Item 1. BUSINESS
Business Strategy
General. Kaiser is the reorganized successor to Kaiser Steel Corporation, referred to as KSC, which was an integrated steel manufacturer that filed for bankruptcy protection in 1987. Since KSC’s bankruptcy, we have been developing certain assets remaining after the bankruptcy. Currently, our principal assets include:
• An 82.48% ownership interest in Mine Reclamation, LLC, (referred to as MRC), which owns a permitted rail-haul municipal solid waste landfill at a property called the Eagle Mountain Site
located in the California desert. This landfill is currently subject to a contract for its sale to County District No. 2 of Los Angeles County (which we refer to as the District) for approximately $41 million;
• A 50% ownership interest in the West Valley Materials Recovery Facility and Transfer Station, a transfer station and materials recovery facility located on land acquired from Kaiser, which we refer to as the West Valley MRF; and
• Approximately 5,400 additional acres owned or controlled by Kaiser at the Eagle Mountain Site that are not included in the pending sale to the District.
As of December 31, 2003, we also had cash and cash equivalents, receivables and short-term investments of approximately $15.2 million.
Cash Maximization Strategy. In September 2000, Kaiser Inc.’s Board of Directors approved a strategy to maximize the cash distributed to Kaiser Inc.’s stockholders. Under this strategy, Kaiser sought to:
• To complete the sale of the landfill project at the Eagle Mountain Site and to resolve the outstanding litigation in connection with the related federal land exchange at that site.
• To reduce the risk to Kaiser from outstanding environmental and other similar types of liabilities by purchasing additional insurance coverage and negotiating with purchasers of our properties to assume liability risks as part of the sale transaction;
• To continue to hold our 50% interest in West Valley MRF, which pays cash distributions to Kaiser, until we believe it is appropriate to sell this asset;
• To sell miscellaneous assets, such as surplus property and mineral interests in Southern California; and
• To further reduce our general and administrative expenses by continuing to reduce our staff as we sell our remaining assets.
Consistent with this strategy, Kaiser Inc. completed or entered into the following transactions:
• In August 2000, MRC entered into an agreement to sell the landfill project at the Eagle Mountain Site to the District. This sale is subject to the satisfaction of numerous conditions, not all of which have been satisfied. As a result, we cannot be sure that this sale will close on the terms negotiated with the District, if at all. For additional information, see “BUSINESS - Eagle Mountain Landfill Project and Pending Sale - Pending Sale of the Landfill Project.”
• Also in August 2000, we sold approximately 588 acres of the former KSC mill site property (referred to as the Mill Site Property) for $16 million in cash plus the assumption of certain environmental liabilities. For additional information, see “BUSINESS - Historical Operations and Completed Transactions - Mill Site Property - CCG Ontario, LLC.”
• In October 2000, we sold approximately 37 additional acres of the Mill Site Property for $3.8 million in cash. For additional information, see “BUSINESS - Historical Operations and Completed Transactions - Mill Site Property - Rancho Cucamonga Parcel.”
• In March 2001, we sold our interest in Fontana Union Water Company, a mutual water company, for $87.5 million in cash, plus approximately $2.5 million in additional payments due under a related lease. For additional information, see “BUSINESS - Historical Operations and Completed Transactions - Water Resources - Fontana Union Stock Sale.”
• In June 2001, we purchased an insurance policy, covering substantially all of Kaiser’s remaining historical environmental and asbestos related risks. For additional information, see “BUSINESS - Historical Operations and Complete Transactions -Mill Site Environmental Matters.”
Conversion to a Limited Liability Company. As a result of the actions outlined above, Kaiser Inc. had cash and cash equivalents of approximately $80 million as of September 30, 2001. At that time, Kaiser Inc.’s Board sought the best means of delivering this cash to its investors on a tax advantageous basis while also avoiding any future double taxation generally imposed on future corporate distributions to investors. After considering various alternatives, Kaiser Inc.’s Board determined that converting Kaiser Inc. into a limited liability company would best achieve these goals.
More specifically, by converting to a limited liability company on or before December 31, 2001, Kaiser ultimately saved approximately $16 million in income taxes in 2001 by capturing, the significant accumulated tax losses associated with MRC. These tax savings meant that Kaiser Inc. was able to increase the cash distributed to its stockholders by almost $2.00 per share. In addition, the conversion enabled most of Kaiser Inc.’s stockholders to offset their tax basis in each share of Kaiser Inc.’s common stock against the cash distribution to them in the merger, with only the difference taxed at capital gains rates.
The conversion was approved at Kaiser Inc.’s November 28, 2001, annual meeting of its stockholders and consummated on November 30, 2001. The conversion was accomplished through the merger of Kaiser Inc. with and into Kaiser LLC, with Kaiser LLC as the surviving company of the merger. In order to capture the benefits associated with the tax flow-through treatment offered by a limited liability structure and as a result of the requirements imposed by the Internal Revenue Code, the Class A Units received in the merger are not traded on any securities market and are subject to significant transfer restrictions.
Eagle Mountain Landfill Project and Pending Sale
Description of the Eagle Mountain Site. Kaiser’s 10,108 acre Eagle Mountain Site, located in the remote California desert approximately 200 miles east of Los Angeles, consists of three large open pit mines, the Eagle Mountain Townsite and a 52-mile private rail line that accesses the site. In 1988, Kaiser leased what is now approximately 4,654 acres of the idle mine site and the rail line to MRC for development of a rail-haul solid-waste landfill.
In 1988, in anticipation of Southern California’s need for new environmentally safe landfill capacity, MRC began the planning and permitting for a 20,000 ton per day rail-haul, non-hazardous solid waste landfill at Kaiser’s Eagle Mountain Site. The landfill project has received all the major permits and approvals required for siting, constructing, and operating the landfill project. We believe that the Eagle Mountain Site has many unique attributes which make it particularly well-suited for a rail-haul, solid waste landfill, including, among other attributes, its remote location, arid climate, available and suitable materials for the proposed liner system and daily cover, and rail access.
Acquisition of Our Interest in MRC. We initially acquired our interest in MRC in 1995, as a result of the withdrawal of MRC’s previous majority owner, a subsidiary of Browning Ferris Industries. Before and in connection with this withdrawal, Browning Ferris invested approximately $45 million in MRC. In 2000, Kaiser assigned all of the economic benefits of the MRC lease and granted an option to buy the landfill property to MRC in exchange for an increase in Kaiser’s ownership interest in MRC. The MRC lease will terminate upon the sale of the landfill project to the District, assuming the sale is completed. We presently own 82.48% of MRC’s Class B Units and 100% of its Class A Units.
Pending Sale of the Landfill Project
Background. In August 2000, MRC entered into an agreement to sell the landfill project to the District for $41 million. Under the terms of that agreement, upon closing of the sale, $39 million of the total purchase price is to be deposited into an escrow account. This money will be released to MRC on the resolution of certain litigation contingencies relating to the litigation challenging the completed federal land exchange. Even though the closing has not taken place and these funds have not been deposited into an escrow account, interest began accruing on this portion of the purchase price on May 3, 2001, and will be paid out to MRC on a quarterly basis once the initial closing of the sale occurs and once there is a successful outcome of the federal litigation at the Federal District Court level. The remaining $2 million of the purchase price would also be placed into an escrow account upon closing and was originally to be released upon the later of (1) the release of the $39 million as described above or (2) the permitting approvals of the District’s Puente Hills landfill for its remaining 10 years of capacity. However, in 2003 and early 2004 the District received the necessary permits for the expansion of its Puente Hills landfill and thus, the full purchase price will be placed into escrow when the initial closing has occurred, and will be released upon resolution of the pending federal land exchange litigation. Receipt of the purchase price, in whole or in part, if at all, is expected to be delayed for several years pending satisfactory resolution of these contingencies. At this time, we cannot estimate when or if the sale may be completed.
Additionally, the sale of the landfill project is subject to the results of the District’s due diligence and satisfaction of numerous contingencies. The contingencies include, but are not limited to, obtaining the transfer of the landfill project’s permits to the District, obtaining all necessary consents to the transaction, resolving title matters and negotiating mutually acceptable joint use agreements. We continue to work on resolving various title issues, obtaining necessary consents and otherwise working toward a closing. Although the contractual expiration date is currently June 30, 2004, the date has already been extended numerous times. The conditions to closing are not expected to be met by the current expiration date, and the parties will individually determine whether to extend the closing date one or more additional times. There is no assurance or requirement that either party will continue to extend the closing date for the proposed sale of the landfill project. Kaiser has agreed with the District to vote its interest in MRC in favor of the sale of the landfill project to the District on its current terms prior to the initial closing.
Flood Damage to Railroad
The Company owns an approximate 52-mile private railroad that runs from Ferrum Junction near the Salton Sea to the Eagle Mountain mine. In late August and early September of 2003, portions of the railroad and related protective structures sustained considerable damage due to heavy rains and flash floods. This damage included having some rail sections being buried under silt while other areas had their rail bed undermined. Subsequent to the filing of our report on Form 10-Q for the quarter ended September 30, 2003, we conducted a more complete investigation of the damage and of the costs to return the railroad to the condition that it was in prior to the flood damage. As a result of such investigation, we currently estimate the cost to repair the damage to be a minimum of $4,500,000. We currently plan to undertake, as soon as reasonably possible, the work necessary to preserve and protect the existing railroad. However, the major repairs required to return the railroad to its condition prior to the flood damage will be deferred until a later date.
MRC Financing
Since 1995 MRC has been funded through a series of private placements to its existing equity holders. During the second quarter of 2003, MRC commenced and then completed in the third quarter of 2003 a $2,100,000 private placement of its Class B Units to its existing members. Kaiser will fund at least $1,820,000 of the private placement. The funding is payable in installments with the last installment due in July 2004. Kaiser made its first equity contribution of $910,000 under the private placement in August 2003, bringing its ownership interest in MRC to 82.48%. A second equity contribution of approximately $435,000 was made in March 2004. Future funding of MRC will be required to cover such items as the federal land exchange litigation and the railroad repairs but there is no assurance that such funding will be obtained.
Current Status
Approval by Riverside County of the Landfill Project; Development Agreement. Between 1992 and 1995, MRC faced legal challenges to its application and receipt of regulatory permits and consents required to operate the landfill project. In March 1995, MRC again initiated the necessary permitting process by filing its land use applications with Riverside County and working with the County and U.S. Bureau of Land Management, referred to as the BLM, in securing the certification and approval of a new environmental impact report, or an EIR. After extensive public comment, the new EIR was released to the public in January 1997, and received final approval from the Riverside Board of Supervisors in September 1997.
As a part of the process of considering the landfill project, Kaiser and MRC negotiated a Development Agreement with Riverside County. The Development Agreement provides the mechanism by which MRC acquires long-term vested land-use rights for a landfill and generally governs the relationship among the parties to the Agreement. The Development Agreement also addresses such items as the duties and indemnification obligations to Riverside County; the extensive financial assurances to be provided to Riverside County; the reservation and availability of landfill space for waste generated within Riverside County; and events of default and remedies, as well as a number of other items.
In addition, the financial payments to or for the benefit of Riverside County and others are detailed in the Development Agreement as well as in the Purchase and Sale Agreement, which forms a part of the Development Agreement. The Purchase and Sale Agreement requires a per ton payment on non-County waste determined from a base rate which is the greater of $2.70 per ton or ten percent (10%) of the landfill tip fee up to 12,000 tons of non-County waste. The 10% number increases to 12½% for all non-County waste in excess of 12,000 tons per day. The per ton payment to the County also increases as volume increases. The per ton payments on non-County Waste to Riverside County are summarized as follows:
Of the payments made to Riverside County by MRC on non-County municipal solid waste, $.90 of the per ton payment will be deposited into an environmental trust. In addition, MRC directly pays $.90
per ton into the environmental trust for in-County waste deposited into the landfill. Funds in the environmental trust are to be used within Riverside County for: (a) the protection, acquisition, preservation and restoration of parks, open space, biological habitat, scenic, cultural and scientific resources; (b) the support of environmental education and research; (c) the mitigation of the landfill project’s environmental impacts; and (d) the long term monitoring of the above mentioned items.
Finally, MRC has agreed to pay $.10 per ton of municipal solid waste deposited into the landfill to the National Parks Foundation for the benefit of the National Park Service.
Other major payments include: (i) partial funding for up to four rail crossings with $1 million due at the commencement of construction of the landfill and an additional $1 million over the course of landfill operations; (ii) financial assistance of approximately $2 million for the host community, Lake Tamarisk, comprised of $500,000 due at the commencement of construction of the landfill plus approximately $1.5 million due over the course of landfill operations; and (iii) funding for the non-California Environmental Quality Act reduction air emission programs of $600,000 over the course of operations.
The initial term of the Development Agreement is fifty years, although it may be extended to November 30, 2088, under certain conditions. The Development Agreement allows the landfill project to receive up to 20,000 tons per day, 6 days a week, of non-hazardous municipal solid waste. However, during its first ten years of operation, the landfill owner is limited to 10,000 tons per day of non-County waste plus the waste generated from within the County. After ten years, the owner of the landfill may request an increase in its daily tonnage, and an independent scientific panel will review such request. The panel’s review is effectively limited to confirming substantial compliance with all developmental approvals, mitigation measures and permits.
We anticipate that the Development Agreement will be fully executed and recorded just prior to the closing of the sale of the landfill project. Riverside County has approved the assumption of the Development Agreement by the District as part of the sale of the landfill by MRC.
Successful Appeal of EIR Litigation. After the September 1997 approval of the new EIR for the landfill project, litigation with respect to MRC’s EIR certification resumed. In February 1998, the San Diego County Superior Court issued a final ruling with respect to this litigation, finding that the EIR certification did not adequately evaluate the landfill project’s impact on the Joshua Tree National Park and the threatened desert tortoise. MRC, Kaiser and Riverside County appealed the Superior Court’s decision; opponents did not appeal.
On May 7, 1999, the Court of Appeal announced its decision to completely reverse the San Diego Superior Court’s prior adverse decision. The Court of Appeal’s decision, in effect, reinstated the EIR certification and reinstated the previous approval of the landfill project by Riverside County. In June 1999, opponents to the landfill project requested that the California Supreme Court review and overturn the Court of Appeal’s decision. In July 1999, the California Supreme Court declined to review the Court of Appeal’s decision.
Federal Land Exchange and Ongoing Litigation. In October 1999, Kaiser’s wholly owned subsidiary, Kaiser Eagle Mountain, Inc. (now Kaiser Eagle Mountain, LLC), completed a land exchange with the BLM. In this exchange, Kaiser transferred approximately 2,800 acres of Kaiser-owned property along its railroad right-of-way to the BLM and a nominal cash equalization payment in exchange for approximately 3,500 acres of land within the landfill project area. The land exchanged by Kaiser was identified as prime desert tortoise habitat and was a prerequisite to completion of the permitting of the landfill project. With the land exchange completed, the Eagle Mountain Site consists of approximately 10,108 acres with 8,636 acres held in fee (which includes the Eagle Mountain Townsite) and approximately 1,472 acres held as various mining claims.
Following completion of the land exchange, two lawsuits were filed challenging it and requesting its reversal. The plaintiffs argue that the land exchange should be reversed because the BLM failed to comply with the National Environmental Policy Act and the Federal Land Management Policy Act. In November 2000, the Ninth Circuit Court of Appeals announced a decision in an unrelated case that may have a material adverse impact on Kaiser’s federal land exchange litigation and the pending sale to the District. In Desert Citizens Against Pollution v. Bisson, (Ninth Circuit Court of Appeals, Case No. 97-55429), the Court of Appeals concluded, among other things, that the BLM did not properly value the land being acquired by the competing Mesquite rail-haul landfill project and ordered a reversal of the land exchange. The court concluded that the appraisal should have considered the lands being acquired from the BLM as a landfill. The court did not, however, determine the proper valuation of the exchanged lands. The plaintiffs in Kaiser’s federal land exchange litigation amended their respective complaints to include allegations that the appraisal used in Kaiser’s land exchange with the BLM is similarly defective. In light of the Bisson decision, the BLM has completed an independent review of the “highest and best use” analysis. The BLM’s independent appraiser concluded that there would be no change in the determination of the “highest and best use” in the appraisal used in the land exchange if the property involved was expressly considered as a landfill site. Given all the facts and circumstances, the independent appraiser concluded that there was no premium to be paid for the property interests exchanged by the BLM even if a portion of such property interests were a part of a planned landfill. The scheduled briefing in this case was completed in January 2003. We are awaiting a decision from the court in this matter.
In addition to the federal land exchange litigation, the Company, along with the U.S. Department of Interior, the BLM, the District and Metropolitan Water District of Southern California, received a letter in September 2002 from the Center for Biological Diversity, the Sierra Club, Citizens for the Chuckwalla Valley (“Complaining Groups”) declaring their intent to sue for violations of the Endangered Species Act in regard to actions or inactions related to the railroad that would serve the landfill project. Among other things, it is alleged that there has been a failure to comply with a biological opinion issued by the U.S. Fish & Wildlife Service and that the BLM has failed to enforce the terms of that biological opinion. In summary, the Complaining Groups are demanding enforcement of the biological opinion or revocation by the BLM of the right-of-ways granted for the existing Eagle Mountain railroad and the Eagle Mountain road. The biological opinion contains, among other items, mitigation measures for the desert tortoise which could require substantial expenditures.
In reviewing the complaints of the Complaining Group, the BLM out of an abundance of caution conducted an informal consultation with the U.S. Fish & Wildlife Service with respect to the biological opinion. Although neither the construction of the landfill project nor the regular use of the railroad have commenced, the BLM requested that the Company develop a maintenance schedule for the railroad that would include addressing, among other things, the particular concerns of culverts and rail line ballast. The Company has submitted a proposed schedule which is under review by the BLM. See “Legal Proceedings-Eagle Mountain Landfill Project Land Exchange Litigation.”
Eagle Crest Energy Company. In November 2000, Eagle Crest Energy Company, referred to as ECEC, a previous opponent to the landfill project, filed an application for a preliminary permit with the Federal Energy Regulatory Commission, referred to as FERC, for a proposed 1,000 mega-watt hydroelectric pump storage project and ancillary facilities. The proposed ECEC project would utilize two of the mining pits and other property at the Eagle Mountain Site, portions of which are currently leased to MRC and the subject of the pending sale to the District. The Company has not agreed to sell or lease this property to ECEC. This project is essentially the same project that ECEC previously proposed and was dismissed by the FERC in July 1999. However, as a result of the land exchange with the BLM, there is no title reservation on any portion of the property. FERC issued a preliminary permit to ECEC in June 2001. We, along with others, have objected to the ECEC project and have intervened in the matter. To
management’s knowledge, there was no material activity by Eagle Crest Energy Company in 2003 with regard to its permit application.
Ongoing Considerations if the Sale is not Completed
Successful resolution of the federal land exchange litigation could take a number of years. Due to delays in closing on the sale to the District, the additional threatened Endangered Species Act litigation, and the need to repair the flood damage to the railroad we anticipate that an additional investment in MRC will be necessary. We can make no assurance that sufficient and suitable funding will be available to MRC in order to allow it to continue to pursue the landfill project, to undertake the major railroad repairs and to resolve the federal litigation and any new litigation. Alternatively, MRC could decide not to pursue the continued development of the landfill project, which would likely materially hinder MRC’s ability to realize any value from the landfill project.
Governmental Regulation/Permitting. In the development and maintenance of our assets, we and other entities on which we rely are subject to extensive, expensive and increasingly stringent regulation by federal, state and local authorities. Entities operating in this arena must obtain and maintain numerous local, state and federal governmental permits and consents. Failure to comply with these regulations could result in the loss of a needed license, permit or consent or could result in significant monetary fines. Examples of the wide ranging regulations which apply to the development and maintenance of our assets include:
• Waste collection - local agencies require licenses to collection vehicles and monitor truck safety,
• Landfill activities (such as the Eagle Mountain landfill project) - local and state authorities require permits and consents.
• Waste transfer, interim processing, resource recovery and disposal - we and the entities on which we rely must comply with zoning and land-use restrictions.
• General - Air, noise and water pollution regulations may also affect our business from time to time.
Competition. The waste management industry is highly competitive, with a few large, integrated waste management firms and a significant number of smaller, independent operators. The number of competitors has decreased over the past five years, but their size has greatly increased as a result of mergers and acquisitions of waste hauler and management companies. Due to this increasing competition and industry consolidation, there are fewer independent waste management operating companies than in the past and, as a result, fewer potential buyers of our waste related assets. If this reduction of industry operators negatively impacts our ability to operate or sell our assets on favorable terms, our results will likely be materially and adversely affected.
Currently, the Mesquite Regional Landfill located in Imperial County, California is the only other competing rail-haul project proposed in California. The District also entered into an agreement to purchase the Mesquite Regional Landfill at a price and on terms substantially similar to the sale of the landfill project by MRC to the District. The District completed its purchase of the Mesquite Regional Landfill in late 2002. We understand that the District has contracted for the engineering and other work necessary to be in a position to begin construction on the Mesquite project. The impact, if any, of the District’s completion of the purchase of the Mesquite landfill project prior to the completion of the purchase of the Eagle Mountain landfill project is unknown.
Truck-haul landfills in the Los Angeles Basin are also competitors to the proposed rail-haul landfills.
Risks. As is discussed in this Report on Form 10-K, there are numerous risks associated with MRC and the landfill project, including the competition represented by the Mesquite rail-haul landfill project,
which the District purchased in late 2002. There are also numerous risks and contingencies associated with the pending sale of the landfill project to the District. There can be no assurance that all outstanding matters currently preventing an initial closing with the District will be resolved to the satisfaction of the parties. Accordingly, there can be no assurance that the sale to the District will occur or that the current terms of the pending transaction may not be significantly modified as a result of future discussions with the District or as to the timing of the receipt of the purchase price. There can be no assurance that the completed purchase of the Mesquite landfill by the District will not adversely impact the negotiations and the closing on the sale of the landfill to the District. In addition, there are material litigation risks associated with the current federal land exchange litigation, including reversal of the completed land exchange and the threatened litigation over the Endangered Species Act, all as discussed above. No assurance can be made that we will successfully and timely resolve these matters so as to avoid a material adverse effect on our current plan to sell the landfill to the District. If we are unable to manage any of these risks or uncertainties, we may not be able to sell the landfill project and the value of our Class A Units could be materially reduced.
In addition, there are risks that the landfill project will be impacted by natural disasters like the floods that caused significant damage to the rail line in 2003. Certain risks may be uninsurable or are not insurable on terms which we believe are economical.
As stated above, MRC will need additional funding to complete the landfill project, including funds to repair the flood damage sustained by the Eagle Mountain rail line. There is no assurance that MRC can obtain additional funds through debt or equity financing on acceptable terms.
We are also dependent upon the continued services of our executive officers given the complex nature of the landfill project, the challenges it faces, and the importance of historical information. The loss of the services of our executive officers, especially without advance notice, could materially and adversely impact this project and well as our other business.
WEST VALLEY MATERIALS RECOVERY FACILITY AND TRANSFER STATION
Background
West Valley MRF, LLC, referred to as “West Valley,” was formed in June 1997 by Kaiser Recycling Corporation (now Kaiser Recycling, LLC (formerly Kaiser Recycling, Inc.)), a wholly-owned subsidiary of Kaiser, and West Valley Recycling & Transfer, Inc., a wholly-owned subsidiary of Burrtec Waste Industries, Inc. This entity was formed to construct and operate the materials recovery facility referred to as the West Valley MRF. Under the terms of the parties’ business arrangements, Kaiser Recycling and Kaiser remain responsible for any pre-existing environmental conditions and West Valley MRF is responsible for environmental issues that may arise related to any future deposit or release of hazardous substances. Kaiser and Burrtec have each separately guaranteed the prompt performance of their respective subsidiary’s obligations.
Phase 1 of the West Valley MRF, which included a 62,000 square foot building, sorting equipment and related facilities for waste transfer and recycling services was built and equipped in 1997 for a total cost of approximately $10.3 million. Phase 2 of the West Valley MRF was completed in 2001 and increased the processing facility by an additional 80,000 square feet and included the installation of new recycling lines that increased the capacity of the facility to approximately 5,000 tons per day. Phase 2 was completed for a total approximate cost of $11 million. West Valley MRF is currently processing approximately 3,500-4,000 tons of municipal solid and green waste per operating day.
The West Valley MRF generates cash flow in excess of that necessary to fund its cost of operations. Furthermore, the West Valley MRF should distribute sufficient cash to cover a significant portion of
Kaiser LLC’s foreseeable general and administrative costs. In 2003, the West Valley MRF distributed a total of $2,250,000 in cash to Kaiser.
The Operating Agreement for the West Valley MRF provides the opportunity for either Burrtec or Kaiser to buy the other party’s interest in the West Valley MRF at fair market value in the event a party desires to accept an offer to buy its interest in the West Valley MRF, in the event of default by a party under the Agreement that is not cured within a specified time period or, in some circumstances, in the event there is a proposed transfer or deemed transfer. For example, a change in the control of Kaiser to a company that is in the waste management business could trigger Burrtec’s option to purchase our interest in the West Valley MRF. In the event a party exercises its right to purchase upon the occurrence of an uncured default, a discount to fair market value may be applicable.
Financing
Most of the financing for the West Valley MRF was obtained through California Pollution Control Financing Authority tax exempt bonds. Approximately $9,500,000 in bonds were issued in June 1997 (Phase 1), and approximately $8,500,000 in bonds were issued in May 2000 (Phase 2). The interest rate for the Bonds varies weekly. The rates for 2003 ranged from 1.20 to 1.95%. Bonds issued for Phase 1 have a stated maturity date of June 1, 2012, and bonds issued for Phase 2 have a stated maturity date of June 1, 2030, although West Valley MRF is required, pursuant to an agreement with Union Bank, to annually redeem a portion of the Bonds.
The bonds are secured by a pledge and lien on the loan payments made by West Valley MRF and funds that may be drawn on an irrevocable direct pay letter of credit issued by Union Bank of California, N.A. The bonds are backed by a letter of credit issued by Union Bank. Kaiser and Burrtec have each severally guaranteed fifty percent (50%) of the principal and interest on the bonds to Union Bank in the event of a default by West Valley MRF.
West Valley MRF and Union Bank have executed a Reimbursement Agreement that, among other things, sets the terms and conditions whereby West Valley MRF:
• is required to repay Union Bank in the event of a draw under the letter of credit;
• grants Union Bank certain security interests in the income and property of West Valley MRF;
• agrees to a schedule for the redemption of the Bonds; and
• agrees to comply with certain financial and other covenants.
Kaiser and Kaiser Recycling have also provided environmental guaranty agreements to Union Bank. Under these agreements, Kaiser and Kaiser Recycling are jointly and severally liable for any liability that may be imposed on Union Bank for pre-existing environmental conditions on the West Valley MRF’s property acquired from Kaiser Recycling that the West Valley MRF fails to timely address.
Competition
Burrtec owns and operates a transfer and limited materials recovery facility in Agua Mansa, California. This facility is located approximately 15 miles from the West Valley MRF and could compete, in very limited areas, for waste that might otherwise go to the West Valley MRF. To date, the materials recovery facility in Agua Mansa has had little impact on the West Valley MRF’s market for customers. Burrtec also owns or controls materials recovery facilities in Victorville, California and in the Coachella Valley of California, which are not considered to be competitors of the West Valley MRF. Other entities have from time to time proposed to develop materials recovery facilities that would serve
the same broad geographic area as that served by West Valley. Except for a relatively small materials recovery facility located in Colton, California owned by Republic Industries, we believe that none of them has yet completed the permitting process. However, the materials recovery facility in Colton is a competitor and one municipality formerly using the West Valley MRF has contracted for its recycling services with the Colton facility.
Tar Pits Parcel
Currently, the only remaining property we own at the Mill Site Property is an approximate 5 acre parcel known as the Tar Pits Parcel. Under our agreement with the West Valley MRF, we are obligated to contribute the Tar Pits Parcel to the West Valley MRF, at its option, upon the environmental remediation of the property. Except for ongoing inspection and monitoring activities, remediation of the Tar Pits Parcel was completed in 2002 at CCG Ontario, LLC’s, (referred to as CCG), expense. CCG is responsible for this property’s environmental remediation pursuant to the terms of the purchase agreement entered into between CCG and Kaiser in August 2000 relating to Kaiser’s sale of approximately 588 acres of the Mill Site Property. See “BUSINESS - Historical Operations and Completed Transactions - Mill Site Environmental Matters.”
EAGLE MOUNTAIN TOWNSITE
We own and operate the Eagle Mountain Townsite through a wholly-owned subsidiary, Kaiser Eagle Mountain, LLC. The Eagle Mountain Townsite covers approximately 1,300 acres, consists of more than 300 houses (of which approximately 100 have been renovated for current occupancy), a water supply and sewage treatment system, an office building, machine shops, school facilities and other structures. As part of the District’s purchase of the landfill project from MRC, the District will acquire or control a substantial portion of this infrastructure, including utility and water distribution facilities, which serves the landfill property as well as the Eagle Mountain Townsite. However, the District will not be acquiring any houses as a part of the landfill property.
During 2003 a portion of the Eagle Mountain Townsite was leased on a month-to-month basis to Management Training Corporation (“MTC”), a company that operates a minimum security prison under contract with the State of California. Funding for many private prisons was eliminated from California’s 2003 - 2004 state budget as of December 31, 2003, including the private prison located at Eagle Mountain. Accordingly, effective December 31, 2003, the private prison at Eagle Mountain was closed. MTC surrendered most of the property it leased as of December 31, 2003, with the exception of several houses that it continued to lease through February 2004. As of the date of this Report on Form 10-K, we have not had any success in finding a replacement tenant and thus, we are in the process of developing and implementing a plan to mothball the Eagle Mountain Townsite which should be completed by the end of the third quarter of 2004. With the closure of the private prison, Eagle Mountain’s ongoing operations and staffing will be reduced. The Company has recorded a reserve for the costs of such a reduction in activity, the adequacy of which management will continue to review.
Other than possible environmental remediation associated with asbestos containing products in certain structures, we are not aware of any material environmental remediation required at the Eagle Mountain Townsite that could require us to expend substantial funds or that could lead to material liability. However, under the terms of a reclamation plan for a portion of the former mine site there are ongoing reclamation activities for which the Company has recorded a reserve for the estimated cost of such activities.
OTHER KAISER ASSETS
Land adjacent to the Eagle Mountain Site
In and around the Eagle Mountain Townsite area, Kaiser has various possessory mining claims aggregating approximately 1,472 acres and holds approximately 7,344 acres in fee simple. This property is in addition to the approximate 1,300 acre Eagle Mountain Townsite. Approximately 4,654 acres of this property will be sold as a part of the sale of the landfill project.
Kaiser owns four deep water wells, two of which are currently being used, and two booster pump stations that serve the Eagle Mountain site and the Eagle Mountain Townsite.
Lake Tamarisk, California
Lake Tamarisk is an unincorporated community located two miles northwest of Desert Center, California and approximately 8 miles from the Eagle Mountain mine. This community has 150 improved lots situated around two recreational lakes and a nine-hole golf course. With 70 homes and a 150-space mobile home park, the community has an average year-round population in excess of 150. Lake Tamarisk Development, LLC, a wholly owned subsidiary of Kaiser, owns: (i) 77 improved lots, including, among other lots, one residential structure; (ii) a 240 acre parcel of unimproved land across the highway from the main entrance to Lake Tamarisk; (iii) and an approximate 200 acre unimproved parcel adjoining the nine-hole Lake Tamarisk golf course.
HISTORICAL OPERATIONS AND COMPLETED TRANSACTIONS
Water Resources
Background. Until the sale of its ownership interest in Fontana Union Water Company, or Fontana Union, to Cucamonga County Water District, referred to as “Cucamonga,” in March 2001 for $87.5 million or approximately $10,860 per share of Fontana Union stock, the Company’s results of operations depended, in large part, on water rights and successfully leasing such rights. Concurrently with the sale of its Fontana Union stock, the Company also received approximately $2.5 million in payments under its water lease with Cucamonga. Thus, the following information concerning Fontana Union and Cucamonga is provided for historical purposes and to assist the reader as to the context of the Fontana Union stock sale.
Fontana Union owns water rights to produce water from four distinct surface and subsurface sources of water near Fontana, California. Kaiser’s ownership of Fontana Union entitled it to receive, annually, a proportionate share of Fontana Union’s water. In addition, when other shareholders of Fontana Union did not take their annual proportionate shares of water, the unclaimed water for each year was divided pro rata among the shareholders that did exercise their right to take water in that year. At the time we sold our interest in Fontana Union in March 2001, our pro rata interest in unclaimed water raised our effective overall ownership percentage to approximately 57.19%.
Lease of Interest in Fontana Union to Cucamonga County Water District. In 1989, Kaiser leased all of its then owned shares of Fontana Union stock to Cucamonga, a local water district, under the terms of the 102-year take-or-pay lease, referred to as the “Cucamonga Lease.” Under this lease, Cucamonga was entitled to receive all of our proportionate share of water from Fontana Union (including shares acquired after 1989) with lease payments based upon fixed quantities of water at a rate of 68.13% of rate charged by the Metropolitan Water District of Southern California, the “MWD,” for untreated, non-interruptible water as available through Chino Basin Municipal Water District.
Under the terms of the Cucamonga Lease, our future lease revenue increases depended primarily upon any adjustments in the MWD water rates and other fees upon which the lease rate was calculated. The MWD rate established for untreated, non-interruptible water is based on a number of factors, including the MWD need for funds to finance capital improvements and to cover its fixed operational and overhead costs.
On July 1, 1995, MWD implemented changed rates and a new rate structure which was the subject of a dispute between Kaiser and Cucamonga. In December 2000, MWD approved another major rate restructuring. Without the Fontana Union stock sale, we anticipated that we would be engaged in an additional dispute with Cucamonga as a result of MWD’s continued adoption major rate restructuring programs every few years.
The Cucamonga Lease Dispute. As a result of these July 1995 changes in the MWD rates, we asserted that all the changed rates and items implemented by MWD, which must be paid in order to receive untreated, non-interruptible water from MWD, were to be included in the calculation of the MWD rate payable under the terms of the Cucamonga Lease. Cucamonga disputed our interpretation and asserted that our interpretation of the Cucamonga lease in relation to the changes effected in 1995 by the MWD would result in a rate increase to Cucamonga in excess of the 1995 MWD rate of increase Cucamonga asserted was the appropriate rate increase (the “Dispute”). This Dispute, impacted all payments made by Cucamonga subsequent to July 1995. Because Kaiser and Cucamonga were unable to resolve this Dispute out of court, in 1996 Kaiser instituted litigation against Cucamonga in San Bernardino County Superior Court.
After a trial on the matter in March 1998, the Court concluded that the MWD rate, as defined in the Cucamonga lease, was discontinued effective July 1, 1995, as a result of the rate restructuring implemented by MWD.
Fontana Union Stock Sale. Prior to the determination of the outcome of an arbitration over the new MWD rate that would be used under the terms of the Cucamonga Lease, the parties negotiated a resolution to the Dispute with the sale of the Company’s Fontana Union Stock to Cucamonga for a purchase price of $87.5 million. In addition, Cucamonga agreed to pay $2.5 million in payments under the Cucamonga Lease. Kaiser Inc.’s stockholders approved the Fontana Union stock sale in February 2001, and the Fontana Union stock sale was completed on March 6, 2001.
Mill Site Property
Background. From 1942 through 1983, KSC operated a steel mill in Southern California near the junction of the Interstate 10 and Interstate 15 freeways and approximately three miles to the northeast of Ontario International Airport. The original Mill Site Property owned by Kaiser after it emerged from the KSC bankruptcy consisted of approximately 1,200 acres and portions of the property required substantial environmental remediation. Except for the approximate five acre Tar Pits Parcel, we no longer own any portion of the Mill Site Property. The disposition of the Mill Site Property by us over the past several years is described below.
The California Speedway Property. In November 1995, the Company contributed approximately 480 acres of the Mill Site Property in exchange for common stock in the company that became Penske Motorsports, Inc., a leading promoter of motor sports activities and an owner and operator of automobile racetracks. In December 1996, the Company sold to PMI approximately 54 additional acres of the Mill Site Property, for cash and additional stock in PMI. The California Speedway, a world class motor sports speedway, was constructed on this approximate 534 acres of the Mill Site Property.
In July 1999, International Speedway Corporation, referred to as ISC, through a wholly owned subsidiary, acquired PMI. Kaiser Inc., as a stockholder in PMI, voted for the merger and elected to receive a portion of the merger consideration in cash and a portion in ISC stock. In the transaction Kaiser received approximately $24 million in cash and 1,187,407 shares of ISC Class A common stock, resulting in a gain of $35.7 million. Subsequent to PMI’s acquisition, we sold all of the shares we owned in ISC at an average price of approximately $53.52 per share, realizing an additional gain of approximately $6.6 million. The gross cash proceeds we received in 1999 from the merger and the subsequent sale of ISC stock totaled approximately $88 million.
The NAPA Lots. In conjunction with the permitting and development of the California Speedway, we permitted and developed three parcels known as the “NAPA Lots” for sale. In September 1997, the largest NAPA Lot, consisting of approximately 15.5 acres, was sold for a gross sale price of approximately $2.9 million. In November 1999, another of the NAPA Lots, consisting of approximately 7.8 acres, was sold for a gross cash sale price of approximately $1.7 million. The remaining NAPA Lot of approximately 5.2 acres was sold in December 1999 for a cash sale price of approximately $1.1 million.
CCG Ontario, LLC (CCG). In August 2000, we sold approximately 588 acres of our remaining Mill Site Property to CCG for $16 million in cash plus the assumption of virtually all known and unknown environmental obligations and risks associated with the property as well as certain other environmental obligations. Included in the land sold to CCG were ancillary items such as the sewer treatment plant and the water rights associated with the property. As part of the transaction, CCG obtained environmental insurance coverage and other financial assurance mechanisms related to the known and unknown environmental obligations and risks associated with the transferred property as well as other environmental obligations subject to limited exceptions. In addition, before this sale transaction, we were party to a consent order with the California Department of Toxic Substances Control, referred to as the DTSC, which was essentially an agreement to investigate and remediate property. As part of the sale transaction, this consent order and our financial assurances to the DTSC were terminated, and CCG entered into a new consent order with the DTSC and provided the necessary financial assurances. For additional information, see “Part I, Item 1. BUSINESS-Historical Operations and Completed Transactions - Mill Site Environmental Matters” below.
Rancho Cucamonga Parcel. In October 2000, the Company completed the sale of approximately 37 acres of the Mill Site Property, known as the Rancho Cucamonga parcel, to The California Speedway Corporation. The gross cash sale price was approximately $3.8 million.
West Valley MRF Property. At the time of the formation of West Valley in 1997, Kaiser Inc. contributed 23 acres of the former Mill Site Property, on which a 62,000 square foot building, sorting equipment and related facilities were constructed during Phase 1 of the West Valley MRF development. Under the terms of our agreements with West Valley, we contributed additional land approximating 7 acres after that land’s environmental remediation in 2000. We are also obligated to contribute the Tar Pits Parcel to West Valley MRF at its option, upon the environmental remediation of the Tar Pits Parcel in a manner suitable for use by West Valley MRF. The Tar Pits Parcel is the only acreage that we continue to own at the former Mill Site Property.
Mill Site Environmental Matters
The operation of a steel mill by the Company’s predecessor, KSC, resulted in known contamination of limited portions of the Mill Site Property. As discussed above, the Company’s consent order with the DTSC was terminated in connection with the sale of approximately 588 acres of the remaining Mill Site Property to CCG for $16 million in cash plus the assumption of virtually all known and unknown environmental obligations and risks associated with the property as well as certain other environmental
obligations. Concurrently with that termination, CCG entered into a new consent order with the DTSC, in which CCG assumed responsibility for all future investigation and remediation of the Mill Site Property it purchased, as well as various other items covered under its CCG consent order. In addition, CCG assumed and agreed to indemnify the Company against various contractual environmental indemnification and operations and maintenance (“O&M”) obligations the Company has with purchasers of other portions of the Mill Site Property. In connection with this land sale, CCG entered into a fixed price environmental remediation services agreement with IT Corporation (“IT”), an environmental contractor, to remediate the known environmental conditions on the property. IT filed for bankruptcy in January 2002, but certain of the assets of IT were eventually acquired by The Shaw Group, including the fixed price environmental contract. Accordingly, the fixed price environmental remediation services contract continues to be performed. In addition, CCG is obligated to remediate the Tar Pits Parcel pursuant to a solidification and capping strategy. The remediation of the Tar Pits parcel is also covered by the fixed price environmental remediation contract. Except for continuing inspection and maintenance obligations, the remediation of the Tar Pits Parcel has been completed.
Many of the environmental obligations assumed by CCG are backed, in whole or in part, by various financial assurance mechanisms or products. Examples of the financial assurances or products provided, include, but are not limited to: a performance bond issued to assure performance under the environmental remediation service agreement; a real estate environmental liability insurance policy with a policy limit of $50 million; a remediation stop loss policy covering $15 million in cost overruns for known remediation, which known remediation was estimated to be approximately $15 million; and a limited corporate guaranty by CCG’s parent company. All financial assurance mechanisms or products are subject to their terms. In addition, there are certain exceptions to CCG’s assumption of the Company’s prior environmental obligations such as any certain environmentally related litigation outstanding as of the date of the closing of the land sale to CCG.
With regard to groundwater, we previously settled certain obligations of groundwater contamination with the California Regional Water Quality Control Board, or the RWQCB, concerning a plume (containing total dissolved solids, sulfate, and organic carbon) to which the historic steel operations contributed. The settlement required us to make a $1.5 million cash payment, which was made in February 1994, and the contribution of 1,000 acre feet of water annually for 25 years to a water quality improvement project. In 1999, approximately 20 years ahead of schedule, we contributed the full 25,000 acre feet required under the terms of the settlement agreement with the RWQCB. This contribution of water satisfied all of the Company’s obligations to the RWQCB under the terms of the settlement agreement. CCG did not assume any of the Company’s future obligations, if any, with regard to the specified plume, and we retained potential liability from certain third party claims alleging damages from the identified groundwater plume. One such claim has been asserted against the Company. See “Part 1. Item 3. LEGAL PROCEEDINGS.”
As a result of the transaction with CCG and the Company’s previous remediation activities in 2000, the Company’s estimated environmental liabilities were reduced by approximately $21.9 to $4.5 million. These potential environmental liabilities included, among other things, environmental obligations at the Mill Site Property that were not assumed by CCG, such as any potential third party damages from the identified groundwater plume discussed above, environmental remediation work at the Eagle Mountain Site, and third-party bodily injury and property damage claims, including asbestos claims not covered by insurance and/or paid by the KSC bankruptcy estate.
In keeping with our goal to minimize our potential liabilities, including the potential liabilities outlined above, we purchased an insurance policy effective June 30, 2001. This insurance policy is designed to provide broad commercial general liability, pollution legal liability, and contractual indemnity coverage for Kaiser’s ongoing and historical operations. With the purchase of this policy, we were able to reduce our estimated environmental liabilities to zero. See “MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” in Part II, Item 7. of this Report on Form 10-K.
The Company is involved, from time-to-time, in legal proceedings concerning environmental matters. See “Part I, Item 3. LEGAL PROCEEDINGS.”
Employees
As of March 23, 2004, Kaiser LLC had no employees. However, Kaiser LLC leases employees through Business Staffing, Inc., a subsidiary of Kaiser LLC, and reimburses Business Staffing for the costs associated with 8 full-time (4 at Ontario, California and 4 at Eagle Mountain, California) and 3 part-time employees at Ontario, California. It is anticipated that the number of full time employees at Eagle Mountain will be reduced in 2004 as a result of the closure of the private prison that was operated through the end of 2003. All of the full-time and part time employees were previously employed by Kaiser Inc.
Item 2.
Item 2. PROPERTIES
Office Facilities
Our principal offices are located at 3633 East Inland Empire Boulevard, Suite 480, Ontario, California, 91764. The Company currently leases approximately 2,950 square feet in Ontario, California at a current cost of approximately $6,900 per month. The lease expires on August 31, 2007, with the right to terminate the lease upon prior written notice effective as of February 28, 2006. Our subsidiary, Kaiser Eagle Mountain, LLC, also currently maintains an office at the Eagle Mountain Site. We own the building used as an office at the Eagle Mountain Site.
Eagle Mountain, California
The Kaiser Eagle Mountain idle iron ore mine and the adjoining Eagle Mountain Townsite are located in Riverside County, approximately ten miles northwest of Desert Center, California. Desert Center is located on Interstate 10 between Indio and Blythe. The heavy duty maintenance shops and electrical power distribution system have been kept substantially intact since the 1982 shutdown. The Company also owns several buildings, a water distribution system, a sewage treatment facility, and related infrastructure. The District, upon its purchase of the landfill project, will own a substantial portion of this infrastructure. Accordingly, the District and the Company are negotiating a number of agreements addressing access and joint use of infrastructure facilities. The Eagle Mountain Townsite includes more than 300 single family homes, approximately 100 of which have been renovated. However, due to the closure of the private prison at the Eagle Mountain Townsite effective December 31, 2003, we are in the process of developing and implementing a plan to mothball the Townsite.
During 2003 a portion of the Eagle Mountain Townsite was leased on a month-to-month basis to MTC that operated a minimum security prison under contract with the State of California. Funding for many private prisons was eliminated from California’s 2003 - 2004 state budget as of December 31, 2003, including the private prison located at Eagle Mountain. Accordingly, effective December 31, 2003, the private prison at Eagle Mountain was closed with most of the leased property returned to us as of that date, with the exception of several houses that it continued to lease through February 2004. As of the date of this Report on Form 10-K, we have not had any success in finding a replacement tenant and thus, we are in the process of developing and implementing a plan to mothball the Eagle Mountain Townsite which we expect to complete by the end of the third quarter of 2004. With the closure of the private prison, Eagle Mountain’s ongoing operations and staffing will be reduced. The Company has recorded a reserve for the costs of such a reduction in activity, the adequacy of which management will continue to review.
In and around the Eagle Mountain area the Company has various possessory mining claims of approximately 3,509 acres and holds approximately 5,635 acres in fee simple (which includes the Eagle Mountain Townsite). Approximately 4,654 acres of this property will be sold as a part of sale of the landfill project, assuming such sale is completed. See “Part I, Item 1. BUSINESS - Eagle Mountain Landfill Project.”
The Company owns four deep water wells, of which two are currently being used, and two booster pump stations that serve the Eagle Mountain Site.
Railroad
To transport ore from the Eagle Mountain mine to the mill site (see below), Kaiser Steel Corporation constructed a 52-mile heavy duty rail line connecting the mine to the main Southern Pacific rail line at Ferrum, California. We own in fee approximately 10% of the 52-mile railroad right-of-way. The major remaining portion of the railroad right-of-way consists of various private easements and an operating right-of-way from the BLM. The railroad is included in the lease to MRC and, to the extent reasonably possible, will be transferred to the District upon the consummation of the sale of the landfill project if the sale is completed. Portions of the railroad suffered significant flood damage in 2003. For additional information, see “Part I, Item 1. BUSINESS - Eagle Mountain Landfill Project and Pending Sale - Flood Damage to Railroad.”
Fontana, California
With exception of the approximate 5 acre Tar Pits Parcel, the Company no longer owns any property at the former Mill Site Property. With the exception of ongoing maintenance and inspection obligations, the environmental remediation of this parcel has been completed. See “Part 1, Item 1. BUSINESS - Historical Operations and Completed Transactions - Mill Site Property.”
Lake Tamarisk, California
Lake Tamarisk is an unincorporated community located two miles northwest of Desert Center, California and approximately 8 miles from the Eagle Mountain mine. This community has 150 improved lots situated around two recreational lakes and a nine-hole golf course. With 70 homes and a 150-space mobile home park, the community has an average year-round population in excess of 150. Lake Tamarisk Development LLC, a wholly-owned subsidiary of the Company, owns 77 improved lots including one residential structure. Lake Tamarisk, LLC also owns a 240 acre parcel of unimproved land across the highway from the main entrance to Lake Tamarisk and an approximate 200 acre parcel of unimproved land adjoining the golf course.
Other Real Estate Properties
Several parcels near Walsenburg, Colorado were sold on an “as is” basis in 2003 for less than $100,000 with the Kaiser Steel bankruptcy estate receiving the net proceeds from the sale.
Item 3.
Item 3. LEGAL PROCEEDINGS
Kaiser, in the normal course of its business, is involved in various claims and legal proceedings. A number of litigation matters previously reported have settled and such settlements did not have a material adverse impact on our financial statements. Significant legal proceedings, including those which may have a material adverse effect on our business or financial condition, are summarized below. However, the following discussion does not, and is not intended to, discuss all of the litigation matters to which we
may be or become a party. Should we be unable to resolve any legal proceeding in the manner we anticipate and for a total cost within close proximity to any potential damage liability we have estimated, our business and results of operations may be materially and adversely affected.
Litigation
Eagle Mountain Landfill Project Land Exchange Litigation. In October 1999, Kaiser’s wholly-owned subsidiary, Kaiser Eagle Mountain, Inc., completed a land exchange with the BLM. This completed land exchange has been challenged in two separate federal lawsuits.
Federal Land Exchange Litigation. There are two separate, but related, litigation matters in federal district court involving the completed land exchange between Kaiser Eagle Mountain, Inc, and the BLM. The details of each case are as follows:
A. Donna Charpied; Laurence Charpied; The Desert Protection Society (Plaintiffs) v. United States Department of the Interior; Bureau of Land Management; Bruce Babbitt, in his official capacity as Secretary of the Interior; Tom Fry, in his official capacity as Acting Director of the Bureau of Land Management; Al Wright, in his official capacity as Acting California State Director of the Bureau of Land Management; Tim Salt, in his official capacity as Bureau of Land Management California Desert District Manager; Robert Stanton, in his official capacity as Director of the National Park Service, Kaiser Eagle Mountain, Inc., and Mine Reclamation Corporation (Defendants), (United States District Court for the Central District of California, Riverside Division, Case No. EDCV 99-0454 RT(MCx)).
In December 1999, opponents of Eagle Mountain landfill project filed a lawsuit in the federal district court located in Riverside, California seeking to stop the Eagle Mountain landfill project. In summary, the lawsuit challenges the BLM’s approval of a land exchange between the Company and the BLM. The challenges are based upon, among other things, the Company’s and the BLM’s alleged failure to comply with the National Environmental Policy Act and the Federal Land Policy Management’s Act. The relief sought is an unwinding of the land exchange that was completed on October 13, 1999, and the award of attorneys’ fees. The National Park Service has been dismissed out of the lawsuit. In Desert Citizens Against Pollution v. Bisson, (Ninth Circuit Court of Appeals, Case No. 97-55429), the Court of Appeals concluded, among other things, that the BLM did not properly value the land being acquired by the competing Mesquite rail-haul landfill project and ordered a reversal of the land exchange. The court concluded that the appraisal should have considered the highest best use of the lands being acquired from the BLM as a landfill. The court did not, however, determine the proper valuation of the exchanged lands. The plaintiffs in Kaiser’s federal land exchange litigation have amended their respective complaints to include allegations that the appraisal used in Kaiser’s land exchange with the BLM is similarly defective.
In light of the Bisson ruling, the BLM has completed an independent review of the “highest and best use” analysis consistent with that discussed in the Bisson decision. The BLM’s independent appraiser concluded that there would be no change in the determination of the “highest and best use” analysis in the appraisal used in the land exchange if the property involved was expressly considered as a land fill site. Given all the facts and circumstances, the independent appraisal concluded that there was no premium to be paid for the property interests exchanged by the BLM even if a portion of such property interests were a part of a planned landfill.
All scheduled briefing for the case was completed in January 2003. We are currently awaiting a decision from the court. Kaiser is vigorously defending the litigation.
B. National Parks and Conservation Association (Plaintiff) v. Bureau of Land Management; United States Department of the Interior; Kaiser Eagle Mountain, Inc.; and Mine Reclamation Corporation
(Defendants), (United States District Court for the Central District of California, Riverside Division, Case No. EDCV 000041 VAP(JWJx)).
This lawsuit was brought by the National Parks Association and alleges causes of action that are virtually identical to the causes of action asserted in the Charpied litigation. All scheduled briefing has been completed for this litigation. Kaiser is also vigorously defending this matter.
Threatened Endangered Species Act Litigation. The Company along with the U.S. Department of Interior, the BLM, the Los Angeles County Sanitation District and Metropolitan Water District of Southern California, received a letter dated September 26, 2002, from the Center for Biological Diversity, the Sierra Club, Citizens for the Chuckwalla Valley (“Complaining Groups”) declaring their intent to sue for violations of the Endangered Species Act in regard to actions or inactions related to the railroad that would serve the Eagle Mountain landfill project. Among other things, it is alleged that there has been a failure to comply with a biological opinion issued by the U.S. Fish & Wildlife Service and that the BLM has failed to enforce the terms of that biological opinion. In summary, the Complaining Groups are demanding enforcement of the biological opinion or revocation by the BLM of the right-of-ways granted for the existing Eagle Mountain railroad and the Eagle Mountain road. The biological opinion contains, among other items, mitigation measures for the desert tortoise which could require substantial expenditures.
In reviewing the complaints of the Complaining Group, the BLM, out of an abundance of caution, conducted an informal consultation with the U.S. Fish & Wildlife Service with respect to the biological opinion. Although neither the construction of the landfill project nor the regular use of the railroad has commenced, the BLM requested the Company to develop a maintenance schedule for the railroad that would address, among other things, the particular concerns of culverts and rail line ballast. The Company has submitted a proposed schedule which is under review by the BLM.
Warrant Dispute. New Kaiser Employees’ Voluntary Benefit Association, VEBA, and Pension Benefit Guaranty Corporation, PBGC, are the beneficial owners of warrants to purchase, respectively, 460,000 and 285,260 Class A Units in the Company (the warrants were initially for common stock of Kaiser Inc. and were converted into Class A Units of Kaiser LLC in the merger). VEBA and PBGC have each claimed that the treatment of its warrant in the conversion violated the terms of the warrant. Prior to the vote on the conversion proposal, it was agreed by Kaiser, VEBA and PBGC that the rights of each VEBA and PBGC, under its warrant, would not be changed or waived by (i) any consent to or approval of the conversion proposal by either VEBA, PBGC or any director representing either of them, or (ii) any decision by either the VEBA or the PBGC to delay any potential legal challenge until after the adoption and completion of the conversion proposal. VEBA and PBGC voted their respective shares in Kaiser Inc. in 2001 in favor of the conversion proposal. VEBA and PBGC each occasionally continue to assert that the conversion proposal violated the terms of its warrant. We have had several discussions with VEBA representatives concerning the claim and we believe the claim does not have any merit. Neither the VEBA nor the PBGC have taken legal action to pursue the claim.
Tex Tin Claim. In February 2004 we received correspondence identifying the Company as a potentially responsible party for remediation and related costs at a property in Texas known as the Tex Tin site. It appears that the basis for such identification is that the Company is considered the reorganized successor to KSC. However, the factual basis and the monetary extent of the alleged liability are currently unknown. No legal action has been commenced against the Company. We have informed those giving the notice that we believe such liability, if any, was discharged in the bankruptcy of KSC. We also believe that there is coverage under our existing insurance for this claim.
Asbestos Litigation. There are pending asbestos litigation claims, primarily bodily injury, against Kaiser LLC and Kaiser Steel Corporation (the bankruptcy estate of Kaiser Steel Corporation is embodied
in KSC Recovery, Inc.). There currently are approximately 14 active suits. Most of the plaintiffs allege that they were aboard Kaiser ships or worked in shipyards in the Oakland/San Francisco, California area or Vancouver, Washington area in the 1940’s and that the Company and/or KSC Recovery were in some manner associated with one or more shipyards or has successor liability. However, we are beginning to see the focus of the claims shifting from ships and shipyards to other facilities such as the former Kaiser Steel Mill Site Property. Plaintiffs attorneys are increasingly requesting mill site and Eagle Mountain related documents in an effort to build a “war chest” of documents for future litigation.
Most of these lawsuits are third party premises claims alleging injury resulting from exposure to asbestos or asbestos containing products and involve multiple defendants. The Company anticipates that it, often along with KSC Recovery, will be named as a defendant in additional asbestos lawsuits. A number of large manufacturers and/or installers of asbestos and asbestos containing products have filed for bankruptcy over the past several years, increasing the likelihood that additional suits will be filed against the Company. In addition, the trend has been toward increasing trial damages and settlement demands. Virtually all of the complaints against us and KSC Recovery are non-specific, but involve allegations relating to pre-bankruptcy activities. It is difficult to determine the amount of damages that we could be liable for in any particular case until near the time of trial; indeed, many of these cases do not include pleadings with specific damages. The Company vigorously defends all asbestos claims as is appropriate for a particular case.
Of the claims resolved to date, approximately 76% have been resolved without payment to the plaintiffs, and of the 40 cases that have been settled to date involving a payment made to plaintiffs, the settlement amount was $37,500 or less for 32 of such cases. The Company believes that it currently has substantial insurance coverage for the asbestos claims and has tendered these suits to appropriate insurance carriers.
City of Ontario Claim. In 2001, the California Regional Water Quality Control Board (“RWQCB”) communicated with us that the City of Ontario had asserted that we were responsible for the damage caused by a plume of high total dissolved solids (such as salt) to one of its wells, which plume allegedly emanated from our former mill site property. By way of background, in the fall of 1993, RWQCB approved a settlement agreement resolving the Company’s groundwater remediation obligation. The settlement agreement provided that the Company would: (i) pay $1,500,000 upon approval of the settlement agreement; and (ii) contribute 1,000 acre feet of water in storage per year for 25 years for the benefit of a regional groundwater de-salter program either by direct transfer to the de-salter project or abandonment to the basin with a Watermaster waiver of the de-salter replenishment obligation. We have satisfied all of its obligations under the settlement agreement. However, the settlement agreement left open the possibility of certain third party claims. The City of Ontario’s claims were fully settled in March 2004 with the settlement paid by one of our insurance carriers.
Slemmer Litigation. Thomas M. Slemmer, et al v. Fontana Union Water Company, et al., (San Bernardino County District Court, California, Case No. SCVSS 086856). The defendants in the lawsuit are Kaiser, Fontana Union Water Company, Cucamonga County Water Company, San Gabriel Valley Water and individuals serving on the Board of Directors of Fontana Union Water Company. In summary, plaintiffs allege that they are the owners of 175 shares of the stock of Fontana Union Water Company, a mutual water company, and that the defendants conspired and committed acts that constitute an unlawful restraint of trade, a breach of fiduciary duty by the controlling shareholders of Fontana Union and fraudulent business practices in violation of California law. Among other things, plaintiffs have requested $25,000,000 in damages and the trebling of such damages under California law. In October 2003, the court ruled that the lawsuit could proceed as a class action lawsuit. With this ruling, discovery will proceed in the case. We believe that the allegations against us are without merit and we will vigorously defend this suit.
Port of Oakland. The Port of Oakland continues to assert a potential claim arising out of alleged contamination of soil from underground storage tanks. The Port of Oakland alleged that KSC used these tanks at property owned by the Port of Oakland and leased by Kaiser Steel Corporation pursuant to a lease agreement that terminated in 1986. Based upon the communication received, the Port of Oakland claims damages of approximately $150,000 plus unknown potential remediation costs. We believe, based upon the information provided to date, that the allegations are without merit and that any potential claim would be barred under the statute of limitations.
Port of Los Angeles. On March 21, 2003, KSC received a Third Party Complaint captioned Santa Monica Baykeeper, et al (Plaintiffs) v. Kaiser International Corporation, et al (Defendants) / American Bulk Loading Enterprises, Inc. et al (Third-Party Plaintiffs) v. AMICOR, et al (Third Party Defendants) United States District Court Central District of California; Case Number CV-97-7761 DDP (RCx). The underlying litigation involves a citizens enforcement action commenced against the Port of Los Angeles, Kaiser International Company, and others by the Santa Monica Baykeepers for alleged contamination to the San Pedro Inner Harbor in the Port of Los Angeles arising from the operation of a bulk loading facility. The Third Party Plaintiffs subsequently commenced litigation against KSC and thirty-nine other Third Party Defendants seeking recovery for any amount paid by the Third Party Defendants under theories of equitable indemnity, negligence and contribution. While we understand the case is still open, the litigation is not being actively pursued against KSC.
London Market Claim. In 2002, litigation was commenced by Truck Insurance Exchange (“Truck”) against Lloyd’s, London, and certain London Market Insurance Companies (collectively “London Carriers”), captioned Truck Insurance Exchange v. Fremont Indemnity, et al, Los Angeles Superior Court Case No. BC 260738. In essence Truck was claiming that the London Carriers were obligated to participate in the payment of a litigation settlement that Truck had made. The London Carriers tendered the claim to the Company for indemnification pursuant to a 1995 settlement agreement between the London Carriers and the Company. The Company in turn submitted the London Carriers’ claim to IMACC, which is a third party that we believe is ultimately responsible for the payment of any amount that it determined to be owed in litigation. During the second quarter of 2003, the Truck litigation was dismissed because of Truck’s failure to commence its law suit within the applicable statute of limitations. As of the date of this Report on Form 10-K, IMACC has been reimbursing the London Carriers for the reasonable attorneys’ fees and costs of this litigation. We understand the Truck has decided to appeal the trial court’s decision to dismiss the case.
Dismissal of Product Liability Litigation. In March 2002, we received a complaint in the mail captioned Explorer Pipeline Company, et al v. Kaiser Steel Corporation, et al., (District Court of Tarrant County, Texas, Case No. 96-191821-02). The plaintiffs in this suit allege that KSC, or possibly other steel companies may have manufactured or sold pipe that was used in a portion of a petroleum pipeline that runs from the Texas Gulf Coast to Hammond, Indiana. It was further alleged that this portion of the pipeline was defective and ruptured on March 9, 2000, releasing gasoline and causing damage to the plaintiffs’ respective interests in land and that there were business interruption damages to certain of the plaintiffs. Plaintiffs filed this lawsuit because of statute of limitations concerns without knowing who may have actually sold or manufactured the pipe in the ruptured section of the pipeline. A National Transportation & Safety accident report identified another company as the maker of the ruptured pipe. On March 2, 2004, the Company was dismissed from the lawsuit.
Bankruptcy Claims. The bankruptcy estate of KSC was officially closed by order of U.S. Bankruptcy Court for the District of Colorado on October 2, 1996. However, the bankruptcy case was reopened in 1999 in connection with certain litigation matters. Since that time, the bankruptcy case was again closed, however, the administration of KSC’s bankrupt estate will continue for several more years.
From time to time various environmental and similar types of claims that relate to Kaiser Steel pre-bankruptcy activities, are asserted against KSC and Kaiser LLC. Excluding the asbestos claims, there has been an average of two to four such claims a year for the past several years. The Explorer Pipeline litigation and the Port of Oakland claims are examples of the types of claims that are occasionally alleged to have arisen out of pre-bankruptcy activities. In connection with the KSC plan of reorganization, Kaiser, as the reorganized successor to KSC, was discharged from all liabilities that may have arisen prior to confirmation of the plan, except as otherwise provided by the plan and by law. Although Kaiser believes that in general all pre-petition claims were discharged under the KSC bankruptcy plan, there have been some challenges as to the validity of the discharge of certain specified claims, such as asbestos claims. If any of these or other similar claims are ultimately determined to survive the KSC bankruptcy, it could have a materially adverse effect on Kaiser’s business and value.
Item 4.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR THE COMPANY’S EQUITY AND RELATED OWNER MATTERS
Kaiser Inc.’s common stock commenced trading on the NASDAQ Stock Marketsm in the fourth quarter of 1990 under the symbol “KSRI.” In the merger, each Kaiser Inc. stockholder of record as of December 5, 2001, received $10.00 in cash plus one (1) Class A Unit in Kaiser LLC for each share of stock. The Class A Units are subject to significant trading restrictions and are not listed for trading on any securities exchange. As a result, Kaiser Inc.’s common stock ceased being publicly traded on November 30, 2001. Kaiser Inc. paid a $2.00 per share cash distribution to stockholders of record as of December 13, 2000.
The Class A Units are subject to substantial transfer restrictions and, therefore, the Class A Units are not traded on an established securities market and are not readily tradable on a secondary market or the substantial equivalent thereof. However, we are aware that there have been a very limited number of private purchase and sale transactions since November 30, 2001, with no single purchase and sale transaction involving more than 15,000 Class A Units. We understand that the sales price in the private transactions has ranged from $1.00 to $1.50 per Class A Unit. In connection with the merger, the Class A Units were independently appraised and determined to have a value of $1.50 as of November 30, 2001.
As of March 23, 2004, there were approximately 3,108 holders of record of our Class A Units which includes holders of Kaiser Inc. stock that have yet to convert their shares to Class A Units as a result of the merger.
As of March 23, 2004, KSC Recovery held 126,598 Class A Units that are outstanding but reserved for distribution to the former general unsecured creditors of KSC pursuant to the KSC Plan. It is anticipated that a distribution of up to 65,000 Class A Units will be made to the former general unsecured creditors of the KSC bankruptcy estate in the second quarter of 2004.
We currently have no immediate plans to make distributions but anticipate making distributions subsequent to receiving our share of the proceeds from the sale of the Eagle Mountain landfill project if such sale is completed.
Equity Compensation Plan Information
As required by Item 201(d) of Regulation S-K, the following table provides certain information as of December 31, 2003, with respect to our equity compensation plans under which equity securities of the Company are authorized for issuance.
This table does not include warrants issued to VEBA and the PBGC in connection with the repurchase of certain of their respective shares in Kaiser, Inc. For additional information see “Item 12. Securities Ownership of Certain Beneficial Owners and Management - Principal Unit Members.”
Each non-management member of the Board of Managers receives an annual grant of 2,500 Class A Units. Accordingly, 7,500 Class A Units are currently being issued each year. For additional information, see “Item 11. Executive Compensation - Manager Compensation.”
Item 6.
Item 6. SELECTED FINANCIAL DATA
The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included herein.
(1) The deferred tax expense credited to equity represents taxes that were recorded by the Company for financial reporting purposes, but were not payable due to the Company’s utilization of Net Operating Loss (“NOL”) benefits from losses arising prior to and through the KSC bankruptcy. Although the amount of this benefit was not included in net income, stockholders’ equity was increased in an amount equal to the NOL tax benefit reported. There were no remaining NOL carryforwards at December 31, 2001.
(2) Through November 30, 2001, Kaiser’s equity consisted of common stock. As of November 30, 2001, the effective date of the merger, Kaiser’s equity ownership was converted into Class A Units in Kaiser Ventures LLC. At December 31, 2003, 2002, and 2001, Kaiser Ventures LLC had 751,956 Class B Units outstanding. At December 31, 2003 and 2002, Kaiser Ventures LLC had 952 and 48, Class C and D Units outstanding, respectively. There were no Class C and D units outstanding at December 31, 2001.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Section 1: Operating Results
Summary Background
Kaiser, including its wholly-owned subsidiaries unless otherwise provided herein, is the reorganized successor to Kaiser Steel Corporation which was an integrated steel manufacturer that filed for bankruptcy protection in 1987 (“KSC”). Since the KSC bankruptcy, we have been developing certain assets remaining after the bankruptcy. As of the date of this Report on Form10-K, our remaining principal assets include: (i) an 82.48% ownership interest in Mine Reclamation, LLC, which owns a permitted rail-haul municipal solid waste landfill located at the Eagle Mountain Site; (ii) a 50% ownership interest in the West Valley Materials Recovery Facility and Transfer Station; and (iii) approximately 5,400 additional acres owned or controlled by Kaiser at the Eagle Mountain Site that are not included in the pending sale to the County District No. 2 of Los Angeles County (which we refer to as the District). As of December 31, 2003, we also had cash and cash equivalents, receivables and long-term investments in securities of approximately $15.2 million. As previously discussed, the permitted rail-haul municipal solid waste landfill project at Eagle Mountain is currently under contract to be sold to the District for approximately $41 million.
We have sought to sell our assets at such times and on such terms as we believe will generate maximum value from those assets. In September 2000, Kaiser Inc.’s Board of Directors approved a strategy to maximize cash distributions to Kaiser Inc.’s stockholders. We continue to pursue this strategy and seek to liquidate our remaining assets in order to maximize cash distributions to our members.
Primary Revenue Sources
Ongoing Operations
Kaiser’s revenues from ongoing operations are generally derived from the development of our long-term projects. Income from equity method investments reflect Kaiser’s share of income related to those equity investments (i.e., West Valley MRF) which we account for under the equity method. Revenues from water resources represent payments received under the lease of our interest in Fontana Union to Cucamonga, which was sold in 2001.
Interim Activities (net)
Revenues and expenses from interim activities are generated from various sources. Significant components of interim activities include housing rental income, aggregate and rock sales and lease payments for the minimum security prison at the Eagle Mountain Site. Due to the interim nature of these activities, we are presenting these revenues net of their related expenses. Due to the termination of the minimum security prison lease at the Eagle Mountain Townsite as of December 31, 2003, interim revenues are expected to decline significantly in 2004. Expenses at the Eagle Mountain Townsite will remain at historical levels while the Townsite operations are being closed down and we are in the process of developing and implementing a plan to mothball its facilities.
Summary of Revenue Sources
Due to the developmental nature of certain of our projects and our recognition of revenues from bankruptcy-related and other non-recurring items, historical period-to-period comparisons of total
revenues may not be meaningful for developing an overall understanding of the Company. Therefore, we believe it is important to evaluate the trends in the components of our revenues as well as the recent developments regarding our long-term ongoing and interim revenue sources. See “Part I, Item 1. BUSINESS” for a discussion of recent material events affecting the Company’s revenue sources.
Results of Operations
Analysis of Results for the Years Ended December 31, 2003 and 2002
An analysis of the significant components of our resource revenues for the years ended December 31, 2003 and 2002 follows:
Resource Revenues. Total resource revenues for 2003 were $2,274,000, compared to $1,394,000 for 2002. Revenues from ongoing operations increased 48% for 2003 to $2,388,000 from $1,609,000 in 2002, while the loss from interim activities (net of related expenses) decreased 47% to $114,000 from $215,000 in 2002.
Ongoing Operations. Income from equity method investments increased by $779,000 to $2,281,000 due to increased equity income from the West Valley MRF during 2003 compared to 2002. This increase in equity income in the West Valley MRF is mainly due to: (a) a 17% increase in volume of waste processed at the West Valley MRF ($626,000); (b) an increase in net recyclable sales mainly due to higher commodity prices ($140,000); (c) reduced repairs and maintenance expenses ($172,000); and (d) a decrease in interest expense ($40,000). These increases in revenues and reductions in expenses were partially offset by an increase in payroll and related operating expenses ($221,000).
Gain on Mill Site land sales. The Company recognized gains of $107,000 during both 2003 and 2002, from the sales of certain Mill Site property parcels that closed in 1997 and 1999.
Interim Activities (net). Interim activities, net of expenses, for 2003 were a loss of $114,000 compared to a loss of $215,000 for 2002. This reduction in interim activities losses is only temporary and was primarily due to higher nonrecurring revenues ($108,000) being offset by slightly higher operating expenses ($7,000). This nonrecurring revenue consists of income from a salvage/scrap contract and onetime location fees for a movie. Due to the termination of the minimum security prison lease at the Eagle Mountain Townsite as of December 31, 2003, (see the following paragraph for details) interim revenues are expected to decline significantly in 2004. Expenses at the Eagle Mountain Townsite will remain at historical levels while the Townsite operations are being closed down and its facilities are being mothballed.
During 2003, a portion of the Eagle Mountain Townsite was leased on a month-to-month basis to Management Training Corporation (“MTC”), a company that operates a minimum security prison under contract with the State of California. Funding for many private prisons was eliminated from California’s 2003 - 2004 state budget as of December 31, 2003, including the private prison located at Eagle
Mountain. Accordingly, effective December 31, 2003, the private prison at Eagle Mountain was closed. MTC surrendered most of the property it leased as of December 31, 2003, with the exception of several houses that it continued to lease through February 2004. As of the date of this Report on Form 10-K, we have not had any success in finding a replacement tenant and thus, we are in the process of developing and implementing a plan to mothball the Eagle Mountain Townsite which should be completed by the end of the third quarter of 2004. With the closure of the private prison, Eagle Mountain’s ongoing operations and staffing will be reduced. The Company has recorded a reserve for the costs of such a reduction in activity, the adequacy of which management will continue to review.
MRC Casualty Loss. During the third quarter of 2003, portions of the 52-mile Eagle Mountain railroad and related protective structures sustained considerable damage due to heavy rains and flash floods. The damage included some rail sections being buried under silt while other areas had their rail bed undermined. We currently estimate the cost of repairing this damage to be $4,500,000, $300,000 of which we expect to be incurred in 2004. As a result, the Company has recorded a reserve and a charge to earnings in the amount of $4,500,000 during 2003 to cover the cost of these repairs.
Corporate General and Administrative Expenses. Total corporate general and administrative expenses for 2003 increased 10% to $2,791,000 from $2,526,000 for 2002. The increase is primarily due to one time retention payments ($1,031,000) made as of June 30, 2003, to senior management under the terms of their respective employment agreements negotiated in 2000. This increase was substantially offset by: (a) reduced staffing expenses ($330,000); (b) lower non-recurring severance costs ($193,000); (c) the elimination of a previously established reserve during 2003 ($189,000); and (d) lower office rent expenses ($52,000). The reserve eliminated had been established in previous years for certain possible liabilities that were resolved during 2003, and thus the reserve was determined to be unnecessary and was reversed against general and administrative expenses.
Net Interest and Investment Income. Net interest and investment income for 2003 was $627,000 compared to $497,000 in 2002. The change was due to increased gains on investments ($243,000) and increased dividend income ($118,000) being partially offset by lower interest income ($232,000).
Loss before Minority Interest and Income Tax Provision. The Company recorded a loss before minority interest and income tax provision of $4,390,000 for 2003 versus $635,000 for 2002.
Minority Interest. The minority unitholders in MRC were allocated $789,000, or 17.52%, of the $4,500,000 recorded casualty loss that was incurred due the heavy rains and flash flood damage on the 52-mile Eagle Mountain railroad.
Pre-Tax Income (Loss) and Income Tax Provision. The Company recorded a loss before income tax provision of $3,601,000 for 2003, versus a loss of $635,000 recorded in 2002. Subsequent to the Company’s conversion into an LLC, the Company is taxed as a partnership and, thus, the Company’s results of operations (on an income tax basis) are distributed to the unit holders for inclusion in their respective income tax returns. Therefore, the only taxes imposed on the Company are a small gross revenue tax imposed by the State of California, and income taxes imposed on Business Staffing Inc., a subsidiary of the Company. These taxes amounted to $16,000 for 2003, versus $18,000 for 2002. Additionally, during 2003, the Company recorded a $46,000 tax expense while in 2002, the Company recorded a tax benefit of $585,000, both of which related to activity prior to its conversion to a limited liability company. The additional income tax expense for 2003 was the result of a finalization of a State of California income tax audit for 1999. The benefit for 2002 was the result of changes in the Federal tax law and finalization of the Company’s Federal income tax returns for 2001.
Net Income (Loss). For 2003, the Company reported a net loss of $3,663,000 or $0.53 per unit, versus a net loss of $68,000, or $0.01 per unit, reported for 2002.
Results of Operations
Analysis of Results for the Years Ended December 31, 2002 and 2001
An analysis of the significant components of our resource revenues for the years ended December 31, 2002 and 2001 follows:
Resource Revenues. Total resource revenues for 2002 were $1,394,000, compared to $68,051,000 for 2001. Revenues from ongoing operations decreased 98% for 2002 to $1,609,000 from $68,307,000 in 2001, while the loss from interim activities (net of related expenses) decreased 16% to $215,000 from $256,000 in 2001.
Ongoing Operations. During the first quarter of 2001, we completed the sale of our investment in Fontana Union to Cucamonga (to whom the shares were leased under a 102 year lease) for $87.5 million, resulting in a gain of $65.2 million. Included in the net gain of $65.2 million was the payment of $1.0 million to management pursuant to our Long-Term Transaction Incentive Program. Accordingly, water lease revenues under our 102-year take-or-pay lease with Cucamonga were $0 during 2002 compared to $295,000 for 2001.
During the first quarter of 2001, we also sold our California Mine properties for $2.0 million, resulting in a gain of $1,756,000. Finally in both 2002 and 2001, we recognized deferred gains of $107,000 from the sales of certain Mill Site property parcels that closed in 1997 and 1999.
Income from equity method investments increased by $524,000 to $1,502,000 due to increased equity income from the West Valley MRF during 2002 compared to 2001. This increase in equity income in the West Valley MRF is mainly due to a 12% increase in volume of waste processed at the West Valley MRF ($575,000); an increase in net recyclable sales due to higher commodity prices ($400,000); and a decrease in interest expense ($60,000). These increases were partially offset by increases in (a) repairs and maintenance ($185,000); (b) depreciation expense due to the facility expansion that was completed in May 2001 ($165,000); and (c) other operational and overhead expenses ($165,000).
Interim Activities (net). Interim activities, net of expenses, for 2002 were a loss of $215,000 compared to a loss of $256,000 for 2001. This reduction in interim activities losses is only temporary and is primarily due to the reimbursement of salaries and expenses by Mine Reclamation LLC on a capital improvement project which was concluded during the second quarter of 2002 ($75,000).
Resource Operating Costs. Resource operating costs are those costs directly related to the associated resource revenue. Total resource operating costs for 2002 decreased to $0 from $42,000 in 2001. This decrease was due to a decrease in the commission and outside legal costs associated with the Cucamonga lease. These expenses terminated with the sale of the Company’s investment in Fontana Union on March 6, 2001.
Corporate General and Administrative Expenses. Total corporate general and administrative expenses for 2002 decreased 63% to $2,526,000 from $6,861,000 for 2001. The decrease is primarily due to: (a) lower professional and outside consulting expenses ($1,740,000); (b) the absence of expenses relating to the exercise of nonqualified stock options ($1,288,000); (c) lower salary and benefit expense ($975,000); and (d) lower non-cash variable stock option accounting expenses ($428,000) being partially offset by the elimination of a previously established reserve during 2001 ($100,000). This reserve was established for certain assets that were sold in the first quarter of 2001, and thus was determined to be unnecessary and was reversed against general and administrative expense.
Net Interest Income. Net interest income for 2002 was $497,000 compared to $2,532,000 in 2001. The reduction was due primarily to: (a) a decrease in interest income due to lower cash and investment balances on hand and lower interest rates ($2,073,000); and (b) a decrease in interest expense ($39,000) primarily associated with the Company’s $30,000,000 revolving-to-term credit facility with Union Bank which was terminated prior to the Company’s sale of its Fontana Union stock (the collateral for the debt).
Loss before Minority Interest and Income Tax Provision. The Company recorded a loss before minority interest and income tax provision $635,000 for 2002, versus income of $63,680,000 recorded in 2001.
Pre-Tax Income (Loss) and Income Tax Provision. The Company recorded a loss before income tax provision of $635,000 for 2002, versus income of $63,680,000 recorded in 2001. Subsequent to the Company’s conversion into an LLC, the Company is taxed as a partnership and, thus, the Company’s results of operations (on an income tax basis) are distributed to the unit holders for inclusion in their respective income tax returns. Therefore, the only taxes imposed on the Company are a small gross revenue tax imposed by the State of California, and income taxes imposed on Business Staffing Inc., a subsidiary of the Company. The total tax expense recorded for 2002 was $18,000. Additionally, during 2002, the Company recorded an income tax benefit of $585,000. This benefit was the result of changes in the Federal tax law and finalization of the Company’s income tax returns for 2001 and related solely to activity prior to its conversion to a limited liability company.
Net Income (Loss). For 2002, the Company reported a net loss of $68,000 or $0.01 per unit, versus net income of $49,024,000, or $7.45 per unit, reported for 2001.
Section 2: Financial Position
Cash, Cash Equivalents and Investments. We define cash equivalents as highly liquid debt investment instruments with original maturities of 90 days or less. Cash and cash equivalents decreased $6,785,000 to $3,562,000 at December 31, 2003 from $10,347,000 at December 31, 2002. Included in cash and cash equivalents is $2,069,000 and $1,335,000 held solely for the benefit of MRC at December 31, 2003 and December 31, 2002, respectively. The decrease in cash and cash equivalents is primarily due to: (a) the net investment of $6.4 million of excess cash in short-term investments; (b) $2.1 million of cash used by operations (exclusive of purchase of investments); and (c) capitalized MRC expenditures of $1.1 million. These cash uses were partially offset by receipt of cash distributions from the West Valley MRF of $2.3 million and collections on notes and accounts receivable totaling $593,000.
Working Capital. During 2003, current assets increased $4.7 million to $16.2 million, while current liabilities increased $1.8 million to $2.8 million. The increase in current assets resulted primarily from the $10.1 million increase in short-term investments and a $1.3 million increase in restricted cash, being mostly offset by a $6.8 million decrease in cash and cash equivalents as discussed above. The restricted cash is the result of receiving $1,300,000 in cash from the Company’s transfer agent as discussed below. The increase in current liabilities resulted primarily from: (a) the $1,340,000 increase in the conversion distribution payable, as discussed below; (b) the moving of the balance of the deferred real estate gain to current; and (c) the $300,000 current portion of the $4,495,000 accrual to repair the 52-mile Eagle Mountain railroad. Included in current liabilities as of December 31, 2003 is $376,000 in accounts payable and accrued liabilities relating to MRC. As a result, working capital increased during 2003 by $2.9 million to $13.3 million at December 31, 2003.
Accounts Receivable and Other (net). During 2003, accounts receivable decreased by $308,000 primarily as the result of collections from MTC ($450,000) being partially offset by advances to vendors for insurance related matters ($173,000). At December 31, 2003, the Company’s accounts receivable and other balances totaled $455,000. A portion of this balance, $281,000, relates to amounts advanced by the Company to certain third party vendors for claim expenses that will be reimbursed by the insurance companies in accordance with the provisions of the Company’s insurance policies. The balance at December 31, 2002, was $763,000, of which $455,000 was receivable from MTC. This large receivable from MTC was a result of the late budget approval by the State of California, which delayed payments to service providers.
Short-Term and Long-Term Investments. At December 31, 2003 the Company had $10.1 million of its excess cash reserves invested in high-grade marketable commercial paper, and bond mutual funds. Based on the maturity dates of these investments, the entire amount was classified as a current asset. During the course of 2003, the Company made investments totaling $14.4 million and had maturities of $8.0 million. At December 31, 2002, the Company had investments totaling $3.8 million in high-grade marketable commercial paper, certificates of deposit, corporate bonds and U.S. government securities all of which were classified as long-term assets.
Investments. There was a $31,000 increase in our investment in the West Valley MRF during 2003 due to the recording of our equity share of income of $2,281,000 being mostly offset by the receipt of $2,250,000 in cash distributions during the year. Our investment in the Eagle Mountain Landfill increased $1,137,000 during 2003 due to continuing landfill development activities.
Other Assets. The decrease in other assets ($904,000) is mainly related to decreases in notes receivable due to the receipt of principal payments during 2003 ($356,000), the reclassification of the balance of a note receivable into current assets ($307,000) and an increase in accumulated depreciation ($227,000).
Environmental Remediation. We estimated, as of December 31, 2003, based upon current information, that our future environmental liability related to certain matters not assumed by CCG Ontario, LLC, a subsidiary of Catellus Development Corporation, a New York Stock Exchange company, in its purchase of the Mill Site Property (August 2000), including groundwater and other possible third party claims, would be approximately $3.9 million. However, we purchased, effective June 30, 2001, a 12 year $50 million insurance policy at a cost of approximately $3.8 million. This policy will cover, among other things, virtually any and all environmental liabilities and claims, including defense costs, (up to the $50 million policy limit) relating to the historical operations and assets of the Company reflected in the above approximate $3.9 million liability. Due to the nature of the insurance policy, generally accepted accounting practices require that the cost of the policy be capitalized, as an asset, separately
from the related liability. The Company amortizes this policy on a “claims paid” basis, and therefore expensed $14,000 of the policy premium during 2003.
Long-term Liabilities. The increase in other long-term liabilities is primarily due to the accrual of the MRC casualty loss ($4,195,000) being partially offset by decreases in the environmental remediation reserve ($18,000), the recognition of deferred gains on prior real estate sales ($107,000) and the reclassification of the balance of the deferred real estate gain to current liabilities to coincide with its note receivable classification.
Minority Interest. As of December 31, 2003, we recorded $5,038,000 of minority interest relating to the approximately 17.52% ownership interest in MRC we do not own. This balance reflects current year contributions by minority owners of $240,000, and the absorption of the $789,000 loss allocated to the minority owners. Upon termination of MRC, each minority unitholder is entitled to receive his pro-rata share of the net proceeds (if any) from the disposition of MRC’s assets.
Contingent Liabilities. We have contingent liabilities that are more fully described in the notes to the financial statements.
Critical Accounting Policies
The Company’s accounting policies are more fully described in the Notes to the Financial Statements. As disclosed in the Notes to the Financial Statements, the preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty and therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
The Company believes the following critical accounting policies are important to the portrayal of the Company’s financial condition and results.
Investments. The Company accounts for investments under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The investments are classified as “available-for-sale” and are recorded at the purchase price of the security plus or minus the amortization of the discount or premium paid. Changes in the market value of the investments are recorded as a change to the investment with a corresponding change to comprehensive income, which is a component of members’ equity. In addition, realized gains or losses, and interest income or dividends are reflected in the statement of operations.
Investment in West Valley MRF, LLC. The Company accounts for its investment in West Valley MRF, LLC, the owner of West Valley MRF, under the equity method of accounting because of the Company’s 50% ownership interest.
Landfill Permitting and Development. Through its 82.48% interest in Mine Reclamation, LLC, the Company has been developing, for sale to a municipal entity or operating company, its property known as the Eagle Mountain Site in the California desert for use as a rail-haul municipal solid waste landfill. Pursuant to SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, capitalizable landfill site development costs are recorded at cost and expensed when management determines that the capitalized costs provide no future benefit.
Long-Lived Assets. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, long-lived assets are evaluated for potential impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Revenue Recognition. Revenues are recognized when the Company has completed the earnings process and an exchange transaction has taken place.
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.
Environmental Reserves. The Company has obligations for environmental liabilities and, based on management’s estimates, the Company has recorded reserves for these obligations. In addition, the Company has purchased an insurance policy related to these environmental liabilities and due to the nature of the insurance policy, accounting principles generally accepted in the United States require that the cost of the policy be capitalized as an Other Asset separately from the related liability and amortized as the related liabilities are resolved.
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“Interpretation 46”), an interpretation of ARB No. 51. Interpretation 46 addresses consolidation by business enterprises of variable interest entities. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. For interests in special-purpose entities, it applies in the first year or interim period ending after December 15, 2003, and for all other types of variable interest entities, it applies for periods ending after March 15, 2004, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Based upon its review of this interpretation, as amended, the Company does not believe it has any variable interest entities to which Interpretation 46 would apply.
In May 2003, FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity and requires an issuer to classify the following instruments as liabilities in its balance sheet:
• a financial instrument issued in the form of shares that is mandatorily redeemable and embodies an unconditional obligation that requires the issuer to redeem it by transferring its assets at a specified or determinable date or upon an event that is certain to occur;
• a financial instrument, other than an outstanding share, that embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and requires the issuer to settle the obligation by transferring assets; and
• a financial instrument that embodies an unconditional obligation that the issuer must settle by issuing a variable number of its equity shares if the monetary value of the obligation is based solely or predominantly on (1) a fixed monetary amount, (2) variations in something other than the fair value of the
issuer’s equity shares, or (3) variations inversely related to changes in the fair value of the issuer’s equity shares.
In November 2003, FASB issued FASB Staff Position No. 150-3 (“FSS 150-3”) which deferred the effective dates for applying certain provisions of SFAS 150 related to mandatorily redeemable financial instruments of certain non-public entities and certain mandatorily redeemable non-controlling interests for public and non-public companies. For public entities, SFAS 150 is effective for mandatorily redeemable financial instruments entered into or modified after May 31, 2003 and is effective for all other financial instruments as of the first interim period beginning after June 15, 2003. For mandatorily redeemable non-controlling interests that would not have to be classified as liabilities by a subsidiary under the exception in paragraph 9 of SFAS 150, but would be classified as liabilities by the parent, the classification and measurement provisions of SFAS 150 are deferred indefinitely. The measurement provisions of SFAS 150 are also deferred indefinitely for other mandatorily redeemable non-controlling interests that were issued before November 4, 2003. For those instruments, the measurement guidance for redeemable shares and non-controlling interests in other literature shall apply during the deferral period.
The Company adopted the provisions of SFAS 150 effective June 30, 2003 and such adoption did not have a material impact on its consolidated financial statements.
Section 3: Business Outlook
The statements contained in this Business Outlook, as well as in “Part I. Item 1. BUSINESS”, are based upon current operations and expectations. In addition to the forward-looking statements and information contained elsewhere in this Report on Form 10-K, these statements are forward-looking and, therefore, actual results may differ materially. See the Company’s disclosure regarding forward-looking statements in the section entitled “Forward-Looking Statements” above.
Ongoing Operations. As noted above, our revenues from ongoing operations have, in the past, generally been derived from the performance of our major long-term development projects and investments. Certain of these projects and investments, such as our 50% equity ownership of the West Valley MRF, are essentially complete and we have been recognizing significant revenues and income from them. However, the revenues from ongoing operations were significantly reduced in 2001 as a result of completing the sale of our stock in Fontana Union to Cucamonga. In addition, we distributed a significant portion of the net proceeds received from the Fontana Union stock sale ($69,285,000) to Kaiser Inc.’s stockholders in December 2001 in connection with the merger. We also continue to evaluate our remaining assets and investments in light of how to best provide maximum value to our members.
In regard to the West Valley MRF, the most significant factor affecting our future equity income from the West Valley MRF is the profitability of the expansion of the facility’s capacity from 2,000 to 5,000 tons per day completed in 2001. The expansion enlarged the processing facility by an additional 80,000 square feet and provides for additional materials recovery sorting capacity. The ultimate success of this expansion will continue to depend: (a) on the ability of the West Valley MRF to attract new customers and waste volumes at attractive processing rates; (b) on recyclable commodity prices; and (c) on future competition from competing facilities.
As part of our strategy, we intend to evaluate any potential offers to purchase our interest in the West Valley MRF or other alternatives in light of our primary objective of maximizing value. The West Valley MRF currently generates more than sufficient cash flow to fund its cost of operations and does not require additional investment by us. Furthermore, the West Valley MRF should continue to generate sufficient cash distributions to cover a significant portion of Kaiser LLC’s foreseeable general and administrative costs.
Pending Sale of Eagle Mountain Landfill Project. As discussed in more detailed in “Part I, Item 1. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - BUSINESS - Eagle Mountain Landfill Project and Pending Site.” In August 2000, MRC entered into that certain Agreement For Purchase and Sale of Real Property and Related Personal Property In Regard To The Eagle Mountain Sanitary Landfill Project and Joint Escrow Instructions (“Landfill Project Sale Agreement”) with the District. In summary, the landfill project (which includes our royalty payments under the MRC Lease) is under contract to be sold to the District for $41 million. The exact future timing of any initial closing is currently unknown and there are a number of risks associated with the project and certain conditions that must be satisfied before the sale of the District.
Upon closing of the sale of the landfill project, $39 million of the total purchase price will be deposited into an escrow account and will be released when any litigation contingencies are fully resolved. As of the date of this Report on Form 10-K, the only litigation contingency is the federal litigation challenging the completed federal land exchange. Although closing has not occurred, interest began to accrue on this portion of the purchase price in May 2001, and will be paid out to MRC after the initial closing on a quarterly basis beginning with a successful outcome of the federal litigation regarding the land exchange with the BLM at the Federal District Court level for a period of up to four years. Also upon closing, the remaining $2 million of the purchase price will also be placed into an escrow account as a result of the District’s Puente Hills landfill receiving in 2003 and early 2004 the necessary permit approvals for its remaining 10 years of capacity.
Mill Site Property. The only remaining Mill Site Property owned by the Company is an approximate five acre parcel referred to as the Tar Pits Parcel. CCG substantially completed the environmental remediation of this parcel pursuant to the terms of its agreement during 2002.
Sale of Miscellaneous Properties. We are continuing to seek buyers for our miscellaneous properties, most of which are located at or near our Eagle Mountain facilities.
Corporate Overhead. As we divest our remaining assets, we intend to further reduce corporate staffing and overhead to reflect the reduced requirements of our remaining operations and projects. The costs of such reductions shall be recorded at the time the decision to make such reductions is made by the Company.
Capital Resources. Kaiser LLC expects that its current cash balances and short-term investments together with cash generated from the West Valley MRF, note receivables and any future asset sales will be sufficient to satisfy the Company’s projected operating cash requirements for the next 3-4 years.
Cash Maximization Strategy
We have been developing our remaining assets and then selling them at such times and on such terms as we believe optimizes the realizable value for a particular project or asset. During 2000 and 2001, we: (i) sold the balance of our real estate at the former KSC mill site near Fontana, California, except for an approximate five acre parcel, the Tar Pits Parcel; (ii) entered into an agreement to sell the landfill project to the District for an aggregate of $41 million, with MRC and the District working toward a closing on such transaction; (iii) sold our interest in Fontana Union to Cucamonga; and (iv) paid a total of $12.00 per share in cash distributions to Kaiser Inc.’s stockholders. In continuing this strategy, our current plans include:
• To complete the sale of the landfill project and to resolve favorably the related outstanding federal land exchange litigation. Although the closing with the District was scheduled to occur during 2002, this sale is subject to the satisfaction of numerous conditions and, as a result, this date has been extended numerous times, and we cannot be sure when or if this sale will ultimately close. If the sale transaction is completed, we do not expect to receive any substantial cash from the sale until the related litigation matters are resolved, which may be several years. See “Part I. - Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Eagle Mountain Landfill Project and Sale of Landfill Project”;
• To continue to hold our interest in West Valley MRF, which pays significant cash distributions to us, until we believe we can negotiate a sale of our interest that maximizes value to our members;
• To sell our remaining miscellaneous assets, such as our surplus property in Riverside County, California; and
• To further reduce our general and administrative expenses.
• The Company expects to terminate operations and distribute all available cash to its members once the cash maximization strategy is completed. The Company currently does not expect completion of this strategy until 2006 at the earliest.
Conversion. In November 2001, the stockholders of Kaiser Inc. overwhelmingly approved the conversion of Kaiser Inc. into a newly-formed limited liability company pursuant to a merger between the Kaiser Inc. and Kaiser LLC. In this conversion, Kaiser Inc.’s stockholders received $10.00 in cash plus one Class A Unit for each share of common stock in Kaiser Inc. The conversion to a limited liability company and the resulting cash payment to stockholders was an important step in the implementation of the cash maximization strategy.
Insurance. In furtherance of the cash maximization strategy, we purchased an insurance policy in 2001 that is designed to provide broad commercial general liability, pollution legal liability, and contractual indemnity coverage for our ongoing and historical operations. The aggregate cost for this policy was approximately $5.8 million, of which KSC Recovery paid $2.0 million and the Company paid $3.8 million.
Item 7A.
Item 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please see Item 15 of this Report on Form 10-K for financial statements and supplementary data.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedure
The Company maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of the Company’s disclosure controls and procedures as of the end of the period covered by this report conducted by the Company’s management, with the participation of the Chief Executive and Chief Financial Officer, the Chief Executive and Chief Financial Officer believe that these controls and procedures are effective at the “reasonable assurance level” to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.
Internal Control Over Financial Reporting
During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Limitations on the Effectiveness of Controls
We do not expect that the disclosure controls or our internal controls will prevent all errors and they cannot possibly prevent all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART III
Item 10.
Item 10. MANAGERS AND EXECUTIVE OFFICERS OF THE COMPANY
BOARD OF MANAGERS
The current members of the Board of Managers are as follows:
NAME
AGE
POSITION WITH THE COMPANY
Richard E. Stoddard
Chief Executive Officer, President and Chairman of the Board
Ronald E. Bitonti
Manager
Todd G. Cole
Manager
Gerald A. Fawcett
Vice Chairman
Marshall F. Wallach
Manager
Richard E. Stoddard was appointed Chief Executive Officer of Kaiser in June 1988, and has held such position and/or the position of Chairman of the Board since such date. Prior to joining Kaiser in 1988, he was an attorney in private practice in Denver, Colorado. Mr. Stoddard is Chairman of the Board of Managers of Mine Reclamation, LLC and until July 1999 he served on the Board of Directors of Penske Motorsports, Inc. (“PMI”) when International Speedway Corporation acquired PMI. As of January 1, 2003, Mr. Stoddard began working less than full time for Kaiser. In addition to working on behalf of Kaiser, Mr. Stoddard works as a general business consultant with an emphasis on distressed businesses and water development opportunities.
Ronald E. Bitonti is Chairman of the Benefits Committee for the VEBA and was Chairman of the Reorganized Creditors’ Committee formed during the KSC bankruptcy until dissolution of this committee in 1991. From 1985 to 1991, Mr. Bitonti served as International Representative for the United Steelworkers of America. Mr. Bitonti retired from KSC in 1981 and has been a director or manager of Kaiser since November 1991.
Todd G. Cole has been a director or manager of Kaiser since November 1989. Mr. Cole was Chief Executive Officer of CIT Financial Corporation before starting his present career as a consultant and corporate director. He currently is President of Cole & Wilds Associates, Inc., a consulting company. Mr. Cole served on the Board of Directors of Hawaiian Airlines, Inc. until his resignation in May 2003. (Hawaiian Airlines, Inc. is a certificated air carrier, which filed for Chapter 11 bankruptcy reorganization on March 21, 2003). He is a founding director of Coral Gable Trust Company, a Florida State chartered institution, which will begin operations in April 2004. Mr. Cole is an active member of the Georgia Bar Association and is an accredited certified public accountant (inactive status).
Gerald A. Fawcett was President and Chief Operating Officer of Kaiser Inc. from January 1996 until his retirement from full time duties on January 15, 1998. He was appointed to Kaiser’s Board on January 15, 1998, and currently serves as Vice Chairman of the Board and undertakes special projects on behalf of the Company from time-to-time. Mr. Fawcett began his employment with KSC in 1951, holding various positions in the steel company and ultimately becoming Division Superintendent of the Cold Rolled and Coated Products Division. After working five years consulting with domestic and overseas steel industry
clients, Mr. Fawcett joined Kaiser in 1988 as Senior Vice President and became Executive Vice President in October 1989. He is also Vice Chairman of the Board of MRC.
Marshall F. Wallach has been a director or manager of Kaiser since November 1991. Since 1984, Mr. Wallach has served as President of The Wallach Company, a Denver, Colorado based investment banking firm. The Wallach Company was sold to Keycorp on January 1, 2001. Mr. Wallach retired from The Wallach Company on Dec. 31, 2003. Prior to forming The Wallach Company, Mr. Wallach managed the corporate finance department and established the mergers and acquisitions department of Boettcher & Company, a regional investment bank in Denver, Colorado. Mr. Wallach serves on the boards of several non-profit organizations and privately-owned corporations. He also serves on the Board of Tomkins, PLC and is currently President of Wallach Capital Advisors, Inc. which was incorporated in early 2004.
MANAGER EMERITUS
Reynold C. MacDonald serves as a Manager Emeritus on our Board of Managers. This is an honorary, nonvoting and unpaid position. In this position, Mr. MacDonald is available to the Board and to the Chief Executive Officer to provide guidance on Company matters. Mr. MacDonald served on the Board of Directors of Kaiser Inc. from November 1988 until completion of the merger in 2001, and he also was an employee of Kaiser Steel from 1946 to 1963, with his last position being assistant general superintendent of all the mills. Mr. MacDonald served as Chairman of the Board for Acme Metals Company from 1986 until 1992 and continues as a director with that company. He has also served as a director with Interlake, Inc., a metals fabrication and materials handling company and of ARAMARK Group, Inc.
AUDIT COMMITTEE MATTERS
The Audit Committee’s primary function is to review the financial information to be provided to our members, the financial reporting process, the system of internal controls, the audit process and the Company’s process for monitoring compliance with laws and regulations.
Under our Audit Committee Charter, the Audit Committee is solely responsible for:
• Hiring and firing the independent auditors for Kaiser LLC;
• Resolving any disagreement between the auditors and management; and
• Approving all non-audit services performed by Kaiser LLC’s auditors, subject to a de minimis exception.
Mr. Wallach and Mr. Cole serve as members of our Audit Committee. Our Board has determined that both Mr. Wallach and Mr. Cole are independent of Kaiser’s management and that they have accounting or financial management experience sufficient to qualify each of them as a “financial expert” under the rules issued by NASDAQ. In addition, our Board has determined that Mr. Wallach and Mr. Cole each qualify as an “audit committee financial expert” under current SEC rules and regulations. However, even if none of the current members of our Audit Committee would qualify as an “audit committee financial expert” under SEC rules and regulations, we would retain Mr. Wallach and Mr. Cole on the Audit Committee because of their expertise and experience in financial matters, including reviewing and analyzing financial statements, and their familiarity with the Company and its operations. In addition:
• Neither Mr. Wallach nor Mr. Cole sits on audit committees for more than two other public companies.
• Each member of the Audit Committee has one vote.
• Neither Mr. Wallach nor Mr. Cole receives any compensation from us, other than as a manager and/or as a member of any committee appointed by the Board of Managers.
In performing its duties, the Audit Committee seeks to maintain free and open communication between the managers, the independent auditors and our internal financial management. The Audit Committee is intended to provide an independent and, as appropriate, confidential forum in which interested parties can freely discuss information and concerns. In carrying out its oversight duties, among other things, the Audit Committee:
• Meets in an executive session at least quarterly, or more frequently as circumstances dictate.
• Inquires quarterly of the independent auditors of their views about Kaiser LLC’s choices of accounting principles and how disclosure practices may affect public views and attitudes about Kaiser LLC.
• Reviews at least quarterly with financial management and the independent auditors (a) the financial statements contained in the quarterly and annual reports to members; (b) critical financial reporting issues, policies and practices, (c) significant period-end adjustments; and (d) the quality, not just acceptability, of accounting principles and the clarity of the financial disclosure practices used or proposed to be used and particularly, the degree of aggressiveness or conservatism of our accounting principles and underlying estimates and other significant decisions made in preparing the financial statements.
• Reviews with financial management and the independent auditors quarterly and annual earnings releases and press releases containing historical or forward-looking financial information before the reports are filed with the Securities and Exchange Commission, or other regulators, or the releases are published.
In connection with our annual audit:
• The Audit Committee reviewed and discussed with Ernst & Young LLP, our independent auditors, their overall plans for the audit and the audit’s scope.
• The Audit Committee reviewed the audit fees for the annual audit and the fees charged for services rendered to Kaiser by Ernst & Young LLP not included in the audit.
• The Audit Committee has reviewed and discussed the audited financial statements with our management.
• The Audit Committee has discussed with our independent auditors the matters required to be discussed by Statement of Auditing Standards 61.
• The Audit Committee has received the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1, and has discussed with the independent auditors their independence.
• Based upon the foregoing, the Audit Committee recommended to the Board of Managers that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2003.
• The Audit Committee retained Ernst & Young LLP as our independent auditors for fiscal 2004.
EXECUTIVE OFFICERS
The current executive officers of the Company are:
Name
Age
Position with the Company
Richard E. Stoddard
President, Chairman of the Board and Chief Executive Officer
James F. Verhey
Executive Vice President - Finance and Chief
Financial Officer
Terry L. Cook
Executive Vice President - Administration, General Counsel and Corporate Secretary
Paul E. Shampay
Vice President - Finance
Richard E. Stoddard’s biographical information is set forth above under “Board of Managers.”
James F. Verhey joined Kaiser and was appointed Vice President-Finance and Chief Financial Officer in August 1993, appointed Senior Vice President-Finance in January 1996, and appointed Executive Vice President of Kaiser in January 1998. In addition to his duties with Kaiser, Mr. Verhey was appointed Vice President of Finance and Chief Financial Officer of Mine Reclamation Corporation in February 1995. Mr. Verhey is a certified public accountant and spent several years with PricewaterhouseCoopers LLP in Los Angeles, California. As of October 1, 1999, Mr. Verhey began working less than full time for Kaiser. In addition to working for Kaiser, Mr. Verhey is the President of UCC Vineyard Group, which is headquartered in Napa, California, and which owns and manages wine grape vineyards.
Terry L. Cook joined Kaiser and was appointed General Counsel and Corporate Secretary in August 1993, became a Senior Vice President in January 1996, and was appointed Executive Vice President-Administration in January 2000. Mr. Cook was appointed General Counsel and Corporation Secretary of Mine Reclamation Corporation in February 1995. Prior to joining Kaiser, Mr. Cook was a partner in the Denver office of the national law firm McKenna & Cuneo (now called McKenna Long & Aldridge) specializing in business, corporate, and securities matters. Prior to his joining McKenna & Cuneo in July 1988, Mr. Cook was an attorney in private practice as a partner in a Denver, Colorado, law firm.
Paul E. Shampay was appointed Vice President, Finance in January 2000. Mr. Shampay joined Kaiser in 1995, as Corporate Controller. Prior to joining Kaiser, Mr. Shampay spent 11 years in various senior financial positions at Rancon Financial Corporation, a syndicator of SEC registered limited partnerships and regional commercial and residential real estate developer. Mr. Shampay is a certified public accountant, certified management accountant, and is certified in financial management.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF
Section 16(a) of the Securities Act of 1934, as amended, requires our managers and executive officers, and persons who own more than 10% of our Class A Units, to file with the SEC initial reports of ownership and reports of changes in ownership of Kaiser LLC.
To our knowledge, based solely on a review of copies of reports provided by such individuals to us and written representations of certain individuals that no other reports were required, during the fiscal
year ended December 31, 2003, all Section 16(a) filing requirements applicable to our managers, officers, and greater that 10% beneficial owners were timely filed.
CODE OF BUSINESS CONDUCT AND ETHICS
In 2003 the Company adopted an employee policy called the “Code of Business Conduct and Ethics.” This policy states the Company’s policies on, among other things, complying with laws, fair dealing, confidentiality and insider trading. The Code of Business Conduct and Ethics applies to all employees including the Company’s executive officers. This policy also creates an enforcement procedure in which employees are able to submit reports or inquiries to the Audit Company, on a strictly confidential basis, for the committee’s independent investigation. The Company’s Code of Business Conduct and Ethics is available on the Company’s website www.kaiserventures.com. A copy may also be obtained free of charge by writing to the Company.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation information for our Chief Executive Officer and our three most highly compensated executive officers. (There are only four executive officers of the Company.) Over the past two years we have reduced our staffing needs due primarily to the sale of substantial assets and consummation of the merger that created the present structure.
SUMMARY COMPENSATION TABLE(1)
(1) Effective January 1, 2002, the officers of the Company became employees of Business Staffing, Inc., a subsidiary of the Company. Pursuant to an agreement between the Company and Business Staffing, Inc., all employees are leased by Business Staffing, Inc. to Kaiser.
(2) The 2001 annual performance bonus, if any, was paid in January 2002. All other performance bonuses are listed in the year paid.
(3) Does not include the dollar value of perquisites and other personal benefits. The aggregate amount of perquisites and other personal benefits received by each executive officer did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for such executive officer. The named executive officers are provided with certain life, health and other non-cash benefits generally available to all salaried employees.
(4) Class C and/or Class D Units were issued to the executive officers in January 2002, as a part of a performance based long term incentive compensation program. These units had no value at the time of issuance.
(5) In September 2000, the Company adopted a long-term transaction incentive plan dependent in large part on the net proceeds from the sale of the Company’s assets. However, this particular program was terminated as to future unearned payments effective January 1, 2002, and Class C and Class D Units in the Company were issued, as applicable, in lieu thereof. No payments have been made under the Class C and D Units and this table reflects payments earned and made in the calendar year pursuant to the long-term transaction incentive plan.
(6) The named executive officers are provided with certain life, health and other non-cash benefits generally available to all salaried employees and not included under applicable SEC rules. Effective January 1, 2002, Business Staffing, Inc. became the sponsor of Kaiser’s 401(k) Savings Plan, Money Purchase Plan and Supplemental Executive Retirement Plan (collectively “Plans”). The amounts contributed by Business Staffing, Inc. to these plans is reimbursed by the Company. Accordingly, the contributions are reflected in the Summary Compensation Table. During 2003, the Company made contributions of $98,972 to the Plan on account of Mr. Stoddard, $28,016 for the account of Mr. Verhey, $44,123 for the account of Mr. Cook, and $8,637 for the account of Mr. Shampay. During, 2002, the Company made contributions of $75,973 to the Plans on account of Mr. Stoddard, $38,531 for the account of Mr. Verhey, $47,649 for the account of Mr. Cook, $12,544 for the account of Mr. Shampay. During, 2001, the Company made contributions to the Plans of $111,404 on the account of Mr. Stoddard, $33,538 for the account of Mr. Verhey, $59,928 for the account of Mr. Cook, and $21,211 for the account of Mr. Shampay.
(7) The “All Other Compensation” includes payment of the following retention bonuses: Richard E. Stoddard - $595,382; James F. Verhey - $155,204 (2002 and 2003); and Terry L. Cook - $167,602, as well as the contributions made to the Plans on the executive’s behalf as described in Note 6 above.
OPTION GRANTS IN 2003
There were no option grants made to a named executive officer in 2003.
AGGREGATED OPTION EXERCISES IN 2003 AND OPTION VALUES AT DECEMBER 31, 2003
No options were exercised during the fiscal year ended December 31, 2003, by the executive officers named in the Summary Compensation Table. The following table summarizes the value of their unexercised options as of December 31, 2003:
(1) Value determined from an assumed value of $1.50 per Class A Unit, which is based on an independent appraisal conducted by Duff & Phelps, an independent financial advisor, as of November 30, 2001. The Class A Units are not publicly traded.
LONG-TERM INCENTIVE COMPENSATION PLANS
Kaiser Inc. provided an incentive to its executive officers through a long-term transaction incentive plan, referred to as the TIP. The TIP was designed to compensate Kaiser Inc.’s executive officers for maximizing proceeds from asset sales and resulting distributions to Kaiser Inc.’s stockholders. The TIP was terminated shortly after the merger. In place of the TIP, Kaiser LLC issued Class C and Class D Units in Kaiser LLC (collectively referred to as the “Incentive Units”) to the five previous participants in the TIP (the “Participating Officers”). The terms of the Incentive Units mirror the previous cash flow incentives provided to the Participating Officers under the TIP.
Under both the TIP and the terms of the Incentive Units, the Participating Officers receive cash distributions based on the cash available for distribution to our members from the proceeds realized in the sale of our remaining major assets (net of expenses and taxes) and on our operating expenses.
The terms of the Incentive Units set “threshold” and “target” sale prices for our remaining assets. The Participating Officers, as a group, receive 5% of the aggregate net proceeds from an asset sale in excess of the threshold. If the net proceeds exceeds the higher target sale value, the Participating Officers, as a group, receive 10% of the aggregate net proceeds from such sale in excess of the target. The Incentive Units do not contain a maximum cap as to the amount distributable to such units.
Based on the predetermined thresholds and targets, Kaiser made the following payments to the named executive officers under the TIP from sale of the Mill Site Property, the sale of Kaiser’s Fontana Union stock to Cucamonga, and the tax benefits generated by the conversion to a limited liability company:
There will be no more payments under the TIP
The Class C Units are held by Participating Officers still employed by Kaiser LLC, and, upon a Participating Officer’s departure, all Class C Units are automatically converted into Class D Units. One former officer of Kaiser LLC holds 72 Class C Units and 48 Class D Units. In the event a Participating Officer is terminated for “cause,” Kaiser LLC may repurchase, for a nominal value, all of that officer’s Incentive Units. Any payment to the Participating Officers will be split with a full share to each Class C Unit and a smaller share for each Class D Unit which will depend on the length of the period since its issuance. The following table sets forth the number of Incentive Units held by the Participating Officers that are also named executive officers.
The Incentive Units do not have the right to vote on any matter, except as required by law. Neither the Incentive Units nor any rights to distributions with respect to such units may be transferred by any Participating Officer. The Incentive Units do not have a termination date.
Each Incentive Unit will be allocated an amount of the profits of the Company equal to the amount of any distribution with respect to such Incentive Unit, with the character (capital gain, ordinary income, etc.) of the profits to reflect the portion of each type of income recognized by the Company with respect to that asset(s) after January 1, 2002, as determined by the Board in good faith. Therefore, the total amount that Participating Officers will receive pursuant to the terms of the Incentive Units can only be determined upon sale of all of our assets and satisfaction of our general obligations and liabilities. The following table sets forth the total amount that would be earned by the Participating Officers, assuming that (i) each Participating Officer continues to work for Kaiser throughout the period; and (ii) the
proceeds generated from the sale of each major asset and the related cash available for distribution to members equals the specified target for such asset:
(1) The actual participation percentage of each Participating Officer in any distributions to the Incentive Units will depend on whether the Participating Officer holds Class C or Class D Units. Adjustment of the individual percentages will not change the size of the total distributions.
(2) The right to distributions primarily depends upon the sale of Kaiser LLC’s major assets for aggregate net proceeds in excess of the previously established threshold levels.
(3) Participating Officers are only entitled to receive distributions on their Incentive Units if and when Kaiser LLC sells a remaining major asset for aggregate net proceeds in excess of the previously established sale price threshold for such asset, or, in the event of the sale of the Company, in excess of the previously set sale price (net of expenses and taxes) for the overall Company. If net proceeds generated from the sale exceeds the applicable thresholds, then the Participating Officers, as a group, would receive as a distribution on their Incentive Units cash equal to 5% of any amount over the applicable threshold up to the applicable target.
(4) There is no maximum cap as to distribution to the holders of Incentive Units. In the event proceeds in excess of the target are generated, the Participating Officers, as a group, would receive distributions equal to 10% of the aggregate net proceeds realized in excess of the target.
EMPLOYMENT AGREEMENTS
As part of our cash maximization strategy and in connection with the merger, effective, January 1, 2002, Business Staffing, Inc., our subsidiary, became the employer of all of Kaiser’s employees and the contracting employer with respect to the several employment agreements discussed below. Business Staffing leases employees to Kaiser LLC and Kaiser LLC reimburses Business Staffing for all employee and related expenses.
Mr. Stoddard is employed pursuant to an employment agreement dated as of January 1, 2003, which reflects a reduced time commitment by Mr. Stoddard to Kaiser and a base salary reduction of $100,000 from Mr. Stoddard’s previous employment agreement with Kaiser. Mr. Stoddard’s employment agreement has a three-year term and continues thereafter on a month-to-month basis until we have disposed of all of our material assets. Voluntary termination of employment by Mr. Stoddard results in the forfeiture of all severance benefits to Mr. Stoddard.
Mr. Verhey is employed pursuant to an employment agreement dated as of January 1, 2002, which reduced his time commitment to the Company. As a part of his new employment arrangement, in January 2002 Mr. Verhey received a transition payment of $155,000 representing the acceleration of his final severance payment. If Mr. Verhey voluntarily terminates his employment, his employment agreement entitles him to continue to receive employee benefits for six months following his termination at levels and at amounts consistent with the benefits offered to him at the time of his termination. Under Mr. Verhey’s employment agreement, 90 days’ advance notice of any employment termination is required by the terminating party.
Effective January 1, 2002, Mr. Cook, and Mr. Shampay each entered into an employment agreement with Business Staffing. Subject to the payment of severance compensation, Kaiser may terminate these executive officers at anytime. Voluntary termination of employment results in the forfeiture of all severance benefits for Mr. Cook and Mr. Shampay.
Although Kaiser’s Board formally terminated our historical annual bonus program, Business Staffing reserves the right, in it’s Board’s sole and absolute discretion, to grant bonuses to executives officers.
Under the terms of prior employment agreements, each executive officer was to receive severance in an amount equal to one year’s base salary and average bonus, with Mr. Stoddard to receive two year’s annual base salary and average bonus. Beginning in 2000, the severance obligation was split equally between a retention fee and a final severance payment, with the total compensation remaining the same. As of June 30, 2003, Mr. Stoddard, Mr. Cook and Mr. Verhey were paid a retention fee of $595,387, $164,267 and $155,000, respectively, since each remained an employee. Mr. Shampay’s employment agreement does not provide for a retention fee.
If an officer is terminated without cause, including, among other reasons, constructive termination, such officer is entitled to receive cash severance pay as follows:
• Mr. Stoddard would receive severance in an amount equal to: (i) one year of his base-salary in effect as of December 31, 2003; (ii) a pro rata portion of his bonus for the current year, if any; (iii) one year of his average annual bonus, determined as described below; and (iv) the base salary for the balance of the initial three-year term of his employment agreement, if any.
• Mr. Cook would receive severance in an amount equal to: (i) six months then-current base salary; (ii) a pro rata portion of his bonus for the current year, if any; and (iii) one half of his average annual bonus, determined as described below.
• Mr. Shampay would receive severance in an amount equal to: (i) one-year’s then current base salary; (ii) a pro rata portion of his bonus for the current year, if any; and (iii) one-year’s average bonus, determined as described below.
• Mr. Verhey would receive severance in an amount equal to a pro rata portion of his bonus for the current year, if any. Due to the accelerated payment of Mr. Verhey’s final severance payment and the receipt of his retention bonus, once Mr. Verhey’s pro rata share of his bonus, if any, has been paid, he is entitled to no further cash severance compensation.
The average annual bonus for any officer, would equal the product of (X) the average percentage of base salary of the bonuses granted to such officer over the five years immediately preceding and including 2000 (or such lesser period for which he has participated in the annual bonus program) and (Y) the officer’s then current base salary.
Severance is payable in one lump sum or, at the executive’s option, over a period of time. In addition, Business Staffing will continue to pay benefits, such as health and dental insurance, for one year except that Mr. Stoddard shall receive a continuation of such benefits for two years. In the event an executive officer voluntarily terminates his employment, Business Staffing will not be obligated to pay him any severance or other additional compensation, other than the compensation due and owing up to the date of termination.
None of the employment agreements contain “change of control” provisions.
In the event any payments to an executive officer would be subject to the excise tax for Internal Revenue Code determined excess “parachute” payments, he has the election to receive either the full amount of the payments or such lesser amount as would result in the greatest after tax payment to him.
Each executive officer can be terminated for “cause.” “Cause” is defined as:
a. Willful breach by an officer of any provision of his employment agreement, provided, however, if the breach is not a material breach, Business Staffing is required to give written notice of such breach and the officer shall have thirty (30) days in which to cure such breach. No written notice or cure period shall be required in the event of a willful and material breach of his agreement;
b. Gross negligence or dishonesty in the performance of the officer’s duties or possibilities under his employment agreement;
c. Engaging in conduct or activities or holding any position that materially conflicts with the interest of, or materially interferes with the officer’s duties and responsibilities to Business Staffing, Kaiser LLC or their respective affiliates; or
d. Engaging in conduct which is materially detrimental to the business of Business Staffing, Kaiser LLC or their respective affiliates.
Set forth below is the annual base salary of Kaiser’s Chief Executive Officer and each of its other named executive officers as of March 1, 2004:
Over the past two years we have had reduced our staffing needs due primarily to the sale of substantial assets and the consummation of the merger creating the present structure.
HUMAN RELATIONS COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONS
During the year ending December 31, 2003, the Human Relations Committee consisted of Messrs. Cole (Chairman), Bitonti, and Fawcett. Mr. Fawcett was President and Chief Operating Officer of Kaiser from January 1996, until his retirement from full time duties on January 15, 1998. Mr. Fawcett continues to perform work for us from time-to-time. During 2003, Mr. Fawcett received $60,000 as a base salary. He was not separately compensated for his service on the Board of Managers. Mr. Fawcett also continues to serve on the Board of Managers of Mine Reclamation, LLC.
MANAGER COMPENSATION
Non-employee managers are paid an annual retainer fee of $15,000 and a meeting fee of $1,000 for each in person meeting and a meeting fee of $750 per telephonic meeting. The chairman of any
committee receives an additional annual retainer fee of $2,000 and an additional meeting fee of $500 per committee meeting.
The current Board equity plan provides that each non-management manager shall be granted 2,500 unvested Class A Units as of May 31st of each year, commencing May 31, 2002. Accordingly, a grant of 2,500 restricted Class A Units was made to Messrs. Bitonti, Cole and Wallach effective May 31, 2003. Each annual grant vests on January 31st of the year following the grant, subject to acceleration upon the occurrence of certain events. Accordingly, the restricted 2,500 Class A Units granted to Messrs. Bitonti, Cole and Wallach on May 31, 2003, fully vested on January 31, 2004.
We do not provide retirement benefits for managers.
Item 12.
Item 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL UNIT MEMBERS
The following table sets forth, based upon the latest available filings with the Securities and Exchange Commission and from the Company’s Class A Unit member ownership list (generally reporting ownership as of March 23, 2004), the number of Class A Units owned by each person known by us to own of record or beneficially five percent (5%) or more of such units. The table includes the 126,598 Class A Units issued but reserved and not yet distributed to the Class 4A unsecured creditors of KSC because those reserved units are not eligible to vote.
(1) This column includes warrants exercisable within 60 days of April 28, 2003, at $6.11 per share in the following amounts: New Kaiser Employees’ Voluntary Benefit Association (VEBA) - 460,000 shares; and Pension Benefit Guaranty Corporation (PBGC) - 285,260. The warrants expire September 30, 2004. The VEBA and PBGC warrants listed in the
above table were initially issued with a strike price of $17.00 per share. The initial strike price of these warrants was reduced to $16.11 as a result of a distribution to Kaiser stockholders in 2000. In the merger, the VEBA and PBGC warrants were effectively exchanged for new warrants to purchase an identical number of Class A Units, each with a strike price of $6.11 per unit ($16.11 minus $10 which represents the cash merger consideration).
(2) The percentage for each member is based on the total number if issued and outstanding Class A Units (excluding the 126,598 Class A Units reserved but not yet distributed to the Class 4A unsecured creditors of KSC) and was determined as if all the warrants specified in Note (1) above held by the member, if any, had been exercised by that particular member.
(3) VEBA received its shares in Kaiser as a creditor of the KSC bankruptcy. VEBA acquired warrants in connection with the purchase by Kaiser of its stock owned by VEBA. See “Certain Relationships and Related Transactions.” VEBA’s shares in Kaiser are held in trust by Wells Fargo & Company.
(4) PBGC received its shares in Kaiser as a creditor of the KSC bankruptcy. PBGC acquired warrants in connection with the purchase by Kaiser of its stock owned by PBGC. See “Certain Relationships and Related Transactions.” Pacholder Associates, Inc. has a contract with PBGC pursuant to which it has full and complete investment discretion with respect to the shares owned by PBGC, including the power to vote such securities. Substantially all of the PBGC’s units are held through a nominee Beat & Co.
(5) For purposes of reporting ownership in this table, the units held by Willow Creek Capital Partners and held by Willow Creek Offshore Fund have been combined.
SECURITY OWNERSHIP OF MANAGEMENT
This table below reflects the number of Class A Units beneficially owned by the Company’s (1) managers and manager nominees, (2) named executive officers, and (3) all of its managers and named executive officers as a group, as of March 23, 2004, as well as the number of options exercisable within 60 days of that date.
* Less than one percent.
(1) The percentage for each individual is based on the total number if issued and outstanding Class A Units (including the 126,598 Class A Units which have been issued but are reserved and not yet distributed to the Class 4A unsecured creditors of KSC) and was determined as if all the options listed in Column 2 had been exercised by that particular individual. All options are vested.
(2) Mr. Fawcett retired as President and Chief Operating Officer of Kaiser effective January 15, 1998.
(3) Mr. Bitonti is Chairman of the VEBA Board of Trustees. He disclaims any beneficial ownership interest in the units beneficially owned by VEBA.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
VEBA and PBGC beneficially own warrants to purchase 460,000 and 285,260 Class A Units, respectively. Both VEBA and PBGC have asserted that the merger violated the terms of their warrants. We have had several discussions with VEBA concerning the claim and we believe the claim is without merit. No legal action has been pursued by either VEBA or PBGC with regard to this matter.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Auditor and Fees
Ernst & Young served as the Company’s independent accountants for fiscal year 2003.
The Audit Committee has appointed Ernst & Young as the Corporation’s auditor for the current fiscal year.
Fees (including reimbursements for out-of-pocket expenses) paid to Ernst & Young for services in fiscal 2003 and 2002 were as follows:
The above Audit Fees are for the respective year’s audit, quarterly reviews and SEC filings, regardless of when the fees were billed or paid. Tax Fees include tax compliance (tax return preparation) and tax advice services. The above Audit-Related Fees, Tax Fees and All Other Fees shown are based upon billings dates, and may relate to the preceding fiscal year. The Audit Committee considered the compatibility of non-audit services by Ernst & Young with the maintenance of that firm’s independence. It should be noted that in 2001 Kaiser Ventures Inc. was merged into Kaiser Ventures LLC which necessitated the preparation of both a final corporate income tax return and an initial partnership tax return for 2001. The services for the preparation of these income tax returns were incurred during 2002.
The Audit Committee generally approves all engagements of the independent auditor in advance including approval of the related fees. The Audit Committee approves an annual budget (and may from time to time approve amendments), which specifies projects and the approved levels of fees for each. To the extent that items are not covered in the annual budget or fees exceed the budget, management must have them approved by the Audit Committee or, if necessary between Committee meetings, by the Audit Committee chairman on behalf of the Committee. Services in fiscal 2002 were engaged prior to the development of the current Committee approval requirements.
PART IV
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements and financial statement schedules are filed as a part of this report:
All other schedules are omitted because they are not required, are inapplicable, or the information is included in the Consolidated Financial Statements or Notes thereto.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
The following exhibits are filed as part of this Form 10-K.
EXHIBIT INDEX
(* Indicates compensation plan, contract or arrangement)
Copies of any of the exhibits referred to above will be furnished at a cost of $.25 per page to members who make a written request therefore to Kaiser Ventures LLC, 3633 E. Inland Empire Blvd., Suite 480, Ontario, California 91764. Attention: Corporate Secretary.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints RICHARD E. STODDARD and JAMES F. VERHEY as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Signature
Title
Date
1. Principal Executive Officer
/s/ RICHARD E. STODDARD
Richard E. Stoddard
President, Chief Executive
Officer and Chairman of the
Board of Managers
(Principal Executive Officer)
March 23, 2004
2. Principal Financial and Accounting Officer
/s/ JAMES F. VERHEY
James F. Verhey
Executive Vice President, and
Chief Financial Officer (Principal
Financial and Accounting Officer)
March 23, 2004
REPORT OF INDEPENDENT AUDITORS
Board of Managers
Kaiser Ventures LLC and Subsidiaries
We have audited the accompanying consolidated balance sheets of Kaiser Ventures LLC and Subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of operations, cash flows, and changes in members’ equity for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kaiser Ventures LLC and Subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
February 12, 2004
KAISER VENTURES LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31
The accompanying notes are an integral part of the consolidated financial statements.
KAISER VENTURES LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31
The accompanying notes are an integral part of the consolidated financial statements.
KAISER VENTURES LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the Years Ended December 31
The accompanying notes are an integral part of the consolidated financial statements.
KAISER VENTURES LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Years Ended December 31
The accompanying notes are an integral part of the consolidated financial statements.
KAISER VENTURES LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
for the Years Ended December 31, 2003, 2002 and
At December 31, 2003, 2002 and 2001, Kaiser Ventures LLC had 751,956 Class B Units outstanding. At December 31, 2003 and 2002, Kaiser Ventures LLC had 952 and 48, Class C and D Units outstanding, respectively. There were no Class C and D units outstanding at December 31, 2001.
The accompanying notes are an integral part of the consolidated financial statements.
KAISER VENTURES LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. NATURE OF BUSINESS
Unless otherwise noted: (1) the term “Kaiser Inc.” refers to the former Kaiser Ventures Inc., (2) the term “Kaiser LLC” refers to Kaiser Ventures LLC, and (3) the terms “Kaiser,” “the Company, “we,” “us,” and “our,” refer to past and ongoing business operations conducted in the form of Kaiser Inc. or Kaiser LLC, and their respective subsidiaries.
On November 16, 1988, the Company began operations as Kaiser Steel Resources, Inc. upon the successful completion of the reorganization of Kaiser Steel Corporation (“KSC”) under Chapter 11 of the Bankruptcy Code. The Company has changed its name twice since reorganization in June 1993 and 1995, to Kaiser Resources Inc. and to Kaiser Ventures Inc. (“Kaiser Inc.”), respectively. In November 2001, the stockholders of Kaiser Inc. approved the conversion of Kaiser Inc. into a newly-formed limited liability company pursuant to a merger of Kaiser Inc. with and into Kaiser Ventures LLC. Under the terms of the agreement and plan of merger, Kaiser Inc.’s stockholders received $10.00 in cash plus one Class A Unit for each share of common stock in Kaiser Inc. Kaiser Inc. assets and liabilities were carried over at their historical cost basis.
At December 31, 2003, the Company’s principal assets include: (i) an 82.48% ownership interest in Mine Reclamation, LLC, which owns a permitted rail-haul municipal solid waste landfill located at the Eagle Mountain Site, this landfill is currently under contract to be sold to County District No. 2 of Los Angeles County for approximately $41 million; (ii) a 50% ownership interest in the West Valley Materials Recovery Facility and Transfer Station (“West Valley MRF”); (iii) approximately 5,400 additional acres owned or controlled by Kaiser at the Eagle Mountain Site that are not included in the pending sale to the District; and (iv) cash and cash equivalents, receivables and short-term investments of approximately $15.2 million.
The Company’s consolidated financial statements include the following significant entities: Kaiser Services, Inc.; Lake Tamarisk Development, LLC; Kaiser Eagle Mountain, LLC; Kaiser Recycling LLC; Business Staffing, Inc.; and Mine Reclamation, LLC. See Note 2 below for additional information concerning the Company’s subsidiaries.
Ongoing Operations
The Company’s revenues from ongoing operations are generally derived from the development of the Company’s long-term projects. Income from equity method investments reflect Kaiser’s share of income related to its equity investment in the West Valley MRF which the Company accounts for under the equity method.
Interim Activities
Revenues and expenses from interim activities are generated from various sources. Significant components of interim activities include housing rental income, aggregate and rock sales and lease payments for the minimum security prison at the Eagle Mountain Townsite. Due to the interim nature of these activities, the Company is presenting these revenues net of their related expenses. Total interim revenues for 2003, 2002, and 2001, were $1.1 million, $1.0 million, $1.0 million, respectively. Due to the termination of the minimum security prison lease at the Eagle Mountain Townsite the Townsite operations are being closed down and its facilities are being mothballed.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries and majority-owned investments, except as specified below. Intercompany accounts and transactions have been eliminated.
Fontana Union Water Company. Prior to the sale in March 2001, the Company owned 53.71% of Fontana Union Water Company (“Fontana Union” or “FUWC”), a mutual water company, which entitled the Company to its proportionate share of Fontana Union water. The Company effectively transferred its control in Fontana Union to Cucamonga County Water District (“Cucamonga”) pursuant to a 102-year lease of its Fontana Union shares (“Cucamonga Lease”) which the Company entered into in March 1989, and which was amended in 1989, 1992 and 1993. Therefore, Kaiser received no direct benefit from nor had any direct exposure to the operations or financial performance of Fontana Union. Consequently, Kaiser’s investment in Fontana Union was recorded on the cost method with revenues from the Cucamonga Lease being recorded on a current basis pursuant to the terms and conditions of the Lease. On March 6, 2001, the Company closed on the sale of its Fontana Union investment to Cucamonga. (See Note 4).
KSC Recovery, Inc. (“KSC Recovery”). The Company’s wholly-owned subsidiary, KSC Recovery, Inc., which is governed and controlled by a Bankruptcy Court approved Plan of Reorganization, acts solely as an agent for KSC’s former creditors in pursuing bankruptcy related adversary litigation and administration of the KSC bankruptcy estate. Kaiser exercises no significant control or influence over nor does Kaiser have any interest in the operations, assets or liabilities of KSC Recovery except as provided by the terms of the approved Plan of Reorganization. In addition, KSC Recovery’s cash on hand and potential future recoveries fund all costs and expenses of KSC Recovery. Consequently, activity of KSC Recovery is not included in Kaiser’s financial statements; however, KSC Recovery is a member of the Kaiser consolidated group for tax purposes and is therefore included in the consolidated tax return.
Reclassification
Certain amounts in the prior years have been reclassified to conform to the current year financial statement presentation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original maturities of 90 days or less to be cash equivalents. The Company maintains its cash balances with two financial institutions that have Standard & Poor’s ratings of AA- or higher, have at least $30 billion in assets and are insured by the Federal Deposit Insurance Corporation up to $100,000 at each institution.
Investments
The Company accounts for investments under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company has an Investment Policy which provides for the investment of excess cash balances primarily in mutual funds, commercial paper, certificates of deposit, debt instruments, and government debt securities. The Company considers instruments with maturities of 365 days or more from the balance sheet date to be long-term investments. The classification of investment securities is reviewed by the Company at each reporting period.
During 2003, the Company invested in bond mutual funds which were originally classified as “trading” when purchased and were accounted for as such through June 30, 2003. As a “trading” security, the investment was marked to market with any unrealized gain or loss reflected in the statement of operations. However, as of June 30, 2003, the bond funds were reclassified to “available-for-sale”. Additionally as a result of certain investment transactions during the first six-months of 2003, the Company reclassified all of its investments previously classified as “held-to-maturity” to “available-for-sale” as of June 30, 2003. As an “available-for-sale” security realized gains or losses, and interest income or dividends are reflected in the statement of operations while unrealized gains and losses are included in comprehensive income (loss) which is a component of members’ equity.
At December 31, 2002 all investments were classified as held-to-maturity and were recorded at the purchase price of the security plus or minus the amortization of the discount or premium paid.
Real Estate
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which the Company adopted effective January 1, 2002, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During 2001, the Company sold its California iron ore mines for $2.0 million.
Interest and property taxes related to real estate under development are capitalized during periods of development.
Investment in West Valley MRF, LLC
The Company accounts for its investment in West Valley MRF, LLC, the owner of West Valley MRF, under the equity method of accounting because of the Company’s 50% ownership interest.
Landfill Permitting and Development
Through its 82.48% interest in Mine Reclamation, LLC, the Company has been developing, for sale to a municipal entity or operating company, its property known as the Eagle Mountain Site in the California desert for use as a rail-haul municipal solid waste landfill. Pursuant to SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, capitalizable landfill site development costs are recorded at cost and consist of engineering and environmental studies, legal and consulting expenses, and other costs directly related to the permitting and development process. These costs are expensed when management determines that the capitalized costs provide no future benefit. Additionally, in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, long-lived assets are evaluated for potential impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company is still litigating challenges to a land exchange completed with the Bureau of Land Management of the U. S. Department of the Interior in October 1999 (See Note 6), and no sale of the Eagle Mountain is expected until this matter is ultimately resolved. Further, the perception of the public and private financial markets of the value of solid waste sites and the waste management industry can fluctuate significantly over time. Accordingly, there can be no assurance that the Company will successfully sell the Eagle Mountain assets on favorable terms or at all.
Buildings and Equipment
Buildings and equipment are stated on the cost basis. Depreciation is provided on the straight-line method over the estimated useful lives of the respective assets.
Revenue Recognition
Revenues are recognized when the Company has completed the earnings process and an exchange transaction has taken place.
Income Taxes
The Company recognized deferred tax liabilities and assets for the expected future tax consequences of temporary timing differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates through November 30, 2001. Subsequent to the conversion into a limited liability company, the Company is taxed as a partnership and thus, the Company’s results of operations (on an income tax basis) are distributed to the members for inclusion in their respective income tax returns. The only income taxes imposed on the Company are a minor gross revenue tax imposed by the State of California and income taxes imposed on Business Staffing Inc., the Company’s only corporate subsidiary.
Earnings Per Share/Unit
The Company follows SFAS No. 128, Earnings per Share in calculating basic and diluted earnings per unit/share. Basic earnings per unit/share excludes the dilutive effects of options, warrants and convertible securities, while diluted earnings per unit/share includes the dilutive effects of claims on the earnings of the Company.
LLC Unit/Stock Options
At December 31, 2003, the Company has three stock-based employee compensation plans, which are described more fully in Note 14. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” to the above plans.
The Company employed the Black-Scholes option-pricing model in order to calculate the above adjustment in net income (loss) and earnings (loss) per unit/share. The effect on net earnings for 2003, 2002, and 2001 is not necessarily representative of the effect in future years. The following table describes the assumptions utilized by the Black-Scholes option-pricing model for options granted during 1999, the last year stock options were granted by the Company.
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.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents. The carrying amount approximates fair value because of the short-term maturity of these instruments.
Receivables. The carrying amount approximates fair value because of the short-term maturity of these instruments.
Investments. The carrying amount approximates fair value of these investments.
New Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“Interpretation 46”), an interpretation of ARB No. 51. Interpretation 46 addresses consolidation by business enterprises of variable interest entities. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. For interests in special-purpose entities, it applies in the first year or interim period ending after December 15, 2003, and for all other types of variable interest entities, it applies for periods ending after March 15, 2004 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Based upon its review of this interpretation, as amended, the Company does not believe it has any variable interest entities to which Interpretation 46 would apply.
In May 2003, FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with
characteristics of both debt and equity and requires an issuer to classify the following instruments as liabilities in its balance sheet:
• a financial instrument issued in the form of shares that is mandatorily redeemable and embodies an unconditional obligation that requires the issuer to redeem it by transferring its assets at a specified or determinable date or upon an event that is certain to occur;
• a financial instrument, other than an outstanding share, that embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation, and requires the issuer to settle the obligation by transferring assets; and
• a financial instrument that embodies an unconditional obligation that the issuer must settle by issuing a variable number of its equity shares if the monetary value of the obligation is based solely or predominantly on (1) a fixed monetary amount, (2) variations in something other than the fair value of the issuer’s equity shares, or (3) variations inversely related to changes in the fair value of the issuer’s equity shares.
In November 2003, FASB issued FASB Staff Position No. 150-3 (“FSS 150-3”) which deferred the effective dates for applying certain provisions of SFAS 150 related to mandatorily redeemable financial instruments of certain non-public entities and certain mandatorily redeemable non-controlling interests for public and non-public companies. For public entities, SFAS 150 is effective for mandatorily redeemable financial instruments entered into or modified after May 31, 2003 and is effective for all other financial instruments as of the first interim period beginning after June 15, 2003. For mandatorily redeemable non-controlling interests that would not have to be classified as liabilities by a subsidiary under the exception in paragraph 9 of SFAS 150, but would be classified as liabilities by the parent, the classification and measurement provisions of SFAS 150 are deferred indefinitely. The measurement provisions of SFAS 150 are also deferred indefinitely for other mandatorily redeemable non-controlling interests that were issued before November 4, 2003. For those instruments, the measurement guidance for redeemable shares and non-controlling interests in other literature shall apply during the deferral period.
The Company adopted the provisions of SFAS 150 effective June 30, 2003 and such adoption did not have a material impact on its consolidated financial statements.
Note 3. ACCOUNTS RECEIVABLE AND OTHER
Accounts receivable and other as of December 31 consisted of the following:
Note 4. SALE OF FONTANA UNION WATER COMPANY STOCK
Effective March 6, 2001, the Company completed the sale of its 53.71% ownership interest in the capital stock of Fontana Union, a mutual water company, to Cucamonga for $87.5 million. Approval for the sale was obtained from Kaiser Inc.’s stockholders. Included in the net gain of $65.2 million was the payment of $1.0 million to management pursuant to the Company’s Long-Term Transaction Incentive Program. In addition, the Company received approximately $2.5 million in payments under the lease of Fontana Union shares to Cucamonga. With the sale of the Fontana Union interest, the lease with Cucamonga was effectively terminated and the rate dispute litigation between the Company and Cucamonga was settled.
Note 5. INVESTMENT IN WEST VALLEY MRF, LLC
Effective June 19, 1997, Kaiser Recycling Corporation (“KRC”) and West Valley Recycling & Transfer, Inc. (“WVRT”), a subsidiary of Burrtec Waste Industries, Inc. (“Burrtec”), which are equal members of West Valley MRF, LLC, (a California limited liability company) entered into a Members Operating Agreement (“MOA”) which is substantially the equivalent of a joint venture agreement but for a limited liability company. The construction and start up of the West Valley MRF was completed during December 1997.
Pursuant to the terms of the MOA, KRC contributed approximately 23 acres of Mill Site property on which the West Valley MRF was constructed while WVRT contributed all of Burrtec’s recycling business that was operated within Riverside County, thereby entitling West Valley MRF to receive all revenues generated from this business after the closing date.
Most of the financing for the construction of the West Valley MRF of approximately $22,000,000, including reimbursement of previously incurred development costs of Burrtec and the Company, was obtained through the issuance and sale of two California Pollution Control Financing Authority (the “Authority”) Variable Rate Demand Solid Waste Disposal Revenue Bonds (West Valley MRF, LLC Project) Series 1997A and Series 2000A (the “Bonds”). The Bonds are secured by an irrevocable letter of credit issued by Union Bank of California, N.A. (“Union Bank”). The Bonds have stated maturity dates of June 1, 2012 for Series 1997A ($9.5 million) and June 1, 2030 Series 2000A ($8.5 million), although West Valley MRF, LLC is required, pursuant to its agreement with Union Bank, to annually redeem a portion of the Bonds on a stated schedule. Pursuant to a Guaranty Agreement with Union Bank, the Company and Burrtec each are liable for fifty percent (50%) of the principal and interest on the Bonds in the event of a default by the West Valley MRF, LLC. West Valley MRF, LLC also has established a $2.0 million equipment line of credit with Union Bank in order to refinance and purchase additional equipment.
The Company also remains responsible for any pre-existing environmental conditions on the land, which is covered by insurance.
The Company is accounting for its investment in West Valley MRF, LLC under the equity method.
The condensed summarized financial information of West Valley MRF, LLC as of November 30, is as follows:
The Company has recognized equity income from the West Valley MRF of $2,281,000, $1,502,000, and $978,000 in 2003, 2002 and 2001, respectively. The Company has received distributions of $2,250,000, $1,250,000, and $750,000 during 2003, 2002, and 2001, respectively, from its investment in the West Valley MRF.
Note 6. MINE RECLAMATION, LLC
The Company, in January 1995, acquired a 70% interest in Mine Reclamation, the developer of the landfill project. As a result of subsequent equity fundings and purchases, the Company’s ownership interest in Mine Reclamation as of December 31, 2003, is 82.48%. On August 9, 2000, MRC, entered into that certain Agreement For Purchase and Sale of Real Property and Related Personal Property In Regard To The Eagle Mountain Sanitary Landfill Project and Joint Escrow Instructions (“Landfill Project Sale Agreement”) with the District. In summary, the landfill project (which includes the Company’s royalty payments under the MRC Lease) is being sold for $41 million, with an initial closing currently scheduled to occur on June 30, 2004, but the initial closing date has been extended numerous times. However, payment of the purchase price will be delayed as described in more detail below. The sale of the landfill project is subject to the results of the District’s due diligence and satisfaction of numerous contingencies. The contingencies include, but are not limited to, obtaining the transfer of the landfill project’s permits to the District and obtaining all necessary consents to the transaction.
Upon closing, $39 million of the total purchase price is to be deposited into an escrow account and will be released when litigation contingencies are fully resolved. The litigation contingencies are the federal litigation challenging the completed federal land exchange. Even though the closing has not taken place and these funds have not been deposited into an escrow account, interest began accruing on this portion of the purchase price on May 3, 2001, and will be paid out to MRC on a quarterly basis, once the initial closing of the sale occurs and once there is a successful outcome of the federal litigation at the Federal District Court level. The remaining $2 million of the purchase price would also be placed into an escrow account upon closing and was originally to be released upon the later of (1) the release of the $39 million as described above or (2) the permitting approvals of the District’s Puente Hills landfill for its remaining 10 years of capacity. However, in 2003 and early 2004, the District received the necessary permits for the expansion of its Puente Hills landfill and thus, the full purchase price will be placed into escrow when the initial closing has occurred, and will be released upon resolution of the pending federal land exchange litigation. Receipt of the purchase price, in whole or in part, if at all, could be delayed for
a substantial period of time pending satisfactory resolution of these contingencies. At this time the Company cannot estimate when or if the sale may be completed.
The District has been undertaking extensive due diligence on the landfill project and has the right to terminate the Landfill Project Sale Agreement if it is not satisfied with the results of its due diligence and other matters. Due diligence, joint use negotiations and other items are expected to continue during 2004. In addition, the parties will individually determine whether each chooses to continue to extend the closing date for the transaction.
There are numerous risks associated with MRC and the landfill project, including the competition represented by the Mesquite rail-haul landfill project, which the District purchased. There are also numerous risks and contingencies associated with the pending sale of the landfill project to the District. There can be no assurance that all outstanding matters currently preventing an initial closing with the District will be resolved to the satisfaction of the parties. Accordingly, there can be no assurance that the sale to the District will occur or that the current terms of the pending transaction may not be significantly modified as a result of future discussions with the District or as to the timing of the receipt of the purchase price. There can be no assurance that the completed purchase of the Mesquite landfill by the District will not adversely impact the negotiations and the closing on the sale of the landfill to the District. In addition, there are material litigation risks associated with the current federal land exchange litigation, including reversal of the completed land exchange and the recently threatened litigation over the Endangered Species Act, all as discussed in “Note 21. -LEGAL PROCEEDINGS”. No assurance can be made that the Company will successfully and timely resolve these matters so as to avoid a material adverse effect on the Company’s current plan to sell the landfill to the District. In addition, there are risks that the landfill project will be impacted by natural disasters like the floods that caused significant damage to the rail line in 2003. Certain risks may be uninsurable or are not insurable on terms which we believe are economical.
As discussed below, MRC will need additional funding to complete the landfill project, including funds to repair the flood damage sustained by the Eagle Mountain rail line. There is no assurance that MRC can obtain additional funds through debt or equity financing on acceptable terms.
If the Company is unable to manage any of these risks or uncertainties, the Company may not be able to sell the landfill at a favorable price, if at all, and the value of the Company’s Class A Units could be materially reduced.
Flood Damage to Railroad. The Company owns an approximate 52-mile private railroad that runs from Ferrum Junction near the Salton Sea to the Eagle Mountain mine. In late August and early September of 2003, portions of the railroad and related protective structures sustained considerable damage due to heavy rains and flash floods. This damage included having some rail sections being buried under silt while other areas had their rail bed undermined. Subsequent to the filing of the Company’s report on Form 10-Q for the quarter ended September 30, 2003, the Company conducted a more complete investigation of the damage and of the costs to return the railroad to the condition that it was in prior to the flood damage. As a result of such investigation, the Company currently estimates the cost to repair the damage to be a minimum of $4,500,000. The Company’s current plans are to undertake, as soon as reasonably possible, the work necessary to preserve and protect the existing railroad. However, the major repairs to return the railroad to its condition prior to the flood damage will be deferred until a later date.
Note 7. INVESTMENTS
The Company has an Investment Policy which provides for the investment of excess cash balances primarily in bond funds, commercial paper, and debt instruments. At December 31, 2002, the Company had investments in U. S. government debt securities, commercial paper, and debt instruments which were all classified as “held to maturity”. At December 31, 2003, the Company had investments in bond mutual funds and U.S. corporate commercial paper which were all classified as “available for sale”. The classification of investment securities is reviewed by the Company at each reporting period.
In April 2003, the Company sold certain of its “held to maturity” investments prior to their stated maturity date. The Company had determined that its investments were too concentrated in one industry, and thus sold certain investments in order to minimize that risk. As a result of these transactions, the remaining “held to maturity” investments with an amortized cost of $4,773,000 were reclassified as “available-for-sale” investments. The unrealized gain of $52,000 associated with investments classified as “available-for-sale” was recorded as an increase to the investment with a corresponding increase to comprehensive income, which is a component of members’ equity. In addition, realized gains or losses, and interest income or dividends are reflected in the statement of operations.
The Company’s investments in bond mutual funds were originally classified as “trading” when purchased and were accounted for as such through June 30, 2003. As a “trading” security, the investment was marked to market with any unrealized gain or loss reflected in the statement of operations. However, as of June 30, 2003, the bond funds were reclassified to “available-for-sale”.
During 2003 the Company sold investments, classified as “held to maturity”, with a basis of $1,025,000 for $1,017,000, resulting in a loss of $8,000. Also during 2003 the Company sold investments, classified as “available-for-sale”, with a basis of $2,942,000 for $3,010,000, resulting in a realized gain of $68,000. The Company had no investment sales during 2002 or 2001. The basis for all investments sold was determined using “specific identification”.
The following is a summary of investment securities, all with maturities on or prior to December 31, 2004, which are classified as “available-for-sale” as of December 31, 2003:
As of December 31, 2003, the Company’s “available for sale” securities had an unrealized net loss of $165,000 that is included in “other comprehensive income”, a component of Member’s Equity. This unrealized net loss includes unrealized gains of $11,000 on four individual bonds, and unrealized losses of $176,000 on two bond funds. The unrealized losses on the two bond funds arose during July 2003. Due to the diverse nature and return history of these bond funds, the Company believes that these losses are only temporary. The value of these bond funds recovered a significant portion of the unrealized loss amount in January 2004.
The following is a summary of the amortized cost of the investment securities as of December 31, 2002:
Note 8. CONVERSION DISTRIBUTION
At December 31, 2003, the Company holds $1,340,000 in cash it had previously sent to its transfer agent in December 2001 for the payment of the $10.00 per share merger consideration to shareholders. This cash, classified as restricted cash, will ultimately be distributed to shareholders once the correct paperwork is submitted by such shareholders, thereby reducing the related conversion distribution payable. During the first seven months of 2003, the transfer agent returned to the Company, $1,470,000 of its December 2001 merger consideration. During the fourth quarter of 2003, the Company returned to the transfer agent $130,000 of these funds for distribution to shareholders.
Note 9. NOTES RECEIVABLE
As of December 31, 2003, the Company has two notes receivable from McLeod Properties, Fontana LLC (Budway Trucking, Inc.) and one note receivable from Levand Steel.
The outstanding balances of the Budway notes at December 31, 2003 total $375,000, all of which has been included in current assets. The notes bear interest at 10% per annum with quarterly payments of $26,700 plus interest, with the remaining balance due October 2004. The Company previously agreed to subordinate its notes receivable to a construction/permanent loan in order to facilitate the construction of a building on the property.
The outstanding balance of the Levand Steel note at December 31, 2003 is $618,000, of which $269,000 has been included in current assets and the balance of $349,000, is classified as a long-term asset. The note bears interest at 8% per annum with monthly payments of $25,700 including interest, with the remaining balance due February 2006.
Note 10. ENVIRONMENTAL INSURANCE
One of the goals in the cash maximization strategy approved by the Company’s Board of Directors in September 2000 was to reduce the liabilities associated with existing and potential future environmental and other similar types of claims. In furtherance of such a goal, the Company purchased an insurance policy effective June 30, 2001 that is designed to provide broad commercial general liability, pollution legal liability, and contractual indemnity coverage for the Company’s ongoing and historical operations. The policy has a twelve (12) year term and limits of $50,000,000 in the aggregate for defense and indemnity, with no deductible or self-insured retention. The policy is designed to provide coverage in excess of the Company’s existing and historic insurance policies; however, to the extent that these other insurance policies are not responsive to a loss, the policy will provide first dollar coverage for a loss resulting from property damage, personal injury, bodily injury, cleanup costs or violations of environmental laws. The policy also provides for a broad defense of claims that are brought against the
Company. The policy is specifically intended to provide additional coverage for the Company’s known and/or potential liabilities arising from pollution conditions or asbestos-related claims. The policy also provides contractual indemnity coverage for scheduled indemnity obligations of the Company arising from, e.g., prior corporate transactions and real estate sales. The aggregate cost for this policy was approximately $5.8 million, of which KSC Recovery paid $2 million and the Company paid the balance of approximately $3.8 million. The Company amortizes this insurance policy on a “claims paid” basis, and therefore expensed $14,000 of the policy premium during 2003.
This policy covers virtually any and all environmental liabilities and claims (up to the $50 million policy limit) relating to the historical operations and assets of the Company and reflected on the balance sheet under the caption Environmental Remediation. At December 31, 2003, the recorded environmental remediation liability was approximately $3.9 million. Due to the nature of the insurance policy, generally accepted accounting principles require that the cost of the policy be capitalized as an Other Asset separately from the related liability and amortized as the related liabilities are resolved.
Note 11. BUILDINGS AND EQUIPMENT (Net)
Buildings and equipment (net) as of December 31 consisted of the following:
Note 12. ACCRUED LIABILITIES - CURRENT
The current portion of accrued liabilities as of December 31 consisted of the following:
Note 13. ENVIRONMENTAL REMEDIATION RESERVE
With the sale of approximately 588 acres of the Company’s Mill Site Property to CCG in August 2000, substantially all of the environmental liabilities associated with that property were eliminated; thus, as a result of the sale and the remediation work undertaken prior to the sale, the Company was able to reduce its environmental remediation reserves by $21,252,000.
As of December 31, 2003, the Company estimates, based upon current information, that its future environmental liability related to certain matters not assumed by CCG in its purchase of the Mill Site Property, such as the groundwater plume discussed below and other environmental related items,
including, but not linked to remediation at the Eagle Mountain Site, potential third party property damage and bodily injury claims, would be approximately $3.9 million. For example, the Company remains contingently liable for any impacts the elevated total dissolved solid groundwater plume may have on previously existing water wells owned by third parties.
See Notes 10, 20 and 22, “Environmental Insurance”, “Commitments and Contingencies” and “Subsequent Events” for further information.
Note 14. EQUITY
Conversion into LLC
In November 2001, the stockholders of Kaiser Inc. approved the conversion of Kaiser Inc. into a newly-formed limited liability company pursuant to a merger between Kaiser Inc. and Kaiser LLC, the surviving company. Under the terms of the merger converting Kaiser Inc., to a limited liability company, Kaiser Inc.’s stockholders received $10.00 in cash plus one Class A Unit for each share of common stock in Kaiser Inc. The new Class A Units are not listed on any stock exchange, additionally the transferability of the units is subject to the approval of an executive of the Company. Subsequent to the conversion, Kaiser LLC is taxed as a partnership and thus, Kaiser LLC results of operations (on an income tax basis) are distributed to the unitholders for inclusion in their respective income tax returns.
Equity Transactions
During 2001 the Company recorded transactions directly to equity other than changes resulting from net income or equity transactions with members/shareholders. These transactions were from the repricing of unit/stock options and amounted to $428,000. No repricings were completed in 2002 or 2003.
Class A Units/Common Stock Outstanding
At December 31, 2003 and 2002, Kaiser LLC had 6,919,299 and 6,911,799 Class A Units outstanding, respectively.
At December 31, 2003, there are 1,043,000 Class A Units available for issuance relating to outstanding options and warrants.
As of December 31, 2000, 136,919 shares of the outstanding common stock of the Company were being held for the benefit of the former general unsecured creditors of the predecessor company pending the resolution of disputed bankruptcy claims. The final resolution of these claims will result in the final allocation of the held shares among the unsecured creditor group, which presents no liability to the Company. For financial reporting purposes these shares have been considered issued and outstanding. Just prior to the Company’s conversion into an LLC in November 2001, these 136,919 shares were issued to the bankruptcy estate, and subsequently converted into Class A units. During 2003, 11,321 of these 136,919 Class A units were tendered by the bankruptcy estate to a bankruptcy claimant as partial settlement of their claim. Therefore, as of December 31, 2003 there are 125,598 Class A units being held by the bankruptcy estate.
Class B Units
Prior to the merger, Kaiser LLC issued 751,956 Class B Units to current and former MRC executives. These MRC executives had previously been granted the right to receive certain contingent incentive
payments in order to incentivize each of them to assist Kaiser and MRC in closing the sale of the landfill project as well as meeting all conditions necessary for the release of funds from escrow. These Class B Units, issued to the MRC executives, replaced those incentive payments rights.
These Class B Units are entitled to receive approximately 2% of any cash actually received by MRC, up to approximately $752,000 or $1.00 per unit, if MRC receives the currently agreed upon price of $41 million. The Class B Units are not entitled to any distributions or profits, have no voting rights except as required by law and are not transferable.
At December 31, 2003 and 2002, Kaiser LLC had 751,956 Class B Units outstanding.
Class C and D Units
During 2002, the Company issued Class C and D Units to certain officers and terminated the Long-Term Incentive Plan (“TIP”) as to future unearned payments that could have been payable to the Company’s executive officers. Payments to holders of the Class C and D Units will only be paid upon the monetization of the Company’s major assets. Payments, if any, will be made under a formula that replicates the amount that would have been paid under the TIP if it had been continued. Class C and D Units are not entitled to any other distributions or profits, have no voting rights except as required by law and are not transferable.
At December 31, 2003 and 2002, Kaiser LLC had 952 and 48, Class C and D Units outstanding, respectively.
Warrants
In November 1999, Kaiser Inc. purchased 2,730,950 and 1,693,551 shares of its common stock from the New Kaiser Voluntary Employees’ Benefit Association (the “VEBA”) and from the Pension Benefit Guaranty Corporation (the “PBGC”), respectively, who were then the Company’s two largest stockholders. As consideration for these shares Kaiser Inc.: paid $13.00 per share in cash; issued stock purchase warrants that have an exercise price of $17 per share and a term of five years to the VEBA (460,000 shares) and the PBGC (285,000 shares), which provided the VEBA and the PBGC with additional consideration approximating $0.60 per share; and gave the VEBA and the PBGC certain limited participation rights in the future success of the Company. The Company initially recorded this transaction at a net value of $13 per share because the warrant value conveyed to the sellers of approximately $0.60 per share is offset by a corresponding equity credit for the warrant’s issuance value. Subsequently, in 2000, as a result of the two sales of the Company’s remaining Mill Site Property, the Company made contingent payments equaling approximately $1.11 per share. At December 31, 2003, these warrants are outstanding.
Unit/Stock Option and Unit/Stock Grant Programs
In October 1990, the Company’s stockholders approved the Amended, Restated and Substituted Kaiser Steel Resources, Inc. 1989 Stock Plan (the “1989 Stock Plan”). The 1989 Stock Plan provided for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock or deferred stock awards. Certain options granted under the 1989 Stock Plan are still outstanding. The Company incurred no compensation expense during 2003, 2002 and 2001 related to these options.
In July 1992, the Company’s stockholders approved the 1992 Stock Plan. The 1992 Stock Plan provides for the grant of incentive stock options and non-qualified stock options. The 1992 Stock Option Plan is administered by the Board of Directors. The 1992 Plan is a three-year Plan with years running
from July 1 to June 30. Each July 1, an amount equal to 2% of the Company’s shares outstanding became available to support grants of stock options to employees during that year. At the end of each plan year, reserved plan shares not made subject to stock options revert to normal unissued share status. Grants are generally established at fair market value of the Company’s common stock on the date of the grant and the exercise thereof may extend for up to 10 years with various vesting schedules.
In addition, under the 1992 Stock Plan each director when first elected to the Board shall automatically be granted options for 5,000 common stock shares. Each non-employee director who is re-elected or serving an unexpired term as a member of the Board at an annual meeting of holders of stock of the Company will be automatically granted an additional 1,500 stock options. These options have an exercise price equal to the fair market value of the Company’s Common Stock on the date of the grant.
In June 1995, the Company’s stockholders approved the 1995 Stock Plan. The 1995 Stock Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock and other stock related incentives. However, there are no outstanding options under this plan, as of December 31, 2003 and 2002.
In addition, under the 1995 Stock Plan, each director when first elected to the Board shall automatically be granted options for 5,000 common stock shares. Each non-employee director who is re-elected or serving an unexpired term as a member of the Board at an annual meeting of holders of stock of the Company will be automatically granted an additional 1,500 stock options. These options have an exercise price equal to the fair market value of the Company’s common stock on the date of the grant.
In May 2000, the Company’s proposed 2000 Stock Plan was not approved by the shareholders of the Company thus no options were granted in 2000. The Company in May 2000 granted to each non-employee director who was re-elected or serving an unexpired term as a member of the Board a restricted stock award of 1,500 shares. The restrictions on these shares lapse equally on the first and second anniversaries of the grants.
In December 2000, the Company declared and paid a cash distribution of $2.00 per share from the proceeds of the two Mill Site Property sales in 2000. As a result of this cash distribution, the Company reduced the exercise price on all outstanding options by the $2.00 in order to mirror the $2.00 dividend per share. This repricing required the Company to change to variable plan accounting for its outstanding options, which resulted in the Company incurring an expense of $428,000 for 2001.
Effective with the date of the merger, all options with an exercise price of $10.00 and below, 326,750 options, were deemed exercised which entitled the optionees to participate in the $10.00 cash distribution and conversion into Class A Units. As a result of this cash distribution, the Company reduced the exercise price on all remaining outstanding options, 301,100 Class A Unit options, by the $10.00 in order to mirror the $10.00 dividend per share. Additionally, the term on the remaining unit options was extended, due to their reduced liquidity, to December 31, 2008.
In 2003 and 2002, the Company did not incur any unit based compensation expense related to the exercise of nonqualified unit options. In 2001 the Company incurred unit/stock based compensation expense of $1,288,000 related to the exercise of nonqualified unit/stock options that were subject to variable accounting.
A summary of the status of grants under the Company’s unit/stock plans as of December 31, 2003, 2002, and 2001 and activities during the years ended on those dates is presented below:
The following table summarizes information about variable unit options outstanding as of December 31, 2003:
Note 15. EARNINGS PER UNIT/SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per unit/share:
For additional disclosures regarding the outstanding employee unit/stock options see Note 14.
The following discussion and table discloses the number of vested and outstanding options during 2003, 2002, and 2001 that were not included in the computation of diluted earnings per unit/share. The Company incurred a net loss during 2003 and 2002, and therefore all options are considered antidilutive for that year. For 2001, the following table lists options of which the exercise price was greater than the average market price of the common shares during for the respective year and, therefore, are antidilutive.
Note 16. SALES OF ASSETS
During 2001 the Company completed the sale of its approximately 53.71% ownership interest in the capital stock of Fontana Union Water Company, a mutual water company, to Cucamonga for $87.5 million. Also during 2001 the Company sold its California Mine properties for $2.0 million.
Note 17. SUPPLEMENTAL CASH FLOW INFORMATION
No interest was paid in 2003 or 2002. The Company paid interest during 2001 of $39,000.
No interest expense was incurred in 2003 or 2002. Total interest expense incurred in 2001 was $25,000.
Income taxes paid in 2003, 2002, and 2001 were $56,000, $5,000, and $3,477,000, respectively. During 2003, the Company was audited by the State of California for years prior to its conversion to a limited liability company, as a result of that audit the Company paid the State of California $46,000.
In the first quarter of 2001, the Company sold its California Mine Property for $2 million, $726,000 cash at closing and $1.3 million on a note receivable secured by the real estate.
During 2001, the Company had 54,333 stock options exercised on a net basis. These transactions resulted in the Company receiving back 36,704 shares during 2001 of its own common stock as payment for the purchase price of the options and for the payment of income taxes.
The Company has not capitalized interest or property taxes during 2003, 2002, and 2001.
Note 18. INCOME TAXES
Subsequent to the Company’s conversion into an LLC, the Company is taxed as a partnership and thus, the Company’s results of operations (on an income tax basis) are distributed to the unitholders for inclusion in their respective income tax returns. Therefore, the only taxes imposed on the Company are a small gross revenue tax imposed by the State of California, and income taxes imposed on Business Staffing Inc. These taxes amounted to $16,000 for 2003 and $18,000 for 2002. Also, during 2003 the Company recorded an additional $46,000 income tax expense as a result of the finalization of a State of California income tax audit for 1999. Additionally, during 2002, the Company recorded an income tax
benefit of $585,000. This benefit was the result of changes in the Federal tax law and finalization of the Company’s income tax returns for 2001 and related solely to activity prior to its conversion to a limited liability company.
The income tax provision for the year ended December 31, 2001 are composed of the following:
As a result of the conversion into a limited liability company, the remaining deferred tax assets and liabilities at December 31, 2001, were eliminated through the provision.
The net change in the valuation allowance during 2001 was a reduction of $238,000. The decrease in the valuation allowance for 2001 was due to the utilization of net operating loss carry forwards that occurred during 2001 as a result of the sale of the Fontana Union stock, in March 2001.
A reconciliation of the effective income tax rate to the federal statutory rate, for financial reporting purposes, is as follows:
Note 19. SIGNIFICANT CUSTOMERS
Significant Customers
Management and Training Corporation (“MTC”) operated a minimum security prison facility on a portion of the Eagle Mountain Site through December 31, 2003.
The Company received substantial portions of its revenue from the following customers:
Note 20. COMMITMENTS AND CONTINGENCIES
Environmental Contingencies
The Company estimates, based upon current information, that its future environmental liability related to certain matters not assumed by CCG Ontario, LLC in its purchase of the mill site property, including groundwater and other possible third party claims, would be approximately $4.0 million. However, the Company purchased, effective June 30, 2001, a 12 year $50 million insurance policy at a cost of approximately $3.8 million. This policy will cover, among other things, virtually any and all environmental liabilities and claims, including defense costs, (up to the $50 million policy limit) relating to the historical operations and assets of the Company and reflected in the above, approximate $4.0 million liability.
Pension Plans
The Company currently sponsors a voluntary qualified 401(k) savings plan and a nonqualified pension plan, available to all full-time employees. Participants may make contributions of up to 15% of their compensation with the Company matching one-half of each participant’s contribution up to 6% of compensation. The non-qualified plan mirrors the qualified 401(k) plan.
Total expense relative to these plans for the years ended December 31, 2003, 2002, and 2001, was $176,000, $192,000, and $262,000, respectively.
Letters of Credit
At December 31, 2003, the Company had guaranteed a letter of credit outstanding on its behalf to third parties totaling $120,000. This letter of credit was issued for reclamation activities performed at an idled coal property, on behalf of and at the expense of the KSC bankruptcy estate.
MRC Financing
Since 1995 MRC has been funded through a series of private placements to its existing equity holders. During the second quarter of 2003, MRC commenced and then completed in the third quarter of 2003 a $2,100,000 private placement of its Class B Units to its existing members. Kaiser will fund at least $1,820,000 of the private placement. The funding is payable in installments with the last installment due in July 2004. Kaiser made its first equity contribution of $910,000 under the private placement in August 2003, bringing its ownership interest in MRC to 82.48%. A second equity contribution of approximately $435,000 was made in March 2004. A third and final equity contribution of approximately $435,000 under the current private placement is due in July 2004. Future funding of MRC will be required to cover such items as the federal land exchange litigation and the railroad repairs but there is no assurance that such funding will be obtained.
Note 21. LEGAL PROCEEDINGS
The Company, in the normal course of its business, is involved in various claims and legal proceedings. A number of litigation matters previously reported have settled and such settlements did not have a material adverse impact on the Company’s financial statements. Significant legal proceedings, including those which may have a material adverse effect on the Company’s business or financial condition, are summarized below. However, the following discussion does not, and is not intended to, discuss all of the litigation matters to which the Company may be or become a party. Should the
Company be unable to resolve any legal proceeding in the manner the Company anticipates and for a total cost within close proximity to any potential damage liability the Company has estimated, the Company’s business and results of operations may be materially and adversely affected.
Eagle Mountain Landfill Project Land Exchange Litigation. In October 1999, Kaiser’s wholly-owned subsidiary, Kaiser Eagle Mountain, Inc., completed a land exchange with the U.S. Bureau of Land Management (“BLM”). This completed land exchange has been challenged in two separate federal lawsuits.
Federal Land Exchange Litigation. There are two separate, but related, litigation matters in federal district court involving the completed land exchange between Kaiser Eagle Mountain, Inc, and the BLM. The details of each case are as follows:
A. Donna Charpied; Laurence Charpied; The Desert Protection Society (Plaintiffs) v. United States Department of the Interior; Bureau of Land Management; Bruce Babbitt, in his official capacity as Secretary of the Interior; Tom Fry, in his official capacity as Acting Director of the Bureau of Land Management; Al Wright, in his official capacity as Acting California State Director of the Bureau of Land Management; Tim Salt, in his official capacity as Bureau of Land Management California Desert District Manager; Robert Stanton, in his official capacity as Director of the National Park Service, Kaiser Eagle Mountain, Inc., and Mine Reclamation Corporation (Defendants), (United States District Court for the Central District of California, Riverside Division, Case No. EDCV 99-0454 RT(MCx)).
In December 1999, opponents of Eagle Mountain landfill project filed a lawsuit in the federal district court located in Riverside, California seeking to stop the Eagle Mountain landfill project. In summary, the lawsuit challenges the BLM’s approval of a land exchange between the Company and the BLM. The challenges are based upon, among other things, the Company’s and the BLM’s alleged failure to comply with the National Environmental Policy Act and the Federal Land Policy Management’s Act. The relief sought is an unwinding of the land exchange that was completed on October 13, 1999, and the award of attorneys’ fees. The National Park Service has been dismissed out of the lawsuit. In Desert Citizens Against Pollution v. Bisson, (Ninth Circuit Court of Appeals, Case No. 97-55429), the Court of Appeals concluded, among other things, that the BLM did not properly value the land being acquired by the competing Mesquite rail-haul landfill project and ordered a reversal of the land exchange. The court concluded that the appraisal should have considered the highest best use of the lands being acquired from the BLM as a landfill. The court did not, however, determine the proper valuation of the exchanged lands. The plaintiffs in Kaiser’s federal land exchange litigation have amended their respective complaints to include allegations that the appraisal used in Kaiser’s land exchange with the BLM is similarly defective.
In light of the Bisson ruling, the BLM has completed an independent review of the “highest and best use” analysis consistent with that discussed in the Bisson decision. The BLM’s independent appraiser concluded that there would be no change in the determination of the “highest and best use” analysis in the appraisal used in the land exchange if the property involved was expressly considered as a land fill site. Given all the facts and circumstances, the independent appraisal concluded that there was no premium to be paid for the property interests exchanged by the BLM even if a portion of such property interests were a part of a planned landfill.
All scheduled briefing for the case was completed in January 2003. The Company is currently awaiting a decision from the court. Kaiser is vigorously defending the litigation.
B. National Parks and Conservation Association (Plaintiff) v. Bureau of Land Management; United States Department of the Interior; Kaiser Eagle Mountain, Inc.; and Mine Reclamation Corporation
(Defendants), (United States District Court for the Central District of California, Riverside Division, Case No. EDCV 000041 VAP(JWJx)).
This lawsuit was brought by the National Parks Association and alleges causes of action that are virtually identical to the causes of action asserted in the Charpied litigation. All scheduled briefing has been completed for this litigation. Kaiser is also vigorously defending this matter.
Threatened Endangered Species Act Litigation. The Company along with the U.S. Department of Interior, the BLM, the Los Angeles County Sanitation District and Metropolitan Water District of Southern California, received a letter dated September 26, 2002, from the Center for Biological Diversity, the Sierra Club, Citizens for the Chuckwalla Valley (“Complaining Groups”) declaring their intent to sue for violations of the Endangered Species Act in regard to actions or inactions related to the railroad that would serve the Eagle Mountain landfill project. Among other things, it is alleged that that there has been a failure to comply with a biological opinion issued by the U.S. Fish & Wildlife Service and that the BLM has failed to enforce the terms of that biological opinion. In summary, the Complaining Groups are demanding enforcement of the biological opinion or revocation by the BLM of the right-of-ways granted for the existing Eagle Mountain railroad and the Eagle Mountain road. The biological opinion contains, among other items, mitigation measures for the desert tortoise which could require substantial expenditures.
In reviewing the complaints of the Complaining Group, the BLM, out of an abundance of caution, conducted an informal consultation with the U.S. Fish & Wildlife Service with respect to the biological opinion. Although neither the construction of the landfill project nor the regular use of the railroad has commenced, the BLM requested the Company to develop a maintenance schedule for the railroad that would address, among other things, the particular concerns of culverts and rail line ballast. The Company has submitted a proposed schedule which is under review by the BLM.
Warrant Dispute. New Kaiser Employees’ Voluntary Benefit Association, VEBA, and Pension Benefit Guaranty Corporation, PBGC, are the beneficial owners of warrants to purchase, respectively, 460,000 and 285,260 Class A Units in the Company (the warrants were initially for common stock of Kaiser Inc. and were converted into Class A Units of Kaiser LLC in the merger). VEBA and PBGC have each claimed that the treatment of its warrant in the conversion violated the terms of the warrant. Prior to the vote on the conversion proposal, it was agreed by Kaiser, VEBA and PBGC that the rights of each VEBA and PBGC, under its warrant, would not be changed or waived by (i) any consent to or approval of the conversion proposal by either VEBA, PBGC or any director representing either of them, or (ii) any decision by either the VEBA or the PBGC to delay any potential legal challenge until after the adoption and completion of the conversion proposal. VEBA and PBGC voted their respective shares in Kaiser Inc. in 2001 in favor of the conversion proposal. VEBA and PBGC each occasionally continue to assert that the conversion proposal violated the terms of its warrant. The Company has had discussions with VEBA representatives concerning the claim and the Company believes the claim does not have any merit. Neither the VEBA nor the PBGC have taken legal action to pursue the claim.
Product Liability Litigation. In March 2002, the Company received a complaint captioned Explorer Pipeline Company, et al v. Kaiser Steel Corporation, et al., (District Court of Tarrant County, Texas, Case No. 96-191821-02). The plaintiffs in this suit allege that KSC, or possibly other steel companies may have manufactured or sold pipe that was used in a portion of a petroleum pipeline that runs from the Texas Gulf Coast to Hammond, Indiana. It was further alleged that this portion of the pipeline was defective and ruptured on March 9, 2000, releasing gasoline and causing damage to the plaintiffs’ respective interests in land and that there were business interruption damages to certain of the plaintiffs. No amount of damages has been pled. Based upon the complaint, it appears that plaintiffs filed this lawsuit because of statute of limitations concerns without knowing who may have actually sold or manufactured the pipe in the ruptured section of the pipeline. There were no material developments in
this case in 2003. A National Transportation & Safety accident report identified another company as the maker of the ruptured pipe. Based upon information currently known, it is anticipated that the Company will ultimately be dismissed from the lawsuit. See “Note 22. Subsequent Events” for further information.
Asbestos Litigation. There are pending asbestos litigation claims, primarily bodily injury, against Kaiser LLC and Kaiser Steel Corporation (the bankruptcy estate of Kaiser Steel Corporation is embodied in KSC Recovery, Inc.). There currently are approximately 14 active suits. Most of the plaintiffs allege that they were aboard Kaiser ships or worked in shipyards in the Oakland/San Francisco, California area or Vancouver, Washington area in the 1940’s and that the Company and/or KSC Recovery were in some manner associated with one or more shipyards or has successor liability. However, the Company is beginning to see the focus of the claims shifting from ships and shipyards to other facilities such as the former Kaiser Steel Mill Site Property. Plaintiffs attorneys are increasingly requesting mill site and Eagle Mountain related documents in an effort to build a “war chest” of documents for future litigation.
Most of these lawsuits are third party premises claims alleging injury resulting from exposure to asbestos or asbestos containing products and involve multiple defendants. The Company anticipates that it, often along with KSC Recovery, will be named as a defendant in additional asbestos lawsuits. A number of large manufacturers and/or installers of asbestos and asbestos containing products have filed for bankruptcy over the past several years, increasing the likelihood that additional suits will be filed against the Company. In addition, the trend has been toward increasing trial damages and settlement demands. Virtually all of the complaints against us and KSC Recovery are non-specific, but involve allegations relating to pre-bankruptcy activities. It is difficult to determine the amount of damages that the Company could be liable for in any particular case until near the time of trial; indeed, many of these cases do not include pleadings with specific damages. The Company vigorously defends all asbestos claims as is appropriate for a particular case.
Of the claims resolved to date, approximately 76% have been resolved without payment to the plaintiffs, and of the 40 cases that have been settled to date involving a payment made to plaintiffs, the settlement amount was $37,500 or less for 32 of such cases. The Company believes that it currently has substantial insurance coverage for the asbestos claims and has tendered these suits to appropriate insurance carriers.
City of Ontario Claim. In 2001, the California Regional Water Quality Control Board (“RWQCB”) communicated with us that the City of Ontario had asserted that the Company was responsible for the damage caused by a plume of high total dissolved solids (such as salt) to one of its wells, which plume allegedly emanated from the Company’s former mill site property. By way of background, in the fall of 1993, RWQCB approved a settlement agreement resolving the Company’s groundwater remediation obligation. The settlement agreement provided that the Company would: (i) pay $1,500,000 upon approval of the settlement agreement; and (ii) contribute 1,000 acre feet of water in storage per year for 25 years for the benefit of a regional groundwater de-salter program either by direct transfer to the de-salter project or abandonment to the basin with a Watermaster waiver of the de-salter replenishment obligation. The Company has satisfied all of its obligations under the settlement agreement. However, the settlement agreement left open the possibility of certain third party claims. See “Note 22. Subsequent Events” for further information.
Slemmer Litigation. Thomas M. Slemmer, et al v. Fontana Union Water Company, et al., (San Bernardino County District Court, California, Case No. SCVSS 086856). The defendants in the lawsuit are Kaiser, Fontana Union Water Company, Cucamonga County Water Company, San Gabriel Valley Water and individuals serving on the Board of Directors of Fontana Union Water Company. In summary, plaintiffs allege that they are the owners of 175 shares of the stock of Fontana Union Water Company, a mutual water company, and that the defendants conspired and committed acts that constitute an unlawful restraint of trade, a breach of fiduciary duty by the controlling shareholders of Fontana Union and
fraudulent business practices in violation of California law. Among other things, plaintiffs have requested $25,000,000 in damages and the trebling of such damages under California law. In October 2003, the court ruled that the lawsuit could proceed as a class action lawsuit. With this ruling, discovery will proceed in the case. The Company believes that the allegations against the Company are without merit and the Company will vigorously defend this suit.
Port of Oakland. The Port of Oakland continues to assert a potential claim arising out of alleged contamination of soil from underground storage tanks. The Port of Oakland alleged that KSC used these tanks at property owned by the Port of Oakland and leased by Kaiser Steel Corporation pursuant to a lease agreement that terminated in 1986. Based upon the communication received, the Port of Oakland claims damages of approximately $150,000 plus unknown potential remediation costs. The Company believes, based upon the information it has been provided to date, that the allegations are without merit and that any potential claim would be barred under the statute of limitations.
Port of Los Angeles. On March 21, 2003, KSC received a Third Party Complaint captioned Santa Monica Baykeeper, et al (Plaintiffs) v. Kaiser International Corporation, et al (Defendants) / American Bulk Loading Enterprises, Inc. et al (Third-Party Plaintiffs) v. AMICOR, et al (Third Party Defendants) United States District Court Central District of California; Case Number CV-97-7761 DDP (RCx). The underlying litigation involves a citizens enforcement action commenced against the Port of Los Angeles, Kaiser International Company, and others by the Santa Monica Baykeepers for alleged contamination to the San Pedro Inner Harbor in the Port of Los Angeles arising from the operation of a bulk loading facility. The Third Party Plaintiffs subsequently commenced litigation against KSC and thirty-nine other Third Party Defendants seeking recovery for any amount paid by the Third Party Defendants under theories of equitable indemnity, negligence and contribution. While the Company understands the case is still open, the litigation is not actively being actively pursued against KSC.
London Market Claim. In 2002, litigation was commenced by Truck Insurance Exchange (“Truck”) against Lloyd’s, London, and certain London Market Insurance Companies (collectively “London Carriers”), captioned Truck Insurance Exchange v. Fremont Indemnity, et al, Los Angeles Superior Court Case No. BC 260738. In essence Truck was claiming that the London Carriers were obligated to participate in the payment of a litigation settlement that Truck had made. The London Carriers tendered the claim to the Company for indemnification pursuant to a 1995 settlement agreement between the London Carriers and the Company. The Company in turn submitted the London Carriers’ claim to IMACC, which is a third party that the Company believes is ultimately responsible for the payment of any amount that is determined to be owed in litigation. During the second quarter of 2003, the Truck litigation was dismissed because of Truck’s failure to commence its law suit within the applicable statute of limitations. As of the date of this Report on Form 10-K, IMACC has been reimbursing the London Carriers for the reasonable attorneys’ fees and costs of this litigation. The Company understands that Truck has decided to appeal the trial court’s decision to dismiss the case.
Bankruptcy Claims. The bankruptcy estate of KSC was officially closed by order of U.S. Bankruptcy Court for the District of Colorado on October 2, 1996. However, the bankruptcy case was reopened in 1999 in connection with certain litigation matters. Since that time, the bankruptcy case was again closed, however, the administration of KSC’s bankrupt estate will continue for several more years.
From time to time various environmental and similar types of claims that relate to Kaiser Steel pre-bankruptcy activities, are asserted against KSC and Kaiser LLC. Excluding the asbestos claims, there has been an average of two to four such claims a year for the past several years. The Explorer Pipeline litigation and the Port of Oakland claims are examples of the types of claims that are occasionally alleged to have arisen out of pre-bankruptcy activities. In connection with the KSC plan of reorganization, Kaiser, as the reorganized successor to KSC, was discharged from all liabilities that may have arisen prior to confirmation of the plan, except as otherwise provided by the plan and by law. Although Kaiser
believes that in general all pre-petition claims were discharged under the KSC bankruptcy plan, there have been some challenges as to the validity of the discharge of certain specified claims, such as asbestos claims. If any of these or other similar claims are ultimately determined to survive the KSC bankruptcy, it could have a materially adverse effect on Kaiser’s business and value.
Note 22. SUBSEQUENT EVENTS
Settlement of City of Ontario. In February 2004, the Company executed a final settlement agreement with the City of Ontario with regard to allegations of impacts to municipal wells owned by the City of Ontario. The full settlement price was paid by insurance and will be reflected in the Company’s financial statements in the first quarter of 2004.
Dismissal of Products Liability Litigation. On March 2, 2004, the Company was dismissed without prejudice from the case Explorer Pipeline Company, et al with Kaiser Steel Corporation, et al (District Court of Tarrant County Texas, Case No. 96-191 821-02).
Tex Tin Claim. In February 2004 the Company received correspondence identifying the Company as a potentially responsible party for remediation and related costs at a property in Texas known as the Tex Tin site. It appears that the basis for such identification is that the Company is considered the reorganized successor to KSC. However, the factual basis and the monetary extent of the alleged liability are currently unknown. No legal action has been commenced against the Company. The Company has informed those giving the notice that the Company believes such liability, if any, was discharged in the bankruptcy of KSC. The Company believes that there is coverage under the Company’s existing insurance for this claim.
Note 23. QUARTERLY FINANCIAL DATA (Unaudited)
KAISER VENTURES LLC AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES