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.
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.
See Notes 1 and 17 of the Notes to Consolidated Financial Statements for additional information on ACL's and NAICC's leases.
(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.
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.
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
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.
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.
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
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.
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.
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.
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.
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
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.
WRITTEN PREMIUM INCREASES ON NAICC'S NON-STANDARD AND COMMERCIAL AUTO INSURANCE LINES
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Net cash from Marine Service's operating activities in 2002 was used primarily for capital expenditures.
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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.
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 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.
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.
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.
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.
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.
No deferred tax effects have been provided on unrealized gains or losses on investment securities due to DHC's net operating tax loss carryforwards.
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.
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.
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 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.
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.
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
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.
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
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.
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.
- 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 be sold in its entirety or segments could be sold, and the proceeds from such sale(s) would be utilized to satisfy creditor claims.
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.
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 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%.
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.
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.
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:
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,
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:
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.
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
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.
The following table summarizes the activity in Insurance Services' liability for unpaid losses and LAE during the three most recent years:
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
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.
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.
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.
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:
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.
b. the time period during which there has been a significant decline in fair value,
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.
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 investment income for the years ended December 2002, 2001 and 2000 was:
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.
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.
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.
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,
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.
DHC's net operating tax loss carryforwards will expire, if not used, in the following amounts in the following years:
DHC's provision for income taxes in the consolidated statement of operations consists of certain state and other taxes. Tax filings for these jurisdictions do not consolidate the activity of the trusts referred to above, and reflect preparation on a separate company basis.
of 1974 ("ERISA"), as amended. Plan assets consist primarily of common stocks, corporate bonds and cash and cash equivalents.
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.
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.
Net pension cost for the years ended December 2002, 2001 and 2000 include the following components:
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:
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.
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.
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.
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.
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-
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.
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.
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.
Revenues are attributed to countries based on the location of the service provided. Properties represent the only long-lived assets of Marine Services.
Revenues from one customer of the barging segment represented approximately 13% of 2002 revenue.
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.
The following is a summary of financial information for the UABL unconsolidated equity investees:
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.
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.
COMBINING STATEMENT OF OPERATIONS OF DANIELSON HOLDING CORPORATION FOR THE YEAR ENDED DECEMBER 27, 2002
COMBINING STATEMENT OF FINANCIAL POSITION OF DANIELSON HOLDING CORPORATION DECEMBER 27, 2002
COMBINING STATEMENT OF CASH FLOWS OF DANIELSON HOLDING CORPORATION FOR THE YEAR ENDED DECEMBER 27, 2002
COMBINING STATEMENT OF OPERATIONS OF AMERICAN COMMERCIAL LINES LLC FOR THE PERIOD MAY 29, 2002 THROUGH DECEMBER 27, 2002
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.