring any
dividend there may be set apart out of any funds of the Corporation available
for dividends, such sum or sums as the directors from time to time in their
discretion deem proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other purposes as the
directors shall deem conducive to the interests of the Corporation.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 6.1. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "Proceeding"), by reason of the fact that he or she
is or was a director, officer, employee or agent of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "Indemnitee"), whether the basis of such Proceeding is alleged
action in an official capacity as a director, officer, employee or agent or in
ay other capacity while serving as a director, officer, employee or agent, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only the extent
that such amendment permits the Corporation to provide broader indemnification
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rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
Indemnitee in connection therewith and such indemnification shall continue as to
an Indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the Indemnitee's heirs, executors and
administrators; PROVIDED, HOWEVER, that, except as provided in paragraph (c)
hereof with respect to Proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such Indemnitee in connection with a Proceeding
(or part thereof) initiated by such Indemnitee only if such Proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
SECTION 6.2. RIGHT TO ADVANCEMENT OF EXPENSES. The right to
indemnification conferred in paragraph (a) of this Section shall include the
right to be paid by the Corporation the expenses incurred in defending any
Proceeding for which such right to indemnification is applicable in advance of
its final disposition (hereinafter an "Advancement of Expenses"); PROVIDED,
HOWEVER, that, if the Delaware General Corporation Law requires, an Advancement
of Expenses incurred by an Indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such Indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "Undertaking"), by or on behalf of such Indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "Final
Adjudication") that such Indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise.
SECTION 6.3. RIGHT OF INDEMNITEE TO BRING SUIT. The rights to
indemnification and to the Advancement of Expenses conferred in Sections 6.1 and
6.2 of this Article shall be contract rights. If a claim under Sections 6.1 or
6.2 of this Article is not paid in full by the Corporation within sixty days
after a written claim has been received by the Corporation, except in the case
of a claim for an Advancement of Expenses, in which case the applicable period
shall be twenty days, the Indemnitee may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim. If successful
in whole or in part in any such suit, or in a suit brought by the Corporation to
recover an Advancement of Expenses pursuant to the terms of an Undertaking, the
Indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (i) any suit brought by the Indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the Indemnitee
to enforce a right to an Advancement of Expenses) it shall be a defense that,
and (ii) in any suit by the Corporation to recover an Advancement of Expenses
pursuant to the terms of an Undertaking the Corporation shall be entitled to
recover such expenses upon a Final Adjudication that, the Indemnitee has not met
any applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its board of
directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
Indemnitee is proper in the circumstances because the Indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its board of
directors, independent legal counsel, or its stockholders) that the Indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the Indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the Indemnitee, be a defense to such suit. In any suit
brought by the Indemnitee to enforce a right to indemnification or to an
Advancement of Expenses hereunder, or by the Corporation to recover an
Advancement of Expenses pursuant to the terms of an Undertaking, the burden of
proving that the Indemnitee is not entitled to be indemnified, or to such
Advancement of Expenses, under this Section or otherwise shall be on the
Corporation.
SECTION 6.4 NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification
and to the Advancement of Expenses conferred in this Article shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the certificate of incorporation, by law, agreement, vote of
stockholders or disinterested directors or otherwise.
SECTION 6.5. INDEMNIFICATION CONTRACTS. The board of directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determines, greater than, those provided for in this
Article VI.
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SECTION 6.6 EFFECT OF AMENDMENT. Any amendment, repeal or modification
of any provision of this Article VI by the stockholders and the directors of the
Corporation shall not adversely affect any right or protection of a director or
officer of the Corporation existing at the time of such amendment, repeal or
modification.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. CORPORATE SEAL. The corporate seal shall be circular in
form and shall contain the name of the Corporation, the year of its creation and
the words "CORPORATE SEAL" and DELAWARE." Said seal may be used by causing it or
a facsimile thereof to be impressed or affixed or reproduced or otherwise.
SECTION 7.2. FISCAL YEAR. The fiscal year of the Corporation shall
begin on the 1st day of January in each year and terminate on the 31st day of
December in each such year or as shall otherwise be determined from time to time
by the Board of Directors.
SECTION 7.3. CHECKS. All checks, drafts or other orders for the payment
of money, notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed by such officer or officers, agent or agents of the
Corporation, and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
SECTION 7.4. NOTICES AND WAIVERS OF NOTICE. Whenever any notice is
required by law, the Certificate of Incorporation, or these Bylaws to be given,
personal notice is not meant unless expressly so stated, and any notice so
required shall be deemed to be sufficient if given by depositing the same in the
United States mail, postage prepaid, addressed to the person entitled thereto at
his address as it appears on the records of the Corporation, and such notice
shall be deemed to have been given on the day of such mailing. Stockholders not
entitled to vote shall not be entitled to receive notice of any meetings except
as otherwise provided by statute.
Whenever any notice whatever is required to be given under the
provisions of any law, or under the provisions of the Certificate of
Incorporation of the Corporation or these Bylaws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the meeting or the time stated therein, shall be deemed equivalent thereto.
SECTION 7.5. STOCK OF OTHER CORPORATIONS OR OTHER INTERESTS. Unless
otherwise ordered by the Board of Directors, the President, the Secretary, and
such attorneys or agents of the Corporation as may from time to time be
authorized by the Board of Directors or the President, shall have full power and
authority on behalf of this Corporation to attend and to act and vote in person
or by proxy at any meeting of the holders of securities of any corporation or
other entity in which this Corporation may own or hold shares or other
securities, and at such meetings shall possess and may exercise all the rights
and power incident to the ownership of such shares or other securities which
this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The President, the Secretary, or such attorneys or agents,
may also execute and deliver on behalf of the Corporation powers of attorney,
proxies, consents, waivers, and other instruments relating to the shares or
securities owned or held by this Corporation.
ARTICLE VIII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the Bylaws of the
Corporation by vote of not less than two-thirds of such shares, and except as
otherwise provided by law, the Board of Directors shall have power equal in all
respects to that of the stockholders to adopt, amend, or repeal the Bylaws by
vote of not less than two-thirds of the entire Board of Directors; PROVIDED,
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HOWEVER, any Bylaws adopted by the Board may be amended or repealed by vote of
the holders of two-thirds of the shares entitled at the time to vote for the
election of directors.
As of and for the years
ended December 31,
----------------------------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS, STOCK PRICES AND EMPLOYEES) 1999 1998 1997
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Earned premiums ........................ $ 54,040 $ 55,411 $ 53,069
Total revenues ......................... $ 71,158 $ 64,744 $ 65,746
Net income ............................. $ 1,255 $ 2,301 $ 4,589
Net cash used in continuing
operating activities ................. $ (6,478) $ (5,170) $ (11,583)
Net income per diluted share
of Common Stock ...................... $ 0.07 $ 0.14 $ 0.28
Combined ratio ......................... 125.2% 108.6% 111.0%
================================================================================
BALANCE SHEET AND OTHER DATA
Total investments ...................... $ 140,391 $ 134,859 $ 142,823
Policyholder liabilities ............... $ 111,987 $ 109,539 $ 116,607
Stockholders' equity ................... $ 76,226 $ 63,273 $ 63,920
Book value per share of Common Stock ... $ 4.13 $ 4.06 $ 4.10
Common Stock price range
High ................................. $7 1/2 $8 1/8 $ 14
Low .................................. $2 7/8 $ 3 $4 7/8
Shares of Common Stock
outstanding at year end .............. 18,476,265 15,576,276 15,576,287
Employees of continuing
operations at year end ............... 138 155 159
<PAGE>
FINANCIAL TABLE OF CONTENTS
---------------------------
Selected Consolidated Financial Data ....................................... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................ 3
Consolidated Statements of Operations ...................................... 9
Consolidated Balance Sheets ................................................ 10
Consolidated Statements of Stockholders' Equity ............................ 11
Consolidated Statements of Cash Flows ...................................... 12
Notes to Consolidated Financial Statements ................................. 13
Independent Auditors' Report ............................................... 25
Responsibility for Financial Reporting ..................................... 25
Quarterly Financial Data ................................................... 26
Stock Market Prices ........................................................ 26
1
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) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A. RESULTS OF OPERATIONS
Total revenues ............................... $ 71,158 $ 64,744 $ 65,746 $ 48,704 $ 75,458
Income (loss) from continuing operations
before extraordinary items ................. $ 1,255 $ 2,301 $ 4,589 $ (6,240)(1,2) $ 4,349
Net loss from discontinued operations ........ -- -- -- $ (633)(3) $ (2,033)(3)
Loss on disposal of discontinued operations .. -- -- -- $ (1,246)(3) --
Net income (loss) ............................ $ 1,255 $ 2,301 $ 4,589 $ (8,119)(1,2,3) $ 2,316(3)
Diluted earnings (loss) per share
of Common Stock:
Income (loss) from continuing operations
before extraordinary items ............... $ 0.07 $ 0.14 $ 0.28 $ (0.41)(1,2) $ 0.27
Net loss from discontinued operations ...... -- -- -- $ (0.04)(3) $ (0.13)(3)
Loss on disposal of discontinued operations .. -- -- -- $ (0.08)(3) --
Net income (loss) .......................... $ 0.07 $ 0.14 $ 0.28 $ (0.53)(1,2,3) $ 0.14(3,4)
B. BALANCE SHEET DATA
Invested assets .............................. $ 140,391 $ 134,859 $ 142,823 $ 151,555 $ 180,263
Total assets ................................. $ 194,752 $ 180,895 $ 187,773 $ 196,419 $ 226,896
Unpaid losses and loss adjustment expenses ... $ 94,934 $ 95,653 $ 105,947 $ 120,651 $ 137,406
Stockholders' equity ......................... $ 76,226 $ 63,273 $ 63,920 $ 58,853 $ 69,821
Shares of Common Stock outstanding ........... 18,476,265(4) 15,576,276(4) 15,576,287(4) 15,360,238(4) 15,360,255(4)
</TABLE>
(1) Includes expenses incurred in connection with the terminated proposed
merger with Midland Financial Group, Inc. and non-recurring compensation
expenses for 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) Does not give effect to currently exercisable options and, in 1999,
warrants to purchase shares of Common Stock.
2
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 regular Federal income tax due to its
net operating loss carryforwards and 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 1999 consolidated Federal
income tax return will report a cumulative net operating loss carryforward
currently estimated at approximately $1.16 billion, which will expire in various
amounts, if not used, between 2000 and 2019. See Note 8 of the Notes to
Consolidated Financial Statements.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations, and certain Notes to Consolidated Financial Statements,
contain forward-looking statements, including statements concerning plans,
capital adequacy, adequacy of reserves, utilization of tax losses, goals, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. Such forward-looking statements may
be identified, without limitation, by use of the words "believes",
"anticipates", "expects", "intends", "plans", "estimates" and similar
expressions. All such statements represent only current estimates or
expectations as to future results and are subject to risks and uncertainties
which could cause actual results to materially differ from current estimates or
expectations. See "RISK FACTORS THAT MAY AFFECT FUTURE RESULTS."
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 premiums earned were $54.0 million, $55.4 million and $53.1 million in
1999, 1998, and 1997, respectively. The change in net premiums earned were
directly related to the change in net written premiums. Net written premiums
were $56.6 million, $58.9 million and $55.8 million in 1999, 1998, and 1997,
respectively. The decrease in 1999 was primarily caused by increased competition
in the California marketplace for non-standard private passenger automobile
insurance. The California non-standard private passenger automobile direct
written premium dropped from $30.3 million in 1998 to $15.8 million in 1999.
Management's philosophy has always been to price its business at rate levels
sufficient to generate an underwriting profit instead of maintaining or building
market share with lower rates.
The decrease in California non-standard private passenger automobile
insurance was offset by growth both in non-standard private passenger automobile
insurance in states outside of California and preferred private passenger
automobile insurance in California. Direct written premium for non-standard
private passenger automobile insurance outside of California increased to $7.7
million in 1999 from $3.5 million in 1998, and direct written premium for
California preferred private passenger automobile insurance increased to $7.9
million in 1999 from $1.6 million in 1998. Net written premiums for our
commercial lines remained relatively flat during 1999.
Net investment income was $7.3 million, $7.7 million and $9.3 million in
1999, 1998, and 1997, respectively. Net investment income has declined due to
slightly lower yields on new acquisitions in 1999 and a decline in average fixed
income invested assets. The decline in invested assets is attributable to
reduced premium volume. As of December 31, 1999 and 1998, the average yield on
NAICC's portfolio was 6.6 percent and 6.7 percent, respectively. The estimated
average maturity of the portfolio was 3.77 years at December 31, 1999.
In January 1999, NAICC entered into a workers' compensation reinsurance
agreement with Reliance Insurance Company ("Reliance Agreement") with a term of
two years. The Reliance Agreement provided excess of loss coverage down to
$10,000 and a 20 percent quota share below the excess retention resulting in a
maximum net loss to NAICC of $18,000 per claim. In the fourth quarter of 1999,
NAICC executed an agreement to rescind the Reliance Agreement retroactive to its
effective date. The terms of the rescission included the return of amounts paid
during the nine month period the Reliance Agreement was active plus a settlement
fee to terminate the Reliance Agreement. NAICC recognized a gain of $8,317,000
in the fourth quarter as a result of this rescission.
Cash used in operations was $4.6 million, $3.0 million, and $9.6 million in
1999, 1998 and 1997, respectively. The increase in cash used in operations in
1999 was primarily due to the decline in our non-standard private passenger
written premiums. The decrease in cash used in operations from 1997 to 1998
3
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------
(CONTINUED)
was due to the payment of $5.9 million in 1997 for the settlement of an
environmental claim, of which $5.3 million was recovered from reinsurers in
1999. See Note 2 of the Notes to Consolidated Financial Statements. Overall cash
and invested assets, stated at market, were $122.4 million at December 31, 1999
as compared to $128.9 million at December 31, 1998.
Net losses and loss adjustment expenses (LAE) were $45.8 million, $39.1
million, and $38.1 million in 1999, 1998 and 1997, respectively. The resulting
loss and LAE ratios were 84.7 percent, 70.6 percent, and 71.8 percent in 1999,
1998 and 1997, respectively. The increase in the loss and LAE ratio in 1999 over
1998 is due to higher than expected losses in the California workers'
compensation line and developments on certain businesses in run-off. The
decrease in the loss and LAE ratio in 1998 from 1997 was due to a continued
shift of business to automobile lines which have lower loss and LAE ratios than
does workers' compensation.
Policy acquisition costs were $13.9 million in 1999 and $13.3 million in
1998 and 1997. As a percentage of net premiums earned, policy acquisition
expenses were 25.7 percent, 24.0 percent and 25.1 percent in 1999, 1998 and
1997, respectively. Policy acquisition costs include expenses directly related
to premium volume (i.e., commissions, premium taxes and state assessments and
other underwriting expenses). The increase in the policy acquisition expense
ratio in 1999 is due in part to an increase in our preferred private passenger
automobile line of business. That line of business has higher commission costs
than our non-standard private passenger automobile line of business. The decline
in the policy acquisition expense ratio in 1998 from 1997 was due primarily to
the overall growth in premium volume while other underwriting expenses remained
relatively constant.
General and administrative expenses were $5.8 million, $7.3 million and
$7.0 million in 1999, 1998 and 1997, respectively. General and administrative
expenses decreased in 1999 and increased in 1998 in line with the overall
premium activity for those years.
Policyholder dividends were $2.2 million, $471,000 and $467,000 in 1999,
1998 and 1997, respectively. The increase in the policyholder dividends in 1999
is attributable to the increase in our Montana workers' compensation line of
business. Historically, loss ratios for non-California workers' compensation
have been well below those recorded in California.
Combined underwriting ratios were 125.2 percent, 108.6 percent and 111.0
percent in 1999, 1998 and 1997, respectively. The increase in the combined ratio
in 1999 was due to higher than expected loss costs, and policyholder dividends.
The insurance operations had income from operations of $3.0 million, $4.1
million and $6.3 million in 1999, 1998 and 1997, respectively. The decrease in
1999 is attributable to the decrease in premium volume, along with an increase
in loss and loss adjustment expenses, which was offset in part by the gain on a
treaty rescission. See Note 2 of the Notes to Consolidated Financial Statements.
Net income includes a realized loss from investments of $155,000 in 1999 and
realized gains of $252,000 and $2.2 million in 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries require both readily liquid assets and
adequate capital to meet ongoing obligations to policyholders and claimants, as
well as to pay ordinary operating expenses. The primary sources of funds to meet
these obligations are premium revenues, investment income, recoveries from
reinsurance and, if required, the sale of invested assets. NAICC's investment
policy guidelines require 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 National Association of Insurance Commissioners provides minimum
solvency standards in the form of risk-based capital requirements (RBC). The RBC
model for property and casualty insurance companies requires companies 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 and believes that it has sufficient capital for its operations.
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, 1999, 1998 and 1997, cash used in parent-only
operating activities was $1.9 million, $2.2 million and $2.0 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. 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
As of December 31, 1999, cash and investments of DHC were
4
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
approximately $18.1 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 1996 non-recurring
compensation. In 1999, DHC received cash in the amount of $13.1 million from the
sale of newly issued common stock. In 1997, DHC received cash in the amount of
$671,000 from the exercise of stock options and used cash in the amount of
approximately $107,000 for the buyback of stock options.
DHC's sources of funds are its investments as well as dividends received
from its subsidiaries. Various state insurance requirements restrict the amounts
that may be transferred to DHC in the form of dividends from its insurance
subsidiaries without prior regulatory approval. To the extent that NAICC's
unassigned surplus remains negative in 2000, NAICC will not be permitted to pay
dividends without prior regulatory approval. See Note 4 of the Notes to
Consolidated Financial Statements.
Current fixed maturity holdings of DHC are in U.S. Treasury obligations and
Aaa rated asset-backed securities. For information regarding the Company's
operating subsidiaries' liquidity and capital resources, see "RESULTS OF NAICC'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 and Montana 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 non-investment grade securities. See Notes 1(B)
and 5 of the Notes to Consolidated Financial Statements.
The following table sets forth a summary of the Company's investment
portfolio at December 31, 1999, by investment grade (dollars in thousands):
Cost Fair Value
- --------------------------------------------------------------------------------
Investment by investment grade:
Fixed maturities
U.S. Government/Agency ............................ $ 25,755 $ 25,200
Mortgage-backed ................................... 40,189 38,920
Asset-backed ...................................... 9,512 9,504
Corporates (AAA to A) ............................. 37,174 36,183
Corporates (BBB) .................................. 1,011 1,034
------------------------
Total fixed maturities .......................... 113,641 110,841
Equity securities ................................... 20,614 21,316
------------------------
Total ........................................... $134,255 $132,157
========================
During 1998, NAICC purchased $20 million in equity securi-ties. The
following table sets forth a summary of the Company's equity securities
portfolio at December 31, 1999 (dollars in thousands):
Cost Fair Value
- --------------------------------------------------------------------------------
Equity securities by type:
U.S. domestic securities .......................... $10,276 $11,251
Foreign securities ................................ 10,338 10,065
------------------------
Total equity securities ......................... $20,614 $21,316
========================
MARKET RISK
The Company's objectives in managing its investment portfolio are to
maximize investment income and investment returns while minimizing overall
credit risk. Investment strategies are developed based on many factors including
underwriting results, overall tax position, regulatory requirements, and
fluctuations in interest rates. Investment decisions are made by management and
approved by the Board of Directors. Market risk represents the potential for
loss due to adverse changes in the fair value of securities. The market risks
related to the Company's fixed maturity portfolio are primarily interest rate
risk and prepayment risk. The market risks related to the Company's equity
portfolio are foreign currency risk and equity price risk.
RISKS RELATED TO FIXED MATURITIES
Interest rate risk is the price sensitivity of fixed maturities to changes
in interest rates. Management views these potential changes in price within the
overall context of asset and liability matching. Management estimates the payout
patterns of the Company's liabilities, primarily loss reserves, to determine
their duration. Management sets duration targets for the Company's fixed income
portfolio after consideration of the duration of its liabilities, which
management believes mitigates the overall interest rate risk.
Fixed maturities of the Company include Mortgage-Backed Securities (MBS)
representing 35.1 percent and 41.7 percent of total fixed maturities at December
31, 1999 and December 31, 1998, 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 mort-
5
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------
(CONTINUED)
gages. 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. The Company 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):
1999 1998
---------------------------------------------
AMORTIZED PERCENT Amortized Percent
COST OF TOTAL Cost of Total
- --------------------------------------------------------------------------------
Non-PAC/TAC ..................... $19,317 48% $21,474 45%
PAC/TAC ......................... 20,872 52% 25,878 55%
---------------------------------------------
$40,189 100% $47,352 100%
=============================================
The following table provides information about the Company's fixed maturity
investments at December 31, 1999 that are sensitive to changes in interest
rates. The table presents expected cash flows of principal amounts and related
weighted average interest rate by expected maturity dates. The expected maturity
date for other than mortgage-backed securities is the earlier of call date or
maturity date, and for mortgage-backed securities is based on expected payment
patterns. Actual cash flows could differ, and potentially materially differ from
expected amounts considering the weighting of the Company's portfolio towards
mortgage-backed securities.
<TABLE>
<CAPTION>
There-
(IN THOUSANDS) 2000 2001 2002 2003 2004 after Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government/Agency $ 2,690 $6,870 $2,400 $1,555 $1,860 $10,380 $25,755
Average interest rate 6.19% 6.81% 9.57% 7.15% 5.32% 7.08%
Mortgage-backed 4,235 4,251 3,706 3,551 2,968 21,478 40,189
Average interest rate 6.80% 6.88% 7.10% 7.08% 6.99% 6.96%
Asset-backed 9,512 9,512
Average interest rate 5.81%
Corporates (AAA to A) 1,100 3,290 3,145 9,600 14,085 5,954 37,174
Average interest rate 7.18% 8.05% 7.05% 6.18% 4.93% 6.48%
Corporates (BBB) 1,011 1,011
Average interest rate 9.5%
-------------------------------------------------------------------------------------------
Total $17,537 $14,411 $9,251 $14,706 $18,913 $38,823 $113,641
===========================================================================================
</TABLE>
6
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
Management believes that the interest and prepayment risks generally inherent in
the Company's fixed maturity portfolio are not significant at December 31, 1999.
RISKS RELATED TO EQUITY SECURITIES
The increase in the equity portfolio during 1998 was done to diversify
NAICC's investments. After consideration of NAICC's relatively conservative
capital position, management believed additional diversification was warranted.
Since the portfolio includes both domestic and foreign securities, the
portfolio is subject to foreign currency risk. Foreign currency risk is the
sensitivity to exchange rate fluctuations of the market value and investment
income related to foreign denominated financial instruments. At December 31,
1999, NAICC held approximately $10.3 million of yen denominated equity
securities. See Note 6 of the Notes to Consolidated Financial Statements.
Equity price risk is the potential loss arising from changes in the value
of equity securities. Typically, equity securities have more year-to-year price
volatility than medium term investment grade fixed maturity instruments.
The foreign currency and equity price risks inherent in the equity
portfolio are subject to several factors beyond the control of management.
Although management has employed what it believes to be appropriate instruments
to mitigate those risks, there can be no assurance that the future price
fluctuations would not be material.
ECONOMIC CONDITIONS
The operating results of a property and casualty insurer are influenced by
a variety of factors including general economic conditions, competition,
regulation of insurance rates, weather, and frequency and severity of losses.
The markets in which NAICC operates have experienced periods of rate adequacy
followed by increased competition and rate inadequacy. The general economic
conditions in California, where NAICC writes approximately 67 percent of its
current business, are currently favorable but competitive.
The competition, rate regulation and loss experience in the automobile
markets are currently such that NAICC is able to write its premium volume
profitably. As part of Proposition 103, the California Department of Insurance
issued new regulations for private passenger automobile rates requiring that the
three mandatory rating factors of (1) driving safety record, (2) number of miles
driven annually, and (3) years of driving experience have the first, second and
third greatest weights, respectively. Geographic location and other
characteristics may still be used as optional rating factors; however, the
combined weight of all such optional rating factors may not be greater than the
third mandatory rating factor of years of driving experience. Previously,
insurers could use geographic location as the primary rating factor. NAICC has
made the appropriate modifications to its rating plans in order to comply with
the latest regulations.
The California workers' compensation market, where NAICC had historically
written a significant amount of its premium, continues to be very price
competitive. Workers' compensation premium volume has continued to decline as
competitors continue to price policies at rates well below a level necessary to
achieve an underwriting profit.
AUTHORITATIVE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities"("FAS 133"). FAS 133 is effective for fiscal years
beginning after June 15, 2000 and establishes standards for the reporting for
derivative instruments. It requires changes in the fair value of a derivative
instrument and the changes in fair value of the assets or liabilities hedged by
that instrument to be included in income. The Company has not adopted FAS 133.
However, the effect of adoption on the consolidated financial statements at
December 31, 1999 would not be material.
Effective January 1, 1999, the Company adopted AICPA Statement of Position
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use (SOP 98-1). The statement establishes the standard in which certain
internal costs incurred to develop software used internally can be capitalized.
During 1999, the Company capitalized approximately $142,000 of internal costs,
mostly salary and benefits, related to software developed.
Effective January 1, 1999, the Company adopted AICPA Statement of Position
97-3, Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments. The statement establishes the standards for reporting assessments
charged to an enterprise. An enterprise is required to recognize a liability for
insurance related assessments when an assessment is probable and estimable. The
impact of adopting this statement was not material to the consolidated financial
statements.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
As noted above, the foregoing discussion and the Notes to Consolidated
Financial Statements may include forward-looking statements that involve risks
and uncertainties. In addition to other factors and matters discussed elsewhere
herein, some of the important factors that, in the view of the Company, could
cause actual results to differ materially from those discussed in the
forward-looking statements include the following:
7
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------
(CONTINUED)
1. The insurance products sold by the Company are subject to intense
competition from many competitors, many of whom have substantially greater
resources than the Company. There can be no assurance that the Company will be
able to successfully compete in these markets and generate sufficient premium
volume at attractive prices to be profitable.
2. In order to implement its business plan, the Company has been seeking to
enter into strategic partnerships and/or make acquisitions of businesses that
would enable the Company to earn an attractive return on investment.
Restrictions on the Company's ability to issue additional equity in order to
finance any such transactions exist which could significantly affect the
Company's ability to finance any such transaction. The Company may have limited
other resources with which to implement its strategy and there can be no
assurance that any transaction will be successfully consummated.
3. The insurance industry is highly regulated and it is not possible to
predict the impact of future state and federal regulation on the operations of
the Company.
4. Unpaid losses and loss adjustment expenses ("LAE") are based on estimates
of reported losses, historical Company experience of losses reported by
reinsured companies for insurance assumed from such insurers, and estimates
based on historical Company and industry experience for unreported claims. Such
liability is, by necessity, based upon estimates which may change in the near
term, and there can be no assurance that the ultimate liability will not exceed,
or even materially exceed, such estimates.
8
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) 1999 1998 1997
REVENUES:
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross premiums earned............................................................... $63,710 $65,861 $64,745
Ceded premiums earned............................................................... (9,670) (10,450) (11,676)
--------------------------------------
Net premiums earned................................................................. 54,040 55,411 53,069
Net investment income............................................................... 7,777 8,174 9,810
Net realized investment gains (losses).............................................. (152) 252 2,174
Gain on reinsurance treaty rescisssion.............................................. 8,317 -- --
Other income........................................................................ 1,176 907 693
--------------------------------------
TOTAL REVENUES.................................................................... 71,158 64,744 65,746
LOSSES AND EXPENSES:
Gross losses and loss adjustment expenses........................................... 57,610 45,559 49,350
Ceded losses and loss adjustment expenses........................................... (11,818) (6,428) (11,268)
--------------------------------------
Net losses and loss adjustment expenses............................................. 45,792 39,131 38,082
Policyholder dividends.............................................................. 2,217 471 467
Policy acquisition expenses......................................................... 13,864 13,300 13,341
General and administrative expenses................................................. 7,927 9,508 9,220
--------------------------------------
TOTAL LOSSES AND EXPENSES......................................................... 69,800 62,410 61,110
--------------------------------------
Income before provision for income tax................................................ 1,358 2,334 4,636
Income tax provision.................................................................. 103 33 47
======================================
NET INCOME ........................................................................... $ 1,255 $ 2,301 $ 4,589
======================================
EARNINGS PER SHARE OF COMMON STOCK:
Basic................................................................................. $ 0.08 $ 0.15 $ 0.30
Diluted............................................................................... $ 0.07 $ 0.14 $ 0.28
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------
(IN THOUSANDS, EXCEPT SHARE INFORMATION) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Fixed maturities at fair value (Cost: $113,641 and $112,131)...................................... $110,841 $114,683
Equity securities at fair value (Cost: $20,614 and $20,129)....................................... 21,316 16,889
Short term investments, at cost which approximates fair value..................................... 8,234 3,287
-----------------------
TOTAL INVESTMENTS............................................................................. 140,391 134,859
Cash.............................................................................................. 105 870
Accrued investment income......................................................................... 1,499 1,427
Premiums and fees receivable, net of allowances of $274 and $136.................................. 11,619 9,972
Reinsurance recoverable on paid losses, net of allowances of $402 and $374........................ 6,060 7,714
Reinsurance recoverable on unpaid losses, net of allowances of $246 and $559...................... 15,628 18,187
Prepaid reinsurance premiums...................................................................... 1,767 1,668
Property and equipment, net of accumulated depreciation of $8,225 and $8,322...................... 1,762 1,930
Deferred acquisition costs........................................................................ 2,522 2,381
Receivable on reinsurance treaty rescission....................................................... 11,459 --
Other assets...................................................................................... 1,940 1,887
-----------------------
TOTAL ASSETS.................................................................................. $194,752 $180,895
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Unpaid losses and loss adjustment expenses........................................................ $ 94,934 $95,653
Unearned premiums................................................................................. 16,239 13,705
Policyholder dividends............................................................................ 814 181
Reinsurance premiums payable...................................................................... 905 2,143
Funds withheld on ceded reinsurance............................................................... 1,708 1,442
Other liabilities................................................................................. 3,926 4,498
-----------------------
TOTAL LIABILITIES............................................................................. 118,526 117,622
Preferred Stock ($0.10 par value; authorized 10,000,000 shares;
none issued and outstanding).................................................................... -- --
Common Stock ($0.10 par value; authorized 100,000,000 shares and 20,000,000 shares;
issued 18,486,994 shares and 15,586,994 shares; outstanding 18,476,265 shares
and 15,576,276 shares)....................................................................... 1,849 1,559
Additional paid-in capital........................................................................ 59,491 46,673
Accumulated other comprehensive income (loss)..................................................... (2,098) (688)
Retained earnings................................................................................. 17,050 15,795
Treasury stock (Cost of 10,729 shares and 10,718 shares).......................................... (66) (66)
-----------------------
TOTAL STOCKHOLDERS' EQUITY.................................................................... 76,226 63,273
-----------------------
Commitments and contingencies
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................... $194,752 $180,895
=======================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
10
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
---------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Balance, beginning of year.................................. $ 1,559 $ 1,559 $ 1,537
Issuance of Common Stock.................................... 290 -- --
Exercise of options to purchase Common Stock................ -- -- 22
--------- --------- ---------
Balance, end of year........................................ 1,849 1,559 1,559
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year.................................. 46,673 46,673 46,131
Issuance of Common Stock.................................... 12,818 -- --
Exercise of options to purchase Common Stock................ -- -- 649
Retirement of stock options................................. -- -- (107)
--------- --------- ---------
Balance, end of year........................................ 59,491 46,673 46,673
--------- --------- ---------
RETAINED EARNINGS
Balance, beginning of year.................................. 15,795 13,494 8,905
Net income ................................................. 1,255 $1,255 2,301 $2,301 4,589 $4,589
--------- ------ --------- ------ -------- ------
Balance, end of year........................................ 17,050 15,795 13,494
--------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year.................................. (688) 2,260 2,346
Net unrealized loss on available-for-sale securities
($(1,410), $(2,948), and $(86) pre-tax, in 1999, 1998, and
1997 respectively)(1)..................................... (1,410) (2,948) (86)
------ ------ -------
Other comprehensive loss.................................... (1,410) (1,410) (2,948) (2,948) (86) (86)
--------- ------ --------- ------ -------- ------
Total comprehensive income (loss)........................... $ (155) $ (647) $4,503
====== ======= ======
Balance, end of year........................................ (2,098) (688) 2,260
--------- --------- ---------
TREASURY STOCK
Balance, beginning and end of year.......................... (66) (66) (66)
--------- --------- ---------
Total stockholders' equity.............................. $76,226 $63,273 $63,920
========= ========= =========
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, SHARES
Balance, beginning of year.................................. 15,586,994 15,586,994 15,370,894
Issuance of Common Stock.................................... 2,900,000 -- --
Exercise of options to purchase Common Stock................ -- -- 216,100
---------- ---------- ----------
Balance, end of year........................................ 18,486,994 15,586,994 15,586,994
========== ========== ==========
TREASURY STOCK, SHARES
Balance, beginning of year.................................. 10,718 10,707 10,656
Purchased during year....................................... 11 11 51
--------- --------- ---------
Balance, end of year........................................ 10,729 10,718 10,707
========== ========== ==========
</TABLE>
- ----------
(1) Disclosure of reclassification amount
1999 1998 1997
------- ------- -------
Unrealized holding losses
Arising during the period $(1,258) $(3,200) $(2,260)
Less: reclassification adjustment
for net (gains) losses included
in net income 152 (252) (2,174)
------- ------- -------
Net unrealized losses on securities $(1,410) $(2,948) $ (86)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
11
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------
(IN THOUSANDS) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations................................................... $ 1,255 $ 2,301 $ 4,589
Adjustments to reconcile income from continuing operations to
net cash used in operating activities:
Net realized investment (gains) losses.......................................... 152 (252) (2,174)
Depreciation and amortization................................................... 654 855 905
Change in accrued investment income............................................. (72) 579 391
Change in premiums and fees receivable.......................................... (1,647) (4,534) 159
Change in reinsurance recoverables.............................................. 1,654 809 (5,452)
Change in reinsurance recoverable on unpaid losses ............................. 2,559 1,998 3,361
Change in prepaid reinsurance premiums.......................................... (99) 13 736
Change in deferred acquisition costs............................................ (141) (831) (593)
Change in unpaid losses and loss adjustment expenses............................ (719) (10,294) (14,704)
Change in unearned premiums..................................................... 2,534 3,456 1,955
Change in policyholder dividends payable........................................ 633 (230) 4
Change in reinsurance payables and funds withheld............................... (972) 1,087 (746)
Change in receivable on reinsurance treaty rescission........................... (11,459) -- --
Other, net...................................................................... (810) (127) (14)
---------------------------------------
Net cash used in operating activities......................................... (6,478) (5,170) (11,583)
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales:
Fixed income maturities available-for-sale........................................ 741 3,412 951
Equity securities................................................................. -- 240 2,159
Investments, matured or called:
Fixed income maturities available-for-sale........................................ 29,995 52,338 23,002
Investments purchased:
Fixed income maturities available-for-sale........................................ (32,255) (28,408) (19,664)
Equity securities................................................................. (560) (19,952) (129)
Purchases of property and equipment................................................. (370) (127) (165)
Proceeds from sale of property and equipment........................................ -- 6 --
---------------------------------------
Net cash (used in) provided by investing activities........................... (2,449) 7,509 6,154
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock.............................................. 13,109 -- --
Retirement of stock options......................................................... -- -- (107)
Proceeds from exercise of options to purchase
Common Stock...................................................................... -- -- 671
---------------------------------------
Net cash provided by financing activities..................................... 13,109 -- 564
---------------------------------------
Net increase (decrease) in cash and short term investments............................ 4,182 2,339 (4,865)
Cash and short term investments at beginning of year.................................. 4,157 1,818 6,683
---------------------------------------
Cash and short term investments at end of year........................................ $ 8,339 4,157 $ 1,818
=======================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
12
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
DECEMBER 31, 1999, 1998, AND 1997
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"). KCP owns 100 percent of the
common stock of National American Insurance Company of California, DHC's
principal operating insurance subsidiary, which owns 100 percent of the common
stock of Danielson Insurance Company, Danielson National Insurance Company, and
Valor Insurance Company, Incorporated ("Valor") (National American Insurance
Company of California and its subsidiaries being collectively referred to as
"NAICC").
The operations of NAICC are in property and casualty insurance. NAICC
writes non-standard and preferred private passenger and commercial automobile,
homeowners' and workers compensation insurance in the western United States,
primarily California. NAICC writes approximately 67 percent of its insurance in
California. For the year ended December 31, 1999, private passenger automobile
direct written premiums, representing 36 percent of total direct written
premiums, were produced through two general agents of NAICC. For the years ended
December 31, 1998 and 1997, private passenger automobile direct written
premiums, representing 44 percent and 59 percent, respectively, of total direct
written premiums, 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.
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 accumulated other comprehensive income (loss) in stockholders'
equity until realized. No deferred tax liability has been provided for
unrealized appreciation due to the anticipated availability of the Company's net
operating tax loss carryforwards, and other various deferred tax assets.
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.
Premiums and discounts of fixed maturities 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 reported as accumulated other comprehensive income (loss) 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. 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 $640,000 and $1.5 million at December 31, 1999 and
1998, 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
13
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
exceed, or even materially exceed, such estimates.
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, 1999 and 1998, the Company had no reinsurance contracts
which were accounted for as deposits.
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 1999, 1998 and 1997 was
$10.1 million, $9.9 million and $10.1 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
7.5 percent, 8 percent and 10 percent of workers' compensation direct written
premiums for the years ended December 31, 1999, 1998 and 1997, 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, 1999.
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 basis
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.
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. Diluted earnings per share computations, as calculated under the treasury
stock method, include the average number of shares of additional outstanding
Common Stock issuable for stock options and warrants, whether or not currently
exercisable. Such average shares were 16,793,873, 16,006,708, and 16,194,180 for
the years ended December 31, 1999, 1998 and 1997, respectively. Basic earnings
per share are calculated using only the average number of outstanding shares of
Common Stock and disregarding the average number of shares issuable for stock
options. Such average shares outstanding were 16,356,821, 15,576,281, and
15,481,041, for the years ended December 31, 1999, 1998 and 1997, respectively.
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, 1999. The fair
value of all other financial instruments approximates their respective carrying
value.
L. USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management
14
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
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.
N. RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform
to the current year's presentation.
2) REINSURANCE
Reinsurance is the transfer of risk, by contract, from one insurance
company to another for consideration (premium). Reinsurance contracts do not
relieve an insurance company of its obligations to policyholders. The failure of
reinsurers to honor their obligations could result in losses to NAICC;
consequently, allowances are established for amounts which are deemed
uncollectable. NAICC evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk arising from similar geographic regions,
activities, or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies.
NAICC cedes reinsurance on an excess of loss basis for workers'
compensation risks in excess of $500,000 and generally for all other risks in
excess of $150,000 prior to January 1, 1998 and $250,000 thereafter. In 1997 and
1998, NAICC ceded 25 percent of its private passenger automobile business on a
quota share basis. Effective January 1, 1999, the quota share agreement was
amended to reduce the cessation rate to 10 percent. The effect of reinsurance on
premiums written reflected in the Company's Consolidated Financial Statements is
as follows (dollars in thousands):
For the years ended December 31,
------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Direct ........................... $ 66,375 $ 69,318 $ 66,700
Ceded ............................ (9,770) (10,438) (10,940)
------------------------------------------
Net premium ...................... $ 56,605 $ 58,880 $ 55,760
==========================================
In 1997, NAICC paid $5.9 million in losses and loss adjustment expenses
relating to an environmental claim filed by Hughes Aircraft (the
"Hughes-Fullerton Claim"). The Hughes-Fullerton Claim alleged that environmental
damage occurred continuously over a period of many years. NAICC assumed certain
policyholder obligations of a general liability policy issued to Hughes Aircraft
for three of those years. The Hughes-Fullerton Claim liability is reinsured
under various contracts involving numerous reinsurance companies under which
NAICC ceded $5.3 million. In 1999 NAICC collected approximately $5.3 million as
settlement on the Hughes-Fullerton Claim from almost all participants.
In November 1999, NAICC paid $2.1 million in losses relating to a
settlement on an environmental claim filed by Hughes Aircraft (the Hughes-Tucson
II Claim). The Hughes-Tucson II Claim also alleged that environmental damage
occurred continuously over a period of many years. NAICC assumed certain
policyholder obligations of a general liability policy issued to Hughes Aircraft
for a portion of those years. The Hughes-Tucson II Claim liability is reinsured
under various contracts involving numerous reinsurance companies under which
NAICC ceded $3.9 million, which includes loss adjustment expenses not previously
ceded of $2.1 million. At this time the reinsurers have not disputed the
submission of amounts ceded and no proceedings are in progress. NAICC believes
that the ultimate disposition of the Hughes-Tucson II Claim will not have a
material adverse impact on the financial condition of the Company.
As of December 31, 1999, General Reinsurance Corporation ("GRC"), American
Reinsurance Company ("ARC") 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, 1999, NAICC
had reinsurance recoverables on paid and unpaid claims of $7.3 million, $3.1
million and $3.9 million from GRC, ARC and Lloyd's, respectively. Both GRC and
ARC had an A.M. Best rating of A+ or better.
In January 1999, NAICC entered into a workers' compensation reinsurance
agreement with Reliance Insurance Company ("Reliance Agreement") with a term of
two years. The Reliance Agreement provided excess of loss coverage down to
$10,000 and a 20 percent quota share below the excess retention resulting in a
maximum net loss to NAICC of $18,000 per claim. In the fourth quarter of 1999,
NAICC executed an agreement to rescind the Reliance Agreement retroactive to its
effective date. The
15
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
terms of the rescission included the return of amounts paid during the nine
month period the Reliance Agreement was active plus a settlement fee to
terminate the Reliance Agreement. NAICC recognized a gain of $8,317,000 in the
fourth quarter as a result of this rescission. During the nine month period that
the Reliance Agreement was active, NAICC ceded $3,875,000 of premiums, net of
ceding commissions, and $417,000 of paid loss and loss adjustment expenses.
3) 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):
For the years ended December 31,
--------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net unpaid losses and
LAE at January 1 .................... $ 77,466 $ 85,762 $ 97,105
Incurred related to:
Current year ........................ 43,301 39,131 37,142
Prior years ......................... 2,491 -- 940
--------------------------------------
Total incurred ........................ 45,792 39,131 38,082
--------------------------------------
Paid related to:
Current year ........................ (16,527) (16,169) (13,729)
Prior years ......................... (27,425) (31,258) (35,696)
--------------------------------------
Total paid ............................ (43,952) (47,427) (49,425)
--------------------------------------
Net unpaid losses and
LAE at December 31 .................. 79,306 77,466 85,762
Plus: reinsurance
recoverables ........................ 15,628 18,187 20,185
--------------------------------------
Gross unpaid losses and
LAE at December 31 .................. $ 94,934 $ 95,653 $ 105,947
======================================
The 1999 losses and LAE incurred related to prior years is attributable to
both claims from businesses which are in run- off and its workers' compensation
line. NAICC strengthened the unpaid losses and allocated loss adjustment
expenses ("ALAE") of pre-1995 businesses written by NAICC from 1988 through 1994
since it has become evident that the legal costs associated with those claims
would be greater than previously anticipated. NAICC also increased its bulk
unpaid liabilities related to workers' compensation policies, as it has become
evident that the loss costs associated with these claims would be greater than
previously anticipated.
NAICC has claims for environmental clean-up against policies issued prior
to 1980 and which are currently in run-off. 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 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. Estimates of
liabilities are reviewed and updated continually and there is the potential that
NAICC's exposure could be materially in excess of amounts which are currently
recorded.
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, 1999 and 1998, NAICC's net unpaid losses
and LAE relating to environmental claims were approximately $8.3 million and
$10.8 million, respectively.
4) 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 "Associ-
16
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
ation"), 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, 1999 and 1998, DHC's
operating insurance subsidiaries reported statutory capital and surplus of $52.5
million and $44.4 million, respectively. The combined statutory net income for
DHC's operating insurance subsidiaries, as reported to the regulatory
authorities for the years ended December 31, 1999, 1998 and 1997, was $2.5
million, $3.5 million and $5.9 million, respectively. The California Department
of Insurance has examined the statutory basis financial statements of NAICC
through December 31, 1995. No adjustments were proposed to the statutory basis
financial statements of NAICC or its subsidiaries.
In December 1993, the Association adopted a model for determining the
risk-based capital ("RBC") requirements for property and casualty insurance
companies. Under the RBC model, property and casualty insurance companies are
required to report their RBC ratios based on their latest statutory annual
statements as filed with the regulatory authorities. NAICC has calculated its
RBC requirement under the Association's model, and has capital in excess of any
regulatory action or reporting level.
Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The agencies
established pursuant to these state laws have broad administrative and
supervisory powers relating to the granting and revocation of licenses to
transact insurance business, regulation of trade practices, establishment of
guaranty associations, licensing of agents, approval of policy forms, premium
rate filing requirements, reserve requirements, the form and content of required
regulatory financial 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. The Association
has adopted a comprehensive set of accounting principles for qualifications as
an Other Comprehensive Basis of Accounting to become effective in 2001.
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. To the extent that NAICC's unassigned surplus
remains negative in 2000, NAICC will not be permitted to pay dividends without
prior regulatory approval.
5) INVESTMENTS
The cost or amortized cost, unrealized gains, unrealized losses and fair
value of the Company's investments at December 31, 1999 and 1998, categorized by
type of security, were as follows (dollars in thousands):
DECEMBER 31, 1999
--------------------------------------------
COST OR
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
- --------------------------------------------------------------------------------
Fixed maturities:
U.S. Government/
Agency ......................... $ 25,755 $ 100 $ 655 $ 25,200
Mortgage-backed ................ 40,189 67 1,336 38,920
Asset-backed ................... 9,512 -- 8 9,504
Corporate ...................... 38,185 48 1,016 37,217
-------- ------ ------ --------
Total fixed
maturities ............... 113,641 215 3,015 110,841
-------- ------ ------ --------
Equity securities ................ 20,614 1,847 1,145 21,316
-------- ------ ------ --------
Total available-for-sale ......... $134,255 $2,062 $4,160 $132,157
======== ====== ====== ========
December 31, 1998
--------------------------------------------
Cost or
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
- --------------------------------------------------------------------------------
Fixed maturities:
U.S. Government/
Agency ......................... $ 35,583 $ 853 $ 32 $ 36,404
Mortgage-backed ................ 47,352 526 57 47,821
Corporate ...................... 29,196 1,271 9 30,458
-------- ------ ------ --------
Total fixed
maturities ............... 112,131 2,650 98 114,683
-------- ------ ------ --------
Equity securities ................ 20,129 334 3,574 16,889
-------- ------ ------ --------
Total available-for-sale ......... $132,260 $2,984 $3,672 $131,572
======== ====== ====== ========
Fixed maturities of the Company include mortgage-backed securities ("MBS")
representing 35.1 percent and 41.7 percent of the Company's total fixed
maturities at December 31, 1999 and 1998, respectively. All MBS held by the
Company are issued by the Federal National Mortgage Association ("Fannie
17
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
DECEMBER 31, 1999, 1998 AND 1997
(CONTINUED)
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. Management does not believe that the
inherent prepayment risk in its portfolio is significant. However, management
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.
The expected maturities of fixed maturities, by amortized cost and fair
value, at December 31, 1999, 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):
Amortized Fair
Maturity Cost Value
- --------------------------------------------------------------------------------
Available-for-sale:
One year or less ................................. $ 17,537 $ 17,451
Over one year to five years ...................... 70,418 69,218
Over five years to ten years ..................... 25,284 23,842
More than ten years .............................. 402 330
------------------------
Total fixed maturities ......................... $113,641 $110,841
========================
The following reflects the change in net unrealized gain (loss) on
available-for-sale securities included as a separate component of accumulated
other comprehensive income (loss) in stockholders' equity (dollars in
thousands):
For the years ended
December 31,
--------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Fixed maturities $(5,352) $ 742 $ 1,904
Equity securities 3,942 (3,690) (1,990)
--------------------------------
$(1,410) $(2,948) $ (86)
================================
Net realized investment gains (losses) in 1999, 1998, and 1997 were as
follows (dollars in thousands):
For the years ended
December 31,
--------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Fixed maturities ................................ $ 3 $198 $ 38
Equity securities ............................... (155) 54 2,136
--------------------------
Net realized investment gains (losses) ......... $(152) $252 $2,174
==========================
Gross realized gains relating to fixed maturities were $3,000, $213,000 and
$75,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Gross realized losses relating to fixed maturities were $15,000 and $37,000 for
the years ended December 31, 1998 and 1997, respectively. Gross realized gains
relating to equity securities were $54,000 and $2,136,000 for the years ended
December 31, 1998 and 1997, respectively. Gross realized losses relating to
equity securities for the year ended December 31, 1999 were $155,000.
Net investment income for the past three years was as follows (dollars in
thousands):
For the years ended
December 31,
--------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Fixed maturities ........................... $7,454 $8,032 $9,682
Short term investments ..................... 363 279 253
Other, net ................................. 61 2 1
--------------------------------
Total investment income .................. 7,878 8,313 9,936
Less: Investment expense ................... 101 139 126
--------------------------------
Net investment income .................... $7,777 $8,174 $9,810
================================
There were no investments with a carrying value greater than ten percent of
stockholders' equity as of December 31, 1999, 1998 or 1997.
In compliance with state insurance laws and regulations, securities with a
fair value of approximately $41 million, $51 million, and $65 million at
December 31, 1999, 1998 and 1997, respectively, were on deposit with various
states or governmental regulatory authorities. In addition, at December 31,
1999, 1998 and 1997, respectively, investments with a fair value of $6.6
million, $6.9 million and $5.6 million were held in trust or as collateral under
the terms of certain reinsurance treaties and letters of credit.
18
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
6) FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS
During 1998, NAICC invested approximately $10.3 million in Japanese Yen
based equity securities. During the second quarter of 1998, NAICC purchased a
foreign currency option at a cost of $155,000 to sell Japanese Yen at a fixed
price on a given date in April 1999. The foreign currency option expired in
April 1999, resulting in a realized loss of $155,000. The foreign currency
option is considered a derivative instrument. Foreign currency translation gain
as of December 31, 1999 was $2 million. Foreign currency translation gain as of
December 31, 1998 was $855,050, net of an unrealized loss on the foreign
currency option for 1998 of $150,000.
Assets and liabilities relating to investments in foreign corporations are
translated into U.S. dollars using current exchange rates; revenues and
expenses, if any, are translated into U.S. dollars using the average exchange
rate for the month when incurred. Translation gains and losses, net of
applicable taxes, are excluded from income and included in net unrealized loss,
reported as accumulated other comprehensive income (loss) in stockholders'
equity.
7) STOCKHOLDERS' EQUITY
On August 12, 1999, pursuant to a Stock Purchase and Sale Agreement with
Samstock, L.L.C. ("Samstock"), which agreement was assigned with the Company's
consent by Samstock to its sole member, SZ Investments, L.L.C. ("SZ"), pursuant
to an amendment and assignment agreement (such Purchase and Sale Agreement, as
amended and assigned, the "Purchase Agreement"), the Company sold to SZ, for
consideration of $9 million, 2,000,000 shares of Common Stock and a four year
warrant (subject to extension in certain circumstances) to purchase an
additional 2,000,000 shares of Common Stock at $4.75 per share (subject to
downward price adjustment under certain circumstances). In order to provide
sufficient available shares of Common Stock for this transaction, on July 20,
1999, DHC's stockholders approved an amendment to DHC's Certificate of
Incorporation increasing DHC's authorized common stock from 20,000,000 shares to
100,000,000 shares. The stockholders also approved amendments to eliminate
cumulative voting for Directors and to eliminate a prohibition on issuing
non-voting equity securities.
On December 29, 1999, the Company sold, for aggregate cash consideration of
$4,162,500, 900,000 newly issued shares of Common Stock. The sale was a private
placement to 18 accredited investors made pursuant to Regulation D under the
Securities Act of 1933. Brokerage commissions of $54,000 were paid to M.J.
Whitman, Inc., an affiliate of DHC, in connection with the placement of certain
of those shares by M.J. Whitman, Inc.
As of December 31, 1999, there were 18,486,994 shares of Common Stock
issued of which 18,476,265 were outstanding; the remaining 10,729 shares of
Common Stock issued but not outstanding are held as treasury stock. 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.
8) INCOME TAXES
DHC files a Federal consolidated income tax return with its subsidiaries
and certain trusts that assumed various liabilities of certain present and
former subsidiaries of DHC.
At the close of 1999, the Company had a consolidated net operating loss
carryforward of approximately $1.16 billion for Federal income tax purposes.
This number is based upon Federal consolidated income tax losses for the periods
through December 31, 1998 and an estimate of the 1999 taxable results. The net
operating loss carryforward will expire in various amounts, if not used, between
2000 and 2019. 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 tax
asset considered realizable could be increased in the near term if estimates of
future taxable income during the carryforward period are increased. See Note 7
"STOCKHOLDERS' EQUITY" for a description of certain restrictions on the transfer
of Common Stock.
The Company's net operating tax loss carryforwards will expire, if not
used, in the following amounts in the following years (dollars in thousands):
Year Ending Amount of Carryforward
December 31, Expiring
-------------------------------------------------------------
2000...................... 253,098
2001...................... 155,806
2002...................... 142,982
2003...................... 60,849
2004...................... 69,947
2005...................... 106,225
2006...................... 92,355
19
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
2007...................... 89,790
2008...................... 31,688
2009...................... 39,689
2010...................... 23,600
2011...................... 19,755
2012...................... 38,255
2019...................... 40,078
----------
$1,164,117
==========
The Company has made provisions for certain state and other 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):
For the years ended
December 31,
-------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Federal income tax ........................... $-- $-- $--
State and other .............................. 103 33 47
-------------------------------
$103 $33 $47
===============================
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 1999, 1998 and 1997, as compared to the provision for income
taxes (dollars in thousands):
For the years ended
December 31,
-----------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Computed "expected"
tax expense...................... $ 462 $ 794 $ 1,576
Change in valuation allowance ..... (56,837) (12,573) 10,945
Decrease (increase) in losses
from the trusts.................. (13,289) 7,125 (12,504)
Expiring NOL....................... 69,315 4,944 --
State and other expense............ 103 33 47
Other, net......................... 349 (290) (17)
-----------------------------------------
Total income tax expense........... $ 103 $ 33 $ 47
=========================================
The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities at December 31, 1999 and 1998, respectively, are
presented as follows (dollars in thousands):
For the years ended
December 31,
------------------------
1999 1998
- -------------------------------------------------------------------------------
Deferred tax assets
Loss reserve discounting ......................... $ 5,032 $ 5,104
Unearned premiums ................................ 984 818
Net operating loss
carryforwards .................................. 395,800 451,488
Allowance for doubtful
accounts ....................................... 93 363
Policyholder dividends ........................... 277 61
Non-recurring compensation ....................... -- 35
Unrealized loss on available-
for-sale securities ............................ 713 234
Capital loss carryforwards ....................... 1,463 2,199
Other ............................................ 164 232
AMT credit carryforward .......................... 375 408
------------------------
Total gross deferred tax asset ................... 404,901 460,942
Less: Valuation allowance ........................ (403,649) (460,006)
------------------------
Total deferred tax asset ......................... $ 1,252 $ 936
------------------------
Deferred tax liabilities
Deferred acquisition costs ....................... 857 810
Difference in tax basis
of bonds ....................................... 127 126
Difference in tax basis of
property and equipment ......................... 268 --
------------------------
Total deferred tax liability ..................... 1,252 936
------------------------
Net deferred tax asset ........................... $ -- $ --
========================
9) EMPLOYEE BENEFIT AND STOCK OPTION PLANS
1990 STOCK OPTION PLAN
The 1990 Stock Option Plan (the "1990 Plan") of DHC was 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 similar 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 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
20
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
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. Effective November 12, 1997, DHC purchased 20,920 of the
remaining 302,637 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 $107,215, which was equal to the difference between the closing
price of Common Stock on November 12, 1997 ($8.125 per share), the effective
date of such purchase, and the exercise price of such options ($3.00 per share),
or $5.125 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.
On June 13, 1997, options to purchase 210,000 shares of Common Stock
granted under the 1990 Plan were exercised at their exercise price of $3.00. As
a result, DHC received $630,000.
As of December 31, 1999, 841,717 options granted under and outside the 1990
Plan were exercisable and unexercised. All such 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). In 1997, 22,800 of
such options expired.
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). In 1997, 1,500 of such options expired.
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).
On March 31, 1997, options to purchase 6,100 shares of Common Stock were
exercised at their exercise price of $6.6875. As a result, DHC received $40,794.
On July 1, 1997, options to purchase an aggregate amount of 10,000 shares
of Common Stock were granted under the 1995 Plan. The exercise price for such
options is $8.0625 (the mean of the high and low prices of the Common Stock on
the American Stock Exchange on the date of the grant). In 1999, all of such
options expired.
On December 15, 1997, options to purchase an aggregate amount of 155,000
shares of Common Stock were granted under the 1995 Plan. The exercise price for
such options is $7.0625 (the mean of the high and low prices of the Common Stock
on the American Stock Exchange on the date of the grant).
On December 2, 1998, options to purchase an aggregate amount of 167,500
shares of Common Stock were granted under the 1995 Plan. The exercise price for
such options is $3.65625 (the mean of the high and low prices of the Common
21
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
Stock on the American Stock Exchange on the date of the grant). In 1999, 5,000
of such options expired.
On December 8, 1999, options to purchase an aggregate amount of 142,500
shares of Common Stock were granted under the 1995 Plan. The exercise price for
such options is $5.3125 (the mean of the high and low prices of the Common Stock
on the American Stock Exchange on the date of the grant).
As of December 31, 1999, 731,000 options granted under the 1995 Plan were
exercisable. 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 and earnings per share would have been reduced to the pro
forma amounts indicated below (dollars in thousands except per share amounts):
1999 1998 1997
- --------------------------------------------------------------------------------
Net income
As reported ........................ $ 1,255 $2,301 $ 4,589
Pro forma .......................... 987 1,827 4,303
Diluted earnings per share
As reported ........................ $ 0.07 $ 0.14 $ 0.28
Pro forma .......................... 0.06 0.11 0.27
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%-59%; and a risk free interest rate of 6%. The pro
forma effect on net income may not be representative of the effects on net
income 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. The loan, which is guaranteed by KCP and collateralized by
the DHC Common Stock held by the ESOP, was paid in full during 1997. All shares
have been 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, 1999 and 1998 were 99,682.
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, 1999 and 1998, valued at January 1, 2000 and 1999, respectively (dollars in
thousands):
1999 1998
- -------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefits obligation,
including vested benefits of $1,560
for 1999 and $1,261 for 1998 ..................... $ 1,749 $ 1,613
========================
Projected benefit obligation ....................... $ 1,793 $ 1,801
Plan assets at fair value .......................... 1,399 1,490
------------------------
Projected benefit obligation in excess
of plan assets ................................... (394) (311)
Unrecognized net loss .............................. 76 66
Unrecognized prior service cost .................... 49 58
Adjustment required to recognize
minimum liability ................................ -- --
------------------------
(Accrued) prepaid pension cost ................... $ (269) $ (187)
========================
22
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
Net pension costs for the years ended December 31, 1999, 1998 and 1997
include the following components:
For the years ended
December 31,
------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
-------
Service cost ................................ $ 243 $ 207 $ 230
Interest cost ............................... 112 133 131
Expected (return) loss on plan assets ....... (101) (128) (102)
Net amortization and deferral ............... 8 8 8
------------------------------
Net pension cost .......................... $ 262 $ 220 $ 267
==============================
The Pension Plan's assets consist of U.S. Government obligations,
registered equity mutual funds and insured certificates of deposit. The average
discount rate used in determining the actuarial present value of the projected
benefit obligation was 7.25 percent, 7.0 percent and 7.75 percent for 1999, 1998
and 1997, respectively. The projected long-term rate of return on assets was 7.5
percent for 1999 and 1998 and 7.25 percent for 1997. The average rate of
compensation increase used in determining the actuarial present value of the
projected benefit obligation was 4.5 percent for 1999 and 1998.
The following tables provide a reconciliation of the changes in the Pension
Plan's benefit obligation and the fair value of plan assets as of December 31,
1999 and 1998 (dollars in thousands):
1999 1998
- -------------------------------------------------------------------------------
Reconciliation of Benefit Obligation
Benefit Obligation, beginning of year ............ $ 1,801 1,942
Service Cost ..................................... 243 207
Interest Cost .................................... 112 133
Actuarial (gain) loss ............................ 9 (63)
Benefits paid .................................... (372) (418)
------------------------
Benefit Obligation, end of year ............... $ 1,793 $ 1,801
========================
Reconciliation of Plan Assets
Plan Assets, beginning of year ................... $ 1,490 $ 1,641
Actual return on plan assets ..................... 101 96
Employer contributions ........................... 180 171
Benefits paid .................................... (372) (418)
------------------------
Plan Assets, end of year ...................... $ 1,399 $ 1,490
========================
The prior service costs are amortized on a straight-line basis over the
average remaining service period of active participants. Gains and losses in
excess of 10 percent of the greater of the benefit obligation and the fair value
of related plan assets are amortized over the average remaining service period
of active participants. NAICC recognized $134,745, $246,838 and $229,635 in
accrued pension benefit for the years ended December 31, 1999, 1998 and 1997,
respectively.
KCP maintains a 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 20
percent of their eligible compensation to a maximum dollar amount allowed by the
IRS. KCP and subsidiaries contributed 50 percent of the first six percent of
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 1999, 1998 and
1997, the employers' matching obligation to the 401(k) Plan was satisfied
through ESOP shares, cash and forfeitures totaling $129,000, $156,000, and
$186,000, respectively, in value.
10) 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 $1.6 million, $1.5 million and
$1.1 million for the years ended December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999, future net minimum operating lease rental payment
commitments were as follows (dollars in thousands):
Years Ending Minimum Operating Lease
December 31, Rental Payments
- --------------------------------------------------------------------------------
2000................................................. $1,525
2001................................................. 1,290
2002................................................. 1,213
2003................................................. 617
2004 and thereafter.................................. 434
------
Total commitments.................................... $5,079
======
23
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------
DECEMBER 31, 1999, 1998, AND 1997
(CONTINUED)
11) 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.
On June 22, 1999, the Missouri Court of Appeals reversed a decision to award
interest on claims under a plan of distribution of assets of the Mission
Reinsurance Corporation Trust (the "Trust"). The effect of the decision of the
Court of Appeals would have been to return to the Company the surplus existing
in the Trust, which was one of the trusts that had been created in connection
with the insolvency and reorganization of Mission Insurance Group, Inc. and its
subsidiaries from which the Company emerged, which surplus was believed to
approximate $14 million. The Missouri Department of Insurance appealed the
decision of the Court of Appeals and the decision was reversed by the Supreme
Court of Missouri. As a result, the Missouri Department of Insurance is
permitted to pay interest on claims, and it is anticipated that there will be no
surplus remaining in the Trust after payment of the interest.
24
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, 1999 and 1998, 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, 1999.
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
March 7, 2000
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 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 LLP and the Company's financial management to review
accounting, internal control, auditing and financial reporting matters.
25
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
QUARTERLY FINANCIAL DATA
---------------------------
(UNAUDITED)
The following table presents unaudited quarterly financial data for the
years ended December 31, 1999 and 1998. 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.
(In thousands, First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
1999:
TOTAL REVENUES ....................... $14,585 $14,312 $15,415 $26,846
NET INCOME ........................... 101 266 466 422
NET INCOME PER DILUTED SHARE ......... .01 .01 .03 .02
1998:
Total revenues ....................... $16,569 $15,837 $16,176 $16,162
Net income ........................... 807 307 597 590
Net income per diluted share ......... .05 .02 .04 .03
STOCK MARKET PRICES
---------------------------
Danielson Holding Corporation Common Stock is listed and traded on the
American Stock Exchange (symbol: DHC). On March 13, 2000, there were
approximately 1,356 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.
1999 1998
------------------------------------------------------
HIGH LOW CLOSE High Low Close
------------------------------------------------------
First Quarter.......... 4 5/8 2 7/8 2 7/8 8 1/8 7 3/16 7 1/2
Second Quarter......... 5 3/4 2 7/8 5 3/8 8 7 7 3/8
Third Quarter.......... 7 1/2 5 1/4 5 5/8 7 1/2 3 5/8 4 3/8
Fourth Quarter......... 6 1/8 4 5/8 5 3/4 4 3/8 3 3 9/16
------------------------------------------------------
26
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
<PAGE>
CORPORATE OFFICERS
Martin J. Whitman
Chief Executive Officer
David M. Barse
President and
Chief Operating Officer
Michael T. Carney
Chief Financial Officer and Treasurer
Ian M. Kirschner
General Counsel and Secretary
BOARD OF DIRECTORS
David M. Barse
President and
Chief Operating Officer,
Danielson Holding Corporation
Stanley J. Garstka
Deputy Dean and Professor in
the Practice of Management,
Yale University School of Management
Eugene M. Isenberg
Chairman of the Board and
Chief Executive Officer,
Nabors Industries, Inc.
William Pate
Director of Mergers and Acquisitions,
Equity Group Investments, LLC
Joseph F. Porrino
Counsellor to the President,
New School University
Frank B. Ryan
Professor of Mathematics,
Rice University
Wallace O. Sellers
Vice Chairman and Director,
Enhance Financial
Services Group, Inc.
Martin J. Whitman
Chief Executive Officer,
Danielson Holding Corporation
Samuel Zell
Chairman,
Equity Group Investments, LLC
Form 10-K
A copy of Danielson's Form 10-K as
filed with the Securities and
Exchange Commission may be
obtained without charge by
writing to:
Danielson Holding Corporation
767 Third Avenue - Fifth Floor
New York, NY 10017-2023
Attention: Lisa Platner
Investor Relations
212/888-0347
Stock Transfer Agent and Registrar
American Stock Transfer and Trust Company
40 Wall Street
New York, NY 10005
718/921-8261
Independent Certified
Public Accountants
KPMG LLP
757 Third Avenue
New York, NY 10017
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Danielson Holding Corporation:
We consent to incorporation by reference in the registration statement (No.
333-30538), on Form S-3 of Danielson Holding Corporation and subsidiaries of our
reports dated March 7, 2000, relating to the consolidated balance sheets of
Danielson Holding Corporation and subsidiaries as of December 31, 1999 and 1998,
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,
1999, and all related schedules, which reports appear in the December 31, 1999
annual report on Form 10-K of Danielson Holding Corporation and its
subsidiaries.
New York, New York
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains Summary Financial Information for the fiscal year
ended December 31, 1999 and is qualified in its entirety by reference to
such financial Statements.
</LEGEND>
<CIK> 0000225648
<NAME> Danielson Holding Corporation
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 110,841
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,316
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 140,391
<CASH> 105
<RECOVER-REINSURE> 21,688<F1>
<DEFERRED-ACQUISITION> 2,522
<TOTAL-ASSETS> 194,752
<POLICY-LOSSES> 94,934
<UNEARNED-PREMIUMS> 16,239
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 814
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,849
<OTHER-SE> 74,377<F2>
<TOTAL-LIABILITY-AND-EQUITY> 194,752
54,040
<INVESTMENT-INCOME> 7,777
<INVESTMENT-GAINS> (152)
<OTHER-INCOME> 9,493<F3>
<BENEFITS> 45,792
<UNDERWRITING-AMORTIZATION> 10,070
<UNDERWRITING-OTHER> 11,721
<INCOME-PRETAX> 1,358
<INCOME-TAX> 103
<INCOME-CONTINUING> 1,255
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,255
<EPS-BASIC> 0.08<F4>
<EPS-DILUTED> 0.07<F5>
<RESERVE-OPEN> 77,466
<PROVISION-CURRENT> 43,301
<PROVISION-PRIOR> 2,491
<PAYMENTS-CURRENT> 16,527
<PAYMENTS-PRIOR> 27,425
<RESERVE-CLOSE> 79,306
<CUMULATIVE-DEFICIENCY> (2,491)
<FN>
<F1> Includes reinsurance recoverables on unpaid losses of 15,628 and
reinsurance recoverables on paid losses of 6,060.
<F2> Includes treasury stock of 66.
<F3> Includes a gain on a reinsurance treaty rescission of 8,317.
<F4> Represents earnings per share--basic.
<F5> Represents earnings per share--diluted.
</FN>
</TABLE>
