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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to SectionANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of
the Securities Exchange Act ofOR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 19951996 COMMISSION FILE NUMBER 1-6732
orOR
[ ] Transition Report Pursuant to SectionTRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of
the Securities Exchange Act ofOR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DANIELSON HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DelawareDELAWARE 95-6021257
(State of incorporation)(STATE OF INCORPORATION) (I.R.S. Employer Identification No.EMPLOYER IDENTIFICATION NO.)
767 Third Avenue, New York, New YorkTHIRD AVENUE, NEW YORK, NEW YORK 10017-2023
(Address of principal executive offices) (Zip Code)(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-0347
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NoneNONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $0.10 par value . . . . . .
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
Common Stock, $0.10 par value................... American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X]X No
[_]--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At March 13, 1996,20, 1997, the aggregate market value of the registrant's voting
stock held by non-affiliates was $91,072,428.$100,584,806.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 13, 1996
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Common Stock, $0.10 par value 15,360,255
CLASS OUTSTANDING AT MARCH 20, 1997
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Common Stock, $0.10 par value 15,360,238 shares
The following documents have been incorporated by reference herein:
19951996 Annual Report to Stockholders, as indicated herein (Parts I and II)
[COVER PAGE 1 OF 101 PAGES / EXHIBIT INDEX ON PAGES 34-36]
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Danielson Holding Corporation ("DHC" or "Registrant") is a holding company
incorporated in Delaware. DHC is continuing to grow by acquisition, as
a corporationDelaware, having separate subsidiaries (collectively with DHC,
the "Company") offering a variety of insurance products and, until recently,
trust and investment management services. It is DHC's intention to continue to
grow by developing business partnerships and other financial service products.making strategic acquisitions.
The largest subsidiary of DHC is its indirectly wholly-owned California
insurance company, National American Insurance Company of California
("NAICC"). NAICC writes workers' compensation, non-standard private passenger
and commercial automobile insurance in the western United States, primarily
California.
Until December 31, 1996, DHC also ownsowned a California trust company
subsidiary, Danielson Trust Company ("Danielson Trust"), which formerly was
known, prior to November 13, 1993, as HomeFed Trust. In February 1994,
Danielson Trust acquired the assets of the Western Trust Services ("WTS") division of
Grossmont Bank. On December 31, 1996, DHC consummated the sale of Danielson
Trust to North American Trust Company. See Note 25 of the Notes to Consolidated
Financial Statements.
As part of DHC's ongoing corporate strategy, DHC has continued to seek ways
to acquire or start-up profitable businesses and/or to expand intoits presence in the
financial services businessindustry in a manner that will both complement its existing
operations and enable DHC to earn an attractive return on investment. Most
recently,During
1996, DHC has entered into an agreement to acquire, by merger, Midland Financial
Group, Inc. ("Midland"). As a result of the crash of TWA Flight 800, in which
the President of DHC, the President of NAICC and the President of Midland were
killed, the proposed merger with Midland was terminated by the mutual consent
of DHC and Midland. See Note 153 of the Notes to Consolidated Financial
Statements.
On January 15, 1997, DHC retainsentered into a letter of intent with The
Progressive Corporation ("Progressive") pursuant to which it was proposed that
DHC sell to Progressive 11 million newly issued shares of Common Stock of DHC
for consideration having a value of $6.60 per share. Progressive would then
have owned a 42% interest in DHC. On March 10, 1997, Progressive informed DHC
that, for "internal Progressive reasons", it was terminating its discussions
with DHC.
DHC retained cash and investments at the holding company level of $11 million.$10.1
million at December 31, 1996. Total book liabilities of DHC at the same date
were $785,000.
The Company has reported,will report, as of the beginningend of its 19951996 tax year, aggregate
consolidated net operating tax loss carryforwards ("NOLs") for Federal income
tax purposes of approximately $1.4$1.34 billion. These losses will start to expire
in 1998 unless utilized prior thereto. See Note 811 of the Notes to
Consolidated Financial Statements.
DESCRIPTION OF BUSINESSES
Set forth below is a description of the business operations of each
industry segment for which financial information, as at December 31, 1995, is
presented in the Company's
Consolidated Financial Statements incorporated by
reference in this Report. Such industry segments are Insurance and Trust
Services.
INSURANCE BUSINESSinsurance services business.
DHC's wholly-owned subsidiary, NAICC, is a California corporation engaged in
writing workers' compensation, non-standard private passenger and commercial
automobile insurance.insurance in the western states, primarily California. NAICC is an indirect wholly-owneda
third tier subsidiary of DHC. NAICC's immediate parent corporation is KCP
Holding Company ("KCP"). NAICC is the
immediate parent of Danielson National Insurance Company ("DNIC") and Danielson
Insurance Company ("DIC"). KCP is wholly-owned by Mission American Insurance
Company ("MAIC"), which in turn is wholly-owned by DHC.
-2-2
NAICC's lines of business are described below.
Workers' Compensation InsuranceWORKERS' COMPENSATION INSURANCE
GENERAL
Workers' compensation insurance policies provide coverage for workers'
compensation benefits and employers'employer's liability. The workers' compensation
portion of the coverage provides for statutory benefits thatwhich 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 offor vocational
rehabilitation. The benefits payable and the duration of such benefits are
prescribed by statute, and vary with the nature and severity of the injury or
disease and the wages, occupation and age of the employee. The employers'employer's
liability portion of the coverage provides protection to an employer for its
liability for losses suffered by its employees which are not included within
the statutorily prescribed workers' compensation coverage. NAICC issues policiesPolicies are issued
having a maximum term of one year.
Net written premiums for workers' compensation were $38.2 million, $77.2
million and $79.3 million in 1995, 1994 and 1993, respectively. NAICC writes
workers' compensation business primarily in the states of California, Oregon,
Arizona and Idaho through approximately 650 independent property and casualty
insurance agents and brokers. NAICC does not write workers' compensation
business through managing general agents and no independent agent produces more than 4.5 percent of the total premium.one year.
At December 31, 1995,1996, NAICC had 3,871approximately 2,579 workers' compensation
policies in force with an approximate average estimated annual premium size of $10,200,$5,344,
compared to 7,2533,844 and 7,161 such7,183 policies in force with approximate average annual
premium sizes of $6,201 and $9,566 at December 31, 1995 and 1994,
and 1993, respectively, with an average estimated annual premium size
of $11,300 and $12,000 in each respective year. The 1995respectively. NAICC's management believes the decrease of
approximately 50.5 percent in the net written premium from 1994policies in
force in 1996 is attributable to significantly increasedsignificant price competition in California.the
California workers' compensation market. In 1995, 871996, NAICC continued to price the
renewals of its in-force California workers' compensation policies above the
market level price. In doing so, its in-force policy count continued to
decrease.
In 1996, approximately 54 percent of NAICC's workers' compensation business wasnet
premiums written were in the stateState of California. In July 1993, the California legislature passed several bills reforming
the State's workers' compensation system. In connection with this reform, cost
savings from favorable loss experience resulting from reform legislation,
stabilization of the California economy, and highly-publicized anti-fraud
activity were passed along to employers in the form of minimum rate decreases.
Thus, at the direction of the California Department of Insurance (the "Insurance
Department"), the minimum rate was decreased by seven percent, 12.7 percent and
16 percent effective in July 1993, January 1994 and October 1994, respectively.
In addition, effectiveEffective January 1, 1995, a
new "open rating" law replaced the old workers' compensation "minimum rate"
law. The new open rating law provides for a significant changesignificantly changed the way in the waywhich insurance
companies price workers' compensation insurance in California. Although the Workers' Compensation
Insurance Rating Bureau of California (the "Bureau") is still the designated
statistical agent for the Insurance Department and will continueUnder open
rating, to accumulate
statewide loss and remuneration data, under the new law the Bureau now only
promulgates advisory pure premium rates instead of final rates. Pure premium
rate is the loss and loss adjustment expense ("LAE") portion of the final rate
charged. Non-loss related expenses constitute the other portion of the final
rate charged.
An insurer establishes its own final rates prospectively based on pure
premium rates promulgated by the Bureau and/or from its own experience. An
insurer may establish the pure premium portion of its rates below the Bureau's
advisory pure premium rates. The pure premium rates are then increased to
provide for non-loss related expenses, which are based solely upon that
company's experience and expectation. Non-loss related expenses include items
such as commissions to agents, general and administrative expenses and premium
taxes. To obtain approval to use any workers' compensation rates in
California, an insurer is required to file its proposed rates and rating plans
with the California Department of Insurance Department.(CDI). The Insurance DepartmentCDI may disapprove a
rate filing only if it finds that the rates are unfairly discriminatory, could
threaten the solvency of the insurer, or could cause a single insurer, other
than the California State Compensation Insurance Fund, (the "State Fund"), to control more than
2020% of the market.
In response to developments affecting the market for workers' compensation
insurance in California, NAICC has pursued a strategy of re-deploying its
capital either in other specialty lines of insurance such as non-standard
automobile insurance or in the workers' compensation line in geographic
markets believed by NAICC to have greater potential for profitability than
California. In furtherance of its strategy to write workers' compensation
insurance in markets other than California, in June 1996, NAICC acquired Valor
Insurance Company, Incorporated ("Valor"), a Montana-domiciled specialty
insurance company that writes workers' compensation insurance policies. This
acquisition has enabled NAICC to market workers' compensation insurance
directly to employers in the State of Montana.
Net written premiums for workers' compensation were $16.8 million, $38.2
million, and $77.2 million, in 1996, 1995, and 1994, respectively.
MARKETING
NAICC writes workers' compensation insurance primarily in the states of
California, Oregon, Arizona and Idaho through approximately 650 independent
property and casualty insurance agents and brokers. NAICC does not write
workers' compensation business through managing general agencies or general
agencies and no independent agent produces more than 4.5 percent of the market.
-3-
total
premiums. The favorable loss experience of the 1992, 1993 and 1994 loss years, and
the elimination of the minimum rate law have created a new and highly
competitive environment in the Californiaagency contracts provide authority to bind coverage within
detailed underwriting guidelines set by NAICC. Valor markets workers'
compensation market.insurance directly to Montana employers principally through
contacts of its President. All business is produced and serviced through its
home office in Billings, Montana.
3
NAICC has filed premium rates with the Insurance Department which are based on the
pure premium rates promulgatedmaintains five new business production offices located in Portland,
Oregon, Phoenix, Arizona and San Francisco, Fresno, and Long Beach, California.
The marketing and underwriting employees at these offices solicit and
underwrite only new applications produced by the Bureau. NAICC's management believes that
the pure premium rates promulgated by the Bureau will best reflect NAICC's
actual loss costs and LAE. NAICC continues its policy to underwrite policies at
prices which are expected to achieve an underwriting profit. Consequently,
management ofindependent 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 volume has decreased because
competitorscollection and record retention are willingperformed
centrally at NAICC's home office in Long Beach, California.
NAICC targets employers having operations that are classified as low to
price policies using pure premium ratesmoderate hazard and that generally have payrolls under $1 million. Typically,
annual premiums for employers in this payroll category are less than $25,000.
Valor writes workers' compensation for employers of a wide range of hazard
classifications, from banks to construction businesses, and targets the larger
employers in the state of Montana.
UNDERWRITING
NAICC maintains a disciplined approach to risk selection and pricing. In
accordance with this policy, NAICC selects each prospective policyholder based
on the characteristics of such risk and establishes premiums based on loss
experience and risk exposure. NAICC's pricing policy is not driven by market
share considerations.
Rates, rating plans, policyholder dividend plans and policy forms are
developed and filed by NAICC's underwriting personnel with the appropriate
regulatory agency in each state in which are
below the average pure premiumNAICC operates. NAICC relies
principally upon rates promulgated by either the Bureau. However, it isWorkers' Compensation
Insurance Rating Bureau (WCIRB) or the viewNational Council on Compensation
Insurance, the statistical agent for other western states in which NAICC
markets insurance.
NAICC retains the first $500,000 of NAICC's management that NAICC will continue to partially offset its
decline ineach workers' compensation premium by increasing its participation in
other markets.
NAICC competes with both the State Fundloss and more than 300 other companies
writing workers' compensation insurance in California. In 1994, the most recent
yearhas
purchased reinsurance for which information is available, the State Fund wrote approximately $1.4
billion in premiums, which represented approximately 18.1 percent of the insured
California workers' compensation market. No single company wroteup to $99.5 million in excess of $500its retention, the
first $4.5 million of which is placed with a major reinsurance company and the
remaining $95 million of which is provided by 16 other companies.
CLAIMS
Workers' compensation claims are received, reviewed, processed and paid by
NAICC employees located in workers' compensation premiumsclaims service offices in California in 1994. NAICC,
which hasPortland, Oregon and Long
Beach, California. Most of NAICC's policyholders are not of sufficient size or
type to make a market share of approximately one percent of the insured market,
does not believe that it is a dominant writer of workers' compensation insurance
in California.
Because of the existence of the State Fund, California does not require
licensed insurersmore specialized managed care approach to participate in any involuntary pools or assigned risk plans
for workers' compensation insurance. California, like other states, has a post
insolvency guarantee fund, the California Insurance Guarantee Association, to
protect policyholders of insolvent insurance companies. Under current law, the
maximum amount that can be assessed against any insurer for this purpose in any
one year is one percent of its net direct premiums written in the preceding
year. These assessments are passed through to all policyholders. There were no
such assessments for the 1994 policy year.
Non-Standard Private Passenger Automobile Insurancemedical cost
containment more cost effective.
NON-STANDARD PRIVATE PASSENGER AUTOMOBILE INSURANCE
GENERAL
NAICC began writing non-standard private passenger automobile insurance in
California in July, 1993. NAICC writes this business through a general agent
which utilizesuses over 600700 sub-agents to obtain applications for policies.
ThePolicyholder selection of policyholders is governed by underwriting guidelines established by
NAICC. Non-standard risks are those segments of the driving public which
generally are not considered to be "preferred" business, such as drivers with a
record of prior accidents or driving violations, drivers involved in particular
occupations or driving certain types of vehicles, or those who have been non-
renewed or declined by another insurance company.
Generally, non-standard premium rates are higher than standard premium rates
and policy limits are lower than typical policy limits. NAICC's private
passenger automobile policies provide maximum coverage of up to $15,000 per
person, $30,000 per accident for liability for bodily injury and $10,000 per
accident for liability for property damage. NAICC also writes physical damage
coveragecoverages for up to $33,000 per vehicle. NAICC's management believes that it
may enhance
itsachieve underwriting success as a result of refinement of various risk
profiles, thereby dividing the non-standard insurance market into more defined segments
which can be adequately priced.
For the 1995 calendar year, NAICC billed $28.8 million in direct written
premiums and, at December 31, 1995, NAICC had 29,000 private passenger
automobile policies in force, compared to 20,000 and 15,419 policies in force in
1994 and 1993, respectively. In 1995, NAICC's non-standard private passenger
automobile business represented approximately 40.6 percent of its total direct
premiums written and 27.2 percent of total net premiums written, respectively.
NAICC cedes 50 percent of its non-standard private passenger automobile direct
written premium, direct losses and allocated LAE to a major reinsurance company
under a quota share reinsurance agreement.
-4-
The California Automobile Assigned Risk Plan (the "Assigned Risk Plan")(CAARP) provides state mandated
minimum levels of automobile liability coverage to drivers whose driving
records, or other relevant characteristics, make it difficult
4
for them to obtain insurance in the voluntary market. The Assigned
Risk Plan allocates risks to private passenger automobile insurers in the
voluntary market based on each insurer's proportionate share of the private
passenger automobile direct written premiums. Premium rates for assigned risk
business are established by the Insurance Department and, by law, these rates
must be actuarially sound. To be eligible for the Assigned Risk Plan, an
applicant must first be denied coverage by three admitted insurance carriers.
The Assigned Risk Plan rates were increased by 8.5 percent on October 1, 1990
and by 5.2 percent on June 1, 1995. The combination of these events have caused
the number of drivers applying for insurance to the Assigned Risk Plan to
decline as well as to reduce the underwriting losses from assigned risk
business. The population of drivers in the Assigned Risk Plan has declined by
approximately 90 percent in the period from 1988 to 1995 and continued declines
are anticipated. NAICC does not expect to
receive a material number of assignments whicharising from its non-standard private
passenger automobile business and does not believe that the assignments will be material nor
should they
have a material adverse effect upon the profitability of this line of
business.
Prior to 1989, California automobile insurance rates, other than assigned
risk rates discussed above,Net written premiums were not subject to approval by any governmental
agency. In November 1988, Proposition 103, a California ballot initiative, was
passed into law by$14.5 million, $15 million and $10.5 million in
1996, 1995 and 1994, respectively, for the California voters. Among other things, Proposition 103
requires insurance companies to obtain prior regulatory approval of any new
rates prior to use. Proposition 103 does not apply to workers' compensation.
Proposition 103 also requires automobile insurers to renew policies of good
drivers as defined in Proposition 103.
The rates for NAICC's California non-standard private passenger
automobile policiesprogram. Until January 1, 1997, NAICC ceded 50 percent of its
private passenger automobile business to a major reinsurance company under a
quota share reinsurance agreement, at which time the agreement was amended to
reduce the ceding percentage to 25 percent.
UNDERWRITING
Insurers admitted in California are subjectrequired to Proposition 103. NAICC filedobtain prior approval of
both rates and forms for and
received approval to adjust its rates effective December 1, 1994. The average
overall effect was to increasemost types of insurance, including non-standard
personal automobile liability premium rates by 7.7 percent and to
decrease physical damage premium rates by 8.5 percent, forinsurance, from the CDI
before being used as part of an overall weighted
average increase of five percent. Rating factors also were adjusted to reflect
NAICC's experience in each classification of driver in each territoryinsurance contract in California. In December 1995, NAICC
filedperiodically revises its forms and rates based upon demand and NAICC's
historical experience. NAICC's general agent has authority through its agency
contract, to decreaseuse these forms and rates to bind new and renewal policies in
accordance with NAICC's underwriting guidelines.
CLAIMS
All automobile claims are handled by employees of NAICC at its home office
in Long Beach, California. Claims are reported by agents, insureds and
claimants directly to NAICC. Claims involving suspected fraud are referred to
an in-house special investigation unit ("SIU") adjuster who manages a detailed
investigation of these claims using outside investigative firms. When evidence
of fraudulent activity is identified, the SIU adjuster works with the various
state departments of insurance, the National Insurance Crime Bureau and local
law enforcement agencies in handling the claims.
COMMERCIAL AUTOMOBILE INSURANCE
GENERAL
Automobiles used or owned by businesses that are used to further the
purposes of those businesses are classified broadly as "commercial
automobiles" for insurance purposes. The majority of automobiles owned or used
by businesses are insured under policies that provide other coverages for the
business, such as commercial multi-peril insurance. Standard insurers,
however, often will not cover certain commercial automobiles because of the
claims experience and/or the type of the business, or the use or the driver of
the automobile.
Businesses which are unable to insure a specific driver and businesses
having vehicles not qualifying for commercial multi-peril insurance are
typical NAICC insureds. Examples of these risks include drivers with more than
one moving violation, one and two vehicle accounts, and specialty haulers,
such as sand and gravel, farm vehicles and certain short haul common carriers.
NAICC does not insure long haul truckers, trucks hauling logs, gasoline or
similar higher hazard operations.
NAICC's policies in force typically cover fleets of four or fewer
automobiles. The current average annual premium of the policies in force is
approximately $3,000. Approximately 45% of the policies provide both liability
premium rates
by 0.1 percent, and to increase physical damage premium rates by 21.8 percent as
well as certain other minor plan changes. Such rate filing was approved in
February 1996. Managementcoverage; most of NAICC believes that the new rates will continue to
be competitive and yield a profit for NAICC.
Commercial Automobile Insurance
In March 1995, NAICC commenced a non-standard commercial automobile
program in Arizona, Idaho, Nevada and Oregon. In August 1995, NAICC began
writing non-standard commercial automobileremainder provide liability
insurance in California. Directonly.
Net written premiums for commercial automobile insurance were $2.3$4.8 million in 1996 and
$2.1 million in each of 1995 and 1994. NAICC intendshas increased its production
efforts in commercial automobile by adding marketing representatives to continue to market this
program in
California,line as well as a vice president of marketing, which resulted in appointments
of approximately fifty new agents in the last nine months of 1996. The
increased marketing emphasis in this line is expected to result in a
significant increase in premium in 1997 and 1998.
5
MARKETING
NAICC markets non-standard commercial automobile insurance through
approximately 600 independent agents located in Arizona, California, Idaho,
Nevada, Oregon and OregonUtah. NAICC does not use any managing general agents in
this line of business, although NAICC has granted agency contracts to independent agents
through itswho may use sub-agents. NAICC's new business field marketing staff in those states.
Commercial Property-Casualty Insurance
The commercial property and casualty market has been highly competitive
and has offered limited profit potential since 1987. As a result, NAICC ceased
writingoffices support the
production of this business through the independent agents.
UNDERWRITING
Rates and policy forms are developed by NAICC and filed with the regulators
in 1994.each of the relevant states, depending upon each state's requirements.
NAICC relies upon industry experience tempered by its own experience in
establishing rates.
The maximum non-standard commercial automobile policy limit provided by
NAICC is $1 million bodily injury and property damage combined single limit of
liability for each occurrence. NAICC retains the first $150,000 bodily injury
and property damage combined single limit of liability for each occurrence.
Losses in excess of $150,000, per occurrence, are ceded to its reinsurers.
CLAIMS
All non-standard commercial automobile claims are handled under the
direction of the NAICC home office claims personnel who also handle the non-
standard personal automobile claims operations.
COMBINED RATIO
Combined Ratio
NAICC had aunderwriting ratios were 136.7 percent , 113.4 percent and 106.2
percent in 1996, 1995 and 1994, respectively. The increase in the combined
ratio in 1996 is due to the provision for additional losses and allocated loss
adjustment expenses associated with NAICC's run-off businesses, which
represents 27.3 percent of 113.4 percent, 106.2 percent and 110.9
percent forthe combined ratio in 1996. The increase in the
combined ratio in 1995 1994 and 1993, respectively. These ratios compare toreflects an overall national industry average forincrease in the workers' compensation insurers of 101.4
percent for the 1994 year, the most recent year for which such information is
available.loss
ratio as well as a decline in premium volume without a corresponding decline
in expenses.
For additional information regarding the foregoing statistics, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, 2. RESULTS OF NAICC'S OPERATIONS."
-5-
LossesResults of NAICC's OPERATIONS--Property and Loss Adjustment ExpensesCasualty Insurance
Operations" and Note 7 of the Notes to Consolidated Financial Statements.
LOSSES AND LOSS ADJUSTMENT EXPENSES
NAICC's unpaid losses and loss adjustment expenses ("LAE") represent the
estimated indemnity cost and LAEloss adjustment expenses necessary to cover the
ultimate net cost of investigating and settling claims. Such estimates are
based upon estimates for reported losses, NAICC's historical company experience of
losses reported by reinsured companies for insurance assumed, and actuarial
estimates based upon historical NAICCcompany and industry experience for
development of reported and unreported claims (incurred but not reported) claims.. Any
changes in estimates of ultimate liability are reflected in current operating
results. Inflation is assumed, along with other factors, in estimating future
claim costs and related liabilities. NAICC does not discount any of its loss
reserves.
The ultimate cost of claims is difficult to predict for several reasons.
Claims may not be reported until many years after they are incurred. Changes
in the rate of inflation and the legal environment have created forecasting
complications. Court decisions may dramatically increase liability in the time
between the dates on which a claim is reported and its resolution may dramatically increase liability.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 relating tofor environmental cleanupclean-up against policies issued prior to
1980 and which are currently in run-off. The principal exposure arises from
direct excess and primary policies of business in run-off, the obligations of
which were assumed by NAICC.NAICC in 1985. These direct excess and primary claims
are relatively
6
few in number and have policy limits of between $50,000 and $1,000,000, with
reinsurance generally above $500,000.$50,000. NAICC also has environmental claims
primarilyarising associated with participationparticipations 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 areclean-up is established
based upon facts currently known and the current state of the law and coverage
litigation. Liabilities are estimated for known claims (including the cost of
related litigation) when sufficient information has been developed to indicate
the involvement of a specific contract of insurance or reinsurance and
management can reasonably estimate its liability. Liabilities for unknown
claims and development of reported claims are included in NAICC's bulk unpaid
losses. The liability for unknown or unreported claims is not estimated to be
material based on historical reporting experience. The liability for the development of reported claims is based on
estimates of the range of potential losses for reported claims in the
aggregate as well as currently established case estimates and industry
development factors for reported claims. Estimates of liabilities are reviewed
and updated continually and exposure exists in excess of amounts which are
currently recorded which could be material. However, management does not
expect that liabilities associated with these types of claims will result in a
material adverse effect on future liquidity or financial position. Liabilities
such as these are based upon estimates and there can be no assurance that the
ultimate liability will not exceed, or even materially exceed, such estimates.
Additionally,NAICC is involved in litigation related to certain environmental claims
which have some significant uncertainty exists aboutuncertainties. 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 which can impact current estimates.cannot be determined at this time, such litigation, net of
liabilities established therefor and giving effect to reinsurance, is not
expected to have a material adverse effect on the future liquidity or
financial position of NAICC. As of December 31, 1996 and 1995, NAICC's net
unpaid losses and LAE relating to environmental claims were approximately
$13.4 million and $4.1 million.million, respectively.
Due to thesethe factors amongdiscussed above and others, the process used in
estimating unpaid losses and LAEloss adjustment expenses cannot provide an exact
result. Management of NAICC believes that the provisions for unpaid losses and LAEloss
adjustment expenses are adequate to cover the net cost of losses and loss
adjustment expenses incurred to date; however, such liability is necessarily is
based on estimates and there can be no assurance that the ultimate liability
will not exceed, or even materially exceed, such estimates.
(continued on following page)
-6-
Analysis of Losses and Loss Adjustment Expenses
The following table provides a reconciliation of NAICC's net
unpaid losses and
LAE (dollars inloss adjustment expenses (LAE) (in thousands):
Years Ended DecemberYEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994 1993
-------- -------- --------
Net unpaid losses and LAE at January 11.......... $116,294 $128,625 $119,223
$104,825Net unpaid losses acquired with Valor Insurance
Company........................................ 403 -- --
-------- -------- --------
Losses and LAE:
Provision for losses and LAE for
claims occurring in current year.......116,697 128,625 119,223
Incurred related to:
Current year.................................. 26,979 45,592 67,131
65,157
Increase (decrease) in estimated
losses and LAE for claims
occurring in prior years...............Prior years................................... 10,120 3,123 384 743
-------- -------- --------
Total incurredincurred.............................. 37,099 48,715 67,515 65,900
-------- -------- --------
Losses and LAE payments for
claims occurring during:Paid Related to:
Current yearyear.................................. (10,559) (14,464) (15,849)
(11,852)
Prior years............................years................................... (46,132) (46,582) (42,264) (39,650)
-------- -------- --------
Total paidpaid...................................... (56,691) (61,046) (58,113) (51,502)
-------- -------- --------
Net unpaid losses and LAE at December 3131........ $ 97,105 $116,294 $128,625
$119,223
Plus: reinsurance recoverables........recoverables................ 23,546 21,112 17,705 18,256
-------- -------- --------
Gross unpaid losses and LAE at December 3131...... $120,651 $137,406 $146,330 $137,479
======== ======== ========
7
The losses and LAE incurred in 1995 relating to prior years are primarily
attributable to claims from business which is in run-off. Two claims from
business in run-off comprise substantially all of the losses and LAE incurred related to prior years: one being ayears is attributable to claims
from businesses which are in run-off. In 1996, management of NAICC strengthened
the unpaid losses and allocated loss adjustment expenses (ALAE) of pre-1980
businesses assumed by NAICC in 1985 and which are in run-off. NAICC increased
these run-off claim liabilities by $10 million. The pre-1980 run-off
liabilities include claims relating to environmental clean-up for asbestosis exposure, whichpolicies
issued prior to 1970. NAICC increased its bulk unpaid liabilities related to
these claims, principally the unpaid ALAE, as it has become evident that the
legal costs associated with these claims would be significantly greater than
previously anticipated. As of December 31, 1996, NAICC's net unpaid losses and
LAE relating to environmental claims was settled in 1995 in the form of a policy buy back; the other, a construction
defect claim in which a court decision was contrary to previously established
case law.approximately $13.4 million.
The following table indicates the manner in which unpaid losses and LAE at
the end of a particular year change as time passes. The first line reflects the
liability as originally reported, net of reinsurance, at the end of the stated
year. Each calendar year-end liability includes the estimated liability for
that accident year and all prior accident years relating tocomprising that liability. The
second section shows the original recorded net liability as of the end of
successive years adjusted to reflect facts and circumstancescircumstance which are later
discovered. The next line, cumulative (deficiency) or redundancy, compares the
adjusted net liability amount to the net liability amount as originally
established and reflects whether the net liability as originally recorded was
adequate to cover the estimated cost of claims.claims or redundant. The third section
reflects the cumulative amounts related to that liability whichthat were paid, net
of reinsurance, as of the end of successive years.
-7-
Analysis of Net Losses and Loss Adjustment Expense ("LAE") Development (dollars in
thousands):
Years Ended DecemberYEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- ----------------- -------
Net unpaid losses and
LAE at end of yearyear..... $115,858 $ 95,272 $ 91,870 $ 97,810 $104,825 $119,223 $128,625 $116,294 $97,105
Net unpaid losses and
LAE re-estimated as of:
One year laterlater........ 120,527 100,599 92,632 94,364 105,568 119,607 131,748 126,414
Two years laterlater....... 124,167 100,143 87,504 99,875 111,063 123,039 141,602
Three years laterlater..... 121,081 94,954 89,844 107,945 117,756 136,735
Four years laterlater...... 116,384 96,948 95,576 116,018 138,877
Five years laterlater...... 118,175 101,537 102,081 136,269
Six years laterlater....... 122,784 107,344 119,107
Seven years laterlater..... 128,589 122,985
Eight years later..... 143,585
Cumulative (deficiency)
redundancy (12,731) (12,072) (10,211) (18,208) (12,931) (3,816) (3,123)redundancy............. (27,727) (27,713) (27,237) (38,459) (34,052) (17,512) (12,977) (10,120)
Cumulative net amounts
paid as of:
One year laterlater........ 41,767 38,165 31,162 39,131 39,650 42,264 46,582 46,132
Two years laterlater....... 72,735 56,876 53,424 63,483 68,025 71,702 80,515
Three years laterlater..... 86,142 71,543 66,198 81,485 88,038 95,525
Four years laterlater...... 96,352 78,991 75,963 94,238 106,431
Five years laterlater...... 102,385 84,980 83,704 108,923
Six years laterlater....... 107,661 90,458 95,199
Seven years laterlater..... 112,555 100,559
Eight years later..... 121,724
8
The following table reflects the same information as the preceding table
gross of reinsurance (dollars in thousands):
YEARS ENDED DECEMBER 31
-------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
Gross unpaid lossesLosses and LAE at end of
year 137,479 146,330 137,406
Reinsurance recoverable 18,256 17,705 21,112
-------- -------- ---------
Netyear.................................. $120,651 $137,406 $146,330 $137,479
Gross unpaid lossesLosses and LAE at end ofre-
estimated as of:
One year 119,223 128,625 116,294
Gross unpaid losses and LAE
re-estimated - latestlater....................... 149,416 149,815 137,898
Two years later...................... 161,731 141,737
149,815
Re-estimated reinsurance recoverable -
latest 18,698 18,067
-------- --------
Net unpaid losses and LAE re-estimated 123,039 131,748
- latestThree years later.................... 158,263
Gross cumulative (deficiency) redundancy (4,258) (3,485)deficiency: (12,010) (15,401) (20,784)
Gross cumulative amount paid as of:
One year later....................... 54,901 53,798 53,634
Two years later...................... 92,991 88,930
Three years later.................... 116,605
-8-
The tablecumulative deficiency as of December 31, 1995 on a net basis of $10.1
million is due to the strengthening of the unpaid losses and ALAE of pre-1980
businesses assumed by NAICC in 1985 and which are in run-off. NAICC increased
these run-off claim liabilities in 1996 by $10 million. The pre-1980 run-off
liabilities include claims relating to environmental clean-up for policies
issued prior to 1970.
The cumulative deficiency on a net basis of $34 million and $38.5 million as
of December 31, 1992 and 1991, respectively, is also attributable to adverse
development of workers' compensation loss experience in the 1990 and 1991 loss
years. The California workers' compensation industry, including NAICC,
experienced adverse development of those loss years. The adverse development
was the result of a significant increase in frequency in workers' compensation
claims that was brought on by a downturn in the California economy, an
increase in unemployment and a dramatic increase in stress and post-
termination claims. The adverse development in 1990 and 1991 was significantly
offset by favorable loss experience and development in the 1992, 1993 and 1994
loss years.
Conditions and trends that have affected the development of these
liabilities in the past may not necessarily recur in the future. It would not
be appropriate to use this cumulative history in the projection of future
performance.
The analysis of net losses and LAE above would ordinarily would present a ten year
development of unpaid losses and LAE, however, the loss and LAE data of NAICC
relating to periods prior to 1988 are not comparable to such data for periods
subsequent to 1988. In 1988, NAICC assumed the unpaid policyholder liabilities
of MAIC for accident years 1985, 1986 and 1987. The data subsequent to 1987
necessary to update the unpaid losses and LAE of NAICC as of December 31, 1987
and earlierprior includes loss and LAE data relating to MAIC which is not reflected
in the December 31, 1987 unpaid losses and LAE of NAICC and such data cannot
be segregated because of the assumption of those 1985, 1986 and 1987 accident
year liabilities in 1988. The 1988 assumption of the policyholder liabilities
of MAIC was the last of a series of significant events and transactions which
resulted in, among other things, the acquisition by DHC of a majority
ownership interest in NAICC, a change in the management of NAICC and a
material change in the business and operations of NAICC. As a result of these
material changes affecting NAICC, the table above, reflecting information
commencing in 1988, provides the most meaningful and relevant historical
analysis possible of unpaid losses and LAE of NAICC.
Although NAICC continues to receive claims related to 1988 and earlier, the
liability recorded represents the best estimate by NAICC's management of the
liability for currently foreseeable claims. The net cumulative deficiency as of December 31, 1995 of $10.2 million,
$18.2 million and $12.9 million for 1990, 1991 and 1992 unpaid losses and LAE,
respectively, is primarily attributable to adverse development subsequent to
1991 of the workers' compensation loss experience in the 1990 and 1991 loss
years. The California workers' compensation industry, including NAICC,
experienced adverse development of those loss years, primarily in Southern
California, largely as a result of a significant increase in the number of
workers' compensation post-termination stress claims primarily due to a downturn
in the California economy and an increase in unemployment. Workers'
compensation reform legislation passed in July 1993, which effectively reduced
the number of successful post-termination stress claims, as well as a decrease
in unemployment in California and highly-publicized anti-fraud activity, have
contributed to significantly more favorable loss experience in the 1992, 1993
and 1994 loss years. In 1995, favorable development of approximately $4.9
million in the 1992 and 1993 loss years for workers' compensation was offset by
$2.6 million of adverse development of other ongoing business lines and loss
years as well as $5.4 million of adverse development of the businesses in run-
off. As stated above, the losses and
LAEloss adjustment expenses reflected in the tables above are reduced both for
amounts ceded to other insurers and for other recoveries.
Conditions and trends that have affected the development of these
liabilities in the past may not necessarily recur or have similar effects in the
future. It would not be appropriate to use this cumulative history in the
projection of future performance.
Ceded Reinsurance and Reinsurance with Affiliates9
CEDED REINSURANCE AND REINSURANCE WITH AFFILIATES
In its normal course of business in accordance with industry practice, NAICC
reinsures a portion of its exposure with other insurance companies so as to
effectively limit effectively its maximum loss arising out of any one occurrence. Contracts
of reinsurance do not legally discharge the original insurer from its primary
liability. In accordance with generally accepted accounting principles,
estimatedEstimated reinsurance receivables arising from these contracts of
reinsurance are, in accordance with generally accepted accounting principles,
reported separately as assets. NAICC retains the first $400,000 of each
workers' compensation loss and has purchased reinsurance for up to $99.6 million
in excess of its retention, of which the first $9.6 million is placed with two
major reinsurance companies and the remaining $90 million is provided by 18
other companies. NAICC cedes 50 percent of its non-standard private passenger
automobile direct written premium, direct losses and LAE to a major reinsurance
company under a quota share reinsurance agreement. Premiums for reinsurance ceded by NAICC in 19951996
were 2229.4 percent of written premiums for the period.premiums.
As of December 31, 1995,1996, General Reinsurance Corporation ("GRC") and(GRC), Munich
American Reinsurance Company ("MARC")(MARC), and Lloyd's of London (Lloyd's) were the
only reinsurers that comprised more than ten10 percent of NAICC's reinsurance
recoverablesrecoverable on paid and unpaid claims. NAICC monitors all reinsurers, by
reviewing A.M. Best and Company ("A.M.
Best") reports and ratingratings, information obtained from reinsurance
intermediaries and analyzing financial statements. At December 31, 1995,1996, NAICC
had reinsurance recoverables on paid and unpaid claims of $10$7.7 million , $7.9
million, and $4.1 million from GRC, MARC, and $9.8 million
from MARC. BothLloyd's respectively. GRC and
MARC had an A.M. Best rating of "A+A++." and A+, respectively. The paid and unpaid
recoverable amounts ceded to Lloyd's relate to business in run-off and assumed
by NAICC. NAICC believes that Equitas has authority to respond on behalf of all
of the syndicates underlying the reinsurance contracts with Lloyd's. See Note 36
of the Notes to Consolidated Financial Statements for further information on
reinsurance.
-9-
NAICC and two of its subsidiaries participate in an intercompanyinter-company pooling and
reinsurance agreement under which DICDanielson Insurance Company (DICO) and
DNICDanielson National Insurance Company (DNIC) cede 100 percent100% of their net liability,
defined to include premiums, losses and allocated LAE,loss adjustment expenses, to
NAICC to be combined with the net liability for policies of NAICC in formation
of a "pool.""Pool". NAICC simultaneously cedes to DICDICO and DNIC ten percent10% of the net
liability of the pool.Pool. DNIC and DIC commenced participation in the pool in July, 1993 and DICO
commenced participation in January 1994, respectively. DIC1994. Additionally, both DICO and DNIC further
reimburse NAICC for executive andservices, professional services, and
administrative expenses based on designated percentages of net premiums written
for each line of business.
This
intercompany pooling and reinsurance agreement has been approved by the
California Department of Insurance (the "Insurance Department").
RegulationREGULATION
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. DHCThe Company and its insurance subsidiaries have
registered as a holding company systemsystems pursuant to such legislation in
California and routinely report to other jurisdictions. The National
Association of Insurance Commissioners (the
"Association") has formed committees and appointed
advisory groups to study and continue to formulate regulatory promulgationsproposals on such diverse
issues as the use of surplus debentures, accounting for reinsurance
transactions and the adoption of risk basedrisk-based capital ("RBC") requirements. It is not
possible to predict the impact of future state and federal regulation on the
operations of DHCthe 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 Department for the benefit of
policyholders. The Insurance Department is currently conducting a routine examination of the
statutory basis financial statements of NAICC, DNIC and DIC as of December 31,
1995 and has disclosed no findings to date. The California Insurance Code prohibitsdoes not permit the payment from other than accumulated earned surplus, of
shareholder dividends whichthat exceed the greater of net income or ten percent10% of statutory
surplus and such dividends can only be paid out of accumulated earned surplus
without prior approval offrom the Insurance Department. As a
result of NAICC'sCommissioner. Because it has negative
unassigned surplus, NAICC is not permittedable to pay dividends in 19961997 without prior
regulatory approval.
10
Capital Adequacy and Risk BasedRisk-Based Capital
Several measures of capital adequacy are common in the property-casualty
industry. The two most often used are (a) premiums-to-surplus (which measures
pressure on capital from inadequate pricing), and (b) reserves-to-surplus
(which measures pressure on capital from inadequate loss and LAEloss adjustment
expense reserves). A commonly accepted maximum premiums-to-surplus ratio is 3
to 1; commonly accepted maximum
reserves-to-surplus ratio is 5ratios range from 3-5 to 1.
The following table sets forthshows the consolidated premiums-to-surplus and reserves-to-surplusreserves-
to-surplus ratios of NAICC (on a statutory basis):
Years Ended DecemberYEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
1993
------- ------- -------------- -------- --------
Ratio of:
Premiums-to-surplusPremiums-to-surplus........................... .9:1 1.2:1 2.3:1
Reserves-to-surplus........................... 2.1:1 Reserves-to-surplus 2.6:1 3.2:1 2.8:1
-10-
Given the foregoing relatively conservative financial security ratios,
NAICC's management believes that existing capital is adequate to support
abovecontinued higher than industry average premium growth from its current premium levels for the foreseeable
future.
InAt December 1993,31, 1996, NAICC had unusual resulting values for four of the
Association adopted aInsurance Regulatory Information System tests. The unusual resulting values
all result from the strengthening of unpaid losses and ALAE of the businesses
in run-off and the decline in written premiums.
A model for determining the RBCrisk-based capital ("RBC") requirements for
property and casualty insurance companies. Under the RBC
model, property and casualty insurancecompanies was adopted in December 1993.
Insurance companies are required to report their RBC ratios based on their
statutory1994 annual statements as filed with the
regulatory authorities.statements. NAICC has calculated its RBC requirement under the
Association'smost recent RBC model and it has sufficient capital in excess of any
regulatory action level. The Company believes that RBC is the most appropriate
indicator of potential regulatory oversight.
The RBC model sets forth four levels of increasing regulatory intervention:
(1) Company Action Level (200% of an insurer's Authorized Control Level) at
which the insurer must submit to the regulator a plan for increasing such
insurer's capital; (2) Regulatory Action Level (150% of an insurer's
Authorized Control Level), at which the insurer must submit a plan for
increasing its capital to the regulator and the regulator may issue corrective
orders; (3) Authorized Control Level (a multi-step calculation based upon
information derived from an insurer's most recent filed statutory annual
statement), at which the regulator may take action to rehabilitate or
reporting level.liquidate the insurer; and (4) Mandatory Control Level (70% of an insurer's
Authorized Control Level), at which the regulator must rehabilitate or
liquidate the insurer.
At December 31, 1996, the RBC of NAICC was 263% greater than the Company
Action Level.
HOLDING COMPANY BUSINESS
DHC is a holding company incorporated under the General Corporation Law of
the State of Delaware. As of December 31, 1996, DHC had the following material
assets and no material liabilities:
(i) ownership of its MAIC subsidiary, an insurance holding company that
owns, directly or indirectly, all of the stock of NAICC, DNIC, DIC, and two
licensed insurance subsidiaries which are expected to commence writing
insurance lines in the future; and
(ii) approximately $10.1 million in cash and investments.
On December 21, 1994, DHC received a partial distribution in the amount of
$750,000 from an unaffiliated trust that owns certain assets and liabilities
of a former subsidiary of DHC. The partial distribution is recorded as
11
an extraordinary item in the Company's 1994 Consolidated Statements of
Operations. The Company has been advised that the trust is anticipated to be
terminated in the near future. DHC does not anticipate that any amount it may
receive upon termination of the trust will be material.
FORMER TRUST BUSINESS
In March 1993, DHC acquired all of the common stock of Danielson Trust
Company ("Danielson Trust") is(which was known as HomeFed Trust until November 13, 1993), a trust company
chartered by the California State Banking Department to provide trust and
fiduciary services. Danielson
Trust isservices and located in San Diego, California. Prior to January 31, 1996, Danielson
Trust also maintained a branch office in Santa Barbara, California. In March
1993 (the "Acquisition Date"), DHC acquired all of the common stock of Danielson
Trust, which was known as HomeFed Trust until November 13, 1993. In February 1994,
Danielson Trust acquired the assets of the Western Trust Services ("WTS") division of
Grossmont Bank. On January 31, 1996, following approval of the California
State Banking Department, Danielson Trust sold substantially all of the
fiduciary accounts administered by its Santa Barbara branch to The Bank of
Montecito. In connection with the sale, in January 1996, Danielson Trust
recognized a gain of $32,874.
The accounts and operations of Danielson Trust subsequent to and as of the
Acquisition Date are reflected in the Company's Consolidated Financial
Statements; however, comparisons of the financial results of Danielson Trust's
operations for the years ended December 31, 1995 and 1994 with the results of
its operations during the partial 1993 period have been omitted as they do not
relate to equivalent periods (nor, in some instances, to equivalent operations)
and would not provide meaningful information relating to historical trends and
financial results. The results of Danielson Trust's operations during the years
ended 1995 and 1994 are not entirely comparable in that they relate, in part, to
different assets, accounts and lines of business. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, 3. RESULTS OF
DANIELSON TRUST COMPANY'S OPERATIONS."
Danielson Trust's business consistsconsisted of providing trust and investment
services to individuals, not-for-profit corporations and retirement service
clients, including its affiliates. In addition, since 1994, Danielson Trust
has
provided custodial services for certificates of deposit to affiliated and
unaffiliated broker-dealers, as well as other custodial services to an
affiliated mutual fund.
See "Custody Services." In connection with Danielson
Trust's efforts to expand its sources of business within its primary market
areas, Danielson Trust has developed enhanced product lines for its private
trust and retirement services lines of business. See "New Business and Capital
Resources."
In January 1995, Danielson Trust announcedOn December 31, 1996, DHC consummated the appointment of A. Vincent
Siciliano as its President and Chief Executive Officer. The appointment became
effective on February 6, 1995.
Danielson Trust's lines of business are described below.
-11-
Private Trust
The private trust unitsale of Danielson Trust primarily provides trust, custodyto North
American Trust Company for $3 million in cash and investment management services for individuals and not-for-profit
corporations. In the performancerecognized a loss of its private trust business, this unit may
serve in the capacities of executor, trustee, investment agent, conservator or
custodian. Danielson Trust has increased its marketing support of the private
trust business, including the development of an enhanced product line.
Danielson Trust plans to offer investment management services provided by
regionally and nationally known investment managers. The company also intends
to introduce customized trust, investment and financial planning, utilizing a
variety of individualized asset allocation models designed to achieve clients'
particular investment objectives. The company also intends to simplify and
clarify the performance measurement process in portfolio management reporting.
Danielson Trust anticipates that it will introduce such new services, together
with an expansion of its client calling program and increased efforts to involve
local professionals in the referral process, by the first quarter of 1996.
Danielson Trust's private trust unit generated fee income of $1.3$1.2
million and
$1.7 million for the years ended December 31, 1995 and 1994, respectively.
Retirement Services
Danielson Trust's retirement services unit (formerly known as employee
benefit trust) provides trustee, custodial, and investment management services
to corporations, typically for qualified employee benefit plans, often in the
form of defined benefit plans, 401(k) plans, or profit sharing plans.
Additionally, this unit provides cash management services to corporations
desiring short term investments in excess of $1 million. Danielson Trust is
strengthening its commitment to the retirement services business with the
development of an enhanced product line for this market which it anticipates
introducing late in the second quarter of 1996. Danielson Trust has designed a
bundled retirement services product offering prospective retirement services
clients a variety of investment management, administrative and consulting
services for employee benefit plans of every size, including third party
recordkeeping and an employee education component. Danielson Trust believes
that such diversity of investment advisory, fiduciary and consulting services
for employee benefit plans also will enhance the company's ability to satisfy
customized client service requirements. For the years ended December 31, 1995
and 1994, the retirement services unit of Danielson Trust generated fee income
of approximately $2.6 million and $2.3 million, respectively (excluding
retirement services custodial revenues). See "Business Related to Former
Parent."
Custody Services
In addition to custodial services associated with the private and
retirement services businesses, since 1994 Danielson Trust has provided
certificate of deposit (CD) custodial services to broker-dealers and other
financial institutions. Danielson Trust also provides custody services for an
affiliated mutual fund. Total fee income for all custody services provided by
Danielson Trust for the years ended December 31, 1995 and 1994 were $537,000 and
$427,000, respectively, which constituted 11.7 percent and 8.9 percent,
respectively, of Danielson Trust's total revenue for the comparable periods. Of
that amount, fee income for CD custody services for the years ended December 31,
1995 and 1994 was $401,000 and $339,000, respectively. Approximately one
percent of Danielson Trust's total revenues in 1995 and 1994 was generated by
each of mutual fund-related custody services and other retirement custody
services. Fee income for custody services are not reflected in the private
trust or retirement services revenue amounts referred to above.
Business Related to Former Parent
During the first quarter of 1994, as previously anticipated, Danielson
Trust ceased providing various trust services to HomeFed Bank (Danielson Trust's
former parent prior to DHC's acquisition of Danielson Trust) following the sale
of HomeFed Bank's branch offices by the Resolution Trust Corporation. All of
the revenues associated with such services ceased by the end of the second
quarter of 1994. For the year ended December 31, 1994, the run-off of HomeFed
Bank-related business of Danielson Trust generated non-recurring total fee
income of $310,000, or less than seven percent of Danielson Trust's 1994
revenues.
-12-
New Business and Capital Resources
Historically, Danielson Trust has generated new business from direct
marketing efforts of Danielson Trust's officers, referrals from independent
professionals, and referrals from and captive business of its former parent
company, HomeFed Bank. As noted above, the HomeFed Bank-related appointments
ceased entirely during 1994. Virtually all of Danielson Trust's new business
during 1995 and 1994 (apart from business associated with the acquisition of
WTS) resulted from client and professional referrals, as well as from Danielson
Trust's marketing efforts.
Danielson Trust has increased its marketing efforts to expand Danielson
Trust's private trust and retirement services business within its primary market
areas with the development of enhanced product lines which it anticipates will
be introduced by the second quarter of 1996. See "Private Trust" and
"Retirement Services" above. Danielson Trust also is in the process of
implementing various marketing initiatives which commenced in 1994, including
systematic calling programs to identified business sectors within the San Diego
area, a bi-monthly local radio program and a business expansion initiative
involving medical groups. During 1995, Danielson Trust was appointed to serve
as the designated trustee for PaineWebber in its west coast region. In
connection with this appointment, Danielson Trust will provide trust services to
PaineWebber investment executives and their clients throughout California, as
well as Arizona, Colorado, Montana, Nevada, Oregon, Utah, Washington and
Wyoming. Danielson Trust intends to seek out additional such established
distribution channels for its services. Management of Danielson Trust is
hopeful that its increased business development efforts will result in continued
enhancement of Danielson Trust's reputation as a quality provider of trust and
investment services with a strong commitment to the San Diego community.
In connection with the sale of its Santa Barbara branch, Danielson Trust
has entered into a servicing agreement with The Bank of Montecito pursuant to
which Danielson Trust provides investment management and operational services
with respect to the accounts that were sold. Management of Danielson Trust
believes that the fee income it anticipates to be generated by such servicing
agreement, together with fee income from retained Santa Barbara accounts, will
partially replace the amount of fee income previously generated by the former
branch office. The former Santa Barbara branch generated fee income of
approximately $200,000 for each of the years ended December 31, 1995 and 1994,
which is included in the private trust and retirement services fee income
previously noted. Danielson Trust continues to maintain a trust services
referral arrangement with San Diego National Bank, whereby each cooperates in
order to offer each company's clients access to services that are not provided
by the separate companies.
The market for Danielson Trust's business is highly competitive and
competition is based primarily upon such factors as price and service. Several
of Danielson Trust's competitors are affiliated with large financial
institutions and, accordingly, enjoy the benefits of referrals from such
institutions. Among the types of financial institutions with which Danielson
Trust competes are banks, brokerage firms, insurance companies and mutual funds.
Liquidity and Capital Resources
Danielson Trust requires liquid assets to meet the working capital needs of
its continuing business. The primary source of these liquid assets are fees
charged to Danielson Trust's trust clients. In connection with the cessation of
fee revenues derived from HomeFed Bank-related business during the first half of
1994, as well as the incurrence by Danielson Trust since 1994 of significant
costs for communications, computer equipment upgrades and unanticipated systems
conversion expenses associated with the acquisition of the assets of WTS (see
Note 2 of the Notes to Consolidated Financial Statements), DHC made a $300,000
unsecured intercompany loan to Danielson Trust in 1994 in the form of a
promissory demand note, with quarterly interest payments at the annual rate of
7.75 percent. At December 31, 1995, the entire principal amount of the
promissory demand note was outstanding. Danielson Trust is servicing such
interest payments from fee revenues generated by its operations. DHC intends to
refrain from making demand for payment of principal until such time as Danielson
-13-
Trust has sufficient capital to make such payment. As of January 1, 1996, DHC
agreed to make an additional unsecured loan to Danielson Trust in the principal
amount of $600,000, bearing interest at the rate of prime plus one percent, and
to consider making additional such loans in the aggregate amount of $600,000
upon the request of Danielson Trust. As of the date hereof, Danielson Trust has
not borrowed any amount under such loan agreement. To the extent that timing
differences exist between the collection of revenue and the actual payment of
expenses, or where revenues generated by Danielson Trust's business are
insufficient to cover its expenses, or to maintain compliance with regulatory
capital requirements, the primary sources of funds to meet those obligations
would be the sale of short term investments, additional intercompany loans,
parent company capital contributions or financing provided by a third party.
In accordance with California banking regulations, Danielson Trust has
pledged assets with a fair value of $603,000 to the State as a reserve in
connection with certain types of fiduciary appointments, which is the maximum
amount of such reserves that may be required. State banking laws also regulate
the nature of trust companies' investments of contributed capital and surplus,
and generally restrict such investments to debt type investments in which banks
also are permitted to invest. In order to satisfy such regulations, a majority
of Danielson Trust's investments are in U.S. Government obligations and, as of
December 31, 1995, Danielson Trust was in compliance with the foregoing
requirements.
HOLDING COMPANY BUSINESS
DHC is a holding company incorporated under the General Corporation Law of
the State of Delaware.on disposal.
TAX LOSS CARRYFORWARD
As of December 31, 1995, DHC had the following material
assets and no material liabilities:
(i) ownership of its MAIC subsidiary, an insurance holding company that
owns, directly or indirectly, all of the stock of NAICC, DNIC, DIC,
and two licensed insurance subsidiaries which are expected to
commence writing insurance lines in the future;
(ii) ownership of 100 percent of the stock of Danielson Trust; and
(iii) approximately $11 million in cash and investments.
On December 21, 1994, DHC received a partial distribution in the amount of
$750,000 from an unaffiliated trust that owns certain assets and liabilities of
a former subsidiary of DHC. The partial distribution is recorded as an
extraordinary item in the Company's 1994 Consolidated Statements of Operations.
The Company has been advised that the trust is anticipated to be terminated in
the near future. DHC does not anticipate that any amount it may receive upon
termination of the trust will be material.
On December 30, 1993, following approval of the California Superior Court,
MAIC received a distribution of approximately $268,000 upon termination of an
unaffiliated trust formerly administered by the California Insurance
Commissioner as trustee. Such trust had assumed the liabilities and
substantially all of the assets of MAIC and a former subsidiary of DHC. Under
the terms of the trust agreement, the trust was required to distribute to MAIC
all amounts which remained in the trust after satisfying or otherwise resolving
all claims against MAIC and such former subsidiary. The distribution was
recorded as an extraordinary item in the Company's 1993 Consolidated Statements
of Operations. MAIC distributed such funds to DHC following approval of the
California Insurance Department (the "Insurance Department"). The termination
of the trust had the effect of finalizing a Superior Court-approved interim
distribution by such former trust to MAIC in 1992 of approximately $6.2 million,
the proceeds of which also were distributed to DHC upon approval of the
Insurance Department, as well as releasing all indemnities and pledges running
from MAIC to the trust, including a pledge of 3,526,140 shares of KCP common
stock owned by MAIC.
-14-
Also during 1993, MAIC received proceeds of $220,000 from the liquidation
of the estate of a former Texas subsidiary of DHC. The distribution was
accounted for as an extraordinary item in the Company's 1993 Consolidated
Statements of Operations.
Tax Loss Carryforward
As of December 31, 1995,1996, the Company had a consolidated net operating loss
carryforward of approximately $1.4$1.34 billion for Federal income tax purposes.
This number is based upon actual Federal consolidated income tax filingslosses for the
periods through December 31, 19941995 and an estimate of the 19951996 taxable loss.
Some or all of the carryforward may be available to it to offset, for Federal income
tax purposes, the future taxable income, if any, of DHC and its wholly-
ownedwholly-owned
subsidiaries. The Internal Revenue Service ("IRS") may attempt to challenge
the amount of this net operating loss in the event of a future tax audit.
Management believes, based in part upon the views of its tax advisors, that
its net operating loss calculations are reasonable and that it is reasonable
to conclude that the Company's net operating losses of in excess of
$1 billion would be available for use
by the Company. These tax loss attributes are currently fully reserved, for
valuation purposes, on the Company's financial statements. The amount of the
deferred asset considered realizable could be increased in the near term if
estimates of future taxable income during the carryforward period are
increased.
The Company's net operating tax loss carryforwards will expire, if not used,
in the following approximate amounts in the following years (dollars in
thousands):
Year Ending Amount of Carryforwards
DecemberYEAR ENDING AMOUNT OF CARRYFORWARDS
DECEMBER 31, Expiring
-----------EXPIRING
------------ -----------------------
19981998............................................ $ 32,804
19991999............................................ 203,869
20002000............................................ 249,488
2001 155,768
2002 169,767
2003 196,476
2004 75,933
2005 99,961
2006 129,755
2007 44,873
2008 4,626
2009 10,938
2010 6,1072001............................................ 155,762
2002............................................ 146,394
2003............................................ 77,736
2004............................................ 70,000
2005............................................ 104,763
2006............................................ 92,235
2007............................................ 87,298
2008............................................ 31,688
2009............................................ 40,405
2010............................................ 24,177
2011............................................ 20,169
12
The Company's ability to utilize its net operating tax loss carryforwards
would be substantially reduced if DHC were to undergo an "ownership change"
within the meaning of Section 382(g)(1) of the Internal Revenue Code. In an
effort to reduce the risk of an ownership change, DHC has imposed restrictions
on the ability of holders of five percent or more of the common stock of DHC,
par value $0.10 per share ("Common Stock") to transfer the Common Stock owned
by them and to acquire additional Common Stock, as well as the ability of
others to become five percent stockholders as a result of transfers of Common
Stock. Notwithstanding such transfer restrictions, there could be
circumstances under which an issuance by DHC of a significant number of new
shares of Common Stock or other new class of equity security having certain
characteristics (for example, the right to vote or to convert into Common
Stock) might result in an ownership change under the Internal Revenue Code.
See Note 710 of the Notes to the Consolidated Financial Statements for a
description of certain restrictions on the transfer of Common Stock.
-15-
DHC's Business Plan and DevelopmentDHC'S BUSINESS PLAN AND DEVELOPMENT
DHC's business plan is to grow by developing business partnerships and
making strategic acquisitions that are expected to contribute higher than
average returns for ourits stockholders. On February 26, 1996, DHC entered into a
merger agreement pursuant to which DHC will acquirewould have acquired all of the
outstanding stock of Midland Financial Group, Inc.
("Midland") in a merger transaction. The purchase price will be 1.6 timesAs described earlier,
the 1995 year-end book valueproposed merger was terminated by mutual consent of Midland. As part of the transaction, DHC will make
a $30 million capital contribution toand Midland at the closing.
The consideration to be received by the Midland shareholders will be
paid 50 percent in
cash, 40 percent in DHC non-convertible preferred stock
having a market dividend rate, and ten percent in Common Stock to be valued
based upon a trading average priorJuly, 1996 due to the closing date.loss of several key executives in the crash of TWA
Flight 800.
On January 15, 1997, DHC expectsentered into a letter of intent with Progressive
pursuant to finance
the cash portion of the purchase price and the $30which it was proposed that DHC sell to Progressive 11 million
capital contribution
with the net proceeds of an underwritten public offeringnewly issued shares of Common Stock to
raise approximately $80 million, which is expected to close concurrently with
the acquisition. The DHC public offering will be made as soon as possible and
currently is anticipated to occur during the second quarter of 1996.
Midland is engaged primarily in non-standard automobile insurance and
related activities in 16 states located primarily in the southern and western
United States. DHC anticipates that operating management of Midland will remain
with the business following the merger.
Management of DHC believes that both Midland and DHC will benefit from
operating synergies and efficiencies between the two companies' businesses and
operations. DHC anticipates that the transaction will have many positive
effects for the acquired company, including particularly providing support for
Midland's Best's ratings at the time of closing. In addition, DHC believes that
the availability of DHC's $1.4 billion net operating tax loss carryforward will
enable Midland to enhance its results throughconsideration having a shift in its investment
portfolio to higher yielding instruments, as well as by offsetting Midland's
pre-tax operating income. Management of DHC currently contemplates that DHC
will recognize the book value of
$6.60 per share. Progressive would then have owned a portion of42% interest in DHC. On
March 10, 1997, Progressive informed DHC that, for "internal Progressive
reasons", it was terminating its approximately $1.4 billion net
operating tax loss carryforward in conjunctiondiscussions with the merger.
The closing of the transaction is subject to various conditions,
including approvals by the stockholders of both companies, the receipt of
regulatory approvals, and financing. No assurance can be given that the
conditions to the transaction can be satisfied or that the transaction will be
completed.
As previously described, in March 1993, DHC completed the acquisition
of the common stock of Danielson Trust from a subsidiary of the Resolution Trust
Corporation. In February 1994, DHC's trust subsidiary, Danielson Trust,
completed the acquisition of the assets of the Western Trust Services ("WTS")
division of Grossmont Bank. See Note 2 of the Notes to Consolidated Financial
Statements.DHC.
EMPLOYEES
As of December 31, 1995,1996, the number of employees of DHC and its consolidated
subsidiaries was approximately as follows:
NAICC 156
Danielson Trust 64NAICC............................................................... 141
DHC (holding company only) 12.......................................... 11
---
Total 232Total........................................................... 152
===
None of these employees is covered by anya collective bargaining agreement. DHC
believes that the staffing levels are adequate to conduct future operations.
-16-
ITEM 2. PROPERTIES.
DHC leases a minimal amount of space for use as administrative and executive
offices. DHC's lease has a term of approximately five years which is scheduled
to expire in 1998. DHC believes that the space available to it is adequate for
DHC's current and foreseeable needs.
NAICC's headquarters are located in a leased office facility in Rancho
Dominguez, California, pursuant to a long term lease which is scheduled to
expire in 1999. In addition, NAICC has entered into short term leases in
connection with its operations in various locations on the west coast of the
United States. NAICC believes that the foregoing leased facilities are
adequate for NAICC's current and anticipated future needs.
Danielson Trust's headquarters are located in a leased office facility in
San Diego, California. This lease has a term of approximately ten years which
is scheduled to expire in 2004, with options to extend. Prior to January 31,
1996, Danielson Trust maintained a branch office in Santa Barbara, California.
On January 31, 1996, following approval of the California State Banking
Department, Danielson Trust sold its Santa Barbara branch to The Bank of
Montecito which assumed the lease of that branch office. In addition, in
connection with the acquisition of the WTS assets and during the process of
integrating such assets into Danielson Trust's operations, from February 22,
1994 through July 31, 1994, Danielson Trust also occupied office space that was
previously occupied by WTS, pursuant to a short term sublease with Grossmont
Bank. Danielson Trust believes that its existing leased premises are adequate
for Danielson Trust's current and foreseeable needs. See Note 1114 of the Notes to Consolidated Financial Statements.
13
ITEM 3. LEGAL PROCEEDINGS.
NAICC and Danielson Trust are partiesis a party to various legal proceedings which are considered routine
and incidental to their respectiveits insurance and trust
businessesbusiness and are not material to the financial
condition and operation of such respective businesses. For information regarding the resolution of NAICC's
claim to recover a reinsurance receivable, see Note 3 of the Notes to
Consolidated Financial Statements.business. DHC is not a party to any legal
proceeding which is considered material to the financial condition and
operation of its business. See Note 1215 of the Notes to Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-17-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
"Stock Market Prices" on page 9832 of DHC's 19951996 Annual Report to Stockholders
(included as an exhibit hereto) is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Consolidated Financial Data" on page 606 of DHC's 19951996 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 617 through 7212 of DHC's 19951996 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 7313
through 76, 7716, 17 through 96,30, and 98,32, respectively, of DHC's 19951996 Annual Report
to Stockholders (included as an exhibit hereto), are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-18-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS.Directors
The Directors of DHC are listed on the following pages with brief statements
of their principal occupationoccupations and other information. A listing of the
Directors' and officers' beneficial ownership of Common Stock appears on
subsequent pages under the heading "Item 12. "SecuritySecurity Ownership of Certain
Beneficial Owners and Management." All of the Directors were elected to their
present terms of office by the stockholders at the Annual Meeting of
Stockholders of DHC held on April 25, 1995.September 17, 1996. The term of office of each
Director continues until the election of Directors to be held at the next
Annual Meeting of Stockholders or until his successor has been elected. There
is no family relationship between any Director and any other Director or
executive officer of DHC. The information set forth below concerning the
Directors has been furnished by such Directors to DHC.
14
DIRECTOR
DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
-
-------- --- -------------------- --------
Martin J. Whitman 71Whitman..... 72 Chairman of the Board and 1990
Chief InvestmentExecutive 1990
Officer of DHC; Managing Director of
Whitman Heffernan Rhein &
Co., Inc.
C. Kirk Rhein, Jr. 43DHC
David M. Barse........ 34 President and Chief Executive Officer and 1990
President of DHC; Managing
Director of Whitman Heffernan
Rhein & Co., Inc.
James P. Heffernan 50 Chief FinancialOperating Officer of 1990
DHC; Managing Director of
Whitman Heffernan Rhein &
Co., Inc.1996
DHC
Eugene M. Isenberg 66Isenberg.... 67 Chairman of the Board and 1990
Chief Executive 1990
Officer of Nabors Industries, Inc.
Joseph F. Porrino 51Porrino..... 52 Executive Vice President of 1990
the New School 1990
for Social Research
Frank B. Ryan 59Ryan......... 60 Professor of Mathematics and Computational 1990
Computational
and Applied Mathematics at Rice University
William R. Story 50Wallace O. Sellers.... 67 Vice Chairman and Director of Enhance 1995
Financial Services Group, Inc.
Anthony G. Petrello... 42 President and Chief Executive 1990Operating Officer of KCP Holding
Company1996
Nabors Industries, Inc.
Stanley J. Garstka.... 53 Deputy Dean and National American
Insurance CompanyProfessor in the Practice 1996
of California
Wallace O. Sellers 66Management at Yale University School of
Management
Timothy C. Collins.... 40 Chief Executive Officer and Senior Managing 1996
Director of Enhance Financial 1995
Services Group, Inc.Ripplewood Holdings LLC
-19-
Mr. Whitman is the Chairman of the Board, Chief InvestmentExecutive Officer and a
Director of DHC, is a Managing Director of Whitman Heffernan Rhein & Co., Inc.
("WHR"), an investment and financial advisory firm which he founded with Messrs.
Heffernan and Rhein during the first quarter of 1987.DHC. Since 1974, Mr. Whitman has been the President and
controlling stockholder of M.J. Whitman & Co., Inc. (now known as Martin J.
Whitman & Co., Inc.) ("MJW&Co") which, until August 1991, was a registered
broker-dealer. From August 1994 to December 1994, Mr. Whitman served as the
Managing Director of M.J. Whitman, L.P. ("MJWLP"), then a registered broker-dealerbroker-
dealer which succeeded to the broker-dealer business of MJW&Co. Since January
1995, Mr. Whitman has served as the Chairman and Chief Executive Officer (and,
until June 1995, as President) of M.J.M. J. Whitman, Inc. ("MJW"), which succeeded
at that time to MJWLP's broker-dealer business. Also since January 1995, Mr.
Whitman has served as the Chairman and Chief Executive Officer of M.J.WhitmanM. J.
Whitman Holding Corp. ("MJWHC"), the parent of MJW and other affiliates. Since
March 1990, Mr. Whitman has been the Chairman of the Board, Chief Executive
Officer and a Director (and, since January 1991, the President) of Third
Avenue Value Fund, Inc. ("TAVF"), an investment company registered under the
Investment Company Act of 1940.1940, and EQSF Advisers, Inc. ("EQSF"), TAVF's
investment adviser. Until April 1994, Mr. Whitman also served as the Chairman
of the Board, Chief Executive Officer and a Director of Equity Strategies
Fund, Inc., previously a registered investment company. Mr. Whitman is a
Managing Director of Whitman Heffernan Rhein & Co., Inc. ("WHR"), an
investment and financial advisory firm which he founded with James P.
Heffernan and C. Kirk Rhein, Jr. during the first quarter of 1987. Since March
1991, Mr. Whitman has served as a Director of Nabors Industries, Inc., a
publicly-traded company. From March 1993 through February 1996, Mr. Whitman
served as a director of Herman's Sporting Goods, Inc., a retail sporting goods
chain, which filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code on April 26, 1996. Mr. Whitman also serves as a Director of
DHC'sthe Company's subsidiaries, including National American Insurance Company of
California ("NAICC"), and KCP Holding Company ("KCP") and Danielson Trust Company ("Danielson
Trust"). Mr. Whitman co-authored
the book The Aggressive Conservative Investor.
------------------------------------ Mr. Whitman is a Distinguished
Faculty Fellow in Finance at the Yale University School of Management. Mr.
Whitman graduated from Syracuse University magna cum laude in 1949 with a
Bachelor of Science degree and received his Masters degree in Economics from
the New School for Social Research in 1956. Mr. Whitman is a Chartered
Financial Analyst.
Mr. Rhein isBarse has been the President, Chief ExecutiveOperating Officer and a Director of
DHC.
He also isDHC since July 1996 and a Managing Directordirector of WHRNAICC since August 1996. Since June
1995, Mr. Barse has been the President of each of MJW and MJWHC. Since April
1995, he has been an Executive Vice President and Chief Operating Officer of
TAVF and
15
EQSF. Mr. Barse joined the predecessors of MJW and MJWHC in December 1991 as
General Counsel. Mr. Barse was prior to April 1987, a partner inpreviously an attorney with the law firm of
Anderson Kill OlickRobinson Silverman Pearce Aronsohn & Oshinsky, P.C.Berman LLP. Mr. Rhein specialized in
corporate transactions and securities law during his law practice. Since March
1991, Mr. Rhein has served as a Director and, since May 1991, as Vice Chairman
of Reading & Bates Corporation, a publicly-traded company listed on the New York
Stock Exchange. Mr. Rhein also serves as a Director of DHC's subsidiaries,
including NAICC, KCP and Danielson Trust. Mr. Rhein graduated from the College
of Wooster withBarse received a Bachelor
of Arts degree. In 1976, Mr. Rhein received hisin Political Science from George Washington University in 1984 and a
Juris Doctor degree from Columbia University School of Law.
Mr. Heffernan is Chief Financial Officer and a Director of DHC. From
1990 through March 1996, Mr. Heffernan served as Chief Investment Officer of
DHC. He also is a Managing Director of WHR. Prior to April 1987, he was a
partner of Anderson Kill Olick & Oshinsky, P.C. During his law practice, Mr.
Heffernan concentrated in the area of bankruptcy law and reorganizations. Since
May 1993, Mr. Heffernan has served as a Director of The Columbia Gas System,
Inc., a publicly-traded company listed on the New York Stock Exchange.
Beginning in February 1995, Mr. Heffernan has served as Chairman of the Board of
Herman's Sporting Goods, Inc., a retail sporting goods chain. Mr. Heffernan also
serves as a Director of DHC's subsidiaries, including NAICC, KCP and Danielson
Trust. Mr. Heffernan graduated with a Bachelor of Arts degree from LeMoyne
College in 1967 and received his Juris Doctor degree from Fordham UniversityBrooklyn Law School in 1970.1987.
Mr. Isenberg, since 1987, has been Chairman and Chief Executive Officer of
Nabors Industries, Inc. ("Nabors"), a publicly-traded oil and gas drilling
company listed on the American Stock Exchange.Exchange ("AMEX"). Beginning in 1996, Mr.
Isenberg iscommenced his term as a memberGovernor of the AMEX. From 1969 to 1982,
Mr. Isenberg was Chairman of the Board and principal stockholder of Directors of Continental Mortgage Investors (an equipment leasingGenimar
Inc., a steel trading and photo
finishing business) and a Managing Partner of EMI Capital Associates, Ltd. (a
manager of private investments and assets).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 magna cum laude in
1950 with a Bachelor of Arts degree in Economics and from Princeton University
in 1952 with a Masters degree in Economics.
Mr. Porrino has been Executive Vice President of the New School for Social
Research since September 1991. Prior to that time, Mr. Porrino was a partner
in the New York law firm of Putney, Twombly, Hall & Hirson, concentrating his
practice in the area of labor law. Mr. Porrino received a Bachelor of Arts
degree from Bowdoin College in 1966, and was awarded a Juris Doctor degree
from Fordham University School of Law in 1970.
-20-
Dr. Ryan, since August 1990, has been a Professor of Mathematics and
Computational and Applied Mathematics at Rice University. Since March 1996,
Dr. Ryan has served as a Director of Sequoia Systems, Inc., a computer systems
company, the capital stock of which is traded on National Association of
Securities Dealers Automated Quotation.NASDAQ. Since March 1995, Dr.
Ryan has served as a Director of America West Airlines, Inc., a publicly-tradedpublicly-
traded company listed on the New York Stock Exchange. From August 1990 to
February 1995, Dr. Ryan also served as Vice President-ExternalPresident--External Affairs at
Rice University. For two years ending August 1990, Dr. Ryan was the President
and Chief Executive Officer of Contex Electronics Inc., a subsidiary of
Buffton Corporation, the capital stock of which is publicly traded on the
American Stock Exchange.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. Story, since September 1991, has been President and Chief Executive
Officer of NAICC and KCP. Prior to that time, Mr. Story was President and Chief
Operating Officer of NAICC, with which he has been employed since 1987. Before
that time, Mr. Story held underwriting and executive positions with Mission
American Insurance Company, Prudential Reinsurance Company, and The Hartford.
Mr. Story also serves as a Director of KCP, NAICC and Danielson Trust. Mr.
Story received a Bachelor of Arts degree in Business from the University of
Northern Iowa in 1968 and holds the designations of Chartered Property and
Casualty Underwriter, and Associate in Risk Management (IIA).
Mr. Sellers is Vice-Chairman and a Director of Enhance Financial Group, Inc.
("Enhance Group"), a financial services corporation the capital stock of which
is publicly traded on the New York Stock Exchange. Until December 31, 1994,
Mr. Sellers was the President and Chief Executive Officer of Enhance Group,
from its inception in 1986, as well as its principal subsidiaries, Enhance
Reinsurance Company and Asset Guaranty Insurance Company, from their
inceptions in 1986 and 1988, respectively. From 1987 to 1994, Mr. Sellers
served as a Director, and from 1992 to 1993 as the Chairman, of the
Association of Financial Guaranty Insurors in New York. From 1990 through 1994, Mr. Sellers served on the Board of
Directors of EIC Corporation Ltd. and Exporters Insurance Company Ltd., both of
Bermuda. Mr. Sellers was a Director and, in 1990, Chairman, of the Foreign
Credit Insurance Association from 1990 through 1994. From 1990 through 1994,
Mr. Sellers was a Director of Van-American Insurance Company in Lexington,
Kentucky. From 1982 through 1991, Mr. Sellers was a member of the Board of
Directors of Financial News Network in Santa Monica, California. From 1985
through 1990, Mr. Sellers was a Director of Intex Holdings (Bermuda) Limited.
Mr. Sellers served on the Board of Directors of The Learning Channel in
Washington, DC. Mr. Sellers received a
Bachelor of Arts degree in Economics,
Anthropology and Archaeology formfrom the University of New Mexico in 1951 and a
Masters degree in Economics from New York University ("NYU") in 1956. Mr.
Sellers also is a Doctoral candidate at the NYU Graduate School of Business
Administration. Mr. Sellers
attended the Advanced Management Program at Harvard University in 1975. Mr. Sellers1975 and is
a Chartered Financial Analyst.
-21-Mr. Petrello has been the President and Chief Operating Officer of Nabors
since 1992 and has been a director of Nabors and a member of the Executive
Committee of its board of directors since 1991. Mr. Petrello was formerly a
partner with the law firm Baker & McKenzie, which he had been with since 1979.
In 1986, Mr. Petrello was named Managing Partner of Baker & McKenzie's New
York Office and served in that capacity until 1991 when he resigned as a
partner in such law firm. Mr. Petrello continues as Of Counsel to Baker &
McKenzie. Mr. Petrello received a Bachelor of Science degree and a Masters
degree from Yale University in 1976 and a Juris Doctor from Harvard University
in 1979.
Mr. Garstka has been Deputy Dean at the Yale University School of Management
(the "Yale School of Management") since November, 1995 and has been a
Professor in the Practice of Management at the Yale School of Management since
1988. Mr. Garstka was the Acting Dean of the Yale School of Management from
August 1994 to October 1995, and an Associate Dean of the Yale School of
Management from 1984 to 1994.
16
EXECUTIVE OFFICERS.Mr. Garstka has served on the Board of Trustees of MBA Enterprises Corps, a
non-profit organization, since 1991 and on the Board of Trustees of The Foote
School in New Haven, Connecticut since 1995. From 1988 to 1990, Mr. Garstka
served as a director of Vyquest, Inc., a publicly-traded company listed on the
AMEX. Mr. Garstka was a Professor in the Practice of Accounting from 1983 to
1988, and an Associate Professor of Organization and Management from 1978 to
1983, at the Yale School of Management. Mr. Garstka has also authored numerous
articles on accounting and mathematics. Mr. Garstka received a Bachelor of
Arts degree in Mathematics from Wesleyan University in Middletown, Connecticut
in 1966, a Masters degree in Industrial Administration in 1968 from Carnegie
Mellon University and a Doctorate in Operations Research in 1970 from Carnegie
Mellon University.
Mr. Collins has been the Chief Executive Officer and Senior Managing
Director of Ripplewood Holdings LLC, a private investment firm, since October
1995. From January 1990 to September 1995, Mr. Collins was the Senior Managing
Director of Onex Investment Corp., a private investment firm. Since April
1994, Mr. Collins has been a director of Scotsman Industries, Inc., a
publicly-traded company listed on the New York Stock Exchange. Mr. Collins is
also a director of Dayton Superior Corporation (NYSE) and is a trustee of
DePauw University. Mr. Collins received a Bachelor of Arts degree in
Philosophy from DePauw University in 1978, and a Masters in Private and Public
Management from the Yale School of Management in 1982.
Executive Officers
The executive officers of DHC are as follows:
NAME AGE PRINCIPAL POSITION WITH REGISTRANT
- ---- --- ----------------------------------
Martin J. Whitman 71Whitman............ 72 Chairman of the Board, Chief
Investment Officer and a Director
C. Kirk Rhein, Jr. 43 President, Chief Executive Officer
and a Director
James P. Heffernan 50President, Chief Operating Officer and a
David M. Barse............... 34 Director
Michael T. Carney............ 43 Chief Financial Officer and a Director
Lisa D. Levey 39Treasurer
Ian M. Kirschner............. 41 General Counsel and Secretary
Claudia C. Cosenza 32 Controller
For additional information about Messrs. Whitman Heffernan and Rhein,Barse, see "Directors"
above.
Ms. LeveyMr. Carney was the Chief Financial Officer ("CFO") of the Company from
August 1990 until March 1996 and has been the CFO of the Company and a
director of NAICC since August 1996. Since 1990, Mr. Carney has served as
Treasurer and CFO of TAVF and EQSF and, since 1989, as CFO of WHR, as well as
MJW&Co., and MJW and MJWHC and their predecessors. From 1990 through April
1994, Mr. Carney also served as CFO of Carl Marks Strategic Investments, L.P.;
and from 1989 through April 1994, Mr. Carney served as Treasurer and CFO of
Equity Strategies Fund. From 1988 to 1989, Mr. Carney was the Director of
Accounting of Smith New Court, Carl Marks, Inc., and, from 1986 to 1988, Mr.
Carney served as the Controller of Carl Marks & Co., Inc. Mr. Carney graduated
from St. John's University in 1981 with a Bachelor of Science degree in
Accounting.
Mr. Kirschner has been the General Counsel and Secretary of DHC since January
1991. Ms. LeveyAugust
1996. Mr. Kirschner has also has served as General Counsel and Secretary of Danielson
TrustMJWHC
and MJW since March 1993, of NAICC since 1992,January 1996 and of WHRTAVF and EQSF since 1991. PriorJanuary 1997. From
February 1993 to January 1991, Ms. LeveyJune 1995, Mr. Kirschner was a partner withVice President, the General
Counsel and Secretary of 2 I Inc., a then NASDAQ Small-Cap listed holding
company. Mr. Kirschner has been practicing law firm of Anderson Kill Olicksince 1979, and was Of Counsel
to Morgan, Lewis & Oshinsky, P.C. specializing in commercial transactions. Ms. Levey graduated
magna cum laude withBockius, from October, 1990 to October, 1992. Mr. Kirschner
obtained a Bachelor of Arts degree from the State University of PennsylvaniaNew York at
Binghamton in 19781976 and received hera Juris Doctor degree from New YorkBoston University School of Law in
1981.
Ms. Cosenza has been Controller of DHC since April 1992. Prior to that
time, Ms. Cosenza was a Senior Accountant with DHC. In addition, since June
1990, Ms. Cosenza has served as Controller of Martin J. Whitman & Co., Inc.
(which formerly was known as MJW&Co.) and various affiliated entities. From
June 1990 through 1993, Ms. Cosenza also served as Controller of MJWLP. Ms.
Cosenza graduated from Adelphi University in 1985 with a Bachelor of Business
Administration degree in Accounting. Ms. Cosenza is a Certified Public
Accountant.
COMPLIANCE WITH SECTION1979.
Section 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires DHC's
Directors and executive officers, and persons who own more than ten percent of
a registered class of the DHC's equity securities, to file with the
17
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 tenten-
percent stockholders are required by Federal securities regulations to furnish
DHC with copies of all Section 16(a) forms they file.
To DHC's knowledge, based solely upon review of the copies of such reports
furnished to DHC and written representations that no other reports were
required, except for one Form 3 and one Form 4 with respect to Ms. Cosenza
(involving one transaction) and one Form 3 with respect to Mr. SellersCollins (not involving any
transaction), all Section 16(a) filing requirements applicable to DHC's
officers, Directors and greater than ten percent beneficial owners were
complied with on a timely basis for the fiscal year ended December 31, 1995.
-22-
1996.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table presents certain information
relating to compensation paid by DHC for services rendered in 19951996 by the Chief
Executive Officer, the former Chief Executive Officer and the threetwo other former
executive officers of DHC as of the last
day of the fiscal year whose cash compensation for such year exceeded
$100,000. No other executive officers of DHC received compensation in excess of
$100,000 for fiscal year 1996. Only those columns which call for information
applicable to DHC or the individuals named for the periods indicated have been
included in such table.
LONG-TERM
ANNUAL LONG TERM
COMPENSATION COMPENSATION
--------------------------------------------------------------------- ------------
AWARDS
-----------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY(A) BONUS(B) OPTIONS COMPENSATION
POSITION YEAR SALARY /a/ BONUS /b/ OPTIONS ($) ($) (#) - ---------------------------------------------------------------------------------------------------($)
------------------ ---- --------- -------- ------------ ------------
C. Kirk Rhein, Jr. 1995 $200,000 -0- -0-
President & Chief Executive Officer 1994 $ 75,000 -0- -0-
1993 $ 75,000 $100,000 -0-
- ---------------------------------------------------------------------------------------------------
James P. Heffernan 1995 $200,000 -0- -0-
Chief Financial Officer 1994 $ 75,000 -0- -0-
1993 $ 75,000 $100,000 -0-
- ---------------------------------------------------------------------------------------------------
Martin J. Whitman 1995Whitman....... 1996 $200,000 -0- -0-
Chairman of the Board &
Chief 1994 $ 75,000Executive 1995 $200,000 -0- -0-
Investment Officer 19931994 $ 75,000 $100,000 -0-
- ---------------------------------------------------------------------------------------------------C. Kirk Rhein, Jr. ..... 1996 $116,667 -0- -0-
President & Chief
Executive Officer(c) 1995 $200,000 -0- -0-
1994 $ 75,000 $100,000 -0-
James P. Heffernan...... 1996 $116,667 -0- -0- $83,333
Chief Financial
Officer(d) 1995 $200,000 -0- -0-
1994 $ 75,000 $100,000 -0-
Lisa D. Levey 1995 $158,675 /c/ $100,000 /c/Levey........... 1996 $114,960 -0- 15,000 $72,917
General Counsel &
SecretarySecretary(e) 1995 $158,675(f) $100,000(f) -0-
1994 $125,175 /c/ $100,000 /c/$125,175(f) $100,000(f) -0-
1993 $131,325 /c/ $100,000 /c/ -0-
- --------------------------------------------------------------------------------------------------
For information regarding compensation paid during 1995 by NAICC to Mr.
Story, who is a member of the Board of Directors, see "Item 13. Certain
Relationships and Related Transactions" below.
- ----------
/a/--------
(a) Amounts shown indicate cash compensation earned and received by executive
officers in the year shown. Executive officers also participate in DHC
group health insurance.
/b/(b) Amounts shown indicate bonuses earned, if any, with respect to services to
DHC in the fiscal year shown whether or not paid in such fiscal year.
/c/(c) Mr. Rhein was President and Chief Executive Officer until his death in the
crash of TWA Flight 800 on July 17, 1996. Annual Compensation reflects
compensation paid through that date. For information regarding additional
payments made to the estate of Mr. Rhein, see Item 13. "Certain
Relationships and Related Transactions."
(d) Mr. Heffernan was the Chief Financial Officer until his resignation on July
29, 1996. At that time, Mr. Heffernan entered into an employment agreement
with DHC pursuant to which he was paid the amount set forth under All Other
Compensation during 1996.
18
(e) Ms. Levey was the General Counsel and Secretary until her resignation on
July 31, 1996. Ms. Levey entered into a severance agreement with DHC
pursuant to which she was paid the amount set forth under All Other
Compensation during 1996.
(f) Amounts shown reflect portion of compensation allocated to DHC based upon
percentage of time spent in connection with DHC matters.
-23-
AGGREGATED OPTION EXERCISESOPTION/SAR GRANTS IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUESThe following table presents certain information relating to the grants of
stock options made during 1996 to the named executive officers of DHC. The
options were granted under DHC's 1995 Stock and Incentive Plan. Pursuant to
rules of the Securities and Exchange Commission, the table also shows the
value of the options granted at the end of the option term (through October
31, 1997) if the stock price were to appreciate annually by 5% and 10%,
respectively. There is no assurance that the stock price will appreciate at
the rates shown in the table. Only those tabular columns which call for
information applicable to DHC or the named individuals have been included in
such table.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------- ----------------------
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL
OPTIONS/ OPTIONS/SARS
SARS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ----------- ---------- ---------- -----------
Martin J. Whitman....... -0-
C. Kirk Rhein, Jr....... -0-
James P. Heffernan...... -0-
Lisa D. Levey........... 15,000 0.94 $6.6875 10/31/97* 9,185 18,768
- --------
* In connection with the termination of her employment, the expiration date of
the options granted to Ms. Levey, which would otherwise have terminated
three months after the date of termination, was extended to October 31,
1997.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table presents certain information relating to the value of
unexercised stock options as of the end of 1995,1996, on an aggregated basis, owned
by the Chief Executive Officer and the three othernamed executive officers of DHC as of the last day of the fiscal year whose cash compensation for such year
exceeded $100,000.year.
None of such officers who owned options to purchase Common Stock during 19951996
exercised any of such options during 1995.1996. Only those tabular columns which
call for information applicable to DHC or the named individuals have been
included in such table.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
IN-THE-
UNEXERCISED OPTIONS AT MONEYFISCAL YEAR- IN-THE-MONEY OPTIONS
FISCAL YEAR-ENDEND AT FISCAL YEAR-END
(#) ($)
----------------------------------------------------------------------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------- ----------- ------------- ----------- -------------
Martin J. Whitman........... 210,000 -0- $420,000 -0-
C. Kirk Rhein, Jr.Jr........... 210,000 /1/ -0- $787,500 /2/$420,000 -0-
President & Chief
Executive Officer
James P. HeffernanHeffernan.......... 210,000 /1/ -0- $787,500 /2/$420,000 -0-
Chief Financial Officer
Martin J. Whitman 210,000 /1/ -0- $787,500 /2/ -0-
Chairman of the Board &
Chief Investment Officer
Lisa D. Levey -0- -0-Levey............... 15,000 -0- -0- General Counsel and
Secretary-0-
19
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995,1996, none of the persons who served as members of the Compensation
Committee of DHC's Board of Directors also was, during that year or
previously, an officer or employee of DHC or any of its subsidiaries or had
any other relationship requiring disclosure herein.
- ----------
/1/ As previously disclosed, these options were granted March 13, 1991 under the
1990 Stock Option Plan and are currently exercisable at an exercise price of
$3.00 per share (which equals the arithmetic average of the closing prices
of the Common Stock on the American Stock Exchange for the 30 days prior to
the date of grant). The options expire ten years after the date of grant.
Options to purchase 70,000 shares of Common Stock became exercisable on each
of March 13, 1992, March 13, 1993 and March 13, 1994.
/2/ The value of unexercised in-the-money options, whether or not exercisable,
equals the difference between the fair market value of such options at
fiscal year-end (i.e., the closing price of the Common Stock on the American
Stock Exchange on December 31, 1995, namely, $6-3/4) and the exercise price
of such options (i.e., the arithmetic average of the closing prices of the
Common Stock on the American Stock Exchange for the 30 days prior to the
date of grant, March 13, 1990, namely, $3.00).
-24-
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of DHC's (the
"Committee"), during 1995, was comprised of three independent (i.e., non-
employee) Directors. The Committee provided the following report on executive
compensation during 1995 as required by applicable securities regulations:
"The Committee's goal continues to be to structure compensation in a way
that will attract and retain highly qualified executives who will conduct the
business of the Company in a manner that will maximize stockholder values.
Toward that end, the Committee seeks to reward effective executive performance
with reference to the Company's achievements, and each individual executive's
contribution to those successes, each year.
DHC does not require its officers to own any amount of Common Stock, nor
does DHC maintain a stock retention policy for officers. However, it is the
Committees's belief that the substantial voluntary stock ownership position of
DHC's executive officers is an extremely strong indication of the alignment of
its officers' interest with that of DHC's stockholders.
For the first time since the inception of the Company's operations in
August 1990, the annual base salary of each of C. Kirk Rhein, Jr., the Chief
Executive Officer of DHC, Martin J. Whitman, the Chairman of the Board and Chief
Investment Officer of DHC, and James P. Heffernan, the Chief Financial Officer
of DHC, was raised, from its prior level of $75,000 to $200,000. As the
Committee has noted in prior Reports, the historic reason for setting and
maintaining low cash compensation has been those executives' collective desire
not to take significant cash out of the Company in the form of executive
compensation at the very early stages of the Company's development. However, the
Committee believed it was necessary to acknowledge in a tangible manner these
executives' unstinting efforts on the Company's behalf over its first five years
of operations and, therefore, the Committee increased those individuals' base
salary.
The three executives' primary goal in 1995 was to identify a suitable
acquisition candidate for the Company. To accomplish this objective, Messrs.
Rhein, Whitman and Heffernan devoted a substantial portion of their time
evaluating numerous potential strategic opportunities -- reviewing materials,
following up introductions, meeting with candidates' management. At the time of
this writing, their efforts appear to have been worthwhile, in light of the
Company's public announcement of its February 26, 1996 agreement to acquire
Midland Financial Group, Inc. in a merger transaction. The Committee is
confident that DHC's executive management will direct all of their abilities
towards consummation of the transaction, including a public offering of DHC's
Common Stock to raise the cash portion of the purchase price, as well as the
capital contribution to be made to Midland at closing. Notwithstanding their
apparent success in achieving their 1995 corporate objective, Messrs. Rhein,
Whitman and Heffernan felt it would be premature to accept any bonus or other
compensation for 1995 beyond their base salary described above. The Committee
notes that there are no employment contracts between DHC and any of its
executive officers.
The Committee recommended an increase in the 1995 base salary of Lisa D.
Levey, DHC's General Counsel and Secretary, from $150,000 to $175,000.
This was the first change in Ms. Levey's base salary since she joined the
Company in 1991. The base compensation of $158,675 paid to Ms. Levey in 1995
reflects the Company's allocated portion of her total base salary amount, based
upon the percentage of Ms. Levey's time actually devoted to Company matters. In
addition to base salary, pursuant to the Committee's recommendation, the Company
paid a $100,000 cash bonus to Ms. Levey with respect to 1995. In arriving at the
bonus amount, the Committee reviewed Ms. Levey's overall performance as well as
her achievement of specific goals identified jointly by DHC's executive
management and Ms. Levey early in 1995. As part of this evaluation, the
Committee considered a variety of Ms. Levey's accomplishments in 1995, including
the development of DHC's 1995 Stock and Incentive Plan (the "1995 Plan") adopted
at the last annual meeting of stockholders, and her involvement in a variety of
legal matters relating to Danielson Trust Company,
-25-
including in connection with its integration of the Western Trust Services
assets acquired in 1994, as well as with respect to the sale of its Santa
Barbara branch to The Bank of Montecito, which closed in January 1996. Ms. Levey
was one of the recipients of stock options granted by the Committee in January
1996 pursuant to the 1995 Plan, noted below.
During 1995, the Committee did not make any stock-based compensation
grants under DHC's 1995 Plan. However, in keeping with the Committee's
view, shared by management of the Company, of the value of non-cash compensation
both to motivate performance and reward the creation of long term stockholder
value, on January 15, 1996, the Committee granted an aggregate of 158,900
options under the 1995 Plan to certain executives and employees of DHC's
(other than Messrs. Rhein, Whitman and Heffernan) and its subsidiaries, NAICC
and Danielson Trust. The exercise price of such options is $6.6875 (the mean of
the high and low prices of the Common Stock on the American Stock Exchange on
the date of grant). These awards will be described in detail in the 1996
Committee Report. The Committee also notes that, in accordance with the terms
of the 1995 Plan, Wallace O. Sellers received an automatic grant of 40,000
options upon his election as a Director of DHC at the last annual
meeting of stockholders on April 25, 1995.
The Committee does not rely upon quantitative measures or other
measurable objective indicia, such as earnings or specifically weighted factors
or compensation formulae, in reaching compensation determinations. Rather, since
DHC at the parent-company level is simply a holding company operation having
only a small group of executives responsible for numerous and diverse areas of
the Company's business and management, and given the high level of awareness
each executive has of the others' activities and contributions, the Committee
evaluates executive performance and reaches compensation decisions based, in
part, upon the recommendations of DHC's executives. The Committee also reviews
quantitative and comparative compensation data and, in some instances, analyses
provided by an independent consulting firm to assist it in reaching its
compensation determinations.
Finally, the Committee notes that Section 162(m) of the Internal Revenue
Code, in most circumstances, limits to $1 million the deductibility of
compensation, including stock-based compensation, paid to top executives by
public companies. None of the 1995 compensation paid to the executive officers
named in the Summary Compensation Table exceeded the threshold for deductibility
under Section 162(m). See "EXECUTIVE COMPENSATION -- Summary Compensation
Table" above. There were no awards under the 1995 Plan during 1995. However,
the 1995 Plan is intended to comply with Section 162(m) and, therefore, awards
under that Plan are anticipated to qualify for the corporate tax deduction."
THE COMPENSATION COMMITTEE:
Joseph F. Porrino
Frank B. Ryan
Wallace O. Sellers
-26-
PERFORMANCE GRAPH
The following graph sets forth a comparison of the semiannual percentage
change in Registrant's cumulative total stockholder return on the Common Stock
with the Standard & Poor's 500 Stock Index/*/ and the AMEX Industrial
(Financial) Index/**/. The foregoing cumulative total returns are computed
assuming (i) an initial investment of $100, and (ii) the reinvestment of
dividends at the frequency with which dividends were paid during the applicable
years. DHC has never paid any dividend on shares of Common Stock. The graph
below reflects comparative information for the five fiscal years of DHC
beginning with the close of trading on December 31, 1990 and ending December 29,
1995. The foregoing information is presented in tabular format immediately
following the graphic presentation. The stockholder return reflected below is
not necessarily indicative of future performance.
[GRAPH APPEARS HERE]
DANIELSON HOLDING AMEX FINANCIAL STANDARD & POOR'S 500
(date) CORPORATION SUB-INDEX STOCK INDEX
----------------- -------------- ---------------------
12/31/90 $100.00 $100.00 $100.00
06/30/91 137.50 122.06 112.40
12/31/91 129.17 127.19 126.31
06/30/92 95.83 131.16 123.60
12/31/92 120.83 142.51 131.95
06/30/93 220.83 146.05 136.43
12/31/93 275.00 153.14 141.25
06/30/94 220.83 150.60 134.54
12/31/94 254.17 138.73 139.08
06/30/95 262.50 158.25 164.97
12/31/95 229.17 181.26 186.52
- ---------
/*/ The Standard & Poor's 500 Stock Index is a capitalization-weighted index
of 500 stocks designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
/**/ The AMEX Industrial (Financial) Index ("AIFI") is maintained by the
American Stock Exchange ("AMEX"). As described by the AMEX, the AIFI is one of
eight industrial subindexes of the AMEX Market Value Index, which is a
capitalization-weighted index reflecting the performance of AMEX-traded common
shares, American Depositary Receipts and warrants.
-27-
1990 STOCK OPTION PLAN
The 1990 Stock Option Plan (the "1990 Plan") of DHC is a non-qualified
stock option plan which is intended to attract, retain and provide incentives to
key employees of DHC by offering them an opportunity to acquire or increase a
proprietary interest in DHC. Options under the 1990 Plan may be granted to
existing officers or employees of DHC for, in the aggregate, the purchase of up
to 1,260,000 shares of Common Stock (all subject to adjustment in connection
with events affecting the capitalization of DHC). No options were granted under
the 1990 Plan during 1990. On March 13, 1991, options to purchase 210,000
shares were granted to each of Messrs. Whitman, Heffernan and Rhein, all of whom
are Directors and officers of DHC. The exercise price for all options granted
on March 13, 1991 is $3.00 per share, the arithmetic average of the closing
prices of the Common Stock on the American Stock Exchange for the 30 days prior
to the date of grant. The options expire ten years after the date of grant and
became exercisable in equal annual installments commencing on the first
anniversary thereof and on each of the next two anniversaries thereafter. An
additional 630,000 options were granted outside the 1990 Plan as of that date to
Junkyard Partners, L.P. ("Junkyard Partners"), upon the same terms as those
granted on that date under the 1990 Plan. After giving effect to the options
granted outside the 1990 Plan to Junkyard Partners (and excluding options
granted to non-employee Directors, described below), DHC has issued options to
purchase 1,260,000 shares of Common Stock, the total number of options which may
be granted under the 1990 Plan. In order to prevent additional dilution, the
Compensation Committee of the Board of Directors of DHC (the "Committee"), on
September 16, 1991, resolved that it intends to refrain from granting any
additional options under the 1990 Plan in excess of the 630,000 options
currently outstanding under the 1990 Plan. During 1994, Junkyard Partners
transferred 257,910 of its 630,000 options to one of its limited partners. On
December 29, 1994, DHC issued 257,910 restricted shares of Common Stock upon the
exercise of such transferred options. In connection therewith, DHC received a
total exercise price of $773,730. Effective May 19, 1995, DHC purchased 69,453
of the remaining 372,090 options to purchase Common Stock owned by Junkyard
Partners. The options were exercisable at the time of such purchase and
otherwise would have expired on March 13, 2001. The aggregate purchase price
paid by DHC for the options was approximately $286,500, which was equal to the
difference between the closing price of Common Stock on May 19, 1995 ($7.125 per
share) the effective date of such purchase, and the exercise price of such
options ($3.00 per share), or $4.125 per share. As of December 31, 1995,
Junkyard Partners continued to own 302,637 options to purchase shares of Common
Stock, and Messrs. Whitman, Heffernan and Rhein continued to own their options,
all of which are currently exercisable.
DHC also was authorized by the terms of its Plan of Reorganization to
grant to non-employee Directors of DHC, outside the 1990 Plan, options to
purchase 140,000 shares of Common Stock (subject to adjustment in events
affecting the capitalization of DHC). On September 16, 1991, DHC granted to
each of Mr. Porrino and Dr. Ryan, both of whom are unaffiliated Directors of
DHC, options to purchase 46,667 shares of Common Stock and granted to Mr.
Isenberg, also an unaffiliated Director of DHC, options to purchase 46,666
shares of Common Stock. See "Item 10. Directors and Executive Officers of the
Registrant, Compensation of Directors." The exercise price of all such options
is $3.63, the arithmetic average of the closing prices of the Common Stock on
the American Stock Exchange for the 30 days prior to the date of grant.
These options expire ten years after the date of grant and become exercisable in
three equal annual installments commencing on the first anniversary of the date
of grant and on each of the next two anniversaries thereafter. As of December
31, 1995, all of the options granted outside the 1990 Plan, all of which are
currently exercisable, remained unexercised.
1995 STOCK AND INCENTIVE PLAN
The 1995 Stock and Incentive Plan (the "1995 Plan") is a qualified plan.
The purpose of the 1995 Plan is to enable DHC to provide incentives to increase
the personal financial identification of key personnel with the long term growth
of DHC and the interests of DHC's stockholders through the ownership and
performance of DHC's Common Stock, to enhance DHC's ability to retain key
personnel, and to attract outstanding prospective employees and Directors.
-28-
The 1995 Plan provides for the grant of any or all of the following types
of awards: stock options, including incentive stock options and non-qualified
stock options; stock appreciation rights, whether in tandem with stock options
or freestanding; restricted stock; incentive awards; and performance awards.
Any stock option granted in the form of an incentive stock option must satisfy
the applicable requirements of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). Awards may be made to the same person on more than one
occasion and may be granted singly, in combination, or in tandem as determined
by the Committee. The 1995 Plan is effective as of March 21, 1995. No
incentive stock options may be granted under the 1995 Plan after March 21, 2005.
The 1995 Plan will remain in effect until all awards have been satisfied or
expired.
The 1995 Plan is administered by the Committee. Other than participating
in formula awards, no member of the Committee shall be eligible to participate
in the 1995 Plan while serving on the Committee. The Board of Directors intends
that each member of the Committee shall be a "Disinterested Person" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and an "Outside Director" within the meaning of Section 162(m)
of the Code; provided, however, that a Director who is a "Disinterested Person"
within the meaning of the Exchange Act will be treated as satisfying the
requirements of an "Outside Director" until the first meeting of stockholders at
which Directors are to be elected that occurs after July 1, 1994 or such later
date as may be permissible under the Code or regulations promulgated thereunder.
Subject to the terms of the 1995 Plan, the Committee has authority to select
personnel to receive awards, to determine the timing, form, amount or value and
terms of grants and awards, and the conditions and restrictions, if any, subject
to which grants and awards will be made and become payable under the 1995 Plan,
and to construe the 1995 Plan and to prescribe rules and regulations with
respect to the administration of the 1995 Plan, except that only executive
officers of DHC and its subsidiaries, as designated by the Committee, may be
entitled to incentive stock awards under the 1995 Plan. The selection of
participants from eligible personnel, other than members of the Committee, is
within the discretion of the Committee.
The aggregate number of shares of Common Stock which may be issued under
the 1995 Plan, or as to which stock appreciation rights or other awards may be
granted, may not exceed 1,700,000, of which a maximum of 1,500,000 shares may
relate to awards to eligible individuals (including employee Directors) and a
maximum of 200,000 shares may relate to awards to non-employee Directors (all
subject to adjustment in the event of stock dividends, stock splits,
reorganizations, mergers, and other events affecting the capitalization of DHC,
and subject to acceleration in the event of changes in control or ownership of
DHC). The maximum number of shares of Common Stock that may be subject to
options, stock appreciation rights, restricted stock awards, performance awards
or incentive awards granted under the 1995 Plan to an individual during any
calendar year cannot exceed 125,000 shares in any calendar year (subject to
adjustment in the event of stock dividends, stock splits and certain other
events). On April 25, 1995, options to purchase 40,000 shares automatically
were granted under the 1995 Plan to Mr. Sellers upon his election as a Director
of DHC. The exercise price for such options is $7.00 per share (the mean of the
high and low prices of the Common Stock on the American Stock Exchange on the
date of grant). The options expire ten years after the date of grant and become
exercisable in three equal annual installments commencing on the first
anniversary thereof and on each of the next two anniversaries thereafter. None
of the options granted to Mr. Sellers is currently exercisable; however, 13,333
such options will become exercisable within the next 60 days (on April 25,
1996). On January 15, 1996, options to purchase an aggregate of 158,900 shares
of Common Stock were granted under the 1995 Plan to certain officers and
employees of DHC and its subsidiaries, NAICC and Danielson Trust. Among the
recipients of such options were Ms. Cosenza and Ms. Levey, who are officers of
DHC, who were granted options to acquire 3,000 shares and 15,000 shares,
respectively, and Mr. Story, who is a member of the Board of Directors, who
received a grant of options to acquire 80,000 shares. The exercise price for
all of such options is $6.6875 per share (the mean of the high and low prices of
the Common Stock on the American Stock Exchange on the date of the grant). The
options expire ten years after the date of grant. The options become
exercisable at various times, depending upon the holder of the options.
Continued employment with DHC or its subsidiaries is a condition to all of the
foregoing options. For information regarding compensation paid during 1995 by
NAICC to Mr. Story, see "Item 13. Certain Relationships and Related
Transactions" below.
The Registrant has no incentive compensation plans, employment agreements
or other benefit plans, other than medical and similar plans available to all
employees.
-29-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock as
of March 13, 19961997 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.
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF CLASS /1/(1)
-------------------- --------------------
PRINCIPAL STOCKHOLDERS
Commissioner of Insurance
1,803,235 /2,3/ 11.7
of the State of
California
c/o Geoffrey A. Nicholls1,803,235/2/,/3/ 11.7
Nicholls.................
Deputy Trustee
Mission Insurance
Companies' Trusts
3333 Wilshire Boulevard -Boulevard--
3rd Floor
Los Angeles, CA 90010
Martin J. Whitman 2,687,947 /2,4,5,6/ 17.3Whitman......... 2,321,024/2/,/4/,/5/,/6/ 14.9
c/o Whitman Heffernan Rhein & Co., Inc.Danielson Holding
Corporation
767 Third Avenue
New York, NY 10017-2023
James P. Heffernan........ 1,372,980/2/,/5/,/6/ 8.8
c/o WHR Management
Company, L.P.
2 Park Place
Bronxville, NY 10708
Whitman Heffernan & Rhein 1,054,996/2/ 6.9
Workout 1,054,996 /2/ 6.9 Fund, L.P. ......
c/o WHR Management
Company, L.P.
2 Park Place
Bronxville, NY 10708
Third Avenue Value Fund, 803,669/2/ 5.2
Inc. 803,669 /2/ 5.2....................
767 Third Avenue
New York, NY 10017-2023
OFFICERS AND DIRECTORS
Martin J. Whitman 2,687,947 /2,4,5,6/ 17.3
C. Kirk Rhein, Jr. 1,407,978 /5,6,7/ 9.0
James P. Heffernan 1,372,980 /5,6/ 8.8Whitman......... 2,321,024/2/,/4/,/5/,/6/ 14.9
David M. Barse............ 17,582/7/ *
Joseph F. Porrino 56,666 /8/Porrino......... 56,666/8/ *
Frank B. Ryan 48,666 /8/Ryan............. 48,666/8/ *
Eugene M. Isenberg 69,924 /9/ *
(continued on following page)
-30-
OFFICERS AND DIRECTORS AMOUNT AND NATURE OF
(continued) BENEFICIAL OWNERSHIP PERCENT OF CLASS /1/
- ---------------------- -------------------- --------------------
William R. Story 38,972 /10/Isenberg........ 69,924/9/ *
Wallace O. Sellers 23,333 /11/Sellers........ 36,666/1//0/ *
Lisa D. Levey 12,200 /12/Anthony G. Petrello....... 0/1//1/ *
ClaudiaStanley J. Garstka........ 11,008/1//1/ *
Timothy C. Cosenza 300 /13/Collins........ 0/1//1/ *
Michael T. Carney......... 17,582/7/ *
Ian M. Kirschner.......... 4,000/1//2/ *
All Officers and Directors
as a Group (11 persons) 3,608,974 /14/ 22.4.. 2,583,118/1//3/ 16.3
20
- --------
* Percentage of shares beneficially owned does not exceed one percent of the
outstanding Common Stock.
/1/1 Share percentage ownership is rounded to nearest tenth of one percent and
reflects the effect of dilution as a result of outstanding options to the
extent such options are, or within 60 days will become, exercisable. As of
March 13, 19961997 (the date as of which this table was prepared), there were
exercisable options outstanding to purchase 1,085,9701,257,084 shares of Common
Stock. Shares underlying any option which was exercisable on March 13,
1996 or becomes exercisable within the next 60 days are deemed outstanding
only for purposes of computing the share ownership and share ownership
percentage of the holder of such option.
/2/2 In accordance with provisions of DHC's Certificate of Incorporation, all
certificates representing shares of Common Stock beneficially owned by
holders of five percent or more of Common Stock are owned of record by
DHC, as escrow agent, and are physically held by DHC in that capacity.
/3/3 Beneficially owned by the Commissioner of Insurance of the State of
California in his capacity as trustee for the benefit of holders of
certain deficiency claims against certain trusts which assumed liabilities
of certain present and former insurance subsidiaries of DHC.
/4/4 Includes 373,397 shares of Common Stock beneficially owned by Carl Marks
Strategic Investments, L.P. ("CMSI"), an investment limited partnership; 803,669 shares beneficially owned by Third Avenue Value Fund,
Inc. ("TAVF"), an investment company registered under the Investment
Company Act of 1940; 103,428104,481 shares beneficially owned by Martin J.
Whitman & Co., Inc. ("MJW&Co"), a private investment company; and 66,16772,641
shares beneficially owned by Mr. Whitman's wife and three adult family
members. Mr. Whitman is a minority general partner of
the partnership that is the general partner of CMSI. Mr. Whitman controls the investment adviser of TAVF, and may be
deemed to own beneficially a five percent equity interest in TAVF. Mr.
Whitman is the principal stockholder in MJW&Co, and may be deemed to own
beneficially the shares owned by MJW&Co. Mr. Whitman disclaims beneficial
ownership of the shares of Common Stock owned by CMSI,
TAVF, MJW&Co, and Mr.
Whitman's family members.
/5/5 Includes 1,054,996 shares of Common Stock beneficially owned by Whitman
Heffernan & Rhein Workout Fund, L.P. ("WHR Fund"), an investment limited
partnership. Each of Messrs. Whitman Heffernan and RheinHeffernan is a general partner of
the partnership that is the general partner of WHR Fund. Each disclaims
beneficial ownership of the shares owned by the WHR Fund.
Does not include
134,763 shares owned by the Employee Stock Ownership Plan and Trust of KCP
Holding Company and Subsidiaries ("ESOP"). Messrs. Heffernan and Rhein are,
with Mr. Story, the trustees of the ESOP; neither Mr. Heffernan nor Mr. Rhein is
a participant in the ESOP.
-31-
/6/6 Includes shares underlying currently exercisable options to purchase an
aggregate of 210,000 shares of Common Stock at an exercise price of $3.00
per share.
/7/7 Includes 28,184shares underlying options to purchase an aggregate of 17,582
shares of Common Stock owned by a trust,at an exercise price of $5.6875 per share, which
Mr. Rhein
serves as trustee, forbecome exercisable within the benefitnext 60 days. Does not include shares
underlying options to purchase an aggregate of Mr. Rhein's children. Mr. Rhein disclaims
beneficial ownership of the32,418 shares of Common
Stock owned byat an exercise price of $5.6875 per share which are not currently
exercisable nor become exercisable within the trust.
/8/next 60 days.
8 Includes shares underlying currently exercisable options to purchase an
aggregate of 46,667 shares of Common Stock at an exercise price of $3.63
per share.
/9/9 Includes 20,088 shares owned by Mentor Partnership, a partnership
controlled by Mr. Isenberg, and 28 shares owned by Mr. Isenberg's wife.
Also includes shares underlying currently exercisable options to purchase
an aggregate of 46,666 shares of Common Stock at an exercise price of
$3.63 per share.
/10/ Includes 36,500 shares of Common Stock beneficially owned by Mr. Story and
an aggregate of approximately 2,472 shares owned by the ESOP which have been
allocated to Mr. Story's account; does not include 132,291 additional shares
owned by the ESOP but not allocated to Mr. Story's account. Mr. Story is a
participant in the ESOP and is, together with Messrs. Heffernan and Rhein, a
trustee of the ESOP. Does not include shares underlying options to purchase an
aggregate of 80,000 shares of Common Stock at an exercise price of $6.6875 per
share which are not currently exercisable nor become exercisable within the next
60 days.
/11/10 Includes shares underlying options to purchase an aggregate of 13,33326,666
shares of Common Stock at an exercise price of $7.00 per share, which
become exercisable within the next 60 days. Does not include shares
underlying options to purchase an aggregate of 26,66713,334 shares of Common
Stock at an exercise price of $7.00 per share which are not currently
exercisable nor become exercisable within the next 60 days.
/12/ Includes 100 shares of Common Stock beneficially owned by Ms. Levey's
children. Ms. Levey disclaims beneficial ownership of the shares of Common
Stock owned by her children.11 Does not include shares underlying options to purchase an aggregate of
15,00040,000 shares of Common Stock at an exercise price of $6.6875$5.50 per share
which are not currently exercisable nor become exercisable within the next
60 days.
/13/12 Includes shares underlying options to purchase an aggregate of 2,500
shares of Common Stock at an exercise price of $5.6875 per share, which
become exercisable within the next 60 days. Does not include shares
underlying options to purchase an aggregate of 3,0002,500 shares of Common
Stock at an exercise price of $6.6875$5.6875 per share which are not currently
exercisable nor become exercisable within the next 60 days.
/14/ In calculating the shares owned by officers and Directors as a group, the
1,054,996 shares of Common Stock owned by WHR Fund referred to in footnote 5
above and included in the beneficial ownership amounts of each of Messrs.
Whitman, Heffernan and Rhein reflected in the table above are counted only once
in order to avoid a misleading total.13 In calculating the percentage of shares owned by officers and Directors as
a group, the shares of Common Stock underlying all options which are
beneficially owned by officers and Directors and which are currently
exercisable or become exercisable within the next 60 days are deemed
outstanding.
21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
William R. Story, a DirectorIn recognition of DHC, is the death of C. Kirk Rhein, Jr., while serving as
President and Chief Executive Officer of NAICC. DuringDHC, DHC intends to pay to Mr.
Rhein's widow, as a death benefit, Mr. Rhein's 1996 base salary through July
31, 1999.
In recognition of the death of William R. Story, a former Director of DHC
and the former President and Chief Executive Officer of NAICC while serving as
such, NAICC paid to Mr. Story's widow, as a death benefit, Mr. Story's base
salary through December 31, 1996 and intends to pay to her $200,000 in each of
1997 and 1998. NAICC has also transferred to Mr. Story's widow ownership of a
1995 Lexus automobile which was owned by NAICC and had been used by Mr. Story
received from NAICC cash
compensationas an officer of $250,000,NAICC.
Effective as wellof July, 29, 1996, DHC entered into an Employment Agreement
with James P. Heffernan, then the Chief Financial Officer of the Company,
which provides for DHC's continued employment of Mr. Heffernan through July
31, 1999. Mr. Heffernan will have the duties and responsibilities assigned to
him by, and will report directly to, the Chief Executive Officer of DHC. Mr.
Heffernan will receive a salary of $200,000 per year through the term of such
agreement and is entitled to participate in all DHC employee benefit plans and
programs.
Lisa D. Levey resigned as non-cash compensation in the approximate
aggregate amount of $14,020 (in respect of various business-related expenses
including group term life insurance). NAICC paid a $200,000 bonus to Mr. Story
in 1996 with respect to 1995 services. NAICC does not anticipate paying any
other compensation or bonus to Mr. Story or any other Director oran officer of DHC effective August 1, 1996. In
connection with Ms. Levey's resignation, DHC entered into a Severance
Agreement with Ms. Levey which provides that during the period through July
31, 1997, Ms. Levey will receive her 1996 annual base salary and will
participate, at DHC's expense, in 1996DHC's employee benefit plans.
DHC shares certain personnel and facilities with respectseveral affiliated and
unaffiliated companies (including M.J. Whitman, Inc., a broker-dealer of which
Mr. Whitman is the Chairman and Chief Executive Officer and Mr. Barse is the
President and Chief Operating Officer), and certain expenses are allocated
among the various entities. Personnel costs are allocated based upon actual
time spent on DHC's business or upon fixed percentages of compensation. Costs
relating to 1995 services. In addition, NAICC in 1995 madeoffice space and equipment are allocated based upon fixed
percentages. Inter-company balances are reconciled and reimbursed on a contribution to a pension plan in which
-32-
Mr. Story participates. The amount of such contribution allocable to the
account of Mr. Story is approximately $7,500. Further, NAICC in 1995 made a
contribution to the 401(k) plan and ESOP account of such individual in the
aggregate amount of $4,620. As noted above, in January 1996, Mr. Story received
80,000 options to acquire Common Stock under DHC's 1995 Stock and Incentive
Plan. See "Item 11. Executive Compensation, 1995 Stock and Incentive Plan."
-33-
monthly
basis.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements -- seeStatements--see Index to Consolidated Financial Statements
and Financial Statement Schedules appearing on Page F-1.
(2) Financial Statement Schedules -- seeSchedules--see Index to Consolidated Financial
Statements and Financial Statement Schedules appearing on Page F-1.
(3) Exhibits:
EXHIBIT NO./1/ NAME OF EXHIBIT
- ----------- ---------------
Plan of Acquisition:
-------------------
2.1 * Agreement and Plan of Merger dated as of February 26, 1996 among
Midland Financial Group, Inc., Danielson Holding Corporation and
Mission Sub E, Inc. (Filed with Report on Form 8-K dated March
1, 1996, Exhibit 2.1.)
Organizational Documents:
------------------------
3.1 * Certificate of Incorporation of Registrant.
3.2 *
EXHIBIT NO. (1) NAME OF EXHIBIT
--------------- ---------------
Organizational Documents:
3.1* Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
Material Contracts--Miscellaneous:
---------------------------------
10.1 * Stock Sale Agreement dated as of January 27, 1993 between
Nationwide Capital Corporation and Danielson Holding Corporation.
(Filed with Report on Form 10-K dated March 26, 1993, Exhibit
10.16.)
10.2 * Deposit Escrow Agreement dated as of January 19, 1993 among
Nationwide Capital Corporation, Danielson Holding Corporation and
Mission Valley Escrow. (Filed with Report on Form 10-K dated
March 26, 1993, Exhibit 10.17.)
10.3 * Guarantee Agreement dated as of March 26, 1993 between Resolution
Trust Corporation, in its capacity as conservator of HomeFed
Bank, and Danielson Holding Corporation. (Filed with Report on
Form 10-K dated March 26, 1993, Exhibit 10.18.)
10.4 * Guarantee Agreement dated as of March 26, 1993 between Resolution
Trust Corporation, in its corporate capacity, and Danielson
Holding Corporation. (Filed with Report on Form 10-K dated March
26, 1993, Exhibit 10.19.)
- ----------
/1/--------
(1) Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
-34-22
EXHIBIT NO./1/ NAME OF EXHIBIT
- ----------- ---------------
10.5 * Asset Purchase Agreement dated as of December 31, 1993 by and
among Grossmont Bank, Donald A. Levi, Murray R. Steeg and
Danielson Trust Company. (Filed with Report on Form 10-K dated
March 18, 1994, Exhibit 10.20.)
10.6 * Amendment No. 1 dated as of February 16, 1994 to Asset Purchase
Agreement dated as of December 31, 1993 by and among Grossmont
Bank, Donald A. Levi, Murray R. Steeg and Danielson Trust
Company. (Filed with Report on Form 10-K dated March 18, 1994,
Exhibit 10.21.)
10.7 * Amendment No. 2 dated as of February 17, 1994 to Asset Purchase
Agreement dated as of December 31, 1993 by and among Grossmont
Bank, Donald A. Levi, Murray R. Steeg and Danielson Trust
Company. (Filed with Report on Form 10-K dated March 18, 1994,
Exhibit 10.22.)
10.8 * Consulting Services Agreement dated as of February 22, 1994
between Danielson Trust Company and Tenney-Levi Corporation.
(Filed with Report on Form 10-K dated March 18, 1994, Exhibit
10.23.)
10.9 * Consulting Services Agreement dated as of February 22, 1994
between Danielson Trust Company and Murray R. Steeg. (Filed with
Report on Form 10-K dated March 18, 1994, Exhibit 10.24.)
10.10 * Agreement dated as of February 22, 1994 between Grossmont Bank
and Danielson Trust Company. (Filed with Report on Form 10-K
dated March 18, 1994, Exhibit 10.25.)
Material Contracts--Executive Compensation Plans and
----------------------------------------------------
Arrangements:
------------
10.11 * 1990 Stock Option Plan. (Filed with Report on Form 8-K dated
September 4, 1990, Exhibit 10.8.)
10.12 *
EXHIBIT NO. (1) NAME OF EXHIBIT
--------------- ---------------
Material Contracts--Miscellaneous:
10.1* Stock Sale Agreement dated as of January 27, 1993 between
Nationwide Capital Corporation and Danielson Holding
Corporation. (Filed with Report on Form 10-K dated March 26,
1993, Exhibit 10.16.)
10.2* Deposit Escrow Agreement dated as of January 19, 1993 among
Nationwide Capital Corporation, Danielson Holding Corporation
and Mission Valley Escrow. (Filed with Report on Form 10-K
dated March 26, 1993, Exhibit 10.17.)
10.3* Guarantee Agreement dated as of March 26, 1993 between
Resolution Trust Corporation, in its capacity as conservator
of HomeFed Bank, and Danielson Holding Corporation. (Filed
with Report on Form 10-K dated March 26, 1993, Exhibit
10.18.)
10.4* Guarantee Agreement dated as of March 26, 1993 between
Resolution Trust Corporation, in its corporate capacity, and
Danielson Holding Corporation. (Filed with Report on Form 10-
K dated March 26, 1993, Exhibit 10.19.)
10.5* Asset Purchase Agreement dated as of December 31, 1993 by and
among Grossmont Bank, Donald A. Levi, Murray R. Steeg and
Danielson Trust Company. (Filed with Report on Form 10-K
dated March 18, 1994, Exhibit 10.20.)
10.6* Amendment No. 1 dated as of February 16, 1994 to Asset
Purchase Agreement dated as of December 31, 1993 by and among
Grossmont Bank, Donald A. Levi, Murray R. Steeg and Danielson
Trust Company. (Filed with Report on Form 10-K dated March
18, 1994, Exhibit 10.21.)
10.7* Amendment No. 2 dated as of February 17, 1994 to Asset
Purchase Agreement dated as of December 31, 1993 by and among
Grossmont Bank, Donald A. Levi, Murray R. Steeg and Danielson
Trust Company. (Filed with Report on Form 10-K dated March
18, 1994, Exhibit 10.22.)
10.8* Consulting Services Agreement dated as of February 22, 1994
between Danielson Trust Company and Tenney-Levi Corporation.
(Filed with Report on Form 10-K dated March 18, 1994, Exhibit
10.23.)
10.9* Consulting Services Agreement dated as of February 22, 1994
between Danielson Trust Company and Murray R. Steeg. (Filed
with Report on Form 10-K dated March 18, 1994, Exhibit
10.24.)
10.10* Agreement dated as of February 22, 1994 between Grossmont Bank
and Danielson Trust Company. (Filed with Report on Form 10-K
dated March 18, 1994, Exhibit 10.25.)
10.11* Stock Sale Agreement dated October 10, 1996 between Danielson
Holding Corporation and North American Trust Company. (Filed
with Report on Form 8-K dated December 31, 1996, Exhibit
10.1.)
10.12* Assignment and Assumption Agreement dated December 31, 1996 by
and between North American Trust Company, North American
Fiduciary Services, Inc. and Danielson Holding Corporation.
(Filed with Report on Form 8-K dated December 31, 1996,
Exhibit 10.2.)
10.13* Merger Agreement dated December 31, 1996 by and among North
American Trust Company, North American Fiduciary Services,
Inc., Danielson Trust Company and Danielson Holding
Corporation. (Filed with Report on Form 8-K dated December
31, 1996, Exhibit 10.3.)
Material Contracts--Executive Compensation Plans and
Arrangements:
10.14* 1990 Stock Option Plan. (Filed with Report on Form 8-K dated
September 4, 1990, Exhibit 10.8.)
10.15* 1995 Stock and Incentive Plan. (Included as Exhibit A to Proxy
Statement filed on March 30, 1995.)
Annual Report to Security-Holders:
---------------------------------
13.1 1995 Annual Report of Danielson Holding Corporation. (To be
included herewith at page 49.)
Powers of Attorney:
------------------
24.1 Powers of Attorney executed by certain directors of Danielson
Holding Corporation. (Filed herewith at page 101.)
Financial Data Schedule:
-----------------------
27.1 Financial Data Schedule for Article 7 Registrant (Insurance
Company). (Filed electronically herewith.)
- ----------
/1/--------
(1) Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
-35-23
Miscellaneous:
-------------
99.1 * Press Release dated February 27, 1996. (Filed with Report on
Form 8-K dated March 1, 1996, Exhibit 99.1.
EXHIBIT NO. (1) NAME OF EXHIBIT
--------------- ---------------
Annual Report to Security-Holders:
13.1 1996 Annual Report of Danielson Holding Corporation. (To be
included herewith.)
Subsidiaries:
21 Subsidiaries of Danielson Holding Corporation. (Filed
herewith.)
27 Financial Data Schedule (Filed herewith.)
(b) Reports on Form 8-K filed during the quarter ended December 31, 1995:
Not applicable.
- ----------
/1/--------
(1) Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
-36-(b) During the quarter ended December 31, 1996 for which this Report is
filed, DHC filed one report on Form 8-K dated December 31, 1996 with respect
to the consummation of the sale of Danielson Trust Company.
24
SIGNATURES
Pursuant to the requirements of SectionPURSUANT TO THE REQUIREMENTS OF SECTION 13 or 15(d) of the Securities
Exchange Act ofOR 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
has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
DANIELSON HOLDING CORPORATION
(Registrant)
By /S/ C. KIRK RHEIN, JR.
------------------------------------
C. Kirk Rhein, Jr.
PresidentBy: /s/ Martin J. Whitman
---------------------------------
Martin J. Whitman
Chairman and Chief Executive Officer
Date: March 19, 1996
Pursuant to the requirements27, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF DANIELSON HOLDING
CORPORATION AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: March 27, 1997
By: /s/ Martin J. Whitman
---------------------------------
Martin J. Whitman
Chairman of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of Danielson
Holding Corporation and in the capacities and on the dates indicated.
Date: March 19, 1996 By /S/ C. KIRK RHEIN, JR.
------------------------------------
C. Kirk Rhein, Jr.
PresidentBoard and Chief
Executive Officer and a Director
Date: March 19, 1996 By /S/ MARTIN J. WHITMAN
------------------------------------
Martin J. Whitman
Chairman of the Board27, 1997
By: /s/ David M. Barse
---------------------------------
David M. Barse
President and Chief InvestmentOperating
Officer
and a Director
Date: March 19, 1996 By /S/ JAMES P. HEFFERNAN
------------------------------------
James P. Heffernan27, 1997
By: /s/ Michael T. Carney
---------------------------------
Michael T. Carney
Chief Financial Officer
and a
Director
Date: March 19, 1996 By /S/ CLAUDIA C. COSENZA
------------------------------------
Claudia C. Cosenza
Controller
Date: March 19, 1996 By /S/ WILLIAM R. STORY
------------------------------------
William R. Story
Director
-37-
Date: March 19, 1996 By /S/ JOSEPH27, 1997
By: /s/ Joseph F. PORRINO
------------------------------------Porrino
---------------------------------
Joseph F. Porrino
Director
Date: March 19, 1996 By /S/ FRANK27, 1997
By: /s/ Frank B. RYAN
------------------------------------Ryan
---------------------------------
Frank B. Ryan
Director
Date: March 19, 1996 By
------------------------------------27, 1997
By: /s/ Eugene M. Isenberg
---------------------------------
Eugene M. Isenberg
Director
25
Date: March 19, 1996 By /S/ WALLACE27, 1997
By: /s/ Wallace O. SELLERS
------------------------------------Sellers
---------------------------------
Wallace O. Sellers
Director
-38-Date: March 27, 1997
By: /s/ Anthony G. Petrello
---------------------------------
Anthony G. Petrello
Director
Date: March 27, 1997
By: /s/ Stanley J. Garstka
---------------------------------
Stanley J. Garstka
Director
Date: March 27, 1997
By: /s/ Timothy C. Collins
---------------------------------
Timothy C. Collins
Director
26
DANIELSON HOLDING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page Number
-----------
Independent Auditors' Report......................................... F-2
Danielson Holding Corporation and Consolidated Subsidiaries:
Statements of Operations - For the years ended December 31,
1995, 1994 and 1993.............................................. *
Balance Sheets - December 31, 1995 and 1994........................ *
Statements of Stockholders' Equity - For the years ended
December 31, 1995, 1994 and 1993................................. *
Statements of Cash Flows - For the years ended December 31,
1995, 1994 and 1993.............................................. *
Schedule I - Summary of Investments - Other than Invest-
ments in Related Parties.......................... S-1
Schedule II - Condensed Financial Information of the
Registrant........................................ S-2-4
Schedule IV - Reinsurance......................................... S-5
Schedule V - Valuation and Qualifying Accounts................... S-6
Schedule III - Supplemental Information Concerning Property-Casualty
and VI Insurance Operations................................
PAGE NUMBER
-----------
Independent Auditors' Report....................................... F-2
Danielson Holding Corporation and Consolidated Subsidiaries:
Statements of Operations--For the years ended December 31, 1996,
1995 and 1994................................................... *
Balance Sheets--December 31, 1996 and 1995....................... *
Statements of Stockholders Equity--For the years ended December
31, 1996, 1995 and 1994......................................... *
Statements of Cash Flows--For the years ended December 31, 1996,
1995 and 1994................................................... *
Schedule I--Summary of Investments--Other than Investments in
Related Parties................................................. S-1
Schedule II--Condensed Financial Information of the Registrant... S-2-4
Schedule IV--Reinsurance......................................... S-5
Schedule V--Valuation and Qualifying Accounts.................... S-6
Schedule III and VI--Supplemental Information Concerning
Property--Casualty Insurance Operations......................... S-7
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 19951996 Annual Report to Stockholders.
-39-F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Danielson Holding Corporation:
Under date of February 26, 1996,28, 1997, we reported on the consolidated balance
sheets of Danielson Holding Corporation and subsidiaries as of December 31,
19951996 and 1994,1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995,1996, as contained in the 19951996 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1995.1996. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As described in Note 15 of the Notes to Consolidated Financial Statements, in
1995 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
/S/ KPMG PEAT MARWICK LLP
----------------------------/s/ KPMG Peat Marwick LLP
New York, New York
February 26, 1996
-40-28, 1997
F-2
SCHEDULE I
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHERINVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
(In thousands)(IN THOUSANDS)
DECEMBER 31, 1995
---------------------------------------------
Cost or Fair Amount Reflected on
Amortized Cost Value Balance Sheet1996
-------------------------------------------
COST OR FAIR AMOUNT REFLECTED ON
AMORTIZED COST VALUE BALANCE SHEET
-------------- -------- -------------------
Fixed maturities classified as
available-for-sale:
U.S. Government/AgencyAgency.......... $ 54,86550,381 $ 56,71551,003 $ 56,715
Mortgage-backed 62,342 63,606 63,606
Corporate 50,566 52,274 52,27451,003
Mortgage-backed................. 54,691 53,877 53,877
Corporate....................... 38,352 38,450 38,450
-------- -------- --------
Total fixed maturities 167,773 172,595 172,595maturities........ 143,424 143,330 143,330
-------- -------- --------
Equity securities:
Common stocks 256 629 629stocks................... 257 2,697 2,697
-------- -------- --------
Total equity securities 256 629 629securities....... 257 2,697 2,697
-------- -------- --------
Short term investments 8,570 8,570 8,570investments............ 5,528 5,528 5,528
-------- -------- --------
Total investments $176,599 $181,794 $181,794investments........... $149,209 $151,555 $151,555
======== ======== ========
-41-S-1
SCHEDULE II
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)(PARENT COMPANY ONLY)
STATEMENTS OF OPERATIONS
(In thousands)(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994
1993
--------------------- ---------- ----------
REVENUES:Revenues:
Net investment incomeincome.................... $ 534 $ 675 $ 435
$ 597
Net realized investment losseslosses........... (1) (2) - ---
Other incomeincome............................. -- 26 12
-
------- ------- -------
TOTAL REVENUES---------- ---------- ----------
Total revenues......................... 533 699 447
597
------- ------- -------
EXPENSES:---------- ---------- ----------
Expenses:
Employee compensation and benefitsbenefits....... 1,201 1,442 1,118
1,182
Professional feesfees........................ 288 221 751
429Expenses in connection with terminated
proposed acquisition.................... 1,849 -- --
Nonrecurring compensation................ 820 -- --
Other general and administrative feesfees.... 684 657 697
625
------- ------- -------
TOTAL EXPENSES---------- ---------- ----------
Total expenses......................... 4,842 2,320 2,566
2,236
------- ------- -------
Income (loss)---------- ---------- ----------
Loss before provision for income taxestaxes..... (4,309) (1,621) (2,119)
(1,639)
Income tax provisionprovision....................... 3 36 40
54
------- ------- ----------------- ---------- ----------
Loss before equity in net income of
subsidiariessubsidiaries.............................. (4,312) (1,657) (2,159) (1,693)
Equity in net income (loss) of
subsidiariessubsidiaries.............................. (3,807) 3,973 5,304
4,927
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM---------- ---------- ----------
Income (loss) before extraordinary item.... (8,119) 2,316 3,145
3,234
Extraordinary item -item....................... -- -- 750
-
------- ------- -------
NET INCOME---------- ---------- ----------
Net income (loss).......................... $ (8,119) $ 2,316 $ 3,895
$ 3,234
======= ======= ================= ========== ==========
-42-S-2
SCHEDULE II, CONTINUED
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)(PARENT COMPANY ONLY)
BALANCE SHEETS
(In thousands, except share and per share information)(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
DECEMBER 31,
-----------------------------------
1996 1995
1994
-------- ---------------- -------
ASSETS:
CashCash....................................................... $ 1875 $ 5118
Fixed maturities:
Available-for-sale at fair value (Cost: $10,487$7,026 and
$12,794)$10,487)................................................ 7,025 10,530 12,736
Short term investments, at cost which approximates fair
valuevalue..................................................... 3,000 466
165
------- ---------------
TOTAL CASH AND INVESTMENTSINVESTMENTS............................... 10,100 11,014 12,952
Investment in subsidiariessubsidiaries................................. 49,167 58,289 48,944
Accrued investment incomeincome.................................. 131 175
176
Other assetsassets............................................... 240 626
576
------- ---------------
TOTAL ASSETSASSETS............................................. $59,638 $70,104
$62,648
======= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilitiesliabilities.......................................... $ 785 $ 283
$ 330
------- --------
Total liabilities-------
TOTAL LIABILITIES........................................ 785 283
330
------- ---------------
Preferred Stock ($0.10 par value; authorized 10,000,000
shares; none issued and outstanding) - -...................... -- --
Common Stock ($0.10 par value; authorized 20,000,000
shares; issued 15,370,894 shares and 15,370,894 shares;
outstanding 15,360,255 shares and 15,360,270 shares)...... 1,537 1,537
Additional paid-in capitalcapital................................. 46,131 46,41746,131
Net unrealized gain (loss) on available-for-sale
securitiessecurities................................................ 2,346 5,195
(278)
Retained earningsearnings.......................................... 8,905 17,024 14,708
Treasury stock (Cost of 10,639 shares and 10,624 shares)... (66) (66)
------- ---------------
TOTAL STOCKHOLDERS' EQUITYEQUITY............................... 58,853 69,821
62,318
------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITYEQUITY............... $59,638 $70,104
$62,648
======= ===============
-43-S-3
SCHEDULE II, CONTINUED
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
(In thousands)(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994
1993
--------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net incomeincome............................... $ (8,119) $ 2,316 $ 3,895 $ 3,234
Adjustments to reconcile net income to
net cash provided by (used in)used in operating activities:
Net realized investment losseslosses........... 1 2 - ---
Depreciation and amortizationamortization............ (60) 86 125 (46)
Equity in net (income) loss of
subsidiariessubsidiaries............................ 3,807 (3,973) (5,304) (4,927)
Increase (decrease) in accrued expensesexpenses.. 502 (47) 56
(47)
Other, netnet............................... 9 (79) 209
(238)
-------- -------- ------------------ ---------- ----------
Net cash (used in)used in operating activitiesactivities.. (3,860) (1,695) (1,019)
(2,024)
-------- -------- ------------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased:
Fixed income maturities available-for-saleavailable-for-
sale.................................... (10,584) (10,787) (12,933) -
Fixed income maturities held-to-maturity - - (8,592)held-to-
maturity................................ -- -- --
Proceeds from sales:
Fixed income maturities available-for-saleavailable-for-
sale.................................... 5,542 1,837 7,026 -
Investments, matured or called
Fixed income maturities available-for-saleavailable-for-
sale.................................... 8,585 11,210 - ---
Fixed income maturities held-to-maturity -held-to-
maturity................................ -- -- 8,430
-Acquisition of Western Trust Services.... -- -- (2,505)
Net proceeds from sale of Danielson Trust
Company................................. 2,968 -- --
Change in accrued investment incomeincome...... 45 1 (127)
36
-------- -------- ------------------ ---------- ----------
Net cash provided by (used in)
investing activitiesactivities.................. 6,556 2,261 2,396 (8,556)
-------- -------- --------(109)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of Danielson Trust Company - - (4,611)
Acquisition of Western Trust Services - (2,505) -
Proceeds from exercise of options to
purchase Common Stock -Stock................... -- -- 774 -
Retirement of stock optionsoptions.............. -- (286) - ---
Purchase of treasury stock -stock............... -- -- (56) -
Dividend received from subsidiary - - 668
Change in receivable from subsidiarysubsidiary..... 353 (12) (344)
(137)Additional capital contributed to
subsidiaries............................ (458) -- --
Return of capital from subsidiaries -subsidiaries...... -- -- (2)
133
-------- -------- ------------------ ---------- ----------
Net cash provided by (used in)
financing activitiesactivities.................. (105) (298) (2,133) (3,947)
-------- -------- --------372
---------- ---------- ----------
Net increase (decrease) in cash and short
term investmentsinvestments.......................... 2,591 268 (756) (14,527)
Cash and short term investments at
beginning of yearyear......................... 484 216 972
15,499
-------- -------- --------
CASH AND SHORT TERM INVESTMENTS AT
END OF YEAR---------- ---------- ----------
Cash and short term investments at end of
year...................................... $ 3,075 $ 484 $ 216
$ 972
======== ======== ================== ========== ==========
-44-S-4
SCHEDULE IV
DANIELSON HOLDING CORPORATION
REINSURANCE
(in thousands)(IN THOUSANDS)
CEDED EARNED ASSUMED EARNED PERCENTAGE
GROSS EARNED TO OTHER FROM OTHER NET EARNED OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
-------------------------- ------------ -------------- ---------- --------------
YEAR ENDED DECEMBER 31,
1996:
Property and liability
insurance premiums..... $ 52,066 $15,441 $-- $36,625 --
======== ======= ==== ======= ===
YEAR ENDED DECEMBER 31,
1995:
Property and liability
insurance premiums $76,688premiums..... $ 76,688 $16,140 $ - $ 60,548 -$-- $60,548 --
======== ======= ==== ======= ======== ======== =========
Year Ended December===
YEAR ENDED DECEMBER 31,
1994:
Property and liability
insurance premiumspremiums..... $106,552 $13,261 $ - $ 93,291 -$-- $93,291 --
======== ======= ======== ======== =========
Year Ended December 31, 1993:
Property and liability
insurance premiums $ 91,768 $ 5,784 $ 68 $ 86,052 -
============ ======= ======== ======== ============
-45-S-5
SCHEDULE V
DANIELSON HOLDING CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)(IN THOUSANDS)
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 receivablereceivable.... $153 $ 32366 $ 11743 $ - $ 283 $ 157
========== ========== ======== ======= ========32 $230
==== ==== ==== ==== ====
Allowance for
uncollectable
reinsurance on paid
losseslosses................. $388 $-- $-- $ 675 $ - $ - $ 287 $ 388
========== ========== ======== ======= ========72 $316
==== ==== ==== ==== ====
Allowance for
uncollectable
reinsurance on unpaid
losses $ 425 $ - $ - $ - $ 425
========== ========== ======== ======= ========losses................. $425 $-- $-- $-- $425
==== ==== ==== ==== ====
-46-S-6
SCHEDULES III AND VI
DANIELSON HOLDING CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION AND SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)(IN THOUSANDS)
RESERVES DISCOUNT
FOR UNPAID FROM
CLAIMS AND RESERVES
OTHER
AFFILIATION DEFERRED CLAIMRESERVES FOR POLICY CLAIMSUNPAID DISCOUNT FROM POLICYCLAIMS
WITH ACQUISITION ADJUSTMENT UNPAIDCLAIMS AND CLAIM RESERVES FOR UNEARNED AND BENEFITS NET EARNED INVESTMENT
REGISTRANT COSTS ADJUSTMENT EXPENSES UNPAID CLAIMS PREMIUMS PAYABLE PREMIUMS INCOME
----------------------- ----------- ------------------- ------------- -------- ------------ ---------- --------- ------------- ---------- -----------
Consolidated
Property-Casualty
Entities:
AS OF AND FOR THE YEAR
ENDEDAs of and for the year
ended 12/31/9596......... $ 1,045 $137,406957 $120,651 $-- $ - $ 8,563 $ - $60,548 $12,3518,294 -- $36,625 $10,121
====== ======== ==== ======= ======== ======== ======= ========== ======= =======
As of and for the year
ended 12/31/9495......... $1,045 $137,406 $-- $ 2,204 $146,330 $ - $14,328 $ - $93,291 $11,2878,563 -- $60,548 $12,351
====== ======== ==== ======= ======== ======== ======= ========== ======= =======
As of and for the year
ended 12/31/93 $ 2,196 $137,479 $ - $16,502 $ - $86,052 $12,58794......... $2,204 $146,330 $-- $14,328 -- $93,291 $11,287
====== ======== ==== ======= ======== ======== ======= ========== ======= =======
CLAIMS AND CLAIM
AFFILIATION ADJUSTMENT EXPENSES
AFFILIATION INCURRED RELATED TO 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 12/31/95 $ 45,592 $ 3,123 $ 9,089 $ 4,302 $ 61,046 $ 55,295
======== ======== ======== ======= ======== ========
As of and for the year
ended 12/31/9496......... $26,979 $10,120 $ 67,131 $ 384 $ 13,724 $ 4,953 $ 58,113 $ 91,069
======== ======== ========6,239 $3,668 $56,691 $36,136
======= ======== =============== ======= ====== ======= =======
As of and for the year
ended 12/31/9395......... $45,592 $ 65,1573,123 $ 7439,089 $4,302 $61,046 $55,295
======= ======= ======= ====== ======= =======
As of and for the year
ended 12/31/94......... $67,131 $ 14,812 $ 2,181 $ 51,502 $ 87,953
======== ======== ========384 $13,724 $4,953 $58,113 $91,069
======= ======== =============== ======= ====== ======= =======
-47-
EXHIBITS
-48-S-7