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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
COMMISSION FILE NUMBER 1-6732
DANIELSON HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-6021257
(State of incorporation) (I.R.S. Employer Identification No.)
767 Third Avenue, New York, New York 10017-2023
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-0347
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock, $0.10 par value............... American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 21, 2001, the aggregate market value of the registrant's voting
stock held by non-affiliates was $67,718,889.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 21, 2001
----- -----------------------------
Common Stock, $0.10 par value 19,505,954 shares
The following documents have been incorporated by reference herein:
2000 Annual Report to Stockholders, as indicated herein (Parts I and II)
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Danielson Holding Corporation ("DHC" or "Registrant") is a holding company
incorporated in Delaware, having separate subsidiaries (collectively with DHC,
the "Company") offering a variety of insurance products. It is DHC's intention
to grow by developing business partnerships and making strategic acquisitions.
As part of DHC's ongoing corporate strategy, DHC has continued to seek
acquisition opportunities which will both complement its existing operations and
enable DHC to earn an attractive return on investment. The largest subsidiary of
DHC is its indirectly wholly-owned California insurance company, National
American Insurance Company of California (together with its subsidiaries,
"NAICC"). NAICC writes non-standard and preferred private passenger and
commercial automobile, homeowners' and workers' compensation insurance in the
western United States, primarily California.
DHC had cash and investments at the holding company level of $21.0 million
at December 31, 2000. Total liabilities of DHC at the same date were $346,000.
The Company expects to report, as of the end of its 2000 tax year,
aggregate consolidated net operating tax loss carryforwards ("NOLs") for Federal
income tax purposes of approximately $899 million. These losses will expire over
the course of the next 19 years unless utilized prior thereto. See Note 8 of the
Notes to Consolidated Financial Statements.
DESCRIPTION OF BUSINESSES
Set forth below is a description of the business operations of the
Company's insurance services business.
DHC's wholly-owned subsidiary, NAICC, is a California corporation engaged
in writing non-standard and preferred private passenger and commercial
automobile, homeowners' and workers' compensation insurance in the western
states, primarily California. NAICC is a second tier subsidiary of DHC. NAICC's
immediate parent corporation is KCP Holding Company ("KCP"). KCP is wholly-owned
by Mission American Insurance Company ("MAIC"), which in turn is wholly-owned by
DHC.
GENERAL
NAICC began writing non-standard private passenger automobile insurance in
California in July, 1993, in Oregon and Washington in April, 1998 and in Arizona
in 1999. NAICC writes its California business through two general agents that
use over 700 sub-agents to obtain applications for policies. Oregon, Washington
and Arizona business is written directly through appointed independent agents.
Policyholder selection is governed by underwriting guidelines established by
NAICC. NAICC began writing non-standard commercial automobile insurance in 1995
through independent agents. Non-standard risks are those segments of the driving
public which generally are not considered "preferred" business, such as drivers
with a record of prior accidents or driving violations, drivers involved in
particular occupations or driving certain types of vehicles, or those who have
been non-renewed or declined by another insurance company. Generally,
non-standard premium rates are higher than standard premium rates and policy
limits are lower than typical policy limits. NAICC's management believes that it
is able to achieve underwriting success through refinement of various risk
profiles, thereby dividing the non-standard market into more defined segments
which can be adequately priced.
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The majority of automobiles owned or used by businesses are insured under
policies that provide other coverages for the business, such as commercial
multi-peril insurance. Businesses which are unable to insure a specific driver
and businesses having vehicles not qualifying for commercial multi-peril
insurance are typical NAICC commercial automobile policyholders. Examples of
these risks include drivers with more than one moving violation, one and two
vehicle accounts, and specialty haulers, such as sand and gravel, farm vehicles
and certain short-haul common carriers. The typical NAICC commercial automobile
policy covers fleets of four or fewer vehicles. NAICC does not insure long-haul
truckers, trucks hauling logs, gasoline or similar higher hazard operations. The
current average annual premium of the policies in force is approximately $2,518.
Net written premiums were $27.2 million, $29.7 million and $27.9 million in
2000, 1999 and 1998, respectively for all private passenger automobile programs.
Net written premiums were $16.7 million, $21.9 million, and $26.3 million in
2000, 1999 and 1998, respectively, for the non-standard private passenger
automobile program. Until January 1, 1999, NAICC ceded 25 percent of its
California non-standard private passenger automobile business to a major
reinsurance company under a quota share reinsurance agreement. Effective January
1, 1999, the ceding percentage was reduced to 10%. NAICC's Oregon and Washington
non-standard automobile, California preferred automobile, and its commercial
automobile businesses are reinsured on an excess of loss basis, where the
company retains the first $250,000.
The decrease in California non-standard private passenger automobile
premiums in 2000 was due to increased competition in the California marketplace.
Part of the decrease in its California non-standard automobile business
continues to be offset by the preferred automobile program in California. Net
written premiums for preferred automobile were $10.5 million, $7.8 million and
$1.6 million in 2000, 1999 and 1998, respectively. Net written premium growth
for NAICC's non-standard private passenger automobile program outside of
California was flat during 2000.
Net written premiums for commercial automobile were $23.1 million, $12.6
million and $13.5 million in 2000, 1999 and 1998, respectively. The increase in
2000 is attributable to increased production as a result of increased marketing
efforts.
NAICC writes workers' compensation insurance in California and four other
western states. Workers' compensation insurance policies provide coverage for
statutory benefits which employers are required to pay to employees who are
injured in the course of employment including, among other things, temporary or
permanent disability benefits, death benefits, medical and hospital expenses and
expenses for vocational rehabilitation. Policies are issued having a term of no
more than one year. NAICC's premium volume in workers' compensation has declined
significantly in California since 1995 when a new "open rating" law replaced the
old workers' compensation "minimum rate" law and fierce price competition
immediately followed. Net written premiums for workers' compensation were $22.3
million, $13.1 million and $17.2 million, in 2000, 1999, and 1998, respectively.
In response to developments affecting the market for workers' compensation
insurance in California, NAICC has pursued a strategy of aggressively seeking
business either in other specialty lines of insurance such as non-standard
automobile insurance or in the workers' compensation line in geographic markets
believed by NAICC to have greater potential for profitability than California.
In furtherance of its strategy to write workers' compensation insurance in
markets other than California, in June 1996, NAICC acquired Valor Insurance
Company, Incorporated ("Valor"), a Montana-domiciled specialty insurance company
that writes workers' compensation insurance policies. During 2000 Valor
increased its direct written premiums $3.3 million from $6.6 million to $9.9
million.
NAICC does not write any business through managing general agents. Its
California non-standard private passenger automobile program, representing 12.2%
of net written premiums, is produced through one general agent, and its
preferred private passenger automobile program in California, representing 14.4%
of net written premiums, is produced through another general agent. Beginning in
2001, NAICC discontinued its California preferred private passenger automobile
program.
-2-
UNDERWRITING
Insurers admitted in California are required to obtain approval from the
California Department of Insurance of rates and/or forms prior to being used.
Many of the states in which NAICC does business have similar requirements. Rates
and policy forms are developed by NAICC and filed with the regulators in each of
the relevant states, depending upon each state's requirements. NAICC relies upon
its own, as well as industry experience, in establishing rates.
Private passenger automobile policy limits vary by state. In California,
non-standard policies provide maximum coverage up to $15,000 per person, $30,000
per accident for liability and bodily injury and $10,000 per accident for
property damage. In Arizona, Oregon and Washington, non-standard policies
provide minimum coverage of $25,000 per person, $50,000 per accident for
liability and bodily injury and $10,000 per accident for property damage, and
can provide coverage to a maximum of $250,000 per person, $500,000 per accident
for liability and bodily injury and $25,000 per accident for property damage. In
general, preferred policies provide coverage to a maximum of $250,000 per
person, $500,000 per accident for liability and bodily injury and $25,000 per
accident for property damage. The maximum non-standard commercial automobile
policy limit provided by NAICC is $1 million bodily injury and property damage
combined single limit of liability for each occurrence. NAICC retains the first
$250,000 bodily injury and property damage combined single limit of liability
for each occurrence, with losses in excess of $250,000, per occurrence, being
ceded to its reinsurers.
Workers' compensation rates, rating plans, policyholder dividend plans and
policy forms are developed and filed with the appropriate regulatory agency in
each state in which NAICC operates. NAICC relies principally upon rates
promulgated by either the Workers' Compensation Insurance Rating Bureau in
California or the National Council on Compensation Insurance, the statistical
agent for other western states in which NAICC markets insurance. NAICC maintains
a disciplined approach to risk selection and pricing. In accordance with this
policy, NAICC selects each prospective policyholder based on the characteristics
of such risk and establishes premiums based on loss experience and risk
exposure. NAICC's pricing policy is not driven by market share considerations.
NAICC retains the first $200,000 of each workers' compensation loss and has
purchased reinsurance for up to $49.8 million in excess of its retention, the
first $9.5 million of which are placed with three major reinsurance companies,
with the remaining $40.3 million being provided by 16 other companies. In April
2000, NAICC entered into a workers' compensation excess of loss reinsuarnce
agreement with SCOR Re Insurance Company that provides coverage down to
$200,000.
In January 1999, NAICC entered into a workers' compensation reinsurance
agreement with Reliance Insurance Company (the "Reliance Agreement") with a term
of two years. The Reliance Agreement provided excess of loss coverage down to
$10,000 and a 20% quota share below the excess retention resulting in a maximum
net loss to NAICC of $18,000 per claim. In the fourth quarter of 1999, NAICC
executed an agreement to rescind the Reliance Agreement. The terms of the
rescission include the return of amounts paid by NAICC during the nine month
period the Reliance Agreement was active plus a settlement fee to terminate the
Reliance Agreement. NAICC recognized a gain of $8,317,000 in the fourth quarter
of 1999 as a result of this rescission.
MARKETING
NAICC maintains five new business production offices located in Portland,
Oregon, Phoenix, Arizona and Concord, Fresno, and Long Beach, California. The
marketing and underwriting employees at these offices solicit and underwrite
only new applications produced by independent agents. NAICC believes that its
local presence allows it to better serve policyholders and independent agents.
All other functions of policyholder service, renewal underwriting, policy
issuance, premium collection and record retention are performed centrally at
NAICC's home office in Long Beach, California.
NAICC currently markets its non-standard private passenger automobile
insurance in California through one general agent. NAICC writes non-standard
private passenger automobile insurance directly through 128 independent agents
in Arizona, Idaho, Nevada, Oregon and Washington. NAICC also began a preferred
private passenger automobile
-3-
program in California in February 1998 which is marketed through a second
general agent. NAICC markets its non-standard commercial automobile insurance
through approximately 900 independent agents located in Arizona, California,
Idaho, Nevada, Oregon, Utah and Washington.
NAICC writes workers' compensation business primarily in the states of
California, Oregon, Arizona, Idaho and Montana through more than 800 independent
agents. The agency contracts provide authority to bind coverage within specific
underwriting guidelines set by NAICC. Valor markets workers' compensation
insurance to Montana employers. All business is produced and serviced through
its home office in Billings, Montana. NAICC targets employers having operations
that are classified as low to moderate hazard and that generally have payrolls
under $1 million. Typically, annual premium for employers in this payroll
category are less than $25,000. Valor writes workers' compensation for employers
of a wide range of hazard classifications, from banks to construction
businesses, and targets the larger employers in the state of Montana.
CLAIMS
All automobile claims are handled by employees of NAICC at its home office
in Long Beach, California. Claims are reported by agents, insureds and claimants
directly to NAICC. Claims involving suspected fraud are referred to an in-house
special investigation unit ("SIU") which manages a detailed investigation of
these claims using outside investigative firms. When evidence of fraudulent
activity is identified, the SIU works with the various state departments of
insurance, the National Insurance Crime Bureau and local law enforcement
agencies in handling the claims.
Workers' compensation claims are received, reviewed and processed by NAICC
employees located in claims service offices in Long Beach, California. Most of
NAICC's policyholders are not of sufficient size or type to make a more
specialized managed care approach to medical cost containment more cost
effective.
The California Automobile Assigned Risk Plan provides for state mandated
minimum levels of automobile liability coverage to drivers whose driving
records, or other relevant characteristics, make it difficult for them to obtain
insurance coverage in the voluntary market. NAICC does not expect to receive a
material number of assignments arising from this program and does not believe
that the assignments will have a material adverse effect on its profitability.
LOSSES AND LOSS ADJUSTMENT EXPENSES
NAICC's unpaid losses and loss adjustment expenses ("LAE") represent the
estimated indemnity cost and loss adjustment expenses necessary to cover the
ultimate net cost of investigating and settling claims. Such estimates are based
upon estimates for reported losses, historical company experience of losses
reported by reinsured companies for insurance assumed, and actuarial estimates
based upon historical company and industry experience for development of
reported and unreported claims (incurred but not reported). Any changes in
estimates of ultimate liability are reflected in current operating results.
Inflation is assumed, along with other factors, in estimating future claim costs
and related liabilities. NAICC does not discount any of its loss reserves.
The ultimate cost of claims is difficult to predict for several reasons.
Claims may not be reported until many years after they are incurred. Changes in
the rate of inflation and the legal environment have created forecasting
complications. Court decisions may dramatically increase liability in the time
between the dates on which a claim is reported and its resolution. Punitive
damages awards have grown in frequency and magnitude. The courts have imposed
increasing obligations on insurance companies to defend policyholders. As a
result, the frequency and severity of claims have grown rapidly and
unpredictably.
NAICC has claims for environmental clean-up against policies issued prior
to 1970 and which are currently in run-off. The principal exposure arises from
direct excess and primary policies of business in run-off, the obligations of
which were assumed by NAICC in 1985. These direct excess and primary claims are
relatively few in number and have policy limits of between $50,000 and
$1,000,000, with reinsurance generally above
-4-
$50,000. NAICC also has environmental claims arising associated with
participations in excess of loss reinsurance contracts assumed by NAICC. These
reinsurance contracts have relatively low limits, generally less than $25,000,
and estimates of unpaid losses are based on information provided by the primary
insurance company.
The unpaid loss and LAE related to environmental cleanup is established
considering facts currently known and the current state of the law and coverage
litigation. Liabilities are estimated for known claims (including the cost of
related litigation) when sufficient information has been developed to indicate
the involvement of a specific contract of insurance or reinsurance and
management can reasonably estimate its liability. Estimates for unknown claims
and development of reported claims are included in NAICC's loss and LAE. The
liability for development of reported claims is based on estimates of the range
of potential losses for reported claims in the aggregate. Estimates of
liabilities are reviewed and updated continually and there is the potential that
NAICC's exposure could be materially in excess of amounts that are currently
recorded. Management does not expect that liabilities associated with these
types of claims will result in a material adverse effect on future liquidity or
financial position. However, liabilities such as these are based upon estimates
and there can be no assurance that the ultimate liability will not exceed, or
even materially exceed, such estimates. As of December 31, 2000 and 1999,
NAICC's net unpaid losses and LAE relating to environmental claims were
approximately $7.6 million and $8.3 million, respectively.
Due to the factors discussed above and others, the process used in
estimating unpaid losses and loss adjustment expenses cannot provide an exact
result. Management believes that the provisions for unpaid losses and loss
adjustment expenses are adequate to cover the net cost of losses and loss
expenses incurred to date; however, such liability is necessarily based on
estimates and there can be no assurance that the ultimate liability will not
exceed, or even materially exceed, such estimates.
-5-
ANALYSIS OF LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of NAICC's unpaid losses and
LAE (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998
---- ---- ----
Net unpaid losses and LAE at January 1 $79,306 $ 77,466 $ 85,762
Incurred related to:
Current year 55,269 43,301 39,131
Prior years 5,254 2,491 --
---------- ----------- -----------
Total incurred 60,523 45,792 39,131
---------- ----------- -----------
Paid Related to:
Current year (26,147) (16,527) (16,169)
Prior years (34,293) (27,425) (31,258)
---------- ----------- -----------
Total paid (60,440) (43,952) (47,427)
---------- ----------- -----------
Net unpaid losses and LAE at
December 31 79,389 79,306 77,466
Plus: reinsurance recoverables on unpaid
losses 20,641 15,628 18,187
---------- ----------- -----------
Gross unpaid losses and LAE at
December 31 $ 100,030 $ 94,934 $ 95,653
========== =========== ===========
The losses and LAE incurred during 2000 related to prior years is
attributable to development on the commercial automobile lines and certain lines
in run-off. The losses and LAE incurred during 1999 related to prior years is
primarily attributable to development in the California workers' compensation
line. NAICC increased its bulk unpaid liabilities related to these policies, as
it has become evident that the loss costs associated with these claims would be
greater than previously anticipated.
The following table indicates the manner in which unpaid losses and LAE at
the end of a particular year change as time passes. The first line reflects the
liability as originally reported, net of reinsurance, at the end of the stated
year. Each calendar year-end liability includes the estimated liability for that
accident year and all prior accident years comprising that liability. The second
section shows the original recorded net liability as of the end of successive
years adjusted to reflect facts and circumstances that are later discovered. The
next line, cumulative (deficiency) or redundancy, compares the adjusted net
liability amount to the net liability amount as originally established and
reflects whether the net liability as originally recorded was adequate to cover
the estimated cost of claims or redundant. The third section reflects the
cumulative amounts related to that liability that were paid, net of reinsurance,
as of the end of successive years.
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Analysis of Net Losses and Loss Adjustment Expense ("LAE") Development (dollars
in thousands):
YEAR ENDED DECEMBER 31
----------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net unpaid losses and LAE at end of
year
$91,870 $ 97,810 $104,825 $119,223 $128,625 $116,294 $97,105 $ 85,762 $ 77,466 $79,306 $79,389
Net unpaid losses and LAE re- estimated as of:
One year later 92,632 94,364 105,658 119,607 131,748 126,414 98,045 85,762 79,957 84,560
Two years later 87,504 99,875 111,063 123,039 141,602 126,796 97,683 85,684 82,778
Three years later 89,844 107,945 117,756 136,735 141,787 127,621 98,545 87,613
Four years later 95,576 116,018 138,877 140,076 144,491 129,792 102,053
Five years later 102,081 136,269 142,423 142,537 146,827 133,985
Six years later 119,107 139,493 144,457 144,556 151,784
Seven years later 121,161 141,467 145,370 147,916
Eight Years later 122,664 142,031 148,052
Nine Years later 122,814 144,936
Ten Years later 125,500
Cumulative (deficiency) redundancy (33,630) (47,126) (43,227) (28,693) (23,159) (17,691) (4,948) (1,851) (5,312) (5,254)
Cumulative net amounts paid as of:
One year later 31,162 39,131 39,650 42,264 46,582 46,132 35,696 31,317 43,090 51,608
Two years later 53,424 63,483 68,025 71,702 80,515 74,543 54,815 43,855 62,577
Three years later 66,198 81,485 88,038 95,525 101,726 90,818 63,290 56,968
Four years later 75,963 94,238 106,431 110,163 114,424 97,900 74,306
Five years later 83,704 108,923 118,136 119,474 119,310 108,061
Six years later 95,199 118,397 125,218 122,296 128,117
Seven years later 102,886 124,569 126,362 129,378
Eight years later 107,726 125,256 132,482
Nine years later 108,277 130,963
Ten years later 112,800
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The following table reflects the same information as the preceding table gross
of reinsurance (dollars in thousands):
Years ended December 31,
1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
Gross unpaid losses and LAE at end of year: $ 137,479 $ 146,330 $ 137,406 $120,651 $ 105,947 $ 95,653 $ 94,934 $100,030
Gross unpaid losses and LAE re-estimated a
as of:
One year later 137,898 149,815 149,416 121,787 107,060 99,314 103,166
Two years later 141,737 161,731 150,106 121,335 106,543 100,893
Three years later 158,263 162,246 150,815 122,369 110,091
Four years later 162,697 165,111 153,509 126,736
Five years later 165,077 168,045 159,164
Six years later 167,702 174,811
Seven years later 172,768
Gross cumulative deficiency: (35,289) (28,481) (21,758) (6,085) (4,144) (5,240) (8,232)
Gross cumulative amount paid as of:
One year later 53,634 53,798 54,901 47,835 36,542 55,245 61,397
Two years later 88,930 92,991 92,422 21,794 56,948 99,185
Three years later 116,605 122,095 110,498 37,092 93,694
Four years later 138,924 136,448 124,153 71,414
Five years later 148,928 146,803 157,591
Six years later 157,196 178,827
Seven years later 187,373
Gross unpaid losses and LAE latest re-estimate 172,768 174,811 159,164 126,736 110,091 100,893 103,166
Reinsurance recoverable latest re-estimate 24,852 23,028 25,179 24,683 22,478 18,116 20,470
-------------------------------------------------------------------------
Net unpaid losses and LAE latest re-estimate 147,916 151,784 133,985 102,053 87,613 82,778 82,697
-------------------------------------------------------------------------
The cumulative deficiency as of December 31, 1999 and 1998 on a net basis
of $5.3 million is due to the strengthening of the unpaid losses and ALAE
ongoing lines of business including workers' compensation, preferred private
passenger automobile, and commercial automobile of approximately $3.4 million.
The increase for commercial automobile was attributable to adverse development.
The increase in the loss and LAE for workers' compensation is attributable to
higher than expected losses in California.
The cumulative deficiency as of December 31, 1995 on a net basis of $17.7
million is due to the strengthening of the unpaid losses and ALAE of pre-1980
businesses assumed by NAICC in 1985 and which are in run-off. NAICC increased
these run-off claim liabilities by $10 million in 1996. The pre-1980 run-off
liabilities include claims relating to environmental clean-up for policies
issued prior to 1970.
The cumulative deficiency on a net basis of $43.2 million and $47.1 million
as of December 31, 1992 and 1991, respectively, is also attributable to both
adverse development of workers' compensation loss experience in the 1990 and
1991 loss years and development in certain lines in run-off. The California
workers' compensation industry, including NAICC, experienced adverse development
of those loss years. The adverse development was the result of a significant
increase in frequency in workers' compensation claims that was brought on by a
downturn in the California economy, an increase in unemployment and a dramatic
increase in stress and post-termination claims. The adverse development in 1990
and 1991 was significantly offset by favorable workers' compensation loss
experience and development in the 1992 through 1995 loss years.
Conditions and trends that have affected the development of these
liabilities in the past may not necessarily recur in the future. It would not be
appropriate to use this cumulative history in the projection of future
performance.
-8-
REINSURANCE
In its normal course of business in accordance with industry practice,
NAICC reinsures a portion of its exposure with other insurance companies so as
to effectively limit its maximum loss arising out of any one occurrence.
Contracts of reinsurance do not legally discharge the original insurer from its
primary liability. Estimated reinsurance receivables arising from these
contracts of reinsurance are, in accordance with generally accepted accounting
principles, reported separately as assets. Premiums for reinsurance ceded by
NAICC in 2000 were 9.5 percent of written premiums.
As of December 31, 2000, General Reinsurance Corporation (GRC), and Mitsui
Marine & Fire Insurance Company, Ltd. ("MMF"), were the only reinsurers that
comprised more than 10 percent of NAICC's reinsurance recoverable on paid and
unpaid claims. NAICC monitors all reinsurers, by reviewing A.M. Best reports and
ratings, information obtained from reinsurance intermediaries and analyzing
financial statements. At December 31, 2000, NAICC had reinsurance recoverables
on paid and unpaid claims of $12.3 million and $2.3 million from GRC and MMF,
respectively. Both GRC and MMF have an A.M. Best rating of A+ or better. The
unsecured balance from MMF is approximately $1.2 million. The paid and unpaid
recoverable amounts ceded to MMF relate to business in run-off and assumed by
NAICC. See Note 2 of the Notes to Consolidated Financial Statements for further
information on reinsurance.
NAICC and two of its subsidiaries participate in an inter-company pooling
and reinsurance agreement under which Danielson Insurance Company ("DICO") and
Danielson National Insurance Company ("DNIC") cede 100% of their net liability,
defined to include premiums, losses and allocated loss adjustment expenses, to
NAICC to be combined with the net liability for policies of NAICC in formation
of a "Pool". NAICC simultaneously cedes to DICO and DNIC 10% of the net
liability of the Pool. DNIC commenced participation in July, 1993 and DICO
commenced participation in January, 1994. Additionally, both DICO and DNIC
reimburse NAICC for executive services, professional services, and
administrative expenses based on designated percentages of net premiums written
for each line of business.
REGULATION
Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The agencies
established pursuant to these state laws have broad administrative and
supervisory powers relating to the granting and revocation of licenses to
transact business, regulation of trade practices, establishment of guaranty
associations, licensing of agents, approval of policy forms, premium rate filing
requirements, reserve requirements, the form and content of required regulatory
financial statements, capital and surplus requirements and the maximum
concentrations of certain classes of investments. Most states also have enacted
legislation regulating insurance holding company systems, including
acquisitions, extraordinary dividends, the terms of affiliate transactions and
other related matters. The Company and its insurance subsidiaries have
registered as holding company systems pursuant to such legislation in California
and routinely report to other jurisdictions. The National Association of
Insurance Commissioners has formed committees and appointed advisory groups to
study and formulate regulatory proposals on such diverse issues as the use of
surplus debentures, accounting for reinsurance transactions and the adoption of
risk-based capital requirements. It is not possible to predict the impact of
future state and federal regulation on the operations of the Company or its
insurance subsidiaries.
NAICC is an insurance company domiciled in the State of California and is
regulated by the California Department of Insurance for the benefit of
policyholders. The California Insurance Code does not permit the payment of an
extraordinary shareholder dividend without prior approval from the Insurance
Commissioner. Dividends are considered extraordinary if they exceed the greater
of net income or 10% of statutory surplus as of the prior December 31. To the
extent that NAICC has available unassigned surplus, as defined for dividend
purposes, NAICC will be able to pay dividends totalling $3.6 million during 2001
without prior regulatory approval.
-9-
RISK-BASED CAPITAL
A model for determining the risk-based capital ("RBC) requirements for
property and casualty insurance companies was adopted in December 1993.
Insurance companies are required to report their RBC ratios based on their 1994
annual statements. NAICC has calculated its RBC requirement under the most
recent RBC model and it has sufficient capital in excess of any regulatory
action level.
The RBC model sets forth four levels of increasing regulatory intervention:
(1) Company Action Level (200% of an insurer's Authorized Control Level) at
which the insurer must submit to the regulator a plan for increasing such
insurer's capital; (2) Regulatory Action Level (150% of an insurer's Authorized
Control Level), at which the insurer must submit a plan for increasing its
capital to the regulator and the regulator may issue corrective orders; (3)
Authorized Control Level (a multi-step calculation based upon information
derived from an insurer's most recent filed statutory annual statement), at
which the regulator may take action to rehabilitate or liquidate the insurer;
and (4) Mandatory Control Level (70% of an insurer's Authorized Control Level),
at which the regulator must rehabilitate or liquidate the insurer.
At December 31, 2000, the RBC of NAICC was 239% greater than the Company
Action Level. NAICC currently has no plans to take any action designed to
significantly affect its RBC level.
HOLDING COMPANY BUSINESS
DHC is a holding company incorporated under the General Corporation Law of
the State of Delaware. As of December 31, 2000, DHC had the following material
assets and no material liabilities:
(i) ownership of its MAIC subsidiary, an insurance holding company that
owns, directly or indirectly, all of the stock of NAICC, DNIC, DICO,
Valor, and two other insurance subsidiaries which may commence
writing insurance lines in the future; and
(ii) approximately $21.0 million in cash and investments.
TAX LOSS CARRYFORWARD
At the close of 2000, the Company had a consolidated net operating loss
carryforward of approximately $899 million for Federal income tax purposes. This
estimate is based upon Federal consolidated income tax losses for the periods
through December 31, 1999 and an estimate of the 2000 taxable results. Some or
all of the carryforward may be available to offset, for Federal income tax
purposes, the future taxable income, if any, of DHC and its wholly-owned
subsidiaries. The Internal Revenue Service ("IRS") has not audited any of the
Company's tax returns for any of the years during the carryforward period
including those returns for the years in which the losses giving rise to the net
operating loss carryforward were reported. The net operating loss carryforward
is currently fully reserved, for valuation purposes, on the Company's financial
statements. The amount of the deferred asset considered realizable could be
increased in the near term if estimates of future taxable income during the
carryforward period are increased.
-10-
The Company's net operating tax loss carryforwards will expire, if not
used, in the following approximate amounts in the following years (dollars in
thousands):
Year Ending Amount of Carryforwards
December 31, Expiring
------------ --------
2001 153,397
2002 139,613
2003 60,849
2004 69,947
2005 106,225
2006 92,355
2007 89,790
2008 31,688
2009 39,689
2010 23,600
2011 19,755
2012 38,255
2019 33,636
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. We will be
treated as having had an "ownership change" if there is more than 50% increase
in stock ownership during a 3 year "testing period" by "5% stockholders." For
this purpose, stock ownership is measured by value, and does not include
so-called "straight preferred" stock. 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. The transfer restrictions
were implemented in 1990, and we expect that they will remain in-force as long
as the NOL is available to us. Notwithstanding such transfer restrictions, there
could be circumstances under which an issuance by DHC of a significant number of
new shares of Common Stock or other new class of equity security having certain
characteristics (for example, the right to vote or to convert into Common Stock)
might result in an ownership change under the Internal Revenue Code.
STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Item 1 to the Report on Form 10-K, together with Items 2, 3, 7, and 8,
contain forward-looking statements, including statements concerning plans,
capital adequacy, adequacy of reserves, utilization of tax losses, goals, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. Such forward-looking statements may
be identified, without limitation, by the use of the words "believes",
"anticipates", "expects", "intends", "plans" and other similar expressions. All
such statements represent only current estimates or expectations as to future
results and are subject to risks and uncertainties which could cause actual
results to materially differ from current estimates or expectations. See "RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS" in Item 7 for further information
concerning certain of those risks and uncertainties.
EMPLOYEES
As of December 31, 2000, the number of employees of DHC and its
consolidated subsidiaries was approximately as follows:
NAICC 144
DHC (holding company only) 12
---
Total 156
-11-
None of these employees is covered by any collective bargaining agreement. DHC
believes that the staffing levels are adequate to conduct future operations.
ITEM 2. PROPERTIES.
DHC leases a minimal amount of space for use as administrative and
executive offices. DHC's lease has a term of approximately five years which is
scheduled to expire in 2003. DHC believes that the space available to it is
adequate for DHC's current and foreseeable needs.
NAICC's headquarters are located in a leased office facility in Rancho
Dominguez, California, pursuant to a five-year lease which is scheduled to
expire in 2004. In addition, NAICC has entered into short term leases in
connection with its operations in various locations on the west coast of the
United States. NAICC believes that the foregoing leased facilities are adequate
for NAICC's current and anticipated future needs.
See Note 10 of the Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
NAICC is a party to various legal proceedings which are considered routine
and incidental to its insurance business and are not material to the financial
condition and operation of such business.
Danielson Reinsurance Corporation ("Danielson Re"), an indirect wholly
owned subsidiary of DHC (the "Registrant"), is the grantor of the Mission
Reinsurance Corporation Trust (the "Trust"). The Trust was one of several
created in connection with the insolvency and reorganization of Mission
Insurance Group, Inc. and its subsidiaries from which the Company emerged. In
connection with the liquidation of the Trust by the Missouri Department of
Insurance (the "Insurance Department"), a surplus existed from which the
Insurance Department sought to pay interest to the claimants of the Trust. DHC
challenged the Insurance Department's plan to pay interest in the Circuit Court
of Jackson County, Missouri, which is overseeing the liquidation of the Trust,
arguing that any surplus belonged to Danielson Re as the grantor of the Trust.
The Circuit Court upheld the plan and DHC appealed that decision.
On June 22, 1999, the Missouri Court of Appeals reversed the decision of
the Circuit Court and remanded the matter to the Circuit Court, ruling that no
interest can be paid to claimants of insolvent insurance companies under the
Missouri Insurance Code. As a result of that decision, Danielson Re would have
been entitled to any surplus remaining in the Trust after payment of all claims
and expenses of the Trust, which was believed to approximate $14 million. The
Insurance Department appealed the decision of the Court of Appeals to the
Missouri Supreme Court, which reversed the decision of the Court of Appeals. As
a result, the Insurance Department is permitted to pay interest on claims, and
it is anticipated that there will be no surplus remaining in the Trust after
payment of the interest.
See Note 11 of the Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-12-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
"Stock Market Prices" on page 26 of DHC's 2000 Annual Report to
Stockholders (included as an exhibit hereto) is incorporated herein by
reference.
On December 29, 2000, the Company sold, for aggregate cash
consideration of $3,073,875, 819,700 newly issued shares of Common
Stock. The sale was a private placement to 22 accredited investors made
pursuant to Regulation D under the Securities Act of 1933. Brokerage
commissions of $33,900 were paid to M.J. Whitman, Inc., an affiliate of
DHC, in connection with the placement of certain of those shares by
M.J. Whitman, Inc.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Consolidated Financial Data" on page 2 of DHC's 2000 Annual
Report to Stockholders (included as an exhibit hereto) is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 3 through 8 of DHC's 2000 Annual Report
to Stockholders (included as an exhibit hereto) is incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
"Market Risk" on pages 5 through 7 of DHC's 2000 Annual Report to
Stockholders (included as an exhibit hereto) is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of DHC and its subsidiaries,
together with the Notes thereto, and "Quarterly Financial Data,"
included on pages 9 through 12, 13 through 24, and 26, respectively, of
DHC's 2000 Annual Report to Stockholders (included as an exhibit
hereto), are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-13-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS.
The Directors of DHC are listed on the following pages with brief
statements of their principal occupations and other information. A listing of
the Directors' and officers' beneficial ownership of Common Stock appears on
subsequent pages under the heading "Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT." All of the Directors were elected to their
present terms of office by the stockholders at the Annual Meeting of
Stockholders of DHC held on June 15, 2000. The term of office of each Director
continues until the election of Directors to be held at the next Annual Meeting
of Stockholders or until his successor has been elected. There is no family
relationship between any Director and any other Director or executive officer of
DHC.
DHC, Martin J. Whitman and SZ Investments, LLC ("SZ") have entered into an
agreement pursuant to which, as long as SZ continues to directly or indirectly
own at least 1,000,000 shares of Common Stock, (i) SZ will have the right to
continue to nominate two members of DHC's Board of Directors (which nominees
were Samuel Zell and William Pate) and (ii) Mr. Whitman has agreed to vote and
use his best efforts to cause to be voted the shares of Common Stock owned or
controlled by him in favor of SZ's designees. In addition, SZ has agreed that,
so long as Mr. Whitman directly or indirectly owns 500,000 shares of Common
Stock and Mr. Whitman continues to be affiliated with Third Avenue Funds in the
same or substantially similar manner as his current affiliation (so long as such
entities continue to exist), SZ will vote the shares owned by it for the
election of Mr. Whitman and one other designee of Mr. Whitman (which nominee was
David Barse).
The information set forth below concerning the Directors has been furnished
by such Directors to DHC.
DIRECTOR
DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
- -------- --- -------------------- -----
Martin J. Whitman 76 Chief Executive Officer of the Company 1990
David M. Barse 38 President and Chief Operating Officer of the 1996
Company
Samuel Zell 59 Chairman of Equity Group Investments, L.L.C. 1999
Eugene M. Isenberg 71 Chairman of the Board and Chief Executive 1990
Officer of Nabors Industries, Inc.
Joseph F. Porrino 56 Counselor to the President of New School 1990
University; Senior Consultant, Powers Global
Strategies, LLC
Frank B. Ryan 64 Professor of Mathematics at Rice University 1990
Wallace O. Sellers 71 Vice Chairman and Director of Enhance Financial 1995
Services Group, Inc.
-14-
Stanley J. Garstka 57 Deputy Dean and Professor in the Practice of 1996
Management at Yale University School of
Management
William Pate 37 Director of Mergers and Acquisitions of Equity 1999
Group Investments, L.L.C.
Mr. Whitman is the Chief Executive Officer and a Director of the Company.
Since 1974, Mr. Whitman has been the President and controlling stockholder of
M.J. Whitman & Co., Inc. (now known as Martin J. Whitman & Co., Inc.) ("MJW&Co")
which, until August 1991, was a registered broker-dealer. From August 1994 to
December 1994, Mr. Whitman served as the Managing Director of M.J. Whitman, L.P.
("MJWLP"), then a registered broker-dealer which succeeded to the broker-dealer
business of MJW&Co. Since January 1995, Mr. Whitman has served as the Chairman
(and, until June 1995, as President and until July 1999 as Chief Executive
Officer) of M. J. Whitman, Inc. ("MJW"), which succeeded at that time to MJWLP's
broker-dealer business. Also since January 1995, Mr. Whitman has served as the
Chairman (and, until July 1999 Chief Executive Officer) of M.J. Whitman Holding
Corp. ("MJWHC"), the parent of MJW and other affiliates. Since March 1990, Mr.
Whitman has been the Chairman of the Board, Chief Executive Officer and a
Trustee (and, from January 1991 to May 1998, the President) of Third Avenue
Trust and its predecessor, Third Avenue Value Fund, Inc. (together with its
predecessor, "Third Avenue Trust"), an open-end management investment company
registered under the Investment Company Act of 1940 (the "40 Act") and
containing three investment series of which he is a trustee. Since July 1999,
Mr. Whitman has been the Chairman of the Board, Chief Executive Officer and a
Trustee of Third Avenue Variable Series Trust ("Variable Trust"), an open-end
management investment company registered under the 40 Act and containing one
investment series. Since March 1990, Mr. Whitman has been Chairman of the Board
and Chief Executive Officer (and, until February 1998, the President) of EQSF
Advisers, Inc. ("EQSF"), the investment adviser of Third Avenue Trust and
Variable Trust. Until April 1994, Mr. Whitman also served as the Chairman of the
Board, Chief Executive Officer and a Director of Equity Strategies Fund, Inc.,
previously a registered investment company. Mr. Whitman is a Managing Director
of Whitman Heffernan Rhein & Co., Inc. ("WHR"), an investment and financial
advisory firm which he helped to found during the first quarter of 1987 and
which ceased operations in December, 1996. Since March 1991, Mr. Whitman has
served as a Director of Nabors Industries, Inc. ("Nabors"), a publicly-traded
oil and gas drilling company listed on the American Stock Exchange ("AMEX").
Since August, 1997, Mr. Whitman has served as a director of Tejon Ranch Co., an
agricultural and land management company listed on the New York Stock Exchange
("NYSE"). Since May 2000, Mr. Whitman has served as a director for Stewart
Information Serives, a publicly traded title insurance company traded on the
NYSE. From March 1993 through February 1996, Mr. Whitman served as a director of
Herman's Sporting Goods, Inc., a retail sporting goods chain, which filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code on
April 26, 1996. Mr. Whitman also serves as a Director of the Company's
subsidiaries, including National American Insurance Company of California
("NAICC"). Mr. Whitman co-authored the book THE AGGRESSIVE CONSERVATIVE INVESTOR
and is the author of VALUE INVESTING: A BALANCED APPROACH. Mr. Whitman is a
Distinguished Faculty Fellow in Finance at the Yale University School of
Management ("Yale School of Management"). Mr. Whitman graduated from Syracuse
University MAGNA CUM LAUDE in 1949 with a Bachelor of Science degree and
received his Masters degree in Economics from the New School for Social Research
in 1956. Mr. Whitman is a Chartered Financial Analyst.
Mr. Barse has been the President, Chief Operating Officer and a Director of
the Company since July 1996 and a director of NAICC since August 1996. Since
June 1995, Mr. Barse has been the President (and, since July 1999, Chief
Executive Officer) of each of MJW and MJWHC. From April 1995 until May 1998 and
February 1998, respectively, he was an Executive Vice President and Chief
Operating Officer of Third Avenue Trust and EQSF, at which times he assumed the
position of President. Since July 1999, Mr. Barse has been the President and
Chief Operating Officer of Variable Trust. Mr. Barse joined the predecessors of
MJW and MJWHC in December 1991 as General Counsel. Mr. Barse was previously an
attorney with the law firm of Robinson Silverman Pearce Aronsohn & Berman LLP.
Mr. Barse received a Bachelor of Arts in Political Science from George
Washington University in 1984 and a Juris Doctor from Brooklyn Law School in
1987.
-15-
Mr. Zell is the Chairman of the Board of the Company. Mr. Zell is Chairman
of Equity Group Investments, L.L.C. ("EGI"), an investment company since 1999
and had been Chairman of the Board of Equity Group Investments, Inc. for more
than five years. Mr. Zell is also Chairman of the Board of American Classic
Voyages Co., a provider of overnight cruises in the United States; Anixter
International Inc., a distributor of electrical and cable products; Capital
Trust, Inc., a specialized finance company; Chart House Enterprises, Inc., an
owner and operator of restaurants, and Manufactured Home Communities, an equity
real estate investment trust ("REIT") primarily focused on manufactured home
communities. Mr. Zell is Chairman of the Board of Trustees of Equity Office
Properties Trust, an equity REIT primarily focused on office buildings and
Equity Residential Properties Trust, an equity REIT primarily focused on
multifamily residential properties.
Mr. Isenberg, since 1987, has been Chairman and Chief Executive Officer of
Nabors. Beginning in 1996, Mr. Isenberg commenced his term as a Governor of the
AMEX. In 1998, Mr. Eisenberg became a Director of the National Association of
Securities Dealers, Inc. and NASDAQ. From 1969 to 1982, Mr. Isenberg was
Chairman of the Board and principal stockholder of Genimar Inc., a steel trading
and building products manufacturing company. From 1955 to 1968, Mr. Isenberg was
employed in various management capacities with the Exxon Corp. Mr. Isenberg
graduated from the University of Massachusetts in 1950 with a Bachelor of Arts
degree in Economics and from Princeton University in 1952 with a Masters degree
in Economics.
Mr. Porrino has been the Counselor to the President of New School
University (the "New School") since February, 1998 and was the Executive Vice
President of the New School from September 1991 to February, 1998. Mr. Porrino
is also Senior Consultant to Powers Global Strategies, LLC, a government
relations and strategic planning firm. Prior to that time, Mr. Porrino was a
partner in the New York law firm of Putney, Twombly, Hall & Hirson,
concentrating his practice in the area of labor law. Mr. Porrino received a
Bachelor of Arts degree from Bowdoin College in 1966, and was awarded a Juris
Doctor degree from Fordham University School of Law in 1970.
Dr. Ryan is retired from his prior position as a Professor of Mathematics
at Rice University. Since November, 1996, Dr. Ryan has served as a Director of
Siena Holdings, Inc., a real estate and health management company, the capital
stock of which is traded over-the-counter. From March 1996 through July 1999,
Dr. Ryan served as a Director of Texas Micro Inc., a computer systems company
that was merged with Radysis Corporation, the capital stock of which is traded
on NASDAQ. Until 1998, Dr. Ryan served as a Director of America West Airlines,
Inc., a publicly-traded company listed on the NYSE. From August 1990 to February
1995, Dr. Ryan also served as Vice President-External Affairs at Rice
University. For two years ending August 1990, Dr. Ryan was the President and
Chief Executive Officer of Contex Electronics Inc., a subsidiary of Buffton
Corporation, the capital stock of which is publicly traded on the AMEX. Prior to
that, and beginning in 1977, Dr. Ryan was a Lecturer in Mathematics at Yale
University, where he was also the Associate Vice President in charge of
institutional planning. Dr. Ryan obtained a Bachelor of Arts degree in Physics
in 1958 from Rice University, a Masters degree in Mathematics from Rice in 1961,
and a Doctorate in Mathematics from Rice in 1965.
Mr. Sellers is Vice-Chairman and a Director of Enhance Financial Group,
Inc. ("Enhance Group"), a financial services corporation the capital stock of
which is publicly traded on the NYSE. Until December 31, 1994, Mr. Sellers was
the President and Chief Executive Officer of Enhance Group, from its inception
in 1986, as well as its principal subsidiaries, Enhance Reinsurance Company and
Asset Guaranty Insurance Company, from their inceptions in 1986 and 1988,
respectively. From 1987 to 1994, Mr. Sellers served as a Director, and from 1992
to 1993 as the Chairman, of the Association of Financial Guaranty Insurors in
New York. Mr. Sellers received a Bachelor of Arts degree from the University of
New Mexico in 1951 and a Masters degree in Economics from New York University in
1956. Mr. Sellers attended the Advanced Management Program at Harvard University
in 1975 and is a Chartered Financial Analyst.
Mr. Garstka has been Deputy Dean at the Yale School of Management since
November, 1995 and has been a Professor in the Practice of Management at the
Yale School of Management since 1988. Mr. Garstka
-16-
was the Acting Dean of the Yale School of Management from August 1994 to October
1995, and an Associate Dean of the Yale School of Management from 1984 to 1994.
Mr. Garstka has served on the Board of Trustees of MBA Enterprises Corps, a
non-profit organization, since 1991 and on the Board of Trustees of The Foote
School in New Haven, Connecticut since 1995. From 1988 to 1990, Mr. Garstka
served as a director of Vyquest, Inc., a publicly-traded company listed on the
AMEX. Mr. Garstka was a Professor in the Practice of Accounting from 1983 to
1988, and an Associate Professor of Organization and Management from 1978 to
1983, at the Yale School of Management. Mr. Garstka has also authored numerous
articles on accounting and mathematics. Mr. Garstka received a Bachelor of Arts
degree in Mathematics from Wesleyan University in Middletown, Connecticut in
1966, a Masters degree in Industrial Administration in 1968 from Carnegie Mellon
University and a Doctorate in Operations Research in 1970 from Carnegie Mellon
University.
Mr. Pate has served as a director of Mergers and Acquisitions for EGI or
its predecessor since February 1994. Mr. Pate serves on the Board of Directors
of Davel Communications, Inc. Prior to February 1994, Mr. Pate was an associate
at Credit Suisse First Boston.
Mr. LeVine is currently a Special Deputy Commissioner of the California
Department of Insurance and is the Chief Executive Officer of the California
Conservation and Liquidation Office, which oversees the management of 53
insurance companies with combined assets exceeding $1.0 billion. Mr. LeVine has
been Senior Staff Counsel with the California Department of Insurance since
1989. Prior to 1989, Mr. LeVine was in private practice as an attorney. Mr.
LeVine received a Bachelor of Arts degree from the University of California,
Berkeley with honors in 1975 and a Juris Doctor from the University of
California, Los Angeles in 1982.
EXECUTIVE OFFICERS.
The executive officers of DHC are as follows:
NAME AGE PRINCIPAL POSITION WITH REGISTRANT
- ---- --- ----------------------------------
Martin J. Whitman 76 Chief Executive Officer and a Director
David M. Barse 38 President, Chief Operating Officer
and a Director
Michael T. Carney 47 Chief Financial Officer and Treasurer
W. James Hall 36 General Counsel and Secretary
For additional information about Messrs. Whitman and Barse, see "DIRECTORS"
above.
Mr. Carney was the Chief Financial Officer ("CFO") of DHC from August 1990
until March 1996 and has been the CFO of the Company and a director of NAICC
since August 1996. Since 1990, Mr. Carney has served as Treasurer and CFO of
Third Avenue Trust and EQSF and, since 1989, as CFO of MJW&Co., and MJW and
MJWHC and their predecessors. Since July 1999, Mr. Carney has served as
Treasurer and CFO of Variable Trust. From 1990 through April 1994, Mr. Carney
also served as CFO of Carl Marks Strategic Investments, L.P.; from 1989 through
December, 1996 Mr. Carney served as CFO of WHR; and from 1989 through April
1994, Mr. Carney served as Treasurer and CFO of Equity Strategies Fund. From
1988 to 1989, Mr. Carney was the Director of Accounting of Smith New Court, Carl
Marks, Inc., and, from 1986 to 1988, Mr. Carney served as the Controller of Carl
Marks & Co., Inc. Mr. Carney graduated from St. John's University in 1981 with a
Bachelor of Science degree in Accounting.
Mr. Hall has been the General Counsel and Secretary of DHC since December
2000. Mr. Hall has also served as General Counsel and Secretary of MJWHC and MJW
since June 2000, of Third Avenue Trust and EQSF since September 2000 and of
Variable Trust since September 2000. Prior to June of 2000, Mr. Hall was an
associate at Paul, Weiss, Rifkind, Wharton & Garrison LLP from February 2000.
Mr. Hall served as and Associate at Morgan, Lewis Bockius LLP from November 1996
to January 2000 and an associate for Gibson, Dunn and Crutcher LLP March 1992
though June 1996. Mr. Hall served as a Captain in the U.S. Army Reserve from
1986 through 1992. Mr. Hall graduated from the University of Pennsylvania School
of Law in 1991 and the Massachusetts Institute of Technology in 1986 with
Bachelor of Science degrees in Biology and Aeronautical/Astronautical
Engineering.
-17-
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires DHC's
Directors and executive officers, and persons who own more than ten percent of a
registered class of the DHC's equity securities, to file with the Securities and
Exchange Commission and the American Stock Exchange initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of DHC. Officers, Directors and greater than ten-percent stockholders are
required by Federal securities regulations to furnish DHC with copies of all
Section 16(a) forms they file.
To DHC's knowledge, based solely upon review of the copies of such reports
furnished to DHC and written representations that no other reports were
required, except for one Form 4 with respect to each of Mr. Pate, Mr. Barse, Mr.
Carney and Mr. Hall, each of which was filed within two days of the
required filing date, and one Form 4 with respect to SZ Investments, LLC not
involving a transaction, all Section 16(a) filing requirements applicable to
DHC's officers, Directors and greater than ten percent beneficial owners were
complied with for the fiscal year ended December 31, 2000.
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 2000 by the Chief
Executive Officer and each other executive officer of DHC who had cash
compensation for such year in excess of $100,000. Only those columns which call
for information applicable to DHC or the individual named for the periods
indicated have been included in such table.
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------- ------------
AWARDS
------------
SECURITIES
UNDERLYING ALL OTHER
YEAR SALARY (a) BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) (#) ($)
- ----------------------------------------------------------------------------------------------------------------
Martin J. Whitman 2000 $ 200,000 -0- -0- -0-
CHAIRMAN OF THE BOARD & CHIEF EXECUTIVE OFFICER 1999 $ 200,000 -0- -0- -0-
1998 $ 200,000 -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------
David M. Barse 2000 $ 75,000 $150,000 50,000 -0-
PRESIDENT AND CHIEF OPERATING OFFICER 1999 $ 75,000 $ 80,000 50,000 -0-
1998 $ 75,000 -0- 50,000 -0-
- ----------------------------------------------------------------------------------------------------------------
Michael Carney 2000 $ 75,000 $ 50,000 25,000 -0-
TREASURER AND CHIEF FINANCIAL OFFICER 1999 $ 75,000 $ 40,000 25,000 -0-
1998 $ 75,000 -0- 35,000 -0-
- ----------------------------------------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table presents certain information relating to the
grants of stock options made during 2000 to the named executive officers of DHC.
The options were granted under DHC's 1995 Stock and Incentive Plan. Pursuant to
rules of the Securities and Exchange Commission, the table also shows the value
of
- --------
a Amounts shown indicate cash compensation earned and received by executive
officers in the year shown. Executive officers also participate in DHC group
health insurance.
-18-
the options granted at the end of the option term if the stock price were to
appreciate annually by 5% and 10%, respectively. There is no assurance that the
stock price will appreciate at the rates shown in the table. Only those tabular
columns which call for information applicable to DHC or the named individuals
have been included in such table.
- ----------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
- ----------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/ GRANTED TO
SARS EMPLOYEES IN EXERCISE OR EXPIRATION
GRANTED FISCAL YEAR BASE PRICE DATE
NAME (#)(1) ($/Sh) 5%($) 10%($)
- ----------------------------------------------------------------------------------------------------
Martin J. Whitman -0- - - - - -
- -----------------------------------------------------------------------------------------------------
David M. Barse 50,000 26.0 4.00 12/12/10 125,779 318,748
- -----------------------------------------------------------------------------------------------------
Michael Carney 25,000 13.0 4.00 12/12/10 62,889 159,374
- ----------------------------------------------------------------------------------------------------
(1) One-half of these options become exercisable on June 12, 2001 and one-
third of the balance of the options become exercisable on each of the
first three anniversaries of the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table presents certain information relating to the value of
unexercised stock options as of the end of 2000, on an aggregated basis, owned
by the named executive officers of DHC as of the last day of the fiscal year.
Such officers did not exercise any of such options during 2000. Only those
tabular columns which call for information applicable to DHC or the named
individuals have been included in such table.
- ----------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
(#) ($)
- ----------------------------------------------------------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------
Martin J. Whitman 210,000 -0- $ 328,125 -0-
- ----------------------------------------------------------------------------------------------
David M. Barse 183,333 66,667 $ 45,313 $ 28,125
- ----------------------------------------------------------------------------------------------
Michael Carney 136,667 33,333 $ 31,719 $ 14,063
- ----------------------------------------------------------------------------------------------
COMPENSATION OF DIRECTORS
During 2000, each Director who was not an officer or employee of the
Company or its subsidiaries received compensation of $2,500 for each Board
meeting attended, whether in person or by telephone. For attendance at Board
meetings during 2000, each Director received $5,000, plus, in each case,
reimbursement of
-19-
reasonable expenses. Directors who are officers or employees of the Company or
its subsidiaries receive no fees for service on the Board. No attendance fee is
paid to any Directors with respect to any committee meetings.
AGREEMENTS WITH EXECUTIVE OFFICERS
Effective April 14, 1999, the Company entered into written two-year
employment agreements with David Barse, President, and Michael Carney, Chief
Financial Officer. The agreements provide for the payment of base salary to each
of Mr. Barse and Mr. Carney of not less than $75,000. If either executive
officer's employment is terminated by the Company without cause (as defined),
the Company is required to pay to him an amount equal to the balance of his base
salary for the remainder of the term of the agreement plus, if he received a
bonus with respect to the prior fiscal year, an amount equal to that bonus (or
pro-rated portion thereof).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2000, none of the persons who served as members of the Compensation
Committee of DHC's Board of Directors also was, during that year or previously,
an officer or employee of DHC or any of its subsidiaries or had any other
relationship requiring disclosure herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock as
of March 21, 2001 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)
-------------------- --------------------
PRINCIPAL STOCKHOLDERS
SZ Investments, LLC 3,900,437 (2)(3) 18.2
2 N. Riverside Plaza
Chicago, IL 60606
Commissioner of Insurance 1,803,235 (2)(4) 9.2
of the State of California
c/o Harry LeVine
Mission Insurance Companies' Trusts
425 Market Street, 23rd Floor
San Francisco, CA 94105
Martin J. Whitman 1,281,143 (2)(5) 6.6
c/o Danielson Holding Corporation
767 Third Avenue
New York, NY 10017-2023
-20-
OFFICERS AND DIRECTORS
Martin J. Whitman 1,281,143 (2)(5) 6.6
David M. Barse 183,333 (6) *
Samuel Zell 3,900,437 (7) 18.2
Joseph F. Porrino 56,667 (8) *
Frank B. Ryan 48,667 (8) *
Eugene M. Isenberg 69,924 (9) *
Wallace O. Sellers 50,000 (10) *
Stanley J. Garstka 51,008 (11) *
William Pate 45,000 (12) *
Michael Carney 136,667 (13) *
All Officers and Directors
as a Group (10 persons) 5,822,846 (14) 26.5
- -----------------------------
* Percentage of shares beneficially owned does not exceed one percent of the
outstanding Common Stock.
(1) Share percentage ownership is rounded to nearest tenth of one percent and
reflects the effect of dilution as a result of outstanding options and warrants
to the extent such options and warrants are, or within 60 days will become,
exercisable. As of March 21, 2001 (the date as of which this table was
prepared), there were exercisable options outstanding to purchase 1,641,051
shares of Common Stock and an exercisable warrants to purchase 2,002,568 shares
of Common Stock. Shares underlying any option or warrant which was exercisable
on March 21, 2001 or becomes exercisable within the next 60 days are deemed
outstanding only for purposes of computing the share ownership and share
ownership percentage of the holder of such option or warrant.
(2) In accordance with provisions of DHC's Certificate of Incorporation, all
certificates representing shares of Common Stock beneficially owned by holders
of five percent or more of the Common Stock are owned of record by DHC, as
escrow agent, and are physically held by DHC in that capacity.
(3) Includes shares underlying a Warrant to purchase 1,900,437 shares of Common
Stock at an exercise price of $4.74391 per share.
-21-
(4) Beneficially owned by the Commissioner of Insurance of the State of
California in his capacity as trustee for the benefit of holders of certain
deficiency claims against certain trusts which assumed liabilities of certain
present and former insurance subsidiaries of the Company.
(5) Includes 803,669 shares beneficially owned by Third Avenue Value Fund
("TAVF"), an investment company registered under the Investment Company Act of
1940; 104,481 shares beneficially owned by Martin J. Whitman & Co., Inc.
("MJW&Co"), a private investment company; and 84,358 shares beneficially owned
by Mr. Whitman's wife and three adult family members. Mr. Whitman controls the
investment adviser of TAVF, and may be deemed to own beneficially a five percent
equity interest in TAVF. Mr. Whitman is the principal stockholder in MJW&Co, and
may be deemed to own beneficially the shares owned by MJW&Co. Mr. Whitman
disclaims beneficial ownership of the shares of Common Stock owned by TAVF and
Mr. Whitman's family members.
(6) Includes shares underlying currently exercisable options to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $5.6875 per
share, 50,000 shares of Common Stock at an exercise price of $7.0625 per share,
50,000 shares of Common Stock at an exercise price of $3.65625 per share and
33,333 shares of Common Stock at an exercise price of $5.3125 per share. Does
not include shares underlying options to purchase an aggregate of 16,667 shares
of Common Stock at an exercise price of $5.3125 per share or 50,000 shares of
Common Stock at an exercise price of $4.00 per share which are not currently
exercisable nor become exercisable within the next 60 days.
(7) Includes 2,000,000 shares of Common Stock owned by SZ Investments, L.L.C.
("SZ"), a company controlled by Mr. Zell, and 1,900,437 shares of Common Stock
issuable upon exercise of a Warrant owned by SZ.
(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. Does not include shares underlying options to purchase an aggregate
of 40,000 shares of Common Stock at an exercise price of $4.00. These options
are subject to approval and ratification of the shareholders and are thus not
exercisable within 60 days.
(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. Does not include shares underlying options to purchase an aggregate
of 40,000 shares of Common Stock at an exercise price of $4.00. These options
are subject to approval and ratification of the shareholders and are thus not
exercisable within 60 days.
(10) Includes shares underlying currently exercisable options to purchase an
aggregate of 40,000 shares of Common Stock at an exercise price of $7.00 per
share. Does not include shares underlying options to purchase an aggregate of
40,000 shares of Common Stock at an exercise price of $4.00. These options
are subject to approval and ratification of the shareholders and are thus not
exercisable within 60 days.
(11) Includes shares underlying currently exercisable options to purchase an
aggregate of 40,000 shares of Common Stock at an exercise price of $5.50 per
share. Does not include shares underlying options to purchase an aggregate of
40,000 shares of Common Stock at an exercise price of $4.00. These options are
subject to approval and ratification of the shareholders and are thus not
exercisable within 60 days.
(12) Does not include shares underlying options to purchase an aggregate of
22,800 shares at an excercise price of $4.00 per share which are not currently
exercisable nor become exercisable within the next 60 days.
(13) Includes shares underlying currently exercisable options to purchase an
aggregate of 50,000 shares of Common Stock at an exercise price of $5.6875 per
share, 35,000 shares of Common Stock at an exercise price of $7.0625 per share,
35,000 shares of Common Stock at an exercise price of $3.65625 per share and
16,667 shares of Common Stock at an exercise price of $5.3125 per share. Does
not include shares underlying options to purchase an aggregate of 8,333 shares
of Common Stock at an exercise price of $5.3125 per share or 25,000 shares
of Common Stock at an exercise price of $4.00 per share which are not currently
exercisable nor become exercisable within the next 60 days.
-22-
(14) In calculating the percentage of shares owned by officers and Directors as
a group, the shares of Common Stock underlying all options which are
beneficially owned by officers and Directors and which are currently exercisable
or become exercisable within the next 60 days are deemed outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
DHC shares certain personnel and facilities with several affiliated and
unaffiliated companies (including M.J. Whitman, Inc., a broker-dealer of which
Mr. Whitman is the Chairman and Mr. Barse is the President and Chief Executive
Officer), and certain expenses are allocated among the various entities.
Personnel costs are allocated based upon actual time spent on DHC's business or
upon fixed percentages of compensation. Costs relating to office space and
equipment are allocated based upon fixed percentages. Inter-company balances are
reconciled and reimbursed on a monthly basis.
In connection with the purchase of Common Stock by SZ, DHC has entered into
a non-exclusive investment advisory agreement with Equity Group Investments, LLC
("EGI"), a company controlled by Mr. Zell, pursuant to which EGI has agreed to
provide, at the request of DHC, certain investment banking services to the
Company in connection with potential transactions. For these services, DHC
pays an annual fee of $125,000 to EGI. In the event that any transaction is
consummated for which the Acquisition Committee of DHC's Board of Directors
determines that EGI provided material services, DHC will pay to EGI a fee in the
amount of 1% of the consideration paid by DHC in connection with such
transaction. Mr. Zell and Mr. Pate are members of the Acquisition Committee,
along with Mr. Whitman and Mr. Barse. DHC has also agreed to reimburse, upon
request, EGI's out-of-pocket expenses related to the investment advisory
agreement.
-23-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements -- see Index to Consolidated Financial
Statements and Financial Statement Schedules appearing on
Page F-1.
(2) Financial Statement Schedules -- see Index to Consolidated
Financial Statements and Financial Statement Schedules
appearing on Page F-1.
(3) Exhibits:
EXHIBIT NO. (1) NAME OF EXHIBIT
- --------------- ---------------
ORGANIZATIONAL DOCUMENTS:
------------------------
3.1 Restated Certificate of Incorporation of Registrant.
(To be included herewith at page 37)
3.2 Bylaws of Registrant.
(To be included herewith at page 41)
MATERIAL CONTRACTS--MISCELLANEOUS:
---------------------------------
10.1 * Stock Purchase and Sale Agreement dated as of April 14,
1999 between Samstock, L.L.C. and Danielson Holding
Corporation. (Filed with Report on Form 10-Q dated June
30, 1999, Exhibit 10.1.)
10.2 * Amendment No. 1, Assignment and Consent to Assignment of
Stock Purchase and Sale Agreement dated May 7, 1999 among
Samstock, L.L.C., S.Z. Investments, L.L.C. and Danielson
Holding Corporation. (Filed with Report on Form 10-Q dated
June 30, 1999, Exhibit 10.2.)
10.3 * Investment Agreement dated as of April 14, 1999 among
Danielson Holding Corporation, Samstock, L.L.C. and Martin
J. Whitman. (Filed with Report on Form 10-Q dated June 30,
1999, Exhibit 10.3.)
10.4 * Assignment and Consent to Assignment of Investment
Agreement dated May 7, 1999 among Danielson Holding
Corporation, Martin J. Whitman and S.Z. Investments,
L.L.C.. (Filed with Report on Form 10-Q dated June 30,
1999, Exhibit 10.4.)
10.5 * Letter Agreement dated April 14, 1999 between Equity Group
Investments, L.L.C. and Danielson Holding Corporation.
(Filed with Report on Form 10-Q dated June 30, 1999,
Exhibit 10.5.)
10.6 * Amendment dated June 2, 1999 to letter agreement dated
April 14, 1999 between Equity Group Investments, L.L.C. and
Danielson Holding Corporation. (Filed with Report on Form
10-Q dated June 30, 1999, Exhibit 10.6.)
-24-
MATERIAL CONTRACTS--EXECUTIVE COMPENSATION PLANS AND
ARRANGEMENTS:
--------------------------------------------------------------
10.7 * 1990 Stock Option Plan. (Filed with Report on Form 8-K dated
September 4, 1990, Exhibit 10.8.)
10.8 * 1995 Stock and Incentive Plan. (Included as Exhibit
A to Proxy Statement filed on March 30, 1995.)
10.9 * Employment Agreement dated April 14, 1999 between
Danielson Holding Corporation and David Barse.
(Filed with Report on Form 10-Q dated June 30, 1999,
Exhibit 10.7.)
10.10 * Employment Agreement dated April 14, 1999 between
Danielson Holding Corporation and Michael Carney.
(Filed with Report on Form 10-Q dated June 30, 1999,
Exhibit 10.8.)
- -------------
(1) Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
ANNUAL REPORT TO SECURITY-HOLDERS:
---------------------------------
13.1 2000 Annual Report of Danielson Holding Corporation.
(To be included herewith at page 51.)
SUBSIDIARIES:
------------
21 * Subsidiaries of Danielson Holding Corporation. (Filed with
Report on Form 10-K for the fiscal year ended December 31,
1996, Exhibit 21.)
CONSENT OF EXPERTS
------------------
(b) During the quarter ended December 31, 2000 for which this Report is
filed, DHC filed no reports on Form 8-K.
-25-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Danielson Holding Corporation has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
DANIELSON HOLDING CORPORATION
(Registrant)
By /s/ Martin J. Whitman
--------------------------------
Martin J. Whitman
Chief Executive Officer
Date: March 30, 2001
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 30, 2001 By /s/ MARTIN J. WHITMAN
-----------------------------------
Martin J. Whitman
Chief Executive Officer and a
Director
Date: March 30, 2001 By /s/ DAVID M. BARSE
-----------------------------------
David M. Barse
President and Chief Operating
Officer and a Director
Date: March 30, 2001 By /s/ MICHAEL T. CARNEY
-----------------------------------
Michael T. Carney
Chief Financial Officer
Date: March 30, 2001 By /s/ SAMUEL ZELL
-----------------------------------
Samuel Zell
Chairman of the Board Director
Date: March 30, 2001 By /s/ JOSEPH F. PORRINO
-----------------------------------
Joseph F. Porrino
Director
Date: March 30, 2001 By /s/ FRANK B. RYAN
-----------------------------------
Frank B. Ryan
Director
-26-
Date: March 30, 2001 By /s/ EUGENE M. ISENBERG
-----------------------------------
Eugene M. Isenberg
Director
Date: March 30, 2001 By /s/ WALLACE O. SELLERS
-----------------------------------
Wallace O. Sellers
Director
Date: March 30, 2001 By /s/ STANLEY J. GARSTKA
-----------------------------------
Stanley J. Garstka
Director
Date: March 30, 2001 By /s/ WILLIAM PATE
-----------------------------------
William Pate
Director
Date: March 30, 2001 By /s/ Harry LeVine
-----------------------------------
Harry LeVine
Director
-27-
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, 2000, 1999 and 1998.................. *
Balance Sheets - December 31, 2000 and 1999........................................................... *
Statements of Stockholders' Equity - For the years ended December 31, 2000, 1999 and 1998 *
Statements of Cash Flows - For the years ended December 31, 2000, 1999 and 1998...................... *
Schedule II - Condensed Financial Information of the Registrant.................................... S-1-3
Schedule V - Valuation and Qualifying Accounts.................................................... S-4
Schedule III - Supplemental Information Concerning Property-Casualty
and VI Insurance Operations................................................................. S-5
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 2000 Annual Report to Stockholders.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Danielson Holding Corporation:
Under date of March 7, 2001, we reported on the consolidated balance
sheets of Danielson Holding Corporation and subsidiaries as of December 31, 2000
and 1999, 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, 2000, as contained in the 2000 annual report to stockholders. These
consolidated financial statements and our report thereon are included in the
annual report on Form 10-K for the year 2000. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedules as listed in the accompanying
index. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/S/ KPMG LLP
----------------------------
KPMG LLP
New York, New York
March 7, 2001
F-2
SCHEDULE II
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)
STATEMENTS OF OPERATIONS
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
---- ---- ----
REVENUES:
Net investment income $ 1,584 $ 504 $ 429
Net realized investment gains 322 3 --
--------- --------- ---------
TOTAL REVENUES 1,906 507 429
--------- --------- ---------
EXPENSES:
Employee compensation and benefits 1,295 1,251 1,177
Professional fees 403 379 427
Other general and administrative fees 839 598 634
--------- --------- ---------
TOTAL EXPENSES 2,537 2,228 2,238
--------- --------- ---------
Loss before provision for
income taxes (631) (1,721) (1,809)
Income tax provision 45 16 2
--------- --------- ---------
Loss before equity in net income of
subsidiaries (676) (1,737) (1,811)
Equity in net income of subsidiaries* 1,706 2,992 4,112
--------- --------- ---------
NET INCOME $ 1,030 $ 1,255 $ 2,301
========= ========= =========
*Eliminated in consolidation.
See accompanying auditors' report.
S-1
SCHEDULE II, CONTINUED
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)
BALANCE SHEETS
(In thousands, except share and per share information)
DECEMBER 31,
-------------------------
2000 1999
---- ----
ASSETS:
Cash $ 2,586 $ 103
Fixed maturities:
Available-for-sale at fair value
(Cost: $15,780 and $11,513) 14,795 11,505
Equity securities (Cost: $0 and $560) -- 531
Short term investments, at cost which approximates
fair value 3,615 5,961
----------- -----------
TOTAL CASH AND INVESTMENTS 20,996 18,100
Investment in subsidiaries* 60,337 58,146
Accrued investment income 176 85
Other assets 167 201
----------- -----------
TOTAL ASSETS $ 81,676 $ 76,532
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 346 $ 306
----------- -----------
TOTAL LIABILITIES 346 306
Preferred Stock ($0.10 par value; authorized 10,000,000
shares; none issued and outstanding) -- --
Common Stock ($0.10 par value; authorized 100,000,000
shares and 20,000,000 shares; issued 19,306,694 shares and
18,486,994 shares; outstanding
19,295,954 shares and 18,476,265 shares) 1,931 1,849
Additional paid-in capital 62,449 59,491
Accumulated other comprehensive income (loss) (1,064) (2,098)
Retained earnings 18,080 17,050
Treasury stock (Cost of 10,740 shares and 10,729 shares) (66) (66)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 81,330 76,226
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 81,676 76,532
=========== ===========
*Eliminated in consolidation.
See accompanying auditors' report.
S-2
SCHEDULE II, CONTINUED
DANIELSON HOLDING CORPORATION
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(Parent Company Only)
STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,030 $ 1,255 $ 2,301
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized investment gains (322) (3) --
Change in accrued investment income (91) (25) 2
Depreciation and amortization (450) (79) (252)
Equity in net income of subsidiaries (1,706) (2,992) (4,112)
Decrease in accrued expenses 28 (1) (132)
Other, net 42 (15) (13)
-------- --------- ---------
Net cash used in operating activities (1,469) (1,860) (2,206)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased:
Fixed income maturities available-for-sale (34,980) (12,723) (11,215)
Equity securities (510) (560) --
Proceeds from sales:
Fixed income maturities available-for-sale 16,656 741 3,412
Equity Securities 1,353 -- --
Investments, matured or called
Fixed income maturities available-for-sale 14,562 7,273 10,037
Purchases of property and equipment (15) (1) (52)
-------- --------- ---------
Net cash provided by (used in)
investing activities (2,934) (5,270) 2,182
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 3,040 13,109 --
Dividends from subisiaries 1,500 -- --
-------- --------- ---------
Net cash provided by
financing activities 4,540 13,109 --
-------- --------- ---------
Net increase (decrease) in cash and
short term investments 137 5,979 (24)
Cash and short term investments at
beginning of year 6,064 85 109
-------- --------- ---------
CASH AND SHORT TERM INVESTMENTS AT
END OF YEAR $ 6,201 $ 6,064 $ 85
======== ========= =========
See accompanying auditors' report.
S-3
SCHEDULE V
DANIELSON HOLDING CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(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 receivable
For the year ended December 31,
1998 $ 179 $ 29 $ -- $ 72 $ 136
========= ========= ========= ======== =======
1999 $ 136 $ 444 $ -- $ 306 $ 274
========= ========= ========= ======== =======
2000 $ 274 $ 726 $ 25 $ 438 $ 587
========= ========= ========= ======== =======
Allowance for uncollectable
reinsurance on paid losses
For the year ended December 31,
1998 $ 374 $ -- $ -- $ -- $ 374
========= ========= ========= ======== =======
1999 $ 374 $ 28 $ -- $ -- $ 402
========= ========= ========= ======== =======
2000 $ 402 $ 221 $ -- $ -- $ 623
========= ========= ========= ======== =======
Allowance for uncollectable
reinsurance on unpaid losses
For the year ended December 31,
1998 $ 499 $ 60 $ -- $ -- $ 559
========= ========= ========= ======== =======
1999 $ 559 $ -- $ -- $ 313 $ 246
========= ========= ========= ======== =======
2000 $ 246 $ -- $ -- $ 145 $ 101
========= ========= ========= ======== =======
See accompanying auditors' report.
S-4
SCHEDULES III AND VI
DANIELSON HOLDING CORPORATION
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)
OTHER
AFFILIATION DEFERRED RESERVES FOR UNPAID DISCOUNT FROM POLICY CLAIMS
WITH ACQUISITION CLAIMS AND CLAIM RESERVES FOR UNEARNED AND BENEFITS NET EARNED INVESTMENT
REGISTRANT COSTS ADJUSTMENT EXPENSES UNPAID CLAIMS PREMIUMS PAYABLE PREMIUMS INCOME
---------- ----- ------------------- ------------- -------- ------- -------- ------
Consolidated
Property-Casualty
Entities:
AS OF AND FOR THE YEAR
ENDED 12/31/00 $3,665 $ 100,030 $ -- $ 23,207 -- $ 67,034 $ 7,741
====== ========== ======== ======== ======== ======== =========
As of and for the year
ended 12/31/99 $2,522 $ 94,934 $ -- $ 16,239 -- $ 54,040 $ 7,273
====== ========== ======== ======== ======== ======== =========
As of and for the year
ended 12/31/98 $2,381 $ 95,653 $ -- $ 13,705 -- $ 55,411 $ 7,745
====== ========== ======== ======== ======== ======== =========
CLAIMS AND CLAIM
AFFILIATION ADJUSTMENT EXPENSES AMORTIZATION OTHER PAID CLAIMS
WITH INCURRED RELATED TO OF DEFERRED OPERATING AND CLAIM NET WRITTEN
REGISTRANT CURRENT YEAR PRIOR YEARS ACQUISITION COSTS EXPENSES ADJUSTMENT EXPENSES PREMIUMS
---------- ------------ ----------- ----------------- --------- ------------------- --------
Consolidated
Property-Casualty
Entities:
AS OF AND FOR THE YEAR
ENDED 12/31/00 $ 55,269 $ 5,254 $12,153 $ 4,283 $60,440 $ 73,141
======== ======= ======= ======= ======= ========
As of and for the year
ended 12/31/99 $ 43,301 $ 2,491 $10,070 $ 3,794 $43,952 $ 56,605
======== ======= ======= ======= ======= ========
As of and for the year
ended 12/31/98 $ 39,131 $ - $ 9,899 $ 3,401 $47,427 $ 58,880
======== ======= ======= ======= ======= ========
See accompanying auditors' report.
S-5