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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-6732
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DANIELSON HOLDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-6021257
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
767 THIRD AVENUE, NEW YORK, NEW YORK 10017-2023
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 888-0347
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
Common Stock, $0.10 par value................... American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At March 20, 1997, the aggregate market value of the registrant's voting
stock held by non-affiliates was $100,584,806.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 20, 1997
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Common Stock, $0.10 par value 15,360,238 shares
The following documents have been incorporated by reference herein:
1996 Annual Report to Stockholders, as indicated herein (Parts I and II)
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Danielson Holding Corporation ("DHC" or "Registrant") is a holding company
incorporated in Delaware, having separate subsidiaries (collectively with DHC,
the "Company") offering a variety of insurance products and, until recently,
trust and investment management services. It is DHC's intention to continue to
grow by developing business partnerships and making strategic acquisitions.
The largest subsidiary of DHC is its indirectly wholly-owned California
insurance company, National American Insurance Company of California
("NAICC"). NAICC writes workers' compensation, non-standard private passenger
and commercial automobile insurance in the western United States, primarily
California.
Until December 31, 1996, DHC also owned a California trust company
subsidiary, Danielson Trust Company ("Danielson Trust"), which formerly was
known, prior to November 13, 1993, as HomeFed Trust. In February 1994,
Danielson Trust acquired the assets of the Western Trust Services division of
Grossmont Bank. On December 31, 1996, DHC consummated the sale of Danielson
Trust to North American Trust Company. See Note 5 of the Notes to Consolidated
Financial Statements.
As part of DHC's ongoing corporate strategy, DHC has continued to seek ways
to acquire profitable businesses and/or to expand its presence in the
financial services industry in a manner that will both complement its existing
operations and enable DHC to earn an attractive return on investment. During
1996, DHC entered into an agreement to acquire, by merger, Midland Financial
Group, Inc. ("Midland"). As a result of the crash of TWA Flight 800, in which
the President of DHC, the President of NAICC and the President of Midland were
killed, the proposed merger with Midland was terminated by the mutual consent
of DHC and Midland. See Note 3 of the Notes to Consolidated Financial
Statements.
On January 15, 1997, DHC entered into a letter of intent with The
Progressive Corporation ("Progressive") pursuant to which it was proposed that
DHC sell to Progressive 11 million newly issued shares of Common Stock of DHC
for consideration having a value of $6.60 per share. Progressive would then
have owned a 42% interest in DHC. On March 10, 1997, Progressive informed DHC
that, for "internal Progressive reasons", it was terminating its discussions
with DHC.
DHC retained cash and investments at the holding company level of $10.1
million at December 31, 1996. Total book liabilities of DHC at the same date
were $785,000.
The Company will report, as of the end of its 1996 tax year, aggregate
consolidated net operating tax loss carryforwards ("NOLs") for Federal income
tax purposes of approximately $1.34 billion. These losses will start to expire
in 1998 unless utilized prior thereto. See Note 11 of the Notes to
Consolidated Financial Statements.
DESCRIPTION OF BUSINESSES
Set forth below is a description of the business operations of the Company's
insurance services business.
DHC's wholly-owned subsidiary, NAICC, is a California corporation engaged in
writing workers' compensation, non-standard private passenger and commercial
automobile insurance in the western states, primarily California. NAICC is a
third tier subsidiary of DHC. NAICC's immediate parent corporation is KCP
Holding Company ("KCP"). KCP is wholly-owned by Mission American Insurance
Company ("MAIC"), which in turn is wholly-owned by DHC.
2
NAICC's lines of business are described below.
WORKERS' COMPENSATION INSURANCE
GENERAL
Workers' compensation insurance policies provide coverage for workers'
compensation benefits and employer's liability. The workers' compensation
portion of the coverage provides for statutory benefits which employers are
required to pay to employees who are injured in the course of employment
including, among other things, temporary or permanent disability benefits,
death benefits, medical and hospital expenses and expenses for vocational
rehabilitation. The benefits payable and the duration of such benefits are
prescribed by statute, and vary with the nature and severity of the injury or
disease and the wages, occupation and age of the employee. The employer's
liability portion of the coverage provides protection to an employer for its
liability for losses suffered by its employees which are not included within
the statutorily prescribed workers' compensation coverage. Policies are issued
having a term of no more than one year.
At December 31, 1996, NAICC had approximately 2,579 workers' compensation
policies in force with an approximate average annual premium size of $5,344,
compared to 3,844 and 7,183 policies in force with approximate average annual
premium sizes of $6,201 and $9,566 at December 31, 1995 and 1994,
respectively. NAICC's management believes the decrease in the policies in
force in 1996 is attributable to significant price competition in the
California workers' compensation market. In 1996, NAICC continued to price the
renewals of its in-force California workers' compensation policies above the
market level price. In doing so, its in-force policy count continued to
decrease.
In 1996, approximately 54 percent of NAICC's workers' compensation net
premiums written were in the State of California. Effective January 1, 1995, a
new "open rating" law replaced the old workers' compensation "minimum rate"
law. The new open rating law significantly changed the way in which insurance
companies price workers' compensation insurance in California. Under open
rating, to obtain approval to use any workers' compensation rates in
California, an insurer is required to file its proposed rates and rating plans
with the California Department of Insurance (CDI). The CDI may disapprove a
rate filing only if it finds that the rates are unfairly discriminatory, could
threaten the solvency of the insurer, or could cause a single insurer, other
than the California State Compensation Insurance Fund, to control more than
20% of the market.
In response to developments affecting the market for workers' compensation
insurance in California, NAICC has pursued a strategy of re-deploying its
capital either in other specialty lines of insurance such as non-standard
automobile insurance or in the workers' compensation line in geographic
markets believed by NAICC to have greater potential for profitability than
California. In furtherance of its strategy to write workers' compensation
insurance in markets other than California, in June 1996, NAICC acquired Valor
Insurance Company, Incorporated ("Valor"), a Montana-domiciled specialty
insurance company that writes workers' compensation insurance policies. This
acquisition has enabled NAICC to market workers' compensation insurance
directly to employers in the State of Montana.
Net written premiums for workers' compensation were $16.8 million, $38.2
million, and $77.2 million, in 1996, 1995, and 1994, respectively.
MARKETING
NAICC writes workers' compensation insurance primarily in the states of
California, Oregon, Arizona and Idaho through approximately 650 independent
property and casualty insurance agents and brokers. NAICC does not write
workers' compensation business through managing general agencies or general
agencies and no independent agent produces more than 4.5 percent of the total
premiums. The agency contracts provide authority to bind coverage within
detailed underwriting guidelines set by NAICC. Valor markets workers'
compensation insurance directly to Montana employers principally through
contacts of its President. All business is produced and serviced through its
home office in Billings, Montana.
3
NAICC maintains five new business production offices located in Portland,
Oregon, Phoenix, Arizona and San Francisco, Fresno, and Long Beach, California.
The marketing and underwriting employees at these offices solicit and
underwrite only new applications produced by independent agents. NAICC believes
that its local presence allows it to better serve policyholders and independent
agents. All other functions of policyholder service, renewal underwriting,
policy issuance, premium collection and record retention are performed
centrally at NAICC's home office in Long Beach, California.
NAICC targets employers having operations that are classified as low to
moderate hazard and that generally have payrolls under $1 million. Typically,
annual premiums for employers in this payroll category are less than $25,000.
Valor writes workers' compensation for employers of a wide range of hazard
classifications, from banks to construction businesses, and targets the larger
employers in the state of Montana.
UNDERWRITING
NAICC maintains a disciplined approach to risk selection and pricing. In
accordance with this policy, NAICC selects each prospective policyholder based
on the characteristics of such risk and establishes premiums based on loss
experience and risk exposure. NAICC's pricing policy is not driven by market
share considerations.
Rates, rating plans, policyholder dividend plans and policy forms are
developed and filed by NAICC's underwriting personnel with the appropriate
regulatory agency in each state in which NAICC operates. NAICC relies
principally upon rates promulgated by either the Workers' Compensation
Insurance Rating Bureau (WCIRB) or the National Council on Compensation
Insurance, the statistical agent for other western states in which NAICC
markets insurance.
NAICC retains the first $500,000 of each workers' compensation loss and has
purchased reinsurance for up to $99.5 million in excess of its retention, the
first $4.5 million of which is placed with a major reinsurance company and the
remaining $95 million of which is provided by 16 other companies.
CLAIMS
Workers' compensation claims are received, reviewed, processed and paid by
NAICC employees located in claims service offices in Portland, Oregon and Long
Beach, California. Most of NAICC's policyholders are not of sufficient size or
type to make a more specialized managed care approach to medical cost
containment more cost effective.
NON-STANDARD PRIVATE PASSENGER AUTOMOBILE INSURANCE
GENERAL
NAICC began writing non-standard private passenger automobile insurance in
California in July, 1993. NAICC writes this business through a general agent
which uses over 700 sub-agents to obtain applications for policies.
Policyholder selection is governed by underwriting guidelines established by
NAICC. Non-standard risks are those segments of the driving public which
generally are not considered "preferred" business, such as drivers with a
record of prior accidents or driving violations, drivers involved in particular
occupations or driving certain types of vehicles, or those who have been non-
renewed or declined by another insurance company.
Generally, non-standard premium rates are higher than standard premium rates
and policy limits are lower than typical policy limits. NAICC's private
passenger automobile policies provide maximum coverage of up to $15,000 per
person, $30,000 per accident for liability for bodily injury and $10,000 per
accident for liability for property damage. NAICC also writes physical damage
coverages for up to $33,000 per vehicle. NAICC's management believes that it
may achieve underwriting success as a result of refinement of various risk
profiles, thereby dividing the non-standard market into more defined segments
which can be adequately priced.
The California Automobile Assigned Risk Plan (CAARP) provides state mandated
minimum levels of automobile liability coverage to drivers whose driving
records, or other relevant characteristics, make it difficult
4
for them to obtain insurance in the voluntary market. NAICC does not expect to
receive a material number of assignments arising from its non-standard private
passenger automobile business and does not believe that the assignments will
have a material adverse effect upon the profitability of this line of
business.
Net written premiums were $14.5 million, $15 million and $10.5 million in
1996, 1995 and 1994, respectively, for the non-standard private passenger
automobile program. Until January 1, 1997, NAICC ceded 50 percent of its
private passenger automobile business to a major reinsurance company under a
quota share reinsurance agreement, at which time the agreement was amended to
reduce the ceding percentage to 25 percent.
UNDERWRITING
Insurers admitted in California are required to obtain prior approval of
both rates and forms for most types of insurance, including non-standard
personal automobile liability and physical damage insurance, from the CDI
before being used as part of an insurance contract in California. NAICC
periodically revises its forms and rates based upon demand and NAICC's
historical experience. NAICC's general agent has authority through its agency
contract, to use these forms and rates to bind new and renewal policies in
accordance with NAICC's underwriting guidelines.
CLAIMS
All automobile claims are handled by employees of NAICC at its home office
in Long Beach, California. Claims are reported by agents, insureds and
claimants directly to NAICC. Claims involving suspected fraud are referred to
an in-house special investigation unit ("SIU") adjuster who manages a detailed
investigation of these claims using outside investigative firms. When evidence
of fraudulent activity is identified, the SIU adjuster works with the various
state departments of insurance, the National Insurance Crime Bureau and local
law enforcement agencies in handling the claims.
COMMERCIAL AUTOMOBILE INSURANCE
GENERAL
Automobiles used or owned by businesses that are used to further the
purposes of those businesses are classified broadly as "commercial
automobiles" for insurance purposes. The majority of automobiles owned or used
by businesses are insured under policies that provide other coverages for the
business, such as commercial multi-peril insurance. Standard insurers,
however, often will not cover certain commercial automobiles because of the
claims experience and/or the type of the business, or the use or the driver of
the automobile.
Businesses which are unable to insure a specific driver and businesses
having vehicles not qualifying for commercial multi-peril insurance are
typical NAICC insureds. Examples of these risks include drivers with more than
one moving violation, one and two vehicle accounts, and specialty haulers,
such as sand and gravel, farm vehicles and certain short haul common carriers.
NAICC does not insure long haul truckers, trucks hauling logs, gasoline or
similar higher hazard operations.
NAICC's policies in force typically cover fleets of four or fewer
automobiles. The current average annual premium of the policies in force is
approximately $3,000. Approximately 45% of the policies provide both liability
and physical damage coverage; most of the remainder provide liability
insurance only.
Net written premiums for commercial automobile were $4.8 million in 1996 and
$2.1 million in each of 1995 and 1994. NAICC has increased its production
efforts in commercial automobile by adding marketing representatives to this
line as well as a vice president of marketing, which resulted in appointments
of approximately fifty new agents in the last nine months of 1996. The
increased marketing emphasis in this line is expected to result in a
significant increase in premium in 1997 and 1998.
5
MARKETING
NAICC markets non-standard commercial automobile insurance through
approximately 600 independent agents located in Arizona, California, Idaho,
Nevada, Oregon and Utah. NAICC does not use any managing general agents in
this line of business, although NAICC has granted agency contracts to agents
who may use sub-agents. NAICC's new business field offices support the
production of this business through the independent agents.
UNDERWRITING
Rates and policy forms are developed by NAICC and filed with the regulators
in each of the relevant states, depending upon each state's requirements.
NAICC relies upon industry experience tempered by its own experience in
establishing rates.
The maximum non-standard commercial automobile policy limit provided by
NAICC is $1 million bodily injury and property damage combined single limit of
liability for each occurrence. NAICC retains the first $150,000 bodily injury
and property damage combined single limit of liability for each occurrence.
Losses in excess of $150,000, per occurrence, are ceded to its reinsurers.
CLAIMS
All non-standard commercial automobile claims are handled under the
direction of the NAICC home office claims personnel who also handle the non-
standard personal automobile claims operations.
COMBINED RATIO
Combined underwriting ratios were 136.7 percent , 113.4 percent and 106.2
percent in 1996, 1995 and 1994, respectively. The increase in the combined
ratio in 1996 is due to the provision for additional losses and allocated loss
adjustment expenses associated with NAICC's run-off businesses, which
represents 27.3 percent of the combined ratio in 1996. The increase in the
combined ratio in 1995 reflects an increase in the workers' compensation loss
ratio as well as a decline in premium volume without a corresponding decline
in expenses.
For additional information regarding the foregoing statistics, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, 2. Results of NAICC's OPERATIONS--Property and Casualty Insurance
Operations" and Note 7 of the Notes to Consolidated Financial Statements.
LOSSES AND LOSS ADJUSTMENT EXPENSES
NAICC's unpaid losses and loss adjustment expenses ("LAE") represent the
estimated indemnity cost and loss adjustment expenses necessary to cover the
ultimate net cost of investigating and settling claims. Such estimates are
based upon estimates for reported losses, historical company experience of
losses reported by reinsured companies for insurance assumed, and actuarial
estimates based upon historical company and industry experience for
development of reported and unreported claims (incurred but not reported). Any
changes in estimates of ultimate liability are reflected in current operating
results. Inflation is assumed, along with other factors, in estimating future
claim costs and related liabilities. NAICC does not discount any of its loss
reserves.
The ultimate cost of claims is difficult to predict for several reasons.
Claims may not be reported until many years after they are incurred. Changes
in the rate of inflation and the legal environment have created forecasting
complications. Court decisions may dramatically increase liability in the time
between the dates on which a claim is reported and its resolution. Punitive
damages awards have grown in frequency and magnitude. The courts have imposed
increasing obligations on insurance companies to defend policyholders. As a
result, the frequency and severity of claims have grown rapidly and
unpredictably.
NAICC has claims for environmental clean-up against policies issued prior to
1980 and which are currently in run-off. The principal exposure arises from
direct excess and primary policies of business in run-off, the obligations of
which were assumed by NAICC in 1985. These direct excess and primary claims
are relatively
6
few in number and have policy limits of between $50,000 and $1,000,000, with
reinsurance generally above $50,000. NAICC also has environmental claims
arising associated with participations in excess of loss reinsurance contracts
assumed by NAICC. These reinsurance contracts have relatively low limits,
generally less than $25,000, and estimates of unpaid losses are based on
information provided by the primary insurance company.
The unpaid losses and LAE related to environmental clean-up is established
based upon facts currently known and the current state of the law and coverage
litigation. Liabilities are estimated for known claims (including the cost of
related litigation) when sufficient information has been developed to indicate
the involvement of a specific contract of insurance or reinsurance and
management can reasonably estimate its liability. Liabilities for unknown
claims and development of reported claims are included in NAICC's bulk unpaid
losses. The liability for the development of reported claims is based on
estimates of the range of potential losses for reported claims in the
aggregate as well as currently established case estimates and industry
development factors for reported claims. Estimates of liabilities are reviewed
and updated continually and exposure exists in excess of amounts which are
currently recorded which could be material. However, management does not
expect that liabilities associated with these types of claims will result in a
material adverse effect on future liquidity or financial position. Liabilities
such as these are based upon estimates and there can be no assurance that the
ultimate liability will not exceed, or even materially exceed, such estimates.
NAICC is involved in litigation related to certain environmental claims
which have some significant uncertainties. Such uncertainties include
difficulties in predicting the outcome of judicial decisions as case law
evolves regarding liability exposure, insurance coverage and interpretation of
policy language with respect to environmental claims. While the outcome of
such litigation cannot be determined at this time, such litigation, net of
liabilities established therefor and giving effect to reinsurance, is not
expected to have a material adverse effect on the future liquidity or
financial position of NAICC. As of December 31, 1996 and 1995, NAICC's net
unpaid losses and LAE relating to environmental claims were approximately
$13.4 million and $4.1 million, respectively.
Due to the factors discussed above and others, the process used in
estimating unpaid losses and loss adjustment expenses cannot provide an exact
result. Management believes that the provisions for unpaid losses and loss
adjustment expenses are adequate to cover the net cost of losses and loss
adjustment expenses incurred to date; however, such liability is necessarily
based on estimates and there can be no assurance that the ultimate liability
will not exceed, or even materially exceed, such estimates.
Analysis of Losses and Loss Adjustment Expenses
The following table provides a reconciliation of NAICC's unpaid losses and
loss adjustment expenses (LAE) (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
Net unpaid losses and LAE at January 1.......... $116,294 $128,625 $119,223
Net unpaid losses acquired with Valor Insurance
Company........................................ 403 -- --
-------- -------- --------
116,697 128,625 119,223
Incurred related to:
Current year.................................. 26,979 45,592 67,131
Prior years................................... 10,120 3,123 384
-------- -------- --------
Total incurred.............................. 37,099 48,715 67,515
-------- -------- --------
Paid Related to:
Current year.................................. (10,559) (14,464) (15,849)
Prior years................................... (46,132) (46,582) (42,264)
-------- -------- --------
Total paid...................................... (56,691) (61,046) (58,113)
-------- -------- --------
Net unpaid losses and LAE at December 31........ $ 97,105 $116,294 $128,625
Plus: reinsurance recoverables................ 23,546 21,112 17,705
-------- -------- --------
Gross unpaid losses and LAE at December 31...... $120,651 $137,406 $146,330
======== ======== ========
7
The losses and LAE incurred related to prior years is attributable to claims
from businesses which are in run-off. In 1996, management of NAICC strengthened
the unpaid losses and allocated loss adjustment expenses (ALAE) of pre-1980
businesses assumed by NAICC in 1985 and which are in run-off. NAICC increased
these run-off claim liabilities by $10 million. The pre-1980 run-off
liabilities include claims relating to environmental clean-up for policies
issued prior to 1970. NAICC increased its bulk unpaid liabilities related to
these claims, principally the unpaid ALAE, as it has become evident that the
legal costs associated with these claims would be significantly greater than
previously anticipated. As of December 31, 1996, NAICC's net unpaid losses and
LAE relating to environmental claims was approximately $13.4 million.
The following table indicates the manner in which unpaid losses and LAE at
the end of a particular year change as time passes. The first line reflects the
liability as originally reported, net of reinsurance, at the end of the stated
year. Each calendar year-end liability includes the estimated liability for
that accident year and all prior accident years comprising that liability. The
second section shows the original recorded net liability as of the end of
successive years adjusted to reflect facts and circumstance which are later
discovered. The next line, cumulative (deficiency) or redundancy, compares the
adjusted net liability amount to the net liability amount as originally
established and reflects whether the net liability as originally recorded was
adequate to cover the estimated cost of claims or redundant. The third section
reflects the cumulative amounts related to that liability that were paid, net
of reinsurance, as of the end of successive years.
Analysis of Net Losses and Loss Adjustment Expense Development (dollars in
thousands):
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------
Net unpaid losses and
LAE at end of year..... $115,858 $ 95,272 $ 91,870 $ 97,810 $104,825 $119,223 $128,625 $116,294 $97,105
Net unpaid losses and
LAE re-estimated as of:
One year later........ 120,527 100,599 92,632 94,364 105,568 119,607 131,748 126,414
Two years later....... 124,167 100,143 87,504 99,875 111,063 123,039 141,602
Three years later..... 121,081 94,954 89,844 107,945 117,756 136,735
Four years later...... 116,384 96,948 95,576 116,018 138,877
Five years later...... 118,175 101,537 102,081 136,269
Six years later....... 122,784 107,344 119,107
Seven years later..... 128,589 122,985
Eight years later..... 143,585
Cumulative (deficiency)
redundancy............. (27,727) (27,713) (27,237) (38,459) (34,052) (17,512) (12,977) (10,120)
Cumulative net amounts
paid as of:
One year later........ 41,767 38,165 31,162 39,131 39,650 42,264 46,582 46,132
Two years later....... 72,735 56,876 53,424 63,483 68,025 71,702 80,515
Three years later..... 86,142 71,543 66,198 81,485 88,038 95,525
Four years later...... 96,352 78,991 75,963 94,238 106,431
Five years later...... 102,385 84,980 83,704 108,923
Six years later....... 107,661 90,458 95,199
Seven years later..... 112,555 100,559
Eight years later..... 121,724
8
The following table reflects the same information as the preceding table
gross of reinsurance (dollars in thousands):
YEARS ENDED DECEMBER 31
-------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
Gross unpaid Losses and LAE at end of
year.................................. $120,651 $137,406 $146,330 $137,479
Gross unpaid Losses and LAE re-
estimated as of:
One year later....................... 149,416 149,815 137,898
Two years later...................... 161,731 141,737
Three years later.................... 158,263
Gross cumulative deficiency: (12,010) (15,401) (20,784)
Gross cumulative amount paid as of:
One year later....................... 54,901 53,798 53,634
Two years later...................... 92,991 88,930
Three years later.................... 116,605
The cumulative deficiency as of December 31, 1995 on a net basis of $10.1
million is due to the strengthening of the unpaid losses and ALAE of pre-1980
businesses assumed by NAICC in 1985 and which are in run-off. NAICC increased
these run-off claim liabilities in 1996 by $10 million. The pre-1980 run-off
liabilities include claims relating to environmental clean-up for policies
issued prior to 1970.
The cumulative deficiency on a net basis of $34 million and $38.5 million as
of December 31, 1992 and 1991, respectively, is also attributable to adverse
development of workers' compensation loss experience in the 1990 and 1991 loss
years. The California workers' compensation industry, including NAICC,
experienced adverse development of those loss years. The adverse development
was the result of a significant increase in frequency in workers' compensation
claims that was brought on by a downturn in the California economy, an
increase in unemployment and a dramatic increase in stress and post-
termination claims. The adverse development in 1990 and 1991 was significantly
offset by favorable loss experience and development in the 1992, 1993 and 1994
loss years.
Conditions and trends that have affected the development of these
liabilities in the past may not necessarily recur in the future. It would not
be appropriate to use this cumulative history in the projection of future
performance.
The analysis of net losses and LAE above would ordinarily present a ten year
development of unpaid losses and LAE, however, the loss and LAE data of NAICC
relating to periods prior to 1988 are not comparable to such data for periods
subsequent to 1988. In 1988, NAICC assumed the unpaid policyholder liabilities
of MAIC for accident years 1985, 1986 and 1987. The data subsequent to 1987
necessary to update the unpaid losses and LAE of NAICC as of December 31, 1987
and prior includes loss and LAE data relating to MAIC which is not reflected
in the December 31, 1987 unpaid losses and LAE of NAICC and such data cannot
be segregated because of the assumption of those 1985, 1986 and 1987 accident
year liabilities in 1988. The 1988 assumption of the policyholder liabilities
of MAIC was the last of a series of significant events and transactions which
resulted in, among other things, the acquisition by DHC of a majority
ownership interest in NAICC, a change in the management of NAICC and a
material change in the business and operations of NAICC. As a result of these
material changes affecting NAICC, the table above, reflecting information
commencing in 1988, provides the most meaningful and relevant historical
analysis possible of unpaid losses and LAE of NAICC.
Although NAICC continues to receive claims related to 1988 and earlier, the
liability recorded represents the best estimate by NAICC's management of the
liability for currently foreseeable claims. As stated above, the losses and
loss adjustment expenses reflected in the tables above are reduced both for
amounts ceded to other insurers and for other recoveries.
9
CEDED REINSURANCE AND REINSURANCE WITH AFFILIATES
In its normal course of business in accordance with industry practice, NAICC
reinsures a portion of its exposure with other insurance companies so as to
effectively limit its maximum loss arising out of any one occurrence. Contracts
of reinsurance do not legally discharge the original insurer from its primary
liability. Estimated reinsurance receivables arising from these contracts of
reinsurance are, in accordance with generally accepted accounting principles,
reported separately as assets. Premiums for reinsurance ceded by NAICC in 1996
were 29.4 percent of written premiums.
As of December 31, 1996, General Reinsurance Corporation (GRC), Munich
American Reinsurance Company (MARC), and Lloyd's of London (Lloyd's) were the
only reinsurers that comprised more than 10 percent of NAICC's reinsurance
recoverable on paid and unpaid claims. NAICC monitors all reinsurers, by
reviewing A.M. Best reports and ratings, information obtained from reinsurance
intermediaries and analyzing financial statements. At December 31, 1996, NAICC
had reinsurance recoverables on paid and unpaid claims of $7.7 million , $7.9
million, and $4.1 million from GRC, MARC, and Lloyd's respectively. GRC and
MARC had an A.M. Best rating of A++ and A+, respectively. The paid and unpaid
recoverable amounts ceded to Lloyd's relate to business in run-off and assumed
by NAICC. NAICC believes that Equitas has authority to respond on behalf of all
of the syndicates underlying the reinsurance contracts with Lloyd's. See Note 6
of the Notes to Consolidated Financial Statements for further information on
reinsurance.
NAICC and two of its subsidiaries participate in an inter-company pooling and
reinsurance agreement under which Danielson Insurance Company (DICO) and
Danielson National Insurance Company (DNIC) cede 100% of their net liability,
defined to include premiums, losses and allocated loss adjustment expenses, to
NAICC to be combined with the net liability for policies of NAICC in formation
of a "Pool". NAICC simultaneously cedes to DICO and DNIC 10% of the net
liability of the Pool. DNIC commenced participation in July, 1993 and DICO
commenced participation in January 1994. Additionally, both DICO and DNIC
reimburse NAICC for executive services, professional services, and
administrative expenses based on designated percentages of net premiums written
for each line of business.
REGULATION
Insurance companies are subject to insurance laws and regulations established
by the states in which they transact business. The agencies established
pursuant to these state laws have broad administrative and supervisory powers
relating to the granting and revocation of licenses to transact business,
regulation of trade practices, establishment of guaranty associations,
licensing of agents, approval of policy forms, premium rate filing
requirements, reserve requirements, the form and content of required regulatory
financial statements, capital and surplus requirements and the maximum
concentrations of certain classes of investments. Most states also have enacted
legislation regulating insurance holding company systems, including
acquisitions, extraordinary dividends, the terms of affiliate transactions and
other related matters. The Company and its insurance subsidiaries have
registered as holding company systems pursuant to such legislation in
California and routinely report to other jurisdictions. The National
Association of Insurance Commissioners has formed committees and appointed
advisory groups to study and formulate regulatory proposals on such diverse
issues as the use of surplus debentures, accounting for reinsurance
transactions and the adoption of risk-based capital requirements. It is not
possible to predict the impact of future state and federal regulation on the
operations of the Company or its insurance subsidiaries.
NAICC is an insurance company domiciled in the State of California and is
regulated by the California Department of Insurance for the benefit of
policyholders. The California Insurance Code does not permit the payment of
shareholder dividends that exceed the greater of net income or 10% of statutory
surplus and such dividends can only be paid out of accumulated earned surplus
without prior approval from the Insurance Commissioner. Because it has negative
unassigned surplus, NAICC is not able to pay dividends in 1997 without prior
regulatory approval.
10
Capital Adequacy and Risk-Based Capital
Several measures of capital adequacy are common in the property-casualty
industry. The two most often used are (a) premiums-to-surplus (which measures
pressure on capital from inadequate pricing), and (b) reserves-to-surplus
(which measures pressure on capital from inadequate loss and loss adjustment
expense reserves). A commonly accepted maximum premiums-to-surplus ratio is 3
to 1; commonly accepted reserves-to-surplus ratios range from 3-5 to 1.
The following table shows the consolidated premiums-to-surplus and reserves-
to-surplus ratios of NAICC (on a statutory basis):
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
Ratio of:
Premiums-to-surplus........................... .9:1 1.2:1 2.3:1
Reserves-to-surplus........................... 2.1:1 2.6:1 3.2:1
Given the foregoing relatively conservative financial security ratios,
NAICC's management believes that existing capital is adequate to support
continued higher than industry average premium growth for the foreseeable
future.
At December 31, 1996, NAICC had unusual resulting values for four of the
Insurance Regulatory Information System tests. The unusual resulting values
all result from the strengthening of unpaid losses and ALAE of the businesses
in run-off and the decline in written premiums.
A model for determining the risk-based capital ("RBC") requirements for
property and casualty insurance companies was adopted in December 1993.
Insurance companies are required to report their RBC ratios based on their
1994 annual statements. NAICC has calculated its RBC requirement under the
most recent RBC model and it has sufficient capital in excess of any
regulatory action level. The Company believes that RBC is the most appropriate
indicator of potential regulatory oversight.
The RBC model sets forth four levels of increasing regulatory intervention:
(1) Company Action Level (200% of an insurer's Authorized Control Level) at
which the insurer must submit to the regulator a plan for increasing such
insurer's capital; (2) Regulatory Action Level (150% of an insurer's
Authorized Control Level), at which the insurer must submit a plan for
increasing its capital to the regulator and the regulator may issue corrective
orders; (3) Authorized Control Level (a multi-step calculation based upon
information derived from an insurer's most recent filed statutory annual
statement), at which the regulator may take action to rehabilitate or
liquidate the insurer; and (4) Mandatory Control Level (70% of an insurer's
Authorized Control Level), at which the regulator must rehabilitate or
liquidate the insurer.
At December 31, 1996, the RBC of NAICC was 263% greater than the Company
Action Level.
HOLDING COMPANY BUSINESS
DHC is a holding company incorporated under the General Corporation Law of
the State of Delaware. As of December 31, 1996, DHC had the following material
assets and no material liabilities:
(i) ownership of its MAIC subsidiary, an insurance holding company that
owns, directly or indirectly, all of the stock of NAICC, DNIC, DIC, and two
licensed insurance subsidiaries which are expected to commence writing
insurance lines in the future; and
(ii) approximately $10.1 million in cash and investments.
On December 21, 1994, DHC received a partial distribution in the amount of
$750,000 from an unaffiliated trust that owns certain assets and liabilities
of a former subsidiary of DHC. The partial distribution is recorded as
11
an extraordinary item in the Company's 1994 Consolidated Statements of
Operations. The Company has been advised that the trust is anticipated to be
terminated in the near future. DHC does not anticipate that any amount it may
receive upon termination of the trust will be material.
FORMER TRUST BUSINESS
In March 1993, DHC acquired all of the common stock of Danielson Trust
(which was known as HomeFed Trust until November 13, 1993), a trust company
chartered by the California State Banking Department to provide trust and
fiduciary services and located in San Diego, California. In February 1994,
Danielson Trust acquired the assets of the Western Trust Services division of
Grossmont Bank. On January 31, 1996, following approval of the California
State Banking Department, Danielson Trust sold substantially all of the
fiduciary accounts administered by its Santa Barbara branch to The Bank of
Montecito. In connection with the sale, in January 1996, Danielson Trust
recognized a gain of $32,874.
Danielson Trust's business consisted of providing trust and investment
services to individuals, not-for-profit corporations and retirement service
clients, including its affiliates. In addition, since 1994, Danielson Trust
provided custodial services for certificates of deposit to affiliated and
unaffiliated broker-dealers, as well as other custodial services to an
affiliated mutual fund.
On December 31, 1996, DHC consummated the sale of Danielson Trust to North
American Trust Company for $3 million in cash and recognized a loss of $1.2
million on disposal.
TAX LOSS CARRYFORWARD
As of December 31, 1996, the Company had a consolidated net operating loss
carryforward of approximately $1.34 billion for Federal income tax purposes.
This number is based upon Federal consolidated income tax losses for the
periods through December 31, 1995 and an estimate of the 1996 taxable loss.
Some or all of the carryforward may be available to offset, for Federal income
tax purposes, the future taxable income, if any, of DHC and its wholly-owned
subsidiaries. The Internal Revenue Service ("IRS") may attempt to challenge
the amount of this net operating loss in the event of a future tax audit.
Management believes, based in part upon the views of its tax advisors, that
its net operating loss calculations are reasonable and that it is reasonable
to conclude that the Company's net operating losses would be available for use
by the Company. These tax loss attributes are currently fully reserved, for
valuation purposes, on the Company's financial statements. The amount of the
deferred asset considered realizable could be increased in the near term if
estimates of future taxable income during the carryforward period are
increased.
The Company's net operating tax loss carryforwards will expire, if not used,
in the following approximate amounts in the following years (dollars in
thousands):
YEAR ENDING AMOUNT OF CARRYFORWARDS
DECEMBER 31, EXPIRING
------------ -----------------------
1998............................................ $ 32,804
1999............................................ 203,869
2000............................................ 249,488
2001............................................ 155,762
2002............................................ 146,394
2003............................................ 77,736
2004............................................ 70,000
2005............................................ 104,763
2006............................................ 92,235
2007............................................ 87,298
2008............................................ 31,688
2009............................................ 40,405
2010............................................ 24,177
2011............................................ 20,169
12
The Company's ability to utilize its net operating tax loss carryforwards
would be substantially reduced if DHC were to undergo an "ownership change"
within the meaning of Section 382(g)(1) of the Internal Revenue Code. In an
effort to reduce the risk of an ownership change, DHC has imposed restrictions
on the ability of holders of five percent or more of the common stock of DHC,
par value $0.10 per share ("Common Stock") to transfer the Common Stock owned
by them and to acquire additional Common Stock, as well as the ability of
others to become five percent stockholders as a result of transfers of Common
Stock. Notwithstanding such transfer restrictions, there could be
circumstances under which an issuance by DHC of a significant number of new
shares of Common Stock or other new class of equity security having certain
characteristics (for example, the right to vote or to convert into Common
Stock) might result in an ownership change under the Internal Revenue Code.
See Note 10 of the Notes to the Consolidated Financial Statements for a
description of certain restrictions on the transfer of Common Stock.
DHC'S BUSINESS PLAN AND DEVELOPMENT
DHC's business plan is to grow by developing business partnerships and
making strategic acquisitions that are expected to contribute higher than
average returns for its stockholders. On February 26, 1996, DHC entered into a
merger agreement pursuant to which DHC would have acquired all of the
outstanding stock of Midland in a merger transaction. As described earlier,
the proposed merger was terminated by mutual consent of DHC and Midland in
July, 1996 due to the loss of several key executives in the crash of TWA
Flight 800.
On January 15, 1997, DHC entered into a letter of intent with Progressive
pursuant to which it was proposed that DHC sell to Progressive 11 million
newly issued shares of Common Stock of DHC for consideration having a value of
$6.60 per share. Progressive would then have owned a 42% interest in DHC. On
March 10, 1997, Progressive informed DHC that, for "internal Progressive
reasons", it was terminating its discussions with DHC.
EMPLOYEES
As of December 31, 1996, the number of employees of DHC and its consolidated
subsidiaries was approximately as follows:
NAICC............................................................... 141
DHC (holding company only).......................................... 11
---
Total........................................................... 152
===
None of these employees is covered by a collective bargaining agreement. DHC
believes that the staffing levels are adequate to conduct future operations.
ITEM 2. PROPERTIES.
DHC leases a minimal amount of space for use as administrative and executive
offices. DHC's lease has a term of approximately five years which is scheduled
to expire in 1998. DHC believes that the space available to it is adequate for
DHC's current and foreseeable needs.
NAICC's headquarters are located in a leased office facility in Rancho
Dominguez, California, pursuant to a long term lease which is scheduled to
expire in 1999. In addition, NAICC has entered into short term leases in
connection with its operations in various locations on the west coast of the
United States. NAICC believes that the foregoing leased facilities are
adequate for NAICC's current and anticipated future needs.
See Note 14 of the Notes to Consolidated Financial Statements.
13
ITEM 3. LEGAL PROCEEDINGS.
NAICC is a party to various legal proceedings which are considered routine
and incidental to its insurance business and are not material to the financial
condition and operation of such business. DHC is not a party to any legal
proceeding which is considered material to the financial condition and
operation of its business. See Note 15 of the Notes to Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
"Stock Market Prices" on page 32 of DHC's 1996 Annual Report to Stockholders
(included as an exhibit hereto) is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Consolidated Financial Data" on page 6 of DHC's 1996 Annual Report
to Stockholders (included as an exhibit hereto) is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 7 through 12 of DHC's 1996 Annual Report to Stockholders
(included as an exhibit hereto) is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of DHC and its subsidiaries, together
with the Notes thereto, and "Quarterly Financial Data," included on pages 13
through 16, 17 through 30, and 32, respectively, of DHC's 1996 Annual Report
to Stockholders (included as an exhibit hereto), are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The Directors of DHC are listed on the following pages with brief statements
of their principal occupations and other information. A listing of the
Directors' and officers' beneficial ownership of Common Stock appears on
subsequent pages under the heading "Item 12. Security Ownership of Certain
Beneficial Owners and Management." All of the Directors were elected to their
present terms of office by the stockholders at the Annual Meeting of
Stockholders of DHC held on September 17, 1996. The term of office of each
Director continues until the election of Directors to be held at the next
Annual Meeting of Stockholders or until his successor has been elected. There
is no family relationship between any Director and any other Director or
executive officer of DHC. The information set forth below concerning the
Directors has been furnished by such Directors to DHC.
14
DIRECTOR
DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
-------- --- -------------------- --------
Martin J. Whitman..... 72 Chairman of the Board and Chief Executive 1990
Officer of DHC
David M. Barse........ 34 President and Chief Operating Officer of 1996
DHC
Eugene M. Isenberg.... 67 Chairman of the Board and Chief Executive 1990
Officer of Nabors Industries, Inc.
Joseph F. Porrino..... 52 Executive Vice President of the New School 1990
for Social Research
Frank B. Ryan......... 60 Professor of Mathematics and Computational 1990
and Applied Mathematics at Rice University
Wallace O. Sellers.... 67 Vice Chairman and Director of Enhance 1995
Financial Services Group, Inc.
Anthony G. Petrello... 42 President and Chief Operating Officer of 1996
Nabors Industries, Inc.
Stanley J. Garstka.... 53 Deputy Dean and Professor in the Practice 1996
of Management at Yale University School of
Management
Timothy C. Collins.... 40 Chief Executive Officer and Senior Managing 1996
Director of Ripplewood Holdings LLC
Mr. Whitman is the Chairman of the Board, Chief Executive Officer and a
Director of DHC. Since 1974, Mr. Whitman has been the President and
controlling stockholder of M.J. Whitman & Co., Inc. (now known as Martin J.
Whitman & Co., Inc.) ("MJW&Co") which, until August 1991, was a registered
broker-dealer. From August 1994 to December 1994, Mr. Whitman served as the
Managing Director of M.J. Whitman, L.P. ("MJWLP"), then a registered broker-
dealer which succeeded to the broker-dealer business of MJW&Co. Since January
1995, Mr. Whitman has served as the Chairman and Chief Executive Officer (and,
until June 1995, as President) of M. J. Whitman, Inc. ("MJW"), which succeeded
at that time to MJWLP's broker-dealer business. Also since January 1995, Mr.
Whitman has served as the Chairman and Chief Executive Officer of M. J.
Whitman Holding Corp. ("MJWHC"), the parent of MJW and other affiliates. Since
March 1990, Mr. Whitman has been the Chairman of the Board, Chief Executive
Officer and a Director (and, since January 1991, the President) of Third
Avenue Value Fund, Inc. ("TAVF"), an investment company registered under the
Investment Company Act of 1940, and EQSF Advisers, Inc. ("EQSF"), TAVF's
investment adviser. Until April 1994, Mr. Whitman also served as the Chairman
of the Board, Chief Executive Officer and a Director of Equity Strategies
Fund, Inc., previously a registered investment company. Mr. Whitman is a
Managing Director of Whitman Heffernan Rhein & Co., Inc. ("WHR"), an
investment and financial advisory firm which he founded with James P.
Heffernan and C. Kirk Rhein, Jr. during the first quarter of 1987. Since March
1991, Mr. Whitman has served as a Director of Nabors Industries, Inc., a
publicly-traded company. From March 1993 through February 1996, Mr. Whitman
served as a director of Herman's Sporting Goods, Inc., a retail sporting goods
chain, which filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code on April 26, 1996. Mr. Whitman also serves as a Director of
the Company's subsidiaries, including National American Insurance Company of
California ("NAICC") and KCP Holding Company ("KCP"). Mr. Whitman co-authored
the book The Aggressive Conservative Investor. Mr. Whitman is a Distinguished
Faculty Fellow in Finance at the Yale University School of Management. Mr.
Whitman graduated from Syracuse University magna cum laude in 1949 with a
Bachelor of Science degree and received his Masters degree in Economics from
the New School for Social Research in 1956. Mr. Whitman is a Chartered
Financial Analyst.
Mr. Barse has been the President, Chief Operating Officer and a Director of
DHC since July 1996 and a director of NAICC since August 1996. Since June
1995, Mr. Barse has been the President of each of MJW and MJWHC. Since April
1995, he has been an Executive Vice President and Chief Operating Officer of
TAVF and
15
EQSF. Mr. Barse joined the predecessors of MJW and MJWHC in December 1991 as
General Counsel. Mr. Barse was previously an attorney with the law firm of
Robinson Silverman Pearce Aronsohn & Berman LLP. Mr. Barse received a Bachelor
of Arts in Political Science from George Washington University in 1984 and a
Juris Doctor from Brooklyn Law School in 1987.
Mr. Isenberg, since 1987, has been Chairman and Chief Executive Officer of
Nabors Industries, Inc. ("Nabors"), a publicly-traded oil and gas drilling
company listed on the American Stock Exchange ("AMEX"). Beginning in 1996, Mr.
Isenberg commenced his term as a Governor of the AMEX. From 1969 to 1982,
Mr. Isenberg was Chairman of the Board and principal stockholder of Genimar
Inc., a steel trading and building products manufacturing company. From 1955
to 1968, Mr. Isenberg was employed in various management capacities with the
Exxon Corp. Mr. Isenberg graduated from the University of Massachusetts in
1950 with a Bachelor of Arts degree in Economics and from Princeton University
in 1952 with a Masters degree in Economics.
Mr. Porrino has been Executive Vice President of the New School for Social
Research since September 1991. Prior to that time, Mr. Porrino was a partner
in the New York law firm of Putney, Twombly, Hall & Hirson, concentrating his
practice in the area of labor law. Mr. Porrino received a Bachelor of Arts
degree from Bowdoin College in 1966, and was awarded a Juris Doctor degree
from Fordham University School of Law in 1970.
Dr. Ryan, since August 1990, has been a Professor of Mathematics and
Computational and Applied Mathematics at Rice University. Since March 1996,
Dr. Ryan has served as a Director of Sequoia Systems, Inc., a computer systems
company, the capital stock of which is traded on NASDAQ. Since March 1995, Dr.
Ryan has served as a Director of America West Airlines, Inc., a publicly-
traded company listed on the New York Stock Exchange. From August 1990 to
February 1995, Dr. Ryan also served as Vice President--External Affairs at
Rice University. For two years ending August 1990, Dr. Ryan was the President
and Chief Executive Officer of Contex Electronics Inc., a subsidiary of
Buffton Corporation, the capital stock of which is publicly traded on the
AMEX. Prior to that, and beginning in 1977, Dr. Ryan was a Lecturer in
Mathematics at Yale University, where he was also the Associate Vice President
in charge of institutional planning. Dr. Ryan obtained a Bachelor of Arts
degree in Physics in 1958 from Rice University, a Masters degree in
Mathematics from Rice in 1961, and a Doctorate in Mathematics from Rice in
1965.
Mr. Sellers is Vice-Chairman and a Director of Enhance Financial Group, Inc.
("Enhance Group"), a financial services corporation the capital stock of which
is publicly traded on the New York Stock Exchange. Until December 31, 1994,
Mr. Sellers was the President and Chief Executive Officer of Enhance Group,
from its inception in 1986, as well as its principal subsidiaries, Enhance
Reinsurance Company and Asset Guaranty Insurance Company, from their
inceptions in 1986 and 1988, respectively. From 1987 to 1994, Mr. Sellers
served as a Director, and from 1992 to 1993 as the Chairman, of the
Association of Financial Guaranty Insurors in New York. Mr. Sellers received a
Bachelor of Arts degree from the University of New Mexico in 1951 and a
Masters degree in Economics from New York University in 1956. Mr. Sellers
attended the Advanced Management Program at Harvard University in 1975 and is
a Chartered Financial Analyst.
Mr. Petrello has been the President and Chief Operating Officer of Nabors
since 1992 and has been a director of Nabors and a member of the Executive
Committee of its board of directors since 1991. Mr. Petrello was formerly a
partner with the law firm Baker & McKenzie, which he had been with since 1979.
In 1986, Mr. Petrello was named Managing Partner of Baker & McKenzie's New
York Office and served in that capacity until 1991 when he resigned as a
partner in such law firm. Mr. Petrello continues as Of Counsel to Baker &
McKenzie. Mr. Petrello received a Bachelor of Science degree and a Masters
degree from Yale University in 1976 and a Juris Doctor from Harvard University
in 1979.
Mr. Garstka has been Deputy Dean at the Yale University School of Management
(the "Yale School of Management") since November, 1995 and has been a
Professor in the Practice of Management at the Yale School of Management since
1988. Mr. Garstka was the Acting Dean of the Yale School of Management from
August 1994 to October 1995, and an Associate Dean of the Yale School of
Management from 1984 to 1994.
16
Mr. Garstka has served on the Board of Trustees of MBA Enterprises Corps, a
non-profit organization, since 1991 and on the Board of Trustees of The Foote
School in New Haven, Connecticut since 1995. From 1988 to 1990, Mr. Garstka
served as a director of Vyquest, Inc., a publicly-traded company listed on the
AMEX. Mr. Garstka was a Professor in the Practice of Accounting from 1983 to
1988, and an Associate Professor of Organization and Management from 1978 to
1983, at the Yale School of Management. Mr. Garstka has also authored numerous
articles on accounting and mathematics. Mr. Garstka received a Bachelor of
Arts degree in Mathematics from Wesleyan University in Middletown, Connecticut
in 1966, a Masters degree in Industrial Administration in 1968 from Carnegie
Mellon University and a Doctorate in Operations Research in 1970 from Carnegie
Mellon University.
Mr. Collins has been the Chief Executive Officer and Senior Managing
Director of Ripplewood Holdings LLC, a private investment firm, since October
1995. From January 1990 to September 1995, Mr. Collins was the Senior Managing
Director of Onex Investment Corp., a private investment firm. Since April
1994, Mr. Collins has been a director of Scotsman Industries, Inc., a
publicly-traded company listed on the New York Stock Exchange. Mr. Collins is
also a director of Dayton Superior Corporation (NYSE) and is a trustee of
DePauw University. Mr. Collins received a Bachelor of Arts degree in
Philosophy from DePauw University in 1978, and a Masters in Private and Public
Management from the Yale School of Management in 1982.
Executive Officers
The executive officers of DHC are as follows:
NAME AGE PRINCIPAL POSITION WITH REGISTRANT
---- --- ----------------------------------
Martin J. Whitman............ 72 Chairman of the Board, Chief Executive Officer
and a Director
President, Chief Operating Officer and a
David M. Barse............... 34 Director
Michael T. Carney............ 43 Chief Financial Officer and Treasurer
Ian M. Kirschner............. 41 General Counsel and Secretary
For additional information about Messrs. Whitman and Barse, see "Directors"
above.
Mr. Carney was the Chief Financial Officer ("CFO") of the Company from
August 1990 until March 1996 and has been the CFO of the Company and a
director of NAICC since August 1996. Since 1990, Mr. Carney has served as
Treasurer and CFO of TAVF and EQSF and, since 1989, as CFO of WHR, as well as
MJW&Co., and MJW and MJWHC and their predecessors. From 1990 through April
1994, Mr. Carney also served as CFO of Carl Marks Strategic Investments, L.P.;
and from 1989 through April 1994, Mr. Carney served as Treasurer and CFO of
Equity Strategies Fund. From 1988 to 1989, Mr. Carney was the Director of
Accounting of Smith New Court, Carl Marks, Inc., and, from 1986 to 1988, Mr.
Carney served as the Controller of Carl Marks & Co., Inc. Mr. Carney graduated
from St. John's University in 1981 with a Bachelor of Science degree in
Accounting.
Mr. Kirschner has been the General Counsel and Secretary of DHC since August
1996. Mr. Kirschner has also served as General Counsel and Secretary of MJWHC
and MJW since January 1996 and of TAVF and EQSF since January 1997. From
February 1993 to June 1995, Mr. Kirschner was a Vice President, the General
Counsel and Secretary of 2 I Inc., a then NASDAQ Small-Cap listed holding
company. Mr. Kirschner has been practicing law since 1979, and was Of Counsel
to Morgan, Lewis & Bockius, from October, 1990 to October, 1992. Mr. Kirschner
obtained a Bachelor of Arts degree from the State University of New York at
Binghamton in 1976 and a Juris Doctor from Boston University School of Law in
1979.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires DHC's
Directors and executive officers, and persons who own more than ten percent of
a registered class of the DHC's equity securities, to file with the
17
Securities and Exchange Commission and the American Stock Exchange initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of DHC. Officers, Directors and greater than ten-
percent stockholders are required by Federal securities regulations to furnish
DHC with copies of all Section 16(a) forms they file.
To DHC's knowledge, based solely upon review of the copies of such reports
furnished to DHC and written representations that no other reports were
required, except for one Form 3 with respect to Mr. Collins (not involving any
transaction), all Section 16(a) filing requirements applicable to DHC's
officers, Directors and greater than ten percent beneficial owners were
complied with on a timely basis for the fiscal year ended December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table presents certain information
relating to compensation paid by DHC for services rendered in 1996 by the Chief
Executive Officer, the former Chief Executive Officer and two other former
executive officers of DHC whose cash compensation for such year exceeded
$100,000. No other executive officers of DHC received compensation in excess of
$100,000 for fiscal year 1996. Only those columns which call for information
applicable to DHC or the individuals named for the periods indicated have been
included in such table.
ANNUAL LONG TERM
COMPENSATION COMPENSATION
--------------------- ------------
AWARDS
------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY(A) BONUS(B) OPTIONS COMPENSATION
POSITION YEAR ($) ($) (#) ($)
------------------ ---- --------- -------- ------------ ------------
Martin J. Whitman....... 1996 $200,000 -0- -0-
Chairman of the Board &
Chief Executive 1995 $200,000 -0- -0-
Officer 1994 $ 75,000 $100,000 -0-
C. Kirk Rhein, Jr. ..... 1996 $116,667 -0- -0-
President & Chief
Executive Officer(c) 1995 $200,000 -0- -0-
1994 $ 75,000 $100,000 -0-
James P. Heffernan...... 1996 $116,667 -0- -0- $83,333
Chief Financial
Officer(d) 1995 $200,000 -0- -0-
1994 $ 75,000 $100,000 -0-
Lisa D. Levey........... 1996 $114,960 -0- 15,000 $72,917
General Counsel &
Secretary(e) 1995 $158,675(f) $100,000(f) -0-
1994 $125,175(f) $100,000(f) -0-
- --------
(a) Amounts shown indicate cash compensation earned and received by executive
officers in the year shown. Executive officers also participate in DHC
group health insurance.
(b) Amounts shown indicate bonuses earned, if any, with respect to services to
DHC in the fiscal year shown whether or not paid in such fiscal year.
(c) Mr. Rhein was President and Chief Executive Officer until his death in the
crash of TWA Flight 800 on July 17, 1996. Annual Compensation reflects
compensation paid through that date. For information regarding additional
payments made to the estate of Mr. Rhein, see Item 13. "Certain
Relationships and Related Transactions."
(d) Mr. Heffernan was the Chief Financial Officer until his resignation on July
29, 1996. At that time, Mr. Heffernan entered into an employment agreement
with DHC pursuant to which he was paid the amount set forth under All Other
Compensation during 1996.
18
(e) Ms. Levey was the General Counsel and Secretary until her resignation on
July 31, 1996. Ms. Levey entered into a severance agreement with DHC
pursuant to which she was paid the amount set forth under All Other
Compensation during 1996.
(f) Amounts shown reflect portion of compensation allocated to DHC based upon
percentage of time spent in connection with DHC matters.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table presents certain information relating to the grants of
stock options made during 1996 to the named executive officers of DHC. The
options were granted under DHC's 1995 Stock and Incentive Plan. Pursuant to
rules of the Securities and Exchange Commission, the table also shows the
value of the options granted at the end of the option term (through October
31, 1997) if the stock price were to appreciate annually by 5% and 10%,
respectively. There is no assurance that the stock price will appreciate at
the rates shown in the table. Only those tabular columns which call for
information applicable to DHC or the named individuals have been included in
such table.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
---------------------------------------------- ----------------------
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL
OPTIONS/ OPTIONS/SARS
SARS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ----------- ---------- ---------- -----------
Martin J. Whitman....... -0-
C. Kirk Rhein, Jr....... -0-
James P. Heffernan...... -0-
Lisa D. Levey........... 15,000 0.94 $6.6875 10/31/97* 9,185 18,768
- --------
* In connection with the termination of her employment, the expiration date of
the options granted to Ms. Levey, which would otherwise have terminated
three months after the date of termination, was extended to October 31,
1997.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table presents certain information relating to the value of
unexercised stock options as of the end of 1996, on an aggregated basis, owned
by the named executive officers of DHC as of the last day of the fiscal year.
None of such officers who owned options to purchase Common Stock during 1996
exercised any of such options during 1996. Only those tabular columns which
call for information applicable to DHC or the named individuals have been
included in such table.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
END AT FISCAL YEAR-END
(#) ($)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Martin J. Whitman........... 210,000 -0- $420,000 -0-
C. Kirk Rhein, Jr........... 210,000 -0- $420,000 -0-
James P. Heffernan.......... 210,000 -0- $420,000 -0-
Lisa D. Levey............... 15,000 -0- -0- -0-
19
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, none of the persons who served as members of the Compensation
Committee of DHC's Board of Directors also was, during that year or
previously, an officer or employee of DHC or any of its subsidiaries or had
any other relationship requiring disclosure herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock as
of March 13, 1997 of (a) each Director, (b) each executive officer, and (c)
each person known by DHC to own beneficially more than five percent of the
outstanding shares of Common Stock. DHC believes that, except as otherwise
stated, the beneficial holders listed below have sole voting and investment
power regarding the shares reflected as being beneficially owned by them.
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)
-------------------- --------------------
PRINCIPAL STOCKHOLDERS
Commissioner of Insurance
of the State of
California
c/o Geoffrey A. 1,803,235/2/,/3/ 11.7
Nicholls.................
Deputy Trustee
Mission Insurance
Companies' Trusts
3333 Wilshire Boulevard--
3rd Floor
Los Angeles, CA 90010
Martin J. Whitman......... 2,321,024/2/,/4/,/5/,/6/ 14.9
c/o Danielson Holding
Corporation
767 Third Avenue
New York, NY 10017-2023
James P. Heffernan........ 1,372,980/2/,/5/,/6/ 8.8
c/o WHR Management
Company, L.P.
2 Park Place
Bronxville, NY 10708
Whitman Heffernan & Rhein 1,054,996/2/ 6.9
Workout Fund, L.P. ......
c/o WHR Management
Company, L.P.
2 Park Place
Bronxville, NY 10708
Third Avenue Value Fund, 803,669/2/ 5.2
Inc. ....................
767 Third Avenue
New York, NY 10017-2023
OFFICERS AND DIRECTORS
Martin J. Whitman......... 2,321,024/2/,/4/,/5/,/6/ 14.9
David M. Barse............ 17,582/7/ *
Joseph F. Porrino......... 56,666/8/ *
Frank B. Ryan............. 48,666/8/ *
Eugene M. Isenberg........ 69,924/9/ *
Wallace O. Sellers........ 36,666/1//0/ *
Anthony G. Petrello....... 0/1//1/ *
Stanley J. Garstka........ 11,008/1//1/ *
Timothy C. Collins........ 0/1//1/ *
Michael T. Carney......... 17,582/7/ *
Ian M. Kirschner.......... 4,000/1//2/ *
All Officers and Directors
as a Group (11 persons).. 2,583,118/1//3/ 16.3
20
- --------
* Percentage of shares beneficially owned does not exceed one percent of the
outstanding Common Stock.
1 Share percentage ownership is rounded to nearest tenth of one percent and
reflects the effect of dilution as a result of outstanding options to the
extent such options are, or within 60 days will become, exercisable. As of
March 13, 1997 (the date as of which this table was prepared), there were
exercisable options outstanding to purchase 1,257,084 shares of Common
Stock. Shares underlying any option which was exercisable on March 13,
1996 or becomes exercisable within the next 60 days are deemed outstanding
only for purposes of computing the share ownership and share ownership
percentage of the holder of such option.
2 In accordance with provisions of DHC's Certificate of Incorporation, all
certificates representing shares of Common Stock beneficially owned by
holders of five percent or more of Common Stock are owned of record by
DHC, as escrow agent, and are physically held by DHC in that capacity.
3 Beneficially owned by the Commissioner of Insurance of the State of
California in his capacity as trustee for the benefit of holders of
certain deficiency claims against certain trusts which assumed liabilities
of certain present and former insurance subsidiaries of DHC.
4 Includes 803,669 shares beneficially owned by Third Avenue Value Fund,
Inc. ("TAVF"), an investment company registered under the Investment
Company Act of 1940; 104,481 shares beneficially owned by Martin J.
Whitman & Co., Inc. ("MJW&Co"), a private investment company; and 72,641
shares beneficially owned by Mr. Whitman's wife and three adult family
members. Mr. Whitman controls the investment adviser of TAVF, and may be
deemed to own beneficially a five percent equity interest in TAVF. Mr.
Whitman is the principal stockholder in MJW&Co, and may be deemed to own
beneficially the shares owned by MJW&Co. Mr. Whitman disclaims beneficial
ownership of the shares of Common Stock owned by TAVF, MJW&Co, and Mr.
Whitman's family members.
5 Includes 1,054,996 shares of Common Stock beneficially owned by Whitman
Heffernan & Rhein Workout Fund, L.P. ("WHR Fund"), an investment limited
partnership. Each of Messrs. Whitman and Heffernan is a general partner of
the partnership that is the general partner of WHR Fund. Each disclaims
beneficial ownership of the shares owned by the WHR Fund.
6 Includes shares underlying currently exercisable options to purchase an
aggregate of 210,000 shares of Common Stock at an exercise price of $3.00
per share.
7 Includes shares underlying options to purchase an aggregate of 17,582
shares of Common Stock at an exercise price of $5.6875 per share, which
become exercisable within the next 60 days. Does not include shares
underlying options to purchase an aggregate of 32,418 shares of Common
Stock at an exercise price of $5.6875 per share which are not currently
exercisable nor become exercisable within the next 60 days.
8 Includes shares underlying currently exercisable options to purchase an
aggregate of 46,667 shares of Common Stock at an exercise price of $3.63
per share.
9 Includes 20,088 shares owned by Mentor Partnership, a partnership
controlled by Mr. Isenberg, and 28 shares owned by Mr. Isenberg's wife.
Also includes shares underlying currently exercisable options to purchase
an aggregate of 46,666 shares of Common Stock at an exercise price of
$3.63 per share.
10 Includes shares underlying options to purchase an aggregate of 26,666
shares of Common Stock at an exercise price of $7.00 per share, which
become exercisable within the next 60 days. Does not include shares
underlying options to purchase an aggregate of 13,334 shares of Common
Stock at an exercise price of $7.00 per share which are not currently
exercisable nor become exercisable within the next 60 days.
11 Does not include shares underlying options to purchase an aggregate of
40,000 shares of Common Stock at an exercise price of $5.50 per share
which are not currently exercisable nor become exercisable within the next
60 days.
12 Includes shares underlying options to purchase an aggregate of 2,500
shares of Common Stock at an exercise price of $5.6875 per share, which
become exercisable within the next 60 days. Does not include shares
underlying options to purchase an aggregate of 2,500 shares of Common
Stock at an exercise price of $5.6875 per share which are not currently
exercisable nor become exercisable within the next 60 days.
13 In calculating the percentage of shares owned by officers and Directors as
a group, the shares of Common Stock underlying all options which are
beneficially owned by officers and Directors and which are currently
exercisable or become exercisable within the next 60 days are deemed
outstanding.
21
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In recognition of the death of C. Kirk Rhein, Jr., while serving as
President and Chief Executive Officer of DHC, DHC intends to pay to Mr.
Rhein's widow, as a death benefit, Mr. Rhein's 1996 base salary through July
31, 1999.
In recognition of the death of William R. Story, a former Director of DHC
and the former President and Chief Executive Officer of NAICC while serving as
such, NAICC paid to Mr. Story's widow, as a death benefit, Mr. Story's base
salary through December 31, 1996 and intends to pay to her $200,000 in each of
1997 and 1998. NAICC has also transferred to Mr. Story's widow ownership of a
1995 Lexus automobile which was owned by NAICC and had been used by Mr. Story
as an officer of NAICC.
Effective as of July, 29, 1996, DHC entered into an Employment Agreement
with James P. Heffernan, then the Chief Financial Officer of the Company,
which provides for DHC's continued employment of Mr. Heffernan through July
31, 1999. Mr. Heffernan will have the duties and responsibilities assigned to
him by, and will report directly to, the Chief Executive Officer of DHC. Mr.
Heffernan will receive a salary of $200,000 per year through the term of such
agreement and is entitled to participate in all DHC employee benefit plans and
programs.
Lisa D. Levey resigned as an officer of DHC effective August 1, 1996. In
connection with Ms. Levey's resignation, DHC entered into a Severance
Agreement with Ms. Levey which provides that during the period through July
31, 1997, Ms. Levey will receive her 1996 annual base salary and will
participate, at DHC's expense, in DHC's employee benefit plans.
DHC shares certain personnel and facilities with several affiliated and
unaffiliated companies (including M.J. Whitman, Inc., a broker-dealer of which
Mr. Whitman is the Chairman and Chief Executive Officer and Mr. Barse is the
President and Chief Operating Officer), and certain expenses are allocated
among the various entities. Personnel costs are allocated based upon actual
time spent on DHC's business or upon fixed percentages of compensation. Costs
relating to office space and equipment are allocated based upon fixed
percentages. Inter-company balances are reconciled and reimbursed on a monthly
basis.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
(1) Financial Statements--see Index to Consolidated Financial Statements
and Financial Statement Schedules appearing on Page F-1.
(2) Financial Statement Schedules--see Index to Consolidated Financial
Statements and Financial Statement Schedules appearing on Page F-1.
(3) Exhibits:
EXHIBIT NO. (1) NAME OF EXHIBIT
--------------- ---------------
Organizational Documents:
3.1* Certificate of Incorporation of Registrant.
3.2* Bylaws of Registrant.
- --------
(1) Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
22
EXHIBIT NO. (1) NAME OF EXHIBIT
--------------- ---------------
Material Contracts--Miscellaneous:
10.1* Stock Sale Agreement dated as of January 27, 1993 between
Nationwide Capital Corporation and Danielson Holding
Corporation. (Filed with Report on Form 10-K dated March 26,
1993, Exhibit 10.16.)
10.2* Deposit Escrow Agreement dated as of January 19, 1993 among
Nationwide Capital Corporation, Danielson Holding Corporation
and Mission Valley Escrow. (Filed with Report on Form 10-K
dated March 26, 1993, Exhibit 10.17.)
10.3* Guarantee Agreement dated as of March 26, 1993 between
Resolution Trust Corporation, in its capacity as conservator
of HomeFed Bank, and Danielson Holding Corporation. (Filed
with Report on Form 10-K dated March 26, 1993, Exhibit
10.18.)
10.4* Guarantee Agreement dated as of March 26, 1993 between
Resolution Trust Corporation, in its corporate capacity, and
Danielson Holding Corporation. (Filed with Report on Form 10-
K dated March 26, 1993, Exhibit 10.19.)
10.5* Asset Purchase Agreement dated as of December 31, 1993 by and
among Grossmont Bank, Donald A. Levi, Murray R. Steeg and
Danielson Trust Company. (Filed with Report on Form 10-K
dated March 18, 1994, Exhibit 10.20.)
10.6* Amendment No. 1 dated as of February 16, 1994 to Asset
Purchase Agreement dated as of December 31, 1993 by and among
Grossmont Bank, Donald A. Levi, Murray R. Steeg and Danielson
Trust Company. (Filed with Report on Form 10-K dated March
18, 1994, Exhibit 10.21.)
10.7* Amendment No. 2 dated as of February 17, 1994 to Asset
Purchase Agreement dated as of December 31, 1993 by and among
Grossmont Bank, Donald A. Levi, Murray R. Steeg and Danielson
Trust Company. (Filed with Report on Form 10-K dated March
18, 1994, Exhibit 10.22.)
10.8* Consulting Services Agreement dated as of February 22, 1994
between Danielson Trust Company and Tenney-Levi Corporation.
(Filed with Report on Form 10-K dated March 18, 1994, Exhibit
10.23.)
10.9* Consulting Services Agreement dated as of February 22, 1994
between Danielson Trust Company and Murray R. Steeg. (Filed
with Report on Form 10-K dated March 18, 1994, Exhibit
10.24.)
10.10* Agreement dated as of February 22, 1994 between Grossmont Bank
and Danielson Trust Company. (Filed with Report on Form 10-K
dated March 18, 1994, Exhibit 10.25.)
10.11* Stock Sale Agreement dated October 10, 1996 between Danielson
Holding Corporation and North American Trust Company. (Filed
with Report on Form 8-K dated December 31, 1996, Exhibit
10.1.)
10.12* Assignment and Assumption Agreement dated December 31, 1996 by
and between North American Trust Company, North American
Fiduciary Services, Inc. and Danielson Holding Corporation.
(Filed with Report on Form 8-K dated December 31, 1996,
Exhibit 10.2.)
10.13* Merger Agreement dated December 31, 1996 by and among North
American Trust Company, North American Fiduciary Services,
Inc., Danielson Trust Company and Danielson Holding
Corporation. (Filed with Report on Form 8-K dated December
31, 1996, Exhibit 10.3.)
Material Contracts--Executive Compensation Plans and
Arrangements:
10.14* 1990 Stock Option Plan. (Filed with Report on Form 8-K dated
September 4, 1990, Exhibit 10.8.)
10.15* 1995 Stock and Incentive Plan. (Included as Exhibit A to Proxy
Statement filed on March 30, 1995.)
- --------
(1) Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
23
EXHIBIT NO. (1) NAME OF EXHIBIT
--------------- ---------------
Annual Report to Security-Holders:
13.1 1996 Annual Report of Danielson Holding Corporation. (To be
included herewith.)
Subsidiaries:
21 Subsidiaries of Danielson Holding Corporation. (Filed
herewith.)
27 Financial Data Schedule (Filed herewith.)
- --------
(1) Exhibit numbers are referenced to Item 601 of Regulation S-K under the
Securities Exchange Act of 1934.
* Asterisk indicates an exhibit previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
(b) During the quarter ended December 31, 1996 for which this Report is
filed, DHC filed one report on Form 8-K dated December 31, 1996 with respect
to the consummation of the sale of Danielson Trust Company.
24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, DANIELSON HOLDING CORPORATION HAS DULY CAUSED THIS
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
Danielson Holding Corporation
(Registrant)
By: /s/ Martin J. Whitman
---------------------------------
Martin J. Whitman
Chairman and Chief Executive Officer
Date: March 27, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF DANIELSON HOLDING
CORPORATION AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Date: March 27, 1997
By: /s/ Martin J. Whitman
---------------------------------
Martin J. Whitman
Chairman of the Board and Chief
Executive Officer and a Director
Date: March 27, 1997
By: /s/ David M. Barse
---------------------------------
David M. Barse
President and Chief Operating
Officer
and a Director
Date: March 27, 1997
By: /s/ Michael T. Carney
---------------------------------
Michael T. Carney
Chief Financial Officer
Date: March 27, 1997
By: /s/ Joseph F. Porrino
---------------------------------
Joseph F. Porrino
Director
Date: March 27, 1997
By: /s/ Frank B. Ryan
---------------------------------
Frank B. Ryan
Director
Date: March 27, 1997
By: /s/ Eugene M. Isenberg
---------------------------------
Eugene M. Isenberg
Director
25
Date: March 27, 1997
By: /s/ Wallace O. Sellers
---------------------------------
Wallace O. Sellers
Director
Date: March 27, 1997
By: /s/ Anthony G. Petrello
---------------------------------
Anthony G. Petrello
Director
Date: March 27, 1997
By: /s/ Stanley J. Garstka
---------------------------------
Stanley J. Garstka
Director
Date: March 27, 1997
By: /s/ Timothy C. Collins
---------------------------------
Timothy C. Collins
Director
26
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, 1996,
1995 and 1994................................................... *
Balance Sheets--December 31, 1996 and 1995....................... *
Statements of Stockholders Equity--For the years ended December
31, 1996, 1995 and 1994......................................... *
Statements of Cash Flows--For the years ended December 31, 1996,
1995 and 1994................................................... *
Schedule I--Summary of Investments--Other than Investments in
Related Parties................................................. S-1
Schedule II--Condensed Financial Information of the Registrant... S-2-4
Schedule IV--Reinsurance......................................... S-5
Schedule V--Valuation and Qualifying Accounts.................... S-6
Schedule III and VI--Supplemental Information Concerning
Property--Casualty Insurance Operations......................... S-7
Schedules other than those listed above are omitted because either they are
not applicable or not required or the information required is included in the
Company's Consolidated Financial Statements.
- --------
* Incorporated by reference to DHC's 1996 Annual Report to Stockholders.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Danielson Holding Corporation:
Under date of February 28, 1997, we reported on the consolidated balance
sheets of Danielson Holding Corporation and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, as contained in the 1996 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As described in Note 5 of the Notes to Consolidated Financial Statements, in
1995 the Company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
/s/ KPMG Peat Marwick LLP
New York, New York
February 28, 1997
F-2
SCHEDULE I
DANIELSON HOLDING CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN THOUSANDS)
DECEMBER 31, 1996
-------------------------------------------
COST OR FAIR AMOUNT REFLECTED ON
AMORTIZED COST VALUE BALANCE SHEET
-------------- -------- -------------------
Fixed maturities classified as
available-for-sale:
U.S. Government/Agency.......... $ 50,381 $ 51,003 $ 51,003
Mortgage-backed................. 54,691 53,877 53,877
Corporate....................... 38,352 38,450 38,450
-------- -------- --------
Total fixed maturities........ 143,424 143,330 143,330
-------- -------- --------
Equity securities:
Common stocks................... 257 2,697 2,697
-------- -------- --------
Total equity securities....... 257 2,697 2,697
-------- -------- --------
Short term investments............ 5,528 5,528 5,528
-------- -------- --------
Total investments........... $149,209 $151,555 $151,555
======== ======== ========
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,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Revenues:
Net investment income.................... $ 534 $ 675 $ 435
Net realized investment losses........... (1) (2) --
Other income............................. -- 26 12
---------- ---------- ----------
Total revenues......................... 533 699 447
---------- ---------- ----------
Expenses:
Employee compensation and benefits....... 1,201 1,442 1,118
Professional fees........................ 288 221 751
Expenses in connection with terminated
proposed acquisition.................... 1,849 -- --
Nonrecurring compensation................ 820 -- --
Other general and administrative fees.... 684 657 697
---------- ---------- ----------
Total expenses......................... 4,842 2,320 2,566
---------- ---------- ----------
Loss before provision for income taxes..... (4,309) (1,621) (2,119)
Income tax provision....................... 3 36 40
---------- ---------- ----------
Loss before equity in net income of
subsidiaries.............................. (4,312) (1,657) (2,159)
Equity in net income (loss) of
subsidiaries.............................. (3,807) 3,973 5,304
---------- ---------- ----------
Income (loss) before extraordinary item.... (8,119) 2,316 3,145
Extraordinary item....................... -- -- 750
---------- ---------- ----------
Net income (loss).......................... $ (8,119) $ 2,316 $ 3,895
========== ========== ==========
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,
----------------
1996 1995
------- -------
ASSETS:
Cash....................................................... $ 75 $ 18
Fixed maturities:
Available-for-sale at fair value (Cost: $7,026 and
$10,487)................................................ 7,025 10,530
Short term investments, at cost which approximates fair
value..................................................... 3,000 466
------- -------
TOTAL CASH AND INVESTMENTS............................... 10,100 11,014
Investment in subsidiaries................................. 49,167 58,289
Accrued investment income.................................. 131 175
Other assets............................................... 240 626
------- -------
TOTAL ASSETS............................................. $59,638 $70,104
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Other liabilities.......................................... $ 785 $ 283
------- -------
TOTAL LIABILITIES........................................ 785 283
------- -------
Preferred Stock ($0.10 par value; authorized 10,000,000
shares; none issued and outstanding)...................... -- --
Common Stock ($0.10 par value; authorized 20,000,000
shares; issued 15,370,894 shares and 15,370,894 shares;
outstanding 15,360,255 shares and 15,360,270 shares)...... 1,537 1,537
Additional paid-in capital................................. 46,131 46,131
Net unrealized gain (loss) on available-for-sale
securities................................................ 2,346 5,195
Retained earnings.......................................... 8,905 17,024
Treasury stock (Cost of 10,639 shares and 10,624 shares)... (66) (66)
------- -------
TOTAL STOCKHOLDERS' EQUITY............................... 58,853 69,821
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... $59,638 $70,104
======= =======
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,
----------------------------------
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ (8,119) $ 2,316 $ 3,895
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized investment losses........... 1 2 --
Depreciation and amortization............ (60) 86 125
Equity in net (income) loss of
subsidiaries............................ 3,807 (3,973) (5,304)
Increase (decrease) in accrued expenses.. 502 (47) 56
Other, net............................... 9 (79) 209
---------- ---------- ----------
Net cash used in operating activities.. (3,860) (1,695) (1,019)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased:
Fixed income maturities available-for-
sale.................................... (10,584) (10,787) (12,933)
Fixed income maturities held-to-
maturity................................ -- -- --
Proceeds from sales:
Fixed income maturities available-for-
sale.................................... 5,542 1,837 7,026
Investments, matured or called
Fixed income maturities available-for-
sale.................................... 8,585 11,210 --
Fixed income maturities held-to-
maturity................................ -- -- 8,430
Acquisition of Western Trust Services.... -- -- (2,505)
Net proceeds from sale of Danielson Trust
Company................................. 2,968 -- --
Change in accrued investment income...... 45 1 (127)
---------- ---------- ----------
Net cash provided by (used in)
investing activities.................. 6,556 2,261 (109)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options to
purchase Common Stock................... -- -- 774
Retirement of stock options.............. -- (286) --
Purchase of treasury stock............... -- -- (56)
Change in receivable from subsidiary..... 353 (12) (344)
Additional capital contributed to
subsidiaries............................ (458) -- --
Return of capital from subsidiaries...... -- -- (2)
---------- ---------- ----------
Net cash provided by (used in)
financing activities.................. (105) (298) 372
---------- ---------- ----------
Net increase (decrease) in cash and short
term investments.......................... 2,591 268 (756)
Cash and short term investments at
beginning of year......................... 484 216 972
---------- ---------- ----------
Cash and short term investments at end of
year...................................... $ 3,075 $ 484 $ 216
========== ========== ==========
S-4
SCHEDULE IV
DANIELSON HOLDING CORPORATION
REINSURANCE
(IN THOUSANDS)
CEDED EARNED ASSUMED EARNED PERCENTAGE
GROSS EARNED TO OTHER FROM OTHER NET EARNED OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
------------ ------------ -------------- ---------- --------------
YEAR ENDED DECEMBER 31,
1996:
Property and liability
insurance premiums..... $ 52,066 $15,441 $-- $36,625 --
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YEAR ENDED DECEMBER 31,
1995:
Property and liability
insurance premiums..... $ 76,688 $16,140 $-- $60,548 --
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YEAR ENDED DECEMBER 31,
1994:
Property and liability
insurance premiums..... $106,552 $13,261 $-- $93,291 --
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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
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Allowance for premiums
and fees receivable.... $153 $ 66 $ 43 $ 32 $230
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Allowance for
uncollectable
reinsurance on paid
losses................. $388 $-- $-- $ 72 $316
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Allowance for
uncollectable
reinsurance on unpaid
losses................. $425 $-- $-- $-- $425
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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 POLICYCLAIMS
WITH ACQUISITION CLAIMS AND CLAIM RESERVES FOR UNEARNED AND BENEFITS NET EARNED INVESTMENT
REGISTRANT COSTS ADJUSTMENT EXPENSES UNPAID CLAIMS PREMIUMS PAYABLE PREMIUMS INCOME
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Consolidated
Property-Casualty
Entities:
As of and for the year
ended 12/31/96......... $ 957 $120,651 $-- $ 8,294 -- $36,625 $10,121
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As of and for the year
ended 12/31/95......... $1,045 $137,406 $-- $ 8,563 -- $60,548 $12,351
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As of and for the year
ended 12/31/94......... $2,204 $146,330 $-- $14,328 -- $93,291 $11,287
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CLAIMS AND CLAIM
ADJUSTMENT EXPENSES
AFFILIATION INCURRED RELATED TO AMORTIZATION OTHER PAID CLAIMS
WITH ------------------------ OF DEFERRED OPERATING AND CLAIM NET WRITTEN
REGISTRANT CURRENT YEAR PRIOR YEARS ACQUISITION COSTS EXPENSES ADJUSTMENT EXPENSES PREMIUMS
----------- ------------ ----------- ----------------- --------- ------------------- -----------
Consolidated
Property-Casualty
Entities:
As of and for the year
ended 12/31/96......... $26,979 $10,120 $ 6,239 $3,668 $56,691 $36,136
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As of and for the year
ended 12/31/95......... $45,592 $ 3,123 $ 9,089 $4,302 $61,046 $55,295
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As of and for the year
ended 12/31/94......... $67,131 $ 384 $13,724 $4,953 $58,113 $91,069
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S-7