Item 1. Business
Corporate History; Overview
Kaiser Group Holdings, Inc. is a Delaware holding company formed on December 6, 2000 for the purpose of owning all of the outstanding stock of Kaiser Group International, Inc. Kaiser Group International, Inc. continues to own the stock of its remaining subsidiaries. On June 9, 2000, Kaiser Group International, Inc. and 38 of its domestic subsidiaries voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code in the District of Delaware (case nos. 00-2263 to 00-2301). Kaiser Group International, Inc. emerged from bankruptcy with a confirmed Plan of Reorganization (the Second Amended Plan of Reorganization (the Plan)) that was effective on December 18, 2000. In this document, we frequently use the terms “we” and “Kaiser” to refer to Kaiser Group Holdings, Inc., Kaiser Group International, Inc. and other subsidiaries we own.
Under the Plan, Kaiser Group International, Inc. sold some of its businesses and made payments of cash and stock to various classes of creditors described in Note 2 to the Consolidated Financial Statements. We now have only a limited number of activities, assets and liabilities, primarily consisting of the following:
• We own Kaiser-Hill Company, LLC equally with CH2M Hill Companies Ltd. Kaiser-Hill is our major source of income. Kaiser-Hill currently serves as the general contractor at the U.S. Department of Energy’s Rocky Flats Environmental Technology Site, a former Department of Energy nuclear weapons production facility near Denver, Colorado. Kaiser-Hill has performed for the Department of Energy at this site since 1995 and in January 2000 was awarded a new contract to manage the closure of the site. The level of success experienced by Kaiser-Hill in achieving timely closure of the Rocky Flats site, and the cost of achieving such closure, are the primary determinants of our long-term financial performance following the completion of the reorganization process. See “Kaiser-Hill” below for additional information on Kaiser-Hill.
• We have a substantial claim, pending resolution, against the owner of a steel mini-mill that we constructed for Nova Hut, s.a. in the Czech Republic. The engineering and construction of the mini-mill was completed in 2000 by a subsidiary of Kaiser Group International, Inc. called Kaiser Netherlands, B.V. See “Nova Hut” below for additional information on the Nova Hut project.
• Until September 30, 2002 we held a minority ownership interest in ICF Consulting Group, Inc. (a division that Kaiser Group International, Inc. sold in 1999). We continue to hold an 8½% subordinated promissory note from ICF Consulting due June 25, 2006 in the principal amount of $6.4 million as a result of that transaction.
• We have a wholly-owned captive insurance company that is not at this time issuing new policies and is solely involved in resolving remaining claims made against previously issued policies.
• We have an ongoing obligation to fund a capped post-employment medical benefit plan for a fixed group of retirees.
General Terms and Distribution Status of Plan of Reorganization
The effectiveness of the Plan as of December 18, 2000 did not in and of itself complete the bankruptcy process. The process of resolving in excess of $500 million of claims initially filed in the bankruptcy is ongoing. By far the largest class of claims (Class 4) was made up of creditor claims other than trade creditor and equity claims. Class 4 claims included holders of Kaiser Group International, Inc.’s senior subordinated notes due 2003 (Old Subordinated Notes). Holders of allowed Class 4 claims received a combination of cash and our preferred (New Preferred) and common stock (New Common) in respect of their claims. Such holders received one share of New Preferred and one share of New Common for each $100 of claims. However, the number of shares of New Preferred issued was reduced by one share for each $55.00 of cash received by the holder of an allowed Class 4 claim.
Pursuant to the terms of the Plan, we were required to complete our initial bankruptcy distribution within 120 days of the effective date of the Plan. Accordingly, on April 17, 2001, we effected our initial distribution of cash, New Preferred and New Common to holders of Class 4 claims allowed by the Bankruptcy Court. At that time, there were approximately $136.8 million of allowed Class 4 claims. The amount of unresolved claims remaining at April 17, 2001 was approximately $130.5 million.
To address the remaining unresolved claims, the Bankruptcy Court issued an order on March 27, 2001 establishing an Alternative Dispute Resolution (ADR) procedure whereby the remaining claimants and we produce limited supporting data relative to their respective positions and engage in initial negotiation efforts in an attempt to reach an agreed claim
determination. If necessary, the parties were thereafter required to participate in a non-binding mediation before a mediator pre-selected by the Bankruptcy Court. All unresolved claims as of March 27, 2001 became subject to the ADR process. Since April 17, 2001, the date of the initial distribution, $123.0 million of asserted claims have been withdrawn, negotiated or mediated to an agreed amount, resulting in cash payments approximating $2.2 million and issuances of 683 shares of New Preferred and 823 shares of New Common. As of March 26, 2004, the amount of unresolved claims was approximately $7.5 million. We expect to resolve the remaining claims in the first six months of 2004 and currently believe that the total amount of Class 4 claims ultimately to be allowed in the Old Kaiser bankruptcy proceeding will not exceed $142.5 million. As demonstrated by the claim settlements completed since April 17, 2001, and based on the belief that it is in the Company’s and its shareholders’ best interest, we have been settling certain remaining Class 4 claims entirely for cash payments in lieu of the combination of cash and New Preferred and New Common as contemplated in the Plan. We intend to continue to use this settlement alternative during its resolution of remaining Class 4 claims.
From time to time in the future, as remaining unresolved claims are resolved, excess cash from the “reserve” fund (including cash added to “reserve” fund in payment of pro forma dividends, classified as interest expense subsequent to July 1, 2003, on retained shares of New Preferred) must be used to redeem outstanding shares of New Preferred. In January 2003, we redeemed 282,000 shares of outstanding New Preferred by using $8.9 million and $5.2 million of restricted and unrestricted cash, respectively. In October 2003, we redeemed 113,530 shares of outstanding New Preferred by using $1.6 million and $4.6 million of restricted and unrestricted cash, respectively. In February 2004, we redeemed 95,932 shares of New Preferred by using $3.2 million of restricted cash and $2.1 million of unrestricted cash.
Kaiser-Hill
Our major remaining asset and primary source of income is our 50% ownership interest in Kaiser-Hill Company, LLC, which we own equally with CH2M Hill Companies Ltd. Kaiser-Hill was formed solely for the performance of the current and former Rocky Flats contracts. CH2M Hill designates three of the five members of Kaiser-Hill’s Board of Managers, and we designate two members.
Kaiser-Hill currently serves as the general contractor at the U.S. Department of Energy’s Rocky Flats Environmental Technology Site near Denver, Colorado. Kaiser-Hill has performed since 1995 at this site, a former Department of Energy nuclear weapons production facility. Kaiser-Hill is working to safely stabilize, package and ship radioactive materials, remediate facilities contaminated with hazardous and radioactive waste, and restore much of the 6,000-acre site to its natural state for future use as a national wildlife refuge. The level of success experienced by Kaiser-Hill in achieving timely closure of the Rocky Flats site, and the cost of achieving such closure, are the primary determinants of our long-term financial performance.
Effective February 1, 2000, Kaiser-Hill was awarded a new contract pursuant to which Kaiser-Hill provides services that will complete the restoration of the Rocky Flats site and close it to Department of Energy occupation. The economic terms of the contract provide that Kaiser-Hill will earn revenue equal to the actual cost of completing the project plus a performance fee based on a combination of factors involving the actual cost of completing the site closure project and the actual date of completing the project.
On March 24, 2004 Kaiser-Hill received a contract modification that motivates safe continuing positive performance by increasing the maximum fee ceiling that may be earned under the Closure Contract. The same contract modification reduces the minimum fee floor and includes other provisions related to work scope changes. The potential fee to be earned pursuant to the Closure Contract as recently modified ranges from $75.0 million to $560.0 million based on Kaiser-Hill’s costs to complete the site closure being within the range of completion costs of $3.12 billion and $4.86 billion, and completion at various dates between 2005 and 2007. For project costs saved below a target level, Kaiser-Hill retains a varying percentage share ranging from 20% to 30% as additional incentive fee. Similarly, for project costs incurred above a target level, Kaiser-Hill’s incentive fee is reduced by a 30% share. Kaiser-Hill recently received a contract modification that motivates safe continuing positive performance by increasing the maximum fee ceiling that may be earned under the contract. The same contract modification reduces the minimum fee floor and includes other provisions related to work scope changes. See Item 7. - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of this activity.
Nova Hut
Although Old Kaiser sold its Metals, Mining and Industry business unit in August 2000, it retained its Netherlands subsidiary, Kaiser Netherlands, B.V., which had been responsible for a turnkey engineering and construction services contract for the construction of a steel mini-mill in the Czech Republic for Nova Hut. After construction of the mini-mill was complete in 2000, the contract with Nova Hut provided for a maximum of three possible performance tests. The first performance test was
completed on November 13, 2000. Kaiser Netherlands believes that the first performance test was successful and that Nova Hut should have agreed to final acceptance of the mini-mill and made final payment of amounts accrued by Kaiser Netherlands throughout the project, including fee and retention amounts with release of performance guarantee instruments. Nova Hut, however, asserted that the first test was not successful. Kaiser Netherlands believes that such contention may have been put forth in response to severe financial constraints on Nova Hut’s operations resulting from weakening conditions in the worldwide steel market and the significant amounts that Kaiser Netherlands believed it was contractually due. To date, this dispute has not been resolved, and Kaiser Netherlands has resorted to legal proceedings to enforce its rights. The primary legal venue up until this time has been the Delaware bankruptcy proceeding for Old Kaiser, where the Company has asserted claims against Nova Hut and the International Finance Corporation (“IFC”). The Delaware bankruptcy court has previously ruled that the Company, as opposed to Kaiser Netherlands, could proceed with prosecution of its specific claims against Nova Hut and IFC in the Delaware bankruptcy court venue. Both Nova Hut and IFC appealed this ruling and during the first quarter 2004, the Delaware bankruptcy court’s decision regarding the IFC was overturned by the District Court, ruling that the IFC enjoys sovereign immunity from prosecution. Kaiser Holdings has filed a notice of appeal to the Third Circuit regarding this decision in favor of the IFC. At this date, the Nova Hut appeal is still pending at the District Court level.
In December 2003, the International Chamber of Commerce (“ICC”), under the dispute resolution provisions of the Nova Hut mini-mill subcontract between Kaiser Netherlands and the mini-mill’s main equipment supplier, Tippins, Inc., issued a final award that was on balance favorable to Kaiser Netherlands. As a result of the ruling, Kaiser Netherlands was relieved of the obligation to pay additional retention to Tippins and Kaiser Netherlands was awarded a net cash settlement of $2.6 million. The Company has not recorded this settlement due to the uncertainties regarding collectibility. However, the Company intends to vigorously pursue collection of this settlement.
In January 2004, Kaiser Netherlands filed arbitration claims against Nova Hut in excess of $40.0 million with the ICC. The arbitration panel is currently being constituted, and the first hearing should take place during the second or third quarter of 2004 with the earliest possible final award ruling being issued sometime in 2005. Nova Hut has submitted a $46.0 million counterclaim against Kaiser Netherlands in these same ICC proceedings.
The continued litigation of these disputes, as well as the cost of a possible ongoing presence in Ostrava, Czech Republic, has had and will continue to have a negative impact on the cash flow of Kaiser Netherlands and Kaiser Holdings.
Based on the Company’s continued concern over Nova Hut’s financial difficulties and the lack of a settlement resulting from an earlier, bankruptcy court-sponsored mediation, in the fourth quarter of 2003 the Company further reduced the carrying value of the remaining Nova Hut project assets from $6.0 million to $3.0 million by recording an additional reserve of $3.0 million, net of a $1.1 million income tax benefit, through a charge to “Loss from Discontinued Operations”. This reserve is in addition to a reserve recorded in 2001, which reduced the carrying value of the Nova Hut project assets from $21.6 million to $6.0 million by recording a reserve of approximately $9.8 million, net of a $5.8 million income tax benefit, through a charge to “Loss from Discontinued Operations”. These adjustments to the project asset carrying value have been determined based on the Company’s estimate of Nova Hut’s current ability to pay such liability.
Other Retained Assets, Activities and Obligations
Until September 30, 2002, we owned a 10% interest in ICF Consulting Group, Inc., a privately held entity, that was retained by Kaiser Group International, Inc. when it sold its Consulting Group in June 1999. In September 2002 we consummated a settlement of outstanding disputes with ICF Consulting. As a result of that transaction, we continue to hold an 8½% subordinated note from ICF Consulting due June 25, 2006 in the principal amount of $6.4 million, net of a $0.5 million reserve for uncollectibility.
We own a captive insurance company that is not at this time engaged in issuing new policies but is solely engaged in the process of resolving existing claims. Restrictions on the insurance company’s cash balances, maintained to support statutory insurance reserves, will be released as reserve requirements decrease in the future and to the extent such cash balances are not used in payment of resolved claims.
We also have the obligation to pay certain medical, disability and life insurance benefits to a fixed group of retirees for life. Such plans cover certain individuals who retired prior to 1993. There are approximately 653 retirees and dependents currently covered by the plans, the average age of whom is approximately 80. The actuarially determined present value of this obligation as of December 31, 2003, based on the existing commitments, interest rate assumptions and related medical benefit insurance policies, was $7.5 million, net of an unrecognized actuarial loss of $0.6 million. Although we intend to attempt to reduce remaining exposures relative to the costs of this obligation in the future, there can be no guarantee that this will be feasible, nor can we estimate the amount of potential future savings with any reasonable degree of accuracy.
Our assets also include those subsidiaries that were not debtors in the Kaiser Group International, Inc.’s bankruptcy proceedings. However, many of those subsidiaries are foreign entities and, except for Kaiser Netherlands which performed services for the Nova Hut project and those subsidiaries related to Kaiser-Hill, subsidiaries that were not debtors in Kaiser Group International, Inc.’s bankruptcy proceedings do not have material value. It is anticipated that a number of such subsidiaries will be dissolved or otherwise cease to exist or become totally inactive.
Our Board of Directors will consider whether we will engage in any additional business activities in the future. Among other things, it is anticipated that the Board of Directors will consider whether we should attempt to take advantage of the successful history of Kaiser Group International, Inc. in the government services market, either independently and through Kaiser-Hill or affiliates, in order to develop a new revenue base.
Insurance
We have a risk management and insurance program in place that provides a range of coverages tailored to the needs of the reorganized company. Insurance coverages include policies for fiduciary, crime, directors and officers liability, property, general liability, workers’ comp, and professional liability “runoff” coverage to deal with liabilities arising from past activities and projects, if necessary.
We believe that the insurance coverages we maintain, including self-insurance, protect against risks that are comparable to those of similar businesses of our scope and present operating profile and that related coverage amounts are economically reasonable. At this time, we expect to continue to be able to obtain insurance in amounts generally available to firms with a similar profile. Insurance costs are rising, and there can be no assurance that the insurance coverage and levels maintained by us will continue to be reasonably available. An insured claim, or uninsured claim for that matter, arising out of pre-reorganization or post-reorganization activities of Kaiser Group International, Inc., if successful and of sufficient magnitude, could have a material adverse effect on our financial position.
Government Regulation
We may, from time to time, either individually or in conjunction with other government contractors operating in similar types of businesses, be involved in U.S. government investigations for alleged violations of procurement or other federal laws and regulations. No charges presently are known to have been filed against Kaiser Group International, Inc. or our other subsidiaries by these agencies.
Employees
As of March 26, 2004, we had approximately 11 part-time employees.
Company Website Information
We currently do not maintain a website.
Item 2.
Item 2. Properties
We owned no properties at December 31, 2003, and leased properties at that date were located at 12303 Airport Way, Broomfield, Colorado, 80021-0007 and 9302 Lee Highway, Fairfax, Virginia 22031-1207.
Item 3.
Item 3. Legal Proceedings
On June 9, 2000, Kaiser Group International, Inc. and 38 of its wholly owned subsidiaries filed petitions for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the District of Delaware in order to facilitate the restructuring of Kaiser Group International Inc.’s long-term debt, trade and other obligations. Kaiser Group International, Inc. continued to operate as a debtor-in-possession subject to the Bankruptcy Court’s supervision and orders until its Plan of Reorganization was confirmed on December 5, 2000 and became effective on December 18, 2000. The provisions of such Plan are further described under Item 1 of this Report, in Note 2 to the Consolidated Financial Statements, and in a Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2000 by Kaiser Group International, Inc.
In the course of normal business activities, various claims or charges have been asserted and litigation commenced against Kaiser Group International, Inc. arising from or related to properties, injuries to persons, and breaches of contract, as well as
claims related to acquisitions and dispositions. Such claims are now part of the overall bankruptcy proceeding. Claimed amounts may not bear any reasonable relationship to the merits of the claim or to a final court award. In the opinion of management, an adequate reserve has been provided for final judgments, if any, in excess of insurance coverage, that might be rendered against Kaiser Group International, Inc. in the event of unsuccessful bankruptcy resolution. The continued adequacy of reserves is reviewed periodically as progress on such matters ensues.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote to security holders during the fourth quarter of 2003.
Item 4A. Executive Officers of the Company
John T. Grigsby Jr., 64, is President and Chief Executive Officer and serves on the Board of Managers of Kaiser-Hill. Mr. Grigsby is also the President of John Grigsby and Associates, Inc., a firm which he founded in June 1984 to provide consulting assistance to financially distressed and reorganizing companies. Mr. Grigsby has served as the Trustee for the Transcom Creditors’ Trust and has served as chief executive officer of a number of financially distressed companies, including Super Shops, Inc., Auto Parts Club, Reddi Brake, Rose Auto Stores-Florida, Inc. as well as for a number of Chapter 11 debtors, including Pro Set, Inc., Lomas Financial Corporation and Thomson McKinnon Securities, Inc. Mr. Grigsby is also a member of the Board of Directors of First Southern Bancorp of Boca Raton, Florida.
Marijo L. Ahlgrimm, 43, is Executive Vice President and Chief Financial Officer. Prior to becoming Executive Vice President and Chief Financial Officer upon the effectiveness of Old Kaiser’s Plan, Ms. Ahlgrimm served as Senior Vice President and Corporate Controller of the predecessor Kaiser entities since December, 1997. From 1993 to 1997, Ms. Ahlgrimm was Vice President and Controller of an information technology service provider that was subsequently acquired by TRW in December, 1997. Ms. Ahlgrimm was a manager with PricewaterhouseCoopers LLP from 1985 to 1993. Ms. Ahlgrimm graduated from the University of Wisconsin-Madison (B.B.A.). Ms. Ahlgrimm is also the Chief Financial/Administrative Officer of a privately held information technology provider located in Rockville, Maryland.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Market Information
Effective with implementation of Kaiser’s Plan of Reorganization, on or about April 17, 2001 each 96 shares of Old Common were exchanged for 1 share of New Common. New Common currently trades on the Over-the-Counter Bulletin Board system under the symbol “KGHI”. The Over-the-Counter Bulletin Board quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. At March 26, 2004, there were 134 shareholders of record of the New Common.
The following table sets forth the high and low sale prices for the New Common as reported on the Over-the-Counter Bulletin Board.
Our Transfer Agent and Registrar is EquiServe Trust Company, N.A, P.O. Box 43069, Providence, RI 02940-3069. The Shareholder Relations telephone number is (781) 575-2723, the hearing impaired numbers are (800) 952-9245 and (781) 575-2692 for callers outside of the United States, and the internet address is http://www.equiserve.com.
Kaiser Group International, Inc. never paid cash dividends on its Old Common. We anticipate that no cash dividends will be paid on the New Common for the foreseeable future and that our earnings will be retained for use in the business and, consistent with the terms of the New Preferred and the KGP put rights described in Note 8 to the Consolidated Financial Statements, be used to pay dividends on and redeem outstanding shares of New Preferred. Our Board of Directors determines our dividend policy based on its results of operations, required payment of dividends on New Preferred, financial condition, capital requirements, and other circumstances.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2003 with respect to compensation plans under which equity securities of the Company are authorized for issuance:
Recent Sales of Unregistered Securities
On April 17, 2001, we made a distribution of cash, New Preferred and New Common to holders of Class 4 claims allowed by the Bankruptcy Court. Holders of Class 4 claims received one share of New Preferred and one share of New Common for each $100 of claims. However, the number of shares of New Preferred issued was reduced by one share for each $55.00 of cash received by the holder of an allowed Class 4 claim. On April 17, 2001, we issued an aggregate of 1,136,024 shares of New Preferred and 1,368,632 shares of New Common to the holders of allowed Class 4 claims. On March 13, 2002, we issued 683 shares of New Preferred to KE Realty Service, Inc. in connection with the settlement of its Class 4 claim. These issuances were exempt from registration under Section 1145 of the U.S. Bankruptcy Code.
In January 2003, we issued shares of New Common to the following directors as part of their compensation for service as officers and Board of Directors: John T. Grigsby, Jr. (1,000 shares), James J. Maiwurm (1,000 shares), Jon B. Bennett (1,000 shares), and Frank E. Williams, Jr. (1,000 shares). These issuances were exempt for registration under Section 4(2) of the Securities Act of 1933.
Item 6.
Item 6. Selected Consolidated Financial Data
Selected consolidated financial data of Kaiser Group Holdings, Inc. for the years ended December 31, 2003, 2002 and 2001 and of Kaiser Group International, Inc. for the years ended December 31, 2000 and 1999, have been derived from our and/or Kaiser Group International, Inc.’s audited consolidated financial statements. This information should be read in conjunction with the Consolidated Financial Statements and the related notes thereto appearing elsewhere in this Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Certain reclassifications have been made to the prior period financial statements to conform to the presentation used in the December 31, 2003 Consolidated Financial Statements.
Selected Consolidated Financial Data
(in thousands, except per share data)
* After the adoption of FAS 150 on July 1, 2003, we reclassified mandatorily redeemable preferred stock from mezzanine equity to long term liabilities. At December 31, 2003, long term liabilities consist entirely of mandatorily redeemable preferred stock.
** After the adoption of FAS 150 (see Note 3 to the Consolidated Financial Statements), we reclassified mandatorily redeemable preferred stock to long term liabilities from mezzanine equity. Additionally, as we did not complete the initial bankruptcy distribution until April 17, 2001, no shares of New Preferred were actually outstanding as December 31, 2000.
We adopted fresh start reporting in our consolidated balance sheet as of December 31, 2000. The American Institute of Certified Public Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (SOP 90-7), requires that, under certain circumstances resulting from a bankruptcy, a new entity be created for financial reporting purposes upon the emergence of that entity from bankruptcy. Accordingly, the value of the reorganized enterprise becomes the established amount for the emerging balance of shareholders’ equity, and any accumulated deficit of the predecessor entity is offset against available paid-in-capital to result in emerging retained earnings of zero. Additionally, assets and liabilities were recorded at their fair values.
Since the financial information as of and subsequent to December 31, 2000 has been prepared as if it is of a new reporting entity and is not comparable to that of previous years, a black line has been used to separate new entity information from prior entity information. Financial information with regard to activity occurring prior to December 31, 2000 has been marked as “Predecessor”, and financial information with regard to activity as of December 31, 2000 and thereafter is marked herein as “Successor”.
The value of the emerged enterprise used for fresh start reporting as of December 31, 2000 was $87.5 million and was determined by management with the assistance of independent advisors. The methodology employed involved estimation of enterprise value taking into consideration a discounted cash flow analysis. The discounted cash flow analysis was based on a seven-year cash flow projection prepared by management, taking into consideration the terminal value of its assets and liabilities as of immediately prior to its emergence from bankruptcy on December 18, 2000. Terminal values of assets and
liabilities were determined based either on contracted amounts, actuarial present values and/or management’s estimates of the outcome of certain operating activities. These post-emergent matters consist largely of the retained operations discussed in this Report. Net after-tax cash flows, assuming a 40% effective tax rate, were discounted at approximately 17% in order to take into consideration the risks and uncertainties inherent in such projections. The cash flow projections were based on estimates and assumptions about circumstances and events that have not yet taken place. Estimates and assumptions regarding individual retained matters that form the collective composition of the overall enterprise value as of December 18, 2000 are inherently subject to significant economic and competitive uncertainties and contingencies beyond the control of the Company. Accordingly, there may be differences between projections and actual results because events and circumstances frequently do not occur as expected and may be significant. More specifically, assumptions within the valuation related to the amount and timing of the ultimate performance and related cash flows of Kaiser-Hill have the greatest impact to the overall enterprise valuation.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
In the three years since the Plan of Reorganization of Kaiser Group International, Inc. under Chapter 11 of the Bankruptcy Code became effective on December 18, 2000, we have consummated the initial bankruptcy distributions to allowed claimholders, continued to progress in resolving remaining outstanding bankruptcy claims, managed our remaining assets, wound down unnecessary elements of previous activities and corporate structure, and redeemed a significant portion of the number of New Preferred shares outstanding.
Following the effectiveness of the Plan, we have only a limited number of activities, assets and liabilities, primarily consisting of the following:
• We own Kaiser-Hill Company, LLC equally with CH2M Hill Companies Ltd. Kaiser-Hill is our major source of income. Kaiser-Hill currently serves as the general contractor at the U.S. Department of Energy’s Rocky Flats Environmental Technology Site, a former Department of Energy nuclear weapons production facility near Denver, Colorado. The level of success experienced by Kaiser-Hill in achieving timely closure of the Rocky Flats site, and the cost of achieving such closure, are the primary determinants of our long-term financial performance following the completion of the reorganization process.
• We have a substantial claim, pending resolution, against the owner of a steel mini-mill constructed for Nova Hut, s.a. in the Czech Republic. The engineering and construction of the mini-mill was completed in 2000 by a subsidiary of Kaiser Group International, Inc. called Kaiser Netherlands, B.V.
• Until September 30, 2002 we held a minority ownership interest in ICF Consulting Group, Inc. (a division that Kaiser Group International, Inc. sold in 1999). We continue to hold an 8½% subordinated promissory note from ICF Consulting due June 25, 2006 in the principal amount of $6.4 million as a result of that transaction.
• We have a wholly-owned captive insurance company that is not at this time issuing new policies and is solely involved in resolving remaining claims made against previously issued policies.
• We have an ongoing obligation to fund a capped post-employment medical benefit plan for a fixed group of retirees.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires that we make estimates and assumptions affecting the assets and liabilities (including contingent assets and liabilities) reported at the date of the Consolidated Financial Statements and the income statement amounts reported for the periods presented. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Our accounting measurements that are most affected by our estimates of future events are:
• Recoverability of net assets of discontinued operations, notes receivable and accrued interest, and investments.
• Income tax provision, deferred tax assets and liabilities and related valuation allowance.
• Use of the equity method of accounting for Kaiser-Hill, an affiliate the Company has the ability to significantly influence but not control. In accordance with the equity method of accounting, we record our proportionate share of the affiliate’s income or losses. The difference between the carrying value of the joint venture investment and our underlying equity is amortized on a straight-line basis over the term of the joint venture investment, estimated at six years.
• Estimated fees on the Kaiser-Hill joint venture. Estimating future costs and, therefore, revenues and profits, is a process requiring a high degree of judgment, including assumptions regarding future operations of Kaiser-Hill as well as general economic conditions. In the event of a change in total estimated contract cost or profit, the cumulative effect of such change is recorded in the period the change in estimate occurs. The period of performance of the Kaiser-Hill contract extends over a long period of time and, as such, revenue recognition and our profitability from this contract may be adversely affected to the extent that estimated cost to complete or incentive or award fee estimates are revised, delivery schedules are delayed, or progress under the contract is otherwise impeded. Accordingly, our recorded revenues and gross profits from year to year can fluctuate significantly. The Kaiser-Hill contract contains incentive provisions for increased or decreased revenue and profit based on actual performance against established cost targets and schedule-related goals. Incentive fees are included in estimated contract revenue at the time the amounts can be reasonably determined and are reasonably assured based on historical experience and other objective criteria. Should Kaiser-Hill fail to perform satisfactorily under its contract, previously recognized revenues could be reversed and/or future period revenues could be reduced.
• Our liability in connection with a post-employment medical benefit plan for a fixed group of retirees. This liability is affected by changes in the discount rate, medical cost trend rates and certain actuarial assumptions. Should actual rates and results differ from the assumptions used, revisions to the liability would be required resulting in additional income statement charges.
Results of Operations
Years Ended December 31, 2003, 2002 and 2001
Equity Income In Earnings of Affiliate
Our major remaining source of income is a 50% ownership in Kaiser-Hill Company, LLC, which performs all elements of daily and long-term operations associated with the ultimate closure of the Department of Energy’s (DOE) Rocky Flats site, including stabilizing and safely storing radioactive material, cleaning up areas contaminated with hazardous and radioactive waste, and restoring much of the 6,000-acre Rocky Flats site to its natural state for future use by the public. Kaiser-Hill is owned equally by Kaiser Holdings and CH2M Hill Companies Ltd. CH2M Hill designates three of the five members of Kaiser-Hill’s Board of Managers and we designate two members. The financial information contained herein for Kaiser-Hill is reflected on the equity basis. Because Kaiser-Hill represents a significant portion of our financial position and results of operations, the audited financial statements of Kaiser-Hill are included in this report (see pages to).
Closure Contract Provisions for Revenue and Performance Award
The economic terms of the Closure Contract provide that Kaiser-Hill will earn revenue equal to the actual cost of physical completion plus a performance fee based on a combination of factors involving the actual cost of completing the site closure project and the actual date of physical completion, both as compared to contracted targets. On March 24, 2004 Kaiser-Hill received a contract modification that motivates safe continuing positive performance by increasing the maximum fee ceiling that may be earned under the Closure Contract. The same contract modification reduces the minimum fee floor and includes other provisions related to work scope changes. The potential fee to be earned pursuant to the Closure Contract as recently modified ranges from $75.0 million to $560.0 million based on Kaiser-Hill’s costs to complete the site closure being within the range of completion costs of $3.12 billion and $4.86 billion, and completion at various dates between 2005 and 2007. For project costs saved below the target level, Kaiser-Hill retains a varying percentage share ranging from 20% to 30% as additional incentive fee. Similarly, for project costs incurred above a target level, Kaiser-Hill’s incentive fee is reduced by the 30% share.
During early 2001, Kaiser-Hill reduced its estimate of total cost at completion to $4.5 billion from the original $4.8 billion. This reduction in estimated cost at completion had the financial statement result of increasing its accrual of the fee to be earned over the contract duration from $150.0 million to $180.0 million. Kaiser-Hill continued to make favorable progress on the Closure Contract during 2001 and, during the quarter ended December 31, 2001, amended its estimate for the physical contract completion date from December 31, 2007 to December 31, 2006 and changed its estimate of the total cost to be incurred during the Closure Contract duration to be below $4.0 billion. Therefore, Kaiser-Hill management increased its estimate of the fee to be earned over the contract duration from the $180.0 million to $355.0 million. Because Kaiser-Hill uses the percentage of completion method for the performance fee recognition on the Closure Contract, the effect of increasing its performance fee estimate on the project from $180.0 million to $355.0 million resulted in recording additional earnings of $50.6 million as a change in estimate in the fourth quarter of 2001. The additional earnings were partially offset by a $34.8 million increase in certain project contingency reserves. Therefore, the overall fourth quarter adjustment in 2001 was $15.8
million. Kaiser-Hill’s favorable progress continued throughout 2002 and, during the quarter ended December 31, 2002, management reduced the amount of project contingency reserves by the exact amount as accrued a year earlier - thus having the effect of increasing contract-to-date earnings by $34.8 million in the fourth quarter of 2002. Also during the fourth quarter of 2002, the DOE awarded Kaiser-Hill an additional $23.0 million in fee based on Kaiser-Hill’s continued reductions in its estimates of total cost to complete the Closure Contract.
Kaiser-Hill’s favorable performance on the contract since its inception in February of 2000 has resulted in a trend of cautious but continuously improving estimates of completion dates, cost estimates and potential fee earning opportunities. As of December 31, 2003, Kaiser-Hill’s cost estimate to complete the project is $3.75 billion, with an estimated completion date of December 2006, resulting in a potential total fee of $424 million. The recent contract modification provides additional performance fee incentives, and Kaiser-Hill plans to manage toward further improved performance in terms of both project cost and schedule. But there are substantial risks and uncertainties associated with Kaiser-Hill’s ultimate performance (see “Risk Factors Relating to Kaiser Holdings and Forward-Looking Statements” below), and Kaiser-Hill does not expect to achieve all, or nearly all, of the increase in the new maximum fee potential. Although the range of feasible enhanced performance fee earnings by Kaiser-Hill could be material to our operating results, due to the continuing uncertainties related to ultimate project performance, the contract modification has no current impact to, or affect on, our financial performance recognition for Kaiser-Hill.
For the years ended December 31, 2003, 2002 and 2001, we recorded our 50% equity in Kaiser-Hill’s income of $20 million, $36.8 million and $15 million, respectively. Fluctuations in the Kaiser-Hill earnings between 2003, 2002 and 2001 are entirely due to the cumulative effects of accounting for periodic changes in the projected fee to be earned upon the completion of the project. Kaiser-Hill’s estimate of the final performance fee to be earned upon completion of the contract has increased from $340 million to $363 million to $388 million as of December 31, 2001, 2002 and 2003, respectively. The changes in estimate of the completion fees are typically generated during the fourth quarter of each year as management completes its annual assessment of project performance. In addition to the changes in estimate, Kaiser-Hill released project contingency reserves during 2002 that had the effect of increasing their net earnings by more than just the change in fee estimate thus the larger net income fluctuation in 2002.
For the years ended December 31, 2003, 2002 and 2001, the equity income in earnings of affiliate is net of $3.5 million of amortization of the excess of our carrying value of our investment in Kaiser-Hill over our ownership percentage of the underlying Kaiser-Hill equity. We increased the carrying value of this investment by $21.1 million as part of our adoption of Fresh-Start reporting as of December 31, 2000 and will continue to amortize that difference over the duration of the Kaiser-Hill closure contract with the DOE (currently estimated to be complete by December 31, 2006).
Closure Contract Billing Provisions
Since the inception of the Closure Contract in February 2000 through December 31, 2003, Kaiser-Hill has invoiced DOE for the performance fee based on the contract provisions, and has collected an aggregate of $115.85 million in fees from the DOE.
Fee payments made by DOE to Kaiser-Hill, less certain non-reimbursable costs, will continue to be distributed to the joint venture owners upon receipt. Kaiser-Hill has historically incurred expenses that are not reimbursable by the DOE pursuant to the Federal regulations. Accordingly, such expenses, which Kaiser-Hill estimates could approximate up to 15% - 20% of the total award fee, are deducted from the total fee earned and collected by Kaiser-Hill prior to any distributions to either of its two owners. Since inception of the Closure Contract through December 31, 2003, Kaiser-Hill has distributed $46.6 million to each of its two owners. Adjusted for the effects of the 50% retainage holdback, Kaiser-Hill expects that its performance fee invoices to DOE will yield distributions of $3.5 million per quarter to each of its two owners in 2004. Similar to 2002 and 2003, Kaiser-Hill is anticipating that DOE will approve a non-recurring fee payment during the fourth quarter of 2004 acknowledging Kaiser-Hill’s continued favorable progression on the project. Historically, the fourth quarter fee payment has ranged from an additional $10.0 million to $16.0 million above the typically recurring quarterly fee payment. However, there are no assurances as to the amount or timing of any additional fourth quarter fee payment.
In the future, as Kaiser-Hill continues to accrue performance fees based on its currently projected total, less reserves deemed appropriate in the circumstances, and remains subject to a 50% retainage holdback on its performance fee invoicing, the level of unbilled accounts receivable on its balance sheet will begin to increase substantially. Kaiser-Hill will classify the difference between recorded performance fees and the collected fees as long-term unbilled accounts receivable on its balance sheet, which will be included as a component of Investment in Affiliate on the Company’s balance sheet. The Closure Contract also contains provisions for DOE to release portions of the retainage holdback prior to contract completion if the DOE deems appropriate. Kaiser-Hill is not able to estimate whether any of the retainage holdback will be released prior to contract completion.
Gain on Demutualization and Gain on Sale of Security
During the year ended December 31, 2001, we benefited from the fact that we had purchased retirement annuity contracts during the 1980’s for a capped group of employees. Kaiser Group International, Inc. paid 100% of the premiums for the retirement annuity contracts, and such annuities represented the entire amount of this particular retirement benefit obligation to the covered employees at the time. Having paid 100% of the insurance premiums, we became a mutual stockholder in the Prudential Insurance Company. Due to the illiquid nature of ownership in a mutual stockholder organization, Kaiser Group International, Inc. did not have a balance sheet carrying value ascribed to this asset. During November 2001, however, the Prudential Insurance Company demutualized its ownership structure through an initial public offering of its common stock. As a result of the demutualization of the Prudential holdings, we became the beneficial holder of approximately 195,000 shares of Prudential common stock and accordingly recorded a gain on the demutualization totaling $5.9 million, net of income tax expense of $2.2 million, in December 2001.
In February 2002, we sold all of our shares of Prudential common stock, and an additional gain of $0.1 million was recorded on sale of security.
Gain on Sale of Investment
On September 30, 2002, the terms of a settlement agreement with ICF Consulting Group, Inc. (ICF Consulting) were implemented. Under this settlement, we restructured the ICF Consulting notes totaling $6.6 million and accrued interest of $0.7 million, net of reserves, for a new subordinated promissory note of $6.4 million, resulting in a write-off of $0.8 million and establishment of a $0.5 million contingency reserve. In return ICF Consulting withdrew its claims against us, released cash in escrow totaling $0.8 million and purchased our 10% ownership in ICF Consulting, carrying value of $1.1 million, for $4.5 million. We recorded a gain of $3.4 million on the sale of the investment in ICF Consulting.
Write-off of Notes Receivable and Accrued Interest
As a result of the above-mentioned settlement agreement with ICF Consulting, we recorded the new ICF Consulting note of $6.4 million and wrote off the remaining balance in the notes receivable and accrued interest totaling $0.7 million. In light of the fact that ICF Consulting had defaulted on the previously held ICF Consulting notes and the subordinated nature of the new note, we have also recorded a reserve of $0.5 million due to uncertainties as to the ultimate collectibility of the new note and accrued interest.
Interest Income
We earn interest on our available cash balances and on the note receivable from ICF Consulting (see above discussion related to settlement with ICF Consulting). Interest income increased nominally in 2003, in spite of a decline in average cash balances, due to a full year of accrual of interest on the ICF Consulting note receivable. Interest income in 2002 compared to 2001 declined by $0.3 million due primarily to the partial forgiveness of interest income on the previous note receivable from ICF Consulting.
Interest income earned in 2001 was based in part on available cash balances, generally asset sale proceeds remaining from 2000 and restricted cash balances maintained for statutory purposes by our wholly-owned captive insurance subsidiary and amounts required under the Plan of Reorganization. Based on the developments in 2001, we recorded a $1.0 million reserve for uncertainties related to the collectibility of the ICF Consulting promissory notes and the related accrued interest. This reserve was recorded as a reduction to interest income as it had the effect of reversing the interest accrued on the notes during 2001.
Administrative Expenses
Administrative expenses for the years ended December 31, 2003, 2002 and 2001 consisted largely of salaries, legal and professional fees incurred for activities associated with the bankruptcy proceedings or with winding down of historical operations as well as the cost to fund a certain retiree medical commitment. Administrative expenses for the year ended December 31, 2003 compared to December 31, 2002 declined by $2.1 million primarily due to a reduction in legal and professional fees incurred for bankruptcy claims resolution. Administrative expenses for the year ended December 31, 2002 compared to December 31, 2001 declined by $2.7 million primarily due to a $1.6 million reduction in legal and professional fees incurred for bankruptcy claims resolution, including the Nova Hut and ICF Consulting claims, a $0.7 million reduction in salaries and benefits, and a $0.4 million reduction in rent expense. The expense for the retiree medical commitment remained relatively unchanged for the three years ended December 31, 2003, 2002 and 2001 at approximately $1.0 million per year. As
we continue to make progress on winding down the operations of Kaiser Group International, Inc. and in resolving remaining bankruptcy claims, we anticipate further declines in general and administrative spending.
In the fourth quarter of 2001, we recorded a $1.1 million impairment charge related to our then 10% interest in ICF Consulting Group, Inc., a privately held entity that was retained by Kaiser Group International, Inc. when it sold its Consulting Group in June 1999. The impairment charge was based on management’s assessment of the potential proceeds available if this investment were liquidated.
Loss from Discontinued Operations
In addition to matters surrounding the resolution of the Nova Hut dispute, Discontinued Operations also reflects the net income statement activity resulting from the winding down of the discontinued engineering operations. At December 31, 2003, based upon the lack of significant favorable developments with the Nova Hut claim in the past two years and the time that has elapsed since completion of the project, the Company established additional reserves to further reduce the net carrying value of the remaining Nova Hut project to $3.0 million by recording an additional reserve of $3.0 million offset by an income tax benefit of $1.1 million, through a charge to “Loss from Discontinued Operations”. This charge is offset by income from discontinued operations of $0.4 million from the collection of foreign accounts receivable, which had previously been fully reserved.
During 2002, we successfully prosecuted an aged claim against a former subcontractor and collected an account receivable, from a previous foreign engineering project, that had previously been written off. Net of legal fees, these activities resulted in the Company’s collection of $0.6 million. In 2001, based on our concern over Nova Hut’s financial difficulties and the uncertainties of a settlement involving a bankruptcy court-sponsored mediation, we reserved approximately $15.6 million of the carrying value of the remaining Nova Hut project assets from $21.6 million to $6.0 million. We also recorded an income tax benefit of $5.8 million associated with this reserve. Other out-of-pocket costs were incurred for winding down the project’s site operations during early 2001, including severance and relocation costs for returning project expatriates back to the United States.
Income Taxes
During 2003, we recognized a total income tax expense of $3.8 million allocable to the following results (in thousands):
During 2002, we recognized a total income tax expense of $11.6 million allocable to the following results (in thousands):
During 2001, we recognized a total income tax benefit of $3.8 million allocable to the following results (in thousands):
Treatment of Net Operating Loss Carryforwards
In December 2000 we went through a change in control as defined under Internal Revenue Code (IRC) Section 382 due to the Chapter 11 bankruptcy reorganization. In September 2001 we determined that the change in control met the stringent guidelines of the bankruptcy exception provided under the Internal Revenue Code. This resulted in our not being subject to the carryforward limitations of IRC Sec. 382. However, we were required to reduce certain carryovers that included net operating losses and credits. We offset the reduction of the carryforwards with the valuation allowance previously established for those carryforwards, and, as a result, the effective income tax rate for income from continuing operations differed significantly from statutory rates. All remaining net operating loss carryforwards were utilized in 2003.
Liquidity and Capital Resources
Years Ended December 31, 2003, 2002 and 2001
Operating Activities: We used $10.4 million in cash for operating activities in 2003, $6.3 million in 2002 and $13.3 million in 2001. This use of cash included $4.9 million, $7.0 million and $9.7 million, respectively, for general and administrative expenses incurred during 2003, 2002 and 2001. Additionally, in 2001 we used $3.6 million for severance and professional fees incurred prior to 2001 in connection with the debt restructuring, bankruptcy and winding-down activities in 2000 and $0.6 million in cash used to satisfy Class 3 bankruptcy claims (former trade accounts payable not paid until after the Plan of Reorganization was deemed effective in December 2000).
Investing Activities: During the years ended December 31, 2003, 2002 and 2001, Kaiser-Hill distributed $16.4 million, $15.7 million and $7.9 million each to us and to the other 50% owner, CH2M Hill. For the year ended December 31, 2002, we also received $4.5 million from the sale of our investment in ICF Consulting and $6.0 million from the sale of our Prudential securities.
Financing Activities: During the years ended December 31, 2003, 2002 and 2001, we paid $2.2 million, $4.2 million and $2.4 million, respectively, in dividends on our preferred stock. Due to the adoption of FAS 150 effective July 1, 2003, $1.4 million of preferred stock dividends have been shown as interest expense and are no longer reflected as preferred stock dividends on the statement of cash flows. In 2003 we acquired 6,848 shares of preferred stock for $0.3 million and 2002 we acquired 119,587 shares of preferred stock for $4.0 million. As a result of the Prudential stock sale and the sale of the investment in ICF Consulting discussed above, we are required, in accordance with the Plan, to use a portion of the proceeds from any asset sales solely for the redemption of the outstanding preferred stock. Pursuant to this requirement, we earmarked approximately $4.5 million of the sale proceeds as restricted cash to be used for the future preferred stock redemptions.
During 2002, $0.8 million of restricted cash was released as a part of the settlement agreement with ICF Consulting and $0.6 million of restricted cash in our captive insurance company was released from restriction by the insurance regulators.
During 2003, we redeemed a total of 370,730 shares of outstanding preferred stock, net of 24,964 shares of treasury stock, through two separate redemptions. In January and October 2003, the Company redeemed $15.5 million and $6.2 million, respectively, liquidation preference of New Preferred or 282,000 and 113,530 shares, respectively, in accordance with the terms of the Kaiser Group International Plan of Reorganization and the KGP put rights described in Note 8 to the Consolidated Financial Statements.
In February 2003, the Company utilized excess operating cash and the excess restricted cash balances to redeem $5.3 million liquidation preference of New Preferred or 95,932 shares. Our Board of Directors will continue to evaluate on a quarterly basis additional redemptions of preferred stock.
At several times during 2001, but primarily in April 2001 as part of our initial bankruptcy distribution, we paid out $13.7 million representing the cash portion of Class 4 bankruptcy claim resolutions. Also as of April 2001, we transferred $12.3 million to a separate reserve cash account to be used to fund the cash portion of any remaining Class 4 bankruptcy claims settlements (including any earned dividends on subsequently issued preferred stock). In June 2001, we used $125,000 to finalize a tender offer to repurchase odd-lot shares of less than 99 in total holdings at $5.00 per common share.
Liquidity and Capital Resources Outlook
We currently have no debt as a result of the effectiveness of the Plan of Reorganization. We continue to finance the bankruptcy distribution requirements and follow-on working capital needs in part through the use of the available cash and distributions from Kaiser-Hill and from other asset sale proceeds. Based on (i) current expectations for operating activities and results, (ii) expected Kaiser-Hill distributions, (iii) our current available cash position, (iv) recent trends and projections in
liquidity and capital needs, and (v) current expectations of total allowed claims upon the completion of the bankruptcy proceedings, management believes we have sufficient liquidity to cover our future operating needs and income tax requirements, as well as the dividend requirements applicable to our preferred stock. Furthermore, we will continue to review the timing of additional partial preferred stock redemptions.
We have obligations to pay interest on outstanding preferred stock at December 31, 2003, which has been shown as interest expense effective July 1, 2003. Accordingly, we are required to present the following table assuming that no additional preferred stock redemptions are made until the mandatory redemption date of December 31, 2007, no additional shares are issued and that all future dividends are paid in cash (irrespective of this disclosure requirement, we are not representing intentions with regard to the timing of additional preferred stock redemptions). The effect these obligations are expected to have on our liquidity and cash flow in future periods are as follows (adjusted for the preferred stock redemption of $5.3 million in February 2004):
Other Matters
We have various obligations and liabilities from our continuing operations, including general overhead expenses in connection with maintaining, operating and winding down various entities. Additionally, we believe contingent liabilities may exist in the areas described in Note 14 to the Consolidated Financial Statements for the periods ended December 31, 2003, 2002 and 2001.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) 46, “Consolidation of Variable Interest Entities,” which provides guidance on when to consolidate variable interest entities. In December 2003, FASB revised FIN 46 with FIN 46R. In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. We will adopt the provisions of FIN 46R immediately for entities created after December 31, 2003. For entities created before December 31, 2003, we will adopt FIN 46R in the first quarter of 2005, as required by FIN 46R. We currently do not have any entities that would be considered variable interest entities under FIN 46R.
On May 31, 2003, FASB issued FASB Statement No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as liabilities (or assets in certain circumstances) in statements of financial position. FAS 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities - all of whose shares are mandatorily redeemable. FAS 150 was to have been generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Recently, the FASB has deferred for an indefinite period the effective date for certain instruments and entities. As discussed in Note 8 of the Consolidated Financial Statements, the Company has adopted the provisions of FAS 150 in the third quarter of 2003.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132(R) increases the existing disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. The new disclosure requirements required by SFAS No. 132(R) are effective for us for the year ending after June 15, 2004. We will adopt the new SFAS No. 132(R) disclosure requirements for the year ending December 31, 2004.
RISK FACTORS RELATING TO KAISER HOLDINGS AND
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains, and our periodic filings with the Securities and Exchange Commission and written or oral statements made by our officers and directors to press, potential investors, securities analysts and others, may contain, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are not historical facts, but rather are predictions and generally can be identified by use of statements that include phrases such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “foresee” or other words or phrases of similar import. Similarly, statements that describe or contain information related to matters such as our intent, belief, or expectation with respect to financial performance, claims resolution, cash availability, stock redemption plans, contract awards and performance, potential acquisitions and joint ventures, and cost-cutting measures are forward-looking statements. These forward-looking statements often reflect a number of assumptions and involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those currently anticipated in these forward-looking statements. In light of these risks and uncertainties, including those described below, the forward-looking events might or might not occur.
Our remaining primary source of funding is from Kaiser-Hill distributions, which are subject to uncertainties that may adversely impact our ability to meet our obligations on our preferred stock and to permit our consideration and funding of strategic alternatives for the Company.
The fee income we anticipate receiving in the future from Kaiser-Hill is dependent upon the ability of Kaiser-Hill to close the Rocky Flats site at a predetermined targeted cost of between $3.6 billion and $4.8 billion and closing date ranging from December 31, 2005 to not later than March 31, 2007, both of which are subject to operational risks and uncertainties.
Our long-term outlook is largely dependent on the performance of Kaiser-Hill under its contract with the Department of Energy. Kaiser-Hill serves as the general contractor at the Rocky Flats Environmental Technology site near Denver, Colorado, a former nuclear weapons production facility. Kaiser-Hill’s contract with the Department of Energy includes a performance fee based upon a combination of the actual costs incurred to complete the site closure and the actual date of completion of the closure. Although unanticipated, if Kaiser-Hill fails to complete the closure within the target cost for the project, Kaiser-Hill’s fee will be reduced to a level significantly less than the fee estimate currently being used to recognize income on the project.
Kaiser-Hill has historically incurred expenses that are not reimbursable by the Department of Energy pursuant to the federal regulations. Accordingly such expenses, which Kaiser-Hill estimates could approximate up to 15% - 20% of the total award fee, will be deducted from the total fee prior to any distributions to its two owners. For reasons similar to those described in the following paragraph, it is difficult to estimate either the amount of net fee to be distributed to the owners of Kaiser-Hill and or the effect, if any, that such unreimbursable costs would have on our future cash flows. A decrease in our cash flows could result in a decrease in the value of our common and preferred stock.
There are substantial performance risks associated with Kaiser-Hill’s work at the Rocky Flats site. The performance risks may impact the timing and cost of closing the site, which in turn could impact our fee income from Kaiser-Hill.
The clean-up and closure of the Department of Energy’s Rocky Flats site involve substantial performance risks. Among other things, Kaiser-Hill’s activities at the Rocky Flats site involve the clean-up, packaging and transportation of nuclear waste, and the demolition and destruction of facilities where nuclear weapons components were previously produced. Some of these activities have not been previously performed elsewhere, and therefore require the development of innovative and untested approaches. Kaiser-Hill emphasizes safety in its performance, but the nature of the Rocky Flats site and the activities of Kaiser-Hill and its subcontractors at the site are such that serious injuries, or even deaths, are possible. Significant safety incidents at the site could stop or significantly impede the progress of work being performed at the site by Kaiser-Hill and its subcontractors. The Department of Energy contract contemplates that all, or substantially all, of the nuclear waste at Rocky Flats will be transported to other sites operated or managed by the Department of Energy. The appropriate sites for storage of certain of those nuclear wastes have not yet been identified. In addition, third-party objections have arisen from time to time with regard to the transportation to, and storage of nuclear waste at, certain sites previously designated by the Department of Energy to receive waste from Rocky Flats. Although the Department of Energy contract contemplates that the Department of Energy is responsible for providing transportation and storage sites for nuclear waste from Rocky Flats, an inability to store nuclear waste at other Department of Energy sites would pose a substantial risk to the timely closure of the Rocky Flats site, and could interfere with Kaiser-Hill’s ability to earn the fees to which Kaiser-Hill believes it should be entitled. This loss of fee income could adversely affect our operating results, which could in turn result in a decrease in the value of our common and preferred stock.
There are potential substantial liabilities and costs associated with Kaiser-Hill’s Department of Energy contract, which may directly and indirectly impact our fee income from Kaiser-Hill.
Under the Department of Energy contract, Kaiser-Hill is responsible for, and the Department of Energy will not pay for costs associated with, liabilities caused by the willful misconduct or lack of good faith of Kaiser-Hill’s managerial personnel or the failure to exercise prudent business judgment by Kaiser-Hill’s managerial personnel. If Kaiser-Hill were found liable for any of these reasons, the associated costs could be substantial, which could have an adverse effect on our operating results. A decrease in our operating results could cause a decrease in the value of our common and preferred stock.
We face significant contingencies, which may adversely impact our ability to meet our obligations on our preferred stock, to fund our continuing operations and to undertake new operations.
We do not have a business plan beyond Kaiser-Hill and we may or may not undertake new activities.
Our long-term future profitability will be dependent, to a significant extent, on our ability to develop a business plan for ongoing operations. Unless and until our Board of Directors develops such a business plan, we are unable to determine either the amount of risk that future operations will involve or whether we have the ability to realize long-term profitability. It is possible that our ongoing business plan will be limited to resolving issues related to the Nova Hut project and participating in the activities of Kaiser-Hill. However, our Board of Directors is considering whether we should attempt to develop a new revenue base. Such efforts could, for example, attempt to take advantage of our successful history of performing in the government services market, both independently and through Kaiser-Hill. Our efforts to develop a revenue base separate from Kaiser-Hill may involve start-up activities with risks peculiar to activities of this type, which may adversely impact our cash flow and operating results. A decrease in our cash flows and operating results could result in a decrease in the value of our common and preferred stock.
We may be unable to obtain performance guarantees, which may limit our ability to undertake new activities.
Given the reorganization history of Kaiser Group Holdings, Inc., we may not be able to obtain satisfactory contract performance guaranty mechanisms, such as performance bonds and letters of credit, at all or on satisfactory terms, to the extent such mechanisms are needed for new projects. These factors could limit the nature of the business activities in which we could engage should we decide to attempt to develop a new revenue base apart from Kaiser-Hill, which may adversely impact our cash flow and operating results and result in a decrease in the value of our common and preferred stock.
We may be unable to generate funds to meet our obligations and we may be unable to access additional capital.
We may be unable to continue to generate sufficient funds to meet our obligations, notwithstanding the significant improvements in our operations and financial condition. Although we believe that we will be able to generate sufficient funds to meet our working capital needs for the foreseeable future, our ability to gain access to additional capital, if needed, is not certain. Due to reorganization history of Kaiser Group Holdings, Inc. and current financial markets, it is difficult to predict whether additional capital would be available to us in the event that we were unable to general funds to meet our obligations. Our inability to gain access to additional capital may also limit our ability to undertake new activities. Ultimately, our inability to meet our existing obligations or to undertake new activities could adversely impact our cash flow and operating results. A decrease in our cash flows and operating results could result in a decrease in the value of our common and preferred stock.
We may have to issue a substantial number of additional common shares.
On January 20, 2004, the United States Bankruptcy Court for the District of Delaware ruled on a claim in favor of former shareholders of ICT Spectrum Constructors, Inc. The Bankruptcy Court has refused to reconsider its decision and we plan to appeal. Should we be unsuccessful in our efforts to achieve reversal of the Bankruptcy Court’s ruling, we could be required to issue an additional 247,350 common shares, which would then comprise approximately 13.4% of the aggregate shares outstanding. We believe that issuing such a substantial number of additional common shares could be expected to have a materially dilutive effect on the value of common shares presently outstanding.
In the event of a change of control, we may not have the financial resources to redeem preferred stock.
Our preferred stock is redeemable at the option of the holder upon a change of control as defined in the terms of the preferred stock. We are not presently aware of any events that would cause a change of control. However, based on a Report on Form 4 dated April 3, 2003, which was filed with the Securities and Exchange Commission by Tennenbaum & Co., LLC on April 3, 2003, we believe that Tennenbaum & Co., LLC and Michael E. Tennenbaum together own approximately 47.2% of our common stock. The terms of our preferred stock provide that a change of control occurs when, among other things, a person or “group” (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) directly or indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of more than 50% of all classes of our common equity (defined in the terms of our preferred stock as capital stock entitled to vote in the election of directors).
In the event that we are required to redeem preferred stock due to a change of control, we may not have available capital to redeem the stock. Our ability to gain access to additional capital from outside sources, if needed, is not certain. The inability to gain access to additional capital may limit our ability to meet the redemption obligations with respect to the preferred stock.
Item 7A.
Item 7A. Quantitative and Qualitative Information about Market Risk
We do not believe we have significant exposures to market risk as we do not presently have any debt. The interest rate risk associated with our obligation to fund a capped retiree medical obligation is not sensitive to interest rate risk other than through the determination of the present value of its remaining obligation thereunder. A 10% increase or decrease in the average annual prime rate would result in an increase or decrease in the carrying value of the plan obligation but would not change the actual cost of the plan.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data appear on pages through and S-1 through S-2 hereto.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure obligations under the Securities Exchange Act of 1934 and the SEC rules thereunder. There were no significant changes in our internal controls over financial reporting that occurred during the fiscal year ended December 31, 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART III
Items 10, 11, 12, 13 and 14.
Information required by Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K is incorporated by reference from our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on May 5, 2004, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year, except that the information required by Item 10
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report
1. Financial Statements
Consolidated Financial Statements of Kaiser Group Holdings, Inc. and Subsidiaries
a.
Report of Independent Accountants
b.
Consolidated Balance Sheets as of December 31, 2003 and December 31,
c.
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
d.
Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001
e.
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
f.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Supplemental Schedule Relating to the Consolidated Financial Statements of Kaiser Group Holdings Inc. and Subsidiaries for the years ended December 31, 2003, 2002 and 2001.
All Schedules except the ones listed above have been omitted because they are not applicable or not required or because the required information is included elsewhere in the financial statements in this filing.
3. Exhibits (listed according to the number assigned in the table in Item 601 of Regulation S-K)
Exhibit No. 2-Plan of Acquisition, reorganization, arrangement, liquidation or succession
2(a) Second Amended Plan of Reorganization (Incorporated by reference to Exhibit 2 to Current Report on Form 8-K (Registrant No. 1-12248) filed with the Commission on December 14, 2000)
Exhibit No. 3-Articles of Incorporation and By-laws of the Registrant
3(a) Certificate of Incorporation of Kaiser Group Holdings, Inc. (Incorporated by reference to Exhibit 3(i) to Current Report on Form 8-K (Registrant No. 1-12248) filed with the Commission on December 14, 2000)
3(b) By-laws of Kaiser Group Holdings, Inc. (Incorporated by reference to Exhibit 3(ii) to Current Report on Form 8-K (Registrant No. 1-12248) filed with the Commission on December 14, 2000)
Exhibit No. 4-Instruments Defining the Rights of Security Holders, including Indentures
4(a) Form of Put Agreement relating to preferred stock of Kaiser Group Holdings, Inc. (Incorporated by reference to Exhibit 4 to Current Report on Form 8-K (Registrant No. 1-12248) filed with the Commission on December 14, 2000)
Exhibit No. 10 - Material Contracts
10(a) Kaiser Group International, Inc. Employee Stock Ownership Plan (as amended and restated as of January 1, 1996) (Incorporated by reference to Exhibit No. 10(b) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
1. Amendment No. 1 with the effective date of January 1, 1998 (Incorporated by reference to Exhibit No. 10(b)(1) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
2. Amendment No. 2 with the effective date of January 1, 1996 (Incorporated by reference to Exhibit No. 10(b)(2) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
3. Amendment No. 3 dated April 19, 1999. (Incorporated by reference to Exhibit No. 10(b)(3) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
4. Amendment No. 4 dated June 25, 1999. (Incorporated by reference to Exhibit No. 10(b)(4) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
10(b) Trust Agreement with Vanguard Fiduciary Trust Company dated as of August 31, 1995, for ICF Kaiser International, Inc. Employee Stock Ownership Plan (Incorporated by reference to Exhibit No. 10(c) to Registration Statement on Form S-1 (Registrant No. 33-64655) filed with the Commission on November 30, 1995)
10(c) ICF Kaiser International, Inc. Retirement Plan (as amended and restated as of March 1, 1993) (and further amended with respect to name change only as of June 26, 1993) (Incorporated by reference to Exhibit No. 10(d) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 1994 filed with the Commission on October 15, 1993)
1. Amendment No. 1 dated April 24, 1995 (Incorporated by reference to Exhibit No. 10(d)(1) to Annual Report on Form 10-K (Registrant No. 1- 12248) filed with the Commission on May 23, 1995)
2. Amendment No. 2 dated December 15, 1995 (Incorporated by reference to Exhibit No. 10(d)(2) to Transition Report on Form 10-K (Registrant No. 1-12248) for the transition period from March 1, 1995 to December 31, 1995 filed with the Commission on March 29, 1996)
3. Amendment No. 3 dated December 13, 1996 (Incorporated by reference to Exhibit No. 10(d)(3) to Registration Statement on Form S-1 (Registrant No. 333-19519) filed with the Commission on January 10, 1997)
4. Amendment No. 4 dated April 19, 1999 (Incorporated by reference to Exhibit No. 10(d)(4) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
5. Amendment No. 5 dated June 25, 1999 (Incorporated by reference to Exhibit No. 10(d)(5) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
6. Amendment No. 6 dated August 30, 1999 (Incorporated by reference to Exhibit No. 10(d)(6) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
7. Amendment No. 7 dated April 13, 2000 (Incorporated by reference to Exhibit 10(d)(7) on Form 8-K (Registrant No. 1-12248) filed with the Commission on May 2, 2000)
8. Amendment No. 8 dated June 8, 2000 (Incorporated by reference to Exhibit 10(d)(8) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 2000 filed with the Commission on September 6, 2000)
9. Amendment No. 9 dated June 19, 2003 (Incorporated by reference to Exhibit 10(c)(9) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 2003 filed with the Commission on August 14, 2003)
10(d) Trust Agreement with Vanguard Fiduciary Trust Company dated as of August 31, 1995, for ICF Kaiser International, Inc. Retirement Plan (Incorporated by reference to Exhibit No. 10(e) to Registration Statement on Form S-1 (Registrant No. 33-64655) filed with the Commission on November 30, 1995)
10(e) ICF Kaiser International, Inc. Section 401(k) Plan (as amended and restated as of March 1, 1993) (and further amended with respect to name change only as of June 26, 1993) (Incorporated by reference to Exhibit No. 10(f) to Quarterly
Report on Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 1994 filed with the Commission on October 15, 1993)
1. Amendment No. 1 dated April 24, 1995 (Incorporated by reference to Exhibit No. 10(p)(1) to Annual Report on Form 10-K (Registrant No. 1-12248) for fiscal 1995 filed with the Commission on May 23, 1995)
2. Amendment No. 2 dated December 15, 1995 (Incorporated by reference to Exhibit No. 10(p)(2) to Transition Report on Form 10-K (Registrant No. 1-12248) for the transition period from March 1, 1995 to December 31, 1995 filed with the Commission on March 29, 1996)
3. Amendment No. 3 dated December 13, 1996 (Incorporated by reference to Exhibit No. 10(q)(3) to Registration Statement on Form S-1 (Registrant No. 333-19519) filed with the Commission on January 10, 1997)
4. Amendment No. 4 dated April 8, 1999 (Incorporated by reference to Exhibit No. 10(k)(4) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
5. Amendment No. 5 dated June 25, 1999 (Incorporated by reference to Exhibit No. 10(k)(5) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
6. Amendment No. 6 dated April 13, 2000 (Incorporated by reference to Exhibit 10(k)(6) on Form 8-K (Registrant No. 1-12248) filed with the Commission on May 2, 2000)
7. Amendment dated January 1, 2001 (Incorporated by reference to Exhibit No. 10(m)(7) to Annual Report on Form 10-K (Registrant No. 1-2248) filed with the Commission on March 30, 2001)
8. Amendment No. 8 dated December 10, 2002 (Incorporated by reference to Exhibit 10(e)(8) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 2003 filed with the Commission on August 14, 2003)
9. Amendment No. 9 dated June 19, 2003 (Incorporated by reference to Exhibit 10(e)(9) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 2003 filed with the Commission on August 14, 2003)
10(f) Trust Agreement with Vanguard Fiduciary Trust Company dated as of March 1, 1989, for the ICF Kaiser International, Inc. Section 401(k) Plan (Incorporated by reference to Exhibit No. 28(b) to Registration Statement on Form S-8 (Registrant No. 33-51460) filed with the Commission on August 31, 1992)
10(g) Contract between Kaiser-Hill Company, LLC and the U.S. Department of Energy dated January 24, 2000 (Incorporated by reference to Exhibit No. 10(o) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)
1. Modification M116 to Contract #DE-AC34-00RF01904, effective March 24, 2004
10(h) Assignment of Membership Interest in Hunters Branch Leasing, LLC by and between Kaiser Holdings Unlimited, Inc. (Assignor) and Nutley Partners, LC (Assignee), dated January 1, 2001 (Incorporated by reference to Exhibit No. 10(r) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with the Commission on April 2, 2001)
Exhibit No. 10-Material Contracts (management contracts, compensatory plans, or arrangements)
10(i) Kaiser Group Holdings, Inc. 2002 Equity Compensation Plan, as amended (Incorporated by reference to Exhibit No. 10 to Registration Statement on Form S-8 (Registration No. 333-107912) filed with the Commission on August 13, 2003)
10(j) Amended and Restated Employment Agreement with John T. Grigsby, Jr., President and Chief Executive Officer, effective as of December 19, 2000 (Incorporated by reference to Exhibit No. 10(m) to Registration Statement on Form S-4 (Registrant No. 333-100640) filed with the Commission on October 18, 2002)
Exhibit 14 - Corporate Code of Conduct
14(a) Kaiser Group Holdings, Inc. Corporate Code of Conduct (Incorporated by reference to Exhibit 14.1 to Current Report on Form 8-K (Registrant No. 1-12248) filed with the Commission on January 13, 2004)
Exhibit No. 21 - Consolidated Subsidiaries of the Registrant as of March 1, 2004
Exhibit 23 - Consent of Independent Accountants
Exhibit No. 31.1 - Certification of the Principal Executive Officer
Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934
Exhibit No. 31.2 - Certification of the Principal Financial Officer
Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934
Exhibit No. 32.1 - Certification of the Principal Executive Officer
Pursuant to Rule 13a-14(b) and Rule 15d-14(b), Section 1350, Chapter 63 of Title 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit No. 32.2 - Certification of the Principal Financial Officer
Pursuant to Rule 13a-14(b) and Rule 15d-14(b), Section 1350, Chapter 63 of Title 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 17, 2003, the Company filed a Current Report on Form 8-K. Pursuant to Item 5 of its Report, the Company disclosed that it had relocated its principal office from Fairfax, Virginia to Broomfield, Colorado effective as of June 1, 2003.
On August 7, 2003, the Company filed a Current Report on Form 8-K for the purpose of describing its capital stock.
On January 13, 2004, the Company filed a Current Report on Form 8-K. Pursuant to Item 5 of its Report, the Company announced plans for a preferred stock redemption of its Series 1 Redeemable Cumulative Preferred Stock with a redemption date of February 16, 2004. The Company also announced that it will hold its annual meeting of shareholders on Wednesday, May 5, 2004.
On January 26, 2004, the Company filed a Current Report on Form 8-K. Pursuant to Item 5 of its Report, the Company announced that on January 20, 2004, the United States Bankruptcy Court for the District of Delaware rendered a decision in claim litigation involving Kaiser Group Holdings, Inc. and a class comprised of former holders of shares of ICT Spectrum Constructors, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
(1) Principal executive officer
(2) Principal financial and accounting officer
(3) Board of Directors
Report of Independent Auditors
To Board of Directors and
Shareholders of Kaiser Group Holdings, Inc.:
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Kaiser Group Holdings, Inc. and its subsidiaries at December 31, 2003 and December 31, 2002, and the 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 of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
March 24, 2004
KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
See notes to consolidated financial statements.
KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements.
KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
See notes to consolidated financial statements.
KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Kaiser Group Holdings, Inc. is a Delaware holding company that was formed on December 6, 2000 for the purpose of owning all of the outstanding stock of Kaiser Group International, Inc. (Old Kaiser), which in turn continues to own the stock of its remaining subsidiaries. On June 9, 2000, Old Kaiser and 38 of its domestic subsidiaries voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code in the District of Delaware (case nos. 00-2263 to 00-2301). Old Kaiser emerged from bankruptcy with an approved plan of reorganization (the Second Amended Plan of Reorganization (the Plan)) that was effective on December 18, 2000 (the Effective Date). The Company is deemed a “successor issuer” to Old Kaiser by virtue of Rule 12g-3(a) under the Securities Exchange Act of 1934. References to the “Company” or “Kaiser Holdings” in this report refer to Kaiser Group Holdings, Inc. and its consolidated subsidiaries. A summary of the Plan for Old Kaiser can be found in a Current Report on Form 8-K dated December 5, 2000 filed by Old Kaiser.
Currently, apart from resolving remaining bankruptcy claims, the Company has only a limited number of activities, assets and liabilities, primarily consisting of:
• the ownership of a 50% interest in Kaiser-Hill Company, LLC (Kaiser-Hill), which serves as the general contractor at the U.S. Department of Energy’s Rocky Flats Environmental Technology Site near Denver, Colorado, for the performance of a contract for the closure of the site (the Closure Contract). (See Note 6 for summarized financial information.)
• the closeout and resolution of a completed contract for the engineering and construction of a steel mini-mill for Nova Hut in the Czech Republic (Nova Hut project).
• the holding of an interest-bearing promissory note from ICF Consulting Group, Inc. (ICF Consulting), a division that Old Kaiser sold in 1999.
• a wholly-owned captive insurance company that is not at this time issuing new policies and is simply involved in resolving remaining claims.
• an ongoing obligation to fund a capped, post-employment medical benefit plan for a fixed group of retirees.
The Company adopted fresh start reporting in its consolidated balance sheet as of December 31, 2000. The American Institute of Certified Public Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (SOP 90-7), requires that under certain circumstances resulting from a bankruptcy, a new entity is created for financial reporting purposes upon the emergence of that entity from bankruptcy. Accordingly, the value of the reorganized enterprise becomes the established amount for the emerging balance of shareholders’ equity, and any accumulated deficit of the predecessor entity is offset against available paid-in-capital to result in an emerging retained earnings of zero. Additionally, assets and liabilities are recorded at their fair values.
The value of the emerged enterprise used for fresh start reporting as of December 31, 2000 was $87.5 million and was determined by management with the assistance of independent advisors. The methodology employed involved estimation of the enterprise value taking into consideration a discounted cash flow analysis. The discounted cash flow analysis was based on a seven-year cash flow projection prepared by management, taking into consideration the terminal value of its assets and liabilities as of immediately prior to its emergence from bankruptcy on December 18, 2000. Terminal values of assets and liabilities were determined based either on contracted amounts, actuarial present values and/or management’s estimates of the outcome of certain operating activities. Net after-tax cash flows, assuming a 40% effective tax rate, were discounted at 17% in order to take into consideration the risks and uncertainties inherent in such projections. The cash flow projections were based on estimates and assumptions about circumstances and events that had not yet taken place. Estimates and assumptions regarding individual retained matters which form the collective composition of the overall enterprise value as of December 18, 2000 are inherently subject to significant economic and competitive uncertainties and contingencies beyond the control of the Company. Accordingly, there may be differences between projections and actual results because events and circumstances frequently do not occur as expected and may be significant. More specifically, assumptions within the valuation related to the amount and timing of the ultimate performance and related cash flows of the Company’s investment in Kaiser-Hill have the greatest impact on the overall enterprise valuation.
2. General Terms of Plan and Status of Bankruptcy Distributions
The effectiveness of the Old Kaiser Plan of Reorganization as of December 18, 2000 did not, in and of itself, complete the bankruptcy process. The process of resolving in excess of $500 million of claims initially filed in the bankruptcy is ongoing.
Old Kaiser objected to the majority of the unresolved claims, and if such claims are not settled via the objection or dispute resolution processes or other means, they will ultimately be heard and determined by the Bankruptcy Court. Once a claim is resolved with an amount due to the creditor, such portion of the claim is deemed to be an allowed claim by the Bankruptcy Court (an allowed claim). The Company cannot predict with accuracy when the claims resolution process will be complete or what the total amount of allowed claims will be upon completion.
In general terms, the Plan contemplated three basic classes of creditors:
• Allowed “Class 3 claims” against the Old Kaiser bankruptcy estate generally consisted of trade and similar creditors’ claims of $20,000 or less. Holders of allowed Class 3 claims received cash for their claims.
• Allowed “Class 4 claims”, the largest class of claims against the Old Kaiser bankruptcy estate, is made up of creditor claims other than Class 3 claims and equity claims. Class 4 claims included holders of Old Kaiser senior subordinated notes due 2003 (Old Subordinated Notes). Holders of allowed Class 4 claims received a combination of cash and Kaiser Holdings preferred and common stock in respect of their claims. Such holders received one share of Kaiser Holdings’ preferred stock (New Preferred) and one share of Kaiser Holdings’ common stock (New Common) for each $100 of claims. However, the number of shares of New Preferred issued was reduced by one share for each $55.00 of cash received by the holder of an allowed Class 4 claim.
• The third class of claims recognized in the Old Kaiser bankruptcy are equity claims, consisting of holders of Old Kaiser common stock (Old Common) and other “Equity Interests” as defined in the Plan. Under the Plan, holders of Equity Interests will receive a number of shares of New Common equal to 17.65% of the number of shares of such common stock issued to holders of allowed Class 4 Claims. In the initial distribution, one share of New Common was issued for each 96 shares of previously outstanding Old Common. Additional distributions of New Common may be made in the future as additional shares of New Common are issued to holders of newly allowed Class 4 claims, if any. Apart from holders of Old Common, the only holders of Equity Interests of which the Company is aware are the former shareholders of ICT Spectrum Constructors, Inc., a corporation acquired by merger with a subsidiary of Old Kaiser in 1998. The Bankruptcy Court confirmed the equity nature of those claims. See Note 14 below for information concerning a recent Bankruptcy Court ruling with respect to these claims.
Pursuant to the terms of Old Kaiser’s Plan, the Company was required to complete its initial bankruptcy distribution within 120 days of the effective date of the Plan. Accordingly, on April 17, 2001, the Company effected its initial distribution. At that time, there were approximately $136.8 million of Class 4 claims that had been allowed in the bankruptcy process. The amount of unresolved claims remaining at April 17, 2001 was approximately $130.5 million.
To address the remaining unresolved claims, the Bankruptcy Court issued an order on March 27, 2001 establishing an Alternative Dispute Resolution (ADR) procedure whereby the remaining claimants and Old Kaiser produce limited supporting data relative to their respective positions and engage in initial negotiation efforts in an attempt to reach an agreed claim determination. If necessary, the parties were thereafter required to participate in a non-binding mediation before a mediator pre-selected by the Bankruptcy Court. All unresolved claims as of March 27, 2001 are subject to the ADR process. Since April 17, 2001, the date of the initial distribution, $123.0 million of asserted claims have been withdrawn, negotiated or mediated to an agreed amount, resulting in cash payments approximating $2.2 million and issuances of 683 shares of New Preferred and 823 shares of New Common. As of March 26, 2004, the amount of unresolved claims was approximately $7.5 million. The Company expects to resolve the remaining claims in the first half of 2004. The Company currently believes that the total amount of Class 4 claims ultimately to be allowed in the Old Kaiser bankruptcy proceeding will not exceed $142.5 million. As demonstrated by the claim settlements completed since April 17, 2001, and based on the belief that it is in the best interest of the Company and its current shareholders, the Company has been settling certain remaining Class 4 claims entirely for cash payments in lieu of the combination of cash and New Preferred and New Common as contemplated in the Plan. The Company intends to continue to use this settlement alternative during the resolution of remaining Class 4 claims.
From time to time in the future, as remaining unresolved claims are resolved, excess cash from the “reserve” fund (including cash added to “reserve” fund in payment of pro forma dividends, classified as interest expense subsequent to July 1, 2003, on retained shares of New Preferred) must be used to redeem outstanding shares of New Preferred. In January 2003, the Company redeemed 282,000 shares of outstanding New Preferred by using $8.9 million and $5.2 million of restricted and unrestricted cash, respectively. In October 2003, the Company redeemed 113,530 shares of outstanding New Preferred by using $1.6 million and $4.6 million of restricted and unrestricted cash, respectively. In February 2004, the Company redeemed 95,932 shares of New Preferred by using $3.2 million of restricted cash and $2.1 million of unrestricted cash.
3. Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements include all majority-owned or controlled subsidiaries. Investments in unconsolidated affiliated companies and joint ventures are accounted for using the equity method. The difference between the carrying value of the joint venture investment and the Company’s underlying equity is amortized on a straight-line basis over the estimated term of the joint venture investment. All significant intercompany balances and transactions have been eliminated.
Income Taxes: Deferred tax assets and liabilities represent the tax effects of differences between the financial statement carrying amounts and the tax bases carrying amounts of the Company’s assets and liabilities. These differences are calculated based upon the statutory tax rates in effect in the years in which the differences are expected to reverse. The effect of subsequent changes in tax rates on deferred tax balances is recognized in the period in which a tax rate change is enacted. The Company evaluates its ability to realize future benefit from all deferred tax assets and establishes valuation allowances for amounts that may not be realizable.
Earnings Per Share: Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. The weighted average shares outstanding for the year ended December 31, 2001 retroactively adjusts for the conversion of the Old Common to New Common effective with the adoption of fresh-start reporting. As additional distributions of Kaiser Holdings common stock are made to holders of newly allowed Class 4 claims, the conversion ratio of 96 shares may be adjusted to reflect the final total number of shares of New Common (as discussed in Note 2).
Diluted EPS normally includes the weighted-average effect of dilutive securities outstanding during the period. Pursuant to the Plan that was effective as of December 18, 2000, all then outstanding common stock equivalents were cancelled. Accordingly, no anti-dilutive information is presented herein.
The effect of preferred dividends of $1.5 million, $4.2 million and $3.1 million has been included in continuing operations in the calculation of basic and diluted earnings per share for the year ended December 31, 2003, 2002 and 2001, respectively. As discussed in Note 8, the Company adopted FAS 150 effective July 1, 2003. Therefore, the $1.4 million of preferred stock dividends for the six months ended and December 31, 2003 have been shown as interest expense.
Foreign Currency Translation: Results of operations for foreign entities are translated using the average exchange rates during the period. Assets and liabilities are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Resulting translation adjustments are reflected net of tax in shareholders’ equity as cumulative translation adjustments.
Cash Equivalents and Restricted Cash: The Company considers all highly liquid financial instruments purchased with maturities of three months or less at date of purchase to be cash equivalents. Restricted cash balances consisted of the following at December 31 (in thousands):
Supplemental cash flow information for the years ended December 31, is as follows:
Marketable Securities: In December 2001, the Company recorded a gain on the stock demutualization of a non-affiliated insurance company. The gain was calculated based upon the fair value of the securities on the date of the insurance company’s initial public offering. These securities were sold in February 2002. Investments classified as available for sale are measured at fair value in the financial statements with unrealized gains and losses reported, net of tax, in other comprehensive income (loss).
Adoption of FIN 45: In November 2002, FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,” (“FIN 45”) was issued. FIN 45 clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to guarantors’ accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 are applicable to interim or annual periods that end after December 15, 2002, and did not have an impact on the December 31, 2003 financial statements. The provisions for initial recognition and measurement under FIN 45 are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The initial recognition and measurement provisions under FIN 45 did not have any impact on our financial statements.
Adoption of FAS 150: On May 31, 2003, FASB issued FASB Statement No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as liabilities (or assets in certain circumstances) in statements of financial position. FAS 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities - all of whose shares are mandatorily redeemable. FAS 150 was to have been generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Recently, the FASB has deferred for an indefinite period the effective date for certain instruments and entities. As discussed in Note 8, the Company has adopted the provisions of FAS 150 in the third quarter of 2003.
Adoption of FAS 142: The Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets effective January 1, 2002. Under FAS 142, intangible assets with indefinite lives will no longer be amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Recognized intangible assets with determinable useful lives will continue to be amortized. The Company’s only intangible asset relates to its investment in Kaiser-Hill recorded upon the adoption of fresh-start reporting. This intangible asset of $21.1 million is being amortized on a straight-line basis through 2006, which is the date currently estimated for Kaiser-Hill’s completion of the Closure Contract. Total accumulated amortization as of December 31, 2003 was $10.6 million. The amortization expense associated with this intangible is recorded as a reduction to the equity income in earnings of affiliate on the consolidation statement of operations. The estimate amortization expense for the remaining life of this intangible asset is:
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses recognized during the reporting period. Such estimates include those related to allowances for contract and notes receivable and accrued interest, deferred tax assets and valuation allowance, recoverability of net assets of discontinued operations and other investments, assumptions used to determine the retiree medical obligation, the amortization period for the excess value attributed to the Kaiser-Hill investment and the remaining Allowed Claims. Actual results could differ from those estimates.
Concentrations of Credit Risk: The Company maintains cash balances primarily in overnight Eurodollar deposits, investment-grade commercial paper, bank certificates of deposit, and U.S. government securities.
Reclassifications: Certain reclassifications have been made to the prior-period financial statements contained herein in order to conform them to the 2003 presentation.
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) 46, “Consolidation of Variable Interest Entities,” which provides guidance on when to consolidate variable interest entities. In December 2003, FASB revised FIN 46 with FIN 46R. In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. The Company will adopt the provisions of FIN 46R immediately for entities created after December 31, 2003. For entities created before December 31, 2003, the Company will adopt FIN 46R in the first quarter of 2005, as required by FIN 46R. The Company does not currently have any entities that would be considered variable interest entities under FIN 46R.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132(R) increases the existing disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. The new disclosure requirements required by SFAS No. 132(R) are effective for us for the year ending after June 15, 2004. The Company will adopt the new SFAS No. 132(R) disclosure requirements for the year ending December 31, 2004.
4. Net Assets of Discontinued Operations
The components of the “Net Assets of Discontinued Operations” consist entirely of the carrying value of the net assets of the Nova Hut project and were as follows at December 31:
Although Old Kaiser sold its Metals, Mining and Industry business unit in August 2000, it retained its Netherlands subsidiary, Kaiser Netherlands, B.V., which had been responsible for a turnkey engineering and construction services contract for the construction of a steel mini-mill in the Czech Republic for Nova Hut. After construction of the mini-mill was complete in 2000, the contract with Nova Hut provided for a maximum of three possible performance tests. The first performance test was completed on November 13, 2000. Kaiser Netherlands believes that the first performance test was successful and that Nova Hut should have agreed to final acceptance of the mini-mill and made final payment of amounts accrued by Kaiser Netherlands throughout the project, including fee and retention amounts with release of performance guarantee instruments. Nova Hut, however, asserted that the first test was not successful. Kaiser Netherlands believes that such contention may have been put forth in response to severe financial constraints on Nova Hut’s operations resulting from then weakening conditions in the worldwide steel market and the significant amounts that Kaiser Netherlands believed it was contractually due. To date, this dispute has not been resolved, and Kaiser Netherlands has resorted to legal proceedings to enforce its rights. The primary legal venue up until this time has been the Delaware bankruptcy proceeding for Old Kaiser, where the Company has asserted claims against Nova Hut and the International Finance Corporation (“IFC”). The Delaware bankruptcy court has previously ruled that the Company, as opposed to Kaiser Netherlands, could proceed with prosecution of its specific claims against Nova Hut and IFC in the Delaware bankruptcy court venue. Both Nova Hut and IFC appealed this ruling and, during the first quarter 2004, the Delaware bankruptcy court’s decision regarding the IFC was overturned by the District Court, ruling that the IFC enjoys sovereign immunity from prosecution. Kaiser Holdings has filed a notice of appeal to the Third Circuit regarding this decision in favor of the IFC. At this date, the Nova Hut appeal is still pending at the District Court level.
In December 2003, the International Chamber of Commerce (“ICC”), under the dispute resolution provisions of the Nova Hut mini-mill subcontract between Kaiser Netherlands and the mini-mill’s main equipment supplier, Tippins, Inc., issued a final award that was on balance favorable to Kaiser Netherlands. As a result of the ruling, Kaiser Netherlands was relieved of the obligation to pay additional retention to Tippins and Kaiser Netherlands was awarded a net cash settlement of $2.6 million. The Company has not recorded this settlement due to the uncertainties regarding collectibility. However, the Company intends to vigorously pursue collection of this settlement.
In January 2004, Kaiser Netherlands filed arbitration claims against Nova Hut in excess of $40.0 million with the ICC. The arbitration panel is currently being constituted, and the first hearing should take place during the second or third quarter of 2004 with the earliest possible final award ruling being issued sometime in 2005. Nova Hut has submitted a $46.0 million counterclaim against Kaiser Netherlands in these same ICC proceedings.
The continued litigation of these disputes, as well as the cost of a possible ongoing presence in Ostrava, Czech Republic, has had and will continue to have a negative impact on the cash flow of Kaiser Netherlands and Kaiser Holdings.
Based on the Company’s continued concern over Nova Hut’s financial difficulties and the lack of a settlement resulting from an earlier, bankruptcy court-sponsored mediation, in the fourth quarter of 2003 the Company further reduced the carrying value of the remaining Nova Hut project assets from $6.0 million to $3.0 million by recording an additional reserve of $3.0 million, net of a $1.1 million income tax benefit, through a charge to “Loss from Discontinued Operations”. This reserve is in addition to a reserve recorded in 2001, which reduced the carrying value of the Nova Hut project assets from $21.6 million to $6.0 million by recording a reserve of approximately $9.8 million, net of a $5.8 million income tax benefit, through a charge to “Loss from Discontinued Operations”. These adjustments to the project asset carrying value have been determined based on the Company’s estimate of Nova Hut’s current ability to pay such liability.
5. Business Segments and Foreign Operations
Business Segments: The Company had no reportable segments at any time during 2003, 2002 or 2001.
Foreign Operations: Because all of the Company’s international operations are presented in the accompanying Statements of Operations as “Discontinued Operations,” all of the Company’s reported gross revenue and operating income (loss) from continuing operations were from domestic sources. Remaining foreign assets consist solely of the carrying value of the net realizable value of the Nova Hut contract matter (See “Net Assets of Discontinued Operations” and “Other Contingencies”).
6. Joint Ventures and Affiliated Companies
Prior to December 31, 2000, the Company had ownership interests in certain unconsolidated corporate joint ventures and affiliated companies. During 1999 and 2000, the Company divested of the majority of such investments. At December 31, 2003 and 2002, it retained a 50% investment in Kaiser-Hill. The Company’s net investments in/or amounts due from this corporate joint venture and affiliated company totaled $45.8 million and $45.7 million at December 31, 2003 and 2002, respectively. The Company accounts for the Kaiser-Hill Company LLC investment using the equity method. The difference between the Company’s carrying value of the investment in Kaiser-Hill and its 50% underlying equity in Kaiser-Hill’s net assets was $10.6 million and $14.1 million, respectively, as of December 31, 2003 and 2002 and is being amortized on a straight-line basis through 2006 (the date currently estimated for Kaiser-Hill’s completion of the Closure Contract.)
ICF Consulting Group, Inc.: In 2002, a settlement was reached between the Company and ICF Consulting, whereby the Company agreed to restructure the ICF Consulting notes totaling $6.6 million and accrued interest of $0.7 million, net of reserves, for a new promissory note of $6.4 million (New Note) bearing interest at 8.5% per annum. In return ICF Consulting agreed to withdraw all claims against the Company, release cash in escrow and purchase the Company’s 10% ownership in ICF Consulting, carrying value of $1.1 million, for $4.5 million. See Note 7 below.
Kaiser-Hill: Summarized financial information of Kaiser-Hill Company was as follows as of December 31 (in thousands):
Under the Closure Contract, Kaiser-Hill is not responsible for, and the DOE pays all costs associated with, any liability, including, without limitation, any claims involving strict or absolute liability and any civil fine or penalty, expense, or remediation cost, but limited to those of a civil nature, which may be incurred by, imposed on, or asserted against Kaiser-Hill arising out of any act or failure to act, condition, or exposure which occurred before Kaiser-Hill assumed responsibility on July 1, 1995 (“pre-existing conditions”). To the extent the acts or omissions of Kaiser-Hill constitute willful misconduct, lack of good faith, or failure to exercise prudent business judgment on the part of Kaiser-Hill’s managerial personnel and cause or add to any liability, expense, or remediation cost resulting from pre-existing conditions, Kaiser-Hill is responsible, but only for the incremental liability, expense, or remediation caused by Kaiser-Hill.
The Closure Contract further provides that Kaiser-Hill will be reimbursed for the reasonable cost of bonds and insurance allocable to the contract and for liabilities and expenses incidental to these liabilities, including litigation costs, to third
parties not compensated by insurance or otherwise. There is an exception to this reimbursement provision applicable to liabilities caused by the willful misconduct, lack of good faith or failure to exercise prudent business judgment by Kaiser-Hill’s managerial personnel.
With respect to a revolving credit facility obtained by Kaiser-Hill in November 1999, both parents of Kaiser-Hill granted a first lien security interest to the Kaiser-Hill lenders in all of the ownership and equity interest of Kaiser-Hill and have agreed to cure any events of default by Kaiser-Hill on the facility. As of December 31, 2003 and 2002, Kaiser-Hill had no cash balances outstanding on its revolving credit.
7. Notes receivable
In June 2002, a settlement was reached between the Company and ICF Consulting, whereby the Company agreed to restructure the ICF Consulting notes totaling $6.6 million and accrued interest of $0.7 million, net of reserves, for a new promissory note of $6.4 million (New Note) bearing interest at 8.5% per annum. The New Note is subordinated to the rights to ICF Consulting’s senior bank lenders. In return ICF Consulting agreed to withdraw all claims against the Company, release cash in escrow totaling $0.8 million and purchase the Company’s 10% ownership in ICF Consulting, carrying value of $1.1 million, for $4.5 million.
At December 31, 2002, all terms of the settlement agreement between the Company and ICF Consulting had been implemented. Due to uncertainties about the ultimate collectibility of the New Note and accrued interest, and considering the fact that ICF Consulting had defaulted on the previously held ICF Consulting notes, the Company has recorded a reserve of $0.5 million against the New Note.
8. Mandatorily Redeemable Preferred Stock
Kaiser Holdings’ certificate of incorporation authorizes the issuance of 2,000,000 shares of New Preferred. Resulting from its initial bankruptcy distribution on April 17, 2001 (see Note 2), the Company had $35.2 million, net of $5.6 million of treasury stock and $55.9 million, net of $6.6 million of treasury stock, in New Preferred outstanding at December 31, 2003 and 2002, respectively. The New Preferred is a series of authorized preferred stock designated as “Series 1 Redeemable Cumulative Preferred Stock,” and has a par value of $0.01 per share. The New Preferred ranks ahead of Kaiser Holdings’ New Common.
The Company adopted FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” effective July 1, 2003. Due to the mandatorily redeemable feature of the New Preferred, described in greater detail below, the New Preferred has been reclassified from mezzanine equity to a long term liability on the consolidated balance sheet, and the preferred stock dividends have been reclassified to interest expense on the consolidated statement of operations effective July 1, 2003. There was no transition adjustment recognized upon adoption of FAS 150. There were 639,542 and 1,017,120 shares of New Preferred outstanding at December 31, 2003 and 2002, respectively, net of 101,471 and 119,587 treasury shares, respectively. The New Preferred is shown at liquidation value of $55 per share.
Pursuant to approval by the Company’s Board of Directors, in 2003 and 2002 the Company purchased 6,848 and 119,587 shares, respectively, of outstanding New Preferred at prices ranging from $25.62 to $50.55 per share. The treasury shares have been recorded at liquidation preference, $55 per share, as a reduction to preferred stock and the remaining difference between cost and the liquidation preference was recorded as an increase to paid-in capital.
The certificate of incorporation of Kaiser Holdings and Delaware law permit the Board of Directors to issue additional series of preferred stock, except that the Board of Directors may not authorize the issuance of any securities that rank senior to or on a parity with the New Preferred without the consent of holders of at least two-thirds of the New Preferred.
Cumulative dividends, classified as interest expense subsequent to July 1, 2003, on the New Preferred are payable on a quarterly basis, as of April 30, July 31, October 31 and January 31, either in cash at an annual rate of 7% of the liquidation preference per share or in additional shares of New Preferred at an annual rate of 12% of the per share liquidation preference. Dividends accrue on the New Preferred commencing with the initial distribution date, April 17, 2001. Dividends will not be paid to any affiliate of Kaiser Holdings on account of that affiliate’s ownership of shares of preferred stock. If Kaiser Holdings fails to pay a quarterly dividend when due, holders of New Preferred will have the right to elect an additional director for each dividend payment missed, up to a maximum of two additional directors, but only until such dividend is paid or provided for in full. The dividend due to holders of record on January 31, 2004, totaling approximately $0.6 million, was paid on February 7, 2004. At December 31, 2003, in addition to the $0.7 million of cash reserves for unresolved claims, the Company had $0.6 million in cash reserved for the payment of accrued dividends on any future issuances of New Preferred issued as a result of remaining bankruptcy claims resolutions (any New Preferred issued as a result of claims resolutions also
carries the right to dividends retroactively from April 17, 2001).
The New Preferred has a liquidation preference of $55 per share plus the amount of unpaid dividends, if any. Upon the liquidation or dissolution of Kaiser Holdings, each holder of New Preferred (other than an affiliate of Kaiser Holdings) is entitled to this per share liquidation preference before any holders of New Common or any other junior securities of Kaiser Holdings receive any payment for their shares. If, in a liquidation or dissolution setting, assets remaining after distribution to holders of debt and other obligations are insufficient to pay all holders of New Preferred the per share liquidation preference, then such assets will be distributed on a proportionate basis to the holders of New Preferred (other than affiliates of Kaiser Holdings) and any securities ranking on a parity with the New Preferred.
The Company has the option to redeem the New Preferred at any time, in whole or in part, at a redemption price of 100% of the liquidation preference per share plus all accrued and unpaid dividends. The Company is required to offer to purchase the New Preferred at 100% of the liquidation preference per share plus all accrued and unpaid dividends in connection with a change of control of Kaiser Holdings. In addition, any net proceeds in excess of $3 million in a calendar year received by the Company or any of its direct or indirect subsidiaries from the disposition of assets to an unaffiliated party outside of the ordinary course of business must be used to redeem New Preferred at a redemption price of 100% of the liquidation preference per share plus all accrued and unpaid dividends. Furthermore, to the extent that certain categories of cash are received from Nova Hut, such cash must be used to redeem New Preferred at a redemption price of 100% of the liquidation preference per share plus all accrued and unpaid dividends.
All outstanding shares of New Preferred are required to be redeemed by the Company on or before December 31, 2007, and if such redemption does not occur, holders of New Preferred will be entitled to elect two-thirds of the directors of the Company. If shares of preferred stock are held by any affiliate of the Company, those shares may not be redeemed pursuant to any of the redemption provisions otherwise applicable to the New Preferred.
Holders of New Preferred generally are entitled to vote with holders of New Common on all matters submitted to a vote of shareholders, with each share of New Preferred being entitled to one-tenth of a vote. In addition, holders of New Preferred have the right to vote separately as a class to exercise their right to elect an additional director due to a failure to pay a quarterly dividend, to elect two-thirds of the directors if the New Preferred is not redeemed by December 31, 2007, and to consent to the issuance of any senior or parity securities. The terms of the New Preferred may not be materially or adversely modified without the consent of holders of at least two-thirds of the New Preferred. If the Company or any of its affiliates holds any New Preferred, they will not be entitled to vote that New Preferred.
The Plan provides that Major Stockholders (defined as holders of 10% or more of the outstanding shares of New Preferred or New Common, or a person who is an “affiliate” of Kaiser Holdings as defined under the Federal securities laws) have certain registration rights. In general, a Major Stockholder may request Kaiser Holdings to register under the Securities Act of 1933 for the sale of all, but not less than all, of the New Preferred and/or New Common owned by the Major Stockholder. Upon request for such a registration from a Major Stockholder, Kaiser Holdings is required to give notice to other Major Stockholders and use its best efforts to cause a registration statement to become effective as expeditiously as possible and maintain such registration statement current for a period of 12 months. Major Stockholders are not entitled to request registration until one year after the Effective Date, and Kaiser Holdings is not obligated to file a registration statement in response to a request from a Major Stockholder until such time as Kaiser Holdings is eligible to use Form S-3 under the Securities Act of 1933 for such an offering. Kaiser Holdings is not required to effect more than one registration for Major Stockholders during any twelve-month period. These registration rights expire on December 31, 2007. The Plan also contemplates that Major Stockholders will have “piggyback” registration rights in connection with a proposed underwritten public offering of Kaiser Holdings New Common or New Preferred solely for cash and for its own account.
Kaiser Government Programs, Inc.’s (“KGP”) Put Rights
KGP is the Company subsidiary that owns (through a wholly owned subsidiary of KGP) the 50% interest in Kaiser-Hill Company LLC. KGP has outstanding put rights, expiring on December 31, 2007, that obligate it to purchase New Preferred owned by a holder of the put right, at the holder’s option, under three circumstances:
• if KGP receives net after-tax proceeds from any cash distributions from Kaiser-Hill that, on a quarterly basis, exceed 2.8 times the amount of cash required to pay all past accrued but unpaid cash dividends on the New Preferred, plus the next scheduled quarterly cash dividend on New Preferred;
• if KGP receives net after-tax proceeds from any direct or indirect disposition of any interest in Kaiser-Hill; or
• if KGP receives net after-tax proceeds from an extraordinary distribution from Kaiser-Hill.
Upon exercise of a put, KGP will pay an exercising holder 100% of the liquidation preference of the preferred stock that is the subject of the KGP put rights, plus all accrued and unpaid dividends on the preferred stock. KGP will purchase shares of preferred stock on a pro rata basis based upon the number of shares of preferred stock as to which puts have been properly exercised, but only up to the amount of the available net after-tax proceeds from triggering events. KGP will not purchase any fractional shares. KGP put rights will not become exercisable more frequently than every 12 months unless the cumulative amount of available net after-tax proceeds from triggering events is at least $3 million. KGP put rights are transferable except that puts shall cease to be transferable if KGP determines that any further transfer would require registration of the puts as a class of securities under the Securities Exchange Act of 1934. Kaiser Holdings does not presently plan to arrange for trading of the KGP put rights on the NASD electronic bulletin board or otherwise.
The Company received distributions from Kaiser-Hill during the third quarter of 2003 and the fourth quarter of 2002 in amounts that triggered the put rights - effectively requiring the Company to redeem certain New Preferred. In addition, the Company had certain restricted cash balances available, which pursuant to the terms of its Plan of Reorganization are required to be used to redeem outstanding New Preferred. Rather than using the mechanism of the put rights to satisfy the Company’s obligations to holders of the put rights after a trigger, the Company observed the requirements in the Plan of Reorganization to use certain restricted cash balances, and in the terms of the New Preferred, to use certain available cash, for preferred redemptions. In January and October 2003, the Company redeemed $14.1 million and 6.2 million, respectively, liquidation preference of New Preferred or 282,000 and 113,530 shares, respectively. The Company believes this was a more cost-efficient manner of satisfying the obligations associated with the KGP put rights and plans to continue to use this redemption process to satisfy such obligations in the future.
In February 2004, the Company redeemed $5.3 million liquidation preference of New Preferred or 95,932 shares.
9. New Common Stock
The Kaiser Holdings certificate of incorporation authorizes the issuance of 3,000,000 shares of New Common. Pursuant to the Company’s Plan, holders of Allowed Class 4 Claims and Allowed Class 5 Equity Interests are to receive shares of New Common Stock under the Plan.
In connection with its initial distribution out of bankruptcy on or about April 17, 2001, Kaiser Holdings issued to holders of Allowed Class 4 Claims one share of New Common for each $100.00 of such holder’s respective Allowed Class 4 Claim. Subsequent to April 17, 2001, 823 shares of New Common have been issued related to the settlement of claims.
Holders of Allowed Class 5 Equity Interests received their pro rata portion of New Common representing 15% of the aggregate amount of New Common to be outstanding following distributions to holders of Allowed Class 4 Claims and Allowed Class 5 Equity Interests. This outcome was accomplished by issuing to each holder of an Allowed Class 5 Equity Interest its pro rata portion of the number of shares of New Common that represents 17.65% of the total number of shares of New Common issued from time to time to holders of Allowed Class 4 Claims.
All shares of New Common, at issuance, were duly authorized, fully paid and non-assessable. The holders of such shares will have no preemptive or other rights to subscribe for additional shares. The New Common has a par value of $0.01 per share. Based on its current estimates of the aggregate amount of Allowed Class 4 Claims and cash available for distribution, Kaiser Holdings expects to ultimately issue no more than 1,715,000 shares of New Common to holders of Allowed Class 4 Claims and Allowed Class 5 Equity Interests. See Note 14 below with respect to Bankruptcy Court ruling that could affect this estimate.
Old Kaiser never paid cash dividends on its Old Common. Kaiser Holdings anticipates that for the foreseeable future no cash dividends will be paid on the New Common and that Kaiser Holdings’ earnings will be utilized to redeem New Preferred or retained for use in the business. The Board of Directors of Kaiser Holdings will determine its dividend policy based on its results of operations, payment of dividends on, and redemption of, New Preferred, financial condition, capital requirements, and other circumstances.
10. Leases
The Company has the following future commitments on material noncancelable operating leases with initial or remaining terms in excess of one year at December 31, 2003:
The total rental expense for all operating leases was $133,000 and $141,000 during the years ended December 31, 2003 and 2002.
11. Income Taxes
The components of net income (loss) used to compute the (expense) benefit for income taxes for the years ended December 31 were as follows (in thousands):
The effective income tax (expense) benefit varied from the federal statutory income tax (expense) benefit because of the following differences (in thousands):
The tax effects of the principal temporary differences and carryforwards that give rise to the Company’s net deferred tax asset (liability) are as follows (in thousands):
The ability to derive future benefit from some of the elements contributing to the net deferred tax liability at December 31, 2003 is dependent on the Company’s ability to generate sufficient taxable income prior to expiration. In the fourth quarter of 2002, the Company determined that in addition to the reduction of tax carryforwards due to the bankruptcy exception of 382, the tax basis of various assets also was required to be reduced. This created a deferred tax liability that would be due upon disposition of the assets. The Company believes that the results of its future operations will be sufficient to assure utilization of the tax benefits prior to expiration.
In December 2000, the Chapter 11 bankruptcy reorganization of the Company caused a change in control under Internal Revenue Code (IRC) Sec. 382. In 2001, the Company determined that the change in control met the stringent guidelines of the bankruptcy exception provided under the Internal Revenue Code. This resulted in the Company not being subject to the carryforward limitations of IRC Sec. 382. However, the Company was required to reduce certain carryovers that included net operating losses and credits. The Company offset the reduction of the carryforwards with the valuation allowance previously established for those carryforwards.
In 2003 the Company utilized its 2002 net operating loss carryforward of $1,511,000 and tax credit carry forward of $685,000.
12. Retiree Benefits Plans
Post Employment Benefit Plan: As of December 31, 2003 the Company is required to continue to fulfill the provisions of a previously curtailed plan which provides certain medical and dental benefits to a group of retirees. A portion of the benefit is fully insured and a portion is covered by the Company’s self-insurance. In respect to the retirees covered by the self-insured plan, the benefits are funded to an insurance company as participants’ insurance claims are reimbursed. The Company is considering changing elements of this plan coverage.
The benefit cost for this curtailed plan for the years ended December 31 consisted of the following (in thousands):
Because there are no new participants in this plan, there is no current service cost. The change in the status of the plan as of December 31 was as follows (in thousands):
The discount rate used in determining the expense was 6.0% and 6.5% for 2003 and 2002, respectively. Pursuant to the terms of the plan obligations, changes in medical cost trend rates have no financial impact on the actuarial valuation as the cost of the benefit to the participant has exceeded the Company’s commitment. At December 31, 2003, there is a $568,000 unrecognized loss related to changes in actuarial assumptions. This loss will be amortized over three years.
13. Benefits and Compensation Plans
The Company sponsors a 401(k) Plan that allows employees to defer portions of their salary, subject to certain limitations. Total expense for this plan for the years ended December 31, 2003 and 2002 was $177,000 and $290,000, respectively.
14. Other Contingencies
Kaiser Holdings has various obligations and liabilities from its continuing operations, including general overhead expenses in connection with maintaining, operating and winding down the various entities and net assets comprising Kaiser Holdings.
Kaiser Holdings has various obligations and liabilities from its continuing operations, including general overhead expenses in connection with maintaining, operating and winding down the various entities and net assets comprising Kaiser Holdings. Additionally, the Company believes contingent liabilities may exist in the following areas:
Nova Hut
Although Old Kaiser sold its Metals, Mining and Industry business unit in August 2000, it retained its Netherlands subsidiary, Kaiser Netherlands, B.V., which had been responsible for a turnkey engineering and construction services contract for the construction of a steel mini-mill in the Czech Republic for Nova Hut. After construction of the mini-mill was complete in 2000, the contract with Nova Hut provided for a maximum of three possible performance tests. The first performance test was completed on November 13, 2000. Kaiser Netherlands believes that the first performance test was successful and that Nova Hut should have agreed to final acceptance of the mini-mill and made final payment of amounts accrued by Kaiser Netherlands throughout the project, including fee and retention amounts with release of performance guarantee instruments. Nova Hut, however, asserted that the first test was not successful. Kaiser Netherlands believes that such contention may have been put forth in response to severe financial constraints on Nova Hut’s operations resulting from weakening conditions in the worldwide steel market and the significant amounts that Kaiser Netherlands believed it was contractually due. To date, this dispute has not been resolved, and Kaiser Netherlands has resorted to legal proceedings to enforce its rights. The primary legal venue up until this time has been the Delaware bankruptcy proceeding for Old Kaiser, where the Company has asserted claims against Nova Hut and the International Finance Corporation (“IFC”). The Delaware bankruptcy court has previously ruled that the Company, as opposed to Kaiser Netherlands, could proceed with prosecution of its specific claims against Nova Hut and IFC in the Delaware bankruptcy court venue. Both Nova Hut and IFC appealed this ruling and during the first quarter 2004, the Delaware bankruptcy court’s decision regarding the IFC was overturned by the District Court, ruling that the IFC enjoys sovereign immunity from prosecution. Kaiser Holdings has filed a notice of appeal to the Third Circuit regarding this decision in favor of the IFC. At this date, the Nova Hut appeal is still pending at the District Court level.
In December 2003, the International Chamber of Commerce (“ICC”), under the dispute resolution provisions of the Nova Hut mini-mill subcontract between Kaiser Netherlands and the mini-mill’s main equipment supplier, Tippins, Inc., issued a final award that was on balance favorable to Kaiser Netherlands. As a result of the ruling, Kaiser Netherlands was relieved of the obligation to pay additional retention to Tippins and Kaiser Netherlands was awarded a net cash settlement of $2.6 million. The Company has not recorded this settlement due to the uncertainties regarding collectibility. However, the Company intends to vigorously pursue collection of this settlement.
In January 2004, Kaiser Netherlands filed arbitration claims against Nova Hut in excess of $40.0 million with the ICC. The arbitration panel is currently being constituted and the first hearing should take place during the second or third quarter of 2004 with the earliest possible final award ruling being issued sometime in 2005. Nova Hut is expected to submit a multi-million dollar counterclaim against Kaiser Netherlands in these same ICC proceedings. According to contract, any such counterclaims could not exceed a total of $46 million, net of interest.
The continued litigation of these disputes, as well as the cost of a possible ongoing presence in Ostrava, Czech Republic, has had and will continue to have a negative impact on the cash flow of Kaiser Netherlands and Kaiser Holdings.
The components of the “Net Assets of Discontinued Operations” consist entirely of the carrying value of the net assets of the Nova Hut project. Based on the Company’s continued concern over Nova Hut’s financial difficulties and the lack of a settlement resulting from an earlier, bankruptcy court-sponsored mediation, in the fourth quarter of 2003, the Company further reduced the carrying value of the remaining Nova Hut project assets from $6.0 million to $3.0 million by recording an additional reserve of $3.0 million, net of a $1.1 million income tax benefit, through a charge to “Loss from Discontinued Operations”. This reserve is in addition to a reserve recorded in 2001, which reduced the carrying value of the Nova Hut
project assets from $21.6 million to $6.0 million by recording a reserve of approximately $9.8 million, net of a $5.8 million income tax benefit, through a charge to “Loss from Discontinued Operations”. These adjustments to the project asset carrying value have been determined based on the Company’s estimate of Nova Hut’s current ability to pay such liability.
Kaiser Hill
Under Kaiser-Hill’s contract with the DOE, Kaiser-Hill is not responsible for, and the DOE pays all costs associated with, any liability, including, without limitation, any claims involving strict or absolute liability and any civil fine or penalty, expense, or remediation cost, but limited to those of a civil nature, which may be incurred by, imposed on, or asserted against Kaiser-Hill arising out of any act or failure to act, condition, or exposure which occurred before Kaiser-Hill assumed responsibility on July 1, 1995 (pre-existing conditions). To the extent the acts or omissions of Kaiser-Hill constitute willful misconduct, lack of good faith, or failure to exercise prudent business judgment on the part of Kaiser-Hill’s managerial personnel and cause or add to any liability, expense, or remediation cost resulting from pre-existing conditions, Kaiser-Hill is responsible, but only for the incremental liability, expense, or remediation caused by Kaiser-Hill.
The Kaiser-Hill contract further provides that Kaiser-Hill will be reimbursed for the reasonable cost of bonds and insurance allocable to the Rocky Flats contract and for liabilities and expenses incidental to these liabilities, including litigation costs, to third parties not compensated by insurance or otherwise. There is an exception to this reimbursement provision applicable to liabilities caused by the willful misconduct, lack of good faith or failure to exercise prudent business judgment by Kaiser-Hill’s managerial personnel.
The clean-up and closure of the DOE’s Rocky Flats site involve substantial performance risks. Among other things, Kaiser-Hill’s activities at the Rocky Flats site involve the clean-up, packaging and transportation of nuclear waste, and the demolition and destruction of facilities where nuclear weapons components were previously produced. Some of the activities have not been previously performed elsewhere, and therefore require the development of innovative and untested approaches. Kaiser-Hill emphasizes safety in its performance, but the nature of the Rocky Flats site and the activities of Kaiser-Hill and its subcontractors at the site are such that serious injuries, or even deaths, are possible. Significant safety incidents at the site could stop or significantly impede the progress of work being performed at the site by Kaiser-Hill and its subcontractors. The DOE contract contemplates that all, or substantially all, of the nuclear waste at Rocky Flats will be transported to other sites operated or managed by the DOE. The appropriate sites for storage of certain of those nuclear wastes have not yet been identified. In addition, objections have arisen from time to time with regard to the transportation and storage of nuclear waste at certain sites previously scheduled by the DOE to receive waste from Rocky Flats. Although the DOE contract contemplates that the DOE is responsible for providing transportation and storage sites for nuclear waste from Rocky Flats, an inability to store nuclear waste at other DOE sites would pose a substantial risk to the timely closure of the Rocky Flats site, and could interfere with Kaiser-Hill’s ability to earn fees to which Kaiser-Hill believes it should be entitled.
As the contract between Kaiser-Hill and the DOE is cost-reimburseable in nature, the costs invoiced by Kaiser-Hill for reimbursement by the DOE are subject to audit by the U.S. government. Also since the inception of Kaiser-Hill, the Company invoiced certain management oversight costs to Kaiser-Hill. Government audits at Kaiser-Hill are in process for the years of the predecessor contract, which ran from 1995 until January 2000. Although Kaiser-Hill and the Company have historically provided for their estimates of disallowed costs on cost-reimburseable contracts, uncertainties exist with regard to whether government audits will result in any disallowed costs needing to be refunded to the government customer. The continued adequacy of provisions for reserves with regard to unallowable costs is reviewed regularly.
Common Stock
On January 20, 2004, the United States Bankruptcy Court for the District of Delaware ruled on a claim in favor of former shareholders of ICT Spectrum Constructors, Inc. The Bankruptcy Court has refused to reconsider its decision and the Company plans to appeal. Should the Company be unsuccessful in its efforts to achieve reversal of the Bankruptcy Court’s ruling, the Company could be required to issue an additional 247,350 common shares, which would then comprise approximately 13.4% of the aggregate shares outstanding. The Company believes that issuing such a substantial number of additional common shares could be expected to have a materially dilutive effect on the value of common shares presently outstanding.
15. Selected Quarterly Financial Information (Unaudited)
For the year ended December 31, 2003:
For the year ended December 31, 2002:
For the year ended December 31, 2001:
The results of operations include the effects of the following non-recurring and unusual items:
2003: In the fourth quarter of 2003, loss from discontinued operations was unfavorably impacted by the write down of net assets of discontinued operations to $3.0 million by a charge to loss from discontinued operations totaling $3.0 million offset by income from discontinued operations of $0.4 million from the successful resolution of a claim against a former subcontractor and through the collection of foreign accounts receivable, which had previously been fully reserved.
At June 30, 2003, the Company adopted FAS 150 and preferred stock dividends were reclassified to interest expense.
2002: In the fourth quarter of 2002, income from continuing operations was favorably impacted by the change in estimate related to the Kaiser-Hill contract that increased the estimated performance fee by $34.8 million. Income from discontinued operations was favorably affected by the successful resolution of a claim against a former subcontractor and through the collection of foreign accounts receivable, which had previously been fully reserved.
In the third quarter of 2002, income from continuing operations was impacted by the Company’s sale of its 10% interest in ICF Consulting resulting in a gain of $3.4 million, offset by the restructuring of the notes receivable and establishment of a reserve on the new note with ICF Consulting with a loss of $1.3 million, for a net positive impact of $2.1 million.
2001: In the fourth quarter of 2001, income from continuing operations was favorably impacted by a change in estimate related to the Kaiser Hill contract that increased the estimated performance fee by $15.8 million.
KAISER-HILL COMPANY, LLC
AND SUBSIDIARY
Consolidated Financial Statements and Schedules
December 31, 2003 and 2002
(With Independent Auditors’ Report Thereon)
Independent Auditors’ Report
The Members
Kaiser-Hill Company, LLC:
We have audited the accompanying consolidated balance sheets of Kaiser-Hill Company, LLC (the Company) and subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of income, members’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The accompanying consolidated financial statements of the Company for the year ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated January 25, 2002.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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-Hill Company, LLC and subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
January 30, 2004
KAISER-HILL COMPANY, LLC
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2003 and 2002
(Amounts in thousands of dollars)
See accompanying notes to consolidated financial statements.
KAISER-HILL COMPANY, LLC
AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 2003, 2002, and 2001
(Amounts in thousands of dollars)
See accompanying notes to consolidated financial statements.
KAISER-HILL COMPANY, LLC
AND SUBSIDIARY
Consolidated Statements of Members’ Equity
Years ended December 31, 2003, 2002, and 2001
(Amounts in thousands of dollars)
See accompanying notes to consolidated financial statements.
KAISER-HILL COMPANY, LLC
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002, and 2001
(Amounts in thousands of dollars)
See accompanying notes to consolidated financial statements.
KAISER-HILL COMPANY, LLC
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2003 and 2002
(1) Organization
Kaiser-Hill Company, LLC (the Company) was formed on October 24, 1994. The principal business of the Company is to procure, execute, deliver, and perform under a contract with the Department of Energy (DOE) to manage the programs and operate the DOE facilities at Rocky Flats Environmental Technology Site (RFETS) in Golden, Colorado. The mission of the RFETS is directed toward cleanup, deactivation, and preparation for decontamination and disposition of these DOE facilities.
The Company is a limited liability company owned equally by Kaiser KH Holdings, Inc., a wholly owned subsidiary of Kaiser Group Holdings, Inc. (formerly known as Kaiser Group International, Inc.) (Kaiser), and CH2M HILL Constructors, Inc., an indirect wholly owned subsidiary of CH2M HILL Companies, Ltd. (CH2M HILL) (collectively the Members). Net profits and/or losses and distributions thereof are allocated equally to the Members.
At December 31, 2003, the Company employed approximately 1,102 hourly workers and approximately 376 salaried workers. Approximately 80% of the hourly employees are represented by United Steel Workers of America under a collective bargaining agreement which expires on January 15, 2007.
On January 24, 2000, the Company and the DOE entered into a new contract (the Contract) effective February 1, 2000. The Contract is in effect until the physical completion of the Rocky Flats Closure Project including closure, disposal of nuclear material, demolition of facilities, environmental remediation, waste disposal, infrastructure, and general site operations. Under the Contract, the Company has the opportunity to earn an additional fee if the total costs incurred are below the Contract target cost or the completion of the site closure is before March 31, 2007. In addition, the Company can lose a portion of its fee if the costs exceed an amount equal to $200 million above the Contract target cost or the site closure is after March 31, 2007. The modified maximum and minimum fee available to be earned by the Company through the date of closure is $461.2 million and $151 million, respectively.
(2) Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the Company and its wholly owned subsidiary, Kaiser-Hill Funding Company, LLC. All intercompany accounts and transactions have been eliminated in the consolidated financial statements.
(b) Revenue Recognition
Under the Contract, revenue is recognized using the percentage-of-completion method whereby revenue is accrued in an amount equal to cost plus management’s best estimate of incentive fees. Incentive fees are estimated based on projected total Contract costs and site closure date. The Company continually monitors its progress toward the completion dates and its estimated costs at completion and will modify its estimates of fees to be earned as needed. Changes in these estimates could have a significant effect on future earnings of the Company. During 2003, management revised its estimate of projected cost at completion based upon the Company’s current progress under the Contract. The change in estimate resulted in approximately $25,200,000 of additional incentive fees to be recognized over the life of the Contract. The Company recognized approximately $17,100,000 in additional revenue during the year ended December 31, 2003 when compared to the previous year ended December 31, 2002, due to the change in estimate.
(c) Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the Company considers cash in checking and short-term investments with original maturities of three months or less to be cash and cash equivalents.
The Company maintains its cash accounts primarily with banks located in Colorado, New York, and Washington, D.C. Cash balances are insured by the FDIC up to $100,000 per bank and cash equivalents are not insured by the FDIC. As of December 31, 2003, the majority of the cash balance was made up of cash equivalents.
(d) Income Taxes
No provision for the payment of income taxes has been made in the accompanying consolidated financial statements related to the activities of the Company since the Members each report their share of the Company’s taxable income in their respective individual income tax return.
(e) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
As discussed in note 2(b), revenue under the Contract is recognized using the percentage-of-completion method whereby revenue is accrued in an amount equal to cost plus management’s best estimate of incentive fees. Incentive fees are estimated based on projected total Contract costs and site closure date. Changes in these estimates could have a significant effect on the future earnings of the Company.
(3) Related Party Transactions
In 2003 and 2002, the Members were subcontracted by the Company to perform certain tasks under the Contract. The “Payable to Members” in the accompanying consolidated balance sheets as of December 31, 2003 and 2002 consists of $250,000 and $250,000, respectively, to Kaiser and $398,000 and $617,000, respectively, to CH2M HILL for these subcontracted tasks. These payables are noninterest bearing.
During 2003, CH2M HILL began providing information technology services for the Company at negotiated rates. Costs incurred related to work performed by CH2M HILL, the majority of which are reimbursable and billed under the Contract and relate to information technology services provided, were approximately $10,652,000 in 2003, $473,000 in 2002, and $851,000 in 2001.
In addition, the Company performed approximately $4,892,000 and $2,145,000 of services on behalf of CH2M HILL during 2003 and 2002, respectively.
(4) Contract Receivables
Contract receivables as of December 31, 2003 and 2002 primarily represent unbilled receivables due under the Contract. Unbilled receivables result from revenue and estimated fees that have been earned by the Company but not billed to the DOE as of the end of the period. Unbilled receivables can be invoiced at contractually defined intervals and milestones. Management anticipates that the current portion of unbilled receivables will be billed and collected in less than one year. Current unbilled receivables primarily represent allowable costs, including subcontractor costs, that have not been submitted to the DOE for payment. These costs cannot be invoiced to the DOE until payment has been made by the Company to the vendor. In addition, under the terms of the Contract, the Company receives a cash payment of 50% of the incentive fee due on a quarterly basis. These payments increased slightly during the last year as DOE has recognized accelerated work progress. The remainder of the incentive fee, based on projected costs at completion and closure date, is to be paid by the DOE upon the completion of the Contract, currently estimated to be September 30, 2006. As such, these amounts are classified as noncurrent in the accompanying consolidated balance sheets. As discussed above, any modifications or changes in the cost estimates or the site closure date will impact these outstanding amounts and could increase or decrease such amounts.
As of December 31, 2003 and 2002, the Company has $113.8 million and $77.4 million, respectively, of long-term unbilled receivables that represent incentive fee under the Contract. These can be billed at the completion of the Contract, currently estimated to be September 30, 2006. In addition, the Company has current unbilled receivables of $100.0 million and $98.5 million as of December 31, 2003 and 2002, respectively. This is comprised of $7.9 million and $7.1 million, respectively, of incentive fees and $92.1 million and $91.4 million, respectively, of direct reimbursable costs under the Contract. All of these amounts have been billed subsequent to year-end.
The Company’s Contract receivables result primarily from its long-term Contract with the DOE. As a consequence, management believes that credit risk is minimal.
(5) Employee Incentive Plan
In connection with the closure Contract with the DOE, the Company implemented an employee incentive plan. There are two components to the plan. The first component represents a cash bonus, which is earned and paid annually. The second component represents the issuance of performance units. These units are allocated to employees on an annual basis. The value of these units ultimately depends on the actual cost achieved and the closure date and range from $0 to $1 per unit. Employees remain eligible for these units as long as they are employed by the Company or left in good standing, as defined. Payments made for performance units will be paid in cash at the end of the Contract.
As of December 31, 2003, the Company has issued approximately 51,927,000 performance units and the estimated value to be paid is accrued as employer incentive plan liability. The payments of the unit bonus will take place upon closure of the Contract, and therefore, the associated accrual is classified as a long-term employee incentive plan liability in the accompanying consolidated balance sheets.
Additionally, the Company has accrued $3.7 million for an enhanced schedule incentive payable to the hourly employees represented by United Steel Workers of America under the collective bargaining agreement. This payment will also take place upon closure of the Contract and is also classified as a long-term liability in the accompanying consolidated balance sheets.
(6) Business Loan and Security Agreement
The Company currently has a Business Loan and Security Agreement (the Agreement) with a bank. The term of the Agreement is through December 31, 2005. The Company, Kaiser, and CH2M HILL granted a first lien security interest to the bank in all of the ownership and equity interest of the Company. As of December 31, 2003 and 2002, the Company had no amounts outstanding under the Agreement.
Under the Agreement, the Company has available temporary financing for the payment of the Company’s costs incurred under the Contract. This financing is utilized throughout the year for periods of less than one month as, under the terms of the Contract, the DOE must pay the Company’s invoices within three business days of receipt. The funding level under the Agreement cannot exceed a maximum borrowing base calculated on the lesser of eligible billed and unbilled government accounts receivable, as defined, or $35,000,000. Under the terms of the Agreement, interest on the advances is calculated either under a rate based upon LIBOR or a rate based upon the higher of the Federal Funds Rate or the Prime Rate.
In connection with the Agreement, the Company incurred $525,000 in loan origination fees, which are capitalized as deferred financing costs and are being amortized to interest expense over the life of the Agreement.
The Agreement also contains various financial covenants, including tangible net worth, fixed charge ratio, and minimum cash balances requirements, among other restrictions. The Company was in compliance with all restrictive covenants at December 31, 2003.
(7) Contingencies
The Company’s reimbursable costs are subject to audit in the ordinary course of business by various U.S. government agencies. Management is not presently aware of any significant costs, which have been, or may be, disallowed by any of these agencies.
(8) Employee Benefit Plans
In accordance with the Contract, the Company participates in several multiemployer benefit plans covering substantially all employees who meet length of service requirements. These plans include a defined benefit pension plan and two defined contribution plans, the latter of which provide for Company matching contributions. The Company contribution amounts for the defined contribution plans were approximately $1,227,000 and $1,916,000 for 2003 and 2002, respectively. No amounts were contributed to the defined pension benefit plan during 2003 or 2002 because current levels of funding did not require contributions to be made.
The Company administers these benefit plans with benefits equivalent to the RFETS contractor benefit plans maintained by the contractor that preceded the Company at RFETS. Under the Contract, the Company recognizes the cost of benefit plans when paid, and such costs are reimbursed by the DOE. Any excess pension plan assets or unfunded pension plan liability which may currently exist or is remaining at the end of the DOE Contract accrues to or is the responsibility of the DOE.
Report of Independent Accountants on Financial Statement Schedule
To Board of Directors and
Shareholders of Kaiser Group Holdings, Inc.
Our audits of the consolidated financial statements referred to in our report dated March 24, 2004 appearing in the 2003 Annual Report to Shareholders of Kaiser Group Holdings, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
March 24, 2004
S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
(in thousands)
(1) Reflects reclassified additions to reserves.
S-2