DANIELSON HOLDING CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 27, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________.

Commission file number 1-6732
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DANIELSON HOLDING CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 95-6021257
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)

1701 EAST MARKET STREET
JEFFERSONVILLE, INDIANA 47130
(Address of Principal Executive Offices) (Zip Code)

(812) 288-0100
(Registrant's Telephone Number, Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

State the aggregate market value of the voting and non-voting common equity
held by nonaffiliates of the registrant computed by reference to the price at
which the common equity was last sold, or the average bid and asked prices of
such common equity, as of the last business day of the registrant's most
recently completed second fiscal quarter. $104,987,132

OUTSTANDING STOCK (ALL CLASSES)

DOCUMENTS INCORPORATED BY REFERENCE
None.
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DANIELSON HOLDING CORPORATION

FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K (the "Report") may
constitute "forward-looking" statements as defined in Section 27A of the
Securities Act of 1933 (the "Securities Act"), Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"), the Private Securities Litigation
Reform Act of 1995 (the "PSLRA") or in releases made by the Securities and
Exchange Commission, all as may be amended from time to time. Such forward
looking statements involve known and unknown risks, uncertainties and other
important factors that could cause the actual results, performance or
achievements of Danielson Holding Corporation ("DHC") and its subsidiaries
(together with DHC, "Danielson"), or industry results, to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Statements that are not historical fact are
forward-looking statements. Forward looking statements can be identified by,
among other things, the use of forward-looking language, such as the words
"plan," "believe," "expect," "anticipate," "intend," "estimate," "project,"
"may," "will," "would," "could," "should," "seeks" or "scheduled to," or other
similar words, or the negative of these terms or other variations of these terms
or comparable language, or by discussion of strategy or intentions. These
cautionary statements are being made pursuant to the Securities Act, the
Exchange Act and the PSLRA with the intention of obtaining the benefits of the
"safe harbor" provisions of such laws.

DHC cautions investors that any forward-looking statements made in this
Report are not guarantees or indicative of future performance. Although DHC
believes that its plans, intentions and expectations reflected in or suggested
by such forward-looking statements are reasonable, actual results could differ
from a projection or assumption in any of our forward-looking statements.
Important assumptions and other important factors that could cause actual
results to differ materially from those forward-looking statements with respect
to the Company include, but are not limited to, the risks and uncertainties
affecting our businesses described in Item 1, Business-Risk Factors, and in
other securities filings by DHC and or by its indirect wholly owned subsidiary,
American Commercial Lines LLC ("ACL"). The forward-looking statements contained
in this Report are made only as of the date hereof and neither DHC nor ACL has
or undertakes any obligation to update or revise any forward-looking statements
whether as a result of new information, subsequent events or otherwise, unless
otherwise required by law.

1

PART I

ITEM 1. BUSINESS

INTRODUCTION

Danielson Holding Corporation ("DHC") is a holding company incorporated in
Delaware, having separate subsidiaries (together with DHC, "Danielson") offering
integrated marine transportation and services ("Marine Services") and insurance
products ("Insurance Services"). DHC engages in the marine transportation and
services business through its indirect subsidiaries, American Commercial Lines,
LLC ("ACL") and related entities. DHC engages in insurance operations through
its indirect subsidiaries, National American Insurance Company of California and
related entities ("NAICC").

As discussed in detail below in Item 1, Business -- The Marine Services
Business -- ACL Bankruptcy Considerations, on January 31, 2003, ACL and certain
of its subsidiaries and its immediate direct parent entity, American Commercial
Lines Holdings LLC ("ACL Holdings"), filed a petition with the U.S. Bankruptcy
Court to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Global
Materials Services LLC ("GMS") and Vessel Leasing LLC ("Vessel Leasing"),
partially owned by ACL, did not file for Chapter 11 protection nor are they
guarantors of ACL's debt. DHC's consolidated financial statements contained
herein include the operations of ACL and its subsidiaries and have been prepared
on a going concern basis, which assumes continuity of operations and realization
of assets and satisfaction of liabilities in the ordinary course of business.
The ability of ACL and the other bankrupt debtors to continue as a going concern
is predicated, among other things, on the confirmation of a reorganization plan,
compliance with the provisions of its debtor in possession financing, the
ability of ACL and the other bankrupt debtors to generate the required cash
flows from operations and, where necessary, obtaining financing sources
sufficient to satisfy future obligations. Substantial doubt exists about ACL's
ability to continue as a going concern. Accordingly, ACL's financial statements
contain an opinion from its independent auditors which contains an explanatory
paragraph for the going concern uncertainty. On a consolidated basis, DHC's 2002
financial statements therefore also contain an opinion from its independent
auditors which contains an explanatory paragraph for ACL's going concern
uncertainty.

Although DHC is not liable for any of ACL's liabilities, ACL's Chapter 11
bankruptcy proceeding presents inherent material uncertainty for DHC as to
whether DHC will have any substantial equity interest in ACL following the
completion of the Chapter 11 proceeding. The ultimate recovery, if any, by ACL's
creditors and by DHC, as the sole indirect equity owner of ACL, will not be
determined until confirmation of a plan or plans of reorganization. No assurance
can be given as to what value will be ascribed in the bankruptcy proceedings to
ACL's creditors and/or to DHC's equity interest in ACL. While it cannot
presently be determined, DHC may receive little or no value with respect to its
equity interest in ACL. DHC's 2002 consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

DHC had cash and investments, including investments in subsidiaries, at the
holding company level of $73.7 million at December 27, 2002. DHC's cash amounted
to $1.3 million, DHC's investments consisted of publicly traded bonds of $5.1
million and an investment in Marine Services companies of $44.0 million,
consisting of a 100% ownership interest in ACLines LLC ("ACLines"), parent
company of ACL Holdings (82.5% owned directly by DHC and 17.5% owned indirectly
through NAICC and related entities), a 5.4% direct and 50% indirect ownership
interest through ACL in GMS, an owner and operator of 26 marine terminal and
warehouse facilities located in the United States and the Netherlands, and a 50%
direct ownership interest and 50% indirect ownership interest through ACL in
Vessel Leasing, an owner of 170 barges that are leased to ACL. DHC also had
$23.3 million in investments in insurance subsidiaries net of NAICC's investment
in ACL. DHC had liabilities at the holding company level of $4.2 million,
consisting primarily of a note payable to NAICC of $4.0 million. See Schedule I
for DHC parent only financial information. As discussed in detail below in Item
1, Business -- Governmental Regulation -- Capital Adequacy and Risk Based
Capital, DHC repaid the $4.0 million to NAICC during February 2003.

2

DHC expects to report, as of the end of its 2002 tax year, aggregate
consolidated net operating tax loss carryforwards for federal income tax
purposes of approximately $605.8 million. These losses will expire over the
course of the next 17 years unless utilized prior thereto. See this Report at
Item 8, Financial Statements, Note 14 of the Notes to Consolidated Financial
Statements (hereinafter referred to as "Notes to Consolidated Financial
Statements").

DHC intends to grow by developing business partnerships and making
strategic acquisitions. As part of DHC's ongoing corporate strategy, DHC has
continued to seek acquisition opportunities which will enable DHC to earn an
attractive return on its investment. Such acquisitions will not necessarily
complement its existing operations, and could be entirely unrelated to DHC's
current businesses.

DESCRIPTION OF BUSINESSES

Set forth below is a description of DHC's business operations as of
December 27, 2002, as presented in the Consolidated Financial Statements
included in this report. DHC is engaged in three primary businesses: the holding
company business, the Marine Services business and the Insurance Services
business. The Marine Services business has three business segments: barging,
construction and terminals. The holding company business and the Insurance
Services business each have one business segment. Each of these three businesses
and business segments are described below.

Additional information about DHC's business segments is included in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 21 of the Notes to Consolidated Financial Statements.

THE HOLDING COMPANY BUSINESS

Nature of Holding Company Operations

DHC is a holding company whose subsidiaries consisted principally of
insurance operations in the western United States, primarily California, prior
to its May 2002 acquisitions. On May 29, 2002, DHC acquired all of the
outstanding equity interests of ACL in connection with a recapitalization of
ACL.

ACL is an integrated marine transportation and service company. ACL
provides barge transportation and ancillary services throughout the inland
United States and Gulf Intracoastal Waterway Systems, which include the
Mississippi, Ohio and Illinois Rivers and their tributaries and the Intracoastal
canals that parallel the Gulf Coast. In addition, ACL is the leading provider of
barge transportation services on the Orinoco River in Venezuela and the
Parana/Paraguay River System serving Argentina, Brazil, Paraguay, Uruguay and
Bolivia. ACL, through its subsidiary Jeffboat LLC ("Jeffboat"), also provides
marine construction and repair services.

GMS is an owner and operator of 26 marine terminal and warehouse facilities
located in the United States and the Netherlands. DHC acquired for approximately
$1.3 million an ownership interest in GMS during 2002 in connection with the ACL
acquisition. GMS' ownership at December 27, 2002 was 5.4% owned by DHC, 50.0%
owned by ACL, and in total 55.4% owned by DHC. The remaining 44.6% is owned by
an unaffiliated third party.

In 2002, GMS, ACL and minority owners organized new companies to unload
bauxite in Venezuela. The "GMSV" companies are Global Materials Services
Venezuela C.A., GMS Venezuela Terminal Partners LLC and GMS Venezuela Terminal
Holdings LLC. DHC, through its ownership of ACL and GMS, has a 57% ownership
interest in GMSV.

Also in 2002 in connection with the ACL acquisition, DHC purchased for
approximately $2.7 million a 50% equity interest in Vessel Leasing, a special
purpose entity that leases barges to ACL's barge transportation operations. DHC
also indirectly owns the other 50% equity interest in Vessel Leasing through
ACL, and, accordingly, Vessel Leasing is consolidated with DHC and with ACL.

DHC holds all of the voting stock of Danielson Indemnity Company ("DIND").
DIND owns 100 percent of the common stock of National American Insurance Company
of California, Danielson's

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principal operating insurance subsidiary, which owns 100 percent of the common
stock of Valor Insurance Company, Incorporated ("Valor"), Danielson Insurance
Company and Danielson National Insurance Company (DIND, National American
Insurance Company of California and its subsidiaries being collectively referred
to hereinafter as "NAICC").

NAICC writes non-standard private passenger and commercial automobile
insurance, primarily in California. NAICC writes approximately 77% of its
insurance in California and 12% of its business in Montana. For the years ended
December 2002, 2001 and 2000, 45%, 16% and 28%, respectively, of total personal
lines direct written premiums were produced through two general agents of NAICC.
Prior to 2001, NAICC also underwrote workers compensation insurance, but has
subsequently exited the workers' compensation business in all states.

Tax Loss Carryforward

At the close of 2002, DHC had a consolidated net operating loss
carryforward of approximately $605.8 million for federal income tax purposes.
This estimate is based upon federal consolidated income tax losses for the
periods through December 31, 2001 and an estimate of the 2002 taxable results.
Some or all of the carryforward may be available to offset, for federal income
tax purposes, the future taxable income, if any, of DHC, its wholly owned
subsidiaries and the Mission trusts described in more detail in Note 14 of the
Notes to Consolidated Financial Statements. The Internal Revenue Service ("IRS")
has not audited any of DHC's tax returns for any of the years during the
carryforward period including those returns for the years in which the losses
giving rise to the net operating loss carryforward were reported. The net
operating loss carryforward is currently fully reserved, for valuation purposes,
on DHC's financial statements.

DHC's net operating loss carryforwards will expire, if not used, in the
following approximate amounts in the following years (dollars in thousands):

DHC's ability to utilize its net operating 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. DHC will be treated
as having had an "ownership change" if there is more than a 50% increase in
stock ownership during a three year "testing period" by "5% stockholders". For
this purpose, stock ownership is measured by value, and does not include
so-called "straight preferred" stock. In an effort to reduce the risk of an
ownership change, DHC has imposed restrictions on the ability of holders of five
percent or more of the DHC common stock, par value $.10 per share (the "Common
Stock"), as well as the ability of others to become five percent stockholders as
a result of transfers of Common Stock. The transfer restrictions were
implemented in 1990, and DHC expects that they will remain in force as long as
the net operating loss carryforwards are available to DHC. 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 convert into Common Stock) might result in an ownership change under the
Internal Revenue Code.

4

THE MARINE SERVICES BUSINESS

Nature of Marine Services Operations

ACL is an integrated marine transportation and service company, providing
barge transportation and ancillary services. The principal cargoes carried are
steel and other bulk commodities, grain, coal and liquids including a variety of
chemicals, petroleum and edible oils. ACL supports its barging operations by
providing towboat and barge design and construction, and terminal services. ACL,
through its domestic barging subsidiary American Commercial Barge Line LLC
("ACBL"), is the leading provider of river barge transportation throughout the
inland United States and Gulf Intracoastal Waterway Systems, which include the
Mississippi, Illinois, Ohio, Tennessee and the Missouri Rivers and their
tributaries and the Intracoastal Canals that parallel the Gulf Coast
(collectively, the "Inland Waterways"). In addition, since expanding its barge
transportation operations to South America in 1993, ACL has become the leading
provider of barge transportation services on the Orinoco River in Venezuela and
the Parana/Paraguay River system serving Argentina, Brazil, Paraguay, Uruguay
and Bolivia.

ACL's position as a leader in South American barging was expanded on
October 24, 2000, when an ACL 80% owned subsidiary, ACBL Hidrovias, Ltd.
("ACBLH") entered into an agreement with UP River Holdings Ltd. ("Ultrapetrol")
to combine the inland river barge transportation divisions of Ultrapetrol and
ACBLH. UABL operates on the Parana/Paraguay River system in South America. ACBLH
has a 50% ownership interest in the joint venture company, UABL Limited
("UABL"). UABL operates 19 towboats and a combined fleet of 369 dry cargo and
tank barges. UABL serves commodity shippers in Argentina, Bolivia, Brazil,
Paraguay and Uruguay.

At year end, ACBL's combined barge fleet was the largest in the United
States, consisting of 3,551 covered and 609 open barges, used for the
transportation of dry cargo, and 421 tank barges used for transportation of
liquid cargo. ACBL's barge fleet is supported by the largest towboat fleet in
the United States, consisting of 187 towboats at year end. ACBL has a strong and
diverse customer base consisting of several of the leading industrial and
agricultural companies in the United States.

ACBL has numerous long-standing customer relationships, with 20 of its top
25 customers having been customers of ACBL for over 20 years. In many cases,
these relationships have resulted in multi-year contracts. Certain long-term
contracts provide for minimum tonnage or requirements guarantees, which allow
ACBL to plan its logistics more effectively. Historically, a majority of ACBL's
contracts for non-grain cargoes are at a fixed price, increasing the stability
and predictability of operating revenue.

ACL, through its Jeffboat subsidiary, designs and manufactures towboats and
barges for ACBL, other ACL subsidiaries and third-party customers. Through its
American Commercial Terminals LLC ("ACT") subsidiary, which operates two river
terminal sites along the Inland Waterways, ACL supports its barging operations
with transfer and warehousing capabilities for coal and liquid commodity
products moving between barge, truck and rail.

Other terminal locations are owned or operated by GMS, a joint venture
between ACT, DHC and Mid-South Terminal Company, L.P., an unaffiliated third
party. Through its Louisiana Dock Company LLC ("LDC") subsidiary, ACL maintains
facilities throughout the Inland Waterways that provide fleeting, shifting,
cleaning and repair services for both towboats and barges, primarily to ACL but
also to third-party customers.

In recent years, ACL also has become the leading provider of river barge
transportation in South America. ACL conducts its international operations
mainly through American Commercial Lines International LLC and its foreign
subsidiaries, ACBL de Venezuela, C.A., ACBL Dominicana SA and ACBL Hidrovias,
Ltd. (collectively, "ACL International"), and through its investment in UABL.
ACL International's fleet consisted at year end of six covered and 113 open
hopper barges, three tank barges, seven deck barges and six towboats. Through
UABL, ACL International participates in the operation of an additional 318
covered hoppers, 15 open hopper barges, 36 tank barges and 19 boats. ACL
International entered the South American market in 1993 by establishing
operations to serve a new customer's shipping needs along the Orinoco River in
Venezuela. Since then, the focus of ACL International's strategy has been to
serve

5

customers that require reliable, low-cost marine transportation abroad. ACL
International works closely with current and potential customers to establish
mutually beneficial long-term contracts to serve these needs. By following this
strategy, ACL International has become the leading provider of barge
transportation on the Orinoco River in Venezuela and, through UABL, the leading
provider of barge transportation on the Parana/ Paraguay River system serving
Argentina, Brazil, Paraguay, Uruguay and Bolivia. Through formation of the ACBL
Dominicana SA subsidiary in 2001, ACL International also began operations on the
Higuamo River in the Dominican Republic. Because demand for transportation in
South America is expected to grow and there are several consolidation
opportunities in the South American market, ACL International has the
opportunity to broaden the scope of its operations over the long term.

ACL History; DHC Acquisition and Recapitalization of ACL

ACL is a Delaware limited liability company formed in April 1998 in
connection with the conversion by merger of its predecessor American Commercial
Lines, Inc. ("ACL Inc."), a Delaware corporation, into a limited liability
company. ACL Inc. was formed in 1953 as the holding company for a family of
barge transportation and marine service companies with an operating history
beginning in 1915.

In 1998, ACL was recapitalized by its owners pursuant to a Recapitalization
Agreement, dated April 17, 1998, among CSX Corporation ("CSX"), Vectura Group
Inc., a Delaware corporation now Vectura Group LLC ("Vectura"), a Delaware
limited liability company, ACL's parent American Commercial Lines Holdings LLC
("ACL Holdings"), a Delaware limited liability company, ACL and National Marine,
Inc., a Delaware corporation now National Marine LLC ("National Marine"), a
Delaware limited liability company, whereby ACL Holdings completed a
recapitalization in a series of transactions (the "Recapitalization") and
combined the barging operations of Vectura, National Marine and their
subsidiaries with that of ACL. ACL Holdings is an indirect wholly owned
subsidiary of DHC.

To finance the Recapitalization, ACL incurred secured debt under a Credit
Agreement, dated June 30, 1998, with certain lenders and J.P. Morgan Chase Bank
(formerly, The Chase Manhattan Bank), as administrative agent (the "Old Senior
Credit Facilities"), consisting of a $200.0 million Tranche B Term Loan due
June, 2006, a $235.0 million Tranche C Term Loan due June, 2007 (collectively
the "Old Term Loans") and a revolving credit facility providing for revolving
loans and the issuance of letters of credit for the account of ACL in an
aggregate principal amount of up to $100.0 million due June, 2005 (the "Old
Revolving Credit Facility"). ACL also issued $300.0 million of unsecured 10 1/4%
Senior Notes due June 2008 (the "Old Senior Notes"), pursuant to an indenture
(the "Old Indenture") with United States Trust Company of New York, as trustee.

Through May 28, 2002, ACL was in default under its bank and bond debt, as
well as its receivables facility, due to nonpayment of interest on the debt as
well as other covenant violations. On December 31, 2001, and subsequent thereto,
ACL elected not to pay the interest due on its bank and bond debt due to ongoing
negotiations with its bankers and noteholders regarding the restructuring of the
debt. ACL obtained forbearance agreements or waivers which enabled it to
complete the Danielson Recapitalization and the debt restructuring described
below in Notes 1, 2 and 4 of the Notes to Consolidated Financial Statements.

On March 15, 2002, Danielson entered into a definitive recapitalization
agreement regarding the acquisition and recapitalization of ACL (the "Danielson
Recapitalization") by Danielson. On April 15, 2002, ACL launched an exchange
offer pursuant to which ACL offered to exchange the Old Senior Notes for a new
series of 11.25% senior notes due January 1, 2008 (the "Senior Notes") and a new
class of 12% pay-in-kind senior subordinated notes due July 1, 2008 (the "PIK
Notes").

On April 11, 2002, ACL and certain lenders executed an amendment agreement
under which the Old Senior Credit Facilities would be amended and restated
("Senior Credit Facilities") upon the satisfaction of certain conditions set
forth in the amendment agreement, including the consummation of the Danielson
Recapitalization.

Effective May 29, 2002, the Danielson Recapitalization was consummated with
$58.5 million of the Old Senior Notes and interest thereon, if any, contributed
by Danielson to ACL Holdings; $230 million, plus accrued interest, of the
remaining $236.5 million in Old Senior Notes exchanged for new Senior Notes, and

6

new PIK Notes and the Old Senior Credit Facilities amended. As part of the
Danielson Recapitalization, DHC contributed $25.0 million in cash to ACL
Holdings, which was immediately used to reduce the outstanding Old Term Loans
under the Old Senior Credit Facilities. In addition, $50.0 million of the amount
outstanding under the Old Revolving Credit Facility was converted into a new
term loan (the "Tranche A Term Loan").

Upon completion of the Danielson Restructuring, ACL became an indirect
wholly owned subsidiary of DHC. At that same time, SZ Investments, LLC ("SZI")
increased its equity ownership in DHC to approximately 18%. Samuel Zell, DHC's
President, Chief Executive Officer and Chairman of DHC's Board of Directors, and
Philip G. Tinkler, DHC's Chief Financial Officer, are affiliated with SZI and HY
I Investments, LLC ("HYI"). HYI is a holder of approximately 42% of ACL's Senior
Notes and PIK Notes. William Pate, a member of DHC's Board of DHC, is also an
officer of SZI.

As of May 29, 2002, after the $25.0 million reduction in outstanding Old
Term Loans, and after the $50.0 million Old Revolving Credit Facility conversion
to a Tranche A Term Loan, ACL's secured debt issued under the amended Senior
Credit Facilities consisted of a $46.6 million Tranche A Term Loan due June 30,
2005, a $134.0 million Tranche B Term Loan due June 30, 2006, a $157.7 million
Tranche C Term Loan due June 30, 2007 (collectively the "Term Loans") and the
amended Revolving Credit Facility providing for revolving loans and the issuance
of letters of credit for the account of ACL in an aggregate principal amount of
up to $50.0 million due June 30, 2005.

ACL Bankruptcy Considerations

During 2002 and the beginning of 2003, ACL experienced a decline in barging
rates, reduced shipping volumes and excess barging capacity during a period of
slow economic growth and a global economic recession. Due to these and other
factors, ACL's revenues and earnings did not meet expectations and ACL's
liquidity was significantly impaired and ACL was unable to comply with its
various debt covenants. As a result, ACL was unable to meet certain of its
financial obligations as they became due. On January 31, 2003 (the "Petition
Date"), ACL filed a petition with the U.S. Bankruptcy Court for the Southern
District of Indiana, New Albany Division (the "Bankruptcy Court") to reorganize
under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code" or "Chapter
11") under case number 03-90305. Included in the filing are ACL, ACL Holdings,
ACBL, Jeffboat, Louisiana Dock Company LLC and ten other U.S. subsidiaries of
ACL (collectively with ACL, the "Debtors") under case numbers 03-90306 through
03-90319. These cases are jointly administered for procedural purposes before
the Bankruptcy Court under case number 03-90305. The Chapter 11 petitions do not
cover any of ACL's foreign subsidiaries or certain of its U.S. subsidiaries, GMS
or Vessel Leasing. DHC did not file for Chapter 11 protection and is not a party
to any proceedings under the Bankruptcy Code.

ACL and the other Debtors will continue to operate their businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court. As debtors-in-possession, the Debtors may not engage in
transactions outside of the ordinary course of business without approval, after
notice and hearing, of the Bankruptcy Court. As part of the Chapter 11 cases,
the Debtors intend to develop and propose for confirmation pursuant to Chapter
11 a plan of reorganization that will restructure the operations and liabilities
of the Debtors to the extent necessary to result in the continuing viability of
ACL. A filing date for such a plan has not been determined, however, ACL has the
exclusive right to submit a plan of reorganization within the first 120 days of
the petition date.

ACL and the other Debtors received approval from the Bankruptcy Court to
pay or otherwise honor certain of their pre-petition obligations, including but
not limited to employee wages and certain employee benefits, certain critical
vendor payments, certain insurance and claim obligations, and certain tax
obligations, as a plan of reorganization is developed.

Furthermore, the Debtors have entered into a Bankruptcy Court approved
debtor-in-possession ("DIP") financing arrangement (which was originally entered
into on January 31, 2003 and which was amended on March 13, 2003, the "DIP
Credit Facility") that provides up to $75 million of financing. As of March 27,

7

2003, participating bank commitments under the DIP Credit Facility total $60
million, of which the Debtors have drawn $50 million, which was used to retire
the Pre-Petition Receivables Facility (as hereinafter defined) and which
continues to be used to fund the Debtors' day-to-day cash needs. The DIP Credit
Facility is secured by the same and additional assets that collateralized the
Senior Credit Facility (as hereinafter defined) and the Pre-Petition Receivables
Facility, and bears interest, at ACL's option, at London InterBank Offered Rates
("LIBOR") plus four percent or an Alternate Base Rate (as defined in the DIP
Credit Facility) plus three percent. There are also certain interest rates
applicable in the event of a default under the DIP Credit Facility.

The DIP Credit Facility also contains certain restrictive covenants that,
among other things, restrict the Debtors' ability to incur additional
indebtedness or guarantee the obligations of others. ACL is also required to
maintain minimum cumulative EBITDA, as defined in the DIP Credit Facility, and
limit its capital expenditures.

As a result of the Chapter 11 filings, certain events of default under the
Senior Credit Facilities, Senior Notes, PIK Notes and Old Senior Notes (all as
hereinafter defined) have occurred subsequent to December 27, 2002, the effects
of which are stayed pursuant to certain provisions of the Bankruptcy Code.

Under Chapter 11, actions by creditors to collect claims in existence at
the filing date ("Pre-Petition Claims") are stayed or deferred absent specific
Bankruptcy Court authorization to pay such Pre-Petition Claims while the Debtors
continue to manage their businesses as debtors-in-possession and act to develop
a plan of reorganization. A claims bar date has not yet been established.

The amount of the claims to be filed against the Debtors by their creditors
could be significantly different than the amount of the liabilities recorded by
the Debtors. The Debtors also have numerous executory contracts and other
agreements that could be assumed or rejected during the Chapter 11 proceedings.
Parties affected by these rejections may file claims with the Bankruptcy Court
in accordance with the Bankruptcy Code, applicable Bankruptcy rules and orders
of the Bankruptcy Court. Under these Chapter 11 proceedings, the rights of and
ultimate payments to pre-petition creditors, rejection damage claimants and DHC
as the sole equity investor in ACL may be substantially altered. This could
result in claims being allowed and/or satisfied in the Chapter 11 proceedings at
less (possibly substantially less) than 100% of their face value, and the ACL
membership interests indirectly owned by DHC being diluted or cancelled. The
Debtors have not yet proposed a plan of reorganization. The Debtors'
pre-petition creditors and DHC will each have a vote in the plan of
reorganization.

The United States Trustee has appointed an unsecured creditors committee.
The unsecured creditors committee and its legal representatives have a right to
be heard on all matters that come before the Bankruptcy creditors.

The Chapter 11 process presents inherent material uncertainty; it is not
possible to determine the additional amount of claims that may arise or
ultimately be filed, or predict the length of time that the Debtors will
continue to operate under the protection of Chapter 11, the outcome of the
Chapter 11 proceedings in general, whether the Debtors will continue to operate
in their present organizational structure, or the effects of the proceedings on
the business of ACL, the other Debtors and its non-filing subsidiaries and
affiliates, or on the interests of the various creditors, security holders and
DHC as ACL's indirect sole equity holder. The ultimate recovery, if any, by
creditors, security holders and DHC will not be determined until, at the
earliest, confirmation of a plan of reorganization. No assurance can be given as
to what value, if any, will be ascribed in the bankruptcy proceedings to each of
these constituencies. Accordingly, DHC urges that appropriate caution be
exercised with respect to existing and future investments in any of DHC's or
ACL's securities. While it cannot presently be determined, DHC may receive
little or no value with respect to its equity interest in ACL.

Marine Services Industry

Domestic barging focuses on four core commodity groups: steel/other bulk
commodities, grain, coal and liquids. Because barging provides a low-cost
transportation alternative for high mass/high volume cargoes, many bulk
commodity shippers choose barging as their preferred mode of transportation.
Coal is the barging

8

industry's largest transport commodity from a tonnage standpoint, while grain is
a material driver for the industry's overall freight rate structure for dry
cargo movements due to the effect the varying levels of grain export demand has
on capacity and rates. Chemicals are the primary liquid cargo handled by liquid
barge carriers, along with petroleum products, edible oils, molasses and
ethanol. Safety and quality control are essential factors in serving this
market.

The barging industry uses two types of equipment to move freight: towboats,
providing the power source, and barges, providing the freight capacity. Each
standard dry cargo barge is capable of transporting approximately 1,500 tons of
cargo with the most common tank barges being either 10,000 barrel or 30,000
barrel capacity. The combination of a towboat and barges is called a tow, and
usually consists of one towboat and from 5 to 40 barges. The number of barges in
a tow will depend upon the horsepower of the towboat, the river capacity and
conditions, the load and empty mix of the tow, the direction of travel and the
commodity carried.

Since 1980, the industry has been consolidating as acquiring companies have
moved towards attaining the widespread geographic reach necessary to support
major national customers. Following Ingram Industries Inc.'s (which operated
1,700 barges and 62 towboats) acquisition of Midland Enterprises Inc. (which
operated 2,300 barges and 80 towboats) on July 2, 2002, there are five major
domestic barging companies that operate more than 1,000 barges. There are also
12 mid-sized operators that operate more than 200 barges, and approximately 14%
of the barging capacity is held by small carriers that operate fewer than 200
barges.

Marine Services Operations

Domestic Barging. In 2002, ACBL maintained its position as the leading
provider of barge transportation in the United States, operating over nearly
11,000 miles of the Inland Waterways and transporting a wide variety of
commodities, including steel/other bulk commodities, grain, coal and liquids.
ACBL is ranked first in the United States in terms of revenues, barges operated
and gross tons hauled. In terms of annual riverborne tonnage, ACBL is the
leading grain transporter in the industry, and is the second largest liquids
transporter. As of year end, ACBL's fleet consisted of 4,160 dry cargo hopper
barges and 421 double-skinned tank barges. ACBL operated 1,601 of these dry
cargo hopper barges and 42 of these tank barges pursuant to charter agreements.
The charter agreements have expiration dates ranging from one to fifteen years.
ACBL expects generally to be able to renew or replace such charter agreements as
they expire. Although ACBL does not expect to purchase a material number of new
barges in the year 2003, ACBL has a program to renew its fleet through which
certain third party lenders or entities will acquire new equipment from Jeffboat
and lease that equipment to ACBL. ACBL anticipates that it will obtain 50 new
barges through this program in 2003.

DOMESTIC FLEET PROFILE BY BARGE TYPE(1)

- ---------------

(1) Includes both owned and chartered equipment and excludes marine equipment
used in international operations. See below, "International Barging."

In addition, at year end ACBL operated 187 towboats with an average age of
approximately 26 years. No comparative industry data is available with respect
to towboats. At year end, 48 of these towboats were operated by ACBL pursuant to
charter agreements. The charter agreements have expiration dates ranging from
one to five years. ACBL generally expects to be able to renew or replace such
charter agreements as they expire.

9

The size and diversity of ACBL's towboat fleet allows it to deploy the
towboats to the portions of the Inland Waterways where they can most effectively
operate. For example, ACBL's towboats that have in excess of 9,000 horsepower
operate with tow sizes of as many as 40 barges along the Lower Mississippi River
where the river channels are wider and there are no restricting locks and dams.
ACBL's 5,600 horsepower towboats operate along the Ohio, Upper Mississippi and
Illinois Rivers where the river channels are narrower and restricting locks and
dams are more prevalent. ACBL deploys smaller horsepower towboats for shuttle
and harbor services.

DOMESTIC TOWBOATS BY HORSEPOWER(1)

- ---------------

(1) Includes both owned and chartered equipment and excludes marine equipment
used in international operations. See below, "International Barging."

ACBL's barging operations encompass four core commodity groups: steel/other
bulk commodities, grain, coal and liquids. In terms of tonnage and revenue,
grain and coal are ACBL's largest transport commodities with steel/other bulk
commodities and liquids second and third, respectively.

ACL DOMESTIC BARGING OPERATIONS BY COMMODITY

- ---------------

(1) Includes towing and demurrage.

To support its domestic barging operations, ACL maintains shore-based
facilities throughout the Inland Waterways that provide fleeting, shifting,
cleaning and repair services for both towboats and barges, including five
towboat dry-docks and nine barge dry-docks.

International Barging. ACL launched its international barging operations
in South America in 1993. ACL International currently operates on the Orinoco
River, with headquarters in Puerto Ordaz, Venezuela, and through UABL on the
Parana/Paraguay River system, with headquarters in Buenos Aires, Argentina. ACL
International also operates on the Higuamo River in the Dominican Republic with
headquarters in Santa Domingo. International operations generated 6% of ACL's
2002 operating revenue, and management expects revenues from international
operations to increase in the coming years. ACL International's expansion in
South America has been accomplished by introducing new equipment and technology
to the South American river systems, utilizing systems used in the United
States, developing new processes to meet local requirements and consolidating
operations to improve efficiencies. ACL International expects to use its
expertise to expand its barging operations into new regions.

10

For additional information regarding DHC's foreign operations, see Note 22
to the Notes to Consolidated Financial Statements.

INTERNATIONAL FLEET PROFILE BY BARGE TYPE (EXCLUDES UABL)

At year end, ACL International operated 20 dry cargo barges pursuant to
charter agreements with expiration dates of one year. ACL International expects
generally to be able to renew or replace such charter agreements as they expire.
In addition, ACL International operated six towboats.

Barge and Towboat Design and Manufacturing. Jeffboat manufactures both
towboats and barges for ACBL, ACL International, and other customers primarily
for inland river service, and also produces coastal and offshore equipment and
other special purpose vessels such as cruise boats, casino boats, and U.S. Army
Corps of Engineers vessels. Jeffboat has long been recognized as a leader in
inland marine technology, incorporating designs and propulsion systems derived
from ongoing model basin studies. Jeffboat also provides around-the-clock vessel
repair services, including complete dry-docking capabilities, back-up support
for emergency cargo salvage and equipment recovery, and full machine shop
facilities for repair and storage of towboat propellers, rudders and shafts. In
2002, Jeffboat was a leading producer of inland barges in the United States,
producing approximately one-third of the new supply of inland barges for the
barging industry.

ACL believes that the relationship between its transportation operations
and Jeffboat provides a competitive advantage to ACL, permitting optimization of
construction schedules and asset utilization between ACL's internal requirements
and sales to customers. The relationship also gives Jeffboat's engineers an
opportunity to collaborate with ACL's barge operations on innovations that
optimize towboat performance and barge life.

Operations at Jeffboat were interrupted in 2002 by a strike of its
unionized employees from April 30, 2002 until July 9, 2002. Due to sharply
decreased demand for new barges and other marine equipment, Jeffboat has
subsequently laid off a substantial number of its employees.

Terminals. ACL's terminal subsidiary, ACT, directly operates two
facilities located on the Inland Waterways at St. Louis, Missouri and Memphis,
Tennessee. GMS, ACL's terminal joint venture, operates 22 terminal or warehouse
facilities at Guntersville, Alabama; Jeffersonville and Evansville, Indiana;
Louisville, Kentucky; Omaha and Nebraska City, Nebraska; Cincinnati, Ohio;
Decatur, Alabama (two sites); Helena, Pine Bluff , West Memphis (two sites) and
Ft. Smith (two sites), Arkansas; Chicago, Illinois; Industry, Pennsylvania (two
sites); Memphis, Tennessee (two sites); Houston, Texas; and Vlissingen, The
Netherlands. GMS also operates four service operations at Battle Creek,
Michigan; Mingo Junction, Ohio; Brooklyn Junction, West Virginia; and Vancouver,
Canada. In addition, GMS and ACL are equity investors in a terminal operation in
Puerto Ordaz, Venezuela.

Marine Services Customers

ACBL's primary customers include many of the nation's major industrial and
agricultural companies. ACBL enters into a wide variety of short and long-term
contracts with these customers ranging from annual one-year contracts to
multi-year extended contracts with inflation adjustments. ACBL's top 25
customers accounted for 54% of ACL's fiscal 2002 operating revenue. One
customer, Cargill, Inc., accounted for more than 10% of ACL's fiscal 2002
consolidated operating revenue.

11

ACBL operates a 24-hour planning center at its headquarters in
Jeffersonville, Indiana to provide around-the-clock customer contact and
planning capability. In addition to enhanced customer service, the planning
center has improved communication between vessels and office staff for more
efficient logistics and better asset utilization.

Marine Services Competition

ACL's barging operations compete on the basis of price, service and
equipment availability. Primary competitors of ACL's barging operations include
other barge lines, railroads, trucks and pipelines. Barge transportation
provides the lowest unit cost of delivery of any major form of transportation
for high volume, bulk products, delivering 12% of the volume of U.S. freight for
2% of the total U.S. freight cost, according to data available from the U.S.
Department of Transportation. One standard hopper barge has the equivalent
carrying capacity of 15 railcars or 58 trucks. In areas where shippers have
access to water transportation, the rate per ton-mile is significantly less than
rail rates and approximately 80% to 90% lower than truck rates. While it is
generally less expensive to move large volumes of certain liquids by pipeline
when both the origin and destination have a direct connection to the pipeline,
barge transportation of liquids has greater flexibility with respect to the
origins and destinations that can be served.

Competition within the barging industry for major commodity contracts is
intense. There are a number of companies offering transportation services on the
Inland Waterways. Carriers compete not only on the basis of commodity shipping
rates, but also with respect to value-added services, including more convenient
and flexible scheduling, more timely information and different equipment. ACL
utilizes its boat and barge repair and vessel fleeting facilities, Jeffboat's
shipbuilding capabilities and the geographically broad-based terminals of ACT
and GMS to support its core barging business and to offer a combination of
competitive pricing and high quality service to its customer base.

ACL considers Trinity Industries Inc. to be a significant competitor to
Jeffboat. ACL believes that in addition to Trinity, Jeffboat's other significant
competitors include Bollinger Machine Shop and Shipyard, Inc. and Galveston
Shipbuilding Company for barges, and Friede Goldman Halter, Inc. and Quality
Shipyards, Inc. for towboats, all of which are located primarily on the Gulf of
Mexico. These other competitors do not currently manufacture barges, however,
should market conditions change they could quickly ready their shipyards to
construct inland barges and related equipment.

Marine Services Intellectual Property

ACL registers some of its material trademarks, tradenames and copyrights
and has acquired patent protection for some of its proprietary processes. ACL
has current trademark rights to conduct its business.

Marine Services Insurance

ACL maintains protection and indemnity insurance to cover liabilities
arising out of the ownership and operation of marine vessels. ACL maintains hull
and machinery insurance policies on each of its vessels in amounts related to
the value of each vessel. Each vessel is insured at its current fair market
value; however, damage claims are subject to an annual aggregate deductible of
$4.0 million. ACL maintains coverage for shore-side properties, shipboard
consumables and inventory, spare parts, worker's compensation, and general
liability risks. ACL maintains primary insurance and third party guaranty
agreements as to its statutory liabilities for discharges of oil or hazardous
substances under the federal Oil Pollution Act of 1990. In the future, ACL may
elect to self-insure such primary statutory liability amounts; however, ACL
currently maintains and expects to continue to maintain excess coverage for
pollution liability. All insurance policies have been obtained and arranged
through the Aon Insurance Brokerage Syndicate, other brokers or direct placement
with commercial insurers, and maintained with underwriters in the United States,
British and other markets.

Insurance premiums for the coverages described above will vary from year to
year depending upon ACL's loss record and market conditions. In order to reduce
premiums, ACL maintains certain per occurrence

12

deductible, annual aggregate deductible and self-insured retention levels that
it believes are prudent and generally consistent with those maintained by other
shipping companies.

THE INSURANCE SERVICES BUSINESS

Nature of Insurance Operations

NAICC is engaged in writing almost exclusively non-standard private
passenger automobile and commercial automobile insurance primarily in
California. Through January 2002, NAICC and Valor wrote workers' compensation
insurance primarily in California and Montana. The accounts and operations of
NAICC and DIND, NAICC's parent and a wholly owned subsidiary of DHC, are
included in the Consolidated Financial Statements of DHC and are collectively
referred to herein as "NAICC".

NAICC began writing non-standard private passenger automobile insurance in
California in July 1993, and in Oregon and Washington in April 1998 and in
Arizona in 1999. NAICC writes its California business primarily through one
general agent. Oregon, Washington and Arizona business is written directly
through appointed independent agents. Policyholder selection is governed by
underwriting guidelines established by NAICC. NAICC began writing non-standard
commercial automobile in 1995 through independent agents. Non-standard risks are
those segments of the driving public which generally are not considered
"preferred" business, such as drivers with a record of prior accidents or
driving violations, drivers involved in particular occupations or driving
certain types of vehicles, or those who have been non-renewed or declined by
another insurance company. Generally, non-standard premium rates are higher than
standard premium rates and policy limits are lower than typical policy limits.
Management believes that it is able to achieve underwriting success through
refinement of various risk profiles, thereby dividing the non-standard market
into more defined segments which can be adequately priced.

The majority of automobiles owned or used by businesses are insured under
policies that provide other coverage for the business, such as commercial
multi-peril insurance. Businesses which are unable to insure a specific driver
and businesses having vehicles not qualifying for commercial multi-peril
insurance are typical NAICC commercial automobile policyholders. Examples of
these risks include drivers with more than one moving violation, one and two
vehicle accounts, and specialty haulers, such as sand and gravel, farm vehicles
and certain short haul common carriers. The typical NAICC commercial automobile
policy covers fleets of four or fewer vehicles. NAICC does not insure long haul
truckers, trucks hauling logs, gasoline or similar higher hazard operations. The
current average annual premium of the policies in force is approximately $5,286.

Net written premiums for all private passenger automobile programs were
$25.4 million, $20.1 million and $27.2 million in 2002, 2001 and 2000
respectively. Net written premiums were $25.4 million, $19.4 million, and $16.7
million in 2002, 2001 and 2000, respectively, for the non-standard private
passenger automobile program. Net written premiums for preferred private
passenger automobile were $0.04 million, $0.7 million and $10.5 million in 2002,
2001 and 2000, respectively. Net written premiums for non-standard private
passenger automobile in California were $25.2 million, $11.9 million and $8.9
million for 2002, 2001 and 2000, respectively. Net written premiums for
non-standard private passenger automobile outside California were $0.2 million,
$7.5 million and $7.8 million for 2002, 2001 and 2000, respectively.

The primary reason for increase in private passenger automobile premiums in
2002 is growth in the California non-standard program. The decrease in 2001 was
due to the cancellation of the preferred private passenger automobile program in
early 2001 and the cancellation of non-standard private passenger automobile
outside of California. The decrease in 2000 California non-standard private
passenger automobile premiums was due to increased competition in the California
marketplace.

Until January 1, 2002, NAICC ceded 10 percent of its California
non-standard private passenger automobile business to a major reinsurance
company under a quota share reinsurance agreement. Effective January 1, 2002 the
treaty was not renewed. NAICC's Oregon and Washington non-standard automobile,
California preferred automobile business, and its commercial automobile business
is reinsured on an excess of loss basis, where the company retains the first
$250,000.

13

Net written premiums for commercial automobile were $19.5 million, $38.4
million and $23.1 million in 2002, 2001 and 2000, respectively. The decrease in
commercial automobile premiums during 2002 is attributable to management's
decision in late 2001 to curtail marketing efforts in this line.

NAICC previously wrote workers' compensation insurance in California and
four other western states. Workers' compensation insurance policies provide
coverage for statutory benefits which employers are required to pay to employees
who are injured in the course of employment including, among other things,
temporary or permanent disability benefits, death benefits, medical and hospital
expenses and expenses for vocational rehabilitation. Policies were issued having
a term of no more than one year. In response to 2001 market developments
affecting California workers' compensation, including worsening loss experience,
NAICC decided to exit the workers' compensation line of business. The last
California workers' compensation policy was issued in July 2001 and the last
policy issued outside of California was issued in January 2002. Net written
premiums for workers' compensation were $7.6 million, $21.7 million and $22.3
million in 2002, 2001 and 2000, respectively. The decrease in 2002 reflects the
decision to exit the workers' compensation line as discussed above. The small
decrease in 2001 reflected reduced production in California that was mitigated
by growth in Montana. NAICC acquired Valor in June 1996. Valor is a Montana
domiciled specialty insurance company that writes workers' compensation
policies. Net written premiums for Valor workers' compensation were $6.6
million, $11.1 million and $9.9 million in 2002, 2001 and 2000, respectively.
Valor began non-renewing all policies in December 2001 and was placed into
run-off effective January 2002.

NAICC does not write any business through managing general agents. Its
California non-standard private passenger automobile, representing 40.6% of 2002
net written premiums, is produced through one general agent as compared to 14.8%
in 2001 for the same general agent. In 2001, NAICC discontinued its California
preferred private passenger auto program in California which had been produced
through another general agent and which represented 14.4% of net written premium
in 2000.

Underwriting

Insurers admitted in California are required to obtain approval from the
California Department of Insurance of rates and/or forms prior to being used.
Many of the states in which NAICC does business have similar requirements. Rates
and policy forms are developed by NAICC and filed with the regulators in each of
the relevant states, depending upon each state's requirements. NAICC relies upon
its own as well as industry experience in establishing rates.

Private passenger automobile policy limits vary by state. In California,
non-standard policies provide maximum coverage up to $15,000 per person, $30,000
per accident for liability and bodily injury and $10,000 per accident for
property damage. In Arizona, Oregon, and Washington, non-standard policies
provide minimum coverage of $25,000 per person, $50,000 per accident for
liability and bodily injury and $10,000 per accident for property damage, and
can provide coverage to a maximum of $250,000 per person, $500,000 per accident
for liability and bodily injury and $25,000 per accident for property damage. In
general, preferred policies provide coverage to a maximum of $250,000 per
person, $500,000 per accident for liability and bodily injury and $25,000 per
accident for property damage. The maximum non-standard commercial automobile
policy limit provided by NAICC is $1 million bodily injury and property damage
combined single limit of liability for each occurrence. NAICC retains the first
$250,000 bodily injury and property damage combined single limit of liability
for each occurrence.

NAICC retains the first $200,000 of each workers' compensation loss and has
purchased reinsurance for up to $49.8 million in excess of its retention, the
first $9.5 million of which are placed with three major reinsurance companies
with the remaining $40.3 million being provided by 16 other companies. In April
2000, NAICC entered into a workers' compensation excess of loss reinsurance
agreement with SCOR Re Insurance Company that provided coverage down to
$200,000. In May 2001, NAICC entered into a workers' compensation excess of loss
reinsurance agreement with PMA Re Insurance Company that provided 50% coverage
down to $200,000.

14

Marketing of Insurance Services

NAICC maintains three sales offices. The offices are located in Long Beach,
California, Phoenix, Arizona and Napa, California, with each office employing a
single marketing representative. As a result of the 2001 decision to exit
certain lines of business, NAICC closed its Fresno, California and Portland,
Oregon offices and reduced its marketing personnel in both its Long Beach and
Napa, California offices. NAICC believes that its local presence allows it to
better serve policyholders and independent agents. All other functions of
policyholder service, renewal underwriting, policy issuance, premium collection
and record retention are performed centrally at NAICC's home office in Long
Beach, California.

NAICC currently markets its non-standard private passenger automobile
insurance in California only by using one general agent that uses over 600
sub-agents to obtain applications for policies. NAICC wrote non-standard private
passenger automobile insurance directly through 128 appointed independent agents
in Arizona, Idaho, Nevada, Oregon and Washington. During 2001 it was decided to
cease writing new policies for non-standard private passenger automobile outside
of California. The appointed independent agents were reduced accordingly. NAICC,
which began a preferred private passenger automobile program in California in
February 1998 marketed through a second general agent, discontinued the program
in 2001. However, certain renewals on this program were continued into 2002.
During 2001, NAICC marketed its non-standard commercial automobile insurance
through approximately 700 independent agents located in Arizona, California,
Idaho, Nevada, Oregon, Utah and Washington. At the end of 2002 NAICC reduced its
appointed agents to approximately 180 compared to 400 at the end of 2001.

Prior to 2002, NAICC wrote workers' compensation business primarily in the
states of California, Oregon, Arizona, Idaho and Montana through more than 800
independent agents. In July 2001 NAICC ceased writing policies in California,
Arizona, and Nevada. NAICC stopped writing Oregon and Idaho polices in December
2001. Valor marketed workers' compensation insurance to Montana employers. All
business is produced and serviced through its home office in Billings, Montana.
NAICC targeted 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 wrote workers' compensation for employers of a wide range of hazard
classifications, from banks to construction businesses, and targeted the larger
employers in the state of Montana. Valor began non-renewing its policies in
December 2001 and the company was placed into run-off effective January 2002.

Insurance Business Claims

All automobile claims are handled by employees of NAICC at its home office
in Long Beach, California. Claims are reported by agents, insureds and claimants
directly to NAICC. Claims involving suspected fraud are referred to an in-house
special investigation unit ("SIU") which manages a detailed investigation of
these claims using outside investigative firms. When evidence of fraudulent
activity is identified, the SIU works with the various state departments of
insurance, the National Insurance Crime Bureau and local law enforcement
agencies in handling the claims.

Workers' compensation claims are received, reviewed, and processed by NAICC
employees located in claims service offices in Long Beach, California. Most of
NAICC's policyholders are not of sufficient size or type to make a specialized
managed care approach to medical cost containment more cost effective.

The California Automobile Assigned Risk Plan provides for state mandated
minimum levels of automobile liability coverage to drivers whose driving
records, or other relevant characteristics, make it difficult for them to obtain
insurance coverage in the voluntary market. NAICC does not expect to receive a
material number of assignments arising from this program, and does not believe
that the assignments will have a material adverse effect on its profitability.

Losses and Loss Adjustment Expenses

NAICC's unpaid losses and loss adjustment expenses ("LAE") represent the
estimated indemnity cost and loss adjustment expenses necessary to cover the
ultimate net cost of investigating and settling claims.

15

Such estimates are based upon estimates for reported losses, historical company
experience of losses reported by reinsured companies for insurance assumed, and
actuarial estimates based upon historical company and industry experience for
development of reported and unreported claims (incurred but not reported). Any
changes in estimates of ultimate liability are reflected in current operating
results. Inflation is assumed, along with other factors, in estimating future
claim costs and related liabilities. NAICC does not discount any of its loss
reserves.

The ultimate cost of claims is difficult to predict for several reasons.
Claims may not be reported until many years after they are incurred. Changes in
the rate of inflation and the legal environment have created forecasting
complications. Court decisions may dramatically increase liability in the time
between the dates on which a claim is reported and its resolution. Punitive
damages awards have grown in frequency and magnitude. The courts have imposed
increasing obligations on insurance companies to defend policyholders. As a
result, the frequency and severity of claims have grown rapidly and
unpredictably.

NAICC has claims for environmental clean-up against policies issued prior
to 1970 and which are currently in run-off. The principal exposure arises from
direct excess and primary policies of business in run-off, the obligations of
which were assumed by NAICC in 1985. These direct excess and primary claims are
relatively few in number and have policy limits of between $50,000 and
$1,000,000, with reinsurance generally above $50,000. NAICC also has
environmental claims arising associated with participation in excess of loss
reinsurance contracts assumed by NAICC. These reinsurance contracts have
relatively low limits, generally less than $25,000, and estimates of unpaid
losses are based on information provided by the primary insurance company.

The unpaid loss and LAE related to environmental cleanup is established
considering facts currently known and the current state of the law and coverage
litigation. Liabilities are estimated for known claims (including the cost of
related litigation) when sufficient information has been developed to indicate
the involvement of a specific contract of insurance or reinsurance and
management can reasonably estimate its liability. Estimates for unknown claims
and development or reported claims are included in NAICC's unpaid loss and LAE.
The liability for development of reported claims is based on the estimates of
the range of potential losses for reported claims in the aggregate. Estimates of
liabilities are reviewed and updated continually and there is the potential that
NAICC's exposure could be materially in excess of amounts that are currently
recorded. Management does not expect that liabilities associated with these
types of claims will result in a material adverse effect on future liquidity or
financial position. However, claims such as these are based upon estimates and
there can be no assurance that the ultimate liability will not exceed, or even
materially exceed, such estimates. As of December 31, 2002 and 2001, NAICC's net
unpaid losses and LAE relating to environmental claims was approximately $7.3
million and $7.6 million, respectively.

Due to the factors discussed above and others, the process used in
estimating unpaid losses and loss adjustment expenses cannot provide an exact
result. Management believes that the provisions for unpaid losses and loss
adjustment expenses are adequate to cover the net cost of losses and loss
expenses incurred to date; however, such liability is necessarily based on
estimates and there can be no assurance that the ultimate liability will not
exceed such estimates.

16

The following table provides a reconciliation of NAICC's unpaid losses and
loss adjustment expenses (LAE) (in thousands):

The losses and LAE incurred during 2002 related to prior years is
attributable to adverse development on both the California workers' compensation
line totaling $3.5 million, certain private passenger automobile programs
totaling $4.7 million, and commercial automobile totaling $2.0 million. The
losses and LAE incurred during 2001 related to prior years is attributable to
adverse development on both the California workers' compensation line totaling
$4.4 million and certain private passenger automobile programs, primarily
outside of California, totaling $1.7 million. All of the workers' compensation
lines and the private passenger automobile programs that caused higher than
expected losses were placed in run-off during 2001. The losses and LAE incurred
during 2000 related to prior years is attributable to development on the
commercial automobile lines and certain lines in run-off.

The 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 that are later discovered. The
next line, cumulative (deficiency) or redundancy, compares the adjusted net
liability amount to the net liability amount as originally established and
reflects whether the net liability as originally recorded was adequate to cover
the estimated cost of claims or redundant. The third section reflects the
cumulative amounts related to that liability that were paid, net of reinsurance,
as of the end of successive years.

17

Analysis of Net Losses and Loss Adjustment Expense (LAE) Development
(dollars in thousands):

18

The following table reflects the same information as the preceding table,
gross of reinsurance (dollars in thousands):

19

The cumulative deficiencies as of December 31, 1999 through 2001 on a net
basis of $12.9 million, $15.2 million and $10.4 million, respectively, are due
in part to the strengthening of the unpaid losses and ALAE for current lines of
business by $9.9 million in 2002. Those lines include workers' compensation that
is in run-off, commercial automobile, and private passenger automobile that has
the business outside California in run-off. The increase in 2002 was
attributable to adverse development.

The cumulative deficiency as of December 31, 1994 and 1995 on a net basis
of $24.8 million and $19.3 million, respectively, is due in part to the
strengthening of the unpaid losses and ALAE of pre-1980 businesses assumed by
NAICC in 1985 and which are in run-off. NAICC increased these run-off claim
liabilities by $10 million in 1996. The pre-1980 run-off liabilities include
claims relating to environmental clean-up for policies issued prior to 1970.

The cumulative deficiency on a net basis of $44.1 million and $30.2 million
December 31, 1992 and 1993, respectively, is also attributable to both adverse
development of workers' compensation loss experience in the 1990 and 1991 loss
years, and development in certain lines in run-off. The California workers'
compensation industry, including NAICC, experienced adverse development of those
loss years. The adverse development in 1990 and 1991 was significantly offset by
favorable workers' compensation loss experience and development in the 1992
through 1995 loss years thus the reduction noted from 1992 to 1993.

Conditions and trends that have affected the development of these
liabilities in the past may not necessarily recur in the future especially
considering that those ongoing lines that have experienced the greatest adverse
development have been placed in run-off in 2001. It may not be appropriate to
use this cumulative history in the projection of future performance.

Reinsurance

In its normal course of business in accordance with industry practice,
NAICC reinsures a portion of its exposure with other insurance companies so as
to effectively limit its maximum loss arising out of any one occurrence.
Contracts of reinsurance do not legally discharge the original insurer from its
primary liability. Estimated reinsurance receivables arising from these
contracts of reinsurance are, in accordance with generally accepted accounting
principles, reported separately as assets. Premiums for reinsurance ceded by
NAICC in 2002 and 2001 were 6.4% and 9.4% of direct written premiums,
respectively.

As of December 31, 2002, General Reinsurance Corporation ("GenRe"), and
Mitsui Sumitomo Insurance Company, Ltd. ("Mitsui"), were the only reinsurers
that comprised more than 10% of NAICC's reinsurance recoverable on paid and
unpaid balances. NAICC monitors all reinsurers, by reviewing A.M. Best reports
and ratings, information obtained from reinsurance intermediaries and analyzing
financial statements. At December 31, 2002 NAICC had reinsurance recoverable on
paid and unpaid balances of $12.8 million and $2.7 million from GenRe and
Mitsui, respectively. Both GenRe and Mitsui have an A.M. Best rating of A+ or
better. The unsecured balance from Mitsui is approximately $1.6 million. The
paid and unpaid recoverable amounts ceded to Mitsui relate to business in
run-off and assumed by NAICC. 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 this agreement 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 the "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 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.

20

GOVERNMENT REGULATION

GENERAL

DHC's holding company business is not regulated by any government agency.
DHC's Marine Services and Insurance Services businesses are highly regulated as
discussed below.

REGULATION OF MARINE SERVICES BUSINESS

The Marine Service's business is highly regulated and subject to government
regulation in the form of international treaties, conventions, national, state
and local laws and regulations, and laws and regulations of the flag nations of
its vessels, including laws relating to the discharge of materials into the
environment. Because such conventions, laws and regulations are regularly
reviewed and revised by the issuing governmental bodies, DHC is unable to
predict the ultimate costs or impacts of compliance. In addition, ACL is
required by various governmental and quasi-governmental agencies to obtain
certain permits, licenses and certificates with respect to DHC's Marine Services
business operations. The kinds of permits, licenses and certificates required
depend upon such factors as the country of registry, the commodity transported,
the waters in which the vessel operates, the nationality of the vessel's crew,
the age of the vessel and the status of ACL as owner, operator or charterer. DHC
believes that ACL and its subsidiaries currently have all permits, licenses and
certificates necessary to permit its vessels to operate in their current trades.

ACL's domestic transportation operations are subject to regulation by the
U.S. Coast Guard, federal laws, state laws and certain international
conventions.

ACL's inland tank barges are inspected by the U.S. Coast Guard and carry
certificates of inspection. ACL's towing vessels and dry cargo barges are not
subject to U.S. Coast Guard inspection requirements.

Jones Act

The Jones Act is a federal cabotage law that restricts domestic marine
transportation in the United States to vessels built and registered in the
United States. Furthermore, the Jones Act requires that the vessels be manned by
U.S. citizens and owned by U.S. citizens. For a limited liability company to
qualify as a U.S. citizen for the purpose of domestic trade, 75% of the
company's beneficial stockholders must be U.S. citizens. ACL presently meets all
of the requirements of the Jones Act for its owned vessels.

Compliance with U.S. ownership requirements of the Jones Act is very
important to the operations of ACL, and the loss of Jones Act status could have
a significant negative effect for ACL. ACL monitors the citizenship requirements
under the Jones Act of its employees and beneficial equity holders and will take
action as necessary to ensure compliance with the Jones Act requirements.

During the past several years, the Jones Act cabotage laws have been
challenged by interests seeking to facilitate foreign flag competition for trade
reserved for U.S. flag vessels under the Jones Act. These efforts have been
consistently defeated by large margins in the U.S. Congress. The Company
believes that continued efforts may be made to modify or eliminate the cabotage
provisions of the Jones Act. If such efforts are successful so as to permit
foreign competition, such competition could have an adverse effect on ACL.

User Fees and Fuel Tax

Federal legislation requires that inland marine transportation companies
pay a user fee in the form of a tax assessed upon propulsion fuel used by
vessels engaged in trade along inland waterways that are maintained by the U.S.
Army Corps of Engineers. Such user fees are designed to help defray the costs
associated with replacing major components of the waterway system, including
dams and locks, and to build new projects. A significant portion of the Inland
Waterways on which ACL's vessels operate are maintained by the Corps of
Engineers.

ACL presently pays a federal fuel tax of 24.4 cents per gallon of fuel
consumed by its towboats. Legislation has been proposed to repeal a portion (4.3
cents per gallon) of the federal fuel tax. In the future, existing user fees may
be increased, and additional user fees imposed, to defray the costs of inland
waterways infrastructure and navigation.
21

REGULATION OF INSURANCE SERVICES BUSINESS

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. DHC 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 DHC or its Insurance Services
business.

Effective January 1, 2001, the Association's codified statutory accounting
principles ("SAP") has been adopted by all U.S. insurance companies. The purpose
of such codification is to provide a comprehensive basis of accounting and
reporting to insurance departments. Although codification is expected to be the
foundation of a state's statutory accounting practice, it may be subject to
modification by practices prescribed or permitted by a state's insurance
commissioner. Therefore, statutory financial statements will continue to be
prepared on the basis of accounting practice prescribed or permitted by the
insurance department of the state of domicile. DHC has determined that the
application of the codification did not have a material impact on the statutory
capital of its insurance subsidiaries upon adoption.

NAICC is an insurance company domiciled in the State of California and is
regulated by the California Department of Insurance for the benefit of
policyholders. The California Insurance Code does not permit the payment of an
extraordinary shareholder dividend without prior approval from the Insurance
Commissioner. Dividends are considered extraordinary if they exceed the greater
of net income or 10% of statutory surplus as of the preceding December 31st. At
this time and into the foreseeable future NAICC does not have sufficient
accumulated earned surplus to pay further ordinary dividends.

Capital Adequacy and Risk-Based Capital

A model for determining the risk-based capital ("RBC") requirements for
property and casualty insurance companies was adopted in December 1993. The
model generally assesses the company's investments and underwriting operations
and determines policyholders' surplus levels to support such activity. NAICC has
calculated its RBC requirement under the most recent RBC model and it has
sufficient capital in excess of any regulatory action level.

The RBC model sets forth four levels of increasing regulatory intervention:
(1) Company Action Level (200% of an insurer's Authorized Control Level) at
which the insurer must submit to the regulator a plan for increasing such
insurer's capital; (2) Regulatory Action Level (150% of an insurer's Authorized
Control Level), at which the insurer must submit a plan for increasing its
capital to the regulator and the regulator may issue corrective orders; (3)
Authorized Control Level (a multi-step calculation based upon information
derived from an insurer's most recent filed statutory annual statement), at
which the regulator may take action to rehabilitate or liquidate the insurer;
and (4) Mandatory Control Level (70% of an insurer's Authorized Control Level),
at which the regulator must rehabilitate or liquidate the insurer.

At December 31, 2002, the RBC of NAICC was 21% greater than the Company
Action Level compared to 186% in 2001. The significant decrease is attributable
to underwriting losses caused primarily in those lines in run-off and investment
losses realized during the period. NAICC currently has no plans to take any
action designed to negatively affect its current RBC level.

22

As discussed further in this Report at Item 1, Business -- ACL Bankruptcy
Considerations, ACL filed for protection under Chapter 11 of the Bankruptcy
Code. As a result, it was determined that NAICC's investment in ACL was fully
impaired for statutory accounting purposes. At December 31, 2002, NAICC
recognized a statutory charge to its surplus of $7.4 million. This charge, when
combined with NAICC's underwriting results and investment losses, reduced its
statutory surplus level below the Company Action Level of NAICC's RBC
calculation.

In response to the above statutory condition, DHC repaid the $4 million
note due May 2004 to NAICC, and further contributed $4 million to NAICC to
increase its statutory capital during February 2003. With permission from the
California Department of Insurance, these amounts were recorded as admitted
assets for statutory accounting purposes at December 31, 2002. After
consideration for the $8 million noted above, NAICC's reported capital and
surplus as of December 31, 2002 was above the Company Action Level of NAICC's
RBC calculation.

ENVIRONMENTAL MATTERS

ACL's operations are subject to federal, state and local environmental laws
and regulations which, among other things, specify requirements for the
management of oil, hazardous wastes, and hazardous substances and impose
liability for releases of these materials into the environment. ACL devotes
resources toward achieving and maintaining compliance with environmental
requirements. DHC believes, except as otherwise set forth herein, that ACL is in
material compliance with environmental requirements. However, there can be no
assurance that ACL will be at all times in material compliance with all
environmental requirements.

As is the case with others in the maritime industry, a release of oil,
hazardous waste, hazardous substances or other pollutants into the environment
at or by its properties or vessels, as a result of ACL's current or past
operations, or at a facility to which ACL has shipped wastes, or the existence
of historical contamination at any of its properties, could result in material
liability to ACL. ACL conducts loading and unloading of dry commodities, liquids
and scrap materials in and near waterways. Such operations present a potential
that some such materials might be spilled into a waterway thereby exposing ACL
to potential liability. While the amount of such liability could be material,
ACL endeavors to conduct its operations in a manner that it believes reduces
such risks.

Federal, state and local governments could in the future enact laws or
regulations concerning environmental matters that affect ACL's operations or
facilities, increase its costs of operation, or adversely affect the demand for
ACL's services. DHC cannot predict the effect that such future laws or
regulations could have on its Marine Services business. Nor can DHC predict what
environmental conditions may be found to exist at its current or past facilities
or at other properties where ACL or its predecessors have arranged for the
disposal of wastes and the extent of liability that may result from the
discovery of such conditions. It is possible that such future laws or
undiscovered conditions could have a material adverse effect on DHC's business,
financial condition and results of operations.

ACL is involved as a potentially responsible party ("PRP") or interested
party with respect to the clean-up of hazardous waste disposal sites (Superfund
sites) identified under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), the federal Superfund clean-up statute,
and similar state laws. While CERCLA authorizes joint and several liability for
remediation costs at clean-up or remediation sites, as a practical matter, such
costs are typically allocated among the waste generators and other involved
parties.

- Pursuant to the Recapitalization, ACL assumed liability under an order
from the U.S. Environmental Protection Agency ("EPA") under CERCLA,
regarding contamination at the former Dravo Mechling property in Seneca,
Illinois. ACL has complied with the terms of the order, which requires
performance of site sampling and certain remediation at the site. As a
result of these remediation efforts, the site has been materially
remediated. The EPA and the State of Illinois have issued "no further
remediation" letters to ACL indicating that neither entity will require
further remediation. In 2001, ACL sold the Seneca, Illinois property to a
third party. DHC is aware of no ongoing environmental issues or exposure
with respect to this property.

23

- Jeffboat was named a PRP at the Third Site in Zionsville, Indiana.
Jeffboat has also received notice of potential liability with regard to
waste allegedly transshipped from the Third Site to the Four County
Landfill in Rochester, Indiana. The EPA has conducted an environmental
site assessment of this property and has approved a work plan to conclude
remediation of the site. The expected cost of this remediation has been
funded by the various PRPs, of which Jeffboat has funded its percentage
share (5.9%). At this time, no further expense associated with the
remediation of Third Site is expected.

- A group of barge operators, including National Marine, had barges cleaned
at the SBA Shipyard in Houma, Louisiana, which is now conducting
voluntary environmental remediation. ACL assumed National Marine's
liability in this matter pursuant to the Recapitalization. The SBA
Shipyard owner who previously funded the cleanup effort has become
insolvent and, as a result, the barge operators involved have formed a
group to fund remediation. The barge operators have funded their
currently expected remediation expenses, of which ACL has a 55% share.
The barge operator group has removed all liquid waste capable of being
pumped from the site and the EPA has preliminarily approved a work plan
to remove the solid waste. Remediation of the solid waste has not
commenced as of the date of this Report, but is expected to commence
within the next year.

- EPS, Inc., a wholly-owned subsidiary of Vectura, is the owner of Connex
Pipe Systems' closed solid waste landfill located in Marietta, Ohio
("Connex"). Liability for the monitoring and potential clean-up of Connex
was assumed by ACL (up to $30,000 per year) pursuant to the
Recapitalization. In 1986 Connex was subject to an Ohio consent judgment
("Consent Judgment") whereby it agreed to remediate and monitor the
closed landfill for a period of three years. Connex complied with the
Consent Judgment and in 1994 the Ohio Environmental Protection Agency
("Ohio EPA") issued a letter confirming Connex's compliance. However, the
Ohio EPA changed its monitoring requirements in 1997 to require longer
periods of monitoring for closed sites and attempted to apply those new
rules to Connex. Connex, and other similarly situated companies, objected
to the new rule which retroactively changed monitoring requirements. On
November 30, 1998, the Ohio EPA issued a finalized guidance rule ("Final
Guidance") applicable to Connex. ACL believes that the Final Guidance
confirmed Connex's position that it had fully complied with the
applicable monitoring requirements and owed no further monitoring. ACL
believes that it has no further monitoring obligations at Connex and
written confirmation from the Ohio EPA has been requested to confirm that
ACL's monitoring responsibilities have ceased.

- ACBL has received notice from the EPA that it is a PRP at the State
Marine of Port Arthur ("State Marine") and the Palmer Barge Line
Superfund Sites in Port Arthur, Texas in regard to approximately 50
barges that were cleaned by State Marine and five barges cleaned by
Palmer Barge Line for ACBL in the early 1980s. The EPA has requested that
ACBL, and other potentially responsible companies, enter into
negotiations for the performance of a Remedial Investigation and
Feasibility Study, however, there has been no further action to pursue
any response costs from ACBL as a PRP.

- On July 10, 2002, a lawsuit was filed in Clark Circuit Court against
Jeffboat, ACBL, ACL and DHC by two Jeffersonville, Indiana residents
purporting to represent a class of individuals affected by alleged
fugitive emissions from Jeffboat painting activity. The named plaintiffs,
seeking actual and punitive damages, claim that fugitive paint emissions
have diminished the value of their automobiles and other property, and
seek redress under a variety of theories, including negligence and
trespass. ACBL, ACL and DHC moved for and received a dismissal with
prejudice. Jeffboat intends to defend this litigation vigorously and to
contest any potential class certification.

- Jeffboat, ACBL, ACL and DHC have also received a "Notice of Citizens
Suit" concerning the alleged fugitive emissions and alleging other
misconduct with respect to water pollution. The notice was filed by the
two named plaintiffs in the class action described above and seven other
individuals. The notice seeks to have state and federal authorities, who
have previously inspected Jeffboat and found no violations, to take
additional regulatory action against Jeffboat, or if they do not take
such action, the right to sue to ask a federal court to redress their
allegations. A resulting suit would not entitle the citizens to damages,
but could result in the imposition of penalties payable to the government
and

24

liability for the plaintiffs' attorneys' fees. To date, no such action
has been filed. Jeffboat would defend vigorously any resulting lawsuit
against it.

Because CERCLA liability is retroactive, it is possible in the future that
ACL may be identified as a PRP with respect to other waste disposal sites, where
wastes generated by ACL have been transported and disposed.

As of December 27, 2002, ACL had reserves of approximately $0.4 million for
environmental matters. DHC believes it has established reasonable and adequate
reserves to cover ACL's known environmental liabilities. However, given the
uncertainties associated with such matters, there can be no assurance that
liabilities will not exceed reserves.

DHC does not believe that its holding company business or Insurance
Services business give rise to any significant environmental concerns.

OCCUPATIONAL HEALTH AND SAFETY MATTERS

ACL's domestic vessel operations are primarily regulated by the U.S. Coast
Guard for occupational health and safety standards. ACL's domestic shore
operations are subject to the U.S. Occupational Safety and Health Administration
regulations. While there can be no assurance that ACL is at all times in
complete compliance with all such regulations, ACL believes that it is in
material compliance with such regulations, and that any noncompliance is not
likely to have a material adverse effect on ACL. There can be no assurance,
however, that claims will not be made against ACL for work related illness or
injury, or that the further adoption of occupational health and safety
regulations in the United States or in foreign jurisdictions in which ACL
operates will not adversely affect its business, financial condition and results
of operations.

ACL endeavors to reduce employee exposure to hazards incident to its
business through safety programs, training and preventive maintenance efforts.
The Company emphasizes safety performance in all of its operating divisions. ACL
believes that ACL's safety performance consistently places it among the industry
leaders as evidenced by what it believes are lower injury frequency levels than
many of its competitors. ACL has been certified in the American Waterway
Operators Responsible Carrier Program which is oriented to enhancing safety in
vessel operations.

EMPLOYEES

As of December 27, 2002, on a consolidated basis, Danielson employed 4,030
individuals of whom three worked for DHC at the parent company level.

ACL employed 3,528 individuals. Of this total, 650 individuals were engaged
in shore-side management and administrative functions, 2,111 individuals were
employed as boat officers and crew members on its marine vessels, 745
individuals were engaged in production and repair activities at ACL's shipyard
facilities, and 22 individuals were employed in production activities at ACL's
terminals. Six hundred of ACL's domestic shore-side employees are represented by
unions. Most of these unionized employees (approximately 578) are represented by
the International Brotherhood of Teamsters at ACL's Jeffboat shipyard facility,
where the contract with the union expires in April 2007. Prior to the execution
of the current union contract in July 2002, Jeffboat's union employees chose to
strike from April 30, 2002 until July 9, 2002. One hundred twelve of ACL's South
American employees are represented by unions.

GMS employed 405 individuals and GMS Venezuela employed four individuals.
Of this total, 137 individuals were engaged in administrative functions and 272
individuals were employed in production activities. Sixty-six GMS employees are
represented by unions.

NAICC had 90 employees.

DHC believes that its relations with its employees are generally good,
other than for any after effects of the Jeffboat strike and the impact of
employee layoffs at Jeffboat, ACL and various ACL related entities that are a
result of ACL's current economic condition. DHC believes that current staffing
levels within each of its

25

businesses are adequate to conduct future operations, although no assurances can
be provided that additional reductions in work force will not be required.

BACKLOG

MARINE SERVICES

ACL's backlog represents firm orders for barge transportation and marine
equipment. The backlog for barge transportation was approximately $529 million
and $760 million at December 27, 2002 and December 28, 2001, respectively. This
backlog ranges from one to nine years with approximately 49% expected to be
filled in 2003. The backlog for marine equipment construction was approximately
$47 million and $69 million at December 27, 2002 and December 28, 2001,
respectively. The backlog for marine equipment is one year with 100% expected to
be filled in 2003.

INSURANCE SERVICES

The Insurance Services business does not create backlog.

SEASONALITY

MARINE SERVICES

ACL's business is seasonal, and its quarterly revenues and profits
historically have been lower during the first and second fiscal quarters of the
year (January through June) and higher during the third and fourth fiscal
quarters (July through December) due to the North American grain harvest. In
addition, working capital requirements fluctuate throughout the year. Adverse
market or operating conditions during the last four months of the year could
have a greater effect on ACL's business, financial condition and results of
operations than during other periods.

GMS' North American business is seasonal, and its quarterly revenues and
profits historically have been lower during the first and second fiscal quarters
of the year and higher during the third and fourth fiscal quarters due to the
North American grain harvest and poorer winter operating and river conditions.
In addition, working capital requirements for GMS fluctuate throughout the year.

UABL's business is seasonal, and its quarterly revenues and profits
historically have been lower during the third and fourth fiscal quarters of the
year (June through January, the South American winter season), which reduces
grain volumes for barging and which creates poor operating and river conditions,
and higher during the first and second fiscal quarters (December through July)
due to the South American grain harvest. GMSV's business is seasonal at the same
times and for the same reasons as UABL. In addition, working capital
requirements for UABL and GMSV fluctuate throughout the year.

INSURANCE SERVICES

The Insurance Services group is not materially affected by seasonal
conditions.

RISK FACTORS

The following risk factors could have a material adverse effect on DHC's
business, financial condition and results of operations.

BANKRUPTCY-SPECIFIC RISKS

Impact of ACL Bankruptcy on DHC

While the final result of ACL's bankruptcy proceeding is uncertain, DHC's
investment in ACL may have little or no value upon completion of that
proceeding. In addition, as DHC locates additional acquisition opportunities,
the loss of its cash investment in ACL will result in DHC needing to obtain more
equity capital

26

and/or debt in order to fund any such acquisitions. There can be no assurance
that such additional capital and/or debt will be available to DHC on acceptable
terms.

Uncertainties Relating to Bankruptcy Proceedings

ACL's future results are dependent upon successfully obtaining approval,
confirmation and implementation of a plan of reorganization. ACL has not yet
submitted such a plan to the Bankruptcy Court for approval and cannot make any
assurance that it will be able to submit and obtain confirmation of any such
plan in a timely manner. Failure to confirm a plan in a timely manner could
adversely affect ACL's operating results, as ACL's ability to obtain financing
to fund its operations and its relations with its customers may be harmed by
protracted bankruptcy proceedings. Moreover, even following confirmation,
consummation and implementation of a plan of reorganization, ACL's operating
results may be harmed by the possible reluctance of prospective lenders and
customers to do business with a company that recently emerged from bankruptcy
proceedings.

Currently, it is not possible to predict with certainty the length of time
ACL will operate under the protection of Chapter 11, the outcome of the Chapter
11 proceedings in general, or the effect of the proceedings on the business of
ACL or on the interests of the various creditors and stakeholders. Under the
priority scheme established by the Bankruptcy Code, certain post-petition
liabilities and pre-petition liabilities need to be satisfied before equity
holders (DHC, directly and indirectly, controls 100% of the equity interests in
ACL) can receive any distribution. The ultimate recovery to DHC, if any, will
not be determined until confirmation of a plan of reorganization. There can be
no assurance as to what value, if any, will be ascribed to DHC's equity
interests in ACL and the other Debtors in the bankruptcy proceedings, and the
value of such equity interests could be substantially or totally diluted or
cancelled.

ACL may, under certain circumstances, file motions with the Bankruptcy
Court to assume or reject executory contracts. An executory contract is one in
which the parties have mutual obligations to perform (e.g., contracts of
affreightment, charters, equipment leases and real property leases). Unless
otherwise agreed, the assumption of a contract will require ACL to cure or
provide for the cure of all prior defaults under the related contract, including
all pre-petition liabilities. Unless otherwise agreed, the rejection of a
contract is deemed to constitute a breach of the agreement as of the moment
immediately preceding the Chapter 11 filing, giving the counter party a right to
assert a general unsecured claim for damages arising out of the breach.
Additional liabilities subject to the proceedings may arise in the future as a
result of the rejection of executory contracts, including leases, and from the
determination of the Bankruptcy Court (or agreement by parties in interest) of
allowed claims for contingencies and other disputed amounts. Conversely, the
assumption of executory contracts and unexpired leases may convert liabilities
shown as subject to compromise to post-petition liabilities. Due to the
uncertain nature of many of the potential claims, ACL is unable to project the
magnitude of such claims with any degree of certainty.

The potential adverse publicity associated with the Chapter 11 filing and
the resulting uncertainty regarding ACL's future prospects may hinder ACL's
ongoing business activities and its ability to operate, fund and execute its
business plan by (i) impairing relations with existing and potential customers;
(ii) negatively impacting the ability of ACL to attract, retain and compensate
key executives and associates and to retain employees generally; (iii) limiting
ACL's ability to obtain trade credit; (iv) and impairing present and future
relationships with vendors and service providers.

ACL has incurred and will continue to incur significant costs associated
with the reorganization. The amount of these costs, which are being expensed as
incurred, are expected to have a significant adverse affect on the results of
operations and cash flows.

The unsecured creditors committee appointed in the bankruptcy proceedings
have the right to be heard on all matters that come before the Bankruptcy Court.
There can be no assurance that the unsecured creditors committee will support
ACL's positions in the bankruptcy proceeding or the plan(s) of reorganization
once proposed, and disagreements between ACL and the committee could protract
the bankruptcy proceedings, could negatively impact ACL's ability to operate
during bankruptcy and could delay ACL's emergence from bankruptcy.
27

Certain additional risk factors associated with the reorganization include,
but are not limited to, the following: potential adverse developments with
respect to ACL's liquidity, results of operations or ability to continue as a
going concern; Bankruptcy Court approval of the motions prosecuted by ACL from
time to time; the availability of exit financing to facilitate emergence from
Chapter 11 pursuant to a plan of reorganization; risks associated with third
parties seeking and obtaining court approval (i) to terminate or shorten the
exclusivity period for ACL to propose and confirm one or more plans of
reorganization, (ii) for the appointment of a Chapter 11 trustee or (iii) to
convert ACL's cases to Chapter 7 cases for the liquidation of its businesses;
and the ability of ACL to execute on its business plans.

Risks Relating to ACL's Debt Obligations

ACL incurred significant debt in connection with the Recapitalization and
the Danielson Recapitalization. After the recapitalizations, ACL experienced
lower than expected revenues and earnings due in part to a deteriorating economy
and a general slow down in the barging industry. After failing to complete an
out-of-court financial restructuring alternative, ACL was unable to meet its
financial obligations as they became due. Consequently, ACL filed a petition
with the Bankruptcy Court in order to reorganize its capital and debt structure
under Chapter 11 of the Bankruptcy Code. As a result of the Chapter 11 filings,
certain events of default under the Senior Credit Facilities, Senior Notes, PIK
Notes and Old Senior Notes have occurred. However, under Chapter 11, actions by
creditors to collect claims on pre-petition debt are stayed or deferred unless
specifically ordered by the Bankruptcy Court. If and when ACL emerges from
bankruptcy it is likely that it will continue to be highly leveraged with
substantial debt service obligations. ACL's Senior Credit Facilities and other
indebtedness could be replaced by new credit facilities with substantial, and
possibly more restrictive, covenants. Thus, ACL's leveraged position could have
a material adverse effect on ACL's business, financial condition, results of
operations and cash flows. For example, ACL's substantial leverage position
after bankruptcy could:

- limit ACL's ability to obtain additional financing to fund future working
capital, capital expenditures and other general corporate requirements;

- increase ACL's vulnerability to general adverse economic and industry
conditions;

- require ACL to dedicate a substantial portion of its cash flow from
operations to the payment of principal of, and interest on, its
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures or other general corporate
requirements;

- limit ACL's flexibility in planning for, or reacting to, changes in its
business and the industry in which it competes; and

- place ACL at a competitive disadvantage compared to its less leveraged
competitors.

Potential Sale of ACL Assets

In connection with the development of alternative plans of reorganization,
ACL will evaluate any and all proposals to maximize the value of all ACL's
stakeholders, including the sale of certain of its remaining business lines.
There can be no assurance that ACL will be able to consummate such asset sales
or that any asset sales will be at or greater than the current net book value of
such assets.

ACL's Liquidity is Dependent on a Number of Factors

ACL's liquidity generally depends on cash provided by operating activities
and access to the DIP Credit Facility. The ability of ACL to continue as a going
concern (including its ability to meet post-petition obligations) and the
continued appropriateness of using the going concern basis for its financial
statements are dependent upon, among other things, (i) ACL's ability to comply
with the covenants of the DIP Credit Facility, (ii) the ability of ACL to
maintain adequate cash on hand, (iii) the ability of ACL to continue to generate
cash from operations, (iv) confirmation of a plan of reorganization under the
Bankruptcy Code and the terms of such plan, (v) ability of ACL to attract,
retain and compensate key executives and associates and to retain employees
generally and (vi) ACL's ability to achieve profitability following such
confirmation.

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MARINE SERVICES-SPECIFIC RISKS

Risks of Adverse Weather and River Conditions

ACL's barging operations are affected by weather and river conditions.
Varying weather patterns can affect river levels and cause ice in Northern
United States river areas. For example, the Upper Mississippi River closes
annually from approximately mid-December to mid-March and ice conditions can
hamper navigation on the upper reaches of the Illinois River during the winter
months. In addition, adverse river conditions affect towboat speed, tow size and
loading drafts and can delay barge movements. Lock outages due to lock
maintenance and/or other interruptions in normal lock operation can also delay
barge movements. Jeffboat's waterfront location is subject to occasional
flooding. Jeffboat's manufacturing operations that are conducted outdoors are
also subject to weather conditions, which may adversely impact production
schedules. Terminals may also experience operational interruptions as a result
of weather and river conditions. It is likely that ACL's operations will be
subject to adverse weather or river conditions in the future and there can be no
assurance that such weather or river conditions will not have a material adverse
effect on ACL's business, financial condition, results of operations and cash
flows.

Exposure to Grain Exports

ACL's dry cargo barging business in North America is significantly affected
by the level of grain export volume handled through the Gulf of Mexico ports.
Grain exports can vary due to, among other things, crop harvest yield levels in
the United States and abroad. Overseas grain shortages can increase demand for
U.S. grain, while worldwide over-production can decrease the demand for U.S.
grain. This variable nature of grain exports can result in temporary barge
oversupply which can drive down freight rates. There can be no assurance that
historical levels of North American grain export volume will be maintained in
the future and, to the extent supply imbalances were to prevail for a
significant period of time, they could have a material adverse effect on ACL's
business, financial condition, results of operations and cash flows.

Seasonality

ACL's business is seasonal, and its quarterly revenues and profits
historically have been lower during the first and second fiscal quarters of the
year (January through June) and higher during the third and fourth fiscal
quarters (July through December) due to the North American grain harvest. In
addition, working capital requirements fluctuate throughout the year. Adverse
market or operating conditions during the last four months of the year could
have a greater effect on ACL's business, financial condition, results of
operations and cash flows than during other periods.

Variability

Freight transportation rates may fluctuate from season to season and year
to year, which could result in varying levels of cash flow. The level of dry and
liquid cargoes requiring transportation on the Inland Waterways will vary due to
numerous factors, including global economic conditions and business cycles,
domestic agricultural production/demand as well as international agricultural
production/demand and the value of the U.S. dollar relative to other currencies.
In addition, the number of barges and towboats in the overall industry fleet
available to transport these cargoes will vary from year to year as older
vessels are retired and scrapped and new vessels are constructed and placed into
service. The resulting relationship between available cargoes and available
vessels will vary with periods of low vessel availability and high cargo demand
causing higher freight rates and periods of high vessel availability and low
cargo demand causing lower freight rates. Significant periods of high vessel
availability and low cargo demand could have a material adverse effect on ACL's
business, financial condition, results of operations and cash flows.

The foregoing factors can also affect market rates. As contracts expire and
terms are renegotiated at then current market rates, the level of revenue can
vary relative to prior years. This has become more evident as the industry has
shifted to shorter term contracts. The impact of these factors could be material
and there can be no assurance that the rates at which contracts are renewed will
not have a material adverse effect on ACL's business, financial condition,
results of operations or cash flows.

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Competition

The barge business is highly competitive and there are few significant
barriers to entry. Certain of ACL's principal competitors have greater financial
resources and/or are less leveraged than ACL and may be better able to withstand
and respond to adverse market conditions within the barging industry. There can
be no assurance that such competition will not have a material adverse effect on
ACL's business, financial condition or results of operations or that ACL will
not encounter increased competition in the future, which also could have a
material adverse effect on its business, financial condition or results of
operations.

Exposure to International Economic and Political Factors

ACL's operations may be affected by actions of foreign governments and
global or regional economic developments. For example, global economic events
such as foreign import/export policy or currency fluctuations, could affect the
level of imports and exports. Foreign agricultural subsidies can also impact
demand for U.S. agricultural exports. In addition, foreign trade agreements and
each country's adherence to the terms of such agreements can raise or lower
demand for U.S. imports and exports. National and international boycotts and
embargoes of other countries' or U.S. imports and/or exports together with the
raising or lowering of tariff rates will affect the level of cargoes requiring
transportation on the Inland Waterways. Changes in the value of the U.S. dollar
relative to other currencies will raise or lower demand for U.S. exports as well
as U.S. demand for foreign produced raw materials and finished good imports.
Such actions or developments could have a material adverse effect on ACL's
business, financial condition, results of operations and cash flows.

Risk of Providing Services Abroad

Demand for ACL's services may be affected by economic and political
conditions in each of the countries in which ACL provides services. ACL's
foreign operations are also subject to other risks of doing business abroad,
including fluctuations in the value of currencies (which may affect demand for
products priced in U.S. dollars as well as local labor and supply costs), import
duties, changes to import and export regulations (including quotas), possible
restrictions on the repatriation of capital and earnings, labor or civil unrest,
long payment cycles, greater difficulty in collecting accounts receivable and
the burdens and cost of compliance with a variety of foreign laws, changes in
citizenship requirements for purposes of doing business and government
expropriation of operations and/or assets. There can be no assurance that
foreign governments will not adopt regulations or take other actions that would
have a direct or indirect adverse impact on the business or market opportunities
of ACL or that the political, cultural or economic climate outside the United
States will be favorable to ACL's operations and growth strategy.

Exposure to Fuel Prices

Fuel prices are subject to fluctuation as a result of domestic and
international events. There can be no assurance that ACL will not experience
increased fuel prices in the future, which could have a material adverse effect
on its business, financial condition, results of operations and cash flows.

Replacement Needs

Barge and towboat replacement represents a significant cost for ACL, and
ACL expects to replace 50 barges in 2003 and approximately 200 per year during
the next four years. Due to the variable nature of the barging industry and the
freight transportation industry in general and the relatively long life of
marine equipment, it is difficult for ACL and other barge companies to
accurately predict equipment requirements. Accordingly, no assurance can be
given that ACL will have sufficient equipment to satisfy market demand or that
the industry will not have an oversupply of equipment. An inability to secure
sufficient equipment to satisfy market demand or an oversupply of equipment
could have a material adverse effect on ACL's business, financial condition,
results of operations and cash flows.

30

ACL Combined Operations

Pursuant to its strategy to pursue synergistic acquisitions in its core
business lines, ACL may expend substantial management time and financial and
other resources for the acquisition and integration of other barging operations.
These acquisitions may pose risks with respect to operations, customer service
and customer acceptance. While ACL's management has successfully combined other
barging operations and it believes that it has sufficient financial and
management resources to accomplish the rationalization and integration of other
barging operations, there can be no assurance that such operations can be
integrated successfully or that ACL will not experience difficulties with
customers, personnel or others. In addition, although ACL believes that the
other barging operations will enhance the competitive position and business
prospects of ACL, there can be no assurance that such benefits will be fully
realized.

Dependence on Key Personnel

ACL is dependent on the continued services of its senior management team.
The loss of such key personnel could have a material adverse effect on ACL's
business, financial condition, results of operations and cash flows.

Labor Relations

Although ACL believes that its relations with its employees and with the
recognized labor unions are generally good, other than for any after effects of
the Jeffboat strike and the impact of employee layoffs at Jeffboat, ACL and
various ACL related entities that are a result of ACL's current economic
condition there can be no assurance that ACL will not be subject to work
stoppages or other labor disruption and, if such events were to occur, that
there would not be a material adverse effect on ACL's business, financial
condition, results of operations and cash flows.

Environmental, Health and Safety Requirements

ACL's operations are subject to extensive federal, state and local
environmental laws and regulations which, among other things, specify
requirements for the management of oil, hazardous wastes, and hazardous
substances and impose liability for releases of these materials into the
environment. A release of oil, hazardous waste, hazardous substances or other
pollutants into the environment at or by ACL's properties or vessels, as a
result of ACL's current or past operations, or at a facility to which ACL has
shipped wastes, or the existence of historical contamination at any of its
properties, could result in material liability to ACL. ACL has been identified
as a potentially responsible party ("PRP") with respect to the cleanup of
certain waste disposal sites.

Federal, state and local governments could in the future enact laws or
regulations concerning environmental matters that affect ACL's operations or
facilities, increase its costs of operation, or adversely affect the demand for
its services. ACL cannot predict the effect that such future laws or regulations
could have on ACL. Nor can ACL predict what environmental conditions may be
found to exist at its current or past facilities or at other properties where
ACL or its predecessors have arranged for the disposal of wastes and the extent
of liability that may result from the discovery of such conditions. It is
possible that such future laws or undiscovered conditions could have a material
adverse effect on ACL's business, financial condition, results of operations and
cash flows.

ACL's domestic vessel operations are primarily regulated by the U.S. Coast
Guard for occupational health and safety standards. ACL's domestic shore
operations are subject to the U.S. Occupational Safety and Health Administration
regulations. There can be no assurance that claims will not be made against ACL
for work related illness or injury, or that the further adoption of occupational
health and safety regulations in the United States or in foreign jurisdictions
in which ACL operates will not adversely affect its business, financial
condition, results of operations and cash flows.

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Other Government Regulation

ACL's barging operations are subject to various laws and regulations,
including international treaties, conventions, national, state and local laws
and regulations and the laws and regulations of the flag nations of ACL's
vessels, all of which are subject to amendment or changes in interpretation.
Further, ACL is required by various governmental and quasi-governmental agencies
to obtain and/or maintain certain permits, licenses and certificates respecting
its operations. ACL's domestic towboats are in certain circumstances subject to
a significant federal fuel use tax, which may be increased. Any significant
changes in laws or regulations affecting ACL's operations, or in the
interpretation thereof, could have a material adverse effect on ACL's business,
financial condition, results of operations and cash flows.

Terrorist Attacks, War and the Risk of War

The impact that terrorist attacks, such as those carried out on September
11, 2001, may have on the marine transportation industry in general, and on ACL
in particular, is not known at this time. Such attacks, and the uncertainty
surrounding them, may impact ACL's operations in unpredictable ways, including
disruptions of rail lines, highways and fuel supplies and the possibility that
ACL's facilities and vessels could be direct targets of, or indirect casualties
of, an act of terror. In addition, war or risk of war may also have an adverse
effect on the economy. A decline in economic activity could adversely affect
ACL's revenues or restrict ACL's future growth. Instability in the financial
markets as a result of terrorism or war could also affect ACL's ability to raise
capital. Such attacks may lead to increased volatility in fuel costs and
availability and could affect ACL's results of operations. In addition, the
insurance premiums charged for some or all of the coverages ACL currently
maintains could increase dramatically, or the coverages could be unavailable in
the future. Any such events could have a material adverse effect on ACL's
business, financial condition, results of operations and cash flows.

Small Number of Customers Account for a Substantial Portion of ACL's Revenues

In 2002, ACL's largest customer, Cargill, Inc., accounted for more than 10%
of ACL's revenues, while ACL's 25 largest customers accounted for approximately
54% of ACL's revenues.

INSURANCE SERVICES -- SPECIFIC RISKS

Competition

The insurance products sold by NAICC are subject to intense competition
from many competitors, many of whom have substantially greater resources that
NAICC. There can be no assurance that NAICC will be able to successfully compete
in these markets and generate sufficient premium volume at attractive prices to
be profitable. This risk is enhanced by the reduction in the lines of business
NAICC writes as a result of it decision to reduce underwriting operations.

Insurance Regulations

The insurance industry is highly regulated and it is not possible to
predict the impact of future state and federal regulations on the operations of
NAICC.

Loss Experience

Unpaid loss and LAE are based on estimates of reported losses, historical
company experience of losses reported by reinsured companies for reinsurance
assumed from such insurers, and historical company experience for unreported
claims. Such liability is, by necessity, based on estimates that may change in
the near term. There can be no assurance that the ultimate liability will not
exceed, or even materially exceed, such estimated amount included herein.

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Capital Adequacy and Risk-Based Capital

NAICC is subject to certain regulatory risk-based capital ("RBC")
requirements. Depending on its RBC, NAICC could be subject to four levels of
increasing regulatory intervention ranging from company action to mandatory
control. NAICC's capital is also one factor used to determine its ability to
distribute or loan funds to DHC.

DHC -- SPECIFIC RISKS

Inability to Use Net Loss Tax Carryforwards

One of DHC's significant assets is its net loss tax carryforwards. In order
to utilize those assets, DHC must generate taxable income which can offset such
carryforwards. The asset is also utilized by income from certain grantor trusts
that were established as part of the Mission organization. The carryforwards
will expire if not used. The carryforwards further 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. DHC will be treated as having
had an "ownership change" if there is more than a 50% increase in stock
ownership during a three year "testing period" by "5% stockholders".

AVAILABILITY OF INFORMATION

DHC's Internet site (www.danielsonholding.com) makes available to
interested parties DHC's Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, and Current Reports on Form 8-K, and all amendments and exhibits to those
reports, as well as all other reports and schedules DHC files electronically
with the Securities and Exchange Commission (the "Commission"), as soon as
reasonably practicable after such material is electronically filed with or
furnished to the Commission. Interested parties may also find reports, proxy and
information statements and other information on issuers that file electronically
with the Commission at the Commission's Internet site (www.sec.gov).

ITEM 2. PROPERTIES

DHC leases a minimal amount of office space for use as administrative and
executive offices on a month to month basis. DHC believes that the space
available to it is adequate for DHC's current and foreseeable needs.

ACL owns or operates numerous land-based facilities that support its
overall marine operations. These facilities include a major construction
shipyard, two terminal facilities for cargo transfer and handling throughout the
river system, 12 locations (which include 19 separate facilities and service
operations) for the staging, fleeting, interchange and repair of barges and
towboats and a corporate office complex in Jeffersonville, Indiana. An
additional 26 terminal facilities and service locations are operated by GMS.

The significant ACL-owned facilities among these properties include the
Jeffboat shipbuilding facility in Jeffersonville, Indiana, which is the largest
single-site shipyard facility on the Inland Waterways. It is situated on 86
acres with 5,600 feet of frontage on the Ohio River across from Louisville,
Kentucky. There are 38 buildings on the property comprising a total of 305,000
square feet under roof.

ACL's main office complex is located on 22 acres in Jeffersonville,
Indiana. The main building has approximately 140,000 square feet, and five
outlying buildings have a total of 25,000 square feet.

NAICC's headquarters are located in a leased office facility in Rancho
Dominguez, California, pursuant to a five-year lease which is scheduled to
expire in 2004. In addition, NAICC has entered into short-term leases in
connection with its operations in various locations on the west coast of the
United States. NAICC believes that the foregoing leased facilities are adequate
for NAICC's current and anticipated future needs.

See Notes 1 and 17 of the Notes to Consolidated Financial Statements for
additional information on ACL's and NAICC's leases.

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ITEM 3. LEGAL PROCEEDINGS

DHC is not currently a party to any material legal proceedings. DHC has
been named as a defendant in two environmental lawsuits regarding Jeffboat's
operations as described in Item 1, Business -- Government
Regulation -- Environmental Matters. Certain of DHC's subsidiaries are engaged
in litigation and similar legal proceedings further described in that section of
this Report and as described below.

The description of ACL's bankruptcy proceedings appearing in this Report at
Item 1, Business -- ACL Bankruptcy Considerations and at Item 7, Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview and Significant Events -- Bankruptcy, is incorporated
herein by reference.

ACL is named as a defendant in various lawsuits that have arisen in the
ordinary course of its business. Claimants seek damages of various amounts for
personal injuries, property damage and other matters. ACL believes that all
material claims asserted under lawsuits of this description and nature are
covered by insurance policies. ACL is not aware of any litigation that would be
deemed material to the financial condition, results of operations or liquidity
of ACL that is not covered by insurance coverages and policies, other than the
environmental matters discussed in this Report at Item 1, Business -- Government
Regulation -- Environmental Matters which is incorporated herein by reference.

NAICC is a party to various legal proceedings which are considered routine
and incidental to its insurance business and are not expected to be material to
the financial condition or results of operations of NAICC.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

DHC Common Stock is listed and traded on the American Stock Exchange
(symbol: DHC). On March 26, 2003, there were approximately 1,356 holders of
record of Common Stock.

The following table sets forth the high, low and closing stock prices of
DHC's Common Stock for the last two years, as reported on the American Stock
Exchange Composite Tape.

DHC has not paid dividends on its common stock and does not expect to
declare or pay any dividends in the foreseeable future.

DHC did not make any sales of unregistered securities during the fourth
quarter of 2002.

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ITEM 6. SELECTED FINANCIAL DATA

- ---------------

(1) In 2002, Danielson Holding Corporation purchased 100% of American Commercial
Lines Holdings LLC, 5.4% of Global Materials Services LLC and 50% of Vessel
Leasing LLC. Certain reclassifications have been made for comparative
purposes.

(2) Does not give effect to currently exercisable options, and, in 2001, 2000
and 1999, warrants to purchase shares of Common Stock.

35

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW AND SIGNIFICANT EVENTS

DHC is a holding company that conducts substantially all of its operations
through its subsidiaries. DHC's parent-only operations consist primarily of
investment return on portfolio securities and limited administrative and
operating expenses, which are not material to DHC on a consolidated basis. DHC
possesses approximately $605 million of tax net operating loss carryforwards.
DHC's strategic and business plan is to acquire businesses that will allow DHC
to earn an attractive return on its investment.

Prior to 2002, DHC primarily engaged in the insurance services business
through NAICC and related entities ("Insurance Services"). In May 2002, as part
of DHC's implementation of its strategic plan, DHC acquired a 100% ownership
interest in ACL and thereby entered the marine transportation, construction and
related service provider businesses ("Marine Services"). The Marine Services
business is substantially larger than DHC's historical Insurance Services
business, which results in significant changes to DHC's consolidated financial
statements for 2002. Approximately 85% of DHC's consolidated 2002 revenues,
expenses and assets relate to its newly acquired Marine Services business and
approximately 15% relate to its historical Insurance Services business.

As discussed in detail in Item 1 of this Report, the Marine Services
business has experienced material financial problems subsequent to being
acquired by DHC. ACL and the other Debtors filed a Chapter 11 bankruptcy
proceeding on January 31, 2003, and material uncertainty exists as to its impact
on DHC's equity interest in ACL upon the conclusion of ACL's bankruptcy
proceeding. While it cannot presently be determined, DHC's investment in ACL may
have little or no value upon the completion of that bankruptcy proceeding. If
the value of DHC's investment in ACL is materially reduced or eliminated, DHC's
consolidated financial results would then again be predominantly based upon its
historical Insurance Services business until such time as DHC may be successful
in acquiring other businesses.

Accordingly, DHC believes that an analysis of DHC's consolidated financial
condition taken as a whole is not meaningful to investors at this time, but
rather that the appropriate analysis must be focused on its separate and
distinct Marine Services and Insurance Services businesses. DHC believes that
this separate analysis of its operating subsidiaries allows for both a more
consistent comparison of results with that of prior years and will provide a
more direct basis for comparison in future years in the event that DHC
effectively exits the Marine Services business as a result of the ACL bankruptcy
proceedings. Therefore, the following discussion of DHC's financial condition
and operating results primarily describes the condition, results, operations and
outlook of each of its businesses on a separate basis.

Notwithstanding the foregoing, the financial condition and results of
operations of DHC's separate business lines will impact DHC's available capital
resources that will be needed for DHC to expand through acquisitions. The net
effect of the operations of DHC's subsidiaries on DHC's liquidity is discussed
below under "Liquidity and Capital Resources".

MARINE SERVICES OVERVIEW AND SIGNIFICANT EVENTS

ACL ACQUISITION AND INVESTMENT IN GMS, GMSV AND VESSEL LEASING

On May 29, 2002, DHC consummated a rights offering to provide funds for the
acquisition of ACL and related entities as discussed below. DHC issued 8,705,219
shares of Common Stock at $5 per share pursuant to the rights offering in
exchange for $42.2 million net of expenses. Expenses included a $1.0 million
backstop fee paid to SZI, a major stockholder of DHC. In addition, 2,002,558
shares were issued pursuant to warrants exercised that were previously held by
SZI in connection with the rights offering for proceeds of $9.5 million and
264,582 shares were issued pursuant to the exercise of options for proceeds of
$1.1 million.

On May 29, 2002, Danielson consummated a transaction (the "Danielson
Recapitalization") to acquire 100% of the membership interest of ACLines, which
is the single member owner of ACL Holdings. ACL Holdings is the single member
owner of ACL. ACL is an integrated marine transportation and service

36

company, operating approximately 4,700 barges and 200 towboats on the inland
waterways of North and South America. ACL transports more than 70 million tons
of freight annually. Additionally, ACL operates marine construction, repair and
service facilities and river terminals.

Also on May 29, 2002, DHC acquired a 5.4% interest in GMS, an entity in
which ACL has a 50% ownership interest. GMS is an owner and operator of 26
marine terminal and warehouse facilities located in the United States and the
Netherlands. In addition, GMS has a 27% equity interest in GMSV, a joint venture
engaged in the unloading of barges in Venezuela. ACL has a 42% direct ownership
interest in GMSV. Danielson, through its ownership of ACL and GMS, has a 57%
direct ownership interest in GMSV. Danielson consolidates the financial
statements of GMS and GMSV in its financial statements.

Simultaneously with the Danielson Recapitalization on May 29, 2002, DHC
also acquired a 50% ownership interest in Vessel Leasing, an entity in which ACL
has a 50% ownership interest. Vessel Leasing is an owner of marine equipment,
which is leased to ACL. Vessel Leasing is considered a special purpose entity
under generally accepted accounting principles and is consolidated by ACL.

At the same time as the Danielson Recapitalization, SZI increased its
equity ownership in DHC to approximately 18%. Samuel Zell, DHC's President,
Chief Executive Officer and Chairman of DHC's Board of Directors, and Philip G.
Tinkler, DHC's Chief Financial Officer, are affiliated with SZI. William Pate, a
member of DHC's Board of DHC, is also an officer of SZI. Additionally, Messrs.
Zell and Tinkler are affiliated with HYI, which is a holder of approximately 42%
of ACL's Senior Notes and PIK Notes.

ACL'S CHAPTER 11 FILING

As also discussed in this Report at Item 1, Business -- Marine
Services -- ACL Bankruptcy Considerations, during 2002 and the beginning of
2003, ACL experienced a decline in barging rates, reduced shipping volumes and
excess barging capacity during a period of slow economic growth and a global
economic recession. Due to these factors, ACL's revenues and earnings did not
meet expectations and ACL's liquidity was significantly impaired and it was
unable to comply with its various debt covenants. As a result, ACL was unable to
meet its financial obligations as they became due. On January 31, 2003, ACL and
the other Debtors filed a petition with the Bankruptcy Court to reorganize under
Chapter 11 of the Bankruptcy Code. The Chapter 11 petitions do not cover any of
ACL's foreign subsidiaries or certain of its U.S. subsidiaries. DHC did not file
for Chapter 11 protection and is not a party to any proceedings under the
Bankruptcy Code.

ACL (as well as its other debtor-in-possession subsidiaries) is continuing
to operate its business as a debtor-in-possession under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. As a debtor-in-possession,
ACL may not engage in transactions outside of the ordinary course of business
without approval, after hearing, of the Bankruptcy Court. As part of the Chapter
11 cases, ACL intends to develop and propose for confirmation pursuant to
Chapter 11 a plan of reorganization that will restructure the operations and
liabilities of ACL to the extent necessary to result in the continuing viability
of ACL. A filing date for such a plan has not been determined by ACL, however,
ACL has the exclusive right to file a plan of reorganization during the 120 day
period following the Petition Date. If the exclusive period were to expire
without being extended, other parties, such as the creditors of ACL, would have
the right to propose alternative plans for reorganization.

In connection with the Chapter 11 filings, ACL received approval from the
Bankruptcy Court to pay or otherwise honor certain of its pre-petition
obligations, including but not limited to employee wages and certain employee
benefits, certain critical vendor payments, certain insurance and claim
obligations, and certain tax obligations, as a plan of reorganization is
developed.

Furthermore, ACL entered into the DIP Credit Facility that provides up to
$75 million of financing. As of March 27, 2003, participating bank commitments
under the DIP Credit Facility total $60 million, of which ACL has drawn $50
million, which was used to retire ACL's Pre-Petition Receivables Facility (as
hereinafter defined) and which continues to be used to fund ACL's day-to-day
cash needs. The DIP Credit Facility is secured by the same and additional assets
that collateralized the ACL Senior Credit Facilities (as hereinafter defined)
and the ACL Pre-Petition Receivables Facility, and bears interest, at ACL's
option, at LIBOR plus

37

four percent or an Alternate Base Rate (as defined in the DIP Credit Facility)
plus three percent. There are also certain interest rates in the event of a
default under the DIP Credit Facility.

The DIP Credit Facility also contains certain restrictive covenants that,
among other things, restrict the Debtors' ability to incur additional
indebtedness or guarantee the obligations of others. ACL is also required to
maintain minimum cumulative EBITDA, as defined in the DIP Credit Facility, and
limit its capital expenditures.

As a result of the Chapter 11 filings, certain events of default under the
ACL Senior Credit Facilities, Senior Notes, PIK Notes and Old Senior Notes (as
hereinafter defined) have occurred subsequent to December 31, 2002, the effects
of which are stayed pursuant to certain provisions of the Bankruptcy Code.

Under Chapter 11, actions by creditors to collect claims in existence at
the filing date are stayed or deferred absent specific Bankruptcy Court
authorization to pay such pre-petition claims while ACL continues to manage its
business as a debtor-in-possession and acts to develop a plan of reorganization
for the purpose of emerging from the Chapter 11 proceedings.

The amount of the claims to be filed against ACL by their creditors could
be significantly different than the amount of the liabilities recorded by ACL.
ACL also has numerous executory contracts and other agreements that could be
assumed or rejected during the Chapter 11 proceedings. Parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with the
reorganization process. Under these Chapter 11 proceedings, the rights of and
ultimate payments to pre-petition creditors, rejection damage claimants and
equity investors in ACL (which DHC controls through its ownership of ACLines
which owns 100% of the interests in ACL's parent, ACL Holdings) may be
substantially altered. This could result in claims being liquidated in the
Chapter 11 proceedings at less (possible substantially less) than 100% of their
face value, and the membership interests of ACL, which are indirectly,
wholly-owned by DHC, being substantially or totally diluted or cancelled.

The United States Trustee has appointed an unsecured creditors committee.
The official committee and its legal representatives have a right to be heard on
all matters that come before the Bankruptcy Court. Since DHC controls all of the
equity of ACL, it and its counsel are closely monitoring and are involved in the
ACL Chapter 11 proceedings as appropriate for an equity holder.

The Chapter 11 process presents inherent material uncertainty. It is not
possible to determine the additional amount of claims that may arise or
ultimately be filed, or predict (i) the length of time that the Debtors will
continue to operate under the protection of Chapter 11, (ii) the outcome of the
Chapter 11 proceedings in general, (iii) whether the Debtors will continue to
operate in their present organizational structure, or (iv) the effects of the
proceedings on the business of ACL, the other Debtors and its non-filing
subsidiaries and affiliates, or on the interests of the various creditors,
security holders and equity holders. The ultimate recovery, if any, by
creditors, security holders and ACL equity holders (100% controlled and
indirectly wholly owned by DHC) will not be determined until confirmation of a
plan or plans of reorganization. No assurance can be given as to what value, if
any, will be ascribed in the bankruptcy proceedings to each of these
constituencies, including DHC's equity interest in ACL, which could be
substantially or totally diluted or cancelled.

PRE-BANKRUPTCY FINANCIAL RESTRUCTURING OF ACL

Through May 28, 2002, ACL was in default under its bank and bond debt, as
well as its receivables facility, due to nonpayment of interest on the debt as
well as other covenant violations. On December 31, 2001, and subsequent thereto,
ACL elected not to pay the interest due on its bank and bond debt due to ongoing
negotiations with its bankers and note holders regarding the restructuring of
the debt. ACL obtained forbearance agreements or waivers which enabled it to
complete the Danielson Recapitalization and the debt restructuring described
below.

ACL's original secured debt was issued pursuant to the Old Senior Credit
Facilities. ACL also had outstanding $295.0 million of Old Senior Notes.

38

On March 15, 2002, ACL entered into a definitive recapitalization agreement
regarding the acquisition of ACL by Danielson. On April 15, 2002, ACL launched
an exchange offer pursuant to which ACL offered to exchange the Old Senior Notes
for new 11.25% Senior Notes and new 12% PIK Notes.

On April 11, 2002, ACL and certain lenders executed an amendment agreement
under which the Old Senior Credit Facilities would be amended and restated upon
the satisfaction of certain conditions set forth in the amendment agreement,
including the consummation of the Danielson Recapitalization.

Effective May 29, 2002, the Danielson Recapitalization was consummated with
$58.5 million of the Old Senior Notes and interest thereon, if any, contributed
by Danielson to ACL Holdings; $230 million, plus accrued interest, of the
remaining $236.5 million in Old Senior Notes exchanged for new Senior Notes, and
new PIK Notes and the Senior Credit Facilities amended. As part of the Danielson
Recapitalization, DHC contributed $25.0 million in cash to ACL Holdings, which
was immediately used to reduce the outstanding term loan debt under the Senior
Credit Facilities. In addition, $50.0 million of the amount outstanding under
the Old Revolving Credit Facility was converted into a new Term Loan.

DHC is neither an obligor nor guarantor of any of indebtedness or other
obligations of ACL, ACL Holdings, GMS, GMSV or Vessel Leasing.

As of May 29, 2002, after the $25.0 million reduction in outstanding Old
Term Loans, and after the $50.0 million Old Revolving Credit Facility conversion
to a Tranche A Term Loan, ACL's secured debt issued under the amended Senior
Credit Facilities consisted of a $46.6 million Tranche A Term Loan due June 30,
2005, a $134.0 million Tranche B Term Loan due June 30, 2006, a $157.7 million
Tranche C Term Loan due June 30, 2007 and the new Revolving Credit Facility
providing for revolving loans and the issuance of letters of credit for the
account of ACL in an aggregate principal amount of up to $50.0 million due June
30, 2005. As of December 27, 2002, the outstanding balance under the Term Loans
was $313.3 million and the outstanding balance under the Revolving Credit
Facility was $41.0 million in cash borrowings and $9.0 million in letters of
credit. The Term Loans bear interest at a rate equal to LIBOR plus a margin
based on ACL's performance. The annual interest rates as of December 27, 2002
were: Tranche A -- 6.00 %; Tranche B -- 6.25 %; and Tranche C -- 6.50 %. ACL
also had outstanding principal of $137.1 million in new Senior Notes and $116.1
million in new PIK Notes as of December 27, 2002. $6.5 million in principal of
the Old Senior Notes remain outstanding. The Senior Notes and PIK Notes are
unsecured.

Also effective May 29, 2002, ACL's receivables facility, which was
administered by PNC Bank, N.A., was replaced with a Receivables Purchase
Agreement among American Commercial Lines Funding Corporation, ACBL, Jupiter
Securitization Corporation and Bank One, NA (the "Pre-Petition Receivables
Facility") having substantially the same terms as the previous receivables
facility. The Pre-Petition Receivables Facility was retired by ACL on January
31, 2003 with funds from the DIP Credit Facility.

PRE-BANKRUPTCY STRIKE AT ACL'S MARINE CONSTRUCTION SUBSIDIARY

On July 3, 2002, Jeffboat, ACL's marine construction subsidiary, and its
unionized employees represented by the International Brotherhood of Teamsters,
Local No. 89, agreed upon a new collective bargaining agreement, ending a two
month long strike. The previous collective bargaining agreement had expired on
April 29, 2002 and the unionized employees chose to strike from April 30, 2002
until July 9, 2002, when they returned to work pursuant to the terms of the new
collective bargaining agreement.

ADDITIONAL ACL FINANCIAL RESTRUCTURING PRIOR TO BANKRUPTCY AND ACL CHAPTER 11
FILING

As discussed in this Report at Item 1, Business -- Marine Services -- ACL
Bankruptcy Considerations, in response to weak market and poor economic
conditions during 2002 and the beginning of 2003, and because of ACL's highly
leveraged position, ACL filed for protection under Chapter 11 of the Bankruptcy
Code. Prior to the Chapter 11 filing, ACL had been pursuing other financial
restructuring alternatives, which are described below.

ACL's Senior Credit Facilities and the indentures governing the Senior
Notes and the PIK Notes (the "Indentures") contain a number of covenants with
specified financial ratios and tests including, with respect to the Senior
Credit Facilities, maximum leverage ratios, rent adjusted maximum leverage
ratios and interest

39

coverage ratios. Compliance with financial ratios is measured at the end of each
quarter. The Indentures also contain certain cross default provisions. ACL's
ability to meet the financial ratios is affected by adverse weather conditions,
seasonality and other risk factors inherent in its business.

The Senior Credit Facilities also contain provisions which require
mandatory prepayments of the Term Loans with net proceeds from certain asset
sales, equity issuances, incurrence of indebtedness and sale and leaseback
transactions, as well as certain excess cash flow.

In late 2002, ACL received a notification from Bank One stating that ACL
was in violation of the cross-default provisions contained in the Pre-Petition
Receivables Facility, which provides that a failure to maintain the financial
ratios provided by the Credit Agreement, whether or not amended or waived,
constitutes a default under the Pre-Petition Receivables Facility. Subsequent to
the notice of default, Bank One and ACL agreed to an amendment to the
Receivables Facility which permitted ACL to continue utilizing the Receivables
Facility, although the loss reserve and certain facility fees were increased and
the termination date changed from May 29, 2003 to January 31, 2003.

Subsequent to the notice of default from Bank One, ACL obtained an
amendment (the "Amendment") of certain covenants under the Senior Credit
Facilities, relating to third quarter and fourth quarter 2002 covenants and a
waiver of any past violations thereof. Absent the Amendment, ACL would not have
been in compliance with the leverage or interest coverage ratios contained in
its Senior Credit Facilities as of December 27, 2002. At the end of the first
quarter of 2003, the covenant ratios revert to levels in effect before the
Amendment.

Although ACL management had been working on operating and financial plans
to comply with its debt covenants in 2003 and thereafter, ACL was unable to
complete an out-of-court restructuring and ACL management believed it was
probable that ACL would not be in compliance with the covenants in the Senior
Credit Facilities at the end of the first quarter 2003, absent another amendment
to the Senior Credit Facilities.

On December 31, 2002, ACL elected to exercise its rights under the
Indentures to postpone the interest payments due on the Senior Notes and Old
Senior Notes for thirty days. ACL did not make the interest payments within the
thirty day grace period. This resulted in an event of default under the Senior
Credit Facilities and the Pre-Petition Receivables Facility. ACL continued to
attempt to complete an out-of-court restructuring during this grace period.

As a result of the factors discussed above, ACL was unable to meet its
financial obligations as they became due and ACL filed for Chapter 11 under the
Bankruptcy Code on January 31, 2003 and is currently operating as a
debtor-in-possession under the Bankruptcy Code. ACL is funding its operations
with normal cash flows from operations and with proceeds from and access to the
DIP Credit Facility.

INSURANCE SERVICES OVERVIEW AND SIGNIFICANT EVENTS

WRITTEN PREMIUM INCREASES ON NAICC'S NON-STANDARD AND COMMERCIAL AUTO
INSURANCE LINES

On July 24, 2002, NAICC, DHC's primary operating insurance subsidiary,
decided to increase the aggregate net written premium run rate of its
non-standard private passenger automobile insurance in the State of California
and commercial automobile insurance in certain western states, including
California, from $30 million to $50 million. This decision was intended to
capitalize on favorable loss ratios occurring in NAICC's automobile insurance
lines and to solidify the distribution network of NAICC's products.

IMPACT OF ACL BANKRUPTCY ON NAICC STATUTORY ACCOUNTING

As discussed further in this Report at Item 1, Business -- Marine
Services -- ACL Bankruptcy Considerations, ACL filed for protection under
Chapter 11 of the Bankruptcy Code. As a result, it was determined for statutory
insurance accounting purposes that NAICC's investment in ACL was fully impaired.
At December 31, 2002, NAICC recognized a statutory charge to its surplus of $7.4
million. This charge, when combined with NAICC's underwriting results reduced
it's statutory surplus level below the Company Action Level of NAICC's risk
based capital calculation. In response to the above statutory condition, DHC
repaid the $4 million note due May 2004 to NAICC, and further contributed $4
million to NAICC to increase its
40

statutory capital during February 2003. With permission from the California
Department of Insurance, these transactions were recorded at December 31, 2002.
After consideration for the $8 million noted above, NAICC's reported capital and
surplus as of December 31, 2002 was above the Company Action Level of NAICC's
RBC calculation.

TAXES

DHC does not currently pay regular Federal income tax due to its net
operating loss carryforwards and the recognition of losses from several trusts
that assumed various liabilities of certain present and former subsidiaries of
DHC. It is expected that DHC's 2002 consolidated Federal income tax return will
report a cumulative net operating loss carryforward currently estimated at $606
million, which will expire in various amounts, if not used, between 2003 and
2019. Exclusive of the trusts' activities, DHC has generated cumulative taxable
losses both historically and during the prior three years. Over the past several
years, DHC's insurance operations have been generating losses exclusive of net
investment income, net realized gains and the trusts' activities. In 2002, DHC
generated income at the holding company level due to the gain recognized from
adjusting the ACL notes to fair value prior to and in connection with the
Danielson Recapitalization. Prior to 2002, DHC has historically generated losses
at the holding company level. Therefore, these tax loss attributes are currently
fully reserved in DHC's financial statements. See Note 14 of the Notes to
Consolidated Financial Statements.

RESULTS OF OPERATIONS -- GENERAL

The Marine Services group's operating revenues and expenses are included in
the Consolidated Statement of Operations for the period from May 29, 2002, the
date of the Danielson Recapitalization, to December 27, 2002. To be meaningful,
comparisons herein of the Marine Services group's operating results are in
reference to the pro forma operating results of the companies in that group
presented for the periods indicated as if the Danielson Recapitalization had
occurred as of January 1, 2001. Comparisons of the Insurance Services group's
and parent company only operating results herein are on a historical basis for
all the periods indicated since their operations are included in DHC's
consolidated financial statements throughout the periods presented.

41

DHC CONSOLIDATED PRO FORMA OPERATING INFORMATION
(UNAUDITED)

RESULTS OF OPERATIONS (2002/2001)

YEAR ENDED DECEMBER 27, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001

Marine Services Year Ended December 27, 2002 Compared with Year Ended December
28, 2001

ACL follows a 52/53 week fiscal year ending on the last Friday in December
of each year.

Operating Revenue. On a pro forma basis, Marine Services' revenue declined
$26.1 million or 3.3% for the year 2002 as compared to 2001. The revenue
decrease was primarily due to lower domestic barging freight rates and volumes
and the strike at Jeffboat, partially offset by higher sales at Jeffboat when
2001 revenue from the sale of barges to Vessel Leasing is excluded and increased
revenue from ACL's international business units.

Domestic barging revenue decreased $54.2 million to $581.8 million due to
lower barging rates for grain, bulk, coal and liquid freight, lower liquid
freight volume, lower coal freight volume, lower demurrage revenue and lower
towing revenue, partially offset by increased grain freight volumes primarily
due to better operating conditions in the first half of the year and increased
bulk freight volume as a result of increased demand in the last six months of
the year.

International barging revenue increased $2.3 million to $38.9 million
primarily due to increased revenue from ACL's Dominican Republic unit which
began operation in the third quarter of 2001, a new operation in Venezuela to
move bauxite tonnage during the low water navigation season and the sale of
logistics services to

42

a third party barge operator in Venezuela to transport equipment from the United
States to Venezuela. The increase was partially offset by the absence of
payments for minimum contract tonnage in Venezuela.

Revenue at Jeffboat increased $19.6 million to $81.5 due to increased sales
of dry cargo hoppers, partially offset by reduced sales of tank barges. In 2001,
$40.8 million of Jeffboat revenue was from the sale of hoppers to Vessel
Leasing. This revenue has been eliminated in the pro-forma operating information
because Vessel Leasing is now consolidated with ACL.

Terminals revenue increased $6.2 million due to the start of the GMSV
operation in 2002 and higher cargo handling revenue from GMS, partially offset
by lower revenue from ACL's terminal in Venezuela, lower revenue from ACL's
liquid transfer and storage facility and lower storage revenue from GMS.

Operating Expense. On a pro forma basis, Marine Services' operating
expense increased $36.1 million or 4.9 %. Consulting and legal fees of $14.1
million incurred by the Marine Services' operations in 2002, primarily as a
result of the Danielson Recapitalization, are included in the pro forma results.

Domestic barging expenses increased $1.8 million to $596.4 million due to
lower gains on property dispositions, higher consulting and legal fees primarily
associated with the Danielson Recapitalization, and higher equipment repair
expense, partially offset by reduced fuel prices, lower barge freight volume,
better operating conditions in the first half of 2002 and lower boat
depreciation expense due to a change in the estimated useful life of towboats.
Average fuel price before user tax decreased 11 cents per gallon to 71 cents per
gallon on a 2002 volume of 105 million gallons.

International barging expenses increased $2.7 million to $34.0 million
primarily due to expenses associated with providing logistics services to a
third party barge operator in Venezuela, an increase in expenses from ACL's
Dominican Republic unit, which began operation in the third quarter of 2001 and
additional expenses associated with operations during low water periods in
Venezuela.

Jeffboat's expenses increased $24.9 million to $82.2 million due to
increased dry cargo hopper production, partially offset by reduced tank barge
production.

Terminals expense increased $6.7 million to $59.1 million due to the start
of the GMSV operation, higher labor cost from GMS due to increased cargo
handling volumes and increased medical insurance expense.

Insurance Services Year Ended December 31, 2002 Compared with Year Ended
December 31, 2001

The operations of DHC's insurance subsidiary, NAICC, are primarily property
and casualty insurance. The results discussed below exclude NAICC's share of any
undistributed earnings related to its proportional ownership of ACLines.

NAICC's objective is to underwrite business that is expected to yield an
underwriting profit. During 2001, NAICC determined that certain lines of
business were unsustainable in the current rate environment. Competitive and
regulatory pressures have resulted in a general market for premium rates in
those lines that is well below a level necessary to achieve a profit, especially
in light of increasingly unfavorable loss development. Rather than continuing
writing those lines that are likely to sustain higher than expected losses, in
2001 NAICC exited both the workers' compensation line of insurance in all
states, and also the private passenger lines of insurance outside of California.
The last workers' compensation policy outside Montana was issued in July 2001
and the last Montana workers' compensation policy was issued in January 2002.
The remaining lines of insurance written by NAICC in 2002 are private passenger
automobile in California and commercial automobile in certain western states,
primarily California. Costs incurred in 2001 attributable to the contraction
process were approximately $1.25 million and include the write-off of goodwill
and employees' severances.

Net premiums earned were $62.2 million in 2002 as compared to $81.9 million
in 2001. The change in net premiums earned during those years is directly
related to the change in net premiums written. Net written premiums were $52.6
million and $80.4 million in 2002 and 2001, respectively. Net earned premiums
exceeded net written premiums in 2002 due to the decision to cease writing in
several lines of business as noted above.

43

The overall decrease in net written premium for 2002 over the comparable
period in 2001 is attributable to significant reduction in our commercial
automobile line and the decision made in 2001 to exit both the workers'
compensation line of business in all states and private passenger automobile
outside of California. Workers' compensation net written premium decreased by
$14.1 million during 2002 over the comparable period in 2001. The commercial
automobile net written premium decreased from $38.4 million in 2001 to $19.5
million in 2002 due to curtailed underwriting activity. Net written premiums for
personal automobile lines increased by $5.3 million during 2002 primarily due to
premium growth in the non-standard California private passenger automobile
programs in excess of the decline in net written premium outside of California.

Premium and fees receivable, net of allowances, decreased by $7.2 million
or 49%. The decrease is attributable to the decision to significantly reduce
NAICC's underwriting operations. Prior to that decision, NAICC experienced
significant growth in installment premiums related to its commercial automobile
program during 2001. NAICC's automobile programs have installment features on
policy terms in excess of six months. Premiums from the automobile program that
generally offer policy terms less than six months and do not utilize installment
plans increased in 2002. The effect of these trends was to magnify the overall
decrease in installment premium receivable during 2002.

The increase in the allowance for premiums and fees receivable during 2002
of $0.2 million was attributable to the increase in installment premiums during
2001 prior to the decision to contract underwriting operations in the commercial
automobile line. In conjunction with the increase in installment premiums during
2001, NAICC experienced an increase in collection efforts relating to such
premiums. As a result, NAICC increased both its allowance for premiums and the
amount written-off against such allowance during 2002.

Net investment income was $5.6 million in 2002 compared to $7.6 million in
2001. The net investment income decrease is due primarily to a decrease in the
fixed income portfolio. The fixed-income invested asset portfolio decreased by
$25.9 million in 2002 compared to an increase of $0.9 million in 2001. The
decrease during 2002 is attributable to the conversion of $9.2 million of ACL
notes into equity in addition to maturities and pay-downs. As a result of the
decrease in written premiums noted above, maturities and pay-downs were not
reinvested at the same level as in 2001. As of December 31, 2002 and 2001, the
average yield on NAICC's portfolio was 5.9% and 5.8%, respectively. The
estimated average duration of the portfolio at December 31, 2002 is 2.7 years
compared to 3.2 at December 31, 2001.

A realized investment gain of $5.2 million was recognized in 2002 upon
conversion of the ACL notes into equity. This gain, combined with a $5.1 million
loss on non-affiliated equity securities and a $0.9 million gain on fixed
maturities produced a net realized investment gain of $1.0 million in 2002. Net
realized investment losses on non-affiliated equity securities during 2002 were
principally a result of deteriorating portfolio fair values deemed to be other
than temporary. Realized losses of $3.6 million were recorded for other than
temporary declines in fair value in 2002 of the equity securities of three
companies. NAICC's investments in two of these companies were sold in 2002
subsequent to the recording of the other than temporary decline. The net
unrealized loss on NAICC's equity portfolio was $1.4 million at the end of
December 2002. NAICC's equity portfolio which consists primarily of small and
midcap technology companies, declined significantly during the last half of
2002. Net realized gains on non-affiliated equity securities were $1.2 million
during 2001. Realized gains in 2001 reflected strong valuations consistent with
the general economic trend for that period.

Net losses and loss adjustment expenses (LAE) incurred were $59.9 million
in 2002 compared to $76.5 million in 2001. The resulting net loss and LAE ratios
were 96.3% in 2002 and 93.5% in 2001. The increase in the loss and LAE ratio
during 2002 was attributable to higher than expected losses in the California
private passenger automobile and commercial automobile programs totaling $2.8
million and $2.0 million, respectively. In addition, NAICC had significant
adverse development in the California workers' compensation line and
non-California private passenger automobile. Adverse development on prior
accident years recognized for workers' compensation in 2002 was $3.6 million.
The adverse development for prior accident years related to the private
passenger automobile lines placed in run-off was $2.0 million. Adverse
development on prior accident years recognized for workers' compensation in 2001
totaled $4.4 million. The

44

adverse development for prior accident years related to the private passenger
automobile lines placed in run-off was $2.4 million.

Policy acquisition costs were $14.1 million in 2002 compared to $20.8
million in 2001. As a percent of net premiums earned, policy acquisition
expenses were 22.7% in 2002 and 25.3% in 2001. Policy acquisition costs include
expenses which are directly related to premium volume (i.e., commissions,
premium taxes and state assessments) as well as certain underwriting expenses
which are fixed in nature. The decrease in the policy acquisition expense ratio
in 2002, compared to 2001, is due to a reduction of acquisition costs of $1.9
million primarily as the result of the decision in 2001 to exit those lines
mentioned above.

General and administrative expenses were $5.9 million in 2002 compared to
$8.7 million in 2001. General and administrative expenses have decreased in 2002
due to decreased production and previously implemented cost containment efforts.
General and administrative expenses in 2001 also include $0.9 million in
amortization of goodwill expense. As a percent of net premiums earned, general
and administrative expenses were 9.5% in 2002 and 10.7% in 2001. The decrease in
2002 reflects decreased production in 2002 and the effect of cost saving
measures implemented during 2001. The 2001 ratio includes an additional $1.25
million of costs associated with the decision to contract NAICC's underwriting
operations. Those costs included employee severance payments of approximately
$0.5 million and a write-off of goodwill of approximately $0.7 million. These
costs added 1.5% to the 2001 ratio.

Combined underwriting ratios were 128.5% and 129.4% in 2002 and 2001,
respectively. The combined ratio decrease in 2002 reflects reductions in both
policy acquisition and administrative expenses, that was partially offset by an
increase in loss and LAE during 2002 compared to 2001.

The insurance operations had a loss, excluding any effect of its investment
in ACLines, LLC, an affiliate, and excluding the $5.2 million gain from
conversion of ACL notes to equity, of $15.7 million in 2002 compared to a loss
of $13.8 million in 2001. The increase in loss from operations compared to 2001
is the result of $5.1 realized losses on the equity portfolio, offset by $0.9
million gain on sales of fixed income securities in 2002 as compared to a gain
on equity portfolio sales of $1.2 million in 2001 that negated the impact of the
improvement in the combined ratio during 2002 noted above.

Year Ended December 27, 2002 Compared with Year Ended December 31,
2001 -- Parent Company Only Administrative Expense and Danielson Interest
Expense

Administrative Expense. Parent company administrative expense increased
$2.5 million to $4.9 million for the year ending December 2002 as compared to
$2.4 million for the year ending December 2001. The increase is primarily due to
expense for stock options, which were modified as of July 24, 2002, one time
increases in management compensation related to the resignation of certain DHC
management in connection with its acquisition of ACL, higher directors' fees and
additional insurance expense. Prior to the acquisition of ACL and shortly
thereafter, DHC shared certain personnel and facilities with several affiliated
and unaffiliated companies who have certain common directors and officers, and
certain expenses were allocated among the various entities. Personnel costs were
allocated based upon actual time spent on DHC business. Costs relating to office
space and equipment were allocated based upon actual usage. Management believes
the methodology used for allocation is appropriate. Total expenses include $1.8
million in 2002 and $1.3 million in 2001 related to expenses allocated to DHC
from affiliated entities.

Interest Expense. Interest expense increased to $38.7 million for the year
ending December 2002 as compared to no interest expense for the year ending
December 2001 primarily due to ACL's and GMS' interest expense after the
acquisition.

Other Expense (Income). Parent company gains on investments increased to
$8.8 million for the year ending December 2002 as compared to $0.3 million for
the year ending December 2001 due to recognition of $8.4 million in gain on ACL
bonds owned by DHC that were contributed as part of the purchase price of ACL
Holdings. The remaining $0.4 million gain on investments in 2002 was due to the
sale of Home Product Bonds during the fourth quarter and is included in Net,
Other Expense (Income).

45

RESULTS OF OPERATIONS (2001/2000)

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

DHC had no Marine Services operations in 2001 or 2000.

Insurance Services Year Ended December 31, 2001 Compared with Year Ended
December 31, 2000

The operations of NAICC in 2001 and 2000 were in property and casualty
insurance. During 2001, NAICC determined that certain lines of insurance might
not be sustainable in the current rate environment. Competitive and regulatory
pressures have resulted in a general market for premium rates in these lines
that is well below a level necessary in order to achieve a profit, especially in
light of increasingly unfavorable loss history. Rather than continue to sustain
losses, NAICC exited the workers' compensation line of insurance in all states,
and also exited the non-standard private passenger automobile program written
outside of California. The last workers' compensation policy outside Montana was
issued in July 2001 and the last Montana workers' compensation policy was issued
in January 2002. The last new non-standard private passenger automobile policy
outside of California was issued in September 2001. The remaining lines of
insurance written by NAICC will be non-standard private passenger automobile in
California and commercial automobile in certain western states, primarily
California.

Net premiums earned were $81.9 million in 2001 compared to $67.0 million in
2000. The change in net premiums earned was directly related to the change in
net written premiums. Net written premiums were $80.4 million in 2001 compared
to $73.1 million in 2000. Net earned premiums exceeded net written premiums in
2001 due to the decision to cease writing in several lines of business as noted
above.

The overall increase in net written premiums in 2001 was attributable to
growth in the commercial automobile insurance business, especially during the
first nine months of 2001. However, in keeping with NAICC's objective of
underwriting only business that is expected to yield an underwriting profit,
NAICC, beginning in September 2001, initiated efforts to reduce the overall
commercial automobile premium production through a temporary moratorium on new
business, eliminating certain states and terminating agency appointments.

Workers' compensation net written premiums decreased by $0.7 million during
2001 over the comparable year to date period in 2000 due to decreased
production, primarily in California. The commercial automobile net written
premiums grew from $23.1 million in 2000 to $38.4 million in 2001 due to
increased production, primarily in California. Net written premiums for personal
automobile insurance decreased during 2001 primarily due to the termination of
certain private passenger automobile programs as noted above.

Premiums and fees receivable, net of allowances, decreased by $0.7 million
or 4.3%. The decrease is attributable to the decision to reduce NAICC's
underwriting operations. Prior to that decision, NAICC experienced significant
growth in installment premiums related to its commercial automobile program.
NAICC's automobile programs have installment features on policy terms in excess
of six months. Premiums from the automobile program that generally offer policy
terms less than six months and do not utilize installment plans increased
slightly in 2001. The effect of these trends was to mitigate the overall
decrease in installment premium receivable during 2001.

The increase in the allowance for premiums and fees receivable during 2001
of $0.8 million was attributable to the increase in installment premiums during
2001 prior to the decision to decrease underwriting operations. In conjunction
with the increase in installment premiums, NAICC experienced an increase in
collection efforts relating to such premiums, especially non-standard private
passenger automobile policies outside of California. As a result, NAICC
increased both its allowance for premiums and the amount of write-offs against
such allowance.

Net investment income was $7.6 million in 2001 compared to $7.7 million in
2000. As of December 31, 2001 and 2000, the average yield on NAICC's portfolio
was 5.8% and 6.6%, respectively. Net investment income remained flat despite the
decrease in the portfolio yield due to the write-off of $1.0 million of accrued
interest related to the investment in ACL Senior Notes, which were in default at
December 31, 2001. Had the

46

write-off not been required the portfolio yield would have been 8.3%. The
fixed-income invested assets increased by only $0.9 million in 2001 compared to
an increase of $9.1 million in 2000. The relatively flat activity during this
year is attributable to maturities and paydowns in excess of purchases in the
fourth quarter of $7.8 million. The estimated average duration of the portfolio
at December 31, 2001 was 3.2 years compared to 3.3 years at December 31, 2000.

Net losses and LAE were $76.5 million in 2001 compared to $60.5 million in
2001. The resulting net loss and LAE ratios were 93.5% in 2001 and 90.3% in
2000. The increase in the loss and LAE ratio during 2001 was attributable to
higher than expected losses in the non-California private passenger automobile
programs, and significant adverse development in the California workers'
compensation line. Adverse development on prior accident years recognized for
workers' compensation in 2001 totaled $4.4 million. The adverse development for
prior accident years related to the private passenger automobile lines placed in
run-off was $2.4 million.

Policy acquisition costs were $20.8 million in 2001 compared to $16.4
million in 2000. As a percentage of net premiums earned, policy acquisition
expenses were 25.3% in 2001 and 24.5% in 2000. Policy acquisition costs include
expenses directly related to premium volume (i.e., commissions, premium taxes
and state assessments) as well as certain underwriting expenses. The increase in
the policy acquisition expense ratio in 2001 compared to 2000, is due to the
increased acquisition costs in the non-California private passenger automobile
business. The increase was caused by a reduction in the deferral rate as
compared to the prior year caused by increased losses as compared to the prior
year.

General and administrative expenses were $8.7 million in 2001 compared to
$5.7 million in 2000. As a percent of net premiums earned, general and
administrative expenses were 10.7% in 2002 and 8.5% in 2000. General and
administrative expenses increased in 2001 due to increased production for the
first nine months of 2001 and an additional $1.25 million of costs associated
with the decision to reduce NAICC's underwriting operations. Those costs include
both severance to terminated employees of approximately $0.5 million and the
write-off of goodwill of approximately $0.7 million. These costs added 1.53% to
the 2001 ratio.

Combined underwriting ratios were 129.4% in 2001 compared to 123.1% in
2000. The increase in the combined ratio in 2001 was primarily the result of
increased loss costs and increased costs associated with the decision to
contract NAICC's underwriting operations as discussed above.

The insurance operations had a loss from operations of $13.8 million in
2001, compared to income from operations of $1.8 million in 2000. The increase
in the loss for 2001 was primarily attributable to increases in loss and LAE
primarily in the non-California private passenger automobile and workers'
compensation lines of business. The increase in the loss for 2001 was also
attributable to costs associated with the reduction of insurance operations.

Parent Company Only Administrative Expense -- Year Ended December 31, 2001
Compared with Year Ended December 31, 2000

Administrative Expense. DHC had $2.4 million in administrative expense in
2001 as compared to $2.5 million in 2000. DHC parent only expenses are for rent
and other administrative services. Total expenses allocated to DHC from
affiliated entities were $1.3 million for both of the years 2001 and 2000.

OUTLOOK

MARINE SERVICES

Domestic barging demand for bulk, steel and liquid commodities is expected
to remain at 2002 levels for the first half of 2003. The domestic barging demand
for grain freight is driven by the supply of and demand for corn and other
grains. The U.S. Department of Agriculture currently forecasts 2002/2003 crop
year corn exports of 1.75 billion bushels and Sparks Company Inc. a private
grain forecast service predicts 2002/2003 crop year exports of 1.725 billion
bushels as compared to actual exports of 1.89 billion bushels for the 2001/2002
crop year.

47

In the first quarter of 2003, the average price of fuel consumed by ACBL
vessels is expected to increase $0.27 per gallon from the $.71 per gallon
average price for 2002. ACBL vessels will consume approximately 110 million
gallons annually and generally ratably throughout the year. ACBL has contract
price adjustment clauses which provide protection for approximately 55% of
gallons consumed. Contract adjustments are deferred one quarter. In March 2003,
ACL made a forward fuel purchase and purchased an option to protect from fuel
price increases on substantially all of its expected fuel consumption during the
second quarter of 2003.

ACL management expects that normal cash flows from operations and access to
the DIP Credit Facility will be sufficient to meet planned working capital,
capital expenditures and other cash requirements until such time as it seeks to
obtain approval for a plan of reorganization. However, due to material
uncertainties associated with the outcome of the Chapter 11 proceedings in
general, and the effects of such proceedings on the business of ACL and its
subsidiaries, there can be no assurances that such plan will be approved or
whether ACL will obtain sufficient liquidity enabling it to continue to operate
in its present organizational structure.

INSURANCE SERVICES

NAICC management expects that the business environment in California will
remain neutral and competitive. The effect of the decision in 2001 to exit
certain lines of business, as expected, was a substantial reduction in the
underwriting operations of NAICC in 2002 evidenced by a 35% reduction in net
written premium. However, this reduced premium activity did not have the desired
impact of improving overall profitability as the loss and loss adjustment costs
associated with the lines placed into run-off during 2001 exceeded estimates. As
a result, NAICC expects a further reduction of premium volume during 2003.
Management is continually evaluating its filed rates and expects to file
adjustments as needed. Cost reductions initiated in 2001 and 2002 should
mitigate the impact of the expected premium reduction. NAICC is experiencing a
condition in which claim payments related to the lines placed into run-off
exceed premium receipts from those lines. Management expects the trend in
negative cash flow to continue for several years until premium growth in the
remaining lines of business becomes sufficient to support operations.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the same
period. Actual results could differ from those estimates.

The consolidated financial statements have been prepared on a going concern
basis which assumes continuity of ACL's operations and realization of assets and
settlement of liabilities in the ordinary course of business. The financial
statements do not give effect to any adjustment to the carrying value of assets
or amounts and adjustments of liabilities that might be necessary as a result of
the ACL Chapter 11 filing. Critical accounting policies that affect the reported
amounts of assets and liabilities on a going concern basis include revenue
recognition; expense estimates of harbor and towing service charges, insurance
claim loss deductibles and employee benefit plans; impairment of long-lived
assets; asset capitalization; loss reserves and investment valuation. Certain of
these policies are critical to the portrayal of Danielson's financial condition
and results of operations since they require management to establish estimates
based on complex and subjective judgments.

The primary source of Marine Services' revenue, barge transportation
revenue, is recognized on a percentage of completion basis. The proportion of
barge transportation revenue to be recognized is determined by applying a
percentage to the contractual charges for such services. The percentage is
determined by dividing the number of miles from the loading point to the
position of the barge as of the end of the accounting period by the total miles
from the loading point to the barge destination as specified in the customer's
freight contract. The position of the barge at accounting period end is
determined by locating the position of the boat

48

with the barge in tow through use of a global positioning system. The
recognition of revenue based upon the percent of voyage completion results in a
better matching of revenue and expenses. Marine construction, repair and harbor
service revenue is recognized based upon the completed contract method. Losses
are accrued if construction costs are expected to exceed construction contract
revenue. Terminal revenue is recognized as services are performed.

Harbor and towing service charges are estimated as service incidents occur
based upon recent historical charges by vendor for the same type of service
event. Service events are recorded by vendor and location in ACL's barge
tracking system. Vendor charges are estimated for these events based on current
published vendor rates. Vendor charges can vary based upon the number of boat
hours required to complete the service, the grouping of barges in vendor tows
and the quantity of man hours and materials required. DHC management believes it
has recorded sufficient liabilities for these services. Changes to these
estimates could have a significant impact on ACL's financial results.

Liabilities for insurance claim loss deductibles include accruals for the
uninsured portion of personal injury, property damage, cargo damage and accident
claims. These accruals are estimated based upon historical experience with
similar claim incidents. The estimates are recorded upon the first report of a
claim and are updated as new information is obtained. The amount of the
liability is based on the type and severity of the claim and an estimate of
future claim development based on current trends and historical data. DHC
management believes it has recorded sufficient liabilities for these claim
incidents. These claims are subject to significant uncertainty related to the
results of negotiated settlements and other developments. As claims develop, DHC
may have to change its estimates and these changes could have a significant
impact on DHC's consolidated financial statements.

Assets and liabilities of DHC's defined benefit plans are determined on an
actuarial basis and are affected by the estimated market value of plan assets,
estimates of the expected return on plan assets, and discount rates. Actual
changes in the fair market value of plan assets and differences between the
actual return on plan assets and the expected return on plan assets will affect
the amount of pension expense ultimately recognized, impacting DHC's results of
operations. The liability for post-retirement medical and life insurance
benefits is also determined on an actuarial basis and is affected by assumptions
including the discount rate and expected trends in health care costs. Changes in
the discount rate and differences between actual and expected health care costs
will affect the recorded amount of post-retirement benefits expense, impacting
DHC's results of operations.

ACL is self-insured for the medical benefit plans covering most of its
employees. DHC estimates its liability for claims incurred by applying a lag
factor to ACL's historical claims and administrative cost experience. The
validity of the lag factor is evaluated periodically and revised if necessary.
Although management believes the current estimated liabilities for medical
claims are reasonable, changes in the lag in reporting claims, changes in claims
experience, unusually large claims, and other factors could materially affect
the recorded liabilities and expense, impacting financial condition and results
of operations.

Statement of Financial Accounting standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") gives companies the choice to account
for stock-based compensation using either the fair value method or the intrinsic
value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Danielson has elected to account for its stock option plans using the intrinsic
value method. Because most of the options granted to employees and directors
under those plans have had an exercise price equal to the market value of the
underlying common stock on the date of grant, only minimal stock-based
compensation cost due to modifications had been recognized in the consolidated
statements of operations for those options. In 2002, options granted to
contractors resulted in more significant expense being recognized under SFAS
123. Had DHC elected to account for all of its stock option grants using the
fair value method of SFAS 123, or if accounting rules change to require
accounting different than the intrinsic value method, DHC's results of
operations could be materially affected.

Note 1 in Item 8, Financial Statements -- Significant Accounting Policies,
includes supplemental information, including pro forma net income and earnings
per share, as if stock-based compensation cost for all of the stock option
grants had been determined using the fair value method of SFAS 123. The fair
value of

49

these options was estimated at the date of grant or modification using a
Black-Scholes option pricing model with assumptions about the risk-free interest
rate, expected option life, and expected stock price volatility. These
assumptions can be highly subjective. Because stock options have characteristics
different from those of traded options, changes in the subjective assumptions
can materially affect the fair value of stock options. Using different
assumptions, the supplemental information provided in Note 1 could be materially
different.

Danielson management periodically reviews long-lived assets for impairment.
Cash flows by operating unit are estimated based upon long-term historical
trends, management's knowledge of the relationship between the supply of barges
and the demand for barge transportation and construction services and
management's estimates of future trends regarding significant operating revenues
and costs. These estimates are subject to uncertainty. ACL's significant assets
were preliminarily appraised in conjunction with the ACL acquisition. Based on
these preliminary appraisals and the estimates of future cash flows, management
believes that ACL's long-lived assets are not impaired.

Asset capitalization policies have been established by Danielson management
to conform to generally accepted accounting principles. Repairs that extend the
original economic life of an asset or that enhance the original functionality of
an asset are capitalized and amortized over their estimated economic life.
Routine engine overhauls that occur on a one to three year cycle are expensed
when they are incurred. The costs of purchasing or developing software are
capitalized and amortized over the estimated economic life of the software.

Insurance Services' earned premium income is recognized ratably over the
contract period of an insurance policy. A liability is established for unearned
insurance premiums that represents the portion of premium received which is
applicable to the remaining portion of the unexpired terms of policies in force.

The Insurance Services group maintains reserves for losses and loss
expenses to cover the estimated liability for unpaid claims, including legal and
other fees as well as a portion of our general expenses, for reported and
unreported claims incurred as of the end of each accounting period. Reserves
represent an estimate of the cost of the expected ultimate settlement and
administration of the claims. Such estimates are based upon estimates for
reported losses and historical company and industry experience for loss
development. The ultimate cost of claims is difficult to predict for several
reasons. The variables described above are affected by both internal and
external events, such as changes in rates of inflation and the legal
environment, which create forecasting complications. Court decisions may
dramatically increase liability in the time between the dates on which a claim
is reported and its resolution. Punitive damage 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.

The Insurance Services group has claims for environmental clean up against
policies issued prior to 1970. The unpaid loss and loss adjustment expenses
related to environmental cleanup is established considering facts currently
known and the current state of the law and coverage litigation.

Due to the factors discussed above and others, the process used in
estimating unpaid losses and loss adjustment expenses cannot provide an exact
result. Danielson's results of operations for each of the past three years have
been adversely affected by insurance loss development related to prior years of
$10.4 million, $7.6 million and $5.3 million for 2002, 2001 and 2000,
respectively.

See, Note 1 of the Notes to the Consolidated Financial Statements, for a
further discussion of significant accounting policies.

LIQUIDITY AND CAPITAL RESOURCES

DHC is a holding company that conducts substantially all of its operations
through its subsidiaries. As such, DHC has limited liquidity and capital
resources at the parent company level. As more fully described elsewhere in this
filing, DHC's subsidiaries are currently unable to distribute or loan funds to
DHC. As a result, DHC is dependent on income from its holding company
investments, and monetizing its holding company investments to provide liquidity
and capital resources. In addition, DHC may be able to raise funds

50

from the equity markets and borrow funds as it deems appropriate to fund
operations and potential acquisitions. However, there can be no assurance that
such additional equity capital or debt will be available to DHC on acceptable
terms.

On May 29, 2002, DHC consummated a rights offering to provide funds for the
acquisition of ACL and related entities as discussed in Marine Services above.
8,705,219 shares of Common Stock were issued at $5 per share pursuant to the
rights offering in exchange for $42.2 million in proceeds, net of expenses.
Expenses included a $1.0 million backstop fee paid to SZ Investments LLC, a
major stockholder of DHC. In addition, 2,002,558 shares were issued pursuant to
warrants exercised that were previously held by SZI in connection with the
rights offering for proceeds of $9.5 million and 264,582 shares were issued
pursuant to the exercise of options for proceeds of $1.1 million.

On May 29, 2002, ACL completed the Danielson Recapitalization through which
DHC acquired ACL Holdings, the parent company of ACL. Holders of ACL Holdings'
preferred units exchanged all of their preferred units, other than the preferred
units held by management unit holders, for $7.0 million in cash from Danielson.
Danielson contributed to ACL Holdings $58.493 million principal amount of ACL's
Old Senior Notes plus the interest obligations thereon, if any, and $25.0
million in cash in exchange for newly issued common units of ACL Holdings. All
common units held by the common unitholders, other than the consenting common
unitholders, were cancelled and extinguished. Members of ACL's management
abandoned to ACL Holdings all preferred units of ACL Holdings held by them for
no consideration and all those preferred units were deemed cancelled and
extinguished.

Upon consummation of the recapitalization, Danielson acquired 100% of the
membership interests of ACL Holdings for $7.0 million in cash paid to preferred
unit holders, cash of $25.0 million contributed to ACL Holdings, Old Senior
Notes and accrued interest, if any, having an estimated fair value of $43.7
million contributed to ACL Holdings and $6.6 million in fees.

Concurrent with the recapitalization of ACL Holdings, ACL reduced its
outstanding term loan debt by $25.0 million.

On May 29, 2002, DHC also purchased the 50% equity interest of Vessel
Leasing for $2.8 million and a 5.4% equity interest in GMS for $1.3 million.

DHC's primary sources of liquidity are cash flows from the operating
activities of the Marine Services group, borrowings under ACL's DIP Credit
Facility and other bank debt, and cash flows from the operating activities and
investments of the insurance subsidiaries. Cash provided by operating activities
totaled $0.05 million for 2002 compared to cash used by operating activities of
$4.7 million for 2001. The increase in cash provided was primarily due to the
cash provided from the operations of the Marine Services group partially offset
by cash used from Insurance Services' operations, discussed below.

PARENT COMPANY OPERATIONS

Operating cash flow of DHC on a parent-only basis is primarily dependent
upon the rate of return achieved on its investment portfolio and the payment of
general and administrative expenses incurred in the normal course of business.
For the years ended December 2002, 2001 and 2000, cash used in parent-only
operating activities was $4.8 million, $0.9 million and $1.5 million,
respectively. Cash used in operations is primarily attributable to wages and
benefit costs, professional fees, directors' fees, insurance and other working
capital requirements of the holding company's business. The increase in cash
used in 2002 as compared to 2001 is due to additional insurance premium
payments, one time increases in management compensation related to the
resignation of certain DHC management in connection with its acquisition of ACL
and higher directors' fees.

As of December 27, 2002, cash and investments of DHC were approximately
$6.4 million.

In 2002, DHC paid cash of $42.7 million, including $6.6 million in fees,
for the acquisition of ACL, 50% of the equity of Vessel Leasing and 5.4% of the
equity of GMS.

51

In 2001, DHC borrowed $4 million from NAICC at an annual interest rate of
6%, to be repaid by 2004. This loan was subsequently repaid in February 2003. In
2002 and 2000 DHC received cash in the amount of $42.2 million and $3.1 million,
respectively, from the sale of newly issued common stock.

DHC's sources of funds are its investments as well as dividends received
from its subsidiaries. Various state insurance requirements restrict the amounts
that may be transferred to DHC in the form of dividends or loans from its
insurance subsidiaries without prior regulatory approval. In 2000, NAICC
received regulatory approval and paid a $1.5 million dividend to DHC. As noted
above, ACL cannot pay dividends to DHC since it is currently in Chapter 11.

DHC's domestic insurance companies are regulated by the insurance
regulatory agencies of the states in which they are authorized to do business.
Many aspects of the Company's insurance business are subject to regulation. For
example, minimum capitalization must be maintained; certain forms of policies
must be approved before they may be offered; reserves must be established in
relation to the amounts of premiums earned and losses incurred; and, in some
cases, schedules of premium rates must be approved.

In compliance with state insurance laws and regulations, securities with a
fair value of approximately $45 million, $45 million and $44 million at December
31, 2002, 2001 and 2000, respectively, were on deposit with various states or
governmental regulatory authorities. In addition, at December 31, 2002, 20001
and 2000, investments with a fair value of $6.4 million, $6.6 million and $6.5
million, respectively, were held in trust or as collateral under the terms of
certain reinsurance treaties and letters of credit.

MARINE SERVICES

The discussion under this heading relates to the entire Marine Services
group, of which ACL is a part. Significant changes in ACL's credit facilities
during 2002 are discussed above at Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Marine Services, Overview
and Significant Events. ACL only indebtedness is discussed in more detail below
at Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- ACL Indebtedness.

As of December 27, 2002, DHC's Marine Services subsidiaries had outstanding
indebtedness of $700.5 million, including $313.3 million drawn under ACL's Term
Loans, $41.0 million drawn under ACL's Revolving Credit Facility, $137.1 million
aggregate principal amount of new 11.25% ACL Senior Notes, $116.1 million of new
12% ACL PIK Notes, $6.5 million of Old Senior Notes and $0.3 million in ACL
other debt. Long-term debt also includes $39.7 million in Vessel Leasing bonds
guaranteed by the U.S. Maritime Administration, $33.7 million in GMS bank debt,
$2.9 drawn under GMS's revolving credit facility, $5.3 million in Illinois
Development Finance Authority bond proceeds outstanding to GMS, $0.8 million in
GMS other debt, $2.8 million in GMSV bank debt and $1.0 million in GMSV other
debt. The ACL debt assumed by Danielson as part of the acquisition was adjusted
to fair value at the acquisition date. The total amount of the unamortized
discount as of December 27, 2002 is $57.4 million. The difference between the
principal amount of the debt and its fair value is being accreted as interest
expense over the term of the debt under the effective interest method.
Accordingly, as of December 27, 2002, the carrying value of the Senior Notes was
$128.5 million, the carrying value of the PIK Notes was $68.8 million and the
carrying value of the Old Senior Notes was $5.0 million. As of December 27,
2002, ACL also had $1.6 million and GMS had $1.7 million in outstanding capital
lease obligations which are included in other current and long-term liabilities.
As of December 27, 2002 ACL had securitized $39.3 million of the trade
receivables of two subsidiaries. DHC does not guarantee the debt of ACL, Vessel
Leasing, GMS or GMSV.

At December 27, 2002, ACL had $39.3 million outstanding under the
Pre-Petition Receivables Facility, its accounts receivable securitization
facility, and had $27.6 million of net residual interest in the securitized
receivables. The fair value of the net residual interest is measured at the time
of the sale and is based on the sale of similar assets. In 2002, Marine Services
received gross proceeds of $20.3 million from the sale of receivables and made
gross payments of $23.6 million under the Pre-Petition Receivables Facility.

52

There was no liquidity available under the ACL Revolving Credit Facility as
of December 27, 2002, with $41.0 million drawn and $9.0 letters of credit
outstanding. There was $1.3 million in liquidity available under the GMS
revolving credit facility as of December 27, 2002.

As of March 27, 2003, ACL had drawn $50.0 million under the DIP Credit
Facility. Terms of the DIP Credit Facility are discussed in this Report at Item
1, Business -- Description of Businesses -- ACL Bankruptcy Considerations.

Net cash from Marine Service's operating activities in 2002 was used
primarily for capital expenditures.

Capital expenditures were $18.2 million for 2002. Cash expenditures in 2002
included $8.1 million for domestic marine equipment acquisitions and $4.5
million for terminal equipment maintenance. The remaining $5.6 million in cash
capital expenditures in 2002 was primarily for marine equipment maintenance.

In July 2002, GMS sold its grain terminal in Osceola, Arkansas for $2.0
million.

Management expects capital expenditures in 2003 to be approximately $27
million and to be primarily for marine equipment and terminal maintenance.
Additional operating lease expense to provide marine replacement equipment will
be mostly offset by reductions in existing barge charter rates.

ACL's business is seasonal, and its quarterly revenues and profits
historically have been lower during the first and second fiscal quarters of the
year (January through June) and higher during the third and fourth fiscal
quarters (July through December) due to the North American grain harvest. In
addition, working capital requirements fluctuate throughout the year.

ACL is highly leveraged, which makes it vulnerable to changes in general
economic conditions and to worldwide weather conditions, particularly those
affecting North and South America, given the nature of ACL's business. ACL's
ability to reorganize under Chapter 11 will depend on, among other things,
financial, business, market, competitive and other conditions, many of which are
beyond ACL's control.

ACL INDEBTEDNESS

During 2002 and the beginning of 2003, the decline in barging rates,
reduced shipping volumes and excess barging capacity during a period of slow
economic growth and a global economic recession caused ACL's revenues and
earnings to fail to meet expectations and ACL's liquidity was significantly
impaired. As a result, ACL was unable to meet its financial obligations as they
became due. On January 31, 2003, ACL and the other Debtors filed a petition with
the Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code. The
Chapter 11 petitions do not cover any of ACL's foreign subsidiaries or certain
of its U.S. subsidiaries, GMS or Vessel Leasing. DHC did not file for Chapter 11
protection and is not a party to any proceedings under the Bankruptcy Code.

As a result of the foregoing and other events, ACL has classified all of
its long-term debt as current debt.

ACL's ability to generate cash sufficient to fund its cash requirements for
the next year, including capital expenditures for fleet maintenance, working
capital, interest payments and scheduled principal payments on the DIP Credit
Facility, is also principally dependent on:

- the absence of unusually adverse weather conditions during 2003, which,
if adverse, could reduce or eliminate ACL's ability to navigate on
certain river segments, adversely affect ACL's operational efficiencies
and reduce overall volumes transported; and

- the absence of a material adverse effect on ACL's business from the
Chapter 11 proceedings and the other risks addressed in this Report in
the section titled "Forward Looking and Cautionary Statements" and at
Item 1, Business -- Risk Factors, the other securities filings referenced
therein, including, but not limited to, changing market, labor, legal and
regulatory conditions and trends in the barge and inland shipping
industries and general economic and business conditions, including a
prolonged or substantial recession in the United States or certain
international commodity markets such as the market for grain exports,
significant pricing competition, unanticipated additions to industry
capacity, fuel costs and interest rates.
53

Demand for freight moved by ACL barges is influenced by the economic demand
for the cargoes. A decrease in that demand could adversely affect ACL's
operating cash flows. Some cargoes are more highly dependent upon general
economic conditions, such as certain liquid and steel cargoes which have
experienced softening in demand over the past year.

Cash flows from ACL's barging and manufacturing operations are also
affected by weather and river conditions. Extreme weather conditions can have a
materially adverse affect on ACL's operating cash flows.

ACL has various environmental matters that could have an impact on its
financial condition, results of operations and cash flows. These environmental
matters are discussed in this Report at Item 3, Legal Proceedings.

Management expects that normal cash flows from operations and access to the
DIP Credit Facility will be sufficient to meet planned working capital, capital
expenditures and other cash requirements until such time as it seeks to obtain
approval for a plan of reorganization. However, due to material uncertainties
associated with the outcome of the Chapter 11 proceedings in general, and the
effects of such proceedings on the business of ACL and its subsidiaries, there
can be no assurances that such plan will be approved or whether ACL will obtain
sufficient liquidity enabling it to continue to operate in its present
organizational structure.

CHANGES IN CREDIT RATINGS FOR ACL

On January 2, 2003, the debt rating agency Standard & Poor's lowered its
rating on ACL's Senior Notes to "D" from "CCC-" and its rating on ACL's Senior
Subordinated Notes to "CC" from "CCC-". Also on January 2, the rating on ACL's
Senior Credit Facilities was lowered to "CCC+" from "B-". The bank loan rating
and subordinated debt rating remained on CreditWatch with negative implications.

On January 7, 2003, the debt rating agency Moody's Investors Services
lowered its rating on ACL's Senior Credit Facilities from "B3" to "Caa1", its
rating on ACL's Senior Notes to "Caa3" from "Caa2", and its rating on ACL's
Senior Subordinated Notes to "Ca" from "Caa3".

On January 31, 2003, the debt rating agency Standard & Poor's lowered its
rating on ACL's Senior Subordinated Notes to "D" from "CC" and its rating on
ACL's Senior Credit Facilities was lowered to "D" from "CCC+". The Senior Note
debt rating, which had been lowered to "D" on January 2, 2003, remained
unchanged. The bank loan and subordinated debt ratings were removed from
CreditWatch, where they had been placed November 14, 2002.

INSURANCE SERVICES

DHC's insurance subsidiaries require both readily liquid assets and
adequate capital to meet ongoing obligations to policyholders and claimants, as
well as to pay ordinary operating expenses. NAICC meets both its short-term and
long-term liquidity requirements through operating cash flows that include
premium receipts, investment income and reinsurance recoveries. To the extent
operating cash flows do not provide sufficient cash flow, the Company relies on
the sale of invested assets. NAICC's investment policy guidelines require that
all liabilities be matched by a comparable amount of investment grade assets.
Management believes that NAICC has both adequate capital resources and
sufficient reinsurance to meet any unforeseen events such as natural
catastrophes, reinsurer insolvencies, or possible reserve deficiencies. NAICC
meets both its short-term and long-term liquidity requirements through operating
cash flows that include premium receipts, investment income, realized gains, and
reinsurance recoveries. To the extent operating cash flows do not provide
sufficient cash flow, NAICC relies on the sale of invested assets.

Cash used in insurance operations was $23.8 million in 2002. Cash used in
operations was $3.9 million in 2001. Cash provided by insurance operations was
$8.8 million in 2000. The increase in cash used by insurance operations for 2002
as compared to 2001 is primarily attributable to the deterioration of
underwriting results and the decision in 2001 to place certain lines of business
into runoff. Due to premium growth during the first nine months of 2001, NAICC
was able to meet its short-term cash needs primarily through premium receipts.
In light of the decision to reduce NAICC's underwriting operations, funds
provided from premium receipts

54

decreased significantly in 2002. Further, because workers' compensation and
automobile liability claims are paid over the course of several years, NAICC
experienced a condition in which claim payments related to the lines placed into
run-off exceeded premium receipts from those lines. Such negative cash flow
requires the sale of invested assets to meet obligations as they arise. The
increase in cash used by operations in 2001 as compared to 2000 was due to
deteriorating underwriting results caused by adverse development in those lines
placed into run-off during 2001 and to amounts received for the rescission of
certain reinsurance treaties of $11.5 million in 2000. Had the funds related to
the rescission not been received in 2000, the cash used in operations would have
been approximately $3.4 million.

The National Association of Insurance Commissioners ("NAIC") provides
minimum solvency standards in the form of risk based capital requirements
("RBC"). The RBC model for property and casualty insurance companies requires
that companies are to report their RBC ratios based on their statutory annual
statements as filed with the regulatory authorities. NAICC has calculated its
RBC requirement under the RBC model and believes that it has sufficient capital
for its operations. Further, the NAIC has developed the Insurance Regulatory
Information System ("IRIS"). IRIS identifies twelve ratios for property/casualty
insurance companies. IRIS specifies ranges of "usual values" for each ratio.
Departure from the "usual value" range on four or more ratios may lead to
increased regulatory oversight from individual state insurance commissioners. As
a result of the losses recognized in 2002 and 2001, NAICC expects that it will
fail seven of those regulatory ratios relating to loss development and surplus
change. Two of the failures relate strictly to loss development and two relate
to surplus changes caused by both loss development and investment losses
incurred during 2002. The remaining three ratio failures relate to reduction in
writings, overall investment yield and liabilities to liquid assets. The failure
of such ratios subjects NAICC to increased regulatory inquiry. Based on the
differential between reported surplus and the surplus level requiring further
regulatory action, NAICC believes that the failure of those ratios will not have
an adverse impact on the operations of NAICC.

As noted above, ACL filed for protection under Chapter 11 of the Bankruptcy
Code. As a result, it was determined for statutory insurance accounting purposes
that NAICC's investment in ACL was fully impaired. At December 31, 2002, NAICC
recognized a statutory charge to its surplus of $7.4 million. This charge, when
combined with NAICC's underwriting results and investment losses reduced its
statutory surplus level below the Company Action Level of NAICC's RBC
calculation. In response to the above statutory condition, DHC repaid the $4
million note due May 2004 to NAICC, and further contributed $4 million to NAICC
to increase its statutory capital during February 2003. With permission from the
California Department of Insurance, these transactions were recorded at December
31, 2002. As a condition to granting permission, the Department required NAICC
to obtain permission prior to entering into a loan with an affiliate. After
consideration for the $8 million noted above, NAICC's reported capital and
surplus as of December 31, 2002 was above the Company Action Level of NAICC's
RBC calculation.

NAICC'S INVESTMENTS

California and Montana insurance laws and regulations regulate the amount
and type of NAICC's investments. NAICC's investment portfolio is comprised
primarily of fixed maturities and is weighted heavily toward investment grade
short and medium term securities. See Notes 1 and 9 of the Notes to the
Consolidated Financial Statements.

55

The following table sets forth a summary of NAICC's investment portfolio at
December 31, 2002 (dollars in thousands):

Letters of Credit

NAICC pledges assets and posts letters of credit for the benefit of other
insurance companies they do business with in the event that NAICC is not able to
pay their reinsurers. NAICC had assets pledged of $9.1 million and had letters
of credit outstanding of $2.8 million at December 31, 2002.

Contractual Obligations and Commercial Commitment Summary

A summary of Danielson's contractual commitments under debt and lease
agreements appears below. The table assumes that ACL's debt and GMS' bank debt
principal payments are not accelerated.

CONTRACTUAL OBLIGATIONS

- ---------------

* Operating leases having initial or remaining non-cancelable lease terms longer
than one year.

56

A summary of Danielson's other commercial commitments appears below.

COMMERCIAL COMMITMENTS

Additional disclosures regarding these obligations and commitments can be
found in Notes 4 and 17 of notes to the consolidated financial statements.

FUEL HEDGING, INTEREST RATE SWAPS AND INTEREST RATE CAP

During 2002, ACL used forward purchases of diesel fuel to provide
protection against increases in prices of diesel fuel used to operate ACL's
vessels. The 2002 forward purchases were swap agreements whereby ACL locked into
a fixed future price at the time of purchase. Diesel fuel was not actually
delivered under these future purchases. Instead the swap is settled when due and
ACL paid or received a dollar amount based on the difference in the fixed future
price and the actual price index for the settlement month. Due to cash
collateral requirements imposed by ACL's broker as a result of increased
volatility in the fuel market, ACL settled its hedge position in January 2003.
In March 2003, ACL made a forward fuel purchase and purchased an option to
protect from fuel price increases on substantially all of the gallons expected
to be consumed during the second quarter of 2003.

The fair value of the net swap was the difference between the future price
of the fuel index as of the date of valuation and the fixed future price
established at the time each individual contract is purchased, multiplied by the
number of gallons purchased. In 2002, ACL typically entered into one forward
contract each month for gallons associated with freight bookings that have fixed
price commitments with no contract fuel adjustment protection clauses. The fair
value of the contracts outstanding at December 27, 2002 was $0.19 million.

GMS has interest rate swap agreements in place on a notional amount of
$31.5 million in debt. These swaps expire between January 2004 and January 2008.
GMS pays a fixed rate and receives a variable LIBOR rate or a variable municipal
bond index rate. As of December 27, 2002, the fair value of these swaps is a
liability of $2.3 million.

FAIR VALUE OF CONTRACTS AT PERIOD END

ACL also has an interest rate cap agreement on a notional amount of $202
million in debt. The agreement expires August 11, 2003 and has a fair value of
zero as of December 27, 2002. The fair value of the cap agreement has been
provided by an external source.

RELATED PARTY TRANSACTIONS

DHC has transactions with various related parties, primarily affiliated
entities accounted for by the equity method. DHC believes that the terms and
conditions of those transactions are in the aggregate not materially more
favorable or unfavorable to DHC than would be obtained on an arm's-length basis
among unaffiliated parties.

DHC recorded charter income from UABL of $5.9 million for the period May
29, 2002 through December 27, 2002. DHC also recorded administrative fee
expenses to UABL of $4.3 million for the period May 29, 2002 through December
27, 2002. Charter rates are established at fair market value based upon similar
transactions. As of December 27, 2002, DHC has recorded $6.3 million in accounts
receivable from UABL.

Prior to and shortly after the acquisition of ACL, DHC shared certain
personnel and facilities with several affiliated and unaffiliated companies who
have certain common directors and officers, and certain expenses were allocated
among the various entities. Personnel costs were allocated based upon actual
time spent on DHC business. Costs relating to office space and equipment were
allocated based upon actual usage. Management believes the methodology used for
allocation is appropriate. Total expenses allocated to DHC from affiliated
entities were $1.8 million, $1.3 million and $1.3 million for the years ended
December 2002, 2001 and 2000, respectively.

DHC has agreed to provide SZI unlimited demand registration rights with
respect to the ACL Senior Notes and ACL PIK Notes held by SZI and its
affiliates, including HYI. Mr. Zell, DHC's President and Chief Executive Officer
and Chairman of DHC's Board of Directors, and Mr. Tinkler, DHC's Chief Financial
Officer, are affiliated with SZI and HYI. Mr. Pate, a member of DHC's Board of
Directors, is affiliated with SZI.

DHC has also entered into a non-exclusive investment advisory agreement
dated April 14, 1999 with EGI, a company affiliated with Mr. Zell, pursuant to
which EGI has agreed to provide, at the request of DHC, certain investment
banking services to DHC in connection with potential transactions. For these
services, in 2002 DHC paid a fee of $0.06 million to EGI. In the event that a
transaction is consummated for which the Acquisition Committee of DHC's Board of
Directors determines that EGI provided material services, DHC will pay to EGI a
fee in the amount of 1% of the aggregate consideration in connection with such
transaction (including indebtedness assumed or outstanding). As a result of
services provided to DHC during the Danielson Recapitalization of ACL, which is
described in more detail in this Report at Item 1, Business -- Description of
Business -- The Marine Services Business -- ACL History; DHC Acquisition and
Recapitalization of ACL, DHC and EGI agreed that the fee for EGI's services was
$3.0 million. DHC has also agreed to reimburse, upon request, EGI's
out-of-pocket expenses related to services provided under the investment
advisory agreement. For providing a standby commitment to purchase any DHC
shares that were unsubscribed in the rights offering conducted by DHC as part of
its acquisition of ACL, DHC paid SZI a fee of $1.0 million. Messrs. Zell and
Pate are members of the Acquisition Committee, along with Messrs. Whitman and
Barse, all of whom are Directors of DHC.

On November 8, 2002, DHC, SZI, and Martin J. Whitman terminated an
investment agreement existing between those parties, which provided certain
voting and registration rights to the parties and entered into a new
registration rights agreement with SZI.

58

CHANGES IN ACCOUNTING STANDARDS

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes
the accounting for goodwill and other intangible assets following their
recognition. SFAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. SFAS
142 provides that goodwill and intangible assets with indefinite lives should
not be amortized but should be tested for impairment annually using a fair-value
based approach. In addition, SFAS 142 provides that other intangible assets
should be amortized over their useful lives and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS
121 has been superceded by SFAS 144 which is described below. The adoption of
SFAS 142 on January 1, 2002 has not had a significant effect on Danielson's
financial position or results of operations.

In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets and supersedes SFAS 121 and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", for the disposal of a segment of business (as
previously defined in that Opinion). SFAS 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception
to consolidation for a subsidiary for which control is likely to be temporary.
The objectives of SFAS 144 are to address significant issues relating to the
implementation of SFAS 121 and to develop a single accounting model, based on
the framework established in SFAS 121, for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired. ACL adopted SFAS
144 in the first quarter 2002. The provisions of SFAS 144 did not have an impact
on Danielson's financial statements during the year ended December 27, 2002.

In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"), which addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs incurred in a Restructuring)"
("Issue 94-3"). The principal difference between SFAS 146 and Issue 94-3 relates
to SFAS 146's requirements for recognition of a liability for a cost associated
with an exit or disposal activity. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
Severance pay under SFAS 146, in many cases, would be recognized over time
rather than up front. Additionally, under SFAS 146, if the benefit arrangement
requires employees to render future service beyond a "minimum retention period"
a liability should be recognized as employees render service over the future
service period even if the benefit formula used to calculate an employee's
termination benefit is based on length of service. The provisions of SFAS 146
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. Management expects to adopt SFAS
146 in 2003.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARINE SERVICES

The Marine Services operations are exposed to certain market risks which
are inherent in its financial instruments and which arise from transactions
entered into in the normal course of business. A discussion of the primary
market exposures in Marine Services financial instruments is presented below.

FUEL PRICE RISK

At December 27, 2002, ACL had forward fuel purchase contracts outstanding
with an aggregate notional amount of approximately $4.4 million and a fair value
of approximately $.19 million, which has been recorded

59

in accounts receivable with the offset to fuel expense. Under these agreements,
ACL will pay fixed prices ranging from $0.69 to $0.80 per gallon. There were 6.1
million gallons remaining on the contracts at December 27, 2002. However, due to
cash collateral requirements imposed by ACL's broker as a result of increased
volatility in the fuel market, ACL settled its hedge position in January 2003.
In March 2003, ACL made a forward fuel purchase and purchased an option to
protect from fuel price increases on substantially all of its expected fuel
consumption during the second quarter of 2003.

For the year ended December 27, 2002, the entire change in fair value
resulted in realized gains of $.05 million and an unrealized gain of $0.19
million which are recorded in fuel expense in the consolidated statement of
operations. ACL estimates that at December 27, 2002, a 10% change in the price
per gallon of fuel would have changed the fair value of the existing fuel rate
swap contracts by $0.4 million.

Fuel consumed in 2002 represented approximately 11% of ACL's operating
expenses. Many of ACL's long-term contracts contain clauses under which
increases in fuel costs are passed on to customers thereby reducing the fuel
price risk. Such contracts protect about half of ACL's fuel consumption but the
contract rate adjustments are deferred one calendar quarter. In addition, ACL
typically enters into fuel rate swap agreements for short-term fuel price
protection. As a result of ACL's fuel hedging strategy, it might not fully
benefit from certain fuel price declines.

Based on ACL's 2003 projected fuel consumption, a one cent change in the
average annual price per gallon of fuel would impact ACL's annual operating
income by approximately $0.4 million (compared to the 2001 projection of $0.3
million), after the effect of escalation clauses in long-term contracts and fuel
rate swap agreements in place as of December 27, 2002.

See ACL's disclosures relating to fuel hedging in this Report at Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Fuel Hedging, Interest Rate
Swaps and Interest Rate Cap.

INTEREST RATE AND OTHER RISKS

At December 27, 2002, ACL had $354.3 million of floating rate debt
outstanding, which represented the outstanding balance of the Senior Credit
Facilities. A 1% change in interest rates would change interest expense by $3.5
million annually.

ACL has an interest rate cap agreement which limits ACL's base LIBOR to
7.5% on a notional amount of $201.8 million, corresponding to that amount of
floating rate debt outstanding which is based on LIBOR. The agreement is
designed to hedge ACL's exposure to future increases in market interest rates.
As of December 27, 2002, the fair value of the interest rate cap agreement was
zero. ACL accounts for the interest rate cap as a cash flow hedge whereby the
fair value of the interest rate cap is reflected as an asset or liability in the
consolidated statement of financial position. The cap rate (hedging instrument)
is the same interest rate index as the base interest rate for the floating rate
debt (hedged item). When the interest rate index exceeds the interest rate cap,
a portion of the change in fair value of the instrument represents a change in
intrinsic value which is an effective hedge. This portion of the change in value
will be recorded as other comprehensive income (loss). The remaining change in
fair value is recorded as other expense (income) in the consolidated statement
of operations.

GMS has four interest rate swaps with a total notional amount of $31.5
million through which GMS pays fixed rates of 4.5% to 7.7% and receives LIBOR or
a municipal bond swap index. A swap with a notional amount of $16.0 million
terminates January 1, 2004, swaps with a notional amount of $11.7 million
terminate in May and June, 2005, and a swap with a notional amount of $3.8
million terminates in January 2008. The fair value of these swaps is a liability
of $2.7 million as of December 27, 2002 and is recorded in other liabilities on
the consolidated statement of financial position. Danielson's share of the
changes in the fair value of the swaps from the acquisition date through
December 27, 2002 is recorded as comprehensive loss or other expense depending
on whether the swap is an effective or ineffective hedge.

60

At December 27, 2002, ACL had sold at a discount based upon commercial
paper rates, $39.3 million of the accounts receivable of two subsidiaries. ACL
has the right to repurchase these receivables. At this amount outstanding, a 1%
change in the commercial paper rates would change other expense by $0.4 million
annually.

FOREIGN CURRENCY EXCHANGE RATE RISKS

All of ACL's significant transportation contracts in South America are
currently denominated in U.S. dollars. However, many expenses incurred in the
performance of such contracts, such as crew wages and fuel, are, by necessity,
denominated in a foreign currency. Therefore, ACL is affected by fluctuations in
the value of the U.S. dollar as compared to certain foreign currencies.
Additionally, ACL's investments in foreign affiliates subject it to foreign
currency exchange rate and equity price risks. Management does not consider its
exposure to exchange rate risks to be material and considers its investments in
foreign affiliates to be denominated in relatively stable currencies and of a
long-term nature. Accordingly, ACL does not typically manage its related foreign
currency exchange rate and equity price risks through the use of financial
instruments.

The Venezuelan government promulgated new currency control laws in February
2003, which restrict the free convertibility of U.S. dollars and Venezuelan
bolivar currencies in Venezuela. Although ACL International's Venezuelan
subsidiary, ACBL de Venezuela, C.A. ("ACBLV"), has contracts denominated in U.S.
dollars, it pays certain expenses incurred in the performance of such contracts,
such as crew wages and fuel, in bolivars. The restrictions on ACBLV's ability to
convert U.S. dollars to bolivars for the payment of these expenses could have an
adverse impact on ACL. ACL is evaluating the overall effect of the new
Venezuelan currency control laws and waiting for the new rules to be promulgated
for a full assessment of the impact, if any.

INSURANCE SERVICES

RISK RELATED TO THE INVESTMENT PORTFOLIO

NAICC's objectives in managing its investment portfolio are to maximize
investment income and investment returns while minimizing overall credit risk.
Investment strategies are developed based on many factors including underwriting
results, overall tax position, regulatory requirements, and fluctuations in
interest rates. Investment decisions are made by management and approved by the
Board of Directors. Market risk represents the potential for loss due to adverse
changes in the fair value of securities. The market risks related to NAICC's
fixed maturity portfolio are primarily credit risk, interest rate risk and
prepayment risk. The market risk related to NAICC's equity portfolio is price
risk.

FIXED MATURITIES

Interest rate risk is the price sensitivity of fixed maturities to changes
in interest rate. Management views these potential changes in price within the
overall context of asset and liability matching. Management estimates the payout
patterns of NAICC's liabilities, primarily loss reserves, to determine their
duration. Management sets duration targets for our fixed income portfolio after
consideration of the duration of NAICC's liabilities that we believe mitigates
the overall interest rate risk. Credit risk is the price sensitivity of fixed
maturities to changes in the credit quality of such investment.

Fixed maturities of NAICC include Mortgage-Backed Securities ("MBS")
representing 33.6% and 29.3% of total fixed maturities at December 31, 2002 and
December 31, 2001, respectively. All MBS held by NAICC are issued by the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are both rated Aaa by Moody's Investors Services.
Both FNMA and FHLMC are corporations that were created by Acts of Congress. FNMA
and FHLMC guarantee the principal balance of their securities. FNMA guarantees
timely payment of principal and interest.

One of the risks associated with MBS is the timing of principal payments on
the mortgages underlying the securities. The principal an investor receives
depends upon amortization schedules and the termination pattern (resulting from
prepayments or defaults) of the individual mortgages included in the underlying
pool

61

of mortgages. The principal is guaranteed but the yield and cash flow can vary
depending on the timing of the repayment of the principal balance. The degree to
which a security is susceptible to changes in yield is influenced by the
difference between its amortized cost and par, the relative sensitivity to
repayment of the underlying mortgages backing the securities in a changing
interest rate environment, and the repayment priority of the securities in its
overall securitization structure. NAICC attempts to limit repayment risk by
purchasing MBS whose cost is below or does not significantly exceed par, and by
primarily purchasing structured securities with repayment protection which
provides more certain cash flow to the investor such as MBS with sinking fund
schedules known as Planned Amortization Classes ("PAC") and Targeted
Amortization Classes ("TAC"). The structures of PAC's and TAC's attempt to
increase the certainty of the timing of prepayment and thereby minimize the
prepayment and interest rate risk. In 2002, NAICC recognized $0.9 million in
gain on sales of fixed maturities.

MBS, as well as callable bonds, have a greater sensitivity to market value
declines in a rising interest rate environment than to market value increases in
a declining interest rate environment. This is primarily due to the ability and
the incentive of the payor to prepay the principal or the issuer to call the
bond in a declining interest rate scenario. NAICC realized significant increases
in its prepayments of principal during 2002 and 2001. The prepayments mitigated
the need to sell securities to meet operating cash requirements as noted above.
Generally, this trend will lower the portfolio yield in future years in a
declining interest environment.

MBS instruments are described in tabular format below.

MORTGAGE-BACKED SECURITIES

The following table provides information about NAICC's fixed maturity
investments at December 31, 2002 that are sensitive to changes in interest
rates. The table presents expected cash flows of principal amounts and related
weighted average interest rate by expected maturity dates. The expected maturity
date for other than mortgage-backed securities is the earlier of call date or
maturity date or for mortgage-backed securities are based on expected payment
patterns. Actual cash flows could differ from expected amounts considering the
weighting of NAICC's portfolio towards mortgage-back securities.

FIXED MATURITIES

EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS

62

EQUITY SECURITIES

During 2001, NAICC reduced its equity portfolio by liquidating almost all
of its position in foreign securities. The proceeds from the sale of these
securities were used to increase NAICC's fixed maturity portfolio by purchasing
$9.2 million of ACL Senior Notes. In May 2002, the ACL Senior Notes, with a fair
value of $14.5 million, were converted into equity of ACLines LLC as part of the
Danielson Recapitalization of ACL announced in January 2002 and consummated on
May 29, 2002, which is more fully described in this Report at Item 1,
Business -- Description of Businesses -- The Marine Services Business -- ACL
History; Danielson Acquisition and Recapitalization of ACL. On January 31, 2003,
ACL filed for protection under Chapter 11 of the Bankruptcy Code.

During 2002, NAICC increased its equity portfolio. At year end, NAICC had
$6.6 million invested in its equity portfolio.

Since the portfolio included foreign securities during 2002 there was
foreign currency risk. Foreign currency risk is the sensitivity to exchange rate
fluctuations of the market value and investment income related to foreign
denominated financial instruments. At December 31, 2001, NAICC held
approximately $2.0 million at cost with a fair value of $0.8 million in yen
denominated equity securities with an average yen-to dollar cost of
approximately 128.7 Japanese yen. During 2002 all yen denominated equity
securities were sold.

Equity price risk is the potential loss arising from changes in the value
of equity securities. Typically, equity securities have more year-to-year price
volatility than medium term investment grade fixed maturity instruments. During
2002, NAICC realized $4.1 million of losses on the sale of its non-affiliate
equity securities and a $1.0 million loss due to an impairment charge for an
other than temporary investment loss.

The equity price risks inherent in the equity portfolio is subject to
several factors beyond the control of management, and as such there can be no
assurance that the future price fluctuations would not be material.

ECONOMIC CONDITIONS

The operating results of a property and casualty insurer are influenced by
a variety of factors including general economic conditions, competition,
regulation of insurance rates, weather, and frequency and severity of losses.
The markets in which NAICC operates have experienced long periods of rate
inadequacy coupled with increased competition. The general economic conditions
in California, where NAICC writes approximately 77% of its business, are
currently neutral and competitive.

The competition, rate regulation and loss experience in the California
automobile markets are currently such that, despite the difficulties in these
lines during 2002, NAICC believes it can write in the state profitably. During
2002 NAICC recognized an increase in the frequency of losses for its
non-standard private passenger automobile line, and also higher than expected
adverse loss experience prior accident years in its commercial automobile line.
During 2001, the competition, rate regulation and loss experience in the non-
California automobile markets are currently such that NAICC was not able to
write in those states profitably, and as a result has exited those markets.

The California workers' compensation market, where NAICC had historically
written a significant amount of its premium, continues to be very price
competitive. Workers' compensation premium volume in 2001, prior to the decision
to exit the market, decreased slightly as competitors began to raise rates
during 2001. Despite those current rate increases, NAICC believes that
competitors continue to price policies at rates below a level necessary to
achieve an underwriting profit. Coupled with an industry-wide increase in
adverse loss experience, NAICC believes that its decision to exit the workers'
compensation line is warranted under these economic conditions.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

The foregoing discussion and the Notes to Consolidated Financial Statements
may include forward-looking statements that involve risks and uncertainties. In
addition to other factors and matters discussed

63

elsewhere herein, some of the important factors that, in the view of NAICC,
could cause actual results to differ materially from those discussed in the
forward-looking statements include the following:

1. The insurance products sold by NAICC are subject to intense competition
from many competitors, many of whom have substantially greater
resources that NAICC. There can be no assurance that NAICC will be able
to successfully compete in these markets and generate sufficient
premium volume at attractive prices to be profitable. This risk is
enhanced by the reduction in the lines of business NAICC writes as a
result of it decision to reduce underwriting operations.

2. The insurance industry is highly regulated and it is not possible to
predict the impact of future state and federal regulations on the
operations of NAICC.

3. Unpaid loss and LAE are based on estimates of reported losses,
historical company experience of losses reported by reinsured companies
for reinsurance assumed from such insurers, and historical company
experience for unreported claims. Such liability is, by necessity,
based on estimates that may change in the near term. There can be no
assurance that the ultimate liability will not exceed, or even
materially exceed, such estimated amount included herein.

64

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

DANIELSON HOLDING CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

The accompanying notes are an integral part of the consolidated financial
statements.
65

DANIELSON HOLDING CORPORATION

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The accompanying notes are an integral part of the consolidated financial
statements.
66

DANIELSON HOLDING CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

The accompanying notes are an integral part of the consolidated financial
statements.
67

DANIELSON HOLDING CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of the consolidated financial
statements.
68

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Danielson Holding Corporation ("DHC") is a holding company whose
subsidiaries (collectively with DHC, "Danielson") consisted principally of
insurance operations in the western United States, primarily California, prior
to the acquisitions described in Note 2. On May 29, 2002, Danielson acquired
marine service operations in the United States and South America, including
barge transportation, marine construction and repair, and cargo handling
operations.

American Commercial Lines LLC ("ACL") is an integrated marine
transportation and service company. ACL provides barge transportation and
ancillary services throughout the inland United States and Gulf Intracoastal
Waterway Systems, which include the Mississippi, Ohio and Illinois Rivers and
their tributaries and the Intracoastal canals that parallel the Gulf Coast. In
addition, ACL is the leading provider of barge transportation services on the
Orinoco River in Venezuela and the Parana/Paraguay River System serving
Argentina, Brazil, Paraguay, Uruguay and Bolivia. ACL, through its subsidiary
Jeffboat LLC ("Jeffboat"), also provides marine construction and repair
services.

Global Materials Services LLC ("GMS") is an owner and operator of 26 marine
terminal and warehouse facilities located in the United States and the
Netherlands. DHC acquired an ownership interest in GMS during 2002 as described
in Note 2. GMS' ownership at December 27, 2002 was 5.4% owned by DHC, 50.0%
owned by ACL, and in total 55.4% owned by Danielson. The remaining 44.6% is
owned by an unaffiliated third party.

In 2002, GMS, ACL and minority owners organized new companies to unload
bauxite in Venezuela. The "GMSV" companies are Global Materials Services
Venezuela C.A., GMS Venezuela Terminal Partners LLC and GMS Venezuela Terminal
Holdings LLC. Danielson, through its ownership of ACL and GMS, has a 57%
ownership interest in GMSV.

Also in 2002 in connection with the ACL acquisition, DHC purchased for
approximately $2.8 million a 50% equity interest in Vessel Leasing LLC ("Vessel
Leasing"), a special purpose entity that leases barges to ACL's barge
transportation operations. DHC also indirectly owns the other 50% equity
interest in Vessel Leasing through ACL and, accordingly, Vessel Leasing is
consolidated with DHC and with ACL.

ACL and GMS are together referred to herein as "Marine Services". DHC's
insurance subsidiaries discussed below are referred to herein as "Insurance
Services".

Danielson holds all of the voting stock of Danielson Indemnity Company
("DIND"). DIND owns 100 percent of the common stock of National American
Insurance Company of California, Danielson's principal operating insurance
subsidiary, which owns 100 percent of the common stock of Valor Insurance
Company, Incorporated ("Valor") (National American Insurance Company of
California and its subsidiaries being collectively referred to as "NAICC").

The operations of NAICC are in property and casualty insurance. NAICC
writes non-standard private passenger and commercial automobile insurance in the
western United States, primarily California. NAICC writes approximately 77
percent of its insurance in California and 12 percent of its business in
Montana. For the years ended December 2002, 2001 and 2000, 45 percent, 16
percent and 28 percent, respectively, of total personal lines direct written
premiums were produced through two general agents of NAICC. In 2001, NAICC,
which formerly wrote workers' compensation insurance, decided to exit the
workers' compensation business in all states as further discussed in Note 12.

69

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements reflect the results of operations,
cash flows and financial position of DHC and its majority-owned subsidiaries as
a single entity. All significant intercompany accounts and transactions have
been eliminated. Investments in companies that are not majority-owned are
accounted for under the equity method.

BASIS OF PRESENTATION AND RECLASSIFICATION

In the second quarter of 2002, DHC changed its presentation of its
statement of financial position from an unclassified to a classified statement
with the insurance operating assets and liabilities presented separately on an
unclassified basis as long-term. The change in the classification of DHC's
assets and liabilities is deemed to be more meaningful in light of the
significant changes in DHC's operations with the acquisitions of ACL and GMS.
Previously reported amounts have been reclassified to conform to the current
classifications.

In response to weak market and poor economic conditions during the last
half of 2002 and because of ACL's highly leveraged financial position , on
January 31, 2003, ACL filed for protection under Chapter 11 of the Bankruptcy
Code as discussed in Note 3. Prior to the Chapter 11 filing, ACL had been
pursuing other financial restructuring alternatives.

The consolidated financial statements contained herein have been prepared
on a going concern basis, which assumes continuity of operations and realization
of assets and satisfaction of liabilities in the ordinary course of business.
The ability of ACL and the other Debtors to continue as a going concern is
predicated, among other things, on the confirmation of a reorganization plan,
compliance with the provisions of the DIP Credit Facility (see Note 3), the
ability of ACL and the other Debtors to generate the required cash flows from
operations and, where necessary, obtaining financing sources sufficient to
satisfy future obligations.

ACL's liquidity generally depends on cash provided by operating activities
and access to the DIP Credit Facility. The ability of ACL to continue as a going
concern (including its ability to meet post-petition obligations) and the
continued appropriateness of using the going concern basis for the consolidated
financial statements are dependent upon, among other things, (i) ACL's ability
to comply with the covenants of the DIP Credit Facility, (ii) the ability of ACL
to maintain adequate cash on hand, (iii) the ability of ACL to continue to
generate cash from operations, (iv) confirmation of a plan of reorganization
under the Bankruptcy Code and the terms of such plan, (v) ability of ACL to
attract, retain and compensate key executives and associates and to retain
employees generally and (vi) ACL's ability to achieve profitability following
such confirmation.

ACL management expects that normal cash flows from operations and access to
the DIP Credit Facility will be sufficient to meet planned working capital,
capital expenditures and other cash requirements until such time as it seeks to
obtain approval for a plan of reorganization. However, due to material
uncertainties associated with the outcome of the Chapter 11 proceedings in
general, and the effects of such proceedings on the business of ACL and its
subsidiaries, there can be no assurances that such plan will be approved or
whether ACL will obtain sufficient liquidity enabling it to continue to operate
in its present organizational structure.

The accompanying consolidated financial statements do not give effect to
any adjustment to the carrying value of assets or amounts and classifications of
liabilities that might be necessary as a result of resolving the bankruptcy. A
plan of reorganization could materially change the amounts recorded in the
consolidated financial statements in future periods.

70

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FISCAL YEAR

The consolidated financial statements presented are for the fiscal years
ended December 27, 2002, December 31, 2001 and December 31, 2000. Through June
30, 2002, DHC's reporting periods were calendar month ends. ACL's reporting
periods are on a thirteen week quarterly basis ending on Friday. In the third
quarter of 2002, DHC conformed its reporting periods to ACL's. ACL has been
consolidated in the accompanying consolidated financial statements using ACL's
reporting periods described above. NAICC has been consolidated in the
accompanying consolidated financial statements using its calendar year end
reporting period.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include short-term investments with a maturity of
less than three months when purchased. Danielson has from time to time, cash in
banks in excess of federally insured limits. Cash and cash equivalents are at
cost which approximates fair value.

RESTRICTED CASH -- MARINE SERVICES

As part of the Maritime Administration guaranteed financing, Vessel Leasing
is required to maintain a minimum cash balance on account which amounted to
$6,328 as of December 27, 2002.

ACCOUNTS RECEIVABLE -- MARINE SERVICES

Accounts Receivable, Net consist of the following:

Allowances for doubtful accounts are based upon the expected collectibility
of accounts.

MATERIALS AND SUPPLIES -- MARINE SERVICES

Materials and Supplies are carried at the lower of cost (average) or market
and consist of the following:

71

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTIES

Marine Services' properties and the parent company's properties which are
minor in amount, are at cost and consist of the following:

Provisions for depreciation of properties are based on the estimated useful
service lives computed on the straight-line method. Buildings and Improvements
are depreciated from 15 to 45 years. Equipment is depreciated from 5 to 42
years. Leasehold improvements are amortized on a straight-line basis over the
estimated useful lives of the assets or over the term of the leases, whichever
is shorter. Marine Services depreciation expense was $40,591 in 2002. Insurance
Services depreciation expense was $479 in 2002 and is included in general and
administrative expenses on the consolidated statement of operations.

Properties and other long-lived assets are reviewed for impairment whenever
events or business conditions indicate the carrying amount of such assets may
not be fully recoverable. Initial assessments of recoverability are based on
estimates of undiscounted future net cash flows associated with an asset or a
group of assets. Where impairment is indicated, the assets are evaluated for
sale or other disposition, and their carrying amount is reduced to fair value
based on discounted net cash flows or other estimates of fair value. There were
no long-lived asset impairment losses in 2002.

The properties of Insurance Services, net of accumulated depreciation, are
$347 at year end 2002 and $826 at year end 2001 and are included in other assets
under Insurance Services on the consolidated statement of financial position.

UABL -- MARINE SERVICES

Danielson accounts for its 50% ownership in UABL Limited and UABL Terminals
Ltd. (collectively, "UABL"), companies with operations in South America, by the
equity method (see Note 25). Danielson's investment in UABL is $48,627 at
December 27, 2002. Marine Service's share of UABL's losses included in other
income in the consolidated statement of operations was $1,130 for 2002.

INVESTMENTS

Debt and equity securities can be classified in one of the three
categories: trading, available-for-sale, or held-to-maturity. Securities that
are classified as "trading" can be classified are bought and held principally to
sell in the near term. Securities which are classified as "held-to-maturity" are
securities which Danielson has the ability and intent to hold until maturity.
All other securities, which are not classified as either trading or
held-to-maturity, are classified as "available-for-sale." Danielson currently
classifies all of its debt and equity securities as available-for-sale.

Fixed maturities classified as available-for-sale are recorded at fair
value. Premiums and discounts of fixed maturity securities are amortized or
accreted based on the effective interest method. Amortization and accretion of
premiums and discounts on collateralized mortgage obligations are adjusted for
principal
72

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

paydowns and changes in expected maturities. Net unrealized gains or losses on
fixed maturities classified as available-for-sale are excluded from earnings and
are reported as a separate component of accumulated other comprehensive income
(loss) in stockholders' equity until realized.

Equity securities are stated at fair value, and any increase or decrease
from cost is reported as accumulated other comprehensive income (loss) in
stockholders' equity as unrealized gain or loss.

A decline in the market value of any available-for-sale or held-to-maturity
security below cost which is deemed to be "other than temporary" is charged to
earnings, resulting in the establishment of a new cost basis for such security.
Dividend and interest income are recognized when earned. The cost of securities
sold is determined using the specific identification method.

No deferred tax effects have been provided on unrealized gains or losses on
investment securities due to DHC's net operating tax loss carryforwards.

DEFERRED ACQUISITION COSTS -- INSURANCE SERVICES

Insurance Services' deferred acquisition costs, consisting principally of
commissions and premium taxes paid at the time of issuance of the insurance
policy, are deferred and amortized over the period during which the related
insurance premiums are earned. Deferred acquisition costs are limited to the
estimated future profit, based on the anticipated losses and loss adjustment
expenses ("LAE") (based on historical experience), maintenance costs,
policyholder dividends, and anticipated investment income. Deferred acquisition
costs which amounted to $1,612 at the year ended December 2002 and $2,209 at
December 2001 are included with other assets under Insurance Services. The
amortization of the deferred acquisition costs charged to operations in 2002,
2001 and 2000 was $11,437, $16,174 and $12,153, respectively.

DEBT COST AMORTIZATION

Marine Services amortizes debt costs over the term of the debt.
Amortization expense was $1,150 in 2002.

DEBT DISCOUNT AMORTIZATION

On May 29, 2002 ACL issued new debt (see Note 4) which was recorded at fair
value. The difference between the principal amount of the notes and the fair
value (discount) is being amortized using the effective interest method over the
life of the notes. The amortization of the discount was $2,882 in 2002 and is
included in interest expense on the consolidated statement of operations.

UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES -- INSURANCE SERVICES

Unpaid losses and LAE are based on estimates of reported losses and
historical experience for incurred but unreported claims, including losses
reported by other insurance companies for reinsurance assumed, and estimates of
expenses for investigating and adjusting all incurred and unadjusted claims.
Management believes that the provisions for unpaid losses and LAE are adequate
to cover the cost of losses and LAE incurred to date. However, such liability
is, by necessity, based upon estimates, which may change in the near term, and
there can be no assurance that the ultimate liability will not exceed, or even
materially exceed, such estimates. The loss and LAE is continually monitored and
reviewed, and as settlements are made or reserves adjusted, differences are
included in current operations.

73

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

REINSURANCE -- INSURANCE SERVICES

In the normal course of business, Insurance Services seeks to reduce the
loss that may arise from catastrophes or other events which cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance enterprises or reinsurers.

Insurance Services accounts for its reinsurance contracts which provide
indemnification by reducing premiums earned for the amounts ceded to the
reinsurer and establishing recoverable amounts for paid and unpaid losses and
LAE ceded to the reinsurer. Amounts recoverable from reinsurers are estimated in
a manner consistent with the claim liability associated with the reinsured
policy. Contracts that do not result in the reasonable possibility that the
reinsurer may realize a significant loss from the insurance risk generally do
not meet conditions for reinsurance accounting and are accounted for as
deposits. For the fiscal years 2002 and 2001, Insurance Services' had no
reinsurance contracts which were accounted for as deposits.

POLICYHOLDER DIVIDENDS

Insurance Services' policyholder dividends represent managements' estimate
of amounts to be paid on participating policies, which share in positive
underwriting results, based on the type of policy plan. Participating policies
represent approximately 1.0%, 1.0 % and 2.7% of workers' compensation direct
written premiums for the fiscal years 2002, 2001 and 2000, respectively. An
estimated provision for policyholder dividends is accrued during the period in
which the related premium is earned. These estimated dividends do not become
legal liabilities unless and until declared by the Board of Directors of NAICC.
No dividends were declared and unpaid as of the fiscal year ended December 27,
2002.

PER SHARE DATA

Per share data is based on the weighted average number of shares of common
stock of DHC, par value $0.10 per share ("Common Stock"), outstanding during the
relevant period. Basic earnings per share are calculated using only the average
number of outstanding shares of Common Stock. Such average shares were
26,258,499, 19,465,104 and 18,482,980 for the fiscal years 2002, 2001 and 2000,
respectively. Diluted earnings per share computations, as calculated under the
treasury stock method, include the average number of shares of additional
outstanding Common Stock issuable for stock options and warrants, whether or not
currently exercisable. Such average shares were 18,841,925 for 2000. Diluted
earnings per share for 2002 and 2001 do not include average shares related to
stock options and warrants because their effect is anti-dilutive.

REVENUE RECOGNITION

Marine Services' barge transportation revenue is recognized proportionately
as shipments move from origin to destination. Terminal, repair and other revenue
is recognized as services are provided. Marine construction revenue and related
expense is primarily recognized on the completed-contract method, due to the
short-term nature of contracts. Revenue from sale/leaseback transactions, if
any, is deferred and recognized over the life of the lease.

Insurance Services' earned premium income is recognized ratably over the
contract period of an insurance policy. A liability is established for unearned
insurance premiums that represents the portion of premium received which is
applicable to the remaining portion of the unexpired terms of the related
policies. Reinsurance premiums are accounted for on a basis consistent with
those used in accounting for the original policies issued and the terms of the
reinsurance contracts.

INCENTIVE COMPENSATION PLANS

Stock-based compensation cost is measured using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees
74

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

("APB 25") for Danielson directors and employees. The fair value based method of
accounting prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123"), is used to measure
stock-based compensation for Danielson contractors. Pro forma net income and
earnings per share are disclosed below as if the fair value based method of
accounting under SFAS 123 had been applied to all stock-based compensation
awards.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and the respective tax basis
thereof. Deferred tax assets and liabilities are measured using enacted tax
rates which are expected to apply to taxable income in the years in which those
temporary differences are anticipated to be recovered or settled, and are
limited, through a valuation allowance, to the amount estimated to be
realizable.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
establishes the accounting for goodwill and other intangible assets following
their recognition. SFAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. SFAS
142 provides that goodwill and intangible assets with indefinite lives should
not be amortized but should be tested for impairment annually using a fair-value
based approach. In addition, SFAS 142 provides that other intangible assets
should be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 has
been superceded by SFAS 144 which is described below. The adoption of SFAS 142
on December 29, 2001 has not had a significant effect on DHC's financial
position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supercedes SFAS 121, and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
the disposal of a segment of a business (as previously defined in that Opinion).
SFAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The objectives of SFAS
144 are to address significant issues relating to the implementation of SFAS 121
and to develop a single accounting model, based on the framework established in
SFAS 121, for long-lived assets to be disposed of by sale, whether previously
held and used or newly acquired. DHC adopted SFAS 144 in Danielson's first
quarter 2002. The provisions of SFAS 144 did not have an impact on DHC's
financial statements in 2002.

75

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"), which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs incurred in a Restructuring)" ("Issue 94-3"). The principal difference
between SFAS 146 and Issue 94-3 relates to SFAS 146's requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. SFAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as generally defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan. Severance pay
under SFAS 146, in many cases, would be recognized over time rather than up
front. Additionally, under SFAS 146, if the benefit arrangement requires
employees to render future service beyond a "minimum retention period", a
liability should be recognized as employees render service over the future
service period even if the benefit formula used to calculate an employee's
termination benefit is based on length of service. The provisions of SFAS 146
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. DHC will adopt SFAS 146 in 2003.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current
year presentation.

NOTE 2. ACQUISITIONS

On May 29, 2002, Danielson completed an acquisition (the "Danielson
Recapitalization") of American Commercial Lines Holdings LLC ("ACL Holdings"),
the parent company of ACL. Holders of ACL Holdings' preferred units, exchanged
all of their preferred units, other than the preferred units held by the
management unitholders, for $7,000 in cash from Danielson. Danielson contributed
to ACL Holdings $58,493 principal amount of ACL's 10.25% senior notes due June
30, 2008, (the "Old Senior Notes"), plus the interest obligations thereon, if
any, and $25,000 in cash in exchange for newly issued common units of ACL
Holdings. All common units held by the common unitholders, other than the
consenting common unitholders, were cancelled and extinguished. Members of ACL's
management abandoned to ACL Holdings all preferred units of ACL Holdings held by
them for no consideration and all those preferred units were deemed cancelled.

The fair value of the consideration given by Danielson includes the $7,000
in cash paid to preferred unitholders, cash of $25,000 and the Old Senior Notes
and accrued interest having an estimated fair value of $43,650 contributed to
ACL Holdings and $6,606 in costs directly associated with the acquisition.

On May 29, 2002, DHC also purchased a 50% equity interest of Vessel Leasing
for $2,769 and a 5.4% equity interest of GMS for $1,290. ACL owns a 50% interest
in Vessel Leasing and GMS and, accordingly, these entities are consolidated
herein. Vessel Leasing leases barges to ACL's barge transportation operations
and GMS owns and operates terminal and warehouse facilities.

The acquired companies operating results are included in DHC's consolidated
statement of operations since the date of the Danielson Recapitalization, May
29, 2002. Following is a condensed consolidated balance sheet disclosing the
amounts preliminarily assigned to assets and liabilities of the acquired
companies at the date of the acquisition.

76

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ASSETS:
Current Assets............................................ $149,323
Property -- Net........................................... 566,391
Pension Assets............................................ 21,391
Other Assets.............................................. 80,982
--------
Total Assets...................................... 818,087

LIABILITIES:
Current Liabilities....................................... 142,116
Long-term Debt............................................ 559,924
Other Long-term Liabilities............................... 29,732
--------
Total Liabilities................................. 731,772
--------
Net Cost of Acquisitions.................................... $ 86,315
========

DHC believes no significant intangibles were acquired in the Danielson
Recapitalization. The purchase price allocation has not been finalized as the
allocations are subject to revision once appraisals and other evaluations of the
fair value of the assets acquired and liabilities assumed are completed.
Accordingly, actual amounts assigned could differ from current estimates.

Following are the pro forma unaudited results of operations for the years
ended December 27, 2002 and December 31, 2001, assuming consummation of the
acquisitions and recapitalization of ACL Holdings as of January 1, 2001:

NOTE 3. CHAPTER 11 FILING BY AMERICAN COMMERCIAL LINES

During 2002 and 2003, ACL experienced a decline in barging rates, reduced
shipping volumes and excess barging capacity during a period of slow economic
growth and a global economic recession. Due to these factors, ACL's revenues and
earnings did not meet expectations and ACL's liquidity was significantly
impaired and debt covenant violations occurred as discussed in Note 4. As a
result, ACL was unable to meet certain of its financial obligations as they
became due. On January 31, 2003 (the "Petition Date"), ACL filed a petition with
the U.S. Bankruptcy Court for the Southern District of Indiana, New Albany
division (the "Bankruptcy Court") to reorganize under Chapter 11 of the U.S.
Bankruptcy Code (the "Bankruptcy Code" or Chapter 11") under case number
03-90305. Included in the filing are ACL, ACL's direct parent (American
Commercial Lines Holdings LLC), American Commercial Barge Line LLC, Jeffboat
LLC, Louisiana Dock Company LLC and ten other U.S. subsidiaries of ACL
(collectively with ACL, the "Debtors") under case numbers 03-90306 through
03-90319. These cases are jointly administered for procedural purposes before
the Bankruptcy Court under case number 03-90305. The Chapter 11 petitions do
77

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

not cover any of ACL's foreign subsidiaries or certain of its U.S. subsidiaries.
DHC did not file for Chapter 11 protection and is not a party to any proceedings
under the Bankruptcy Code.

ACL and the other Debtors are continuing to operate their businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court. As debtors-in-possession, the Debtors may not engage in
transactions outside of the ordinary course of business without approval, after
notice and hearing, of the Bankruptcy Court. As part of the Chapter 11 cases,
the Debtors intend to develop and propose for confirmation pursuant to Chapter
11 a plan of reorganization that will restructure the operations and liabilities
of the Debtors to the extent necessary to result in the continuing viability of
ACL. A filing date for such a plan has not been determined; however, the Debtors
have the exclusive right to file a plan any time during the 120 day period
following the Petition Date. If the exclusivity period were to expire, other
parties, such as the creditors of the Debtors, would have the right to propose
alternative plans for reorganization.

The Debtors have entered into a Bankruptcy Court approved
debtor-in-possession financing arrangement (which was originally entered into on
January 31, 2003 and which was subsequently amended, the "DIP Credit Facility")
that provides up to $75 million of financing. Participating bank commitments
under the DIP Credit Facility total $60 million, of which the Debtors have drawn
$50 million, which was used to retire ACL's Pre-Petition Receivables Facility
(see Note 5) and which continues to be used to fund the Debtors' day-to-day cash
needs. The DIP Credit Facility is secured by the same and additional assets that
collateralized the Senior Credit Facilities (see Note 4) and ACL's Pre-Petition
Receivables Facility, and bears interest, at ACL's option, at LIBOR plus four
percent or an Alternate Base Rate (as defined in the DIP Credit Facility) plus
three percent. There are also certain interest rates applicable in the event of
a default under the facility.

The DIP Credit Facility also contains certain restrictive covenants that,
among other things, restrict the Debtors' ability to incur additional
indebtedness or guarantee the obligations of others. ACL is also required to
maintain minimum cumulative EBITDA, as defined in the DIP Credit Facility, and
limit its capital expenditures.

As a result of the Chapter 11 filings, certain events of default under the
Senior Credit Facilities, Senior Notes, PIK Notes and Old Senior Notes have
occurred subsequent to December 31, 2002, the effects of which are stayed
pursuant to certain provisions of the Bankruptcy Code (see Note 4). Under
Chapter 11, actions by creditors to collect claims in existence at the filing
date are stayed or deferred absent specific Bankruptcy Court authorization to
pay such pre-petition claims while the Debtors continue to manage their
businesses as debtors-in-possession and act to develop a plan of reorganization
for the purpose of emerging from these proceedings. A claims bar date has not
yet been established. The Debtors received approval from the Bankruptcy Court to
pay or otherwise honor certain of its pre-petition obligations, including but
not limited to employee wages and certain employee benefits, certain critical
vendor payments, certain insurance and claim obligations, and certain tax
obligations, as a plan of reorganization is developed.

The amount of the claims to be filed against the Debtors by their creditors
could be significantly different than the amount of the liabilities recorded by
the Debtors. The Debtors also have numerous executory contracts and other
agreements that could be assumed or rejected during the Chapter 11 proceedings.
Parties affected by these rejections may file claims with the Bankruptcy Court
in accordance with the Bankruptcy Code, applicable Bankruptcy rules and orders
of the Bankruptcy Court. Under these Chapter 11 proceedings, the rights of and
ultimate payments to pre-petition creditors, rejection damage claimants and
ACL's equity investor may be substantially altered. This could result in claims
being allowed and/or satisfied in the Chapter 11 proceedings at less (possible
substantially less) than 100% of their face value, and the membership interests
of ACL's equity investor (DHC) being substantially or totally diluted or
cancelled. The Debtors have not yet proposed a plan of reorganization. The
Debtors' pre-petition creditors and ACL's equity investor (DHC) will each have a
vote in the plan of reorganization.

78

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The United States Trustee has appointed an unsecured creditors' committee.
The official committee and its legal representatives have a right to be heard on
all matters that come before the Bankruptcy creditors.

The Chapter 11 process presents inherent material uncertainty; it is not
possible to determine the additional amount of claims that may arise or
ultimately be filed, or predict the length of time that the Debtors will
continue to operate under the protection of Chapter 11, the outcome of the
Chapter 11 proceedings in general, whether the Debtors will continue to operate
in their present organizational structure, or the effects of the proceedings on
the business of ACL, the other Debtors and its non-filing subsidiaries and
affiliates, or on the interests of the various creditors and the equity holder.
The ultimate recovery, if any, by creditors, and the equity holder will not be
determined until, at the earliest, confirmation of a plan of reorganization. No
assurance can be given as to what value, if any, will be ascribed in the
bankruptcy proceedings to each of these constituencies. While it cannot be
presently determined, Danielson, as the holder of 100% of the membership
interests of ACLines, may receive little or no value with respect to its equity
interest in ACL Holdings or ACL.

DHC management cannot determine with certainty the ultimate outcome of the
Chapter 11 proceedings; however, it is possible that the following outcomes
could result:

- DHC could elect to provide additional financing to ACL in connection with
the reorganization if it is in the best interest of DHC.

- ACL could reorganize, and their creditors could receive all or a portion
of their claims.

- ACL could be sold in its entirety or segments could be sold, and the
proceeds from such sale(s) would be utilized to satisfy creditor claims.

- The creditors could assume ownership and continue to operate ACL.

In each of the above possible outcomes, DHC could have little or no future
ownership in or involvement with ACL. It is also possible that none of the above
outcomes will occur.

As a result of the Debtors' bankruptcy filings, DHC ceased consolidation of
ACL's financial statements as of the Petition Date. As of the Petition Date, DHC
began to account for its investments in ACL on the equity method. During the
period May 29, 2002 through December 27, 2002, ACL incurred a net loss of
$26,001 which is reflected in DHC's 2002 consolidated results of operations. At
December 27, 2002, $44,022 of DHC's net equity represented its investment in
ACL. The recognition of ACL's net loss of $26,001 and other comprehensive loss
of $15,299 has reduced DHC's investment in ACL to a carrying value of $44,022.
DHC is currently assessing the possible outcomes from the Bankruptcy filing and
the impact of such filing on the value of its investment in ACL.

NOTE 4. DEBT

Danielson's debt as of December 27, 2002 is as follows:

ACL:
Revolving Credit Facility................................. $ 41,000
Tranche A Term Loan....................................... 43,119
Tranche B Term Loan....................................... 124,141
Tranche C Term Loan....................................... 146,069
Senior Notes (New)........................................ 128,491
Senior Subordinated Notes................................. 68,797
Senior Notes (Old)........................................ 4,946
Other Notes............................................... 317

79

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Vessel Leasing:
Bonds guaranteed by the Maritime Administration........... 39,693
GMS:
Revolving Credit Facility................................. 2,873
GMS Bank Note............................................. 33,652
Illinois Development Finance Authority.................... 5,325
Other Notes............................................... 794
GMSV:
IFC Note.................................................. 2,850
Other Notes............................................... 1,005
--------
643,072
Less short-term debt........................................ 43,873
Less, current portion long-term debt........................ 590,731
--------
Long-term debt.............................................. $ 8,468
========

As part of the Danielson Recapitalization, ACL's debt was restructured.
ACL's existing credit facility was amended and restated as of April 11, 2002
(the amended and restated credit facilities are hereafter referred to as the
"Senior Credit Facilities") to, among other things, modify financial and
restrictive covenants thereunder, prepay $25,000 of term loans thereunder from
the $25,000 in cash contributed by Danielson and convert $50,000 of revolving
credit loans thereunder into a new tranche of term loans having an interest rate
and other terms substantially similar to the revolving credit loans under the
senior credit facility.

ACL also completed an exchange offer (the "Exchange Offer") for Old Senior
Notes, pursuant to which $284,500 or approximately 96.4%, of the principal
amount of the Old Senior Notes were tendered, with the $58,493 principal amount
of the Old Senior Notes contributed by Danielson to ACL Holdings being deemed
tendered in the Exchange Offer. Holders of Old Senior Notes, who tendered their
Old Senior Notes pursuant to the Exchange Offer, received approximately $134,700
aggregate principal amount of new 11.25% senior notes ("Senior Notes") and
approximately $112,900 aggregate principal amount of new 12% pay-in-kind senior
subordinated notes ("PIK Notes"). Following the consummation of the Exchange
Offer, a holder of $4,000 aggregate principal amount of the Old Senior Notes
exchanged such notes and accrued interest for approximately $2,400 of Senior
Notes and approximately $2,000 of PIK notes as permitted by the indentures
governing the notes, following which $6,500 of the Old Senior Notes remained
outstanding.

ACL's debt was adjusted to fair value as of the date of the Danielson
Recapitalization. The difference between the principal amount of the debt and
its fair value is being accreted as interest expense over the term of the debt
under the effective interest method.

ACL's revolving credit facility (the "Revolving Credit Facility"), which
provides for revolving loans and letters of credit not to exceed the aggregate
principal amount of $50,000, matures June 30, 2005, but each loan must be repaid
within one year. The Revolving Credit Facility bears interest at a rate equal to
the London Interbank Offered Rates ("LIBOR" or "LIBOR Rates") plus a margin
based on ACL's performance. The interest rate as of December 27, 2002 ranged
from 5.8125% to 6.0625%.

Tranche A of the Term Loans matures June 30, 2005. Tranche B of the Term
Loans matures June 30, 2006. Tranche C of the Term Loans matures June 30, 2007.
The Term Loans bear interest at a rate equal to LIBOR plus a margin based on
ACL's performance. The annual interest rates as of December 27, 2002 were:
Tranche A -6.0%, Tranche B -6.25% and Tranche C -6.5%.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The new Senior Notes are due January 1, 2008 and bear interest at an annual
rate of 11.25%, payable semi-annually. The PIK Notes are due July 1, 2008 and
bear interest at an annual rate of 12%. ACL has the option of issuing new PIK
Notes in lieu of paying cash interest on such notes each June 30 and December 31
until maturity. After 2 years from issuance, interest accretes at 13.5% per
annum if ACL elects to not pay the interest due in cash. The interest rate
remains 12% if the interest is paid in cash. The Old Senior Notes are due June
30, 2008 and bear interest at an annual rate of 10.25%.

In connection with the Exchange Offer, ACL completed a consent solicitation
of the holders of the Old Senior Notes, which resulted in the elimination or
amendment of substantially all the restrictive covenants contained in the
indenture governing the Old Senior Notes, the subordination of the subsidiary
guarantees of the Old Senior Notes to the subsidiary guarantees of the Senior
Credit Facilities, the Senior Notes and the PIK notes and the waiver of any and
all defaults under the indenture governing the Old Senior Notes through the
effective date of the Exchange Offer, May 29, 2002.

The Senior Credit Facilities and the indentures governing the Senior Notes
and the PIK Notes (the "Indentures") contain a number of covenants with
specified financial ratios and tests including, with respect to the Senior
Credit Facilities, maximum leverage ratios, rent adjusted maximum leverage
ratios and interest coverage ratios. Compliance with financial ratios is
measured at the end of each quarter. The Indentures also contain certain cross
default provisions. ACL's ability to meet the financial ratios is affected by
adverse weather conditions, seasonality and other risk factors inherent in its
business. The Senior Credit Facilities also contain mandatory prepayments of the
Term Loans with net proceeds from certain asset sales, equity issuances,
incurrence of indebtedness and sale and leaseback transactions, as well as
excess cash flow, as defined in the Senior Credit Facilities.

In late 2002, ACL received a notification from Bank One stating that ACL
was in violation of the cross-default provisions contained in the Pre-Petition
Receivables Facility, as defined herein, which provides that a failure to
maintain the financial ratios provided by the Credit Agreement, whether or not
amended or waived, constitutes a default under the Pre-Petition Receivables
Facility. Subsequent to the notice of default, Bank One and ACL agreed to an
amendment to the Pre-Petition Receivables Facility which permitted ACL to
continue utilizing the Receivables Facility, although the loss reserve and
certain facilities' fees were increased and the termination date changed from
May 29, 2003 to January 31, 2003.

Subsequent to the notice of default from Bank One, ACL obtained an
amendment (the "Amendment") of certain covenants under the Senior Credit
Facilities, relating to third quarter and fourth quarter 2002 covenants and a
waiver of any past violations thereof. Absent the Amendment, ACL would not have
been in compliance with the leverage or interest coverage ratios contained in
its Senior Credit Facilities as of December 27, 2002. At the end of the first
quarter of 2003, the covenant ratios revert to levels in effect before the
Amendment. Although management had been working on operating and financial plans
to comply with its debt covenants in 2003 and thereafter, ACL was unable to
complete an out-of-court restructuring and management believed it was probable
that ACL would not be in compliance with Senior Credit Facility covenants at the
end of the first quarter 2003, absent another amendment to the Senior Credit
Facilities. Accordingly, all of ACL's long-term debt has been classified as
current debt as of December 27, 2002.

On December 31, 2002, ACL elected to exercise its rights under the
Indentures to postpone the interest payments due on the Senior Notes and Old
Senior Notes for thirty days. This resulted in an event of default under the
Senior Credit Facilities and the Pre-Petition Receivables Facility.

As of December 27, 2002, there were $39,693 outstanding in bonds (the
"MARAD Bonds") issued by Vessel Leasing, which bear interest at fixed rates of
5.65% and 6.14% (Tranche 1 and 2) and LIBOR plus .4% (Tranche 3). All three
tranches mature in 2016. The MARAD Bonds are guaranteed by the U.S. Maritime
Administration. Neither DHC nor ACL guarantees payment of the MARAD Bonds.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 27, 2002, GMS had bank term loans outstanding of $33,652.
These loans bear interest at a rate equal to LIBOR plus a margin of 4.0% and
mature on May 1, 2005. GMS also had Illinois Development Finance Authority Bonds
outstanding in the amount of $5,325. These bonds bear interest at a variable
rate based on a municipal swap plus a margin of 4.5% index and mature January 1,
2010. GMS was in violation of certain bank loan covenants as of December 27,
2002. Accordingly, GMS' long-term bank debt has been reclassified as current
debt as of December 27, 2002.

As of December 27, 2002, GMSV had $2,850 in loans outstanding from the
International Finance Corporation which bear interest at LIBOR plus a margin of
4.75% and mature May 2007. ACL currently guarantees the outstanding loan
amounts.

DHC does not guarantee the debt of ACL, Vessel Leasing, GMS or GMSV.

Without the acceleration of the ACL debt or the GMS bank debt, principal
payments of long-term debt due during the next five fiscal years and thereafter
according to the original terms of the debt and unamortized debt discount are as
follows:

2003........................................................ $ 9,011
2004........................................................ 42,335
2005........................................................ 112,517
2006........................................................ 90,198
2007........................................................ 111,265
Thereafter.................................................. 291,310
--------
656,636
Unamortized debt discount................................... (57,437)
--------
$599,199
========

NOTE 5. ACCOUNTS RECEIVABLE SECURITIZATION

At December 27, 2002 ACL had $39,300 outstanding under its pre-petition
accounts receivable securitization facility agreement and had $27,603 of net
residual interest in the securitized receivables which is included in Accounts
Receivable, Net on the consolidated statement of financial position. The fair
value of the net residual interest is measured at the time of the sale and is
based on the sale of similar assets. In 2002, Danielson received gross proceeds
of $20,300 from the sale of receivables and made gross payments of $23,600 under
this agreement.

ACL's receivables facility, which was administered by PNC Bank, N.A., was
replaced on May 29, 2002 with a Receivables Purchase Agreement among American
Commercial Lines Funding Corporation ("ACLF"), American Commercial Barge Line
LLC, Jupiter Securitization Corporation and Bank One, NA (the "Pre-Petition
Receivables Facility") having substantially the same terms as the old
receivables facility. As described in Note 3, ACL's Pre-Petition Receivables
Facility was retired with proceeds from ACL's DIP Credit Facility.

NOTE 6. REINSURANCE

Reinsurance is the transfer of risk, by contract, from one insurance
company to another for consideration (premium). Reinsurance contracts do not
relieve Insurance Services from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to Insurance
Services; consequently, allowances are established for amounts deemed
uncollectible. Insurance Services evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions,

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

activities, or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies.

NAICC has reinsurance under both excess of loss and quota share treaties.
NAICC cedes reinsurance on an excess of loss basis for workers' compensation
risks in excess of $500 prior to April 2000 and $200 thereafter. Beginning in
May 2001, NAICC retained 50% of the loss between $200 and $500. For risks other
than workers' compensation, NAICC cedes reinsurance on an excess of loss basis
risks in excess of $250. Since January 1, 1999 the private passenger automobile
quota share ceded percentage was 10% and effective January 1, 2002 the quota
share treaty was terminated. The effect of reinsurance on premiums written and
premiums earned reflected in DHC's consolidated financial statements is as
follows:

Direct earned premium................................... $66,957 $90,767 $73,888
Ceded earned premium.................................... (4,793) (8,913) (6,854)
------- ------- -------
Net earned premium...................................... $62,164 $81,854 $67,034
======= ======= =======

The effect of ceded reinsurance on loss and LAE incurred was a decrease of
$10,401, $1,801 and $11,001 for the years ended December 2002, 2001 and 2000,
respectively.

In November 1999, NAICC paid $2.1 million in losses relating to a
settlement on an environmental claim filed by Hughes Aircraft (the Hughes-Tucson
II Claim). The Hughes-Tucson II Claim also alleged that environmental damage
occurred continuously over a period of many years. NAICC assumed certain
policyholder obligations of a general liability policy issued to Hughes aircraft
for a portion of those years. The Hughes-Tucson II Claim liability is reinsured
under various contracts involving numerous reinsurance companies under which
NAICC ceded $3.9 million, which includes loss adjustment expenses not previously
ceded of $2.1 million. During 2000 and 2001, NAICC collected approximately $2.7
million and $0.5 million, respectively, as settlement on the Hughes-Tucson II
claim from almost all the participants. At this time the reinsurers have not
disputed the submission of amounts ceded and no proceedings are in progress.
NAICC believes that the ultimate disposition of the Hughes-Tucson II Claim will
not have a material adverse impact on its financial condition.

In February 2000, NAICC paid $1,000 in losses relating to settlement on an
environmental claim filed by Public Service of Indiana ("PSI Claim"). The PSI
Claim alleged that environmental damage occurred continuously over a period of
many years. NAICC assumed certain policyholder obligations of a general
liability policy issued to PSI for a portion of those years. The PSI Claim
liability is reinsured under various contracts involving numerous reinsurance
companies under which NAICC ceded $1,200, which includes LAE not previously
ceded of $295. To date, the reinsurers have paid approximately $646. At this
time, reinsurers have not disputed the unpaid amount ceded in the submission,
and no proceedings are in progress. NAICC believes that the ultimate disposition
of the PSI Claim will not have a material adverse impact on the financial
condition of Danielson.

As of the year ended December 2002, General Reinsurance Corporation
("GenRe") and Mitsui Marine & Fire Insurance Company, Ltd. ("Mitsui") 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. As of the year ended December
2002, NAICC had reinsurance recoverable on

83

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

paid and unpaid claims of $13,000 and $2,700 from GenRe and Mitsui,
respectively. Both GenRe and Mitsui have an A.M. Best rating of A+ or better.
The unsecured balance from Mitsui is approximately $1,600.

In 2000, NAICC received $11,459 related to the rescission in 1999 of a
workers' compensation reinsurance agreement with Reliance Insurance Company.

NOTE 7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table summarizes the activity in Insurance Services'
liability for unpaid losses and LAE during the three most recent years:

The losses and LAE incurred during 2002 related to prior years is
attributable to adverse development on both the California workers' compensation
line totaling $3,500, certain private passenger automobile programs totaling
$4,700 and commercial automobile totaling $2,000. The losses and LAE incurred
during 2001 related to prior years is attributable to adverse development on
both the California workers' compensation line totaling $4,400 and certain
private passenger automobile programs, primarily outside of California, totaling
$1,700. All of the workers' compensation lines and the private passenger
automobile programs that caused higher than expected losses were placed in
run-off during 2001. The losses and LAE incurred during 2000 related to prior
years is attributable to adverse developments on the commercial automobile lines
and certain lines in run-off.

Insurance Services has claims for environmental cleanup against policies
issued prior to 1980 and which are currently in run-off. The principal exposure
from these claims arises from direct excess and primary policies of business in
run-off, the obligations of which were assumed by Insurance Services. These
direct excess and primary claims are relatively few in number and have policy
limits of between $50 and $1,000, with reinsurance generally above $50.
Insurance Services also has environmental claims primarily associated with
participations in excess of loss reinsurance contracts assumed by Insurance
Services. These reinsurance contracts have relatively low limits, generally less
than $25, and estimates of unpaid losses are based on information provided by
the primary insurance company.

The unpaid losses and LAE related to environmental cleanup is established
considering facts currently known and the current state of the law and coverage
litigation. Liabilities are estimated for known claims (including the cost of
related litigation) when sufficient information has been developed to indicate
the involvement of a specific contract of insurance or reinsurance and
management can reasonably estimate its liability. Estimates for unknown claims
and development of reported claims are included in Insurance Services' unpaid
losses and LAE. The liability for the development of reported claims is based on
estimates of

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the range of potential losses for reported claims in the aggregate. Estimates of
liabilities are reviewed and updated continually and there is the potential that
Insurance Services' exposure could be materially in excess of amounts which are
currently recorded. Management does not expect that liabilities associated with
these types of claims will result in a material adverse effect on the future
liquidity or financial position of Insurance Services. However, claims such as
these are based upon estimates and there can be no assurance that the ultimate
liability will not exceed or even materially exceed such estimates. As of the
years ended December 2002 and 2001, Insurance Services' net unpaid losses and
LAE relating to environmental claims were approximately $7,300 and $7,600,
respectively.

NOTE 8. REGULATION, DIVIDEND RESTRICTIONS AND STATUTORY SURPLUS

DHC's insurance subsidiaries are regulated by various states. For
regulatory purposes, separate financial statements which are prepared in
accordance with statutory accounting principles are filed with these states.
Insurance Services prepares it's statutory-basis financial statements in
accordance with accounting practices prescribed or permitted by the California
Department of Insurance (the "CDI"). Prescribed statutory accounting practices
include a variety of publications of the NAIC, as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed (see below for
discussion of Insurance Services' permitted practice). The Association has
adopted a comprehensive set of accounting principles for qualification as an
Other Comprehensive Basis of Accounting which was effective in 2001. Insurance
Services has determined that application of these comprehensive accounting
principles did not have a material impact on its financial condition upon
adoption. As of the years ended December 2002 and 2001, DHC's operating
insurance subsidiaries had statutory capital and surplus of $19,000 and $36,600,
respectively. The combined statutory net (loss) income for DHC's operating
insurance subsidiaries, as reported to the regulatory authorities for the years
ended December 2002, 2001 and 2000 was $(15,500), $(10,700) and $600,
respectively.

The CDI is currently examining the statutory-basis financial statements of
NAICC, excluding Valor, for the three years ended December 2001.

A model for determining the risk-based capital ("RBC") requirements for
property and casualty insurance companies was adopted in December 1993 and
companies are required to report their RBC ratios based on their statutory
annual statements. As discussed in Note 3, ACL filed for protection under
Chapter 11 of the Bankruptcy Code. As a result, for statutory accounting
purposes, it was determined that NAICC's investment in ACL was fully impaired.
At December 31, 2002, NAICC recognized a statutory charge to its surplus of $7.4
million. This charge, when combined with NAICC's underwriting results, reduced
it's statutory surplus level below the company action level per NAICC's RBC
calculation.

In response to the above statutory condition, in 2003, DHC repaid a $4
million note due May 2004 to NAICC, and further contributed $4 million to NAICC
to increase its statutory capital. With permission from the CDI, these
transactions were recorded at December 31, 2002 in NAICC's statutory-basis
annual statement. After consideration for the $8 million noted above, NAICC's
reported statutory-basis capital and surplus as of December 31, 2002 was above
the company action level of the RBC calculation.

Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The governmental
agencies established pursuant to these state laws have broad administrative and
supervisory powers over insurance company operations. These powers include
granting and revoking of licenses to transact business, regulating trade
practices, establishing guaranty associations, licensing agents, approving
policy forms, filing premium rates on certain business, setting reserve
requirements, determining the form and content of required regulatory financial
statements, conducting periodic examination of insurers' records, determining
the reasonableness and adequacy of capital and surplus, and prescribing the
maximum concentrations of certain classes of investments. Most states have also
enacted legislation regulating insurance holding company systems, including
acquisitions, extraordinary dividends, the terms of affiliate transactions
85

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and other related matters. DHC and its insurance subsidiaries have registered as
holding company systems pursuant to such legislation in California and routinely
report to other jurisdictions.

Under the California Insurance Code, NAICC is prohibited from paying
shareholder dividends, other than from accumulated earned surplus, exceeding the
greater of net income or ten percent of the preceding year's statutory surplus,
without prior approval of the CDI. No dividends were paid in 2002 or 2001. In
2000, NAICC paid an ordinary dividend of $1,500 to DHC from NAICC's accumulated
surplus within the limits specified under the California Insurance Code. The
overall limit of dividends that can be paid during 2003 is approximately $1,900
as long as there is sufficient accumulated earned surplus to pay such. As of the
year ended December 2002, NAICC did not have sufficient accumulated earned
surplus, as defined by the CDI, to pay further ordinary dividends.

NOTE 9. INVESTMENTS

The cost or amortized cost, unrealized gains, unrealized losses and fair
value of DHC's investments as of the years ended December 2002 and 2001,
categorized by type of security, were as follows:

Fixed maturities of DHC include mortgage-backed securities ("MBS")
representing 31.7% and 23.5% of the total fixed maturities at years ended
December 2002 and 2001, respectively. All MBS held by Danielson are issued by
the Federal National Mortgage Association ("Fannie Mae") or the Federal Home
Loan

86

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Mortgage Corporation ("Freddie Mac"), both of which are rated "Aaa" by Moody's
Investors Services. MBS and callable bonds, in contrast to other bonds, are more
sensitive to market value declines in a rising interest rate environment than to
market value increases in a declining interest rate environment. This is
primarily because of payors' increased incentive and ability to prepay principal
and issuers' increased incentive to call bonds in a declining interest rate
environment. Management does not believe that the inherent prepayment risk in
its portfolio is significant. However, management believes that the potential
impact of the interest rate risk on Danielson's consolidated financial
statements could be significant because of the greater sensitivity of the MBS
portfolio to market value declines and the classification of the entire
portfolio as available-for-sale. Danielson has no MBS concentrations in any
geographic region.

The expected maturities of fixed maturity securities, by amortized cost and
fair value, as of the year ended December 2002, are shown below. Expected
maturities may differ from contractual maturities due to borrowers having the
right to call or prepay their obligations with or without call or prepayment
penalties. Expected maturities of mortgage-backed securities are estimated based
upon the remaining principal balance, the projected cash flows and the
anticipated prepayment rates of each security:

The following reflects the change in net unrealized gain (loss) on
available-for-sale securities included as a separate component of accumulated
other comprehensive income (loss) in stockholders' equity:

Danielson's fixed maturity and equity securities portfolio is classified as
"available for sale" and is carried at fair value. Changes in fair value are
credited or charged directly to stockholders' equity as unrealized gains or
losses, respectively. "Other than temporary" declines in fair value are recorded
as realized losses in the statement of operations and the cost basis of the
security is reduced.

Danielson considers the following factors in determining whether declines
in the fair value of securities are "other than temporary":

a. the significance of the decline in fair value compared to the cost
basis,

b. the time period during which there has been a significant decline
in fair value,

c. whether the unrealized loss is credit-driven or a result of
changes in market interest rates,

d. a fundamental analysis of the business prospects and financial
condition of the issuer, and

e. Danielson's ability and intent to hold the investment for a period
of time sufficient to allow for any anticipated recovery in fair value.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Based upon these factors, securities that have indications of potential
impairment are subject to further review. In the third quarter of 2002,
Danielson determined that two equity securities had declines in fair value that
were "other than temporary" and Danielson, accordingly, recorded a realized loss
of $2,655. These securities were subsequently sold in the fourth quarter. At
year end 2002, Danielson determined that one equity security had a decline in
fair value that was "other than temporary" and, accordingly recorded a realized
loss of $967. The net unrealized loss of Danielson's equity securities was
$1,373 at the end of December 2002.

Net realized investment gains (losses) for the years ended December were as
follows:

Gross realized gains relating to fixed maturities were $14,848, $370 and
$60 for the years ended December 2002, 2001 and 2000, respectively. Gross
realized losses relating to fixed maturities were $21, $24 and $17 for the years
ended December 2002, 2001 and 2000, respectively. Gross realized gains relating
to equity securities were $100, $2,427 and $8,734 for the years ended December
2002, 2001 and 2000, respectively. Gross realized losses relating to equity
securities were $5,080, $1,215 and $12 for the years ended December 2002, 2001
and 2000, respectively.

Net investment income for the years ended December 2002, 2001 and 2000 was:

At December 31, 2001, Danielson held $58,493 face amount of American
Commercial Lines LLC ("ACL") Senior Notes 10.25%, due 6/30/08, at a cost of
$30,026 and a fair value of $31,952, representing 42.9% of stockholders' equity.
These notes were contributed to ACL Holdings in 2002 in connection with the

88

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

acquisition discussed in Note 2. There were no other investments with a carrying
value greater than ten percent of stockholders' equity as of years ended
December 2002, 2001 or 2000.

In compliance with state insurance laws and regulations, securities with a
fair value of approximately $45,000, $45,000 and $44,000 as of the years ended
December 2002, 2001 and 2000, respectively, were on deposit with various states
or governmental regulatory authorities. In addition, as of the years ended
December 2002, 2001 and 2000, investments with a fair value of $6,400, $6,600
and $6,500, respectively, were held in trust or as collateral under the terms of
certain reinsurance treaties and letters of credit.

NOTE 10. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS

Assets and liabilities relating to investments in foreign operations are
translated into U. S. dollars using current exchange rates; revenues and
expenses are translated into U. S. dollars using the average exchange rate
during the period When the functional currency is the local currency, the
translation gains and losses are excluded from income and are recorded in the
other comprehensive income component of stockholders' equity. If the functional
currency is the U. S. dollar, the translation gains and losses are recorded as
other income or expense in the consolidated statement of operations.

At December 31, 2001, Insurance Services held $768 in a Japanese Yen
denominated security. During 2002 the remaining Yen denominated security was
sold. The foreign currency translation gain of $15 and $1,100 on these
securities is included in other comprehensive income for the years ended
December 2001 and 2000.

Through its investment in GMS, DHC recognized $453 in foreign currency
translation gains in 2002 related to the Netherlands terminal. This amount is
recorded as other comprehensive income.

NOTE 11. RECEIVABLES -- INSURANCE SERVICES

Insurance Services' receivables as of the years ended December 2002 and
2001 consist of the following:

NOTE 12. REDUCTION OF INSURANCE OPERATIONS

Insurance Services' objective is to underwrite business that is expected to
yield an underwriting profit. Insurance Services has made a determination that
certain lines of insurance may not be sustainable in the current rate
environment. Competitive and regulatory pressures have resulted in a general
market for premium rates in these lines that is well below a level necessary in
order to achieve a profit, especially in light of increasingly unfavorable loss
history. Rather than continue to sustain losses, Insurance Services will exit
the workers' compensation line in all states and the non-standard private
passenger automobile program written outside of California. The last workers
compensation policy outside Montana was issued in July 2001 and the last Montana
workers compensation policy was issued in January 2002. Costs incurred in 2001
associated with this process totaled approximately $1,250 and are included in
General and Administrative Expenses. The remaining lines written by Insurance
Services will be non-standard private passenger automobile in the State of
California and commercial automobile in certain western states.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 13. STOCKHOLDERS' EQUITY

On December 29, 2000, DHC sold, for $3,074 in aggregate cash consideration,
819,700 newly issued shares of DHC common stock, par value $.10 per share (the
"Common Stock"). The sales were private placements to accredited investors made
pursuant to Regulation D under the Securities Act of 1933. In 2000, brokerage
commissions of $34 were paid to M. J. Whitman, Inc., an affiliate of DHC, in
connection with the placement of certain of those shares by M. J. Whitman, Inc.

On September 4, 2001, DHC's stockholders approved an amendment to DHC's
Certificate of Incorporation increasing DHC's authorized Common Stock from
100,000,000 shares to 150,000,000 shares.

During the second quarter of 2002, DHC consummated a rights offering to
provide funds for the acquisition of ACL and related entities as discussed in
Note 2. 8,705,219 shares of Common Stock were issued at $5 per share pursuant to
the rights offering in exchange for $42,228 in net proceeds, net of expenses.
Expenses included a $1,000 backstop fee paid to SZ Investments LLC, a major
stockholder of DHC. In addition, 2,002,558 shares were issued pursuant to
warrants exercised that were previously held by SZ Investments LLC in connection
with the rights offering for proceeds of $9,500 and 264,582 shares were issued
pursuant to the exercise of options for proceeds of $1,087.

In connection with the ACL acquisition, 339,040 shares of restricted DHC
Common Stock were issued to ACL management. These restricted shares have been
valued at fair value at the date of issuance and vest one third annually over a
three year period. The full value of these shares is recorded as paid in capital
with an offset to unearned compensation in stockholders' equity. As employees
render service over the vesting period, compensation expense is recorded and
unearned compensation is reduced.

As of December 27, 2002, there were 30,828,093 shares of Common Stock
issued of which 30,817,297 were outstanding; the remaining 10,796 shares of
Common Stock issued but not outstanding are held as treasury stock. In
connection with efforts to preserve DHC's net operating tax loss carryforwards,
DHC has imposed restrictions on the ability of holders of five percent or more
of DHC Common Stock to transfer the Common Stock owned by them and to acquire
additional Common Stock, as well as the ability of others to become five percent
stockholders as a result of transfers of Common Stock.

Also, as of December 27, 2002, there were 10,000,000 shares of preferred
stock authorized, with none issued or outstanding. The preferred stock may be
divided into a number of series as defined by the Board of Directors. The Board
of Directors is authorized to fix the rights, powers, preferences, privileges
and restrictions granted to and imposed upon the preferred stock upon issuance,
with prior approval of the stockholders required for any series of preferred
stock issued to any holder of 1% or more of the outstanding Common Stock.

A substantial portion of DHC's net assets are restricted. Various state
insurance requirements restrict the amounts that may be transferred to DHC in
the form of dividends or loans from its insurance subsidiaries without prior
regulatory approval. In 2000, NAICC received regulatory approval and paid a $1.5
million dividend to DHC. Also, as noted above, ACL is currently in Chapter 11 so
it cannot transfer assets to DHC. DHC's investments in the net assets of its
Insurance Services subsidiaries and its Marine Services subsidiaries total
approximately $67.3 million as of December 27, 2002.

NOTE 14. INCOME TAXES

DHC files a Federal consolidated income tax return with its subsidiaries.
Danielson's Federal consolidated income tax return includes the taxable results
of certain grantor trusts. These trusts were established by certain state
insurance regulators and the courts as part of the 1990 reorganization from
which the Mission Insurance Group, Inc. ("Mission") emerged from Federal
bankruptcy and various state insolvency court proceedings as DHC. These trusts
were created for the purpose of assuming various liabilities of their grantors,

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain present and former subsidiaries of DHC (the "Mission Insurance
Subsidiaries"). This allowed the state regulators to administer the continuing
run-off of Mission's insurance business, while DHC and the Mission Insurance
Subsidiaries were released, discharged and dismissed from the proceedings free
of any claims and liabilities of any kind, including any obligation to provide
further funding to the trusts. The agreements establishing the trusts provide
the grantor of each trust with a certain "administrative power" which, as
specified in Section 675(4)(c) of the Internal Revenue Code, requires that DHC
include the income and deductions of each trust on its consolidated Federal
income tax returns.

This was to ensure that DHC's net operating loss carryforward would remain
available to offset any post-restructuring taxable income of the trusts, thereby
maximizing the amounts available for distribution to trust claimants. The
Insurance Commissioner of the State of California and the Director of the
Division of Insurance of the State of Missouri, as the trustees, have sole
management authority over the trusts. Neither DHC nor any of its subsidiaries
has any power to control or otherwise influence the management of the trusts nor
do they have any rights with respect to the selection or replacement of the
trustees. At the present time, it is not anticipated that any of the Mission
Insurance Subsidiaries will receive any distribution with regard to their
residual interests in the existing trusts. Since DHC does not have a controlling
financial interest in these trusts, they are not consolidated with DHC for
financial statement purposes.

As of the close of 2002, DHC had a consolidated net operating loss
carryforward of $605,789 for Federal income tax purposes. The net operating loss
carryforward will expire in various amounts, if not used, between 2003 and 2019.
The Internal Revenue Service has not audited any of DHC's tax returns for any of
the years during the carryforward period including those returns for the years
in which the losses giving rise to the net operating loss carryforward were
reported.

Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" (SFAS 109) requires the establishment of a valuation allowance to reflect
the likelihood of realization of deferred tax assets. Pursuant to SFAS 109, DHC
makes periodic determinations of whether it is "more likely than not" that all
or a portion of the DHC's deferred tax assets will be realized. In making these
determinations, DHC considers all of the relevant factors, both positive and
negative, which may impact upon its future taxable income including the size and
operating results of its subsidiaries, the competitive environment in which
these subsidiaries operate and the impact of the grantor trusts. Exclusive of
the trusts' activities, DHC has generated cumulative taxable losses on a
historical basis. Over the past several years, DHC's subsidiaries and holding
company operations have been generating combined losses exclusive of net
investment income, net realized gains and the trusts' activities.

Therefore, due to the absence of a reliable taxable income stream,
Danielson has recorded a valuation allowance for the amount by which its
deferred tax assets exceed its deferred tax liabilities and, as a result, DHC
has not recorded any liability or asset for deferred taxes.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DHC's net operating tax loss carryforwards will expire, if not used, in the
following amounts in the following years:

The tax effects of temporary differences that give rise to the deferred tax
assets and liabilities as of the years ended December 2002 and 2001,
respectively, are presented as follows:

NOTE 15. EMPLOYEE BENEFIT PLANS

MARINE SERVICES

Marine Services sponsors or participates in defined benefit plans covering
both salaried and hourly employees. The plans provide for eligible employees to
receive benefits based on years of service and either compensation rates near
retirement or at a predetermined multiplier factor. Contributions to the plans
are sufficient to meet the minimum funding standards set forth in the Employee
Retirement Income Security Act

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of 1974 ("ERISA"), as amended. Plan assets consist primarily of common stocks,
corporate bonds and cash and cash equivalents.

In addition to the defined benefit pension and related plans, Marine
Services has a defined benefit post-retirement plan covering most full-time
employees. The plan provides medical benefits and is contributory, with retiree
contributions adjusted annually, and contains other cost-sharing features such
as deductibles and coinsurance. The accounting for the health care plan
anticipates future cost-sharing changes to the written plan that are consistent
with Marine Services' expressed intent to increase the retiree contribution rate
annually.

Marine Services also sponsors certain contributory defined contribution
plans covering eligible employee groups. Contributions to such plans are based
upon a percentage of employee contributions and were $1,274 in 2002.

A summary of the pension and post-retirement plan components follows:

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMPONENTS OF NET PERIODIC BENEFIT COST FOR 2002:

WEIGHTED-AVERAGE ASSUMPTIONS AT SEPTEMBER 30, 2002:

The net post-retirement benefit obligation was determined using the
assumption that the health care cost trend rate for retirees was 10.0% for 2002,
decreasing gradually to a 5.0% trend rate by 2009 and remaining at that level
thereafter. A 1% increase in the assumed health care cost trend rate would have
increased the accumulated post-retirement benefit obligation as of December 27,
2002 by $382 and the aggregate of the service and interest cost components of
net periodic post-retirement benefit expense for 2002 by $26.

INSURANCE SERVICES

KCP, the former parent company of NAICC and first tier subsidiary of DHC,
maintained an Employee Stock Ownership Plan ("ESOP") of KCP and Subsidiaries
covering all of its employees. All of the shares of Common Stock held by the
ESOP are deemed to be outstanding for earnings per share computations. KCP
elected to include the value of the Common Stock allocated annually to
participants under the ESOP in the calculation of its matching contribution to
the NAICC Salary Deferred Plan and Trust ("401(k) Plan"). The participating
employers contributed 50% of the first 6% of employee-contributed compensation
to the 401(k) Plan. The shares of Common Stock owned by the ESOP as of the years
ended December 2002 and 2001 were zero and 58,977, respectively. The ESOP was
terminated in February 2002, and all shares held by it were distributed to
participants.

On January 1, 1988, Insurance Services adopted a non-contributory defined
benefit pension plan (the "Pension Plan") covering substantially all of its
employees. Pension benefits are based on an employee's years of service and
average final compensation. The funding policy of the Pension Plan is for the
employers to contribute the minimum pension costs equivalent to the amount
required under the Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code. Vested benefits are fully funded. Any liability
associated with the Pension Plan is reflected in the consolidated financial
statements.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective December 31, 2001, Insurance Services amended the Pension Plan to
cease future service credit for active employees. As a result of the curtailment
of future benefits, the Pension Plan's projected benefit obligation was reduced
by $301. This gain reduced the Pension Plan's unrecognized actuarial loss and
will be recognized as the related plan participants terminate.

The following table sets forth the Pension Plan's funded status as of the
years ended December 2002 and 2001, valued at January 1, 2003 and 2002,
respectively:

Net pension cost for the years ended December 2002, 2001 and 2000 include
the following components:

The Pension Plan's assets consist of U.S. Government obligations,
registered equity mutual funds and insured certificates of deposit. The average
discount rate used in determining the actuarial present value of the projected
benefit obligation was 6.75%, 7.00% and 7.25% for 2002, 2001 and 2000,
respectively. The projected long-term rate of return on assets was 7.0% for 2002
and 2001, and 7.5% for 2000. The average rate of compensation increase used in
determining the actuarial present value of the projected benefit obligation was
0% for 2002, 4.5% for 2001 and 4.5% for 2000.

The following tables provide a reconciliation of the changes in the Pension
Plan's benefit obligation and the fair value of plan assets as of the years
ended December 2002 and 2001 (dollars in thousands):

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On January 1, 1988, NAICC established a 401(k) Plan in which all employees
of NAICC, and effective April 1, 1993, the Danielson Trust are eligible to
participate. Under the 401(k) Plan, employees may elect to contribute up to 20
percent of the eligible compensation to a maximum dollar amount allowed by the
IRS. Effective January 1, 2002, NAICC suspended it's matching contribution to
the 401(k) Plan. Prior to January 1, 2002, the Company matched 50 percent of the
first six percent of compensation contributed by employees to the 401(k) Plan.
In the years ended December 2001 and 2000, NAICC's matching contribution to the
401(k) Plan was satisfied through cash payments totalling $139 and $146,
respectively.

NOTE 16. STOCK OPTION PLANS

1990 STOCK OPTION PLAN

The 1990 Stock Option Plan (the "1990 Plan") of DHC was intended to
attract, retain and provide incentives to key employees of DHC by offering them
an opportunity to acquire or increase a proprietary interest in DHC. Options
under the 1990 Plan were granted to existing officers or employees of DHC.

On September 16, 1991, the Compensation Committee of the Board of Directors
of Danielson resolved that it intended to refrain from granting any additional
options under the 1990 Plan. The 1990 Plan terminated in 2001. The following
table summarizes the options under the 1990 Plan:

1995 STOCK OPTION PLAN

The 1995 Stock and Incentive Plan (the "1995 Plan") is a qualified plan
which provides for the grant of any or all of the following types of awards:
stock options, including incentive stock options and non-qualified stock
options; stock appreciation rights, whether in tandem with stock options or
freestanding; restricted stock; incentive awards; and performance awards. The
purpose of the 1995 Plan is to enable Danielson to provide incentives to
increase the personal financial identification of key personnel with the
long-term growth of Danielson and the interests of DHC's stockholders through
the ownership and performance of DHC's Common Stock, to enhance DHC's ability to
retain key personnel, and to attract outstanding prospective employees and
Directors. The 1995 Plan became effective as of March 21, 1995. In September
2001, DHC's stockholders approved amendments to the 1995 Plan which increases
the aggregate number of shares available

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

for option grants from 1,700,000 to 2,540,000 and provides for options to be
awarded to independent contractors to enable Danielson to attract, retain and
give incentives to highly qualified persons who provide valuable services to
DHC. No awards may be granted under the 1995 Plan after March 21, 2005. The 1995
Plan will remain in effect until all awards have been satisfied or expired.

The following table summarizes the options under the 1995 Plan:

As of December 27, 2002, options for shares were outstanding in the
following price ranges:

On July 24, 2002, DHC's stockholders amended the 1995 Stock and Incentive
Plan to increase the aggregate number of shares available for grant from
2,540,000 to 4,976,273. The Board reserved 1,936,273 shares for the grant of
stock options to management of ACL, of which options for 1,560,000 shares of DHC
common stock were granted. The options have an exercise price of $5.00 per share
and expire 10 years from the date of grant. One half of the options time vest
over a 4 year period in equal annual installments and one half of the options
vest over a 4 year period in equal annual installments contingent upon the
financial performance of ACL. DHC accounts for stock options under the intrinsic
value method based on Accounting Principles Board Opinion ("APB 25"), Accounting
for Stock Issued to Employees" ("APB 25"). Because the market price of DHC's
common stock has been lower than the exercise price of the options since the
date of grant, no expense has been recognized in the accompanying financial
statements for the options granted to ACL management.

Options for 918,084 shares previously granted to employees, directors and
contractors of DHC, which would have expired upon the termination of the service
of these individuals to DHC on July 24, 2002, were extended 2 years or 2 years
beyond the termination of their service in a new capacity, but in no case longer
than the original term. Vesting accelerated simultaneously with the extension.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In September, 2001, 140,000 options owned by certain directors of DHC
lapsed and were reissued under the 1995 Stock and Incentive Plan, as amended and
approved by DHC's stockholders.

DHC applies APB 25 and Related Interpretations in accounting for the stock
options granted to directors and employees. Accordingly, compensation cost of
$87 and $57 was recognized in 2002 and 2001 relating to the modification of
Common Stock options. The fair value based method of accounting prescribed by
the Statement of Financial Accounting Standards "Accounting for Stock-Based
Compensation ("SFAS 123"), is used to measure stock-based compensation for DHC
contractors. Accordingly, compensation cost of $833 was recognized in 2002
relating to the modification of Common Stock options for contractors. Pro forma
net income and earnings per share are disclosed in Note 1 as if the fair value
based method of accounting under SFAS 123 had been applied to all stock options.
For pro forma calculation purposes, fair value of the option grants are
estimated as of the date of grant using the Black-Scholes option pricing model
with the following assumptions: dividend yield of 0% per annum; an expected life
of approximately 8 years; expected volatility of 50%-56%; and a risk free
interest rate of 6%. The pro forma effect on net loss may not be representative
of the effects on income for future years.

NOTE 17. LEASES

MARINE SERVICES

Marine Services leases buildings, data processing hardware and operating
equipment under various operating leases and charter agreements, which expire
from 2002 to 2017 and which generally have renewal options at similar terms.
Certain vessel leases also contain purchase options at prices approximating fair
value of the leased vessels. Rental expense under continuing obligations was
approximately $29,896 in 2002.

Marine Services' obligations under operating leases with initial or
remaining noncancelable lease terms longer than one year and capital leases were
as follows:

The total future minimum lease payments under capital leases of $4,931 less
an interest amount of $1,629, results in a present value of net minimum lease
payments of $3,302 which is recorded in other liabilities and other current
liabilities.

INSURANCE SERVICES

Insurance Services has entered into various non-cancelable operating lease
arrangements for office space and data processing equipment. The terms of the
operating leases generally contain renewal options and escalation clauses based
on increases in operating expenses and other factors. Rent expense under
operating leases was $1,387, $1,446 and $1,398 for the years ended December
2002, 2001 and 2000, respectively. At year end December 2002, future net minimum
operating lease rental payment commitments were as follows:

2003........................................................ $ 896
2004........................................................ 701
2005........................................................ 127
2006........................................................ 74
------
$1,798
======

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 18. RELATED PARTIES

MARINE SERVICES

Marine Services recorded charter income from UABL of $5,936 in 2002. Marine
Services also recorded administrative fee expenses to UABL of $4,306 in 2002. At
December 27, 2002 Marine Services had receivables of $6,341 from UABL.

INSURANCE SERVICES

Prior to and shortly after the acquisition of ACL, DHC shared certain
personnel and facilities with several affiliated and unaffiliated companies who
have certain common directors and officers, and certain expenses were allocated
among the various entities. Personnel costs were allocated based upon actual
time spent on DHC business. Costs relating to office space and equipment were
allocated based upon actual usage. Management believes the methodology used for
allocation is appropriate. Total expenses allocated to DHC from affiliated
entities were $1,765, $1,334 and $1,310 for the years ended December 2002, 2001
and 2000, respectively.

PARENT COMPANY

Samuel Zell, the Chairman of the Board, Chief Executive Officer and
President of DHC, is the Chairman of Equity Group Investments, LLC ("EGI"). DHC
entered into a non-exclusive investment advisory agreement dated April 14, 1999
with EGI, a company affiliated with Mr. Zell, pursuant to which EGI agreed to
provide, at the request of DHC, certain investment banking services to DHC in
connection with potential transactions. For these services, in 2002 DHC paid a
fee of $63 to EGI. In the event that a transaction is consummated for which the
Acquisition Committee of DHC's Board of Directors determines that EGI provided
material services, DHC will pay to EGI a fee in the amount of 1% of the
aggregate consideration in connection with such transaction (including
indebtedness assumed or outstanding). As a result of services provided to DHC
during the Danielson Recapitalization of ACL. DHC and EGI agreed that the fee
for EGI's services was $3,000. DHC has also agreed to reimburse, upon request,
EGI's out-of-pocket expenses related to services provided under the investment
advisory agreement. For providing a standby commitment to purchase any DHC
shares that were unsubscribed in the rights offering conducted by DHC as part of
its acquisition of ACL, DHC paid SZ Investments, LLC a fee of $1,000. Messrs.
Zell and Pate are members of the Acquisition Committee, along with Messrs.
Whitman and Barse, all of whom are Directors of DHC.

DHC has agreed to provide SZ Investments, LLC ("SZI") unlimited demand
registration rights with respect to the ACL Senior Notes and ACL PIK Notes held
by SZI, LLC and its affiliates, including HY I Investments, LLC ("HYI"). Mr.
Zell, DHC's President and Chief Executive Officer and Chairman of DHC's Board of
Directors, and Mr. Tinkler, DHC's Chief Financial Officer, are affiliated with
SZI and HYI. Mr. Pate, a member of DHC's Board of Directors, is affiliated with
SZI.

NOTE 19. CONTINGENCIES

MARINE SERVICES

A number of legal actions are pending against Marine Services in which
claims are made in substantial amounts. While the ultimate results of pending
litigation cannot be predicted with certainty, management does not currently
expect that resolution of these matters will have a material adverse effect on
DHC's consolidated results of operations, financial position or cash flow.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INSURANCE SERVICES

Insurance Services is involved in litigation relating to losses arising
from insurance contracts in the normal course of business which are provided for
under "unpaid losses and loss adjustment expenses." While litigation is by
nature uncertain, management, based in part on advice from counsel, believes
that the ultimate outcome of these actions will not have a material adverse
effect on DHC's consolidated results of operations, financial position or cash
flow.

NOTE 20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The carrying amounts (net of debt discounts) and fair values of financial
instruments are as follows:

The fair values of the Interest Rate Cap, Home Product Bonds, Fixed
Maturity Securities, Equity Securities, Interest Rate Swaps, new Senior Notes,
Senior Subordinated Notes and old Senior Notes payable are based on quoted
market values. The carrying values of all Revolving Credit Facilities, Term
Loans, GMS Bank Note, Illinois Development Finance Authority and IFC Note all of
which bear interest at floating rates, approximate their fair values. The Bonds
guaranteed by the Maritime Administration were recently issued and, accordingly,
the carrying amount approximates fair value.

FUEL PRICE RISK MANAGEMENT

Marine Services uses forward purchases to provide partial short-term
protection against a sharp increase in diesel fuel prices. These instruments
generally cover a portion of Marine Services forecasted diesel fuel needs for
towboat operations over the next one to twelve months. Marine Services accounts
for the forward fuel purchases as cash flow hedges. In accordance with SFAS No.
133, such financial instruments are marked-

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to-market and, if they qualify for hedge accounting, the offset is recorded to
other comprehensive income and then subsequently recognized as a component of
fuel expense when the underlying fuel being hedged is used. Should the forward
not qualify for hedge accounting (correlation ratio is outside the defined
deviation) such changes in value would be recorded in the statement of
operations rather than through other comprehensive income. ACL also has barging
customer contract rate adjustment provisions for changes in fuel prices for
approximately half of the gallons consumed. The adjustments are deferred one
quarter.

At December 27, 2002, Marine Services had forward fuel purchase contracts
outstanding with an aggregate notational value of $4,428 and a fair value of
$194, which has been recorded in other current assets on the consolidated
statement of financial position. Under these agreements, ACL will pay fixed
prices ranging from $0.69 to $0.80 per gallon. There were 6.1 million gallons
remaining on the contracts at December 27, 2002, terminating December 31, 2003,
but settled in January 2003.

INTEREST RATE RISK MANAGEMENT

With the acquisition of ACL, DHC assumed an interest rate cap agreement.
The interest rate cap has a notional amount of $201,800 and a fair value of zero
as of December 27, 2002 and is effective through August 11, 2003. Marine
Services accounts for the interest rate cap as a cash flow hedge whereby the
fair value of the interest rate cap is reflected as an asset or liability in the
consolidated statement of financial position. The cap rate (hedging instrument)
is the same interest rate index as the base interest rate for the floating rate
debt (hedged item). When the interest rate index exceeds the interest rate cap,
a portion of the change in fair value of the instrument represents a change in
intrinsic value which is an effective hedge. This portion of the change in value
will be recorded as other comprehensive income (loss).

DHC also records changes in the fair value of interest rate swap agreements
entered into by GMS. GMS has four interest rate swaps with a total notional
amount of $31,528 through which GMS pays fixed rates of 4.5% to 7.7% and
receives LIBOR or a municipal bond swap index. A swap with a notional amount of
$16,028 terminates January 1, 2004, swaps with a notional amount of $11,674
terminate in May and June, 2005, and a swap with a notional amount of $3,826
terminates in January 2008. The fair value of these swaps is a liability of
$2,718 as of December 27, 2002 and is recorded in other liabilities on the
consolidated statement of financial position. DHC's share of the changes in the
fair value of the swaps from the acquisition date through December 27, 2002 is
recorded as comprehensive income (loss) or other income (loss) depending on
whether the swap is an effective or ineffective hedge.

NOTE 21. BUSINESS SEGMENTS

DHC has five reportable business segments -- barging, construction,
terminals, insurance and other. Marine Services' barging segment includes barge
transportation operations in North and South America and domestic fleeting
facilities that provide fleeting, shifting, cleaning and repair services at
various locations along the inland waterways. The construction segment
constructs marine equipment for Marine Services' domestic and international
fleets, as well as external customers. The terminals segment operates marine
terminal and warehouse facilities in the United States and the Netherlands. The
Insurance Services segment writes property and casualty insurance in the western
United States, primarily in California. The other segment represents the
operating expenses and miscellaneous income of the holding company, DHC.

Management evaluates performance based on segment earnings, which is
defined as operating income before income taxes. The accounting policies of the
reportable segments are consistent with those described in the summary of
significant accounting policies. Intercompany sales are transferred at cost.

Reportable segments are business units that offer different products or
services. The reportable segments are managed separately because they provide
distinct products and services to internal and external customers.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 22. BUSINESS SEGMENTS

The following is a reconciliation of segment (loss) earnings to
consolidated totals.

GEOGRAPHIC INFORMATION

Revenues are attributed to countries based on the location of the service
provided. Properties represent the only long-lived assets of Marine Services.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MAJOR CUSTOMER

Revenues from one customer of the barging segment represented approximately
13% of 2002 revenue.

NOTE 23. QUARTERLY DATA (UNAUDITED)

Marine Services' business is seasonal, and its quarterly revenues and
profits historically are lower during the first and second fiscal quarters of
the year (January through June) and higher during the third and fourth fiscal
quarters (July through December) due to the North American grain harvest.

NOTE 24. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) as of December 27, 2002 and
December 31, 2001 consists of the following:

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 25. INVESTMENT IN UABL

The following is a summary of financial information for the UABL
unconsolidated equity investees:

NOTE 26. GUARANTOR FINANCIAL STATEMENTS

Debt issued by ACL amounting to $313,329 in outstanding term loans as of
December 27, 2002, $259,671 in outstanding notes under the Indentures as of
December 27, 2002 and the Revolving Credit Facility, which provides for
revolving loans and the issuance of letters of credit in an aggregate amount up
to $50,000, are guaranteed by ACL's wholly-owned domestic subsidiaries, other
than ACL Capital Corp. (which was formed in connection with the issuance of the
senior notes), any Accounts Receivable Subsidiary (as defined in the Indentures
with respect to such debt) and certain subsidiaries of ACL without substantial
assets or operations (collectively the "Guarantor Subsidiaries"). Such
guarantees are full, unconditional and joint and several.

The following financial information is presented to meet the requirements
of S-X Rule 3-10 with respect to guarantor's of the above noted debt of ACL.
Separate financial statements of the Guarantor Subsidiaries are not presented
because management has determined they would not be material to investors. The
following supplemental financial information sets forth on a combined basis,
combining statement of operations, statement of financial position, and
statement of cash flows for the Parent Company and Nonguarantor Subsidiaries and
the Guarantor Subsidiaries for the year ended December 27, 2002. It should be
noted that the amounts shown under the caption "Parent Company and Nonguarantor
Subsidiaries" include amounts related to the Insurance Services' subsidiaries of
Danielson as well as Marine Services' subsidiaries which are not guarantors of
the above noted debt of ACL.

Danielson acquired ACL in May 2002. The following supplemental financial
information also sets forth on a combined basis, combining statement of
operations, statement of financial position, and statement of cash flows for ACL
and its Guarantor Subsidiaries and the Nonguarantor Subsidiaries as of December
27, 2002 and the period May 29, 2002 through December 27, 2002.

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMBINING STATEMENT OF OPERATIONS OF DANIELSON HOLDING CORPORATION
FOR THE YEAR ENDED DECEMBER 27, 2002

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DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMBINING STATEMENT OF FINANCIAL POSITION OF DANIELSON HOLDING CORPORATION
DECEMBER 27, 2002

107

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMBINING STATEMENT OF CASH FLOWS OF DANIELSON HOLDING CORPORATION
FOR THE YEAR ENDED DECEMBER 27, 2002

108

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMBINING STATEMENT OF OPERATIONS OF AMERICAN COMMERCIAL LINES LLC
FOR THE PERIOD MAY 29, 2002 THROUGH DECEMBER 27, 2002

109

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMBINING STATEMENT OF CASH FLOWS FOR AMERICAN COMMERCIAL LINES LLC
FOR THE PERIOD MAY 29, 2002 THROUGH DECEMBER 27, 2002

110

DANIELSON HOLDING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMBINING STATEMENT OF FINANCIAL POSITION FOR AMERICAN COMMERCIAL LINES LLC
DECEMBER 27, 2002

111

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Danielson Holding Corporation

We have audited the accompanying consolidated statement of financial position of
Danielson Holding Corporation as of December 27, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 27, 2002. Our audit also included the financial
statement schedules listed in the index at Item 15(a) for the year ended
December 27, 2002. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Danielson Holding
Corporation at December 27, 2002, and the consolidated results of its operations
and its cash flows for the year ended December 27, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules for the year ended December
27, 2002, when considered in relation to the 2002 basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 1, the accompanying consolidated financial statements have
been prepared assuming that American Commercial Lines LLC, a wholly-owned
subsidiary of the Company, will continue as a going concern. American Commercial
Lines LLC has incurred recurring operating losses, has a working capital
deficiency, and has not complied with certain covenants of its loan agreements.
As more fully described in Note 3, on January 31, 2003, American Commercial
Lines LLC and its immediate direct parent, American Commercial Lines Holdings
LLC, as well as certain subsidiaries of American Commercial Lines LLC, filed a
petition with the U.S. Bankruptcy Court to reorganize under Chapter 11 of the
U.S. Bankruptcy Code. These conditions raise substantial doubt about American
Commercial Lines LLC's ability to continue as a going concern. The 2002
consolidated financial statements of Danielson Holding Corporation do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amount and classification of
liabilities that may result from the outcome of this uncertainty.

Louisville, Kentucky /S/ ERNST & YOUNG, LLP
February 21, 2003

112

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Danielson Holding Corporation

We have audited the accompanying consolidated Statement of Financial Position of
Danielson Holding Corporation and subsidiaries as of December 31, 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 2001. Our
audits also included the financial statement schedules listed in the index at
Item 15(a) for each of the years in the two-year period then ended. These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Danielson Holding
Corporation and subsidiaries at December 31, 2001, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedules for each of the years in the two-year period ended December
31, 2001, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.

/s/ KPMG LLP

New York, New York
March 5, 2002

113

SCHEDULE I.

DANIELSON HOLDING CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

PARENT COMPANY ONLY

114

SCHEDULE I -- (CONTINUED)

DANIELSON HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

PARENT COMPANY ONLY

115

SCHEDULE I -- (CONTINUED)

DANIELSON HOLDING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

PARENT COMPANY ONLY

116

DANIELSON HOLDING CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

- ---------------

(1) Acquired with purchase of ACL and GMS

117

SCHEDULE V.

DANIELSON HOLDING CORPORATION

SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS

118

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There were no disagreements with accountants in 2001 or 2002. During those
years, KPMG LLP ("KPMG") served as DHC's principal independent accounting firm
until July 25, 2002. On July 25, 2002, KPMG's appointment as the principal
independent accounting firm for DHC was terminated and Ernst & Young LLP ("E&Y")
was engaged as DHC's principal independent accounting firm. The decision to
change accounting firms was made by the Audit Committee of the Board of
Directors of DHC. Prior to such change, DHC actively considered whether it was
advisable to change firms following DHC's acquisition of ACL, whose business is
different from DHC's traditional areas. DHC solicited bids from a group of
accounting firms, including KPMG, and on the basis of that information the Audit
Committee determined that DHC should change accounting firms.

In connection with the audits of the two fiscal years ended December 31,
2001 and December 31, 2000, and during the subsequent interim period through
July 25, 2002, there were no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference to the subject matter of the disagreement in
connection with their reports.

The audit reports of KPMG on the consolidated financial statements of DHC
and its subsidiaries for the years ended December 31, 2001 and December 31,
2000, did not contain any adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or accounting
principles.

During DHC's fiscal years ended December 31, 2001 and December 31, 2000 and
the subsequent interim period through July 25, 2002, DHC did not consult with
E&Y regarding any of the matters or events set forth in Items 304(a)(2)(i) and
(ii) of Regulation S-K.

E&Y has reviewed the disclosures in this Item 9 and concurs with the
statements regarding E&Y set forth herein. DHC has also provided KPMG with a
copy of the disclosures contained herein. KPMG previously has furnished a letter
to the Securities and Exchange Commission attached as Exhibit 16.1 to DHC's
Current Report on Form 8-K filed on August 1, 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

EXECUTIVE OFFICERS

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BOARD OF DIRECTORS

BACKGROUND OF BOARD OF DIRECTORS AND MANAGEMENT

Mr. Zell is the Chairman of the Board, Chief Executive Officer and
President of DHC. Mr. Zell has served as Chairman of the Board of Directors of
Equity Group Investments, L.L.C. ("EGI"), an investment company, since 1999, and
had been Chairman of the Board of its predecessor, Equity Group Investments,
Inc., for more than five years. Mr. Zell has been a trustee and Chairman of the
Board of Trustees of Equity Office Properties Trust, an equity real estate
investment trust ("REIT") primarily focused on office buildings, since October
1996, and was President from April 2002 to November 2002, and has been Chief
Executive Officer since April 2002. For more than the past five years, Mr. Zell
has served as Chairman of the Board of Anixter International, Inc., a
distributor of electrical and cable products; as Chairman of the Board of
Manufactured Home Communities, an equity REIT primarily focused on manufactured
home communities; and as Chairman of the Board of Trustees of Equity Residential
Properties Trust, an equity REIT primarily focused on multifamily residential
properties. Since July 1997, Mr. Zell has been Chairman of the Board of Capital
Trust, Inc., a specialized finance company. Since March 1997, Mr. Zell has
served as a Director of Angelo & Maxie's, Inc. (formerly Chart House
Enterprises, Inc.), an owner and operator of restaurants, and since May 1998 has
been Chairman of the Board. In July 2002, Mr. Zell became a Director of iDine
Rewards Network Inc., an administrator of loyalty-based consumer rewards
programs, and has been its Chairman since September 2002.

Mr. Barse has been a Director of DHC since July 1996 and was the President
and Chief Operating Officer of DHC from July 1996 to July 24, 2002. Mr. Barse
has been President and Chief Operating Officer (May 1998 to present), Trustee
(September 2001 to present) and Executive Vice President (April 1995 to May
1998) of Third Avenue Trust; President and Chief Operating Officer (July 1999 to
present) and Trustee (September 2001 to present) of Third Avenue Variable Series
Trust; President and Chief Operating Officer (February 1998 to present),
Director (April 1995 to December 2002) and Executive Vice President (April 1995
to February 1998) of EQSF Advisers, Inc. and its successor, Third Avenue
Management LLC; Chief Executive Officer (July 1999 to present), President (June
1995 to Present), Director and Chief Operating Officer (January 1995 to present)
of M.J. Whitman LLC, a registered broker dealer; President (June 1995 to August
2002), Director and Chief Operating Officer (January 1995 to August 2002) of
M.J. Whitman Advisers, Inc., a registered investment adviser.

Mr. Hagan has served as President and Chief Executive Officer of ACL and
its subsidiaries since 1991 and is Chairman of the ACL Board of Managers. Prior
to that, he held a series of positions of increasing responsibility within ACL
and CSX Corporation. He resigned as a Director of DHC on January 22, 2003.

Mr. Huber has been Managing Director, Chief Executive Officer and Principal
of the Latin American direct investment group Norte-Sur Partners and Senior
Director of Kissinger McLarty Associates, a strategic advisory firm that assists
international businesses since January 2001. Mr. Huber has approximately forty
years of investment and merchant banking, international business, and management
experience, and was most

120

recently Chief Executive Officer of Aetna, Inc. Before joining Aetna in 1995, he
held executive positions with Chase Manhattan Bank, Citibank, Bank of Boston,
and Continental Bank. Mr. Huber is also Chairman of UABL Ltd. and a Director of
Opticare and Malta Cleyton.

Mr. Isenberg, since 1987, has been Chairman and Chief Executive Officer of
Nabors Industries, Inc. ("Nabors"), the world's largest land and offshore
platform drilling company. Mr. Isenberg presently serves as a director of the
American Stock Exchange, the National Association of Securities Dealers, Inc.,
and is a member of the National Petroleum Council. 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, he
was employed in various management capacities with the Exxon Corp. Mr. Isenberg
founded and is the principal financial sponsor of the Parkside School for
children with learning disabilities in New York City.

Mr. Pate is Managing Director of EGI. Mr. Pate has been employed by EGI or
its predecessor since 1994. Mr. Pate also serves on the board of directors of
Adams Laboratories, Inc.

Mr. Solomon has served as Executive Vice President, General Counsel and
Secretary of DHC since July 24, 2002. From November 1999 to August 2001, Mr.
Solomon was Vice President and General Counsel of Blue Chip Broadcasting
Company. From February 1997 through May 1999, Mr. Solomon was Senior Vice
President, General Counsel and Secretary of Jacor Communications, Inc. From
October 1992 to February 1997, Mr. Solomon was a partner in the Cincinnati-based
law firm of Graydon Head & Ritchey LLP.

Mr. Sullivan served as Chairman of the Board of IMC Global July 1999 to
November 2000, also having served as a Member of the Board and its Executive
Committee from March 1996 through December 2000. He also served as Chairman of
the Board of the Vigoro Corporation from March 1991 through February 1996 and as
its CEO from March 1991 to September 1994. From July 1997 until December 2000,
Mr. Sullivan served as a director of American Classic Voyages. He also served as
a director and Chairman of the Special Committee of Mycogen Corporation from
January 1998 until December 1998.

Mr. Tinkler was named Chief Financial Officer of DHC on January 27, 2003.
Mr. Tinkler is Chief Financial Officer of EGI and has served in various other
capacities for EGI or its predecessor since 1990. Mr. Tinkler has been Vice
President -- Finance and Treasurer of First Capital Financial, LLC, a sponsor of
public limited real estate partnerships, since April 2001.

Mr. Whitman has been a Director of DHC since August 1990 and was the
Chairman of DHC from August 1990 to July 2002, and Chief Executive Officer of
DHC from July 1996 to July 2002. Mr. Whitman has also been the Chairman and
Chief Executive Officer (March 1990 to present), President (January 1991 to May
1998) of Third Avenue Trust; Chairman and Chief Executive Officer (July 1999 to
present) of Third Avenue Variable Series Trust; Chairman and Chief Executive
Officer (March 1990 to August 2002), Co-Chief Investment Officer (February 2003
to present), Chief Investment Officer (January 1991 to February 2003), President
(January 1991 to February 1998) of EQSF Advisers, Inc. and its successor, Third
Avenue Management LLC; Chief Executive Officer, President and Director (October
1974 to Present) of Martin J. Whitman & Co., Inc. (formerly M.J. Whitman & Co.
Inc.), a private investment company; Chairman (January 1995 to August 2002) and
Chief Investment Officer (October 1992 to August 2002) of M.J. Whitman Advisers,
Inc.; Distinguished Management Fellow (1972 to present) and Member of the
Advisory Board (October 1994 to June 1995) of the Yale School of Management at
Yale University; Adjunct Professor (January 2001 to December 2001) of the
Columbia University Graduate School of Business. Mr. Whitman is also a Chartered
Financial Analyst.

Mr. Wolff served as Chief Financial Officer of DHC from July 24, 2002 to
January 22, 2003. He is currently a Member of the ACL Board of Managers and
serves as Senior Vice President, Finance and Chief Financial Officer of ACL and
its subsidiaries. Mr. Wolff was with Texas Gas Exploration, a former CSX
subsidiary, from 1979 to 1986. In 1986, he joined CSX and transferred to ACL in
1992 as Senior Vice President -- Finance. He was appointed chief of
international business development in 1996 and returned to the Chief Financial
Officer position in August 1998.

121

Dr. Yeutter has been Of Counsel to Hogan & Hartson LLP, a law firm in
Washington, D.C., since 1993 where he has an international trade and
agricultural law practice. Between 1985 and 1993 he served in the Reagan and
Bush Administrations as the U.S. Trade Representative, Secretary of Agriculture,
Chairman of the Republican National Committee and Counselor to the President for
Domestic Policy. He was President and Chief Executive Officer of the Chicago
Mercantile Exchange from 1978-1985. In the 1970s, Dr. Yeutter held three
subcabinet positions in the Nixon and Ford Administrations as Assistant
Secretary of Agriculture for Marketing and Consumer Services, Assistant
Secretary of Agriculture for International Affairs and Commodity Programs, and
Deputy Special Trade Representative.

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 DHC's equity securities, to file with the Securities and
Exchange Commission and the American Stock Exchange initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of DHC. Executive 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.

Based upon a review of filings with the Securities and Exchange Commission
and/or written representations from certain reporting persons, DHC believes that
all of its Directors, executive officers and other Section 16 reporting persons
complied during fiscal 2002 with the reporting requirements of Section 16(a)
except as follows: Messrs. Whitman, Barse and former DHC chief financial
officer, Michael Carney, each filed one late Form 4 with respect to shares of
DHC common stock purchased by them upon exercise of stock rights in connection
with the Danielson Recapitalization; W. James Hall, former DHC general counsel,
filed one late Form 3 with respect to his being named general counsel and
secretary of DHC in December 2000 and one late Form 4 with respect to shares of
DHC common stock purchased by him upon exercise of stock rights in connection
with the Danielson Recapitalization; Mr. Pate filed two late Forms 4 with
respect to shares of DHC common stock purchased by him in May 2002 and the other
with respect to his purchase of shares of DHC common stock and receipt of stock
options from DHC in December 2000; Mr. Isenberg failed to file two Forms 4, one
with respect to shares of DHC common stock purchased by him upon exercise of
stock rights in connection with the Danielson Recapitalization and the other
with respect to a change in beneficial ownership arising from a 1994 transfer of
28 shares of DHC common stock into a partnership controlled by him; and former
DHC Directors, Frank B. Ryan and Joseph F. Porrino, each filed one late Form 4
with respect to their receipt of stock options from DHC in December 2000.

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ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to DHC, or its subsidiary
companies or their predecessors for 2000 through 2002 of those persons who
served as (i) the Chief Executive Officer during 2002 (two persons), (ii) the
two most highly compensated executive officers employed by DHC as of December
27, 2002, (iii) the former President of DHC who was one of DHC's four most
highly compensated officers but who was not serving as an executive officer of
DHC at year end, and (iv) the Chief Executive Officer of a significant DHC
subsidiary (collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

- ---------------

(1) No bonuses were paid to Named Executive Officers in 2002, other that Mr.
Barse's bonus in connection with the closing of the Danielson
Recapitalization and his resignation from service for DHC following that
transaction.

(2) Consists of automobile allowance only.

123

(3) Consists of the dollar value of restricted stock awards (calculated by
multiplying the number of shares awarded by the closing market price of
DHC's common stock on the date of the grant -- which was $6.16 as of the May
29, 2002 grant date) to certain members of ACL management made in restricted
DHC common stock as part of the Danielson Recapitalization whereby each of
the respective Named Executive Officers holding preferred membership units
in ACL Holdings at the time of Danielson Recapitalization abandoned those
units to ACL Holdings for no consideration and received certain amounts of
restricted DHC common stock from DHC for their continued employment with
ACL. ACL management received a total of 339,039 shares of restricted stock,
of which Messrs. Hagan and Wolff received 90,293 and 30,098 shares,
respectively. At December 27, 2002, the aggregate value of Messrs. Hagan and
Wolff's restricted DHC common stock was $173,363 (120,391 shares multiplied
by $1.44, the closing price of DHC common stock on December 27, 2002).

(4) Amounts shown include the 2002 above-market portion of earnings on a CSX
deferred compensation program available to Mr. Hagan through his employment
at ACL in the amount of $29,621. Amounts shown also include life insurance
premium payments made on behalf of Messrs. Solomon, Hagan, and Wolff in the
amounts of $90, $5,433 and $731, respectively; matching contributions made
by ACL in conjunction with deferral of salary or bonus to a supplementary
savings plan on behalf of Messrs. Hagan and Wolff in the amounts of $9,450
and 5,070, respectively; and payment for the provision of tax services for
Mr. Hagan in the amount of $1,991 and Mr. Wolff in the amount of $2,721.
Amounts for 2002 also include matching contributions made by ACL to Messrs.
Solomon, Wolff and Hagan to the ACL 401(k) plan in the following amounts:
$2,187 for Mr. Solomon, $5,512 for Mr. Hagan, and $5,070 for Mr. Wolff.

(5) Amounts shown for Messrs. Hagan and Wolff were paid by ACL, a significant
subsidiary of DHC.

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

- ---------------

(1) For Messrs. Wolff and Hagan, the options for 50% of the shares vest over
time in four equal annual installments; the remaining 50% of the options
vest in four annual installments subject to the achievement of financial
performance goals relating to EBITDA and ACL Senior Credit Facility
compliance. For Mr. Solomon, 50% of the options vested on January 1, 2003;
the remaining 50% of the options vest in three equal annual installments.

124

The following table sets forth the number of securities underlying
unexercised options held by each of the Named Executive Officers and the value
of such options at the end of fiscal 2002:

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

- ---------------

(1) Value of unexercised options at fiscal year-end represents the difference
between the exercise price of any outstanding in-the-money options and
$1.44, the mean value of DHC common stock on December 27, 2002. All
outstanding options have exercise prices in excess of $1.44 and, as a
result, none of the options have value as of December 27, 2002.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 2002, 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.

PENSION PLANS

DHC does not offer a pension benefit. ACL, NAICC and the other DHC
insurance subsidiaries offer certain pension and retirement benefits.

BENEFIT PLANS

DHC does not offer employee benefits. However, Mr. Solomon participates in
the ACL 401(k) Plan and receives health benefits through ACL. ACL, NAICC and the
other DHC insurance subsidiaries offer certain benefit plans.

COMPENSATION OF BOARD OF DIRECTORS

Prior to July 24, 2002, each Director who was not an officer or employee of
DHC or its subsidiaries received compensation of $2,500 for each Board meeting
attended, whether in person or by telephone. Each eligible Director prior to
July 24, 2002 was paid $10,000. Audit Committee members each received $2,500 in
2002 for their service on the Audit Committee. Directors who are officers or
employees of DHC or its subsidiaries receive no fees for service on the Board.
No attendance fee was paid to any Director with respect to any committee
meetings.

After July 24, 2002, the Board of Directors ratified an annual fee of
$30,000 payable to each Director who is not an officer or employee of DHC or its
subsidiaries. For 2002, and after July 24, 2002, each eligible Director was paid
$15,000, which is the $30,000 annual fee prorated for the shortened period.
Members of the Audit, Compensation, Public Policy and Independent Committees
receive $1,500 per meeting. Each member of the Audit Committee received $4,500
($1,500 per meeting) for three Audit Committee meetings in 2002.

125

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP

The following table sets forth the beneficial ownership of DHC Common Stock
as of March 27, 2003 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 DHC 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.

* Percentage of shares beneficially owned does not exceed one percent of
the outstanding Common Stock.
- ---------------

(1) Share percentage ownership is rounded to nearest tenth of one percent and
reflects the effect of dilution as a result of outstanding options and
warrants to the extent such options and warrants are, or within 60 days
will become, exercisable. As of March 27, 2002, there were exercisable
options outstanding to purchase 1,412,254 shares of Common Stock. Shares
underlying any option or warrant which was exercisable on March 27, 2003 or
becomes exercisable within the next 60 days are deemed outstanding

126

only for purposes of computing the share ownership and share ownership
percentage of the holder of such option or warrant.

(2) In accordance with provisions of DHC's certificate of incorporation, all
certificates representing shares of Common Stock beneficially owned by
holders of five percent or more of the Common Stock are owned of record by
us, as escrow agent, and are physically held by us 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 us.

(4) Includes 1,317,695 shares beneficially owned by Third Avenue Value Fund
Series ("TAVF") of the Third Avenue Trust, an investment company registered
under the Investment Company Act of 1940 and by separate accounts managed
by the investment adviser to TAVF; 170,509 shares beneficially owned by
Martin J. Whitman & Co., Inc. ("MJW&Co"), a private investment company; and
134,587 shares beneficially owned by Mr. Whitman's wife and three adult
family members. Mr. Whitman may be deemed to control 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,
in separate accounts managed by its investment adviser and owned by Mr.
Whitman's family members and, therefore, these shares are not held in
escrow by DHC.

(5) Includes 5,460,612 shares of Common Stock owned by SZ Investments, LLC,
which is affiliated with Mr. Zell. Also includes shares underlying
currently exercisable options to purchase 103,333 shares of Common Stock at
an exercise price of $3.37 per share owned by Equity Group Investments,
LLC, also an affiliate of Mr. Zell ("EGI"). Does not include shares
underlying options to purchase 51,667 shares of Common Stock at an exercise
price of $3.37 per share which are not currently exercisable nor become
exercisable within the next 60 days that are owned by EGI.

(6) Includes 1,317,695 shares beneficially owned by TAVF and in separate
accounts managed by the investment adviser to TAVF, of which Mr. Barse is
President. Includes shares underlying currently exercisable options to
purchase an aggregate of 50,000 shares of Common Stock at an exercise price
of $5.6875 per share, 50,000 shares of Common Stock at an exercise price of
$7.0625 per share, 25,000 shares of Common Stock at an exercise price of
$3.65625 per share, 50,000 shares of Common Stock at an exercise price of
$5.3125 per share, 50,000 shares of Common Stock at an exercise price of
$4.00 per share and 100,000 shares of Common Stock at an exercise price of
$3.37 per share. Mr. Barse disclaims beneficial ownership of the shares of
Common stock owned by TAVF or held in accounts managed by its adviser and,
therefore, these shares are not held in escrow by DHC.

(7) Includes restricted stock issued to Messrs. Hagan and Wolff on May 29,
2002. Does not include shares underlying options to purchase 210,000 (for
Mr. Hagan) or 140,000 (for Mr. Wolff) shares of Common Stock at an exercise
price of $5.00 per share which are not currently exercisable nor become
exercisable within the next 60 days.

(8) Includes restricted stock issued to Mr. Huber on May 29, 2002. Does not
include shares underlying options to purchase 40,000 shares of Common Stock
at an exercise price of $4.26 per share which are not currently exercisable
nor become exercisable within the next 60 days.

(9) Includes 152,457 shares owned by Salmon Atlas, a partnership controlled by
Mr. Isenberg and his wife. Includes shares underlying options to purchase
an aggregate of 6,667 shares of Common Stock at an exercise price of $4.00
per share. Does not include shares underlying options to purchase an
aggregate of 6,667 shares of Common Stock at an exercise price of $4.00 per
share which are not currently exercisable nor become exercisable within the
next 60 days.

(10) Includes shares underlying currently exercisable options to purchase an
aggregate of 19,000 shares of Common Stock at an exercise price of $4.00
per share. Does not include shares underlying options to purchase an
aggregate of 3,800 shares of Common Stock at an exercise price of $4.00 per
share which are not currently exercisable nor become exercisable within the
next 60 days.

127

(11) Includes shares underlying currently exercisable options to purchase 75,000
shares of Common Stock at an exercise price of $5.06 per share. Does not
include shares underlying options to purchase 75,000 shares of Common Stock
at an exercise price of $5.06 per share which are not currently exercisable
nor become exercisable within the next 60 days.

(12) Includes shares underlying currently exercisable options to purchase an
aggregate of 30,000 shares of Common Stock at an exercise price of $5.78
per share. Does not include shares underlying options to purchase 30,000
shares of Common Stock at an exercise price of $5.78 per share or options
to purchase 40,000 shares of Common Stock at an exercise price of $4.26 per
share which are not currently exercisable nor become exercisable within the
next 60 days

(13) Includes shares underlying currently exercisable options to purchase an
aggregate of 4,166 shares of Common Stock at an exercise price of $4.00 per
share. Does not include shares underlying options to purchase 834 shares of
Common Stock at an exercise price of $4.00 per share which are not
currently exercisable nor become exercisable within the next 60 days.

(14) Does not include shares underlying options to purchase 40,000 shares of
Common Stock at an exercise price of $4.26 per share which are not
currently exercisable nor become exercisable within the next 60 days.

(15) In calculating the percentage of shares owned by officers and directors as
a group, excluding Messrs. Hagan and Wolff, 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.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information regarding the number of
securities which could be issued upon the exercise of outstanding options, the
weighted average exercise price of those options and the number of securities
remaining for future issuance under the 1995 Stock and Incentive Plan. DHC does
not have any equity compensation plans that have not been approved by its
security holders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

AFFILIATE AGREEMENTS

DHC has agreed to provide SZI unlimited demand registration rights with
respect to the ACL Senior Notes and ACL PIK Notes held by SZI and its
affiliates. The selling noteholder, HYI, is an affiliate of SZI. Mr. Zell, DHC's
President and Chief Executive Officer and Chairman of DHC's Board of Directors,
and Mr. Tinkler, DHC's Chief Financial Officer, are affiliated with SZI and HYI.
Mr. Pate, a member of DHC's Board of Directors, is affiliated with SZI.

DHC has also entered into a non-exclusive investment advisory agreement
dated April 14, 1999 with EGI, a company affiliated with Mr. Zell, pursuant to
which EGI has agreed to provide, at the request of DHC, certain investment
banking services to DHC in connection with potential transactions. For these
services, in 2002 DHC paid a $0.06 million fee to EGI. In the event that a
transaction is consummated for which the

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Acquisition Committee of DHC's Board of Directors determines that EGI provided
material services, DHC will pay to EGI a fee in the amount of 1% of the
aggregate consideration in connection with such transaction (including
indebtedness assumed or outstanding). As a result of services provided to DHC
during the Danielson Recapitalization of ACL, which is described in more detail
in this Report at Item 1, Business - ACL Business; DHC Acquisition and
Recapitalization of ACL, DHC and EGI agreed that the fee for EGI's services was
$3.0 million. DHC has also agreed to reimburse, upon request, EGI's
out-of-pocket expenses related to services provided under the investment
advisory agreement. For providing a standby commitment to purchase any DHC
shares that were unsubscribed in the rights offering conducted by DHC as part of
its acquisition of ACL, DHC paid SZI a fee of $1.0 million. Messrs. Zell and
Pate are members of the Acquisition Committee, along with Messrs. Whitman and
Barse, all of whom are Directors of DHC.

On November 8, 2002, DHC, SZI and Martin J. Whitman terminated an
investment agreement existing between those parties, which provided certain
voting and registration rights to the parties, and entered into a new
registration rights agreement with SZI.

Prior to and shortly after the acquisition of ACL, DHC shared certain
personnel and facilities with several affiliated and unaffiliated companies who
have certain common directors and officers, and certain expenses were allocated
among the various entities. Personnel costs were allocated based upon actual
time spent on DHC business. Costs relating to office space and equipment were
allocated based upon actual usage. Management believes the methodology used for
allocation is appropriate. Total expenses allocated to DHC from affiliated
entities were $1.7 million for the year ended December 27, 2002.

ACL has entered into certain non-material agreements with certain
affiliates of UABL for ship management and chartering arrangements, which relate
to the UABL merger described in this Report at Item 1, Business -- General. DHC
recorded charter income from UABL of $5.9 million for the period May 29, 2002
through December 27, 2002. Danielson also recorded administrative fee expenses
to UABL of $4.3 million for the period May 29, 2002 through December 27, 2002.
Charter rates are established at fair market value based upon similar
transactions. As of December 27, 2002, DHC has recorded $6.3 million in accounts
receivable from UABL.

The arrangements described above are each on terms and conditions that DHC
believes are in the aggregate not materially more burdensome to DHC than would
be obtained on an arm's-length basis among unaffiliated parties.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this Report, DHC carried out an
evaluation, under supervision and with the participation of Danielson's
management, including DHC's Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of DHC's disclosure controls
and procedures as defined in Exchange Act Rules 13a-14(c) and 15d-14(c). Based
upon and as of the date of that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that DHC's disclosure controls and procedures
were effective, in all material respects, to ensure that information required to
be disclosed in this Report and DHC's other periodic filings is recorded,
processed, summarized and reported as and when required.

There have been no significant changes in DHC's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date DHC completed its evaluation. Therefore, no corrective actions were
taken.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Documents filed as part of this report:

(1) CONSOLIDATED FINANCIAL STATEMENTS:

Included in Part II of this Report:

Consolidated Statement of Operations, for the years ended December 27,
2002, December 31, 2001 and December 31, 1999.

Consolidated Statement of Financial Position as of December 27, 2002 and
December 31, 2001.

Consolidated Statement of Cash Flows, for the years ended December 27,
2002, December 31, 2001 and December 31, 2000.

Consolidated Statement of Stockholders' Equity, for the years ended
December 27, 2002, December 31, 2001 and December 31, 2000.

Notes to Consolidated Financial Statements, for the years ended December
27, 2002, December 31, 2001 and December 31, 2000.

Report of Ernst & Young LLP, Independent Accountants, on the
consolidated financial statements of Danielson Holding Corporation for
the year ended December 27, 2002.

Report of KPMG LLP, Independent Accountants, on the consolidated
financial statements of Danielson Holding Corporation for the years
ended December 31, 2001 and December 31, 2000.

(2) FINANCIAL STATEMENT SCHEDULE

Included in Part II of this report:

Schedule I -- Parent Company Only Financial Information

Schedule II -- Valuation and Qualifying Accounts

Schedule V -- Supplemental Information Concerning
Property -- Casualty Insurance Operations

All other schedules are omitted because they are not applicable, not
significant or not required, or because the required information is
included in the financial statement notes thereto.

(3) EXHIBITS

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131

132

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- ---------------

+ Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
Regulations under the Securities and Exchange Act of 1934, reference is made
to the document previously filed with the Commission.

* Management Contract or Compensatory Plan or Arrangement.

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(b) Reports on Form 8-K: Concurrently with the filing of DHC's Quarterly Report
on Form 10-Q for the quarterly period ended September 27, 2002, DHC filed a
Current Report on Form 8-K on November 12, 2002, which contained the
Sarbanes-Oxley Act of 2002, Section 906 Certifications from Samuel Zell,
Chief Executive Officer of ACL, and James J. Wolff, Chief Financial Officer
of ACL.

(c) Exhibits: See Index to Exhibits

(d) All financial statements and schedules except those items listed under Item
15(a)(1) and (2) above are omitted because they are not applicable, or are
not required, or because the required information is included in the
financial statements or notes thereto.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Danielson Holding Corporation
(Registrant)

By: /s/ SAMUEL ZELL
------------------------------------
Samuel Zell
President and Chief Executive
Officer

March 27, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 2003.

136

CERTIFICATIONS

I, Samuel Zell, the Chief Executive Officer of Danielson Holding Corporation
("DHC"), the registrant, certify that:

1. I have reviewed this annual report on Form 10-K of DHC;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ SAMUEL ZELL
--------------------------------------
Samuel Zell
Chief Executive Officer/
Principal Executive Officer
(Signature and Title)

Date: March 27, 2003

137

I, Philip Tinkler, Chief Financial Officer of Danielson Holding Corporation
("DHC"), the registrant, certify that:

1. I have reviewed this annual report on Form 10-K of DHC;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

/s/ PHILIP G. TINKLER
--------------------------------------
Philip G. Tinkler
Chief Financial Officer/
Principal Financial Officer
(Signature and Title)

Date: March 27, 2003

138