10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 Commission File No. 1-12248 KAISER GROUP HOLDINGS, INC. (successor issuer to Kaiser Group International, Inc.) (Exact name of registrant as specified in its charter) Delaware 54-1437073 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9300 Lee Highway, Fairfax, Virginia 22031-1207 ---------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (703) 934-3300 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No On November 9, 2001, there were 1,585,221 shares of Kaiser Group Holdings, Inc. Common Stock, par value $0.01 per share, outstanding. KAISER GROUP HOLDINGS, INC. INDEX TO FORM 10-Q
Page Part I - Financial Information Item 1. Financial Statements: Consolidated Balance Sheets - September 30, 2001 and December 31, 2000...................... 3 Consolidated Statements of Operations and Comprehensive Loss Three and Nine Months Ended September 30, 2001 and 2000....... 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000................. 5 Notes to Consolidated Financial Statements.................... 6-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 13-22 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 22 Part II - Other Information Item 1. Legal Proceedings Item........................................ 22 Item 2. Changes in Securities and Use of Proceeds..................... 22 Item 3. Defaults Upon Senior Securities............................... 22 Item 4. Submission of Matters to a Vote of Security Holders........... 22 Item 5. Other Information............................................. 22 Item 6. Exhibits and Reports on Form 8K............................... 22
KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
September 30, December 31, ------------- ------------ 2001 2000 ------- -------- ASSETS Successor --------- Current Assets Cash and cash equivalents....................................................... $ 9,989 $ 41,344 Restricted cash and cash equivalents............................................ 16,326 16,190 Contract receivables, net....................................................... 126 1,692 Prepaid expenses and other current assets....................................... 2,452 2,861 Net assets of discontinued operations........................................... 21,631 10,712 ------- -------- Total Current Assets........................................................ 50,524 72,799 ------- -------- Other Assets Investments in and advances to affiliates....................................... 29,176 26,692 Notes receivable................................................................ 6,550 6,550 Other long-term assets.......................................................... 346 127 ------- -------- 36,072 33,369 ------- -------- Total Assets................................................................ $86,596 $106,168 ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable................................................................ $ 1,016 $ 2,367 Accrued salaries and benefits................................................... 7,572 9,148 Other accrued expenses.......................................................... 5,008 6,848 Preferred stock dividend payable................................................ 731 -- Income taxes payable............................................................ 1,068 305 ------- -------- Total Current Liabilities................................................... 15,395 18,668 Commitments and Contingencies Preferred stock, par value $.01 per share: Authorized--2,000,000 shares Issued and outstanding--1,136,024 shares at September 30, 2001; stated at liquidation value of $55 per share............................................ 62,481 -- New Common stock, par value $.01 per share: Authorized--3,000,000 shares Issued and outstanding--1,585,221 shares at September 30, 2001................ 16 -- Old Common stock, par value $.01 per share: Authorized--90,000,000 shares Issued and outstanding--23,414,328 shares at December 31, 2000................ -- 234 Capital in excess of par........................................................ 9,403 87,266 Accumulated loss................................................................ (656) -- Accumulated other comprehensive income (loss)................................... (43) -- ------- -------- Total Liabilities and Shareholders' Equity.................................. $86,596 $106,168 ======= ========
See notes to consolidated financial statements 3 KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands, except per share amounts)
For the Three For the Nine Months Ended Months Ended September 30, September 30, ------------------------ ------------------------ 2001 2000 2001 2000 ------- ------- ------- --------- Successor Predecessor Successor Predecessor --------- ----------- --------- ----------- (Unaudited) (Unaudited) Gross Revenue......................................... $ -- $ -- -- $ 271,385 Subcontract and direct material costs............... -- -- -- (195,367) ------- ------- ------- --------- Service Revenue....................................... -- -- -- 76,018 Operating Expenses Direct labor and fringe benefits.................... -- -- -- 63,426 Administrative expenses............................. 2,240 1,343 8,843 6,389 Depreciation and amortization....................... -- 822 -- 2,467 Restructuring charges............................... -- 2,462 -- 4,377 ------- ------- ------- --------- Operating Income (Loss)............................... (2,240) (4,627) (8,843) (641) Other Income (Expense) Equity income in earnings of affiliate, net of amortization of $881 and $2,643, respectively, for the three and nine months ended September 30, 2001.............. 2,843 2,121 8,665 2,621 Interest income.................................... 429 793 1,755 1,966 Interest expense................................... -- -- -- (8,445) ------- ------- ------- --------- Income (Loss) From Continuing Operations Before Income Tax and Minority Interest............ 1,032 (1,713) 1,577 (4,499) Income tax benefit (expense)....................... (801) 7,672 (1,815) 8,420 ------- ------- ------- --------- Income (Loss) From Continuing Operations Before Minority Interest............................. 231 5,959 (238) 3,921 Minority interest in net income of affiliated company............................. -- -- -- (5,999) ------- ------- ------- --------- Income (Loss) From Continuing Operations.............. 231 5,959 (238) (2,078) Loss on sale of discontinued operations, net of tax............................ -- (9,435) -- (9,435) Income (loss) from discontinued operations, net of tax............................ (51) (755) (418) 1,089 ------- ------- ------- --------- Income (Loss) before Extraordinary Item............... 180 (4,231) (656) (10,424) Extraordinary Item, net of tax........................ -- (35) -- (35) ------- ------- ------- --------- Net Income (Loss)..................................... 180 (4,266) (656) (10,459) Preferred stock dividends............................. (1,102) -- (1,989) -- ------- ------- ------- --------- Net Loss Applicable to Common Shareholders Net Loss.. $ (922) $(4,266) $(2,645) $ (10,459) ======= ======= ======= ========= Basic and Diluted Earnings (Loss) Per Common Share: Continuing operations, net of tax.................. $ (0.55) $ 0.26 $ (2.27) $ (0.09) Discontinued operations, net of tax................ (0.03) (0.44) (0.43) (0.36) Extraordinary item, net of tax..................... -- -- -- -- ------- ------- ------- --------- Net Earnings (Loss) Per Common Share............... $ (0.58) $ (0.18) $ (2.70) $ (0.45) ======= ======= ======= ========= Weighted average shares for basic and diluted earnings (loss) per common share.................... 1,585 23,255 980 23,720 ======= ======= ======= ========= Comprehensive Income (Loss) Net Income (Loss).................................. $ 180 $(4,266) $ (656) $ (10,424) Other Comprehensive Income (Loss): Change in cumulative foreign translation Adjustments.................................... (4) 2,793 (43) 3,127 ------- ------- ------- --------- Total Comprehensive Income (Loss)............. $ 176 $(1,473) (699) $ (7,297) ======= ======= ======= =========
See notes to consolidated financial statements. 4 KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the nine Months ended September 30, ------------------------------- 2001 2000 ------------ ------------ Successor Predecessor (Unaudited) Operating Activities Net loss.......................................................................... $ (656) $(10,459) Adjustments to reconcile net loss to net cash used in operating activities: Net loss (income) of discontinued operations................................... 418 (1,089) Loss on sale of discontinued operations........................................ -- 9,435 Depreciation and amortization.................................................. -- 2,467 Extraordinary item............................................................. -- 35 Equity in income of unconsolidated affiliate................................... (8,665) (2,621) Minority interest in net income of affiliate................................... -- 5,999 Changes in operating assets and liabilities, net of acquisitions and dispositions: Contract receivables, net.................................................... 1,566 7,174 Prepaid expenses and other current assets.. ................................. 409 (2,016) Accounts payable and accrued expenses........................................ (4,767) (10,081) Income tax payable........................................................... 763 (2,125) Other operating activities................................................... 795 (8,929) -------- -------- Net Cash Used in Operating Activities before claims resolution............... (10,137) (12,210) Distributions to allowed class 3 claim holders............................... (912) -- -------- -------- Net Cash Used by Operating Activities........................................ (11,049) (12,210) -------- -------- Investing Activities Distributions from 50% owned affiliate.......................................... 6,200 -- Proceeds from sales of discontinued operations.................................. -- 37,717 Purchases of fixed assets....................................................... -- (666) -------- -------- Net Cash Provided by Investing Activities................................... 6,200 37,051 -------- -------- Financing Activities Distribution of income to minority interest.................................... -- (8,250) Release of cash collateral for performance guarantee........................... -- 455 Redemption of Senior Notes..................................................... -- (1,000) Cash reserved for unresolved claims............................................ (12,331) Distribution to allowed class 4 claim holders.................................. (12,793) -- Repurchase of New Common stock pursuant to buy back............................ (125) -- Payment of preferred stock dividends........................................... (1,257) -- -------- -------- Net Cash Used in Financing Activities...................................... (26,506) (8,795) -------- -------- Increase (Decrease) in Cash and Cash Equivalents................................... (31,355) 16,046 Cash and Cash Equivalents at Beginning of Period................................... 41,344 26,391 -------- -------- Cash and Cash Equivalents at End of Period......................................... $ 9,989 $ 42,437 ======== ========
See notes to consolidated financial statements. 5 KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying consolidated financial statements of Kaiser Group Holdings, Inc. and subsidiaries (the Company), except for the December 31, 2000 balance sheet (derived from audited financial statements), are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These statements should be read in conjunction with the Company's audited consolidated financial statements and footnotes and the other information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Certain reclassifications have been made to the prior period financial statements to conform them to the presentation used in the September 30, 2001 financial statements. 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 12-g 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 as well as other information relative to the process regarding the Plan distributions of the cash and new securities 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. Kaiser-Hill has performed for the Department of Energy ("DOE") at this site since 1995 and in January 2000 was awarded a new contract to manage the closure of the site within this decade. Rocky Flats is a former DOE nuclear weapons-production facility, and under the new closure contract, Kaiser-Hill is working to stabilize and safely store radioactive materials at the site, to clean up areas contaminated with hazardous and radioactive waste, and to restore much of the 6,000-acre site to the public. . the resolution and closeout of a completed contract for the engineering and construction of a steel mini-mill for Nova Hut in the Czech Republic ("Nova Hut project"). See Note 6 - Contingencies. . the holding of a minority ownership interest in ICF Consulting Group Inc. (the consulting division that Old Kaiser sold in 1999) as well as the interest-bearing promissory notes and escrowed cash received in connection with that sale. . a wholly owned captive insurance company that is in the process of resolving existing claims. As a result of the Company's sale of its E&C Group in 2000, the captive insurance company will be liquidated over time as existing claims are resolved. . an ongoing obligation to fund a capped, post-employment medical benefit plan for a fixed group of retirees. Changes in Accounting Affecting Comparability of Financial Statements --------------------------------------------------------------------- Adoption of Fresh-Start Reporting: 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 stockholders' 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. Since the financial information as of and subsequent to December 31, 2000 has been prepared as if it is of a new reporting entity, a 6 black line has been shown to separate new entity information from prior entity information on the Statements of Operations and the Statements of Cash Flows since such presentations were not prepared on a comparable basis to the prior year. The recorded value for the emergent enterprise used for fresh start reporting, resulting in the December 31, 2000 stockholder's equity balance of $87.5 million, 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 16% 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 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 to the overall enterprise valuation. Investment in Kaiser-Hill: Prior to June 8, 2000, through a designated majority representation on Kaiser-Hill Company, LLC's board of managers, the Company had a controlling interest in Kaiser-Hill and therefore consolidated Kaiser-Hill's results of operations with those of its only other remaining business segment, the Engineers and Constructors Group. Effective June 8, 2000, the Company adopted the equity method of accounting for Kaiser-Hill coincident with its signing of an agreement whereby the other 50% owner has the right to designate 3 out of the 5 members of Kaiser-Hill's board of managers. The Company retains the right to designate 2 out of the 5 members of Kaiser-Hill's board of managers. Accordingly, the financial information contained herein for Kaiser- Hill is reflected on a consolidated basis for all periods presented through June 8, 2000, and financial information for periods after June 8, 2000 is reflected on the equity method. Discontinued Engineering Operations: In two separate transactions completed in July 2000 and August 2000, the Company sold the majority of its Engineering Operations pursuant to its Plan of Reorganization as filed with the Bankruptcy Court. The Company did not divest of a particular foreign engineering operation that is in the final stages of completing its sole project and plans to discontinue such foreign operations upon the project's completion. Accordingly, the financial results of the divested and non-divested engineering operations have been presented in the accompanying financial statements as "discontinued operations" for all periods presented. 2. General Terms of Plan and Status of Bankruptcy Distributions 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 Kaiser Group International bankruptcy process 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 determined to be owed 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, but it does expect the process to continue into 2002. In very general terms, the Plan contemplated three basic different classes of creditors: . Allowed "Class 3 claims" against Kaiser Group International bankruptcy - generally trade and similar creditors' claims of $20,000 or less - received cash for their claims. . Allowed "Class 4 claims", the largest class of claims against Kaiser Group International bankruptcy, is made up of creditor claims other than Class 3 claims and equity claims. Class 4 claims included holders of the former Kaiser Group International senior subordinated notes due 2003. Holders of allowed Class 4 claims received a combination of cash and Kaiser Group Holdings preferred and common stock in respect of their claims. Such holders received one share of preferred stock and one share of common stock for each $100 of claims. However, the number of shares of preferred stock issued was reduced by one share for each $55.00 of cash received by the holder of an allowed Class 4 claim. 7 . The third class of claims recognized in the Kaiser Group International bankruptcy are equity claims, consisting of holders of former Kaiser Group International common stock and other "Equity Interests" as defined in the Plan. Under the Plan, holders of Equity Interests will receive a number of shares of common stock of Kaiser Group Holdings 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 Kaiser Group Holdings common stock was issued for each 96 shares of previously outstanding Kaiser Group International common stock. Additional distributions of Kaiser Group Holdings common stock may be made in the future as additional shares of common stock are issued to holders of newly allowed Class 4 claims, if any. Apart from holders of former Kaiser Group International common stock, 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 Kaiser Group International in 1998. The Bankruptcy Court recently confirmed the equity nature of those claims, which were treated as such in the initial distribution. Old shares of Old Kaiser were essentially cancelled and will continue to represent the right to this distribution until all such shares have been exchanged for the New Common. 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 (as described in following discussions). 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 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 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, thereafter, the parties are required to participate in a non-binding mediation before a mediator pre-selected by the Bankruptcy Court. All unresolved claims are subject to the ADR process. Since April 17, 2001, the date of initial distribution, $49.3 million of asserted claims have been withdrawn, negotiated or mediated to an agreed amount, resulting in a cash payment of approximately $0.9 million without any additional issuance of New Preferred or New Common stock. At November 12, 2001, the amount of unresolved claims was approximately $81.0 million. The Company continues to aggressively pursue the resolution of these remaining claims primarily via the ADR process. The Company continues to believe that the amount of Class 4 claims to ultimately be allowed in the Kaiser Group International bankruptcy will not exceed $150.0 million. As demonstrated in 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 stockholders, the Company has been settling certain remaining Class 4 claims entirely for cash payments in lieu of the cash, preferred and common stock combination contemplated in Old Kaiser's Plan of Reorganization. The Company intends to continue to use this settlement alternative during its resolution of remaining Class 4 claims, but has no ability to determine the effect of the outcome on its overall financial condition in the event such settlements are accepted in the future. With respect to the unresolved claims, the Plan required that, at the date of the initial distribution, sufficient cash reserves were to be retained by the Company such that if all remaining unresolved claims were ultimately deemed allowed at the originally claimed amount, the Company would be able to satisfy the allowed claims including dividends accruing on related preferred stock since April 17, 2001. The cash reserve requirement and the fact that the Company had not yet received a substantial cash payment that the Company asserts it is due from the owner of the Nova Hut steel mini-mill in the Czech Republic (see Note 6 - Contingencies) limited the amount of cash available at the time of the initial distribution to the holders of allowed Class 4 claims. The Company determined that an aggregate of $25.0 million, or approximately $0.09347 per $1.00 of Allowed and "deemed allowed" Class 4 claims, was available at the time of the initial distribution to Allowed Class 4 claim holders. Thus, more shares of Kaiser Group Holdings preferred stock were issued than would have been had the claims resolution process had advanced more quickly and had more cash been available, collectively, from the Nova Hut project and/or other sources. Due to the proportion of remaining unresolved Class 4 claims in relation to the total of all resolved and unresolved claims, approximately $12.3 million of the $25.0 million in available cash was paid into the reserve cash account as of April 17, 2001. As discussed in General Terms and Distribution Status of Plan, the exchange ratio of Kaiser Group Holdings common stock for former Kaiser Group International common stock (1 share for 96 shares) and the nature of the distribution of shares of common stock to holders of Class 4 claims resulted in there being a number of holders of a relatively small number of shares of Kaiser Group Holdings common stock. Therefore, the Company initiated an offer to purchase all, but not less than all, shares of Kaiser Group Holdings common stock distributable to persons who received 99 or fewer shares in the initial distribution for a price equal to $4.50 per share. This price was generally based on the trading price of Kaiser Group International common stock during the prior 30 days, which may not have borne any relation to the true value of such shares. The Company made no representation as to the fairness of the offer price. The offer expired on June 15, 2001 with 25,650 shares being repurchased by the Company under this plan for a total of $115,000. 8 In the case of holders of former Kaiser Group International common stock, the offer to purchase shares was conditioned on the holder's agreement to also sell the holder's right to future distributions of shares of Kaiser Group Holdings' common stock under the Plan. The offer price for such distribution rights was $0.50 per share that would otherwise be distributed. This offer price was determined arbitrarily, based primarily on the Company's expectation that future distributions of shares of Kaiser Group Holdings' common stock would not exceed 10% of the number of shares then distributed at the present time. Holders who wished to sell their right to future distributions had to also sell their shares of Kaiser Group Holdings common stock. Effective as of June 15, 2001, the Company had repurchased 20,002 rights under this plan for a total cost of $10,000. The following table (amounts in thousands) depicts the Plan's unaudited status on a pro forma basis as of September 30, 2001, as if all remaining bankruptcy claims were resolved, all related bankruptcy distributions were made and a projected preferred stock redemption had been completed. The pro forma adjustments are based on the following assumptions: . the remaining Allowed Class 4 Claims will approximate $12.2 million, and . the total excess cash reserves available upon the completion of all bankruptcy claims and distributions approximates $10.3 million to be used in the redemption of outstanding New Preferred Stock.
(Amounts in Thousands) Estimated Remaining As Reported Distributions September 30, and Redemptions Pro Forma Balance Sheet Category 2001 (c) September 30, 2001 ---------------------- -------------- ---------------- ------------------ Cash and restricted cash $26,315 $(11,400) a),b) $14,915 Other current assets 24,209 24,209 Other noncurrent assets 36,072 -- 36,072 ------- -------- ------- Total Assets $86,596 $(11,400) $75,196 ======= ======== ======= Current Liabilities $15,395 $15,395 Preferred Stock 62,481 $ (4,691) a),b) 57,790 Common Stock 16 1 a) 17 Capital in excess of par 9,403 (6,710) a) 2,693 Accumulated loss (656) (656) Accumulated other comprehensive amount (43) -- (43) ------- -------- ------- Total Liabilities and Shareholders' Equity $86,596 $(11,400) $75,196 ======= ======== =======
Pro forma Adjustments and Assumptions: a) Reflects the final bankruptcy distribution as though an additional $12.2 million in claims are deemed Allowed (resulting in the Company's total Class 4 Claim estimate of $150.0 million in cumulatively Allowed Class 4 Claims upon resolution of all bankruptcy claims): . the issuance of $1.14 million in cash ($0.09347 per $1.00 of newly Allowed Claim) . the issuance of 101,266 shares of New Preferred Stock . the issuance of 119,137 shares of New Common Stock b) Reflects the redemption of 187,273 shares of New Preferred Stock, of the 1,245,073 in pro forma outstanding shares of preferred stock, at $55.00/share, $10.3 million of cash available from the "reserve" fund and from operations, upon the resolution of all bankruptcy claims, provided that the total of Allowed Class 4 Claims does not exceed $150 million. The pro forma redemption does not intend to reflect future redemptions based on distributions of any cash received by the Company from sources other than the excess cash from the "reserve" fund. c) These adjustments do not reflect the affect, if any, of any claims that may be settled for something other than the Class 4 distribution discussed previously in this footnote. 3. Earnings Per Share Basic earnings per share (EPS) is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Under the bankruptcy plan, holders of Kaiser Group International, Inc. common stock (Old Common) were to receive a number of shares of common stock of Kaiser Group Holdings (New Common) equal to 17.65% of the number of shares of such common stock issued to holders of Class 4 claims. In the initial bankruptcy distribution, effected on April 17, 2001, one share of Kaiser Group Holdings' common stock was issued for each 96 shares of previously outstanding Kaiser Group International common stock. The weighted average shares outstanding for the three and nine months ended September 30, 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 Group 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 New Common. Because Kaiser Group Holdings is assumed to be a new entity (as discussed in Note 1) period prior to the adoption of fresh-start reporting have not been restated. 9 Diluted EPS normally includes the weighted-average effect of dilutive securities outstanding during the period. Pursuant to the Company's Plan of Reorganization that was effective as of December 18, 2000, all then outstanding common stock equivalents were cancelled. Accordingly, no anti-dilutive information is presented as of September 30, 2001 and the Company had no anti- dilutive securities outstanding at September 30, 2000. The effect of preferred dividends of $1.1 million and $2.0 million has been included in continuing operations in the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2001, respectively. 4. Components of net assets of discontinued operations The components of the "Net Assets of Discontinued Operations" consist of the carrying value of the net assets of the Nova Hut project and were as follows (in thousands):
September 30, 2001 December 31, 2000 ------------------- ------------------ (unaudited) Cash................................................. $ 137 $ 276 Letter of credit cash collateral drawn by Nova Hut... 11,100 - Retained accounts receivable, less reserves and allowances of $4,044 and $3,081, respectively... 16,769 17,559 Subcontractor retentions and other accounts payable.. (6,375) (7,123) ------- ------- $21,631 $10,712 ======= =======
As of December 31, 2000, the Company had $11.1 million in letters of credit outstanding, collateralized by restricted cash balances for this project. At December 31, 2000, the restricted cash balance of $11.1 million was not included as part of "Net Assets of Discontinued Operations". On February 16, 2001, however, Nova Hut drew against the $11.1 million letter of credit prior to its expiration on March 5. Accordingly, the $11.1 million has been included in the September 30, 2001 balance above. See Note 6 - Contingencies. The Company has categorized this entire balance as a current asset in the accompanying Consolidated Balance Sheets. 5. Preferred Stock Resulting from its initial bankruptcy distribution on April 17, 2001, the Company had $62.5 million in preferred stock outstanding as of September 30, 2001. The preferred stock 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 preferred stock ranks ahead of the Company's New Common Stock. Cumulative dividends on the preferred stock 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 preferred stock at an annual rate of 12% of the per share liquidation preference. Dividends accrue on the preferred stock coincident with the initial distribution date, April 17, 2001. The dividend due to holders of record on October 31, 2001, totaling approximately $1.1 million, was paid on November 7, 2001. At September 30, 2001, in addition to the $10.5 million of cash reserves for unresolved claims, the Company has reserved $1.4 million in the cash reserve account for future dividends of preferred stock related to unresolved claims. The preferred stock has a liquidation preference of $55 per share plus the amount of unpaid dividends, if any. Upon the liquidation or dissolution of the Company, each holder of preferred stock will be entitled to be paid this per share liquidation preference before any holders of New Common stock or any other junior securities of the Company receive 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 preferred stock the per share liquidation preference, then such assets will be distributed on a proportionate basis to the holders of preferred stock and any securities ranking on a parity with the preferred stock. The Company will have the option to redeem the preferred stock 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. In addition, any net proceeds in excess of $3.0 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 preferred stock at a redemption price of 100% of the liquidation preference per share plus all accrued and unpaid dividends. Furthermore, the Company has certain other assets relative to the Nova Hut Project. To the extent that such assets are recovered, a portion must be used to redeem preferred stock at a 10 redemption price of 100% of the liquidation preference per share plus all accrued and unpaid dividends. All outstanding shares of preferred stock are required to be redeemed by the Company on or before December 31, 2007, and if such redemption does not occur, holders of preferred stock will be entitled to elect two-thirds of the directors of the Company. The Company will be required to offer to purchase the preferred stock at 100% of the liquidation preference per share plus accrued and unpaid dividends in connection with a change of control of Kaiser Holdings. Holders of preferred stock generally will be entitled to vote with holders of New Common Stock on all matters submitted to a vote of shareholders, with each share of preferred stock being entitled to one-tenth of a vote. In addition, holders of preferred stock will 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 preferred stock is not redeemed by December 31, 2007, and to consent to the issuance of any senior or parity securities. The terms of the preferred stock may not be materially and adversely modified without the consent of holders of a least two-thirds of the preferred stock. If the Company or any of its affiliates holds any preferred stock, they will not be entitled to vote that preferred stock. 6. Contingencies Kaiser Group 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 Group 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 to Hatch in August, 2000, it retained its Netherlands subsidiary, Kaiser Netherlands, B.V., which is responsible for a turnkey engineering and construction services contract for the construction of a steel mini-mill in the Czech Republic for Nova Hut. At the present time, the mini-mill project is mechanically complete. 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 at the completion of the first test. However, Nova Hut has asserted that the first test was not successful. Despite consistent and lengthy efforts on the part of Kaiser Netherlands and the Company to address and protect their positions, this matter remains disputed and Kaiser Netherlands and the Company resorted to legal proceedings to enforce their rights. The primary legal venue at this time is the Delaware bankruptcy proceeding for Kaiser Group International, where Kaiser has asserted claims against Nova Hut and the International Finance Corporation ("IFC"), while rejecting claims from Nova Hut and the IFC. The initiation of a future arbitration proceeding under the Nova Hut contract is also being contemplated. The cost of litigating this dispute, as well as the cost of a possible ongoing presence in Ostrava, Czech Republic, depending upon a final outcome, have had and are expected to continue to have a negative impact on the cash flow of Kaiser Netherlands and Kaiser Group Holdings. In addition to litigation actions, Kaiser Holdings has been engaged in direct settlement discussions with Nova Hut, which if successful would suspend current litigation proceedings. In connection with the Nova Hut project, on February 16, 2001 an $11.1 million cash collateralized letter of credit, which was originally expected to remain in place for at least one year following the achievement of Final Acceptance of the mini-mill, was drawn by Nova Hut. Kaiser Holdings, through litigation, is attempting to regain the cash drawn from Nova Hut pursuant to the terms of the Nova Hut contract. Nova Hut has also drawn down the $11.0 million retention account, resulting from withholdings from payments due to Old Kaiser and its subcontractors, that was held in a bank in the Czech Republic. In addition, under the Nova Hut contract as it currently exists, Kaiser Netherlands believes that amounts payable to it include a $10 million fee due upon achievement of Final Acceptance. Kaiser Holdings has accrued the majority of this fee over the duration of its performance on the project and currently has it included as part of Net Assets of Discontinued Operations on the Consolidated Balance Sheet - See Note 4. On May 3, 2001, Kaiser Holdings received correspondence from Nova Hut claiming that due to Kaiser Netherland's nonperformance of a second and third performance test by a particular date, it had effectively breached the contract and accordingly Nova Hut demanded that it be paid $46.0 million for the breach pursuant to the terms of the contract. Relative to this breach claim, Nova Hut withdrew the $22.1 million of cash (consisting of the $11.1 million drawn performance letter of credit and $11.0 million retention funds), that had been maintained for Kaiser Netherland's benefit in a separate Czech bank account, as it is entitled to do pursuant to the contract terms in the event of a valid breach. In addition, in consequence of its breach claim, in July 2001, Nova Hut attempted to secure payment of a $5 million promissory note issued by Kaiser Netherlands as a project performance guarantee instrument. Nova Hut is attempting to win a judgment in favor of payment of the promissory note by Kaiser Netherlands through separate legal action in the Netherlands. The initial Nova Hut claim in the Dutch court system has been dismissed and is currently under appeal by Nova Hut. 11 Given the existing disputes with Nova Hut and the fact that Nova Hut is experiencing financial difficulties, it is not possible to determine whether, or when, Kaiser Netherlands will be able to (1) collect the substantial fees Kaiser Netherlands believes is due to it from Nova Hut, (2) reclaim the cash that had collateralized the $11.1 million letter of credit, (3) obtain the release of the $11.0 million previously retained by Nova Hut in a separate Czech bank account, (4) determine its liability, if any, for future warranty guarantees, or (5)determine the remaining cost to pursue the resolution of the entire Nova Hut matter. 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. 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 September 30, 2001, Kaiser-Hill had no balances outstanding on its revolving credit facility. ICF Consulting: Kaiser Holdings owns a 10% interest in ICF Consulting Group, Inc., a privately-held entity, which was retained by Old Kaiser when it sold its Consulting Group in September 1999. Kaiser Holdings also holds approximately $6.55 million of notes (a $3.25 million Escrow Note and a $3.3 million Non-Escrow Note (the "ICF Notes") issued to Old Kaiser in connection with that sale. The notes mature on June 25, 2006 and bear interest at a rate of 10 1/2% per annum. Amounts payable by ICF Consulting Group, Inc. on such notes are subject to (1) the rights of holders of ICF Consulting Group's senior lenders and (2) possible reduction as a result of indemnification claims asserted by ICF Consulting Group, Inc. pursuant to the agreements entered into by the parties at the time of Old Kaiser's sale of its Consulting Group. The Company has been advised that ICF Consulting Group, Inc. remedied a technical default under the financial covenants in its senior credit agreement. As of the date hereof however, ICF Consulting Group, Inc. has not paid $1.4 million in interest payment due on the ICF Notes. Under the terms of the notes, overdue interest bears interest at 12 1/2% per annum. Lastly, the Company is the beneficiary of $750,000 of cash resulting from the sale transaction that is currently held in escrow as collateral for various contractual indemnification provisions, if any. The escrowed cash balance was due to be released to Kaiser on April 15, 2001. On February 12, 2001, however, ICF Consulting presented the escrow agent with notice that it has claims for indemnification from the Company for amounts exceeding the balance of the escrowed cash and the $3.25 million escrowed note. The Company believes the claim to be without merit, has not provided for any negative outcome in the accompanying financial statements, and will vigorously defend its right to be paid the escrowed funds. However there can be no assurance that the Company will be successful in this effort. The Company continues to accrue 10% interest on the $6.55 million of notes and continues to carry the notes at their face value on its balance sheet. Lastly, the Company has not adjusted the historical carrying value, approximating $2.2 million, of its 10% ownership in the ICF Consulting Group. Litigation, Claims and Assessments: In the course of the Company's normal business activities, various claims or charges have been asserted and litigation commenced against the Company arising from or related to properties, injuries to persons, and breaches of contract, as well as claims related to acquisitions and dispositions. 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, adequate reserves have been provided for final judgments, if any, in excess of insurance coverage, that might be rendered against the Company in such litigation. The continued adequacy of reserves is reviewed periodically as progress on such matters ensues. 12 Preferred Stock Put Rights: Holders of its former Senior Subordinated Notes were offered the opportunity to have a right to "put" their New Preferred Stock to Kaiser Government Programs, Inc. ("KGP"), which is the indirect 100% owner of Old Kaiser's 50% interest in Kaiser-Hill, if KGP receives certain proceeds from Kaiser-Hill. This opportunity was offered in exchange for the surrender of any remaining rights held by holders of Senior Subordinated Notes as of August 14, 2000 under a guarantee previously issued by KGP. The exchange offer by KGP expired on November 15, 2000, and the holders of $124,303,000, or 99.4%, principal amount of the Old Subordinated Notes accepted the exchange offer. Effective with the Company's initial bankruptcy distribution on April 17, 2001, holders of Senior Subordinated Notes, as to which the KGP exchange offer was accepted, also received certificates representing the KGP put rights. The number of KGP put rights represented by such certificates correspond to the number of shares of New Preferred Stock distributed with respect to such Senior Subordinated Notes. The KGP put rights will expire on December 31, 2007. The KGP put rights obligate KGP to purchase New Preferred Stock owned by a holder of the KGP put right, at the option of the then holder of a put, 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 Stock distributed to holders of Senior Subordinated Notes pursuant to the Plan, plus the next scheduled quarterly cash dividend on New Preferred Stock; . 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. KGP put rights may be exercised only as a result of a triggering event as described above. Upon exercise of a put, KGP will pay an exercising holder 100% of the liquidation preference of the New Preferred Stock that is the subject of the KGP put rights, plus all accrued and unpaid dividends on the New Preferred Stock. KGP will purchase shares of New Preferred Stock on a pro rata basis based upon the number of shares of New 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 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview 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 a confirmed plan of reorganization (the Second Amended Plan of Reorganization (the "Plan")), that was effective on December 18, 2000. The Company is deemed a "successor issuer" to Old Kaiser by virtue of rule 12-g 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, as well as other information relative to the process regarding the Plan distributions of the cash and new securities, can be found in a Current Report on Form 8-K dated December 5, 2000, and, in less detail, in the Annual Report on Form 10-K filed with the SEC by Kaiser Group Holdings on April 2, 2001. Following the completion of the sales of businesses, the effectiveness of the Plan in December 2000 and the resolution of the remaining bankruptcy claims, the Company has only a limited number of activities, assets or 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. Kaiser-Hill has performed for DOE at this site since 1995 and in January 2000 was awarded a new contract to manage the closure of the site within this decade. Rocky Flats is a former DOE nuclear weapons-production facility, and under the new closure contract, Kaiser-Hill is working to stabilize and relocate to Safe Storage the radioactive materials at the site, to clean up areas contaminated with hazardous and radioactive waste, to demolish the on-site structures, and to restore much of the 6,000-acre site to the public. As discussed below, the Company is encouraged, based on Kaiser-Hill's recent progress, that Kaiser-Hill will be able to complete the performance of the closure contract within the target schedule and cost. Of course, the Kaiser-Hill project remains subject to substantial performance and other risks. 13 . The resolution and closeout of a completed contract for the engineering and construction of a steel mini-mill for Nova Hut in the Czech Republic ("Nova Hut project"). See Note 6 to the Financial Statements - Contingencies. The Company is disappointed that it has not yet been possible to resolve the disputes related to the Nova Hut project, which has been more time- consuming and expensive than anticipated. The Company continues to believe that substantial sums are due to it in relation to the Nova Hut project, and that it is necessary to continue to invest in the pursuit of these claims and to defend against the claims of Nova Hut. . The holding of a minority ownership interest in ICF Consulting Group Inc. (the consulting division that Old Kaiser sold in 1999) as well as the interest-bearing promissory notes and escrowed cash received in connection with that sale. As discussed in Note 6 to the Consolidated Financial Statements, ICF Consulting has asserted claims against the Company, has not released the escrowed cash the Company believes is due to it, and has not paid interest that is due on the notes held by the Company. The Company continues to attempt to resolve these matters without incurring further litigation expense, but such a resolution cannot be assured. . A wholly owned captive insurance company that is in the process of resolving existing claims. As a result of the Company's sale of its E&C Group in 2000, the captive insurance company will be liquidated over time, as existing claims are resolved. The Company is attempting to accelerate the liquidation of the captive insurance company in order to make available cash reserves held by the captive insurance company earlier than had previously been anticipated. This will require a final resolution of a number of the remaining bankruptcy claims filed against the Company. . An ongoing obligation to fund a capped, post-employment medical benefit plan for a fixed group of retirees. Management has entered into discussions with a number of entities in an effort to seek ways to enhance shareholder value through an expansion of the Company's activities. To date, these discussions have focused on potential joint ventures, but in the future, may also encompass possible acquisitions of new lines of business. The potential outcome of future management efforts to enhance shareholder value is uncertain. General Terms and Distribution Status of Plan 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 Kaiser Group International bankruptcy process is ongoing. Old Kaiser has 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 determined to be owing to the creditor, such portion of the claim is deemed to be an allowed claim by the Bankruptcy Court (an "Allowed Claim"). While the Company has made substantial progress in resolving disputed claims and has achieved a number of what it considers favorable settlements, the Company cannot predict with accuracy when the claims resolution process will be complete or what the total amount of Allowed Claims will be, but it does expect the process to continue into 2002. In very general terms, the Plan contemplated three basic different classes of creditors: . Allowed "Class 3 claims" against Kaiser Group International bankruptcy-- generally trade and similar creditors' claims of $20,000 or less - received cash for their claims. . Allowed "Class 4 claims", the largest class of claims against Kaiser Group International bankruptcy, is made up of creditor claims other than Class 3 claims and equity claims. Class 4 claims included holders of the former Kaiser Group International senior subordinated notes due 2003. Holders of allowed Class 4 claims received a combination of cash and Kaiser Group Holdings preferred and common stock in respect of their claims. Such holders received one share of preferred stock and one share of common stock for each $100 of claims. However, the number of shares of preferred stock issued was reduced by one share for each $55.00 of cash received by the holder of a Class 4 claim. 14 . The third class of claims recognized in the Kaiser Group International bankruptcy are equity claims, consisting of holders of former Kaiser Group International common stock and other "Equity Interests" as defined in the Plan. Under the Plan, holders of Equity Interests will receive a number of shares of common stock of Kaiser Group Holdings equal to 17.65% of the number of shares of such common stock issued to holders of Class 4 Claims. In the initial distribution, one share of Kaiser Group Holdings common stock was be issued for each 96 shares of previously outstanding Kaiser Group International common stock. Additional distributions of Kaiser Group Holdings common stock may be made in the future as additional shares of common stock are issued to holders of newly allowed Class 4 claims, if any. Apart from holders of former Kaiser Group International common stock, 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 Kaiser Group International in 1998. The Bankruptcy Court recently confirmed the equity nature of those claims, which were treated as such in the initial distribution. Old shares of Kaiser were essentially cancelled and will continue to represent the right to this distribution until all such shares have been exchanged for the New Common. 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 or about April 17, 2001, the Company effected its initial distribution (as described in following discussions). 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 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 (the "ADR") procedure whereby the 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, thereafter, the parties are required to participate in a non-binding mediation before a mediator pre-selected by the Bankruptcy Court. All unresolved claims are subject to the ADR process. Since April 17, 2001, the date of initial distribution, $49.3 million of asserted claims have been withdrawn or negotiated or mediated to an agreed amount, resulting in a cash payment of $0.9 million without any additional issuance of New Preferred or New Common stock. At November 9, 2001, the amount of unresolved claims is approximately $81.0 million. The Company expects that substantial progress will continue in the resolution of claims over the balance of this calendar year. The Company continues to believe that the amount of Class 4 claims to ultimately be allowed in the Kaiser Group International bankruptcy will not exceed $150.0 million. As demonstrated by the claim settlements completed during the quarter ended September 30, 2001, and based on the belief that it is in the best interest of the Company and its current stockholders, the Company began settling certain remaining Class 4 claims entirely for cash payments in lieu of the cash/preferred and common stock combination contemplated in Old Kaiser's Plan of Reorganization. The Company intends to continue to use this settlement alternative during its resolution of remaining Class 4 claims, but has no ability to determine the effect of the outcome on its overall financial condition in the event such settlements are accepted in the future. With respect to the unresolved claims, the Plan required that, at the date of the initial distribution, sufficient cash reserves were to be retained by the Company such that, if all remaining unresolved claims were ultimately deemed allowed at the originally claimed amount, the Company would be able to satisfy the allowed claims, including dividends accruing on related preferred stock since April 17, 2001. The cash reserve requirement and the fact that the Company had not yet received a substantial cash payment that the Company asserts it is due from the owner of the Nova Hut steel mini-mill in the Czech Republic (see Note 6 - Contingencies) limited the amount of cash available at the time of the initial distribution to the holders of allowed Class 4 claims. The Company determined that an aggregate of $25.0 million, or approximately $0.09347 per $1.00 of Allowed and "deemed allowed" Class 4 claims, was available at the time of the initial distribution to Allowed Class 4 claim holders. Thus, more shares of Kaiser Group Holdings preferred stock were issued than would have been had the claims resolution process advanced more quickly and had more cash been available, collectively, from the Nova Hut project and/or other sources. Due to the proportion of remaining unresolved Class 4 claims in relation to the total of all resolved and unresolved claims, approximately $12.3 million of the $25.0 million was paid into the reserve cash account as of April 17, 2001. Based on the claims settlement activities since April 17, 2001 and on the level of remaining unresolved Class 4 claims of $81.0 million and the dividends theoretically accrued on such unresolved dividends since April 17, 2001, the Company is required to have reserve cash on hand of approximately $9.1 million until such claims are resolved. As of November 9, 2001, the actual balance of reserve cash on hand was $11.4 million. The difference of $2.3 million, representing roughly 4% of the total preferred stock outstanding at November 9, 2001, will be required to be used to redeem outstanding preferred stock. As the Company will continue to aggressively pursue the resolution of remaining Class 4 claims and continues to estimate that the total amount of Class 4 claims ultimately allowed will not exceed $150.0 million (roughly $12.3 million more than have been allowed or settled to date), it is likely that a significant amount of the reserve cash will be available to redeem additional shares of preferred stock in the future. Pending the resolution of the remaining $80.1 million in open claims, however, the Company is not contemplating a preferred stock redemption during 2001, but will continue to 15 evaluate the timing of such a redemption commensurate with its progress in claims resolution As discussed in General Terms and Distribution Status of Plan, the exchange ratio of Kaiser Group Holdings common stock for former Kaiser Group International common stock (1 share for 96 shares) and the nature of the distribution of shares of common stock to holders of Class 4 claims resulted in there being a number of holders of a relatively small number of shares of Kaiser Group Holdings common stock. Therefore, the Company initiated an offer to purchase all, but not less than all, shares of Kaiser Group Holdings common stock distributable to persons who received 99 or fewer shares in the initial distribution for a price equal to $4.50 per share. This price was generally based on the trading price of Kaiser Group International common stock during the prior 30 days, which may not have borne any relation to the true value of such shares. The Company made no representation as to the fairness of the offer price. The offer expired on June 15, 2001 with 25,650 shares being repurchased by the Company under this plan for a total of $115,000. In the case of holders of former Kaiser Group International common stock, the offer to purchase shares was conditioned on the holder's agreement to also sell the holder's right to future distributions of shares of Kaiser Group Holdings' common stock under the Plan. The offer price for such distribution rights was $0.50 per share that would otherwise be distributed. This offer price was determined arbitrarily, based primarily on the Company's expectation that future distributions of shares of Kaiser Group Holdings' common stock would not exceed 10% of the number of shares then distributed. Holders who wished to sell their right to future distributions had to also sell their shares of Kaiser Group Holdings common stock. At June 15, 2001, the Company had repurchased 20,002 rights under this plan for a total cost of $10,000. The following table depicts the status, as of the date of this Report, of the initial distribution under the Plan as well as a projection of the effects of all distributions, once completed, in the bankruptcy process:
(Amounts in Thousands) Distribution Element ------------------------------------ Liquidation # of # of ------------ --------- --------- Preference shares of shares of ------------ --------- --------- of New New New ------------ --------- --------- Claim % of Preferred Preferred Common Amounts as of -------- Distribution ----- ------------ --------- --------- Initial Distribution Date: Amount Amount Total Cash Stock Stock Stock ($'s in thousands) -------- ------------ ----- ---------- ------------ --------- --------- % $Value --- -------- Amount of Allowed $ 912 100% $ 912 -- $ 912 -- -- -- Class 3 Claims Amount of Allowed Class 4 Claims $136,863 55% $ 75,275 51% $ 12,793 $ 62,481 1,136,024 1,368,632 Remaining Amount of Unresolved Claims /1/ $130,329 55% $ 71,681 48% $ 12,183 $ 59,499 /NI/ /NI/ Holders of Old Common Stock -- 55% -- -- -- -- 242,239 Buyback of Odd-Lot New Common Stock -- -- -- -- -- (25,650) -------- -------- ---------- ------------ --------- --------- Totals $268,104 $147,868 100% $ 25,888 $121,980 1,136,024 1,585,221 ======== ======== ========== ============ ========= ========= Total Estimates at Completion of Bankruptcy/2/: - Allowed Class 3 Claims $ 912 100% $ 912 $ 912 $ -- -- -- - Other Priority Claims 88 100% 88 88 -- -- -- - Allowed Class 4 Claims 150,000 55% 82,500 14,628 68,050 1,237,273 1,491,000 - Holders of Old Common Stock -- -- -- -- -- 263,118 -------- -------- ---------- ------------ --------- --------- $151,000 $ 83,500 $ 15,628 $ 68,050 1,237,273 1,754,118 Pro Forma Redemption of Outstanding New Preferred Stock/3/: -- -- 10,260/3/ (10,260) (187,273) -- -------- -------- ---------- ------------ --------- --------- Total $151,000 $ 83,500 $ 25,888 $ 57,790 1,050,000 1,754,118 ======== ======== ========== ============ ========= =========
/NI/ Not Issued. The Company is required to retain cash, New Preferred Stock and New Common Stock for all unresolved claims at the claimed amount until such claims are resolved. Shares of New Preferred Stock and New Common Stock will not be issued until claims are resolved and deemed Allowed. Upon the resolution of all remaining outstanding claims, available reserve cash balances will be used to redeem shares. /1/ The amount of unresolved claims have been and will continue to be reduced significantly from time-to-time as pending court actions are finalized. /2/ Excluding the effect of any cash reserves, available upon the resolution of all remaining claims, that may be being used to redeem outstanding shares of New Preferred Stock in the future. /3/ From time-to-time in the future, as remaining unresolved claims are resolved, excess cash to be available from the "reserve" fund (including cash added to "reserve" fund in payment of pro forma dividends on retained shares of New Preferred Stock) will be used to redeem outstanding shares of New Preferred Stock. This pro forma, cumulative, estimate of $10.0 million of available cash is based on the assumption that there is a total of $150.0 million in Allowed Class 4 Claims upon the resolution of all remaining unresolved bankruptcy claims. The estimate excludes cash collections from Nova and does not intend to depict the effects of any future redemptions based on distributions of cash received by the Company from sources other than the excess cash from the "reserve" fund. 16 Results of Retained Operations Due to the sale of the majority of Old Kaiser's operations and the reporting of those operations as discontinued in the accompanying Statements of Operations for all periods presented, all remaining operations are solely attributable to the Company's 50% ownership of Kaiser-Hill. The Kaiser-Hill contribution to the Company's overall financial results for the three and nine month period ended September 30, 2001 were $2.8 million and $8.7 million, respectively (prior to a $0.9 million and $2.6 million, respectively, charge for amortization), versus $2.1 million and $14.6 million for the same periods in 2000. The difference in the results for the nine months ended September 30, 2001 and 2000 is due in part to a nonrecurring award in the first quarter of 2000 related to a performance fee that was awarded to Kaiser-Hill upon the January 2000 completion and closeout of the original Rocky Flats contract and in part to the fact that the terms of the new closure contract provided for different profitability characteristics preventing comparability to the predecessor contract that was in place for the month of January 2000. Kaiser-Hill Company, LLC is a 50% owned joint venture between Kaiser Group Holdings, Inc. and CH2M Hill, formed solely to perform the U.S. Department of Energy's Rocky Flats Closure Project initially awarded in late 1995. Under such contract, Kaiser-Hill serves as the general contractor at the U.S. Department of Energy's Rocky Flats Environmental Technology Site (a former DOE nuclear weapons production facility) near Denver, Colorado. Prior to June 8, 2000, through a designated majority representation on Kaiser-Hill's board of managers, the Company had a controlling interest in Kaiser-Hill and therefore consolidated Kaiser-Hill's results of operations with those of its only other remaining business segment, the Engineering Operations. Effective June 8, 2000, the Company adopted the equity method of accounting for Kaiser-Hill coincident with its signing of an agreement whereby the other 50% owner has the right to designate 3 out of the 5 members of Kaiser-Hill's board of managers. The Company retains the right to designate 2 out of the 5 members of the Kaiser-Hill board of managers. Accordingly, the financial information contained herein for Kaiser- Hill is reflected on a consolidated basis for all periods presented through June 8, 2000, and financial information for periods after June 8, 2000 is reflected on the equity basis. On January 24, 2000, Kaiser-Hill was awarded the follow-on Rocky Flats contract pursuant to which Kaiser-Hill is providing services that will complete the restoration of the Rocky Flats site and close it to DOE occupation (the Closure Contract). The Closure Contract became effective February 1, 2000 and terminated the remaining period of the former contract as of January 31, 2000. The economic terms of the Closure Contract are significantly different from the former contract in that Kaiser-Hill, in addition to continuing to earn revenue from the reimbursement of the actual costs of its services, will also earn a performance fee based on a combination of the actual costs of completion and on the actual date of physical completion. The Closure Contract will reimburse Kaiser-Hill for the costs it incurs to complete the site closure, currently estimated to range between $3.6 billion and $4.8 billion and, in addition, will pay Kaiser-Hill an incentive fee ranging from $150.0 million to $460.0 million, depending on Kaiser-Hill's ability to control the incurred costs at completion to within the targeted range and its ability to meet the closure goal anytime between March 31, 2006 - March 31, 2007. In addition to recognizing revenue equal to all reimbursable costs incurred on the project, Kaiser-Hill is also recognizing a portion of the total estimated performance fee equal to the proportion of total costs incurred to date as compared to total estimated costs it expects to incur over the life of the project. For the contract to date period ended December 31, 2000, Kaiser-Hill used the highest potential cost amount and accordingly the lowest potential fee award of $150.0 million as its estimate for recording revenue and profit on the contract in 2000. Effective in 2001, Kaiser-Hill estimates its total costs at contract completion to be approximately $4.5 billion. The effect of the lower cost estimate has the impact of increasing the fee that Kaiser-Hill could earn to approximately $180.0 million from the previous estimate of $150.0 million. The fee estimate is likely to change over time as Kaiser-Hill achieves certain milestones and is better able to estimate its ultimate award. Notwithstanding significant uncertainties inherent in Kaiser-Hill's ultimate performance on the project, Kaiser-Hill management has achieved substantial project performance improvement in the past several months, is currently achieving positive variances to both target project schedule and cost and believes that it is currently executing work plans that, with continued successful performance, would attain closure of the site prior to the end of 2007 and result in a larger fee award than is currently be accrued. Once the ultimate fee earned by Kaiser-Hill is determined however, it will be reduced for any costs incurred by Kaiser-Hill that were not reimbursable by the DOE, in accordance with the provisions of Federal Acquisition Regulations, prior to any distribution of its net earnings to either of the two owners. Kaiser-Hill has estimated the unreimbursable costs could range up to 20%-30% of the net performance fee ultimately awarded to it by the DOE. Kaiser-Hill recognizes these unreimbursable expenses as they are incurred. Through 2000, the Closure Contract provided for Kaiser-Hill to invoice the DOE quarterly based on a $340.0 million target fee pool, less a 50% retainage for 2000. Thereafter, the quarterly invoicing will revert to a formula such that, unless otherwise approved by the DOE, cumulative contract billings may not exceed the minimum fee of $150.0 million spread over a 7-year timeframe, with retainages. The DOE does however have the ability to increase the quarterly payments based on their acknowledgement of upward fee adjustments subject to the same 50% retainage. To date, DOE has not agreed to increase the quarterly payments beyond the $150.0 million minimum fee level. However, Kaiser-Hill has been accruing 17 the fee using an estimate of $180 million for the duration of 2001. Kaiser-Hill anticipates that the DOE will take formal action to acknowledge its accelerated contract performance during the first half of 2002. Such action would then result with an adjustment to catch up and increase the annual fee payments by up to 13%, inclusive of a triggered requirement for DOE to "holdback" 50% of the amount of fee over the $150 million minimum level. In connection with the Company's adoption of fresh-start reporting as of December 31, 2000, it increased the carrying value of the investment in Kaiser- Hill by approximately $21.0 million. Generally accepted accounting principles require that the difference between the carrying value and the Company's actual percentage ownership in Kaiser-Hill's undistributed equity be amortized over the estimated useful life of the Kaiser-Hill asset. Therefore, beginning in 2001, the Company recognized amortization expense for the three months and nine months ended September 30, 2001 of $0.9 million and $2.6 million, respectively, against its 50% ownership of Kaiser-Hill's actual net income for the same period. The Company is using an estimated 6-year life of the Kaiser-Hill investment for purposes of computing this amortization charge. Administrative Expenses: Administrative expenses incurred during the three and nine month period ended September 30, 2001 consisted of roughly equal amounts of salaries/benefits and external professional costs and, to a lesser extent, other customary facilities, utilities and regulatory compliance costs, all incurred in connection with managing the asset divestitures, bankruptcy proceedings and other activities associated with remaining asset management and the winding down of historical operations. Also included in this expense category is the Company's expense relative to retiree medical benefit costs. As the Company progresses on the winding down and bankruptcy claim resolution initiatives, it continues to reduce the amount of administrative expense incurred. Although the Company anticipates further near-term reductions in administrative expenses attributable primarily to full-time staffing reductions, until the majority of the remaining bankruptcy claims and the dispute with the Nova Hut client are resolved, it remains difficult to estimate a normal level of administrative expenditures necessary for the Company's remaining operations. Administrative expenses incurred during the same time periods in 2000 consisted largely of costs incurred for activities that were indirectly supporting the business units that were later divested. Since these support functions were not divested in 2000 along with the asset sales, the related costs have not been presented as part of the results of discontinued operations. Depreciation and Amortization Expense: The expense recognized during the three and nine month periods ended September 30, 2000 was largely attributable to amortization expense associated with the carrying value of the original issuance costs of the Company's Senior and Senior Subordinated Notes. The notes were eliminated from the balance sheet in connection with transactions and reorganization completed later in 2000 and therefore related amortization did not recur in 2001. Restructuring Charges: During the three and nine months ended September 30, 2000, the Company incurred approximately $2.5 million and $4.4 million, respectively, in costs associated with its restructuring plan. These costs primarily consisted of professional fees incurred in connection with the Company's debt restructuring activities. Equity Income in Earnings of Affiliate: Equity income in earnings of affiliate consists of the Company's 50% equity income in Kaiser-Hill for the three and nine months ended September 30, 2001 totaling $2.8 million and $8.7 million, respectively, net of $0.9 million and $2.6 million, respectively, related to the amortization of the excess of the Company's carrying value of its investment in Kaiser-Hill over its ownership percentage of the underlying Kaiser-Hill equity. The Company increased the carrying value of this investment significantly as part of its adoption of Fresh-Start reporting as of December 31, 2000 and will continue to amortize that difference over the estimated life of the Kaiser-Hill investment of approximately 6 years. Interest: Interest income is earned on available cash balances that were generated primarily from the divestitures in 1999 and 2000 prior to the use of cash in operations or for bankruptcy distributions and related matters. Interest income of 10% has also been accrued on $6.55 million in notes outstanding from the sale of ICF Consulting in September 1999 - See Note 6 to the Consolidated Financial Statements - Contingencies. Interest expense incurred for the three and nine months ended September 30, 2000 was primarily attributable to the 13% interest expense accruing on the $125.0 million of outstanding Senior Subordinated Notes. Interest on the Senior Subordinated Notes for this period was not paid in 2000 but was allowed as a claim of the note holders together with the principal amount of their notes. The Company incurred no interest expense on the Senior Subordinated Notes after it filed for bankruptcy protection on June 8, 2000. Income Tax: The Company recorded an income tax expense of $0.8 million and $1.8 million on income from continuing operations of $1.0 million and $1.6 million, respectively, for the three and nine months ended September 30, 2001 due to the fact that the amortization of the Kaiser-Hill investment carrying is not deductible for federal income tax purposes. 18 Results of Discontinued Operations: The operating results of the Company's divested and non-divested discontinued operations have been presented in the accompanying financial statements, in accordance with generally accepted accounting principles, in the form of its net results only. Summarized results for the discontinued segments for the three and nine months ended September 30, 2001and 2000 are as follows (in thousands):
2001 2000 Three Months Nine Months Three Months Nine Months ------------ ----------- ----------- ----------- Gross Revenue $ -- $ 488 $ 41,599 $157,173 Subcontracts and materials -- -- (29,702) (92,198) Equity income of affiliates -- -- 267 1,275 ---- ----- -------- -------- Service Revenue -- 488 12,164 66,250 Operating Expenses: Direct labor and fringe 16 666 8,027 40,180 Selling, general and administrative 68 518 5,169 23,225 Depreciation/amortization -- -- 226 1,030 ---- ----- -------- -------- Operating Income (Loss) Before Income Taxes (84) (696) (1,258) 1,815 Income Tax Benefit (Provision) 33 278 503 (726) ---- ----- -------- -------- Income (Loss) from Discontinued Operations (51) (418) (755) 1,089 ==== ===== ======== ========
The losses from discontinued operations in 2001 relate to expenses incurred for project wind-down, demobilization and the inception of warranty related activities of the Nova Hut project. LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources Operating activities: The Company used $11.0 million of cash in the nine months ended September 30, 2001, that, in addition to funding operating costs of its remaining activities, was used primarily for extinguishment of obligations arising out of its bankruptcy, including severances, professional fees and various other wind-down expenditures and distributions to allowed class 3 claim holders. Of the total $12.2 million of cash used in operating activities during the nine months ended September 30, 2000, Kaiser-Hill's earnings in excess of cash distributions represented approximately $3.5 million of the total operating cash shortfall. The remaining $8.7 million was used for operating, asset sale preparation, the payment of the 1999 pension obligation on September 15, 2000 of approximately $2.2 million and debt restructuring activities. Investing activities: During the nine months ended September 30, 2001, the Company received three quarterly distributions totaling $6.2 million from Kaiser-Hill. During the nine months ended September 30, 2000, the Engineering Operations were sold for proceeds totaling $36.7 million, and Old Kaiser sold an investment in a French environmental company and collected approximately $1.0 million. Financing activities: In the nine month period ended September 30, 2001, the Company paid out $12.8 million in connection with the initial bankruptcy distribution to allowed claim class 4 holders and $0.9 million in subsequent class 4 holder claim settlements were paid out of the cash reserves for remaining open claims. The Company transferred $12.3 million to a restricted cash account required, pursuant to the terms of the Plan of Reorganization, as a reserve for future claim holders and related potential dividends, paid $125,000 to repurchase certain odd-lot shares of new common stock resulting from a stock buy back offer (see related discussion above) and paid $1.3 million in preferred stock dividends. As of September 30, 2000, the Company had received an $8.3 million distribution from Kaiser-Hill and repurchased the remaining $1.0 million in outstanding Senior Notes plus accrued interest. Liquidity and Capital Resource Outlook The Company currently has no debt as a result of the effectiveness of Old Kaiser's Plan of Reorganization. The Company is financing its initial bankruptcy distribution requirements and follow-on working capital needs, in part, through the use of the available cash generated from the 2000 asset sales and, in part, from distributions from its Kaiser-Hill subsidiary. Based on (i) current expectations for operating activities and results, (ii) its current available cash position, (iii) recent trends and projections in liquidity and capital needs, and (iv) current expectations of total Allowed Claims upon the completion of the bankruptcy proceedings, management believes the Company has sufficient liquidity to cover the required cash distributions resulting from the resolution of Claims in the bankruptcy process, the future operating needs of the Company and the dividend requirements applicable to the New Preferred Stock. 19 The terms of the New Preferred Stock include provisions for cumulative dividends, payable quarterly, either in cash at an annual rate of 7% of the liquidation preference per share or in additional shares of New Preferred Stock at an annual rate of 12% of the per share liquidation preference. Dividends began to accrue on the New Preferred Stock as of the initial distribution date regardless of whether the stock had been actually issued as of that time or issued in the future upon the resolution of additional Allowed Claims. As of September 30, 2001, Old Kaiser had $4.6 million in letters of credit outstanding collateralized by restricted cash balances primarily for the requirements of its captive insurance subsidiary. Kaiser Holdings' longer-term liquidity and future ability to redeem significant portions of its outstanding shares of preferred stock will depend in large part upon: . its ability to resolve the remaining $81.0 million of open bankruptcy claims for a substantially lesser amount; . Kaiser-Hill's performance under its Closure Contract with the DOE. Kaiser- Hill serves as the general contractor at the DOE's Rocky Flats Environmental Technology Site near Denver, Colorado - see section entitled - Overview of Retained Operations; . the timing of DOE actions to accelerate the payment of Kaiser-Hill award fee; . the resolution of disputes relating to Kaiser Netherlands' performance under its fixed-price contract for turnkey engineering and construction services relating to a steel mini-mill in the Czech Republic for Nova Hut and on the ability of Nova Hut, which is in financial difficulty, to pay for such services (See Note 6 to the Consolidated Financial Statements); and . the liquidation of certain other remaining, non-operating, assets and liabilities for amounts approximating their current carrying values. Lastly, 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 September 30, 2001, Kaiser-Hill had no balances outstanding on its revolving credit facility. Other Matters Contingencies: The Company 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 areas described in Note 6 to its Consolidated Financial Statements. Recent Accounting Pronouncements: Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142) was issued in June 2001. FAS 142 provides guidance on the treatment of goodwill and other intangible assets. This standard is effective for fiscal years beginning after December 15, 2001. Upon adoption of FAS 142, goodwill and other intangibles assets that have indefinite useful lives will not be amortized, but rather will be tested at least annually for impairment. Recognized intangible assets with determinable useful lives will continue to be amortized. We will adopt FAS 142 effective January 1, 2002 and do not expect any financial impact. In August 2001, the Financial Accounting Standards Board (FASB) issued FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144 provides guidance on the accounting for the impairment or disposal of long-lived assets. FAS 144 supercedes FAS 121 and applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business. FAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, its provisions are to be applied prospectively. The Company will adopt FAS 144 effective January 1, 2002 and does not expect any financial impact. RISK FACTORS RELATING TO KAISER HOLDINGS The restructuring of Old Kaiser through the bankruptcy process involves a significant degree of risk, and certain disclosures and reports or statements to be released by Kaiser Holdings or statements to be made by its officers or directors may contain forward-looking statements that involve risks and uncertainty. Kaiser Holdings' actual results could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, including those set forth in the following risk factors and elsewhere in this Report. 20 Kaiser Holdings is Dependent on Kaiser-Hill's Performance and wind-down of Nova Hut Project: Kaiser Holdings' long-term future profitability is dependent, to a significant extent, on Kaiser-Hill's performance under its Closure Contract with the DOE. Kaiser-Hill serves as the general contractor at the DOE's Rocky Flats Environmental Technology Site near Denver, Colorado. Rocky Flats is a former DOE nuclear weapons production facility. Kaiser-Hill's contract with the DOE includes a performance fee based upon a combination of the actual costs to complete the site closure and the actual date of completion of the closure. If Kaiser-Hill fails to complete within the target cost for the project and fails to complete the project by March 31, 2007, Kaiser Hill's potential fee will be reduced by 30% of the costs incurred after the target date, up to a maximum of $20 million. Kaiser Holdings' profitability and cash flow will also be dependent, to a significant extent, on the resolution of disputes relating to Kaiser Netherlands' performance under its fixed-price contract for turnkey engineering and construction services relating to a steel mini-mill in the Czech Republic for Nova Hut and on the ability of Nova Hut, which is in financial difficulty, to pay for such services. Risks From Special Federal Regulations: Because Kaiser-Hill provides the Federal government with nuclear energy and defense- related services, it and a number of its employees are required to have and maintain security clearances from the Federal government. There can be no assurance that the required security clearances will be obtained and maintained in the future. In addition, Kaiser-Hill is subject to foreign ownership, control and influence regulations imposed by the Federal government and designed to prevent the release of classified information to contractors subject to foreign ownership, influence and control. There can be no assurance that foreign ownership, influence and control concerns will not affect the ability of Kaiser-Hill to maintain its DOE contract. Potential Substantial Liabilities and Costs Associated With Kaiser-Hill's DOE Contract: Under the DOE contract, Kaiser-Hill is responsible for, and the DOE 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. Absence of a Business Plan Beyond Kaiser-Hill and Nova Hut Project: Apart from the risks associated with Kaiser-Hill's performance under its Closure Contract with the DOE, the performance of Kaiser Netherlands and resolution of the dispute regarding the Nova Hut project, and Nova Hut's ability to pay Kaiser Netherlands, Kaiser Holdings' long-term future profitability will be dependent, to a significant extent, on its ability to develop a business plan for ongoing operations. It is possible that Kaiser Holdings' ongoing business plan will be limited to completing the Nova Hut project and participating in the activities of Kaiser-Hill. The Board of Directors of Kaiser Holdings is considering whether Kaiser Holdings should attempt to take advantage of its successful history of performing in the government services market, both independently and through Kaiser-Hill, in order to develop a new revenue base. Ability to Obtain Performance Guaranties: Given Old Kaiser's history, Kaiser Holdings may not be able to obtain satisfactory contract performance guaranty mechanisms, such as performance bond and letters of credit, at all or on satisfactory terms, to the extent such mechanisms are needed for new or existing projects. Uncertainties Beyond Kaiser Holdings' Control: A number of other uncertainties may adversely impact Kaiser Holdings' future operations including, without limitation, economic recession, adverse regulatory agency actions, acts of God, or similar circumstances. Many of these factors will be substantially beyond Kaiser Holdings' control, and a change in any factor or combination of factors could have a material adverse effect on Kaiser Holdings' financial condition, cash flows, and results of operations. Uncertainties Concerning Adequacy of Funds: There can be no assurance that Kaiser Holdings will be able to continue to generate sufficient funds to meet its obligations, notwithstanding the significant improvements in Kaiser Holdings' operations and financial condition. Although Kaiser Holdings' believes it will be able to generate sufficient funds to meet its working capital needs for the foreseeable future, its ability to gain access to additional capital, if needed, cannot be assured. Risks Related to Old Kaiser's Reorganization and Related Estimates and Assumptions: As with any plan of reorganization or other financial transaction, there are certain risk factors that must be considered in connection with Kaiser Holdings in relation to Old Kaiser's reorganization. All risk factors cannot be anticipated, some events will develop in ways that were not foreseen, and many or all of the assumptions that have been used in connection with this Report on Form 10-Q and the Plan will not be realized exactly as assumed. Some or all of such variations may be material. 21 Some of the principal risks associated with Old Kaiser's reorganization include the following: . The total amount of all Allowed Claims in the Bankruptcy Cases may be materially in excess of the estimated amounts of Allowed Claims assumed in Kaiser Holdings' financial statements in this Report. The amount and timing of the distributions that will ultimately be received by any particular holder of an Allowed Claim in any Class may be materially and adversely affected should the assumptions be exceeded as to any Class. . There are substantial uncertainties relating to the resolution of disputes between Kaiser Netherlands and Nova Hut concerning the Nova Hut mini-mill project and Nova Hut's financial capacity to pay the substantial amounts Kaiser Holdings believes is due to Kaiser Netherlands. . Realization of the ICF Notes and related interest and investment carrying values and ability to favorably resolve pending claim made by ICF. Item 3. Quantitative and Qualitative Information about Market Risk Market Risk The Company does not believe that it has significant exposures to market risk. The interest rate risk associated with the Company's Preferred Stock activity is fixed at 7%. The interest rate risk associated with the Company's obligation to fund a capped retiree medical obligation is sensitive to interest rate risk via the use of a discount rate in determining the present value of its remaining obligation thereunder. A 10% increase or decrease in the average annual prime rate would result in a change in the financial statement carrying value of the plan obligation but would not change the actual long-term cost of the plan. Part II - Other Information Item 1. Legal Proceedings As previously reported in the Annual Report on Form 10-K for the year ended December 31, 2000. See also Note 6 to the consolidated financial statements contained herein. Item 2. Changes in Securities (a) None (b) None (c) None (d) Not applicable Item 3. Defaults Upon Senior Securities (a) None (b) None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) The exhibits filed as part of this report are listed below: No. 3(ii) Amended and Restated Bylaws of Kaiser Group Holdings, Inc. as of October 23, 2001. No. 21 Consolidated Subsidiaries of the Registrant as of October 31, 2001. (b) Reports on Form 8-K None 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. KAISER GROUP HOLDINGS, INC. (Registrant) Date: November 14, 2001 /s/ Marijo L. Ahlgrimm --------------------------- Marijo L. Ahlgrimm Executive Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer) 23