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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, 1998
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
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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 24, 1999, the aggregate market value of the registrant's voting
stock held by non-affiliates was $45,247,170.
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 24, 1999
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Common Stock, $0.10 par value 15,576,276 shares
The following documents have been incorporated by reference herein:
1998 Annual Report to Stockholders, as indicated herein (Parts I and II)
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PART I
Item 1. BUSINESS.
INTRODUCTION
Danielson Holding Corporation ("DHC" or "Registrant") is a holding
company incorporated in Delaware, having separate subsidiaries (collectively
with DHC, the "Company") offering a variety of insurance products. 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 workers' compensation, non-standard private
passenger and commercial automobile insurance in the western United States,
primarily California.
DHC retained cash and investments at the holding company level of $6.8
million at December 31, 1998. Total liabilities of DHC at the same date were
$293,000.
The Company will report, as of the end of its 1998 tax year, aggregate
consolidated net operating tax loss carryforwards ("NOLs") for Federal income
tax purposes of approximately $1.3 billion. These losses will expire over the
course of the next 14 years unless utilized prior thereto. See Note 12 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 private passenger and commercial automobile and
workers' compensation insurance in the western states, primarily California.
NAICC is a third tier subsidiary of DHC. NAICC's immediate parent corporation is
KCP Holding Company ("KCP"). KCP is wholly-owned by Mission American Insurance
Company ("MAIC"), which in turn is wholly-owned by DHC.
GENERAL
NAICC began writing non-standard private passenger automobile insurance
in California in July, 1993 and in Oregon and Washington in April, 1998. NAICC
writes its California business through a general agent which uses over 700
sub-agents to obtain applications for policies. The Oregon/Washington business
is written directly through twenty-one 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. Standard insurers, however, often will not cover certain
commercial automobiles because of the claims experience and/or the type of the
business, or the use or the driver of the automobile. Businesses which are
unable to insure a specific driver and businesses having vehicles not qualifying
for commercial multi-peril insurance are typical NAICC 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 $2,650.
Net written premiums were $26.3 million, $29.8 million and $14.5
million in 1998, 1997 and 1996, respectively, for the non-standard private
passenger automobile program. Until January 1, 1997, NAICC ceded 50 percent of
its California private passenger automobile business to a major reinsurance
company under a quota share reinsurance agreement, at which time the agreement
was amended to reduce the ceding percentage to 25 percent. The ceding percentage
was further reduced to 10 percent effective January 1, 1999. NAICC's
Oregon/Washington non-standard automobile and California preferred automobile
business is written 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 1998 were due to several new companies entering the
California marketplace and a 10 percent rate reduction taken mid-year. Part of
the decrease in its California non-standard automobile business was offset by
management's decision to expand its non-standard automobile business into Oregon
and Washington, and to begin offering a preferred automobile program in
California. Net written premiums for commercial automobile were $13.5 million in
1998, $8.8 million in 1997 and $4.8 million in 1996. NAICC has increased its
production efforts in commercial automobile by adding to the number of
commercial automobile agents in both 1997 and 1998 and increasing the marketing
efforts in each of NAICC's branch offices.
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 $17.2
million, $17.2 million, and $16.8 million, in 1998, 1997, and 1996,
respectively. In response to developments affecting the market for workers'
compensation insurance in California, NAICC has pursued a strategy of
re-deploying its capital either in other specialty lines of insurance such as
non-standard automobile insurance or in the workers' compensation line in
geographic markets believed by NAICC to have greater potential for profitability
than California. In furtherance of its strategy to write workers' compensation
insurance in markets other than California, in June 1996, NAICC acquired Valor
Insurance Company, Incorporated ("Valor"), a Montana-domiciled specialty
insurance company that writes workers' compensation insurance policies.
NAICC does not write any business through managing general agents. Its
California non-standard private passenger automobile program, representing 38.7%
of net written premiums, is produced through one general agent, and its
preferred private passenger automobile program is produced through another
general agent.
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 and periodically revised by NAICC and filed
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with the regulators in each of the relevant states, depending upon each state's
requirements. NAICC relies upon its own and industry experience in establishing
rates.
Private passenger automobile policy limits vary by state. In
California, non-standard policies provide maximum coverage of up to $15,000 per
person, $30,000 per accident for liability for bodily injury and $10,000 per
accident for liability for property damage. In 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.
During 1996 and 1997, NAICC retained the first $150,000 bodily injury and
property damage combined single limit of liability for each occurrence, with
losses in excess of $150,000, per occurrence, being ceded to its reinsurers.
NAICC increased its retention to $250,000 effective January 1, 1998.
Workers' compensation rates, rating plans, policyholder dividend plans
and policy forms are developed and filed by NAICC's underwriting personnel with
the appropriate regulatory agency in each state in which NAICC operates. NAICC
relies principally upon rates promulgated by either the Workers' Compensation
Insurance Rating Bureau in California or the National Council on Compensation
Insurance, the statistical agent for other western states in which NAICC markets
insurance. NAICC maintains a disciplined approach to risk selection and pricing.
In accordance with this policy, NAICC selects each prospective policyholder
based on the characteristics of such risk and establishes premiums based on loss
experience and risk exposure. NAICC's pricing policy is not driven by market
share considerations.
NAICC retains the first $500,000 of each workers' compensation loss and
has purchased reinsurance for up to $49.5 million in excess of its retention,
the first $9.5 million of which are placed with two major reinsurance companies
and the remaining $40 million of which is provided by 16 other companies.
MARKETING
NAICC maintains five new business production offices located in
Portland, Oregon, Phoenix, Arizona and San Ramon, Fresno, and Long Beach,
California. The marketing and underwriting employees at these offices solicit
and underwrite only new applications produced by independent agents. NAICC
believes that its local presence allows it to better serve policyholders and
independent agents. All other functions of policyholder service, renewal
underwriting, policy issuance, premium collection and record retention are
performed centrally at NAICC's home office in Long Beach, California.
NAICC currently markets its non-standard private passenger automobile
insurance in California through one general agent. In April 1998, NAICC began
marketing non-standard private passenger automobile insurance directly through
21 independent agents in Oregon and Washington. NAICC also began a preferred
private passenger automobile program in California in February 1998 which is
marketed through a second general agent. NAICC markets non-standard commercial
automobile insurance through approximately 600 independent agents located in
Arizona, California, Idaho, Nevada, Oregon, Utah and Washington.
NAICC writes workers' compensation insurance primarily in the states of
California, Oregon, Arizona, Idaho and Montana through more than 650 independent
agents. The agency contracts provide authority to bind coverage within detailed
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.
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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, processed and paid
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 state mandated
minimum levels of automobile liability coverage to drivers whose driving
records, or other relevant characteristics, make it difficult for them to obtain
insurance in the voluntary market. NAICC does not expect to receive a material
number of assignments arising from its non-standard private passenger automobile
business and does not believe that the assignments will have a material adverse
effect upon the profitability of this line of business.
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 $50,000. NAICC also has
environmental claims primarily associated with participations in excess of loss
reinsurance contracts assumed by NAICC. These reinsurance contracts have
relatively low limits, generally less than $25,000, and estimates of unpaid
losses are based on information provided by the primary insurance company.
The unpaid losses and LAE related to environmental clean-up is
established based upon facts currently known and the current state of the law
and coverage litigation. Liabilities are estimated for known claims (including
the cost of related litigation) when sufficient information has been developed
to indicate the involvement of a specific contract of insurance or reinsurance
and management can reasonably estimate its liability. Liabilities for unknown
claims and development of reported claims are included in NAICC's bulk unpaid
losses. The liability for the development of reported claims is based on
estimates of the range of potential losses for reported claims in the aggregate.
Estimates of liabilities are reviewed and updated continually and there is the
potential that NAICC's exposure could be materially in excess of amounts which
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are currently recorded. However, management does not expect that liabilities
associated with these types of claims will result in a material adverse effect
on future liquidity or financial position. Liabilities such as these are based
upon estimates and there can be no assurance that the ultimate liability will
not exceed, or even materially exceed, such estimates.
NAICC is involved in litigation related to certain environmental claims
which have some significant uncertainties. Such uncertainties include
difficulties in predicting the outcome of judicial decisions as case law evolves
regarding liability exposure, insurance coverage and interpretation of policy
language with respect to environmental claims. While the outcome of such
litigation cannot be determined at this time, such litigation, net of
liabilities established therefor and giving effect to reinsurance, is not
expected to have a material adverse effect on the future liquidity or financial
position of NAICC. As of December 31, 1998 and 1997, NAICC's net unpaid losses
and LAE relating to environmental claims were approximately $10.8 million and
$10.9 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.
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,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Net unpaid losses and LAE at January 1 $ 85,762 $ 97,105 $ 116,294
Net unpaid losses acquired with Valor
Insurance Company -- -- 403
--------- --------- ---------
85,762 97,105 116,697
Incurred related to:
Current year 39,131 37,142 26,979
Prior years -- 940 10,120
--------- --------- ---------
Total incurred 39,131 38,082 37,099
Paid Related to:
Current year (16,169) (13,729) (10,559)
Prior years (31,258) (35,696) (46,132)
--------- --------- ---------
Total paid (47,427) (49,425) (56,691)
--------- --------- ---------
Net unpaid losses and LAE at
December 31 77,466 85,762 97,105
Plus: reinsurance recoverables 18,187 20,185 23,546
--------- --------- ---------
Gross unpaid losses and LAE at
December 31 $ 95,653 $ 105,947 $ 120,651
========= ========= =========
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The losses and LAE incurred in 1996 related to prior years is
attributable to claims from businesses which are in run-off. In 1996, management
of NAICC strengthened the unpaid losses and allocated loss adjustment expenses
("ALAE") of pre-1980 businesses assumed by NAICC in 1985 and which are in
run-off. NAICC increased these run-off claim liabilities by $10 million. The
pre-1980 run-off liabilities include claims relating to environmental clean-up
for policies issued prior to 1970. NAICC increased its bulk unpaid liabilities
related to these claims, principally the unpaid ALAE, as it had become evident
that the legal costs associated with these claims would be significantly 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 circumstance which are later
discovered. The next line, cumulative (deficiency) or redundancy, compares the
adjusted net liability amount to the net liability amount as originally
established and reflects whether the net liability as originally recorded was
adequate to cover the estimated cost of claims or redundant. The third section
reflects the cumulative amounts related to that liability that were paid, net of
reinsurance, as of the end of successive years.
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Analysis of Net Losses and Loss Adjustment Expense ("LAE") Development (dollars
in thousands):
Years Ended December 31,
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1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net unpaid losses and
LAE at end of year $115,858 $95,272 $91,870 $97,810 $104,825 $119,223 $128,625 $116,294 $97,105 $85,762 $77,466
Net unpaid losses and
LAE re-estimated as of:
One year later 120,527 100,599 92,632 94,364 105,568 119,607 131,748 126,414 98,045 85,762
Two years later 124,167 100,143 87,504 99,875 111,063 123,039 141,602 126,796 97,683
Three years later 121,081 94,954 89,844 107,945 117,756 136,735 141,787 127,621
Four years later 116,384 96,948 95,576 116,018 138,877 140,076 144,491
Five years later 118,175 101,537 102,081 136,269 142,423 142,537
Six years later 122,784 107,344 119,107 139,493 144,457
Seven years later 128,589 122,985 121,161 141,467
Eight Years later 143,585 124,749 122,664
Nine Years later 145,093 125,801
Ten Years later 146,050
Cumulative (deficiency)
redundancy (30,192) (30,529) (30,794) (43,657) (39,632) (23,314) (15,866) (11,327) (578)
Cumulative net amounts
paid as of:
One year later 41,767 38,165 31,162 39,131 39,650 42,264 46,582 46,132 35,696
Two years later 72,735 56,876 53,424 63,483 68,025 71,702 80,515 74,543 54,815
Three years later 86,142 71,543 66,198 81,485 88,038 95,525 101,726 90,818
Four years later 96,352 78,991 75,963 94,238 106,431 110,163 114,424
Five years later 102,385 84,980 83,704 108,923 118,136 119,474
Six years later 107,661 90,458 95,199 118,397 125,218
Seven years later 112,555 100,559 102,886 124,569
Eight years later 121,724 107,630 107,726
Nine years later 128,313 111,735
Ten years later 132,185
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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,
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1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
Gross unpaid losses and LAE at end of year: $ 95,653 $ 105,947 $ 120,651 $ 137,406 $ 146,330 $ 137,479
Gross unpaid losses and LAE re-estimated as of:
One year later 107,060 121,787 149,416 149,815 137,898
Two years later 121,335 150,106 161,731 141,737
Three years later 150,815 162,246 158,263
Four years later 165,111 162,697
Five years later 165,077
Gross cumulative deficiency: (1,113) (684) (13,409) (18,781) (27,598)
Gross cumulative amount paid as of:
One year later 36,542 47,835 54,901 53,798 53,634
Two years later 21,794 92,422 92,991 88,930
Three years later 110,498 122,095 116,605
Four years later 136,448 138,924
Five years later 148,928
The cumulative deficiency as of December 31, 1995 on a net basis of
$11.3 million is due to the strengthening of the unpaid losses and ALAE of
pre-1980 businesses assumed by NAICC in 1985 and which are in run-off. NAICC
increased these run-off claim liabilities in 1996 by $10 million. The pre-1980
run-off liabilities include claims relating to environmental clean-up for
policies issued prior to 1970.
The cumulative deficiency on a net basis of $39.6 million and $43.7
million as of December 31, 1992 and 1991, respectively, is also attributable to
adverse development of workers' compensation loss experience in the 1990 and
1991 loss years. The California workers' compensation industry, including NAICC,
experienced adverse development of those loss years. The adverse development was
the result of a significant increase in frequency in workers' compensation
claims that was brought on by a downturn in the California economy, an increase
in unemployment and a dramatic increase in stress and post-termination claims.
The adverse development in 1990 and 1991 was significantly offset by favorable
workers' compensation loss experience and development in the 1992 through 1995
loss years.
Conditions and trends that have affected the development of these
liabilities in the past may not necessarily recur in the future. It would not be
appropriate to use this cumulative history in the projection of future
performance.
REINSURANCE AND REINSURANCE WITH AFFILIATES
In its normal course of business in accordance with industry practice,
NAICC reinsures a portion of its exposure with other insurance companies so as
to effectively limit its maximum loss arising out of any one occurrence.
Contracts of reinsurance do not legally discharge the original insurer from its
primary liability. Estimated reinsurance receivables arising from these
contracts of reinsurance are, in accordance with generally accepted accounting
principles, reported separately as assets. Premiums for reinsurance ceded by
NAICC in 1998 were 15.1 percent of direct written premiums.
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As of December 31, 1998, General Reinsurance Corporation (GRC),
American Reinsurance Company (ARC), and Lloyd's of London (Lloyd's) were the
only reinsurers that comprised more than 10 percent of NAICC's reinsurance
recoverable on paid and unpaid claims. NAICC monitors all reinsurers, by
reviewing A.M. Best reports and ratings, information obtained from reinsurance
intermediaries and analyzing financial statements. At December 31, 1998, NAICC
had reinsurance recoverables on paid and unpaid claims of $6.1 million, $6.3
million, and $7.5 million from GRC, ARC, and Lloyd's respectively. Both GRC and
ARC had an A.M. Best rating of A+ or better. The paid and unpaid recoverable
amounts ceded to Lloyd's relate to business in run-off and assumed by NAICC.
NAICC believes that Equitas has authority to respond on behalf of all of the
syndicates underlying the reinsurance contracts with Lloyd's. See Note 6 of the
Notes to Consolidated Financial Statements for further information on
reinsurance.
NAICC and two of its subsidiaries participate in an inter-company
pooling and reinsurance agreement under which Danielson Insurance Company
("DICO") and Danielson National Insurance Company ("DNIC") cede 100% of their
net liability, defined to include premiums, losses and allocated loss adjustment
expenses, to NAICC to be combined with the net liability for policies of NAICC
in formation of a "Pool". NAICC simultaneously cedes to DICO and DNIC 10% of the
net liability of the Pool. DNIC commenced participation in July, 1993 and DICO
commenced participation in January, 1994. Additionally, both DICO and DNIC
reimburse NAICC for executive services, professional services, and
administrative expenses based on designated percentages of net premiums written
for each line of business.
REGULATION
Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The agencies
established pursuant to these state laws have broad administrative and
supervisory powers relating to the granting and revocation of licenses to
transact business, regulation of trade practices, establishment of guaranty
associations, licensing of agents, approval of policy forms, premium rate filing
requirements, reserve requirements, the form and content of required regulatory
financial statements, capital and surplus requirements and the maximum
concentrations of certain classes of investments. Most states also have enacted
legislation regulating insurance holding company systems, including
acquisitions, extraordinary dividends, the terms of affiliate transactions and
other related matters. The Company and its insurance subsidiaries have
registered as holding company systems pursuant to such legislation in California
and routinely report to other jurisdictions. The National Association of
Insurance Commissioners has formed committees and appointed advisory groups to
study and formulate regulatory proposals on such diverse issues as the use of
surplus debentures, accounting for reinsurance transactions and the adoption of
risk-based capital requirements. It is not possible to predict the impact of
future state and federal regulation on the operations of the Company or its
insurance subsidiaries.
NAICC is an insurance company domiciled in the State of California and
is regulated by the California Department of Insurance for the benefit of
policyholders. The California Insurance Code does not permit the payment of
shareholder dividends that exceed the greater of net income or 10% of statutory
surplus and such dividends can only be paid out of accumulated earned surplus
without prior approval from the Insurance Commissioner. To the extent that
NAICC's unassigned surplus remains negative in 1999, NAICC will not be permitted
to pay dividends without prior regulatory approval.
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 Company believes that RBC is the most appropriate indicator of
potential regulatory oversight.
The RBC model sets forth four levels of increasing regulatory
intervention: (1) Company Action Level (200% of an insurer's Authorized Control
Level) at which the insurer must submit to the regulator a plan for
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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, 1998, the RBC of NAICC was 232% 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, 1998, DHC had the following
material assets and no material liabilities:
(i) ownership of its MAIC subsidiary, an insurance holding company
that owns, directly or indirectly, all of the stock of NAICC,
DNIC, DICO, Valor, and two licensed insurance subsidiaries
which are expected to commence writing insurance lines in the
future; and
(ii) approximately $6.8 million in cash and investments.
FORMER TRUST BUSINESS
In March 1993, DHC acquired all of the common stock of Danielson Trust
Company ("Danielson Trust") (which was known as HomeFed Trust until November 13,
1993), a trust company chartered by the California State Banking Department to
provide trust and fiduciary services and located in San Diego, California. In
February 1994, Danielson Trust acquired the assets of the Western Trust Services
division of Grossmont Bank. On January 31, 1996, following approval of the
California State Banking Department, Danielson Trust sold substantially all of
the fiduciary accounts administered by its Santa Barbara branch to The Bank of
Montecito. In connection with the sale, in January 1996, Danielson Trust
recognized a gain of $32,874.
Danielson Trust's business consisted of providing trust and investment
services to individuals, not-for-profit corporations and retirement service
clients, including its affiliates. In addition, since 1994 Danielson Trust
provided custodial services for certificates of deposit to affiliated and
unaffiliated broker-dealers, as well as other custodial services to an
affiliated mutual fund.
On December 31, 1996, DHC consummated the sale of Danielson Trust to
North American Trust Company for $3 million in cash and recognized a loss of
$1.2 million on disposal.
TAX LOSS CARRYFORWARD
As of December 31, 1998, the Company had a consolidated net operating
loss carryforward of approximately $1.3 billion for Federal income tax purposes.
This number is based upon Federal consolidated income tax losses for the periods
through December 31, 1997 and an estimate of the 1998 taxable results. Some or
all of the carryforward may be available to offset, for Federal income tax
purposes, the future taxable income, if any, of DHC and its wholly-owned
subsidiaries. The Internal Revenue Service ("IRS") may attempt to challenge the
amount of this net operating loss in the event of a future tax audit. Management
believes, based in part upon the views of its tax advisors, that its net
operating loss calculations are reasonable and that it is reasonable to conclude
that the Company's net operating losses would be available for use by the
Company. These tax loss attributes are currently fully reserved, for valuation
purposes, on the Company's financial
-11-
statements. The amount of the deferred asset considered realizable could be
increased in the near term if estimates of future taxable income during the
carryforward period are increased.
The Company's net operating tax loss carryforwards will expire, if not
used, in the following approximate amounts in the following years (dollars in
thousands):
Year Ending Amount of Carryforwards
December 31, Expiring
----------- -----------------------
1999 $ 203,868
2000 253,098
2001 155,806
2002 142,982
2003 60,849
2004 69,947
2005 106,225
2006 92,355
2007 89,790
2008 31,688
2009 39,689
2010 23,600
2011 19,755
2012 38,255
The Company's ability to utilize its net operating tax loss
carryforwards would be substantially reduced if DHC were to undergo an
"ownership change" within the meaning of Section 382(g)(1) of the Internal
Revenue Code. In an effort to reduce the risk of an ownership change, DHC has
imposed restrictions on the ability of holders of five percent or more of common
stock of DHC, par value $0.10 per share ("Common Stock") to transfer the Common
Stock owned by them and to acquire additional Common Stock, as well as the
ability of others to become five percent stockholders as a result of transfers
of Common Stock. Notwithstanding such transfer restrictions, there could be
circumstances under which an issuance by DHC of a significant number of new
shares of Common Stock or other new class of equity security having certain
characteristics (for example, the right to vote or to convert into Common Stock)
might result in an ownership change under the Internal Revenue Code. See Note 11
of the Notes to the Consolidated Financial Statements for a description of
certain restrictions on the transfer of Common Stock.
YEAR 2000 COMPLIANCE
The Company has undertaken a review of its systems for "year 2000"
compliance at both the holding company and subsidiary levels. DHC has completed
an assessment of its hardware and software systems and has contacted the third
party vendors that it believes are critical to its operations. DHC has developed
a budget for bringing its systems into compliance and does not anticipate that
it will be required to make material expenditures. Although DHC expects that it
will be year 2000 compliant prior to the end of 1999 and has received assurances
from its third party vendors that they will be year 2000 compliant, DHC is
currently developing a contingency plan in the event that those assumptions are
incorrect.
NAICC is highly dependent on electronic data processing and information
systems in its operations. NAICC believes that its hardware and operating system
software are year 2000 compliant. NAICC also believes that it has identified
substantially all of the application software programs which require
modification in order to become year 2000 compliant and has a formal plan to
correct and test the programs affected by the conversion of a two-digit year to
a four-digit year. NAICC has completed and tested the modifications to its
insurance applications and believes that they are year 2000 compliant. All
non-insurance applications (e.g. e-mail software, accounting software, and
report archiving software) are expected to be upgraded and year 2000 compliant
by the second quarter of 1999.
-12-
NAICC has identified the third parties material to its operations and
is continuing to monitor and, in the case of certain material third parties, has
been able to test its interface to the external systems of its third-party
business associates and believes that they are year 2000 compliant.
NAICC believes that it does not currently issue any insurance policies
with coverages under which claims for year 2000 related losses or damages could
be successfully asserted. Management does not believe that material risk exists
that such claims will be made on previous policies.
NAICC is utilizing internal and external resources to meet its
deadlines for year 2000 modifications. The costs of year 2000 related efforts
were $200,000 for the year ended December 31, 1998. Remediation costs are
expected to total $150,000 during 1999. Due to the complexities of estimating
the cost of modifying all applications to become year 2000 compliant and the
difficulties in assessing third-party vendor's ability to become year 2000
compliant, estimates are subject to and are likely to change
The management of NAICC believes that its electronic data processing
and information systems will be year 2000 compliant. However, should any
material system fail to correctly process information due to the century change,
operations could be interrupted and this could have a material adverse effect on
NAICC's results of operations.
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, year
2000 compliance, 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, 1998, the number of employees of DHC and its
consolidated subsidiaries was approximately as follows:
NAICC 143
DHC (holding company only) 12
---
Total 155
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 long term lease which is scheduled to
expire in 1999. In addition, NAICC has entered into short
-13-
term leases in connection with its operations in various locations on the west
coast of the United States. NAICC believes that the foregoing leased facilities
are adequate for NAICC's current and anticipated future needs.
See Note 14 of the Notes to Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS.
NAICC is a party to various legal proceedings which are considered
routine and incidental to its insurance business and are not material to the
financial condition and operation of such business. DHC is not a party to any
legal proceeding which is considered material to the financial condition and
operation of its business. See Note 15 of the Notes to Consolidated Financial
Statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
-14-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
"Stock Market Prices" on page 26 of DHC's 1998 Annual Report to
Stockholders (included as an exhibit hereto) is incorporated herein by
reference.
Item 6. SELECTED FINANCIAL DATA.
"Selected Consolidated Financial Data" on page 2 of DHC's 1998 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 1998 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 1998 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 1998 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.
-15-
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, other than William W.
Palmer, who was appointed by the other Directors on September 15, 1998 following
the Annual Meeting of Stockholders, were elected to their present terms of
office by the stockholders at the Annual Meeting of Stockholders of DHC held on
September 15, 1998. The term of office of each Director continues until the
election of Directors to be held at the next Annual Meeting of Stockholders or
until his successor has been elected. There is no family relationship between
any Director and any other Director or executive officer of DHC. The information
set forth below concerning the Directors has been furnished by such Directors to
DHC.
DIRECTOR
DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
- -------- --- -------------------- -----
Martin J. Whitman 74 Chairman of the Board 1990
and Chief Executive Officer of DHC
David M. Barse 36 President and Chief 1996
Operating Officer of DHC
Eugene M. Isenberg 69 Chairman of the Board and 1990
Chief Executive Officer of
Nabors Industries, Inc.
Joseph F. Porrino 54 Counsellor to the President of the 1990
New School for Social Research
Frank B. Ryan 62 Professor of Mathematics at 1990
Rice University
Wallace O. Sellers 69 Vice Chairman and Director of 1995
Enhance Financial Services
Group, Inc.
Anthony G. Petrello 44 President and Chief Operating 1996
Officer of Nabors Industries, Inc.
Stanley J. Garstka 55 Deputy Dean and Professor in the 1996
Practice of Management at Yale
University School of Management
Timothy C. Collins 42 Chief Executive Officer and Senior 1996
Managing Director of Ripplewood
Holdings LLC
William W. Palmer 37 Chief of Staff and General 1998
Counsel to the Commissioner
for the California Department
of Insurance
-16-
Mr. Whitman is the Chairman of the Board, Chief Executive Officer and a
Director of DHC. Since 1974, Mr. Whitman has been the President and controlling
stockholder of M.J. Whitman & Co., Inc. (now known as Martin J. Whitman & Co.,
Inc.) ("MJW&Co") which, until August 1991, was a registered broker-dealer. From
August 1994 to December 1994, Mr. Whitman served as the Managing Director of
M.J. Whitman, L.P. ("MJWLP"), then a registered broker-dealer which succeeded to
the broker-dealer business of MJW&Co. Since January 1995, Mr. Whitman has served
as the Chairman and Chief Executive Officer (and, until June 1995, as President)
of M. J. Whitman, Inc. ("MJW"), which succeeded at that time to MJWLP's
broker-dealer business. Also since January 1995, Mr. Whitman has served as the
Chairman and Chief Executive Officer of M.J. Whitman Holding Corp. ("MJWHC"),
the parent of MJW and other affiliates. Since March 1990, Mr. Whitman has been
the Chairman of the Board, Chief Executive Officer and a 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 and containing four investment series
of which he is a trustee, and EQSF Advisers, Inc. ("EQSF"), Third Avenue Trust's
investment adviser (of which he was President until February 1998). Until April
1994, Mr. Whitman also served as the Chairman of the Board, Chief Executive
Officer and a Director of Equity Strategies Fund, Inc., previously a registered
investment company. Mr. Whitman is a Managing Director of Whitman Heffernan
Rhein & Co., Inc. ("WHR"), an investment and financial advisory firm which he
helped to found during the first quarter of 1987 and which ceased operations in
December, 1996. Since March 1991, Mr. Whitman has served as a Director of Nabors
Industries, Inc. ("Nabors"), a publicly-traded oil and gas drilling company
listed on the American Stock Exchange ("AMEX"). Since August, 1997, Mr. Whitman
has served as a director of Tejon Ranch Co., an agricultural and land management
company listed on the New York Stock Exchange ("NYSE"). From March 1993 through
February 1996, Mr. Whitman served as a director of Herman's Sporting Goods,
Inc., a retail sporting goods chain, which filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code on April 26, 1996. Mr. Whitman
also serves as a Director of the Company's subsidiaries, including National
American Insurance Company of California ("NAICC") and KCP Holding Company
("KCP"). Mr. Whitman co-authored the book THE AGGRESSIVE CONSERVATIVE INVESTOR.
Mr. Whitman's second book, VALUE INVESTING: A BALANCED APPROACH, is expected to
be in bookstores on April 16, 1999. 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 DHC since July 1996 and a director of NAICC since August 1996. Since
June 1995, Mr. Barse has been the President of each of MJW and MJWHC. 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. Mr. Barse joined the predecessors of
MJW and MJWHC in December 1991 as General Counsel. Mr. Barse was previously an
attorney with the law firm of Robinson Silverman Pearce Aronsohn & Berman LLP.
Mr. Barse received a Bachelor of Arts in Political Science from George
Washington University in 1984 and a Juris Doctor from Brooklyn Law School in
1987.
Mr. Isenberg, since 1987, has been Chairman and Chief Executive Officer
of Nabors. Beginning in 1996, Mr. Isenberg commenced his term as a Governor of
the AMEX. From 1969 to 1982, Mr. Isenberg was Chairman of the Board and
principal stockholder of Genimar Inc., a steel trading and building products
manufacturing company. From 1955 to 1968, Mr. Isenberg was employed in various
management capacities with the Exxon Corp. Mr. Isenberg graduated from the
University of Massachusetts in 1950 with a Bachelor of Arts degree in Economics
and from Princeton University in 1952 with a Masters degree in Economics.
Mr. Porrino has been the Counselor to the President of the New School
for Social Research (the "New School") since February, 1998 and was the
Executive Vice President of the New School from September 1991 to February,
1998. 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.
-17-
Dr. Ryan, since August 1990, has been a Professor of Mathematics at
Rice University (currently on leave). Since November, 1996, Dr. Ryan has served
as a Director of Siena Holdings, Inc., a real estate and health management
company, the capital stock of which is traded over-the-counter. Since March
1996, Dr. Ryan has served as a Director of Texas Micro Inc., a computer systems
company, the capital stock of which is traded on NASDAQ. Until 1998, Dr. Ryan
served as a Director of America West Airlines, Inc., a publicly-traded company
listed on the NYSE, and now continues as an advisory director. From August 1990
to February 1995, Dr. Ryan also served as Vice President-External Affairs at
Rice University. For two years ending August 1990, Dr. Ryan was the President
and Chief Executive Officer of Contex Electronics Inc., a subsidiary of Buffton
Corporation, the capital stock of which is publicly traded on the AMEX. Prior to
that, and beginning in 1977, Dr. Ryan was a Lecturer in Mathematics at Yale
University, where he was also the Associate Vice President in charge of
institutional planning. Dr. Ryan obtained a Bachelor of Arts degree in Physics
in 1958 from Rice University, a Masters degree in Mathematics from Rice in 1961,
and a Doctorate in Mathematics from Rice in 1965.
Mr. Sellers is Vice-Chairman and a Director of Enhance Financial Group,
Inc. ("Enhance Group"), a financial services corporation the capital stock of
which is publicly traded on the NYSE. Until December 31, 1994, Mr. Sellers was
the President and Chief Executive Officer of Enhance Group, from its inception
in 1986, as well as its principal subsidiaries, Enhance Reinsurance Company and
Asset Guaranty Insurance Company, from their inceptions in 1986 and 1988,
respectively. From 1987 to 1994, Mr. Sellers served as a Director, and from 1992
to 1993 as the Chairman, of the Association of Financial Guaranty Insurors in
New York. Mr. Sellers received a Bachelor of Arts degree from the University of
New Mexico in 1951 and a Masters degree in Economics from New York University in
1956. Mr. Sellers attended the Advanced Management Program at Harvard University
in 1975 and is a Chartered Financial Analyst.
Mr. Petrello has been the President and Chief Operating Officer of
Nabors since 1992 and has been a director of Nabors and a member of the
Executive Committee of its board of directors since 1991. Mr. Petrello was
formerly a partner with the law firm Baker & McKenzie, which he had been with
since 1979. In 1986, Mr. Petrello was named Managing Partner of Baker &
McKenzie's New York Office and served in that capacity until 1991 when he
resigned as a partner in such law firm. Mr. Petrello continues as Of Counsel to
Baker & McKenzie.
Mr. 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 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. Collins has been the Chief Executive Officer and Senior Managing
Director of Ripplewood Holdings LLC, a private investment firm, since October
1995. From January 1990 to September 1995, Mr. Collins was the Senior Managing
Director of Onex Investment Corp., a private investment firm. Since April 1994,
Mr. Collins has been a director of Scotsman Industries, Inc., a publicly-traded
company listed on the NYSE. Mr. Collins is also a director of Dayton Superior
Corporation (NYSE) and is a trustee of DePauw University. Mr. Collins received a
Bachelor of Arts degree in Philosophy from DePauw University in 1978, and a
Masters in Private and Public Management from the Yale School of Management in
1982.
-18-
Mr. Palmer has been the Chief of Staff and General Counsel to the
Commissioner for the California Department of Insurance (the "Commissioner")
since March 1998. Mr. Palmer is also the Chief Executive Officer of the
California Conservation and Liquidation Office, where he oversees the management
of 69 insurance companies with combined assets exceeding $1.6 billion that have
been conserved or liquidated by the Commissioner. From January 1, 1995 to March
1998, Mr. Palmer was Chief Counsel to the Department of Insurance. Prior to
January 1, 1995, Mr. Palmer was in private practice as an attorney with Farmer &
Murphy. Mr. Palmer received a Bachelor of Arts degree in History and Political
Science from the University of California, Los Angeles in 1985 and a Juris
Doctor from the University of the Pacific, McGeorge School of Law in 1989.
EXECUTIVE OFFICERS.
The executive officers of DHC are as follows:
NAME AGE PRINCIPAL POSITION WITH REGISTRANT
- ---- --- ----------------------------------
Martin J. Whitman 74 Chairman of the Board, Chief
Executive Officer and a Director
David M. Barse 36 President, Chief Operating Officer
and a Director
Michael T. Carney 45 Chief Financial Officer and Treasurer
Ian M. Kirschner 43 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. 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, Inc.
From 1988 to 1989, Mr. Carney was the Director of Accounting of Smith New Court,
Carl Marks, Inc., and, from 1986 to 1988, Mr. Carney served as the Controller of
Carl Marks & Co., Inc. Mr. Carney graduated from St. John's University in 1981
with a Bachelor of Science degree in Accounting.
Mr. Kirschner has been the General Counsel and Secretary of DHC since
August 1996. Mr. Kirschner has also served as General Counsel and Secretary of
MJWHC and MJW since January 1996 and of Third Avenue Trust and EQSF since
January 1997. From February 1993 to June 1995, Mr. Kirschner was a Vice
President, the General Counsel and Secretary of 2 I Inc., a then NASDAQ
Small-Cap listed holding company. Mr. Kirschner has been practicing law since
1979, and was Of Counsel to Morgan, Lewis & Bockius, from October, 1990 to
October, 1992. Mr. Kirschner obtained a Bachelor of Arts degree from the State
University of New York at Binghamton in 1976 and a Juris Doctor from Boston
University School of Law in 1979.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires DHC's
Directors and executive officers, and persons who own more than ten percent of a
registered class of the DHC's equity securities, to file with the Securities and
Exchange Commission and the American Stock Exchange initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of DHC. Officers, Directors and greater
-19-
than ten-percent stockholders are required by Federal securities regulations to
furnish DHC with copies of all Section 16(a) forms they file.
To DHC's knowledge, based solely upon review of the copies of such
reports furnished to DHC and written representations that no other reports were
required, except for one Form 3 with respect to Mr. Palmer (not involving any
transaction), all Section 16(a) filing requirements applicable to DHC's
officers, Directors and greater than ten percent beneficial owners were complied
with for the fiscal year ended December 31, 1998.
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 1998 by the Chief
Executive Officer. No other executive officers of DHC had cash compensation for
such year in excess of $100,000. Only those columns which call for information
applicable to DHC or the individual named for the periods indicated have been
included in such table.
Long Term
Compensation
Awards
Annual Compensation Securities
----------------------- Underlying All Other
Name and Principal Position Year Salary a ($) Bonus ($) Options (#) Compensation ($)
- ---------------------------------------------------------------------------------------------------
Martin J. Whitman 1998 $ 200,000 -0- -0- -0-
----------------------------------------------------------------------
Chairman of the Board &
Chief Executive Officer 1997 $ 200,000 -0- -0- -0-
----------------------------------------------------------------------
1996 $ 200,000 -0- -0- -0-
- ---------------------------------------------------------------------------------------------------
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 1998, on an aggregated basis,
owned by the named executive officer of DHC as of the last day of the fiscal
year. Such officer did not exercise any of such options during 1998. Only those
tabular columns which call for information applicable to DHC or the named
individual have been included in such table.
Number of Securities Value of Unexercised in-the-
Underlying Unexercised Money Options at
Options at Fiscal Year-End (#) Fiscal Year-End ($)
---------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------
Martin J. Whitman 210,000 -0- $118,125 -0-
- --------------------------------------------------------------------------------
- ------------
(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.
-20-
COMPENSATION OF DIRECTORS
During 1998, 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 1998, each of Mr. Porrino, Dr. Ryan, and Mr. Garstka received
$10,000 and each of Mr. Sellers, Mr. Isenberg, Mr. Petrello and Mr. Collins
received $7,500, plus, in each case, reimbursement of 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, 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 24, 1999 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
Commissioner of Insurance 1,803,235 (2,3) 11.6
of the State of California
c/o William Palmer
Chief of Staff
Mission Insurance Companies' Trusts
3333 Wilshire Boulevard - 3rd Floor
Los Angeles, CA 90010
Martin J. Whitman 2,321,941 (2,4,5,6) 14.7
c/o Danielson Holding Corporation
767 Third Avenue
New York, NY 10017-2023
James P. Heffernan 1,372,980 (2,5,6) 8.7
RR 1, Box 31D
Millbrook, NY 12545
Whitman Heffernan & Rhein Workout
Fund, L.P.
c/o WHR Management Company, L.P.
RR 1, Box 31D
Millbrook, NY 12545 1,054,996 (2) 6.8
- ----------
-21-
Third Avenue Value Fund 803,669 (2) 5.2
767 Third Avenue
New York, NY 10017-2023
OFFICERS AND DIRECTORS
Martin J. Whitman 2,321,941 (2,4,5,6) 14.7
David M. Barse 74,999 (7) *
Joseph F. Porrino 56,667 (8) *
Frank B. Ryan 48,667 (8) *
Eugene M. Isenberg 69,924 (9) *
Wallace O. Sellers 50,000 (10) *
Anthony G. Petrello 26,666 (11) *
Stanley J. Garstka 37,674 (11) *
Timothy C. Collins 26,666 (11) *
William W. Palmer 0 *
Michael Carney 64,999 (12) *
Ian M. Kirschner 8,999 (13) *
All Officers and Directors
as a Group (12 persons) 2,787,202 (14) 17.2
- ----------
* Percentage of shares beneficially owned does not exceed one percent of
the outstanding Common Stock.
(1) Share percentage ownership is rounded to nearest tenth of one percent
and reflects the effect of dilution as a result of outstanding options
to the extent such options are, or within 60 days will become,
exercisable. As of March 24, 1999 (the date as of which this table was
prepared), there were exercisable options outstanding to purchase
1,333,379 shares of Common Stock. Shares underlying any option which
was exercisable on March 24, 1999 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.
-22-
(2) In accordance with provisions of DHC's Certificate of Incorporation,
all certificates representing shares of Common Stock beneficially owned
by holders of five percent or more of Common Stock are owned of record
by DHC, as escrow agent, and are physically held by DHC in that
capacity.
(3) Beneficially owned by the Commissioner of Insurance of the State of
California in his capacity as trustee for the benefit of holders of
certain deficiency claims against certain trusts which assumed
liabilities of certain present and former insurance subsidiaries of
DHC.
(4) Includes 803,669 shares beneficially owned by Third Avenue Value Fund
("TAVF"), an investment company registered under the Investment Company
Act of 1940; 104,481 shares beneficially owned by Martin J. Whitman &
Co., Inc. ("MJW&Co"), a private investment company; and 73,558 shares
beneficially owned by Mr. Whitman's wife and three adult family
members. Mr. Whitman controls the investment adviser of TAVF, and may
be deemed to own beneficially a five percent equity interest in TAVF.
Mr. Whitman is the principal stockholder in MJW&Co, and may be deemed
to own beneficially the shares owned by MJW&Co. Mr. Whitman disclaims
beneficial ownership of the shares of Common Stock owned by TAVF and
Mr. Whitman's family members.
(5) Includes 1,054,996 shares of Common Stock beneficially owned by Whitman
Heffernan & Rhein Workout Fund, L.P. ("WHR Fund"), an investment
limited partnership. Each of Messrs. Whitman and Heffernan is a general
partner of the partnership that is the general partner of WHR Fund.
Each disclaims beneficial ownership of the shares owned by the WHR
Fund.
(6) Includes shares underlying currently exercisable options to purchase an
aggregate of 210,000 shares of Common Stock at an exercise price of
$3.00 per share.
(7) Includes shares underlying options to purchase an aggregate of 41,666
shares of Common Stock at an exercise price of $5.6875 per share and
33,333 shares of Common Stock at an exercise price of $7.0625 per
share, which are currently exercisable or become exercisable within the
next 60 days. Does not include shares underlying options to purchase an
aggregate of 8,334 shares of Common Stock at an exercise price of
$5.6875 per share, 16,667 shares of Common Stock at an exercise price
of $7.0625 per share or 50,000 shares of Common Stock at an exercise
price of $3.65625 per share which are not currently exercisable nor
become exercisable within the next 60 days.
(8) Includes shares underlying currently exercisable options to purchase an
aggregate of 46,667 shares of Common Stock at an exercise price of
$3.63 per share.
(9) Includes 20,088 shares owned by Mentor Partnership, a partnership
controlled by Mr. Isenberg, and 28 shares owned by Mr. Isenberg's wife.
Also includes shares underlying currently exercisable options to
purchase an aggregate of 46,666 shares of Common Stock at an exercise
price of $3.63 per share.
(10) Includes shares underlying currently exercisable options to purchase an
aggregate of 40,000 shares of Common Stock at an exercise price of
$7.00 per share.
(11) Includes shares underlying currently exercisable options to purchase an
aggregate of 26,666 shares of Common Stock at an exercise price of
$5.50 per share. Does not include shares underlying options to purchase
an aggregate of 13,334 shares of Common Stock at an exercise price of
$5.50 per share which are not currently exercisable nor become
exercisable within the next 60 days.
(12) Includes shares underlying options to purchase an aggregate of 41,666
shares of Common Stock at an exercise price of $5.6875 per share and
23,333 shares of Common Stock at an exercise price of $7.0625 per
share, which are currently exercisable or become exercisable within the
next 60 days. Does not include shares underlying options to purchase an
aggregate of 8,334 shares of Common Stock at an exercise price of
$5.6875 per share, 11,667 shares of Common Stock at an exercise price
of $7.0625 per share or 35,000 shares of Common Stock at an
-23-
exercise price of $3.65625 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 4,166 shares of Common Stock at an exercise price of
$5.6875 per share and 3,333 shares of Common Stock at an exercise price
of $7.0625 per share. Does not include shares underlying options to
purchase an aggregate of 834 shares of Common Stock at an exercise
price of $5.6875 per share, 1,667 shares of Common Stock at an exercise
price of $7.0625 per share or 10,000 shares of Common Stock at an
exercise price of $3.65625 per share which are not currently
exercisable nor become exercisable within the next 60 days.
(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 Chief Executive Officer and Mr. Barse is the
President and Chief Operating Officer), and certain expenses are allocated among
the various entities. Personnel costs are allocated based upon actual time spent
on DHC's business or upon fixed percentages of compensation. Costs relating to
office space and equipment are allocated based upon fixed percentages.
Inter-company balances are reconciled and reimbursed on a monthly basis.
-24-
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 * Certificate of Incorporation of Registrant.
3.2 * Bylaws of Registrant.
MATERIAL CONTRACTS--MISCELLANEOUS:
10.1 * Stock Sale Agreement dated October 10, 1996 between
Danielson Holding Corporation and North American Trust
Company. (Filed with Report on Form 8-K dated December 31,
1996, Exhibit 10.1.)
10.2 * Assignment and Assumption Agreement dated December 31, 1996
by and between North American Trust Company, North American
Fiduciary Services, Inc. and Danielson Holding Corporation.
(Filed with Report on Form 8-K dated December 31, 1996,
Exhibit 10.2.)
10.3 * Merger Agreement dated December 31, 1996 by and among North
American Trust Company, North American Fiduciary Services,
Inc., Danielson Trust Company and Danielson Holding
Corporation. (Filed with Report on Form 8-K dated December
31, 1996, Exhibit 10.3.)
MATERIAL CONTRACTS--EXECUTIVE COMPENSATION PLANS AND
ARRANGEMENTS:
10.4 * 1990 Stock Option Plan. (Filed with Report on Form 8-K
dated September 4, 1990, Exhibit 10.8.)
10.5 * 1995 Stock and Incentive Plan. (Included as Exhibit A to
Proxy Statement filed on March 30, 1995.)
- ---------------
(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.
-25-
ANNUAL REPORT TO SECURITY-HOLDERS:
13.1 1998 Annual Report of Danielson Holding Corporation. (To be
included herewith at page 38.)
SUBSIDIARIES:
21 * Subsidiaries of Danielson Holding Corporation. (Filed with
Report on Form 10-K for the fiscal year ended December 31,
1996, Exhibit 21.)
(b) During the quarter ended December 31, 1998 for which this Report is
filed, DHC filed no reports on Form 8-K.
-26-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Danielson Holding Corporation has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
DANIELSON HOLDING CORPORATION
(Registrant)
By /s/ Martin J. Whitman
---------------------------------------
Martin J. Whitman
Chairman and Chief Executive Officer
Date: March 26, 1999
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 26, 1999 By /s/ MARTIN J. WHITMAN
----------------------------------------------
Martin J. Whitman
Chairman of the Board and Chief
Executive Officer and a Director
Date: March 26, 1999 By /s/ DAVID M. BARSE
----------------------------------------------
David M. Barse
President and Chief Operating Officer
and a Director
Date: March 26, 1999 By /s/ MICHAEL T. CARNEY
----------------------------------------------
Michael T. Carney
Chief Financial Officer
Date: March 26, 1999 By /s/ JOSEPH F. PORRINO
----------------------------------------------
Joseph F. Porrno
Director
Date: March 26, 1999 By /s/ FRANK B. RYAN
----------------------------------------------
Frank B. Ryan
Director
Date: March 26, 1999 By /s/ EUGENE M. ISENBERG
----------------------------------------------
Eugene M. Isenberg
Director
-27-
Date: March 26, 1999 By /s/ WALLACE O. SELLERS
----------------------------------------------
Wallace O. Sellers
Director
Date: March 26, 1999 By /s/ ANTHONY G. PETRELLO
----------------------------------------------
Anthony G. Petrello
Director
Date: March 26, 1999 By /s/ STANLEY J. GARSTKA
----------------------------------------------
Stanley J. Garstka
Director
Date: March 26, 1999 By /s/ TIMOTHY C. COLLINS
----------------------------------------------
Timothy C. Collins
Director
Date: March 26, 1999 By /s/ WILLIAM W. PALMER
----------------------------------------------
William W. Palmer
Director
-28-
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, 1998, 1997 and 1996............... *
Balance Sheets - December 31, 1998 and 1997................................................... *
Statements of Stockholders' Equity - For the years ended December 31, 1998, 1997 and 1996 *
Statements of Cash Flows - For the years ended December 31, 1998, 1997 and 1996............... *
Schedule I - Summary of Investments - Other than Investments in Related Parties........... S-1
Schedule II - Condensed Financial Information of the Registrant............................ S-2-4
Schedule IV - Reinsurance.................................................................. S-5
Schedule V - Valuation and Qualifying Accounts............................................ S-6
Schedule III - Supplemental Information Concerning Property-Casualty
and VI Insurance Operations......................................................... S-7
Schedules other than those listed above are omitted because either they are
not applicable or not required or the information required is included in the
Company's Consolidated Financial Statements.
- ----------
* Incorporated by reference to DHC's 1998 Annual Report to Stockholders.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Danielson Holding Corporation:
Under date of March 5, 1999, we reported on the consolidated balance
sheets of Danielson Holding Corporation and subsidiaries as of December 31, 1998
and 1997, 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, 1998, as contained in the 1998 annual report to stockholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the year 1998. 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 5, 1999
F-2
SCHEDULE I
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN
RELATED PARTIES
(In thousands)
DECEMBER 31, 1998
-------------------------------------------
Cost or Fair Amount Reflected on
Amortized Cost Value Balance Sheet
-------------- ----- -------------------
Fixed maturities classified as
available-for-sale:
U.S. Government/Agency $ 35,583 $ 36,404 $ 36,404
Mortgage-backed 47,352 47,821 47,821
Corporate 29,196 30,458 30,458
-------- -------- --------
Total fixed maturities 112,131 114,683 114,683
-------- -------- --------
Equity securities:
Common stocks 20,129 16,889 16,889
-------- -------- --------
Total equity securities 20,129 16,889 16,889
-------- -------- --------
Short term investments 3,287 3,287 3,287
-------- -------- --------
Total investments $135,547 $134,859 $134,859
======== ======== ========
S-1
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,
1998 1997 1996
------- ------- -------
REVENUES:
Net investment income $ 429 $ 538 $ 534
Net realized investment gains (losses) -- 2 (1)
------- ------- -------
TOTAL REVENUES 429 540 533
------- ------- -------
EXPENSES:
Employee compensation and benefits 1,177 1,170 1,201
Professional fees 427 426 288
Expenses in connection with terminated
proposed acquisition -- -- 1,849
Nonrecurring compensation -- -- 820
Other general and administrative fees 611 615 684
------- ------- -------
TOTAL EXPENSES 2,215 2,211 4,842
------- ------- -------
Loss before provision for
income taxes (1,786) (1,671) (4,309)
Income tax provision 25 26 3
------- ------- -------
Loss before equity in net income of
subsidiaries (1,811) (1,697) (4,312)
Equity in net income (loss) of subsidiaries 4,112 6,286 (3,807)
------- ------- -------
NET INCOME (LOSS) $ 2,301 $ 4,589 $(8,119)
======= ======= =======
S-2
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,
---------------------------
1998 1997
--------- --------
ASSETS:
Cash $ 45 $ 47
Fixed maturities:
Available-for-sale at fair value
(Cost: $6,684 and $8,618 ) 6,713 8,617
Short term investments, at cost which approximates
fair value 40 62
--------- --------
TOTAL CASH AND INVESTMENTS 6,798 8,726
Investment in subsidiaries 56,500 55,366
Accrued investment income 60 62
Other assets 208 166
--------- --------
TOTAL ASSETS $ 63,566 $ 64,320
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities $ 293 $ 400
--------- --------
TOTAL LIABILITIES 293 400
Preferred Stock ($0.10 par value; authorized 10,000,000
shares; none issued and outstanding) -- --
Common Stock ($0.10 par value; authorized 20,000,000
shares; issued 15,586,994 shares ; outstanding 15,576,276
shares and 15,576,287 shares) 1,559 1,559
Additional paid-in capital 46,673 46,673
Accumulated other comprehensive income (loss) (688) 2,260
Retained earnings 15,795 13,494
Treasury stock (Cost of 10,718 shares and 10,707 shares) (66) (66)
--------- --------
TOTAL STOCKHOLDERS' EQUITY 63,273 63,920
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 63,566 $ 64,320
========= ========
S-3
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,
--------------------------------
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,301 $ 4,589 $ (8,119)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Net realized investment (gains) losses -- (2) 1
Change in accrued investment income 2 69 45
Depreciation and amortization (252) (57) (60)
Equity in net (income) loss of subsidiaries (4,112) (6,286) 3,807
Increase (decrease) in accrued expenses (132) (411) 502
Other, net (13) 56 9
-------- -------- --------
Net cash used in operating activities (2,206) (2,042) (3,815)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased:
Fixed income maturities available-for-sale (11,215) (8,001) (10,584)
Proceeds from sales:
Fixed income maturities available-for-sale 3,412 951 5,542
Investments, matured or called
Fixed income maturities available-for-sale 10,037 5,562 8,585
Purchases of property and equipment (52) -- --
Net proceeds from sale of Danielson Trust Company 2,968
Net cash provided by (used in)
investing activities -- -- --
-------- -------- --------
2,182 (1,488) 6,511
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options
to purchase Common Stock -- 671 --
Retirement of stock options -- (107) --
Change in receivable from subsidiary -- -- 353
Additional capital contributed to subsidiaries -- -- (458)
-------- -------- --------
Net cash provided by
(used in) financing activities -- 564 (105)
-------- -------- --------
Net increase (decrease) in cash and
short term investments (24) (2,966) 2,591
Cash and short term investments at
beginning of year 109 3,075 484
-------- -------- --------
CASH AND SHORT TERM INVESTMENTS AT
END OF YEAR $ 85 $ 109 $ 3,075
======== ======== ========
S-4
SCHEDULE IV
DANIELSON HOLDING CORPORATION
REINSURANCE
(in thousands)
PERECENTAGE
CEDED EARNED ASSUMED EARNED OF AMOUNT
GROSS EARNED TO OTHER FROM OTHER NET EARNED ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- ---------- ---------- ---------- --------
YEAR ENDED DECEMBER 31, 1998:
Property and liability
insurance premiums $ 65,861 $ 10,450 $ -- $ 55,411 --
========== ========== ========== ========== ========
Year Ended December 31, 1997:
Property and liability
insurance premiums $ 64,745 $ 11,676 $ -- $ 53,069 --
========== ========== ========== ========== ========
Year Ended December 31, 1996:
Property and liability
insurance premiums $ 52,066 $ 15,441 $ -- $ 36,625 --
========== ========== ========== ========== ========
S-5
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,
1996 $ 153 $ 66 $ 43 $ 32 $ 230
=========== =========== =========== ======= ======
1997 $ 230 $ 53 $ 20 $ 124 $ 179
=========== =========== =========== ======= ======
1998 $ 179 $ 29 $ -- $ 72 $ 136
=========== =========== =========== ======= ======
Allowance for uncollectable
reinsurance on paid losses
For the year ended December 31,
1996 $ 388 $ -- $ -- $ 72 $ 316
=========== =========== =========== ======= ======
1997 $ 316 $ 65 $ -- $ 7 $ 374
=========== =========== =========== ======= ======
1998 $ 374 $ -- $ -- $ -- $ 374
=========== =========== =========== ======= ======
Allowance for uncollectable
reinsurance on unpaid losses
For the year ended December 31,
1996 $ 425 $ -- $ -- $ -- $ 425
=========== =========== =========== ======= ======
1997 $ 425 $ 74 $ -- $ -- $ 499
=========== =========== =========== ======= ======
1998 $ 499 $ 60 $ -- $ -- $ 559
=========== =========== =========== ======= ======
S-6
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 12/31/98 $ 2,381 $ 95,653 $ -- $ 13,705 -- $ 55,411 $ 7,745
======== ============ ========== ========= ========= ========= =========
As of and for the year
ended 12/31/97 $ 1,550 $ 105,947 $ -- $ 10,249 -- $ 53,069 $ 9,272
======== ============ ========== ========= ========= ========= =========
As of and for the year
ended 12/31/96 $ 957 $ 120,651 $ -- $ 8,294 -- $ 36,625 $ 10,121
======== ============ ========== ========= ========= ========= =========
====================================================================================================================================
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 12/31/98 $ 39,131 $ -- $ 9,899 $ 3,401 $ 47,427 $ 58,880
========= ========= ========= ========= ========== =========
As of and for the year
ended 12/31/97 $ 37,142 $ 940 $ 10,063 $ 3,278 $ 49,425 $ 55,760
========= ========= ========= ========= ========== =========
As of and for the year
ended 12/31/96 $ 26,979 $ 10,120 $ 6,239 $ 3,668 $ 56,691 $ 36,136
========= ========= ========= ========= ========== =========
S-7