UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q/A
Amendment No. 1
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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
DANIELSON HOLDING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-6021257
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
TWO NORTH RIVERSIDE PLAZA, SUITE 600
CHICAGO, IL 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 466-4030
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether 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 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 whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 7, 2004
----- --------------------------
Common Stock, $0.10 par value 35,964,145 shares
EXPLANATORY NOTE: The purpose of this amendment is to amend and restate in its
entirety Part I, Item 1 in order to correct a computational arithmetic error in
the consolidated statements of financial position, a computational error in the
formula calculating the foreign income taxes in the pro forma information
contained in Note 2, and to supplement the exhibits filed under Part II, Item
6(a) of the Quarterly Report on Form 10-Q for Danielson Holding Corporation as
filed with the Securities and Exchange Commission on May 7, 2004 for the
quarterly period ended March 31, 2004. This Form 10-Q/A does not reflect events
occuring after the filing of the original Form 10-Q, or modify or update the
disclosures therein in any way other than as required to reflect these changes.
DANIELSON HOLDING CORPORATION
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2004
PART I
Item 1. Financial Statements
Condensed Consolidated Statements of Operations for the Quarters Ended
March 31, 2004 and March 28, 2003 (Unaudited)..............................................................1
Condensed Consolidated Statements of Financial Position as of March 31, 2004 (Unaudited)
and December 31, 2003......................................................................................3
Condensed Consolidated Statement of Stockholders' Equity for the Quarter Ended
March 31, 2004 (Unaudited).................................................................................5
Condensed Consolidated Statements of Cash Flows for the Quarters Ended
March 31, 2004 and March 28, 2003 (Unaudited)..............................................................6
Notes to Condensed Consolidated Financial Statements (Unaudited)...........................................7
Item 6. Exhibits and Reports on Form 8-K.....................................................................33
OTHER
Signatures....................................................................................................34
Exhibit 31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002......................35
Exhibit 31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002......................36
Exhibit 32.1 CEO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.....................................................37
Exhibit 32.2 CFO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.....................................................38
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED
------------------------------
MARCH 31, MARCH 28,
2004 2003
------------ ------------
ENERGY AND WATER:
OPERATING REVENUES:
Service Revenues $ 25,453 $ --
Electricity and Steam Sales 13,521 --
Other 2 --
------------ ------------
Total Energy and Water Operating Revenues 38,976 --
------------ ------------
OPERATING EXPENSES:
Plant Operating Expenses 27,322 --
Construction Costs -- --
Depreciation and Amortization 3,495 --
Debt Service Charges, Net 2,237 --
Other Operating Costs and Expenses 12
Selling, General and Administrative Expenses 1,596 --
Other (198) --
------------ ------------
Total Energy and Water Operating Expenses 34,464 --
Operating Income from Energy and Water 4,512 --
------------ ------------
INSURANCE SERVICES:
OPERATING REVENUES:
Gross Earned Premiums 6,321 11,096
Ceded Earned Premiums (333) (744)
------------ ------------
Net Earned Premiums 5,988 10,352
Net Investment Income 722 1,162
Net Realized Investment Gains (Losses) 171 (548)
Other Income 18 110
------------ ------------
Total Insurance Services' Operating Revenues 6,899 11,076
------------ ------------
OPERATING EXPENSES:
Gross Losses and Loss Adjustment Expenses 4,311 10,416
Ceded Losses and Loss Adjustment Expenses (28) (1,227)
------------ ------------
Net Losses and Loss Adjustment Expenses 4,283 9,189
Policy Acquisition Expenses 1,215 2,636
General and Administrative 1,297 1,034
------------ ------------
Total Insurance Services' Operating Expenses 6,795 12,859
------------ ------------
Operating Income (Loss) from Insurance Services 104 (1,783)
------------ ------------
The accompanying notes are an integral part of the consolidated
financial statements.
1
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - (CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED
------------------------------
MARCH 31, MARCH 28,
2004 2003
------------ ------------
PARENT COMPANY:
Net Investment Income 86 134
Net Realized Investment Gains -- 530
Administrative Expenses (779) (1,531)
------------ ------------
Operating Loss from Parent Company (693) (867)
------------ ------------
Operating Income (Loss) 3,923 (2,650)
------------ ------------
OTHER INCOME (EXPENSES):
Interest Expense (6,922) --
Equity in Net Income (Loss) of Unconsolidated Investments 1,015 (55,174)
------------ ------------
Total Other Expenses (5,907) (55,174)
------------ ------------
Loss Before Minority Interests and Provision for
Income Taxes (1,984) (57,824)
------------ ------------
INCOME TAX PROVISION (BENEFIT) (368) 12
MINORITY INTERESTS, ENERGY AND WATER (557) --
------------ ------------
Net Loss $ (2,173) $ (57,836)
============ ============
LOSS PER SHARE OF COMMON STOCK - BASIC $ (0.07) $ (1.88)
============ ============
LOSS PER SHARE OF COMMON STOCK - DILUTED $ (0.07) $ (1.88)
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
2
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
ASSETS
ENERGY AND WATER ASSETS:
Current:
Cash and Cash Equivalents $ 91,953 $ --
Restricted Funds Held in Trust 162,370 --
Receivables (Less Allowances of $45) 178,596 --
Deferred Income Taxes 6,538
Prepaid Expenses and Other 70,511 --
------------ ------------
Total Current Assets 509,968 --
Property, Plant and Equipment, Net 1,033,584 --
Restricted Funds Held in Trust 109,415 --
Unbilled Service and Other Receivables 113,944 --
Service and Energy Contracts (Net of Accumulated Amortization of $1,407) 316,707
Goodwill 24,470 --
Investments In and Advances to Investees and Joint Ventures 68,885 --
Other Assets 38,276 --
------------ ------------
Total Energy and Water Assets 2,215,249 --
------------ ------------
PARENT COMPANY'S AND INSURANCE SERVICES' ASSETS:
Cash and Cash Equivalents 19,750 17,952
Restricted Cash, Covanta Escrow -- 37,026
Investments:
Fixed Maturities, Available for Sale at Fair Value (Cost: $61,288 and $69,840) 62,616 70,656
Equity Securities, Available for Sale at Fair Value (Cost: $367 and $367) 404 401
Accrued Investment Income 620 966
Premium and Consulting Receivables, Net of
Allowances of $457 and $462 1,380 2,261
Reinsurance Recoverable on Paid Losses, Net of
Allowances of $1,951 and $1,898 1,429 1,448
Reinsurance Recoverable on Unpaid Losses, Net of
Allowances of $252 and $237 17,579 18,238
Ceded Unearned Premiums 164 508
Properties, Net 229 254
Investments in Unconsolidated Marine Services Subsidiaries 4,508 4,425
Deferred Financing Costs (Net of Amortization of $4,097 and $1,024) 3,373 6,145
Deferred Income Taxes 1,625 --
Other Assets 2,057 2,368
------------ ------------
Total Parent Company's and Insurance Services' Assets 115,734 162,648
------------ ------------
Total Assets $ 2,330,983 $ 162,648
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
3
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
ENERGY AND WATER LIABILITIES:
Current:
Current Portion of Long-term Debt $ 9,631 $ --
Current Portion of Project Debt 94,134 --
Accounts Payable 23,186 --
Federal Income Taxes Payable 1,301
Accrued Expenses 184,635 --
Deferred Income 35,040 --
------------ ------------
Total Current Liabilities 347,619 --
Long-term Debt 337,775 --
Project Debt 847,003 --
Deferred Income Taxes 311,034 --
Deferred Income 127,177 --
Other Liabilities 124,349 --
------------ ------------
Total Energy and Water Liabilities 2,095,265 --
------------ ------------
PARENT COMPANY'S AND INSURANCE SERVICES' LIABILITIES:
Unpaid Losses and Loss Adjustment Expenses 77,445 83,380
Unearned Premiums 2,256 4,595
Interest Payable 1,600 400
Parent Company Debt Payable to Related Parties 40,000 40,000
Bank Overdraft 616 1,436
Other Liabilities 4,133 5,046
------------ ------------
Total Parent Company's and Insurance Services' Liabilities 126,050 134,857
------------ ------------
Total Liabilities 2,221,315 134,857
------------ ------------
MINORITY INTERESTS, ENERGY AND WATER 71,532 --
STOCKHOLDERS' EQUITY:
Preferred Stock ($0.10 par value; authorized 10,000,000 shares; none issued
and outstanding) -- --
Common Stock ($0.10 par value; authorized 150,000,000 shares; issued
35,969,941 and 35,793,440 shares; outstanding 35,959,145 and 35,782,644 shares) 3,597 3,579
Additional Paid-in Capital 135,433 123,446
Unearned Compensation (238) (289)
Accumulated Other Comprehensive Loss 17 (445)
Accumulated Deficit (100,607) (98,434)
Treasury Stock (Cost of 10,796 shares) (66) (66)
------------ ------------
Total Stockholders' Equity 38,136 27,791
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,330,983 $ 162,648
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
4
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED MARCH 31, 2004
(UNAUDITED)
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
--------------------------- PAID-IN UNEARNED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) INCOME
------------ ------------ ------------ ------------ -------------
Balance at December 31, 2003 35,793,440 $ 3,579 $ 123,446 $ (289) $ (445)
Stock Option Compensation Expense 10
Amortization of Unearned Compensation 51
Exercise of Options to Purchase Common Stock 176,501 18 677
Stock Purchase Rights Issued to Covanta
Creditors (Note 2) 11,300
Comprehensive (Loss):
Net Loss
Foreign Currency Translation (54)
Net Unrealized (Loss) on Available for
Sale Securities 516
------------
Total Comprehensive Income (Loss) 462
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2004 35,969,941 $ 3,597 $ 135,433 $ (238) $ 17
============ ============ ============ ============ ============
TREASURY STOCK
RETAINED ---------------------------
(DEFICIT) SHARES AMOUNT TOTAL
------------ ------------ ------------ ------------
Balance at December 31, 2003 $ (98,434) 10,796 $ (66) $ 27,791
Stock Option Compensation Expense 10
Amortization of Unearned Compensation 51
Exercise of Options to Purchase Common Stock 695
Stock Purchase Rights Issued to Covanta
Creditors (Note 2) 11,300
Comprehensive (Loss):
Net Loss (2,173) (2,173)
Foreign Currency Translation (54)
Net Unrealized (Loss) on Available for
Sale Securities 516
------------ ------------
Total Comprehensive Income (Loss) (2,173) (1,711)
------------ ------------ ------------ ------------
Balance at March 31, 2004 $ (100,607) 10,796 $ (66) $ 38,136
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
5
DANIELSON HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
QUARTERS ENDED
------------------------------
MARCH 31, MARCH 28,
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net Loss $ (2,173) $ (57,836)
Adjustments to Reconcile Net Loss to Net Cash (Used in)
Operating Activities:
Net (Gain) Loss on Investment Securities (171) 18
Depreciation and Amortization 3,581 137
Amortization of Deferred Financing Costs 3,073 --
Provision for Doubtful Accounts 46 --
Stock Option and Unearned Compensation Expense 61 152
Interest Accretion and Amortization 18 28
Equity in Net (Income ) Loss of Unconsolidated Marine Services Subsidiaries (83) 55,174
Equity in Net (Loss) of Water and Energy Subsidiaries (932) --
Deferred Tax Asset (1,625) --
Change in Operating Assets and Liabilities, Net of Effects of Acquisition:
Accrued Investment Income 327 237
Receivables 7,959
Premium and Consulting Receivables 881 301
Reinsurance Recoverable on Paid Losses 18 405
Reinsurance Recoverable on Unpaid Losses 659 (396)
Ceded Unearned Premiums 344 (291)
Other Assets 5,419 550
Unpaid Losses and Loss Adjustment Expenses (5,935) (6,442)
Unearned Premiums (2,339) 1,313
Accounts Payable (385) --
Accrued Expenses (23,248) --
Deferred Income (167) --
Interest Payable 1,200 --
Other Liabilities (3,693) 2,164
Other, Net (449) 26
------------ ------------
Net Cash (Used in) Operating Activities (17,614) (4,460)
------------ ------------
INVESTING ACTIVITIES
Property Additions (1,234) (15)
Decrease in Restricted Cash, Covanta Escrow 37,026 --
Purchase of Covanta (36,400)
Cash Acquired of Covanta 95,462
Collection of Notes Receivable from Affiliate -- 6,036
Proceeds from the Sale of Investment Securities -- 8,722
Matured or Called Investment Securities 16,583 --
Purchase of Investment Securities (7,910) (12,055)
Distribution Received from Investees and Joint Ventures 632 --
Distribution Received from Unconsolidated Marine Services Subsidiary -- 58
------------ ------------
Net Cash Provided by Investing Activities 104,159 2,746
------------ ------------
FINANCING ACTIVITIES
Bank Overdrafts (820) --
Proceeds from the Exercise of Options for Common Stock 694 --
Debt Repayments (175) --
Distribution to Minority Partners (428) --
Proceeds from Sale of Minority Interests 25 --
Decrease in Restricted Funds Held in Trust 8,210 --
Parent Company Debt Issue Costs (300) --
------------ ------------
Net Cash Provided by Financing Activities 7,206 --
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 93,751 (1,714)
Cash and Cash Equivalents at Beginning of Period 17,952 9,939
------------ ------------
Cash and Cash Equivalents at End of Period $ 111,703 $ 8,225
============ ============
SUPPLEMENTAL INFORMATION:
Cash Paid During the Period For:
Interest 804 --
Income Taxes 1,696 --
The accompanying notes are an integral part of the consolidated
financial statements.
6
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Danielson Holding Corporation ("DHC" or the "Company") have been prepared in
accordance with the instructions to Form 10-Q. As permitted by the rules and
regulations of the Securities and Exchange Commission (the "SEC"), the financial
statements contain certain condensed financial information and exclude certain
footnote disclosures normally included in audited consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP"). In the opinion of management, the
accompanying financial statements contain all adjustments, including normal
recurring accruals, necessary to fairly present the accompanying financial
statements. For further information, refer to the consolidated financial
statements and footnotes thereto included in DHC's Annual Report on Form 10-K
for the year ended December 31, 2003. Operating results for the interim period
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2004.
DHC is a holding company that owns subsidiaries engaged in a number of
diverse business activities. The most significant of these are the energy and
water businesses of Covanta Energy Corporation ("Covanta") acquired on March 10,
2004. DHC also has investments in subsidiaries engaged in the insurance
operations in the western United States, primarily California, and in American
Commercial Lines LLC ("ACL"), an integrated marine transportation and service
company currently in bankruptcy proceedings under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code").
Covanta develops, constructs, owns and operates for others, key
infrastructure for the conversion of waste to energy, independent power
production and the treatment of water and waste water in the United States and
abroad. On March 10, 2004, Covanta consummated a plan of reorganization and
except for six subsidiaries, emerged from its reorganization proceeding under
Chapter 11 of the Bankruptcy Code ("Chapter 11"). Pursuant to the plan of
reorganization, DHC acquired 100% of the equity in Covanta. This transaction is
more fully described in Note 2. Six of Covanta's subsidiaries have not
reorganized or filed a liquidation plan under the Bankruptcy Code. While Covanta
exercises significant influence over the operating and financial policies of
those subsidiaries. Those six subsidiaries will continue to operate as debtors
in possession in the Chapter 11 cases. Because any plan of reorganization or
liquidation relating to these debtors would have to be approved by the
Bankruptcy Court, and possibly their respective creditors. Neither the Company
nor Covanta controls these debtors or the ultimate outcome of their respective
Chapter 11 cases relating to these debtors. Accordingly, applicable accounting
rules require that Covanta no longer include those six subsidiaries as
consolidated subsidiaries in its financial statements. Covanta's investment in
these six subsidiaries are recorded using the equity method effective as of
March 10, 2004.
DHC holds all of the voting stock of Danielson Indemnity Company
("DIND"). DIND owns 100% of the common stock of National American Insurance
Company of California, DHC's principal operating insurance subsidiary, which
owns 100% of the common stock of Valor Insurance Company, Incorporated
("Valor"). National American Insurance Company of California and its
subsidiaries are collectively referred to herein as "NAICC". The operations of
NAICC are in property and casualty insurance. NAICC writes non-standard private
passenger insurance in the western United States, primarily California.
Effective September 7, 2003, NAICC discontinued writing all commercial
automobile insurance. Effective January 2002, NAICC discontinued writing all
workers' compensation insurance.
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 provides barge
transportation services on the Orinoco River in Venezuela and the
Parana/Paraguay River System serving Argentina, Brazil, Paraguay, Uruguay and
Bolivia. As discussed in Note 3, on April 23, 2004, ACL sold it interest in UABL
Limited, a South American barging and terminalling company.
7
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
In May 2002, DHC acquired a 100% ownership interest in ACL, thereby
entering into the marine transportation, construction and related service
provider businesses. On January 31, 2003, ACL and many of its subsidiaries and
its immediate direct parent entity, American Commercial Lines Holdings, LLC,
referred to herein as "ACL Holdings," filed a petition with the U.S. Bankruptcy
Court to reorganize under Chapter 11 of the Bankruptcy Code. Material
uncertainty exists as to the impact of the bankruptcy on DHC's equity interest
in ACL upon the conclusion of ACL's bankruptcy proceeding. While it cannot
presently be determined, DHC believes that its investment in ACL is likely to
have little or no value upon the completion of that bankruptcy proceeding.
Accordingly, DHC attributes no value to its investment in ACL on its financial
statements. DHC, NAICC and DHC's equity investees, operating in the marine
services industries, are not guarantors of ACL's debt, nor are they
contractually liable for any of ACL's liabilities.
As a result of the bankruptcy filing, while DHC continues to exercise
influence over the operating and financial policies of ACL through its ownership
of all of the equity interests in ACL, DHC no longer maintains control of ACL.
Accordingly, for the year ended December 31, 2003, DHC has accounted for its
investments in ACL, Global Materials Services, LLC ("GMS") and Vessel Leasing,
LLC ("Vessel Leasing") using the equity method of accounting. Under the equity
method of accounting, DHC reports its share of the equity investees' income or
loss based on its ownership interest.
SZ Investments, L.L.C., a significant stockholder of DHC's, and a
company affiliated with Samuel Zell, DHC's Chairman of the Board of Directors,
William Pate, a member of DHC's Board of Directors and Philip Tinkler, DHC's
Chief Financial Officer, is a holder through its affiliate, HY I Investments,
L.L.C., of approximately 42% of ACL's senior notes and payment-in-kind notes. As
a result, a special committee of DHC's Board of Directors was formed in November
2002, composed solely of disinterested directors, to oversee DHC's investment in
ACL and its related Chapter 11 bankruptcy proceedings.
Covanta is referred to herein as "Energy and Water Services" or as
"Covanta". DHC's insurance subsidiaries are referred to herein as "Insurance
Services". ACL, GMS and Vessel Leasing are together referred to herein as
"Marine Services".
The December 31, 2003 consolidated financial statements include the
accounts of DHC and DIND and their consolidated subsidiaries. The March 31, 2004
consolidated financial statements include the accounts of DHC, DIND and Covanta
and their consolidated subsidiaries. All intercompany accounts and transactions
have been eliminated. As previously mentioned, DHC's investments in ACL and its
consolidated subsidiaries, GMS and Vessel Leasing, are included in the quarter
ended March 31, 2004 consolidated financial statements using the equity method
of accounting.
The accompanying consolidated statement of financial position at
December 31, 2003 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements.
NOTE 2. COVANTA ACQUISITION AND FINANCING AGREEMENTS
On December 2, 2003, DHC executed a definitive investment and purchase
agreement to acquire Covanta in connection with Covanta's emergence from Chapter
11 proceedings in bankruptcy after the non-core and geothermal assets of Covanta
were divested. The primary components of the transaction were: (1) the purchase
by DHC of 100% of the equity of Covanta in consideration for a cash purchase
price of approximately $30 million, and (2) agreement as to new letter of credit
and revolving credit facilities for Covanta's domestic and international
operations, provided by some of the existing Covanta lenders and a group of
additional lenders organized by DHC.
8
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
As required by the investment and purchase agreement, Covanta filed a
proposed plan of reorganization, a proposed plan of liquidation for specified
non-core businesses, and the related draft disclosure statement, each reflecting
the transactions contemplated under the investment and purchase agreement, with
the Bankruptcy Court. On March 5, 2004, the Bankruptcy Court confirmed the
proposed plans (the "Reorganization Plan"). On March 10, 2004, DHC acquired 100%
of Covanta's equity in consideration for approximately $30 million.
With the purchase of Covanta, DHC acquired a leading provider of waste
to energy services, independent power production and water and wastewater
treatment services in the United States and abroad. DHC's equity investment and
ownership provided Covanta's businesses with improved liquidity and capital
resources to finance their business activities and emerge from bankruptcy.
Management believes that these factors will enable DHC to earn an attractive
return on its investment.
The aggregate purchase price was $47.5 million which includes the cash
purchase price of $29.8 million, approximately $6.4 million for professional
fees and other estimated costs incurred in connection with the acquisition, and
an estimated fair value of $11.3 million for DHC's commitment to sell up to 3
million shares of its common stock at $1.53 per share to certain creditors of
Covanta, subject to certain limitations as more fully described below.
The following table summarizes a preliminary allocation of values to
the assets acquired and liabilities assumed at the date of acquisition in
conformity with Statement of Financial Accounting Standards (SFAS) No. 141
"Business Combinations" and SFAS No. 109 "Accounting for Income Taxes". In
addition to purchase price allocation adjustments, Covanta's emergence from
Chapter 11 proceedings on March 10, 2004 resulted in a new reporting entity and
adoption of fresh start accounting as of that date, in accordance with AICPA
Statement of Position (SOP) 90-7, "Financial Reporting by Entities in
Reorganization Under Bankruptcy Code". Preliminary fair value determinations of
the tangible and intangible assets are based on discounted cash flows using
currently available information. The excess of the reorganization value over
tangible assets and identifiable intangible assets has been reflected as
goodwill. Management's estimate of the fair value of long term debt was based on
the new principal amounts of recourse debt that was part of the reorganized
capital structure of Covanta upon emergence. The Company has engaged
valuation consultants to review its valuation methodology and their work is
ongoing. Changes in the fair values of these assets from the current estimated
values as well as changes in other assumptions could significantly impact the
reported value of goodwill. The summary balance sheet information that follows
reflects:
(i) reduction of Covanta's property, plant and equipment carrying
values;
(ii) increase in the carrying value of the Covanta's various operation
and maintenance agreements and power purchase agreements;
(iii) forgiveness of the Covanta's pre-petition debt;
(iv) issuance of new common stock to DHC and other items in equity and
notes pursuant to the plan;
(v) payment of various administrative and other claims associated with
the Covanta's emergence from Chapter 11;
(vi) distribution of cash of $235.5 million to the Covanta's
pre-petition secured lenders and for the payment of exit costs and
funding of reserves;
(vii) deferred tax assets of approximately $91.7 million principally
related to net operating loss carryforwards ("NOLs") from the inclusion
of Covanta in DHC's consolidated Federal income tax group; and
(viii) additional costs and expense related to DHC's acquisition of
Covanta.
9
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
These adjustments were based upon the preliminary work of the Company
and its financial consultants, as well as other valuation estimates, to
determine the relative fair values of Covanta's assets and liabilities.
Accordingly, the allocation of purchase price is subject to refinement.
The following depicts the summary balance sheet of Covanta as of March
10, 2004 (in thousands):
Current Assets $ 529,923
Property, Plant and Equipment 1,034,779
Intangible Assets 318,114
Goodwill 24,470
Other Assets 329,743
------------
Total Assets Acquired $ 2,237,029
------------
Current Liabilities $ 371,618
Long-term Debt 337,761
Project Debt 847,651
Deferred Income Taxes 305,784
Other Liabilities 326,690
------------
Total Liabilities Assumed $ 2,189,504
------------
Net Assets Acquired $ 47,525
============
The acquired intangible assets of $318.1 million primarily relate to
service agreements on publicly owned waste to energy projects with an
approximate six-year weighted average useful life.
The $24.5 million of goodwill is not expected to be deductible for
income tax purposes. Approximately $20.3 million of goodwill has been assigned
to Covanta's domestic energy and water operations and $4.2 million to the
international energy operations of Covanta Power International Holdings, Inc.
("CPIH").
The results of operations from Covanta are included in DHC's
consolidated results of operations from March 10, 2004. The following table sets
forth certain unaudited consolidated operating results for the quarters ended
March 31, 2004 and March 28, 2003, as if the acquisition of Covanta were
consummated on the same terms at the beginning of each period (in thousands,
except per share amounts).
2004 2003
------------ ------------
Total Revenues $ 183,376 $ 196,488
Income (Loss) from continuing operations before
change in accounting principle 3,227 (29,672)
Cumulative effect of change in accounting principle -- (8,538)
------------ ------------
Net Income (Loss) $ 3,227 $ (38,210)
============ ============
Basic Income (Loss) per Share:
Income (loss) from Continuing Operations $ 0.09 $ (0.83)
Cumulative Effect of Accounting Change -- (0.24)
------------ ------------
Net Income (Loss) per Share $ 0.09 $ (1.07)
============ ============
Diluted Net Income (Loss) per Share $ 0.06 $ (1.07)
============ ============
10
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
As part of the investment and purchase agreement, DHC arranged for a
new $118.0 million replacement letter of credit facility for Covanta, secured by
a second lien on Covanta's domestic assets. This financing was provided by SZ
Investments, L.L.C., a DHC stockholder ("SZ Investments"), Third Avenue
Trust, on behalf of Third Avenue Value Fund Series, a DHC stockholder
("Third Avenue"), and D. E. Shaw Laminar Portfolios, L.L.C., a creditor of
Covanta and a DHC stockholder ("Laminar"). In addition, in connection with
a note purchase agreement described below, Laminar arranged for a $10.0 million
revolving loan facility for CPIH, secured by CPIH's assets.
DHC obtained the financing necessary for the Covanta acquisition
pursuant to a note purchase agreement dated December 2, 2003, with each of SZ
Investments, Third Avenue and Laminar, referred to collectively as the "Bridge
Lenders". Pursuant to the note purchase agreement, the Bridge Lenders severally
provided DHC with an aggregate of $40 million of bridge financing in exchange
for notes issued by DHC. In the event that DHC is unable to repay all or a
portion of the notes with the proceeds from a rights offering of DHC common
stock, then the notes are convertible without action by the Bridge Lenders into
shares of DHC common stock at a price of $1.53 per share subject to certain
agreed upon limitations. These notes have a scheduled maturity date of January
2, 2005 and an extended maturity date of July 15, 2005, and bear interest at a
rate of 12% per annum through July 15, 2004 and 16% per annum thereafter. In the
event of a default or the failure to pay a note on its maturity, the interest
rate under the note increases by 2% per annum. DHC used $30.0 million of the
proceeds from the notes to post an escrow deposit prior to the closing of the
transactions contemplated by the investment and purchase agreement with Covanta.
At closing, the deposit was used to purchase Covanta. DHC will use the remainder
of the proceeds to pay transaction expenses and for general corporate purposes.
DHC issued to the Bridge Lenders an aggregate of 5,120,853 shares of
DHC's common stock primarily in consideration for the $40 million of bridge
financing. At the time that DHC entered into the note purchase agreement, agreed
to issue the notes convertible into shares of DHC common stock and issued the
equity compensation to the Bridge Lenders, the trading price of the DHC common
stock was below the $1.53 per share conversion price of the notes. On December
1, 2003, the day prior to the announcement of the Covanta acquisition, the
closing price of DHC common stock on the American Stock Exchange was $1.40 per
share.
In addition, under the note purchase agreement, Laminar has agreed to
convert an amount of notes to acquire up to an additional 8.75 million shares of
DHC common stock at $1.53 per share based upon the levels of public
participation in a previously announced rights offering. Further, DHC has
agreed, in connection with the note purchase agreement, to sell up to an
additional 3.0 million shares of DHC common stock at $1.53 per share to certain
creditors of Covanta based upon the levels of public participation in the rights
offering and subject to change of ownership and other limitations.
As part of DHC's negotiations with Laminar and its becoming a 5%
stockholder, pursuant to a letter agreement dated December 2, 2003, Laminar has
agreed to additional restrictions on the transferability of the shares of DHC
common stock that Laminar holds or will acquire. Further in accordance with the
transfer restrictions contained in Article Fifth of DHC's charter restricting
the resale of DHC common stock by 5% stockholders, DHC has agreed with Laminar
to provide it with limited rights to resell the DHC common stock that it holds.
Finally, DHC has agreed with the Bridge Lenders to file a registration statement
with the SEC to register the shares of DHC common stock issued to or acquired by
them under the note purchase agreement not later than the earlier of June 30,
2004 or ten days after closing of the rights offering.
Samuel Zell, DHC's Chairman of the Board of Directors, Philip Tinkler,
DHC Chief Financial Officer and William Pate, a director of DHC, are affiliated
with SZ Investments. Martin Whitman and David Barse, directors of DHC, are
affiliated with Third Avenue. The note purchase agreement and other transactions
involving the Bridge Lenders were negotiated, reviewed and approved by a special
committee of DHC's Board of Directors composed solely of disinterested directors
and advised by independent legal and financial advisors.
See Notes 9 through 11 for additional information regarding Covanta's
credit and debt arrangements.
11
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
NOTE 3. ACL CHAPTER 11 FILING
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. Due to these factors, ACL's revenues and earnings did not meet
expectations and ACL's liquidity was significantly impaired. Debt covenant
violations occurred and, as a result, ACL was unable to meet 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 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.
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
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 of reorganization at any time on or before
May 28, 2004. If the exclusive filing period were to expire, other parties, such
as ACL creditors, would have the right to propose alternative plans of
reorganization. During the pendency of these Chapter 11 cases, the Debtors have
routinely requested extension of the exclusivity period. Such extensions have
been granted with the support of the Debtors' creditors. The Debtors intend to
file for an additional extension of the exclusivity period to July 28, 2004.
The Debtors' direct and indirect foreign subsidiaries and foreign joint
venture entities did not file petitions under Chapter 11 and are not
debtors-in-possession. DHC, GMS and Vessel Leasing also did not file petitions
under Chapter 11 and are not debtors-in-possession.
The Debtors have entered into a Revolving Credit and Guaranty Agreement
("DIP Credit Facility") that provides up to $75 million of financing during
ACL's Chapter 11 proceeding. As of December 26, 2003, participating bank
commitments under the DIP Credit Facility totaled $75 million, consisting of a
$50 million term loan and a $25 million revolving credit facility. Of this
amount, the Debtors had fully drawn the $50 million term loan, which was used to
retire ACL's Pre-Petition Receivables Facility and which continues to be used to
fund the Debtors' day-to-day cash needs. The Debtors have made no draws against
the revolving credit facility. In the first quarter of 2004, the Debtors repaid
$8 million of the term loan. Each payment permanently reduces the amount
available under the DIP Credit Facility. As of March 31, 2004, participating
bank commitments remaining under the DIP Credit Facility totaled $67 million,
consisting of $42 million remaining on a fully-drawn term loan and a $25 million
revolving credit facility. Total amounts drawn under the DIP Credit Facility are
limited by a borrowing base (as defined in the DIP Credit Facility). The
borrowing base limit was $56 million as of December 26, 2003 and is updated
weekly. The DIP Credit Facility is secured by the same and additional assets
that collateralized ACL's Senior Credit Facilities and Pre-Petition Receivables
Facility, and bears interest, at ACL's option, at London Inter Bank Offered
Rates ("LIBOR or LIBOR Rates") plus 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 facility.
12
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
The obligations of the Debtors under the DIP Credit Facility, by court
order, have super-priority administrative claim status as provided under the
Bankruptcy Code. Under the Bankruptcy Code, a super-priority claim is senior to
secured and unsecured pre-petition claims and all administrative expenses
incurred in the Chapter 11 case. In addition, with certain exceptions (including
a carve-out for unpaid professional fees and disbursements), the DIP Credit
Facility obligations are secured by (1) a first-priority lien on all
unencumbered pre- and post-petition property of the Debtors, (2) a
first-priority priming lien on all property of the Debtors that is encumbered by
the existing liens securing the Debtors' pre-petition secured lenders and (3) a
junior lien on all other property of the Debtors that is encumbered by the
pre-petition liens.
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, limit
its capital expenditures to defined levels and restrict advances to certain
subsidiaries.
The DIP Credit Facility will terminate and the borrowings thereunder
will be due and payable upon the earliest of (i) July 31, 2004 (with borrowings
repayable on August 2, 2004), (ii) the date of the substantial consummation of a
plan of reorganization that is confirmed pursuant to an order by the Bankruptcy
Court, or (iii) the acceleration of the term loans or the revolving credit loans
made by any of the banks who are a party to the DIP Credit Facility and the
termination of the total commitment under the DIP Credit Facility pursuant to
the DIP Credit Facility.
As a result of the Chapter 11 filings, certain events of default under
ACL's Senior Credit Facilities, Senior Notes, PIK Notes and Old Senior Notes
have occurred, 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 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. The Debtors
have 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. A claims bar date of December 5, 2003 was
established for all other pre-petition creditors to file a claim against the
estate of the various debtors. The Debtors are currently in the process of
reviewing the claims that were filed against the Debtors. The ultimate amount of
claims allowed by the Court against the Debtors 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 reorganization process. 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 liquidated 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 being diluted or
cancelled. The Debtors have not yet proposed a plan of reorganization. The
Debtors' pre-petition creditors and ACL's equity investor will each have a vote
in the plan of reorganization.
13
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
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 equity holder. The
ultimate recovery, if any, by creditors and 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. While it cannot be presently determined, DHC believes it
will receive little or no value with respect to its equity interest in ACL
Holdings or ACL. Accordingly, DHC wrote off its remaining investment in ACL at
the end of the first quarter of 2003 as an other than temporary asset
impairment. (See Note 5)
On April 23, 2004, ACL announced the sale of its ownership interest in
UABL Limited ("UABL"), a South American barging and terminalling company, and
other assets being used by UABL for $24.1 million of cash and other
consideration. In connection with the UABL sale, ACL recorded a pre-tax loss of
$34.9 million.
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PARENT AND CONSOLIDATED ENTITY
Principles of Consolidation
The consolidated financial statements reflect the results of
operations, cash flows and financial position of DHC and its majority-owned and
controlled subsidiaries. All intercompany accounts and transactions have been
eliminated. Investments in companies that are not majority-owned or controlled
are accounted for under the equity method.
Fiscal Year
In 2002, DHC conformed its previous calendar year-end reporting basis
to ACL's fiscal year-end reporting basis. Effective with the fiscal year
beginning December 28, 2002, DHC is again reporting on a calendar year-end basis
to conform with DIND and its consolidated subsidiaries who have been
consolidated in the accompanying consolidated financial statements using its
calendar year-end reporting period in all periods presented.
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. DHC, from time to time, has
cash in banks in excess of federally insured limits. Cash and cash equivalents
are stated at cost, which approximates fair value.
14
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
Deferred Financing Costs
The Company recorded $18.8 million of deferred financing costs in
connection with arranging its various financing arrangements. These costs are
being amortized over the expected period that the related financing will be
outstanding. Amortization for quarter ended March 31, 2004 was $3.2 million and
is included in interest expense on the consolidated statement of operations.
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" ("APB 25") for the Company's
directors and employees. Pro forma net loss and loss 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.
(IN THOUSANDS)
QUARTER ENDED QUARTER ENDED
MARCH 31, 2004 MARCH 28, 2003
-------------- --------------
Stock Option Expense Recorded .......... $ (10) $ (25)
============ ============
Net Loss As Reported ................... $ (2,173) $ (57,836)
Pro Forma Compensation Expense ......... (46) (553)
------------ ------------
Pro Forma Net Loss ..................... $ (2,219) $ (58,389)
============ ============
Basic and Diluted Loss Per Share:
As Reported ....................... $ (0.07) $ (1.88)
Pro Forma ......................... (0.07) (1.90)
INSURANCE SERVICES
Deferred Policy Acquisition Costs
Insurance Services' deferred policy 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 policy 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 policy
acquisition costs were $431,000 and $833,000 at March 31, 2004 and March 28,
2003, respectively.
15
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
Unpaid Losses and Loss Adjustment Expenses
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.
Reinsurance
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 earned premiums 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 quarters ended March 31, 2004 and March 28, 2003, Insurance
Services had no reinsurance contracts which were accounted for as deposits.
Earned Premiums
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 represent 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.
Insurance Services establishes an allowance for premium receivables and
reinsurance recoverables through a charge to general and administrative expenses
based on historical experience. After all collection efforts have been
exhausted, Insurance Services reduces the allowance for balances that have been
deemed uncollectible.
ENERGY AND WATER
Service Revenues
Covanta's revenues are generally earned under contractual arrangements.
Service revenues include:
o Fees earned under contract to operate and maintain waste to
energy, independent power and water facilities;
16
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
o Fees earned to service project debt (principal and interest)
where such fees are expressly included as a component of the
service fee paid by the client community pursuant to
applicable waste to energy service agreements.
o Regardless of the timing of amounts paid by client communities
relating to project debt principal, Covanta records service
revenue with respect to this principal component on a
levelized basis over the term of the service agreement.
Long-term unbilled service receivables related to waste to
energy operations are discounted in recognizing the present
value for services performed currently in order to service the
principal component of the project debt;
o Fees earned for processing waste in excess of service
agreement requirements;
o Tipping fees earned under waste disposal agreements; and
o Other miscellaneous fees such as revenue for scrap metal
recovered and sold.
Electricity and Steam Sales
Revenue from the sale of electricity and steam are earned at energy
facilities and are recorded based upon output delivered and capacity provided at
rates specified under contract terms or prevailing market rates net amounts due
to client communities under applicable service agreements.
Construction Revenues
Revenues under fixed-price contracts, including construction, are
recognized on the basis of the estimated percentage of completion of services
rendered. Anticipated losses are recognized as soon as they become known.
Property, Plant and Equipment
As of March 10, 2004, property, plant, and equipment was recorded at
its estimated fair values based upon discounted cash flows using currently
available information. For financial reporting purposes, depreciation is
calculated by the straight-line method over the estimated remaining useful lives
of the assets, which range generally from three years for computer equipment to
41 years for waste-to-energy facilities.
Service and Energy Contracts
As of March 10, 2004, service and energy contracts were recorded at
their estimated fair values based upon discounted cash flows from the service
contracts and the above market portion of the energy contracts using currently
available information. Amortization is calculated by the straight-line method
over the estimated life of the underlying agreements.
Estimated amortization over the next five years is as follows (in
thousands):
2004......................................$21,346
2005.......................................28,900
2006.......................................28,900
2007.......................................28,900
2008.......................................26,425
Goodwill
Goodwill represents the amount by which the purchase price for Covanta
exceeds the fair value of its tangible assets and identified intangible assets
less its liabilities. Pursuant to the provisions of Statement of Financial
Accounting
17
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"),
goodwill is not amortized but is subject to annual impairment testing or when
indicators of impairment exist.
Restricted Funds
Restricted funds held in trust are primarily amounts received by third
party trustees relating to projects owned by Covanta, and which may be used only
for specified purposes. Covanta generally does not control these accounts. They
include debt service reserves for payment of principal and interest on project
debt, deposits of revenues received with respect to projects prior to their
disbursement as provided in the relevant indenture or other agreements, lease
reserves for lease payments under operating leases, and proceeds received from
financing the construction of energy facilities. Such funds are invested
principally in United States Treasury bills and notes and United States
government agencies securities.
Project Development Costs
Covanta capitalizes project development costs once it is determined
that it is probable that such costs will be realized through the ultimate
construction of a plant. These costs include outside professional services,
permitting expense and other third party costs directly related to the
development of a specific new project. Upon the start-up of plant operations or
the completion of an acquisition, these costs are generally transferred to
property, plant and equipment and are amortized over the estimated useful life
of the related project or charged to construction costs in the case of a
construction contract for a facility owned by a municipality. Capitalized
project development costs are charged to expense when it is determined that the
related project is impaired.
Pension and Postretirement Plans
Covanta has pension and post-retirement obligations and costs that are
developed from actuarial valuations. Inherent in these valuations are key
assumptions including discount rates, expected return on plan assets and medical
trend rates. Changes in these assumptions are primarily influenced by factors
outside Covanta's control and can have a significant effect on the amounts
reported in the financial statements.
Interest Rate Swap Agreements
The fair value of interest rate swap agreements are recorded as assets
and liabilities, with changes in fair value during the year credited or charged
to debt service revenue or debt service charges, as appropriate.
Long-Lived Assets
Covanta accounts for the impairment of long-lived assets to be held and
used by evaluating the carrying value of its long-lived assets in relation to
the operating performance and future undiscounted cash flows of the underlying
businesses when indications of impairment are present. If the carrying value of
such assets is greater than the anticipated future undiscounted cash flows of
those assets, Covanta would measure and record the impairment amount, if any, as
the difference between the carrying value of the assets and the fair value of
those assets.
Foreign Currency Translation
For foreign operations, assets and liabilities are translated at
year-end exchange rates and revenues and expenses are translated at the average
exchange rates during the year. For subsidiaries whose functional currency is
deemed to be other than the U.S. dollar, translation adjustments are included as
a separate component of other comprehensive income (loss) and shareholders'
equity. Currency transaction gains and losses are recorded in Other-net in the
Statements of Consolidated Operations and Comprehensive Income (Loss).
18
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," and applies immediately to any variable interest entities created
after January 31, 2003 and to variable interest entities in which an interest is
obtained after that date. FIN No. 46 was revised in December 2003 and is
applicable for the Company on January 1, 2004 for interests acquired in variable
interest entities prior to February 1, 2003. The Company adopted the provisions
of FIN No. 46 without impact on its financial position or results of operations.
RECLASSIFICATION
Certain prior period amounts, including various revenues and expenses,
have been reclassified in the Financial Statements to conform with the current
period presentation.
NOTE 5. EQUITY IN INCOME AND LOSSES OF EQUITY INVESTEES
DHC wrote off its investment in ACL during the quarter ended March 28,
2003. The GMS and Vessel Leasing investments are not considered by DHC to be
impaired. The reported net income (loss) for the quarters ended March 31, 2004
and March 28, 2003, includes, under the caption "Equity in Net Income (Loss) of
Unconsolidated Investments", the following components (in thousands):
MARCH 31, 2004 MARCH 28, 2003
-------------- --------------
ACL's Reported Loss for the Three Months
Ended $ -- $ (46,998)
Other Than Temporary Impairment of Remaining
Investment in ACL as of March 28, 2003 -- (8,205)
-------------- --------------
Total ACL Loss -- (55,203)
GMS Loss (19) (34)
Vessel Leasing Income 102 63
-------------- --------------
Equity in Net Income (Loss) of Unconsolidated
Marine Services Subsidiaries 83 (55,174)
Equity in Net Income of Unconsolidated Energy
and Water Investments 932 --
-------------- --------------
Equity in Net Income (Loss) of Unconsolidated
Investments $ 1,015 $ (55,174)
============== ==============
19
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
Activity in the equity investees for the quarters ended March 31, 2004
and March 28, 2003 is as follows (in thousands):
MARCH 31, 2004
-------------------------------------------------------------------------------
HARIPUR BARGE
VESSEL QUEZON POWER PLANT
ACL GMS LEASING (THE PHILIPPINES) (BANGLADESH)
----------- ----------- ----------- ----------------- -------------
Net Revenue $ 139,670 $ 13,778 $ 1,240 $ 11,799 $ 1,948
Operating (Loss) Income* (8,175) 1,111 758 5,383 1,142
Net (Loss) Income (23,774) (354) 204 3,157 488
MARCH 28, 2003
-------------------------------------------------------------------------------
HARIPUR BARGE
VESSEL QUEZON POWER PLANT
ACL GMS LEASING (THE PHILIPPINES) (BANGLADESH)
----------- ----------- ----------- ----------------- -------------
Net Revenue $ 139,153 $ 13,150 $ 1,152 $ -- $ --
Operating (Loss) Income* (27,791) 618 680 -- --
Net (Loss) Income (46,998) (624) 126 -- --
*Before ACL Reorganization Expenses
NOTE 6. INVESTMENTS
DHC'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.
NOTE 7. 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 31,954,042 and 30,817,297 for the quarters ended March 31, 2004 and March
28, 2003, 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, warrants, rights
and convertible notes whether or not currently exercisable.
5,120,853 shares of Common stock issued on December 2, 2003 pursuant to
the note purchase agreement were included in the weighted average outstanding
shares calculation as of March 10, 2004, the date on which certain conditions
upon which the shares were contingently returnable were satisfied. The weighted
average number of such shares included in the basic and diluted earnings per
share calculation was 1,238,008 for the quarter ended March 31, 2004.
20
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
Options to purchase 182,500 shares of Common Stock at exercise prices
ranging from $7.00 to $7.0625 per share and options to purchase 3,343,918 shares
of Common Stock at exercise prices ranging from $3.37 to $7.0625 per share were
outstanding during the quarters ended March 31, 2004, and March 31, 2003,
respectively but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the Common Stock. 180,000 and 3,013,293 of such options were
outstanding as of March 31, 2004, and March 31, 2003, respectively. Options to
purchase 2,382,043 shares of Common Stock at exercise prices ranging from $1.45
to $6.6875 per share, rights to purchase 3,000,000 shares of Common Stock at
$1.53 per share, and $40 million notes convertible into shares of Common Stock
at a price of $1.53 per share were outstanding during the quarter ended March
31, 2004 but were not included in the computation of diluted earnings per share
because the effect would have been antidilutive. 1,949,917 of such options were
outstanding as of March 31, 2004. See Note 2 for additional information
regarding the rights and convertible notes.
NOTE 8. REINSURANCE
NAICC cedes reinsurance on an excess of loss basis for workers'
compensation risks in excess of $500,000 prior to April 2000 and $200,000
thereafter. For all other lines, NAICC cedes reinsurance on an excess of loss
basis for exposure in excess of $250,000.
NOTE 9. CREDIT ARRANGEMENTS
In connection with the effectiveness of the Covanta Reorganization Plan
and the consummation of the acquisition of Covanta by DHC, Covanta emerged from
bankruptcy with a new debt structure. Domestic Borrowers have two credit
facilities; the First Lien Facility and the Second Lien Facility.
o The First Lien Letter of Credit Facility ("First Lien
Facility") provides commitments for the issuance of letters of
credit contractually required in connection with a
waste-to-energy facility. These letters of credit are
currently required in the aggregate amount of approximately
$138.2 million as of March 31, 2004, and the contractually
required amount decreases semi-annually. The First Lien
Facility has a term of five years, and requires cash
collateral to be posted for issued letters of credit in the
event Covanta has cash in excess of specified amounts. Covanta
paid a 1% upfront fee (approximately $1.4 million) upon
entering into the First Lien Facility, and will pay with
respect to each issued letter of credit (i) a fronting fee
equal to the greater of $500 or 0.25% per annum of the daily
amount available to be drawn under such letter of credit, (ii)
a letter of credit fee equal to 2.5% per annum of the daily
amount available to be drawn under such letter of credit, and
(iii) an annual fee of $1,500.
o The Second Lien Letter of Credit Facility ("Second Lien
Facility") provides commitments in the aggregate amount of
$118 million, up to $10.0 million of which shall also be
available for cash borrowings on a revolving basis and the
balance for letters of credit supporting Covanta's domestic
and international businesses. This Second Lien Facility has a
term of five years. The Second Lien Facility requires cash
collateral to be posted for issued letters of credit in the
event Covanta has cash in excess of specified amounts. The
revolving loan component of the second lien credit facility
bears interest at either (i) 4.5% over a base rate with
reference to either the Federal Funds rate of the Federal
Reserve System or Bank One's prime rate or (ii) 6.5% over a
formula Eurodollar rate, the applicable rate to be determined
by Covanta (increasing by 2% over the then applicable rate in
specified default situations). Covanta also paid an upfront
fee of $2.36 million upon entering into the second lien credit
agreement, and will pay (i) a commitment fee equal to 0.5% per
annum of the daily calculation of available credit, (ii) an
annual agency fee of $30,000, and (iii) with respect to each
issued letter of credit an amount equal to 6.5% per annum of
the daily amount available to be drawn under such letter of
credit. As of March 31, 2004, letters of credit in the
approximate aggregate amount of $85.9 million had been issued
under the Second Lien Facility,
21
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
which amount was reduced to $70.9 million as of April 2, 2004,
and Covanta had not sought to make draws against the $10.0
million liquidity facility of the Second Lien Facility.
Total fees of $11.6 million paid on March 10, 2004 have been
capitalized and are being amortized using the interest method over the life of
the credit facilities on a straight line basis to the extent no borrowings
exist. Both facilities are secured by the assets of the Domestic Borrowers not
otherwise pledged. The lien of the Second Lien Facility is junior to that of the
First Lien Facility.
Also, CPIH and each of its domestic subsidiaries, which hold all of the
assets and operations of Covanta's international businesses (the "CPIH
Borrowers") entered into a term loan facility:
o The CPIH Revolving Credit Facility is secured by a first
priority lien on the CPIH stock and substantially all of the
CPIH Borrowers' assets not otherwise pledged and consists of
commitments for cash borrowings of up to $10 million for
purposes of supporting the international businesses. The CPIH
revolving credit facility has a maturity date of three years
and to the extent drawn upon bears interest at the rate of
either (i) 7% over a base rate with reference to either the
Federal Funds rate of the Federal Reserve System or Deutsche
Bank's prime rate or (ii) 8% over a formula Eurodollar rate,
the applicable rate to be determined by CPIH (increasing by 2%
over the then applicable rate in specified default
situations). CPIH also paid a 2% upfront fee of $200,000, and
will pay (i) a commitment fee equal to 0.5% per annum of the
average daily calculation of available credit, and (ii) an
annual agency fee of $30,000. As of March 31, 2004, CPIH had
not sought to make draws on this facility.
The debt of the CPIH Borrowers is non-recourse to Covanta and its other
domestic subsidiaries.
NOTE 10. OTHER LONG-TERM DEBT
Long-term debt consisted of the following at March 31, 2004 (in
thousands):
High yield notes $ 205,190
CPIH term loan facility 94,825
Unsecured notes 36,500
Other long-term debt 10,891
------------
Total 347,406
Less current portion of long term debt (9,631)
------------
Total $ 337,775
============
The Domestic Borrowers also issued two additional series of notes
pursuant to indentures, which are referred to herein as the "High Yield Notes"
and "Unsecured Notes".
o The High Yield Notes are secured by a third priority lien in
the same collateral securing the First Lien Facility and the
Second Lien Facility. The High Yield Notes were issued in the
initial principal amount of $205.0 million, which will accrete
to $230.0 million at maturity in seven years. Interest is
payable at a rate of 8.25% semi-annually on the basis of the
principal at final maturity; no principal is due prior to
maturity of the High Yield Notes; and the High Yield Notes may
be prepaid without premium or penalty within two years of
issuance.
o Unsecured Notes in a principal amount of $4.0 million were
issued on the effective date of the Covanta Reorganization
Plan, and Covanta expects to issue additional Unsecured Notes
in a principal amount of between $30.0 million and $35.0
million including additional Unsecured Notes that may be
issued to holders
22
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
of allowed claims against the remaining debtors if and when
they emerge from bankruptcy. The final principal amount of all
Unsecured Notes will be equal to the amount of allowed
unsecured claims against Covanta's operating subsidiaries
which were reorganizing debtors, and such amount will be
determined when such claims are resolved through settlement or
further proceedings in the Bankruptcy Court. The principal
amount of Unsecured Notes indicated in the table above
represents the expected liability upon completion of the
claims process. Notwithstanding the date on which Unsecured
Notes are issued, interest on the Unsecured Notes accrues from
March 10, 2004. Interest is payable semi-annually on the
Unsecured Notes at a rate of 7.5%; principal is paid annually
beginning in March, 2006. The Unsecured Notes mature in eight
years.
Also, CPIH Borrowers entered into the following term loan facility:
o The CPIH Term Loan Facility of up to $95 million secured by a
second priority lien on the same collateral as the CPIH
Revolving Credit Facility, and bears interest at 10.5% per
annum, 6.0% of such interest to be paid in cash and the
remaining 4.5% to be paid in cash to the extent available and
otherwise payable by adding it to the outstanding principal
balance. The interest rate increases to 12.5% per annum in
specified default situations. The CPIH Term Loan Facility
matures in three years.
The debt of the CPIH Borrowers is non-recourse to Covanta and its other
domestic subsidiaries.
Covanta may issue tax notes in an aggregate principal amount equal to
the aggregate amount of allowed priority tax claims with a maturity six years
after the date of assessment. Interest will be payable semi-annually at the rate
of four percent. Under the Covanta Reorganization Plan, Covanta may pay the
amount of such claims in cash.
The maturities on long-term debt including capital lease obligations at
March 31, 2004 were as follows (in thousands):
2004 $ 9,631
2005 25
2006 1,235
2007 94,825
Later years 241,690
------------
Total 347,406
Less current portion (9,631)
------------
Total long-term debt $ 337,775
============
23
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
NOTE 11. PROJECT DEBT
Project debt consisted of the following at March 31, 2004 (in
thousands):
Revenue Bonds Issued by and Prime Responsibility of Municipalities:
3.625-6.75% serial revenue bonds due 2005 through 2011 $ 306,843
5.0-7.0% term revenue bonds due 2005 through 2015 165,961
Adjustable-rate revenue bonds due 2006 through 2013 120,967
----------
Sub total 593,771
----------
Revenue Bonds Issued by Municipal Agencies with Sufficient Service Revenues
Guaranteed by Third Parties:
5.25-8.9% serial revenue bonds due 2005 through 2008 24,006
----------
Other Revenue Bonds:
4.7-5.5% serial revenue bonds due 2005 through 2015 72,515
5.5-6.7% term revenue bonds due 2014 through 2019 69,515
----------
Sub total 142,030
----------
Other project debt 87,196
----------
Total long-term project debt 847,003
Current portion of project debt 94,134
----------
Total $ 941,137
==========
Project debt associated with the financing of waste-to-energy
facilities is generally arranged by municipalities through the issuance of
tax-exempt and taxable revenue bonds. The category, "Revenue Bonds Issued by and
Prime Responsibility of Municipalities," includes bonds issued with respect to
projects owned by Covanta for which debt service is an explicit component of the
client community's obligation under the related service agreement. In the event
that a municipality is unable to satisfy its payment obligations, the
bondholders' recourse with respect to Covanta is limited to the waste-to-energy
facilities and restricted funds pledged to secure such obligations.
The category "Revenue Bonds Issued by Municipal Agencies with
Sufficient Service Revenues Guaranteed by Third Parties" includes municipal
bonds issued to finance two facilities for which contractual obligations of
third parties to deliver waste ensure sufficient revenues to pay debt service,
although such debt service is not an explicit component of the third parties'
service fee obligations.
The category "Other Revenue Bonds" includes bonds issued to finance one
facility for which current contractual obligations of third parties to deliver
waste provide sufficient revenues to pay debt service related to that facility
through 2011, although such debt service is not an explicit component of the
third parties' service fee obligations. Covanta anticipates renewing such
contracts prior to 2011.
24
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
Payment obligations for the project debt associated with facilities
owned by Covanta are limited recourse to the operating subsidiary and
non-recourse to Covanta, subject to construction and operating performance
guarantees and commitments. These obligations are secured by the revenues
pledged under various indentures and are collateralized principally by a
mortgage lien and a security interest in each of the respective facilities and
related assets.
The maturities on long-term project debt at March 31, 2004 were as
follows (in thousands):
2004 $ 64,525
2005 93,696
2006 99,904
2007 98,183
2008 98,048
Later years 486,781
------------
Total 941,137
Less current portion (94,134)
------------
Total long-term project debt $ 847,003
============
NOTE 12. INCOME TAXES
DHC files a Federal consolidated income tax return with its
subsidiaries. DHC's Federal consolidated return includes the taxable results of
certain grantor trusts established pursuant to a prior court approved
reorganization to assume various liabilities of certain present and former
subsidiaries of DHC. These trusts are not consolidated with DHC for financial
statement purposes. DHC's Federal consolidated return will exclude the results
of CPIH since their operations do not qualify for consolidation under the
applicable tax laws. DHC records its interim tax provisions based upon estimated
effective tax rates for the year.
DHC's provision for income taxes in the condensed consolidated
statements 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. For further
information, reference is made to Note 13 of the Notes to the Consolidated
Financial Statements included in DHC's Annual Report on Form 10-K for the year
ended December 31, 2003.
DHC had NOLs estimated to be approximately $652 million for Federal
income tax purposes as of the end of 2003. The NOLs will expire in various
amounts beginning on December 31, 2004 through December 31, 2023, if not used.
In connection with the purchase of Covanta, the Company reassessed its valuation
allowances on deferred tax benefits associated with its NOLs. Included in the
consolidated financial statements is a deferred tax asset of $91.7 million
associated with the reduction in valuation allowances to reflect the estimated
future NOL utilization from the inclusion of Covanta (exclusive of its
international holding company) in DHC's consolidated Federal income tax group.
The Internal Revenue Service ("IRS") has not audited any of DHC's tax returns.
There can be no assurance that DHC would prevail if the IRS were to challenge
the use of the NOLs.
25
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
If DHC were to undergo, an "ownership change" as such term is used in
Section 382 of the Internal Revenue Code, the use of its NOLs would be limited.
DHC will be treated as having had an "ownership change" if there is a more than
50% increase in stock ownership during a 3-year "testing period" by "5%
stockholders". DHC's Certificate of Incorporation contains stock transfer
restrictions that were designed to help preserve DHC's NOLs by avoiding an
ownership change. The transfer restrictions were implemented in 1990, and DHC
expects that they will remain in-force as long as DHC has NOLs. DHC cannot be
certain, however, that these restrictions will prevent an ownership change.
NOTE 13. STOCKHOLDERS' EQUITY
As of March 31, 2004, there were 35,969,941 shares of Common Stock
issued of which 35,959,145 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 NOLs, DHC has imposed restrictions on
the ability of holders of five percent or more of Common Stock to transfer the
Common Stock owned by them and to acquire additional Common Stock, as well as
the ability of others to become five percent stockholders as a result of
transfers of Common Stock.
The following represents shares of Common Stock reserved for future
issuance as of March 31, 2004:
2004 rights offering ............................................. 26,969,359(A)
Required conversion of Laminar debt .............................. 8,750,000(A)
Stock purchase rights of certain creditors of Covanta ............ 3,000,000(A)
Stock options exercisable in 2004 ................................ 1,687,414
------------
40,406,773
============
(A) The number of shares is based on the maximum number of shares which
could be issued assuming 100% stockholder participation in the rights
offering. The number of shares for the required conversion of Laminar debt
and the stock purchase rights of certain creditors of Covanta are subject
to the level of public participation in the rights offering (as defined in
the agreements), as well as other limitations regarding the Covanta
creditors' stock purchase rights.
NOTE 14. BUSINESS SEGMENTS
DHC has four reportable business segments - energy and water,
insurance, marine and corporate. Energy and Water develops, constructs, owns and
operates for others key infrastructure for the conversion of waste to energy,
independent power production and the treatment of water and waste water in the
United States and abroad. The Insurance Services segment writes property and
casualty insurance in the western United States, primarily in California. The
Marine segment includes the barging, construction and terminals segments of the
Marine Services businesses which are accounted for using the equity method
beginning in 2003. The corporate segment represents the operating expenses and
miscellaneous income of the holding company, DHC.
26
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
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.
(IN THOUSANDS)
QUARTER ENDED QUARTER ENDED
MARCH 31, 2004 MARCH 28, 2003
-------------- --------------
Revenues:
Energy and Water
Domestic Energy and Water $ 29,798 $ --
International Energy 9,178 --
-------------- --------------
Subtotal Energy and Water 38,976 --
Insurance 6,899 11,076
Corporate -- --
-------------- --------------
Total Revenues 45,875 11,076
-------------- --------------
Income (Loss) from Operations:
Energy and Water
Domestic Energy and Water 4,736 --
International Energy 2,499 --
Unallocated Income and (Expenses) - Net (2,723) --
-------------- --------------
Subtotal Energy and Water 4,512 --
Insurance 104 (1,783)
Corporate (693) (867)
-------------- --------------
Income (Loss) from Operations 3,923 (2,650)
Other
Interest Expense - Net (6,922) --
Equity in Net Income (Loss) of Unconsolidated
Investments 1,015 (55,174)
-------------- --------------
Loss before Minority Interests and Provision
for Income Taxes $ (1,984) $ (57,824)
============== ==============
As previously described in Note 5, the investment in ACL was written
off during the quarter ended March 28, 2003.
27
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
The following is a reconciliation of segment loss to consolidated
pre-tax totals:
(IN THOUSANDS)
QUARTER ENDED QUARTER ENDED
MARCH 31, 2004 MARCH 28, 2003
-------------- --------------
Total Segment Income (Loss) ................................ $ 3,923 $ (2,650)
Unallocated Amounts:
Interest Expense ...................................... (6,922) --
Equity in Net Income (Loss) of Unconsolidated
Investments ........................................... 1,015 (55,174)
-------------- --------------
Loss before Minority Interests and
Provision for Income Taxes ............................ $ (1,984) $ (57,824)
============== ==============
NOTE 15. EMPLOYEE BENEFIT PLANS
Net periodic benefit cost for the Company's pension and other
post-retirement benefit plans is immaterial for each of the quarters presented.
NOTE 16. INTEREST EXPENSE
Interest expense in the condensed consolidated statement of operations
for the quarter ended March 31, 2004 is comprised of the following (in
thousands):
Parent Company Debt $ 4,273
Energy and Water Debt 2,649
----------
$ 6,922
==========
Parent Company Debt interest expense is comprised of the amortization
of deferred financing costs of $3,073 and accrued interest payable on the
Covanta bridge financing of $1,200.
NOTE 17. COMMITMENTS AND CONTINGENT LIABILITIES
At March 31, 2004, capital commitments for operations amounted to $11.2
million for normal maintenance and replacement in domestic energy and water.
Other capital commitments for domestic energy and water and international energy
as of March 31, 2004 amounted to approximately $11.9 million. This amount
includes a commitment to pay $10.6 million in 2009 for a service contract
extension at an energy facility. In addition, this amount includes a commitment
to contribute $1.3 million in capital to an investment in a waste-to-energy
facility in Italy which is expected to be contributed in late 2004.
Covanta and certain of its subsidiaries have issued or are party to
performance bonds and guarantees and related contractual obligations undertaken
mainly pursuant to agreements to construct and operate certain energy
facilities.
The surety bonds relate to performance under its waste water treatment
operating contracts ($8.5 million), possible closure costs for various energy
projects when such projects cease operating ($10.8 million) and to energy
businesses that have been sold and the related surety bonds ($1.2 million) are
expected to be cancelled in 2004.
28
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
The Company is party to a number of other claims, lawsuits and pending
actions, most of which are routine and all of which are incidental to its
business. Covanta assesses the likelihood of potential losses on an ongoing
basis and when losses are considered probable and reasonably estimable, records
as a loss an estimate of the ultimate outcome. If Covanta can only estimate the
range of a possible loss, an amount representing the low end of the range of
possible outcomes is recorded. The final consequences of these proceedings are
not presently determinable with certainty.
Generally claims and lawsuits against the Covanta debtors emerging from
bankruptcy upon consummation of DHC's acquisition of Covanta arising from events
occurring prior to their respective petition date have been resolved pursuant to
the Covanta Reorganization Plan, and have been discharged pursuant to the March
5, 2004 order of the Bankruptcy Court which confirmed the Covanta Reorganization
Plan. However, to the extent that claims are not dischargeable in bankruptcy,
such claims may not be discharged. For example, the claims of certain persons
who were personally injured prior to the petition date but whose injury only
became manifest thereafter may not be discharged pursuant to the Covanta
Reorganization Plan.
ENVIRONMENTAL MATTERS
Covanta's operations are subject to the environmental regulatory laws
and the environmental remediation laws. Although Covanta's operations are
occasionally subject to proceedings and orders pertaining to emissions into the
environment and other environmental violations, which may result in fines,
penalties, damages or other sanctions, Covanta believes that it is in
substantial compliance with existing environmental laws and regulations.
Covanta may be identified, along with other entities, as being among
parties potentially responsible for contribution to costs associated with the
correction and remediation of environmental conditions at disposal sites subject
to CERCLA and/or analogous state laws. In certain instances, Covanta may be
exposed to joint and several liability for remedial action or damages. Covanta's
ultimate liability in connection with such environmental claims will depend on
many factors, including its volumetric share of waste, the total cost of
remediation, the financial viability of other companies that also sent waste to
a given site and, in the case of divested operations, its contractual
arrangement with the purchaser of such operations. Generally such claims arising
prior to the petition date were resolved in and discharged by the Chapter 11
Cases.
On September 15, 2003, the Environmental Protection Agency (the "EPA")
issued a "General Notice Letter" identifying Covanta as among 41 potentially
responsible parties ("PRPs") with respect to the Diamond Alkali Superfund
Site/"Lower Passaic River Project." The EPA alleges that the PRPs are liable for
releases or potential releases of hazardous substances to a 17 mile segment of
the Passaic River, located in northern New Jersey, and requests the PRPs'
participation as "cooperating parties" with respect to the funding of a five to
seven year study to determine an environmental remedial and restoration program.
Covanta has informed the EPA that it was a Debtor, the EPA did not file a proof
of claim, and Covanta believes that its liability, if any, was discharged under
the Covanta Reorganization Plan. On March 5, 2004, one PRP did file a motion in
the Bankruptcy Court for leave to file a late proof of claim, but subsequently
withdrew that motion. No other proofs of claim have been filed relating to this
matter. The allegations as to Covanta relate to discontinued, non-energy
operations.
In 1985, Covanta sold its interests in several manufacturing
subsidiaries, some of which allegedly used asbestos in their manufacturing
processes, and one of which was Avondale Shipyards, now a subsidiary of Northrop
Grumman Corporation. Some of these former subsidiaries have been and continue to
be parties to asbestos-related litigation. In 2001, Covanta was named a party,
with 45 other defendants, to one such case. Before the first petition date,
Covanta had filed for its dismissal from the case. Also, eleven proofs of claim
seeking unliquidated amounts have been filed against Covanta in the Chapter 11
cases based on what appears to be purported asbestos-related injuries that may
relate to the operations of former Covanta subsidiaries. Covanta believes that
these claims lack merit and has filed objections to them, and plans to object
vigorously to such claims if necessary to resolve them.
29
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
The potential costs related to the following matters and the possible
impact on future operations are uncertain due in part to the complexity of
governmental laws and regulations and their interpretations, the varying costs
and effectiveness of cleanup technologies, the uncertain level of insurance or
other types of recovery and the questionable level of Covanta's responsibility.
Although the ultimate outcome and expense of any litigation, including
environmental remediation, is uncertain, Covanta believes that the following
proceedings will not have a material adverse effect on Covanta's consolidated
financial position or results of operations.
o On June 8, 2001, the EPA named Covanta's wholly-owned
subsidiary, Ogden Martin Systems of Haverhill, Inc., now known
as Covanta Haverhill, Inc., as one of 2,000 PRPs at the Beede
Waste Oil Superfund Site, Plaistow, New Hampshire in
connection with alleged waste disposal by PRPs on this site.
On January 9, 2004, the EPA signed its Record of Decision with
respect to the cleanup of the site. According to the EPA, the
costs of response actions incurred as of January 2004 by the
EPA and the State of New Hampshire total approximately $19
million, and the estimated cost to implement the remedial
alternative selected in the Record of Decision is an
additional $48 million. Covanta Haverhill, Inc. is
participating in PRP group discussions towards settlement of
the EPA's claims and will continue to seek a negotiated
resolution of this matter. Although Covanta Haverhill, Inc.'s
share of liability, if any, cannot be determined at this time
as a result of uncertainties regarding the source and scope of
contamination, the large number of PRPs and the varying
degrees of responsibility among various classes of PRPs,
Covanta believes that based on the amount of materials Covanta
Haverhill, Inc. sent to the site, any liability will not be
material. Covanta Haverhill, Inc. was not in the Covanta
Bankruptcy.
o On May 25, 2000 the California Regional Water Quality Control
Board, Central Valley Region, issued a cleanup and abatement
order to Pacific-Ultrapower Chinese Station ("Chinese
Station"), a general partnership in which one of Covanta's
subsidiaries owns 50% and which owns and operates an
independent power project in Jamestown, California which uses
waste wood as a fuel. The order is in connection with the
partnership's neighboring property owner's use of ash
generated by Chinese Station's plant. Chinese Station
completed the cleanup in mid-2001 and submitted its Clean
Closure Report to the Water Quality Control Board on November
2, 2001. The Board and other state agencies continue to
investigate alleged civil and criminal violations associated
with the management of the material. The partnership believes
it has valid defenses, and a petition for review of the order
is pending. Settlement discussions in this matter are
underway. Based on penalties proposed by the Board, Covanta
believes that this matter can be resolved in amounts that will
not be material to Covanta taken as a whole. Chinese Station
and Covanta's subsidiary that owns a partnership interest in
Chinese station were not debtors in the Covanta bankruptcy.
OTHER MATTERS
o In late 2000, Lake County, Florida commenced a lawsuit in
Florida state court against Covanta Lake, Inc. (now merged
with Covanta Lake II, Inc., ("Covanta Lake")) which also
refers to its merged successor, as defined below) relating to
the waste-to-energy facility operated by Covanta in Lake
County, Florida (the "Lake Facility"). In the lawsuit, Lake
County sought to have its service agreement with Covanta Lake
(the "Lake Service Agreement") declared void and in violation
of the Florida Constitution. That lawsuit was stayed by the
commencement of the Chapter 11 Cases. Lake County subsequently
filed a proof of claim seeking in excess of $70 million from
Covanta Lake and Covanta.
On June, 20, 2003, Covanta Lake filed a motion with the
Bankruptcy Court seeking entry of an order (i) authorizing
Covanta Lake to assume, effective upon confirmation of a plan
of reorganization for Covanta Lake, the Lake Service Agreement
with Lake County, (ii) finding no cure amounts due under the
Service Agreement, and (iii) seeking a declaration that the
Lake Service Agreement is valid, enforceable and
constitutional, and remains in full force and effect.
Contemporaneously with the filing of the assumption motion,
Covanta Lake filed an adversary complaint asserting that Lake
County is in arrears to
30
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
Covanta Lake in the amount of more than $8.5 million. Shortly
before trial commenced in these matters, Covanta and Lake
County reached a tentative settlement calling for a new
agreement specifying the parties' obligations and
restructuring of the project. That tentative settlement and
the proposed restructuring will involve, among other things,
termination of the existing Lake Service Agreement and the
execution of a new waste disposal agreement which shall
provide for a put-or-pay obligation on Lake County's part to
deliver 163,000 tons per year of acceptable waste to the Lake
Facility and a different fee structure; a replacement
guarantee from Covanta in a reduced amount; the payment by
Lake County of all amounts due as "pass through" costs with
respect to Covanta Lake's payment of property taxes; the
payment by Lake County of a specified amount in each of 2004,
2005 and 2006 in reimbursement of certain capital costs; the
settlement of all pending litigation; and a refinancing of the
existing bonds.
The Lake settlement is contingent upon, among other things,
receipt of all necessary approvals, as well as a favorable
outcome to Covanta's pending objection to the proof of claims
filed by F. Browne Gregg, a third-party claiming an interest
in the existing Lake Service Agreement that would be
terminated under the proposed settlement. On November 3, 2003
through November 5, 2003, the Bankruptcy Court conducted a
trial on Mr. Gregg's proofs of claim. At issue in the trial
was whether Mr. Gregg is entitled to damages as a result of
Covanta Lake's proposed termination of the existing Lake
Service Agreement and entry into a waste disposal agreement
with Lake County. As of May 1, 2004, the Bankruptcy Court had
not ruled on Covanta's claims objections. Based on the
foregoing, Covanta determined not to propose a plan of
reorganization or plan of liquidation for Covanta Lake, and
instead that Covanta Lake should remain a debtor-in-possession
after the effective date of the Covanta Reorganization Plan.
To emerge from bankruptcy without uncertainty concerning
potential claims against Covanta related to the Lake Facility,
Covanta has rejected its guarantees of Covanta's obligations
relating to the operation and maintenance of the Lake
Facility. Covanta anticipates that if a restructuring is
consummated, Covanta may at that time issue new parent
guarantees in connection with that restructuring and emergence
from bankruptcy.
Depending upon the ultimate resolution of these matters with
Mr. Gregg and Lake County, Covanta Lake may determine to
assume or reject one or more executory contracts related to
the Lake Facility, terminate the Service Agreement with Lake
County for its breaches and default and pursue litigation
against Lake County and/or Mr. Gregg. Based on this
determination, Covanta may reorganize or liquidate Covanta
Lake. Depending on how Covanta Lake determines to proceed,
creditors of Covanta Lake may receive little or no recovery on
account of their claims.
o During 2003 Covanta Tampa Construction, Inc. ("CTC") completed
construction of a 25 million gallon per day
desalination-to-drinking water facility under a contract with
Tampa Bay Water ("TBW") near Tampa, Florida. Covanta Energy
Group, Inc., guaranteed CTC's performance under its
construction contract with TBW. A separate subsidiary, Covanta
Tampa Bay, Inc. ("CTB") entered into a contract with TBW to
operate the Tampa Water Facility after construction and
testing is completed by CTC.
As construction of the Tampa Water Facility neared completion,
the parties had material disputes between them, primarily
relating to (i) whether CTC has satisfied acceptance criteria
for the Tampa Water Facility; (ii) whether TBW has obtained
certain permits necessary for CTC to complete start-up and
testing, and for CTB to subsequently operate the Tampa Water
Facility; (iii) whether influent water provided by TBW for the
Tampa Water Facility is of sufficient quality to permit CTC to
complete start-up and testing, or to permit CTB to operate the
Tampa Water Facility as contemplated and (iv) if and to the
extent that the Tampa Water Facility cannot be optimally
operated, whether such shortcomings constitute defaults under
CTC's agreements with TBW.
31
DANIELSON HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
In October 2003, TBW issued a default notice to CTC, indicated
that it intended to commence arbitration proceedings against
CTC, and further indicated that it intended to terminate CTC's
construction agreement. As a result, on October 29, 2003, CTC
filed a voluntary petition for relief under chapter 11 of the
Bankruptcy Code in order to, among other things, prevent
attempts by TBW to terminate the construction agreement
between CTC and TBW. On November 14, 2003, TBW commenced an
adversary proceeding against CTC and filed a motion seeking a
temporary restraining order and preliminary injunction
directing that possession of the Tampa Water Facility be
turned over to TBW. On November 25, 2003, the Bankruptcy Court
denied the motion for a temporary restraining order and
preliminary injunction and ordered, among other things, that
the parties attempt to resolve their disputes in a non-binding
mediation.
In February 2004 Covanta and TBW reached a tentative
compromise of their disputes which has been approved by the
Bankruptcy Court, subject to definitive documentation, and
confirmation of an acceptable plan of reorganization for CTC
and CTB, which were not included in the Covanta Reorganization
Plan. Under that tentative compromise, all contractual
relationships between Covanta and TBW will be terminated, CTC
will operate the facility in "hot stand-by" for a limited
period of time, and the responsibility for optimization and
operation of the Tampa Water Facility will be transitioned to
a new, non-affiliated operator. In addition, TBW will pay
$4.95 million to or for the benefit of CTC, of which up to
$550,000 is earmarked for the payment of claims under the
subcontracts previously assigned by Covanta to TBW. The
settlement funds ultimately would be distributed to creditors
and equity holders of CTC and CTB pursuant to a plan of
reorganization for CTC. As a result of the foregoing, Covanta
determined not to include CTC and CTB in the Covanta
Reorganization Plan or liquidation plan, and instead that CTC
and CTB should remain debtor-in-possessions after the
effective date of the Covanta Reorganization Plan, and that
separate plans of reorganization subsequently would be
proposed for CTC and CTB. In April, 2004, CTC and CTB filed a
plan of reorganization as contemplated by the settlement. It
is anticipated that the Bankruptcy Court will schedule a
hearing in July, 2004 at which the Court will consider
confirmation of such plan of reorganization.
If the parties are unable to resolve their differences
consensually, and depending upon, among other things, whether
the parties are able to successfully effect the settlement
described above, Covanta may, among other things, commence
additional litigation against TBW, attempt to assume or reject
one or more executory contracts related to the Tampa Water
Facility, or propose different liquidating plans and/or plans
of reorganization for CTB and/or CTC. In such an event,
creditors of CTC and CTB may receive little or no recovery on
account of their claims.
32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits filed with this Form 10-Q/A
Exhibit 31.1 - Certification Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002 from Chief Executive Officer
Exhibit 31.2 - Certification Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002 from Chief Financial Officer
Exhibit 32.1 - Certification of Periodic Financial Report Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 from Chief Executive Officer
Exhibit 32.2 - Certification of Periodic Financial Report Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 from Chief Financial Officer
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Danielson Holding Corporation has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DANIELSON HOLDING CORPORATION
(Danielson Holding Corporation)
By: /s/ PHILIP G. TINKLER
----------------------------------------
Philip G. Tinkler
Chief Financial Officer
May 18, 2004
34