**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2004**

 

**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**                                                                | ** ** | **54-2014870**                        |
|-----------------------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)             |       | (I.R.S. Employer  Identification No.) |
|                                                                        |       |                                  |
| **9300 Lee Highway, Fairfax, Virginia**                                     | ** ** | **22031-1207**                        |
| (Address of principal executive offices)                                    |       | (Zip Code)                            |
|                                                                        |       |                                  |
| Registrant’s telephone number including area code: **(703)  934-3413** |

 

Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).  Yes o No ý

 

**Applicableonly to issuer’s involved in bankruptcy proceedings during the preceding fiveyears:**

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the Securities Exchange Actof 1934 subsequent to the distribution of securities under a plan confirmed bya court.  Yes ý No o

 

ThePlan of Reorganization of Kaiser Group International, Inc. under Chapter 11 ofthe Bankruptcy Code became effective on December 18, 2000.  The Plan provides, among other things, thatholders of shares of common stock of Kaiser Group International, Inc. receivedshares of common stock of Kaiser Group Holdings, Inc. and that holders ofspecified outstanding debt obligations and other specified claimants receivedcash and shares of preferred stock and common stock of Kaiser Group Holdings,Inc., all in accordance with the terms set forth in the Plan. The initialdistribution of securities occurred as of April 17, 2001.

 

**Applicableonly to corporate issuers:**

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date.

 

Asof November 12, 2004, there were 1,598,270 shares of Kaiser Group Holdings,Inc. Common Stock, par value $0.01 per share, outstanding.

 

 

----

 

**KAISER GROUP HOLDINGS, INC.**

 

**INDEX TO FORM 10-Q**

 
| **Part I - Financial  Information**                                                                  |                                                                                                                      |
|------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
|                                                                                                 |                                                                                                                      |
| Item 1. Financial  Statements:                                                                       |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
|                                                                                                 | Consolidated Balance Sheets  - September 30, 2004 and December 31, 2003.                                                  |   |
|                                                                                                 |                                                                                                                      |   |
|                                                                                                 | Consolidated  Statements of Operations and Comprehensive Income Three and Nine Months Ended  September 30, 2004 and 2003. |   |
|                                                                                                 |                                                                                                                      |   |
|                                                                                                 | Consolidated  Statements of Cash Flows - Nine Months Ended September 30, 2004 and 2003.                                   |   |
|                                                                                                 |                                                                                                                      |   |
|                                                                                                 | Notes to  Consolidated Financial Statements.                                                                              |   |
|                                                                                                 |                                                                                                                      |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk.                                 |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| Item 4. Controls and  Procedures                                                                     |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| **Part II - Other  Information**                                                                     |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| Item 1. Legal Proceedings.                                                                           |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                 |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| Item 3.  Defaults Upon Senior Securities                                                             |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| Item  4. Submission of Matters to a Vote of Security Holders                                         |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| Item 5. Other Information                                                                            |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| Item 6. Exhibits                                                                                     |                                                                                                                      |
|                                                                                                 |                                                                                                                      |
| **Signatures**                                                                                       |                                                                                                                      |

 

2

----

 

**PART I – FINANCIALINFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except share amounts)**

 
| ** **                                                                                                                                               | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                               |       |                    |       |                   |       |
| Current Assets                                                                                                                                           |       |                    |       |                   |       |
| Cash and cash  equivalents                                                                                                                               |       | $                       | 8,026      |                   | $          | 11,151 |   |
| Restricted cash  and cash equivalents                                                                                                                    |       | 3,887                   |       | 7,049                  |       |
| Accounts  receivable                                                                                                                                     |       | 197                     |       | —                 |       |
| Prepaid expenses  and other current assets                                                                                                               |       | 1,070                   |       | 971                    |       |
| Contract  receivable, net                                                                                                                                |       | 3,000                   |       | 3,000                  |       |
| Total Current  Assets                                                                                                                                    |       | 16,180                  |       | 22,171                 |       |
|                                                                                                                                                     |       |                    |       |                   |       |
| Other Assets                                                                                                                                             |       |                    |       |                   |       |
| Investments in  and advances to affiliates                                                                                                               |       | 48,287                  |       | 45,788                 |       |
| Notes receivable                                                                                                                                         |       | 5,894                   |       | 5,894                  |       |
| Other long-term  assets                                                                                                                                  |       | 72                      |       | 227                    |       |
|                                                                                                                                                     |       | 54,253                  |       | 51,909                 |       |
| Total Assets                                                                                                                                             |       | $                       | 70,433     |                   | $          | 74,080 |   |
| ** **                                                                                                                                               | ** ** | ** **              | ** ** | ** **             | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                            | ** ** | ** **              | ** ** | ** **             | ** ** |
|                                                                                                                                                     |       |                    |       |                   |       |
| Current  Liabilities                                                                                                                                     |       |                    |       |                   |       |
| Accounts payable                                                                                                                                         |       | $                       | 110        |                   | $          | 304 |   |
| Post retirement  benefit plan obligation                                                                                                                 |       | 6,695                   |       | 6,913                  |       |
| Other accrued  expenses                                                                                                                                  |       | 4,857                   |       | 4,432                  |       |
| Interest payable  on preferred stock                                                                                                                     |       | 313                     |       | 409                    |       |
| Deferred tax  liability                                                                                                                                  |       | 5,876                   |       | 6,495                  |       |
| Income taxes  payable                                                                                                                                    |       | 2,108                   |       | 275                    |       |
| Total Current  Liabilities                                                                                                                               |       | 19,959                  |       | 18,828                 |       |
|                                                                                                                                                     |       |                    |       |                   |       |
| Long Term  Liabilities                                                                                                                                   |       |                    |       |                   |       |
| Mandatorily  redeemable preferred stock                                                                                                                  |       | 26,909                  |       | 35,175                 |       |
|                                                                                                                                                     |       |                    |       |                   |       |
| Commitments and  Contingencies                                                                                                                           |       |                    |       |                   |       |
|                                                                                                                                                     |       |                    |       |                   |       |
| Common stock,  par value $.01 per share:                                                                                                                 |       |                    |       |                   |       |
| Authorized—3,000,000  shares  Issued and outstanding—1,598,270 and 1,594,270 shares at September 30, 2004  and December 31, 2003, respectively |       | 16                      |       | 16                     |       |
| Capital in excess  of par                                                                                                                                |       | 8,063                   |       | 7,975                  |       |
| Retained  earnings                                                                                                                                       |       | 15,448                  |       | 12,049                 |       |
| Accumulated  other comprehensive income                                                                                                                  |       | 38                      |       | 37                     |       |
| Total  Shareholders’ Equity                                                                                                                         |       | 23,565                  |       | 20,077                 |       |
| Total Liabilities  and Shareholders’ Equity                                                                                                         |       | $                       | 70,433     |                   | $          | 74,080 |   |

 

See notes to consolidatedfinancial statements.

 

3

----

 

**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

**(In thousands, except per share amounts)**

 
| ** **                                                                                                                                                                                                     | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | **2004**                                      | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Gross Revenue                                                                                                                                                                                                  |       | $                                             | 512        |                                         | $          | — |   | $ | 512 |   | $ | — |   |
| Labor and  subcontract costs                                                                                                                                                                                   |       | (373                                          | )          | —                                       |       | (373 | ) | — |   |
| Service Revenue                                                                                                                                                                                                |       | 139                                           |       | —                                       |       | 139 |   | — |   |
| Operating  Expenses                                                                                                                                                                                            |       |                                          |       |                                         |       |   |   |   |   |
| Administrative  expenses                                                                                                                                                                                       |       | 999                                           |       | 2,094                                        |       | 4,060 |   | 4,987 |   |
| Reserve for  Settlement of Remaining Class 4 Claims                                                                                                                                                            |       | —                                        |       | —                                       |       | 1,400 |   | — |   |
| Operating Loss                                                                                                                                                                                                 |       | (860                                          | )          | (2,094                                       | )          | (5,321 | ) | (4,987 | ) |
| Other Income                                                                                                                                                                                                   |       |                                          |       |                                         |       |   |   |   |   |
| Equity income in  earnings of affiliate, net of amortization of $881 for each of the three  months ended September 30, 2004 and 2003 and $2,643 for each of the nine  months ended September 30, 2004 and 2003 |       | 4,287                                         |       | 4,150                                        |       | 12,893 |   | 12,782 |   |
| Interest income                                                                                                                                                                                                |       | 175                                           |       | 186                                          |       | 510 |   | 636 |   |
| Interest expense  for preferred dividends                                                                                                                                                                      |       | (493                                          | )          | (733                                         | )          | (1,580 | ) | (733 | ) |
| Other income                                                                                                                                                                                                   |       | —                                        |       | —                                       |       | 25 |   | — |   |
|                                                                                                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Income from  Continuing Operations Before Income Tax                                                                                                                                                           |       | 3,109                                         |       | 1,509                                        |       | 6,527 |   | 7,698 |   |
| Income tax  expenses                                                                                                                                                                                           |       | (1,385                                        | )          | (892                                         | )          | (3,128 | ) | (3,296 | ) |
|                                                                                                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Net Income                                                                                                                                                                                                     |       | 1,724                                         |       | 617                                          |       | 3,399 |   | 4,402 |   |
| Preferred stock  dividends                                                                                                                                                                                     |       | —                                        |       | —                                       |       | — |   | (1,532 | ) |
|                                                                                                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Income Applicable  to Common Shareholders                                                                                                                                                                      |       | $                                             | 1,724      |                                         | $          | 617 |   | $ | 3,399 |   | $ | 2,870 |   |
|                                                                                                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Basic and  Diluted Income Per Common Share:                                                                                                                                                                    |       |                                          |       |                                         |       |   |   |   |   |
| Continuing  operations, net of tax                                                                                                                                                                             |       | $                                             | 1.08       |                                         | $          | 0.39 |   | $ | 2.13 |   | $ | 1.80 |   |
| Discontinued  operations, net of tax                                                                                                                                                                           |       | —                                        |       | —                                       |       | — |   | — |   |
|                                                                                                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Net Income Per  Share                                                                                                                                                                                          |       | $                                             | 1.08       |                                         | $          | 0.39 |   | $ | 2.13 |   | $ | 1.80 |   |
|                                                                                                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Weighted average  shares for basic and diluted earnings per common share                                                                                                                                       |       | 1,598                                         |       | 1,595                                        |       | 1,597 |   | 1,594 |   |
|                                                                                                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Comprehensive  Income                                                                                                                                                                                          |       |                                          |       |                                         |       |   |   |   |   |
| Net Income                                                                                                                                                                                                     |       | $                                             | 1,724      |                                         | $          | 617 |   | $ | 3,399 |   | $ | 4,402 |   |
| Other  Comprehensive Income (Loss):                                                                                                                                                                            |       |                                          |       |                                         |       |   |   |   |   |
| Realization of  gain on securities, net of tax                                                                                                                                                                 |       | —                                        |       | —                                       |       | — |   | — |   |
| Change in  cumulative foreign translation adjustments                                                                                                                                                          |       | (1                                            | )          | 1                                            |       | 1 |   | 69 |   |
|                                                                                                                                                                                                           |       |                                          |       |                                         |       |   |   |   |   |
| Total  Comprehensive Income                                                                                                                                                                                    |       | $                                             | 1,723      |                                         | $          | 618 |   | $ | 3,400 |   | $ | 4,471 |   |

 

Seenotes to consolidated financial statements.

 

4

----

 

**KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                     | ** ** | **For the Nine Months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | **(Unaudited)**                              | ** ** |
| Operating Activities:                                                          |       |                                         |       |   |   |
| Net income                                                                     |       | $                                            | 3,399      |   | $ | 4,402 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                         |       |   |   |
| Deferred taxes  related to continuing operating activities                     |       | (619                                         | )          | 1,109 |   |
| Equity in  earnings of affiliate                                               |       | (12,893                                      | )          | (12,782 | ) |
| Changes in  operating assets and liabilities:                                  |       |                                         |       |   |   |
| Account  receivables                                                           |       | (197                                         | )          | — |   |
| Prepaid expenses  and other current assets                                     |       | (99                                          | )          | 1,237 |   |
| Accounts payable  and accrued expenses                                         |       | 13                                           |       | (1,540 | ) |
| Income taxes  payable                                                          |       | 1,833                                        |       | 577 |   |
| Other operating  activities                                                    |       | 226                                          |       | 38 |   |
| Net Cash Used in  Operating Activities                                         |       | (8,337                                       | )          | (6,959 | ) |
| Investing  Activities:                                                         |       |                                         |       |   |   |
| Distributions  from affiliate                                                  |       | 10,394                                       |       | 9,000 |   |
| Net Cash  Provided by Investing Activities                                     |       | 10,394                                       |       | 9,000 |   |
| Financing  Activities:                                                         |       |                                         |       |   |   |
| Transfer from  restricted cash for the redemption of preferred stock           |       | 3,084                                        |       | 8,913 |   |
| Payment of  preferred stock dividends                                          |       | —                                       |       | (1,701 | ) |
| Redemption of  preferred stock                                                 |       | (8,266                                       | )          | (14,146 | ) |
| Purchase of  preferred treasury stock                                          |       | —                                       |       | (312 | ) |
| Net Cash Used in  Financing Activities                                         |       | (5,182                                       | )          | (7,246 | ) |
| Increase (decrease)  in Cash and Cash Equivalents                              |       | (3,125                                       | )          | (5,205 | ) |
| Cash and Cash  Equivalents at Beginning of Period                              |       | 11,151                                       |       | 17,413 |   |
| Cash and Cash  Equivalents at End of Period                                    |       | $                                            | 8,026      |   | $ | 12,208 |   |

 

Seenotes to consolidated financial statements.

 

5

----

 

**KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.                                       Basis of Presentation

 

The accompanyingconsolidated financial statements of Kaiser Group Holdings, Inc. andsubsidiaries (the Company), except for the December 31, 2003 balance sheet(derived from audited financial statements), are unaudited and have beenprepared in accordance with generally accepted accounting principles in theUnited States of America (GAAP) for interim financial information.  Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financialstatements.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included.

 

These statementsshould be read in conjunction with the Company’s audited consolidated financialstatements and footnotes and the other information included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003.  Certain reclassifications have been made tothe prior period financial statements to conform them to the presentation usedin the September 30, 2004 financial statements.

 

Kaiser GroupHoldings, 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 GroupInternational, Inc. (Old Kaiser), which in turn continues to own the stock ofits remaining subsidiaries. On June 9, 2000, Old Kaiser and 38 of its domesticsubsidiaries voluntarily filed for protection under Chapter 11 of the UnitedStates Bankruptcy Code in the District of Delaware (case nos. 00-2263 to00-2301). Old Kaiser emerged from bankruptcy with an approved plan ofreorganization (the Second Amended Plan of Reorganization (the Plan)) that waseffective on December 18, 2000 (the Effective Date). The Company is deemed a “successorissuer” to Old Kaiser by virtue of Rule 12g-3(a) under the Securities ExchangeAct of 1934. References to the “Company” or “Kaiser Holdings” in this reportrefer to Kaiser Group Holdings, Inc. and its consolidated subsidiaries. Asummary of the Plan for Old Kaiser can be found in a Current Report on Form 8-Kdated December 5, 2000 filed by Old Kaiser.

 

Currently, apart fromresolving remaining bankruptcy claims, theCompany has only a limited number of activities, assets and liabilities,primarily consisting of:

 

•                  theownership of a 50% interest in Kaiser-Hill Company, LLC (Kaiser-Hill), whichserves as the general contractor at the U.S. Department of Energy’s (DOE) RockyFlats site near Denver, Colorado, for the performance of a contract for theclosure of the site (the Closure Contract). (See Note 4 for summarizedfinancial information.)

•                  thecloseout and resolution of a completed contract for the engineering and constructionof a steel mini-mill for Nova Hut in the Czech Republic (Nova Hut project).

•                  theholding of an interest-bearing promissory note from ICF Consulting Group, Inc.(ICF Consulting), a division that Old Kaiser sold in 1999.

•                  a wholly-ownedcaptive insurance company that is not at this time issuing new policies and issimply involved in resolving remaining claims. However, we have begun the necessary regulatory and legal process toenable our wholly-owned captive insurance company to offer derivative captiveinsurance services to third-party clients through a sponsored captivesubsidiary.

•                  anongoing obligation to fund a capped, post-employment medical benefit plan for afixed group of retirees.

•                  a new subsidiary, Kaiser Analytical ManagementServices, Inc. (“KAMS”), which will attempt to take advantage of the successfulhistory of the Company in the government services market.

 

The Company adopted freshstart reporting in its consolidated balance sheet as of December 31, 2000. TheAmerican 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 abankruptcy, a new entity is created for financial reporting purposes upon theemergence of that entity from bankruptcy. Accordingly, the value of the reorganized enterprise becomes theestablished amount for the emerging balance of shareholders’ equity, and anyaccumulated deficit of the predecessor entity is offset against availablepaid-in-capital to result in an emerging retained earnings of zero.  Additionally, assets and liabilities arerecorded at their fair values.

 

The value of the emerged enterprise used for fresh start reporting asof December 31, 2000 was $87.5 million and was determined by management withthe assistance of independent advisors. The methodology employed involved estimation of the enterprise valuetaking into consideration a discounted cash flow analysis.  The discounted cash flow analysis was basedon a seven-year cash flow projection prepared by management, taking intoconsideration the terminal value of its assets and liabilities as ofimmediately prior to its emergence from bankruptcy on December 18, 2000.  Terminal values of assets and

 

6

----

 

liabilities were determined based either on contracted amounts,actuarial present values and/or management’s estimates of the outcome ofcertain operating activities. Net after-tax cash flows, assuming a 40%effective tax rate, were discounted at 17% in order to take into considerationthe risks and uncertainties inherent in such projections.  The cash flow projections were based onestimates and assumptions about circumstances and events that had not yet takenplace.  Estimates and assumptionsregarding individual retained matters which form the collective composition ofthe overall enterprise value as of December 18, 2000 are inherently subject tosignificant economic and competitive uncertainties and contingencies beyond thecontrol of the Company.  Accordingly,there may be differences between projections and actual results because eventsand circumstances frequently do not occur as expected and may besignificant.  More specifically,assumptions within the valuation related to the amount and timing of theultimate performance and related cash flows of the Company’s investment inKaiser-Hill have the greatest impact on the overall enterprise valuation.

 

2.                                       GeneralTerms of Plan and Status of Bankruptcy Distributions

 

The effectivenessof the Old Kaiser Plan of Reorganization as of December 18, 2000 did not, inand of itself, complete the bankruptcy process. The process of resolving inexcess of $500 million of claims initially filed in the bankruptcy is ongoing.Old Kaiser objected to the majority of the unresolved claims, and if suchclaims are not settled via the objection or dispute resolution processes orother means, they will ultimately be heard and determined by the Bankruptcy Court.Once a claim is resolved with an amount due to the creditor, such portion ofthe claim is deemed to be an allowed claim by the Bankruptcy Court (an allowedclaim). The Company cannot predict with accuracy when the claims resolutionprocess will be complete or what the total amount of allowed claims will beupon completion.

 

In general terms,the Plan contemplated three basic classes of creditors:

 

•                  Allowed“Class 3 claims” against the Old Kaiser bankruptcy estate generally consistedof trade and similar creditors’ claims of $20,000 or less.  Holders of allowed Class 3 claims receivedcash for their claims.

 

•                  Allowed“Class 4 claims”, the largest class of claims against the Old Kaiser bankruptcyestate, is made up of creditor claims other than Class 3 claims and equityclaims. Class 4 claims included holders of Old Kaiser senior subordinated notesdue 2003 (Old Subordinated Notes). Holders of allowed Class 4 claims received acombination of cash and Kaiser Holdings preferred and common stock in respect oftheir claims. Such holders received one share of Kaiser Holdings’ preferredstock (New Preferred) and one share of Kaiser Holdings’ common stock (NewCommon) for each $100 of claims. However, the number of shares of New Preferredissued was reduced by one share for each $55.00 of cash received by the holderof an allowed Class 4 claim.

 

•                  Thethird class of claims recognized in the Old Kaiser bankruptcy are equityclaims, consisting of holders of Old Kaiser common stock (Old Common) and other“Equity Interests” as defined in the Plan. Under the Plan, holders of EquityInterests will receive a number of shares of New Common equal to 17.65% of thenumber of shares of such common stock issued to holders of allowed Class 4Claims. In the initial distribution, one share of New Common was issued foreach 96 shares of previously outstanding Old Common. Additional distributionsof New Common may be made in the future as additional shares of New Common areissued to holders of newly allowed Class 4 claims, if any. Apart from holdersof Old Common, the only holders of Equity Interests of which the Company isaware are the former shareholders of ICT Spectrum Constructors, Inc., acorporation acquired by merger with a subsidiary of Old Kaiser in 1998. TheBankruptcy Court confirmed the equity nature of those claims.  See Note 6 below for information concerning arecent Bankruptcy Court ruling with respect to these claims.

 

Pursuant to the terms of Old Kaiser’s Plan, the Company was required tocomplete its initial bankruptcy distribution within 120 days of the effectivedate of the Plan.  Accordingly, on April17, 2001, the Company effected its initial distribution.  At that time, there were approximately $136.8million of Class 4 claims that had been allowed in the bankruptcy process.  The amount of unresolved claims remaining atApril 17, 2001 was approximately $130.5 million.

 

To address the remaining unresolved claims, the Bankruptcy Court issuedan order on March 27, 2001 establishing an Alternative Dispute Resolution (ADR)procedure whereby the remaining claimants and Old Kaiser produce limitedsupporting data relative to their respective positions and engage in initialnegotiation efforts in an attempt to reach an agreed claim determination.  If necessary, the parties were thereafterrequired to participate in a non-binding mediation before a mediatorpre-selected by the Bankruptcy Court. All unresolved claims as of March 27, 2001 are subject to the ADRprocess. Since April 17, 2001, the date of the initial distribution, $123.5million of asserted claims have been withdrawn, negotiated or mediated to anagreed amount, resulting in cash payments approximating $2.6 million andissuances of 683 shares of New Preferred and 823 shares of New Common. As of November12, 2004, the amount of unresolved claims was approximately

 

7

----

 

$4.5 million. The Company expects that the resolution of the remainingclaims will continue into the first quarter of 2005.  The Company currently believes that the totalamount of Class 4 claims ultimately to be allowed in the Old Kaiser bankruptcyproceeding will not exceed $142.0 million. As demonstrated by the claim settlements completed since April 17, 2001,and based on the belief that it is in the best interest of the Company and itscurrent shareholders, the Company has been settling certain remaining Class 4claims entirely for cash payments in lieu of the combination of cash and NewPreferred and New Common as contemplated in the Plan.  The Company established a reserve for theremaining unresolved claims in the amount of $1.4 million during the firstquarter of 2004.  The Company intends tocontinue to use this settlement alternative during the resolution of remainingClass 4 claims.

 

From time to timein the future, as remaining unresolved claims are resolved, excess cash fromthe “reserve” fund (including cash added to “reserve” fund in payment of proforma dividends, classified as interest expense subsequent to July 1, 2003, onretained shares of New Preferred) must be used to redeem outstanding shares ofNew Preferred.  See Note 5 for a scheduleof past redemptions of New Preferred and the amount of restricted cash used tofacilitate the redemption.

 

3.                                       Earnings Per Share

 

Basicearnings per share (EPS) is computed by dividing net income by the weightedaverage number of common shares outstanding for the period.  As additional distributions of New Common aremade to holders of newly allowed Class 4 claims, the conversion ratio of 96shares to one share may be adjusted to reflect the final total number of sharesof New Common (as discussed in Note 2).

 

DilutedEPS normally includes the weighted-average effect of dilutive securitiesoutstanding during the period.  Pursuantto the Plan that was effective as of December 18, 2000, all then outstandingcommon stock equivalents were cancelled. Accordingly, no anti-dilutive information is presented herein.

 

In2004, the effect of preferred dividends of $0.5 million and $1.6 million hasbeen included in continuing operations in the calculation of basic and dilutedearnings per share for the three and nine months ended September 30, 2004.  In 2003, the effect of preferred dividends of$0.7 million and $2.3 million has been included in continuing operations in thecalculation of basic and diluted earnings per share for the three and ninemonths ended September 30, 2003.  Asdiscussed in Note 5, the Company adopted FAS 150 effective July 1, 2003.  Therefore, all of the 2004 preferred stockdividends and the preferred stock dividends for the three months endedSeptember 30, 2003 have been shown as interest expense in the appropriateperiod.

 

4.                                       Summarized Financial Information ofUnconsolidated Affiliate

 

KaiserGroup owns 50% of Kaiser-Hill Company, LLC. Summarized, unaudited financial information of Kaiser-Hill is as follows(in thousands):

 
| ** **              | ** ** | **September 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|-------------------------|------------|------------------------|------------|-----------------------|------------|
|                    |       |                   |       |                  |       |
| Current assets          |       | 124,980                |       | 111,368               |       |
| Non-current assets      |       | 135,192                |       | 99,538                |       |
| Current liabilities     |       | 129,622                |       | 115,941               |       |
| Non-current liabilities |       | 55,647                 |       | 28,644                |       |

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------|------------|------------------------|------------|------------------------|------------|
| ** **    | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** | **September 30, 2004** | ** ** | **September 30, 2003** | ** ** |
|          |       |                   |       |                   |       |   |   |   |   |
| Gross revenue |       | $                      | 188,573    |                   | $          | 180,222 |   | $ | 487,811 |   | $ | 531,995 |   |
| Net income    |       | 10,336                 |       | 10,062                 |       | 31,072 |   | 30,849 |   |
|               |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

5.                                       Mandatorily Redeemable Preferred Stock

 

KaiserHoldings’ certificate of incorporation authorizes the issuance of 2,000,000shares of New Preferred. The Company had New Preferred outstanding with aliquidation preference of $26.9 million and $35.2 million, respectively, at September30, 2004 and December 31, 2003, net of $5.6 million of treasury stock at both September30, 2004 and December 31, 2003.  The NewPreferred is a series of authorized preferred stock designated as “Series 1Redeemable Cumulative Preferred Stock,” and has a par value of $0.01 per share.The New Preferred ranks ahead of Kaiser Holdings’ New Common.

 

8

----

 

TheCompany adopted FAS 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” effective July 1, 2003.  Due to the mandatorily redeemable feature ofthe New Preferred, described in greater detail below, the New Preferred hasbeen reclassified from mezzanine equity to a long term liability on theconsolidated balance sheet, and the preferred stock dividends have beenreclassified to interest expense on the consolidated statement of operationseffective July 1, 2003.  There was notransition adjustment recognized upon adoption of FAS 150.  There were 489,249 and 639,542 shares of NewPreferred outstanding at September 30, 2004 and December 31, 2003,respectively, net of 101,471 treasury shares. The New Preferred is shown at liquidation value of $55 per share.

 

Pursuantto approval by the Company’s Board of Directors, in 2002 and 2003, the Companypurchased a total of 101,471 shares, net of redemptions, of outstanding NewPreferred at prices ranging from $25.62 to $50.55 per share.  The treasury shares have been recorded atliquidation preference, $55 per share, as a reduction to preferred stock andthe remaining difference between cost and the liquidation preference wasrecorded as an increase to paid-in capital.

 

Thecertificate of incorporation of Kaiser Holdings and Delaware law permit theBoard of Directors to issue additional series of preferred stock, except thatthe Board of Directors may not authorize the issuance of any securities thatrank senior to or on a parity with the New Preferred without the consent ofholders of at least two-thirds of the New Preferred.

 

Cumulativedividends, classified as interest expense subsequent to July 1, 2003, on theNew Preferred are payable on a quarterly basis, as of April 30, July 31,October 31 and January 31, either in cash at an annual rate of 7% of theliquidation preference per share or in additional shares of New Preferred at anannual rate of 12% of the per share liquidation preference. Dividends accrue onthe New Preferred commencing with the initial distribution date, April 17,2001. Dividends will not be paid to any affiliate of Kaiser Holdings on accountof that affiliate’s ownership of shares of preferred stock. If Kaiser Holdingsfails to pay a quarterly dividend when due, holders of New Preferred will havethe right to elect an additional director for each dividend payment missed, upto a maximum of two additional directors, but only until such dividend is paidor provided for in full.   The dividenddue to holders of record on October 31, 2004, totaling approximately $0.5million, was paid on November 8, 2004. At September 30, 2004, in addition to the $0.4 million of cash reservesfor unresolved claims, the Company had $0.5 million in cash reserved for thepayment of accrued dividends on any future issuances of New Preferred issued asa result of remaining bankruptcy claims resolutions (any New Preferred issuedas a result of claims resolutions also carries the right to dividendsretroactively from April 17, 2001).

 

TheNew Preferred has a liquidation preference of $55 per share plus the amount ofunpaid dividends, if any. Upon the liquidation or dissolution of KaiserHoldings, each holder of New Preferred (other than an affiliate of KaiserHoldings) is entitled to this per share liquidation preference before anyholders of New Common or any other junior securities of Kaiser Holdings receiveany payment for their shares. If, in a liquidation or dissolution setting,assets remaining after distribution to holders of debt and other obligationsare insufficient to pay all holders of New Preferred the per share liquidationpreference, then such assets will be distributed on a proportionate basis tothe holders of New Preferred (other than affiliates of Kaiser Holdings) and anysecurities ranking on a parity with the New Preferred.

 

TheCompany has the option to redeem the New Preferred at any time, in whole or inpart, at a redemption price of 100% of the liquidation preference per shareplus all accrued and unpaid dividends. The Company is required to offer topurchase the New Preferred at 100% of the liquidation preference per share plusall accrued and unpaid dividends in connection with a change of control ofKaiser Holdings.  In addition, any netproceeds in excess of $3.0 million in a calendar year received by the Companyor any of its direct or indirect subsidiaries from the disposition of assets toan unaffiliated party outside of the ordinary course of business must be usedto redeem New Preferred at a redemption price of 100% of the liquidation preferenceper share plus all accrued and unpaid dividends. Furthermore, to the extentthat certain categories of cash are received from Nova Hut, such cash must beused to redeem New Preferred at a redemption price of 100% of the liquidationpreference per share plus all accrued and unpaid dividends.

 

Alloutstanding shares of New Preferred are required to be redeemed by the Companyon or before December 31, 2007, and if such redemption does not occur, holdersof New Preferred will be entitled to elect two-thirds of the directors of theCompany. If shares of New Preferred are held by any affiliate of the Company,those shares may not be redeemed pursuant to any of the redemption provisionsotherwise applicable to the New Preferred.

 

Holders of New Preferredgenerally are entitled to vote with holders of New Common on all matterssubmitted to a vote of shareholders, with each share of New Preferred beingentitled to one-tenth of a vote. In addition, holders of New Preferred have theright to vote separately as a class to exercise their right to elect anadditional director due to a failure to pay a quarterly dividend, to electtwo-thirds of the directors if the New Preferred is not redeemed by December31, 2007, and to consent to the issuance of any senior or parity securities.The terms of the New Preferred may not be materially or adversely

 

9

----

 

modified without the consent of holders of at least two-thirds of theNew Preferred. If the Company or any of its affiliates holds any New Preferred,they will not be entitled to vote that New Preferred.

 

KaiserGovernment Programs, Inc.’s (“KGP”) Put Rights 

 

KGPis the Company subsidiary that owns (through a wholly owned subsidiary of KGP)the 50% interest in Kaiser-Hill Company, LLC. KGP has outstanding put rights, expiring on December 31, 2007, thatobligate it to purchase New Preferred owned by a holder of the put right, atthe holder’s option, under three circumstances:

 

•                  if KGPreceives net after-tax proceeds from any cash distributions from Kaiser-Hillthat, on a quarterly basis, exceed 2.8 times the amount of cash required to payall past accrued but unpaid cash dividends on the New Preferred, plus the nextscheduled quarterly cash dividend on New Preferred;

•                  if KGP receives netafter-tax proceeds from any director indirect disposition of any interest in Kaiser-Hill; or

•                  if KGP receives net after-tax proceeds from anextraordinary distribution from Kaiser-Hill.

 

Uponexercise of a put, KGP will pay an exercising holder 100% of the liquidationpreference of the New Preferred that is the subject of the KGP put rights, plusall accrued and unpaid dividends on the New Preferred. KGP will purchase sharesof New Preferred on a pro rata basis based upon the number of shares of New Preferredas to which puts have been properly exercised, but only up to the amount of theavailable net after-tax proceeds from triggering events. KGP will not purchaseany fractional shares. KGP put rights will not become exercisable more frequentlythan every 12 months unless the cumulative amount of available net after-taxproceeds from triggering events is at least $3 million.  KGP put rights are transferable except thatputs shall cease to be transferable if KGP determines that any further transferwould require registration of the puts as a class of securities under theSecurities Exchange Act of 1934. Kaiser Holdings does not presently plan toarrange for trading of the KGP put rights on the NASD electronic bulletin boardor otherwise.

 

The Company from time to time has receiveddistributions from Kaiser-Hill that triggered the put rights – effectivelyrequiring the Company to redeem certain New Preferred.  In addition, the Company had certainrestricted cash balances available, which pursuant to the terms of its Plan ofReorganization are required to be used to redeem outstanding NewPreferred.  Rather than using themechanism of the put rights to satisfy the Company’s obligations to holders ofthe put rights after a trigger, the Company observed the requirements in thePlan of Reorganization to use certain restricted cash balances, and in theterms of the New Preferred, to use certain available cash, for preferredredemptions.  The Company believes thiswas a more cost-efficient manner of satisfying the obligations associated withthe KGP put rights and plans to continue to use this redemption process tosatisfy such obligations in the future.

 

As of November 12,2004, the Company has redeemed the following shares of New Preferred (inthousands except per share amounts):

 
| **Date of  Redemption** | ** ** | **Use of  Unrestricted  Cash** | ** ** | **Use of  Restricted  Cash** | ** ** | **Total  Amount of  Redemption** | ** ** | **Number of  Shares  Redeemed** | ** ** |
|-------------------------|------------|--------------------------------|------------|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                    |       |                           |       |                         |       |                             |       |                            |       |
| July 2004               |       | $                              | 2,536      |                         | $          | 454                              |       | $                               | 2,990      |   | 54,361 |   |
| February 2004           |       | 2,646                          |       | 2,630                        |       | 5,276                            |       | 95,932                          |       |
| October 2003            |       | 4,650                          |       | 1,594                        |       | 6,244                            |       | 113,530                         |       |
| January 2003            |       | 5,233                          |       | 8,913                        |       | 14,146                           |       | 257,200                         |       |
|                         |            |                                |            |                              |            |                                  |            |                                 |            |  |  |  |

 

6.                                       Other Contingencies

 

Kaiser Holdings hasvarious obligations and liabilities from its continuing operations, includinggeneral overhead expenses in connection with maintaining, operating and windingdown the various entities and net assets comprising Kaiser Holdings.  Additionally, the Company believes contingentliabilities may exist in the following areas:

 

NovaHut

 

Although Old Kaiser sold its Metals, Mining and Industry business unitin August 2000, it retained its Netherlands subsidiary, Kaiser Netherlands,B.V., which had been responsible for a turnkey engineering and constructionservices contract for the construction of a steel mini-mill in the CzechRepublic for Nova Hut.  Afterconstruction of the mini-mill was complete in

 

10

----

 

2000, the contract with Nova Hut provided for a maximum of threepossible performance tests. The first performance test was completed onNovember 13, 2000. Kaiser Netherlands believes that the first performance testwas successful and that Nova Hut should have agreed to final acceptance of themini-mill and made final payment of amounts accrued by Kaiser Netherlands throughoutthe project, including fee and retention amounts with release of performanceguarantee instruments.  Nova Hut,however, asserted that the first test was not successful. Kaiser Netherlandsbelieves that such contention may have been put forth in response to severefinancial constraints on Nova Hut’s operations resulting from weakeningconditions in the worldwide steel market and the significant amounts thatKaiser Netherlands believed it was contractually due. To date, this dispute hasnot been resolved, and Kaiser Netherlands has resorted to legal proceedings toenforce its rights.  Until recently, theprimary legal venue has been the Delaware bankruptcy proceeding for Old Kaiser,where the Company has asserted claims against Nova Hut and the InternationalFinance Corporation (“IFC”).  TheDelaware bankruptcy court had previously ruled that the Company, as opposed toKaiser Netherlands, could proceed with prosecution of its specific claimsagainst Nova Hut and IFC in the Delaware bankruptcy court venue.  Both Nova Hut and IFC appealed this rulingand, during the first quarter 2004, the Delaware bankruptcy court’s decisionregarding the IFC was overturned by the District Court, ruling that the IFCenjoys sovereign immunity from prosecution. Kaiser Holdings has filed a notice of appeal with the Third Circuitregarding this decision in favor of the IFC. The disposition of Kaiser Holdings’ appeal to the Third Circuit Court isstill pending.  With regard to the NovaHut appeal, the District Court has ruled that U.S. Bankruptcy proceedingsshould be stayed pending completion of international arbitration proceedings.

 

In January 2004, KaiserNetherlands filed arbitration claims against Nova Hut in the amount of $51.1million with the International Chamber of Commerce (“ICC”).  In November 2004, Kaiser Netherlands’ claimagainst Nova Hut was amended and now totals $67.5 million.  The arbitration panel has been constituted,and the proceedings have been initiated.  The earliest possible date for a final awardruling being issued is the last quarter of 2005.  Nova Hut has submitted a $49.7 millioncounterclaim against Kaiser Netherlands in these same ICC proceedings.

 

In December 2003, theICC, under the dispute resolution provisions of the Nova Hut mini-mill subcontractbetween Kaiser Netherlands and the mini-mill’s main equipment supplier,Tippins, Inc., issued a final award that was on balance favorable to KaiserNetherlands.  As a result of the ruling,Kaiser Netherlands was relieved of the obligation to pay additional retentionto Tippins and Kaiser Netherlands was awarded a net cash settlement of $2.6million.  The Company has not recordedthis award due to the uncertainties regarding collectibility.  However, the Company intends to vigorouslypursue collection of this award.

 

The continued litigationof these disputes has had and will continue to have a negative impact on thecash flow of Kaiser Netherlands and Kaiser Holdings.

 

Thecomponents of the “Contract Receivable, net” consist entirely of the carryingvalue of the net assets of the Nova Hut project.  Based on the Company’s continued concern overNova Hut’s financial difficulties and the lack of a settlement resulting froman earlier bankruptcy court-sponsored mediation in the fourth quarter of 2003, theCompany further reduced the carrying value of the remaining Nova Hut contractreceivable from $6.0 million to $3.0 million by recording an additional reserveof $3.0 million, net of a $1.1 million income tax benefit, through a charge to “Lossfrom Discontinued Operations”.  Thisreserve is in addition to a reserve recorded in 2001, which reduced thecarrying value of the Nova Hut contract receivable from $21.6 million to $6.0million by recording a reserve of approximately $9.8 million, net of a$5.8 million income tax benefit, through acharge to “Loss from Discontinued Operations”.  These adjustments to the contract receivablecarrying value were determined based on the Company’s late 2003 estimate ofNova Hut’s ability to pay such liability.

 

Kaiser Hill

 

Under Kaiser-Hill’scontract with the DOE, Kaiser-Hill is not responsible for, and the DOE pays allcosts associated with, any liability, including, without limitation, any claimsinvolving strict or absolute liability and any civil fine or penalty, expense,or remediation cost, but limited to those of a civil nature, which may beincurred by, imposed on, or asserted against Kaiser-Hill arising out of any actor failure to act, condition, or exposure which occurred before Kaiser-Hillassumed responsibility on July 1, 1995 (pre-existing conditions). To the extentthe acts or omissions of Kaiser-Hill constitute willful misconduct, lack ofgood faith, or failure to exercise prudent business judgment on the part ofKaiser-Hill’s managerial personnel and cause or add to any liability, expense,or remediation cost resulting from pre-existing conditions, Kaiser-Hill isresponsible, but only for the incremental liability, expense, or remediationcaused by Kaiser-Hill.

 

The Kaiser-Hill contractfurther provides that Kaiser-Hill will be reimbursed for the reasonable cost ofbonds and insurance allocable to the Rocky Flats contract and for liabilitiesand expenses incidental to these liabilities, including litigation costs, tothird parties not compensated by insurance or otherwise. There is an exceptionto this reimbursement provision applicable to

 

11

----

 

liabilities caused by the willful misconduct, lack of good faith orfailure to exercise prudent business judgment by Kaiser-Hill’s managerialpersonnel.

 

The clean-up and closureof the DOE’s Rocky Flats site involve substantial performance risks.  Among other things, Kaiser-Hill’s activitiesat the Rocky Flats site involve the clean-up, packaging and transportation of nuclearwaste, and the demolition and destruction of facilities where nuclear weaponscomponents were previously produced. Some of the activities have not been previously performed elsewhere, andtherefore require the development of innovative and untested approaches.  Kaiser-Hill emphasizes safety in itsperformance, but the nature of the Rocky Flats site and the activities ofKaiser-Hill and its subcontractors at the site are such that serious injuries,or even deaths, are possible. Significant safety incidents at the site could stop or significantlyimpede the progress of work being performed at the site by Kaiser-Hill and itssubcontractors.  The DOE contractcontemplates that all, or substantially all, of the nuclear waste at RockyFlats will be transported to other sites operated or managed by the DOE.  In addition, objections have arisen from timeto time with regard to the transportation and storage of nuclear waste atcertain sites previously scheduled by the DOE to receive waste from RockyFlats.  Although the DOE contractcontemplates that the DOE is responsible for providing transportation andstorage sites for nuclear waste from Rocky Flats, an inability to store nuclearwaste at other DOE sites would pose a substantial risk to the timely closure ofthe Rocky Flats site, and could interfere with Kaiser-Hill’s ability to earnfees to which Kaiser-Hill believes it should be entitled.

 

As the contract betweenKaiser-Hill and the DOE is cost-reimburseable in nature, the costs invoiced byKaiser-Hill for reimbursement by the DOE are subject to audit by the U.S.government.  Also since the inception ofKaiser-Hill, the Company invoiced certain management oversight costs toKaiser-Hill.  Government audits atKaiser-Hill are in process for the years of the predecessor contract, which ranfrom 1995 until January 2000.  AlthoughKaiser-Hill and the Company have historically provided for their estimates ofdisallowed costs on cost-reimburseable contracts, uncertainties exist withregard to whether government audits will result in any disallowed costs needingto be refunded to the government customer. The continued adequacy of provisions for reserves with regard tounallowable costs is reviewed regularly. 

 

Common Stock

 

On January 20, 2004, the United States Bankruptcy Court for theDistrict of Delaware ruled on a claim in favor of former shareholders of ICTSpectrum Constructors, Inc.  TheBankruptcy Court has refused to reconsider its decision and the Company hasappealed. Should the Company be unsuccessful in its efforts to achieve reversalof the Bankruptcy Court’s ruling, the Company could be required to issue toformer ICT Spectrum shareholders an additional 247,350 shares of New Common,which would then comprise approximately 13.4% of the aggregate shares of NewCommon outstanding. The Company believes that issuing such a substantial numberof additional shares of New Common could be expected to have a materiallydilutive effect on the value of shares of New Common presently outstanding.

 

12

----

 

**I****TEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**GeneralOverview**

 

KaiserGroup Holdings, Inc. is a Delaware holding company formed on December 6, 2000for the purpose of owning all of the outstanding stock of Kaiser GroupInternational, Inc.  Kaiser GroupInternational, Inc. continues to own the stock of its remainingsubsidiaries.  On June 9, 2000, KaiserGroup International, Inc. and 38 of its domestic subsidiaries voluntarily filedfor protection under Chapter 11 of the United States Bankruptcy Code in theDistrict of Delaware (case nos. 00-2263 to 00-2301). Kaiser GroupInternational, Inc. emerged from bankruptcy with a confirmed Plan ofReorganization (the Second Amended Plan of Reorganization (the Plan)) that waseffective on December 18, 2000.  In thisdocument, we frequently use the terms “we” and “Kaiser” to refer to KaiserGroup Holdings, Inc., Kaiser Group International, Inc. and other subsidiarieswe own.

 

Underthe Plan, Kaiser Group International, Inc. sold some of its businesses and madepayments of cash and stock to various classes of creditors described in Note 2to the Consolidated Financial Statements. We now have only a limited number of activities, assets and liabilities,primarily consisting of the following:

 

•                  Weown Kaiser-Hill Company, LLC equally with CH2M Hill Companies Ltd.  Kaiser-Hill is our major source ofincome.  Kaiser-Hill currently serves asthe general contractor at the U.S. Department of Energy’s Rocky Flatssite.  Kaiser-Hill has performed for theDepartment of Energy at this site since 1995 and in January 2000 was awarded anew contract to manage the closure of the site. The level of success experienced by Kaiser-Hill in achieving timely closureof the Rocky Flats site, and the cost of achieving such closure, have been andcontinue to be the primary determinants of our long-term financial performancefollowing the completion of the reorganization process.  See “Kaiser-Hill” below for additionalinformation on Kaiser-Hill.

•                  We have a substantial claim, pending resolution,against the owner of a steel mini-mill that we constructed for Nova Hut, s.a.in the Czech Republic.  The engineeringand construction of the mini-mill was completed in 2000 by a subsidiary ofKaiser Group International, Inc. called Kaiser Netherlands, B.V.

•                  Until September 30, 2002 we held a minorityownership interest in ICF Consulting Group, Inc. (a division that Kaiser GroupInternational, Inc. sold in 1999).  Wecontinue to hold an 81⁄2% subordinated promissory note from ICF Consulting dueJune 25, 2006 in the principal amount of $6.4 million as a result of thattransaction.

•                  We have a wholly-owned captive insurance companythat is not at this time issuing new policies and is solely involved inresolving remaining claims made against previously issued policies.  However, we have begun the necessaryregulatory and legal process to enable our wholly-owned captive insurancecompany to offer derivative captive insurance services to third party clientsthrough a sponsored captive subsidiary.

•                  We have an ongoing obligation to fund a cappedpost-employment medical benefit plan for a fixed group of retirees.

•                  We formed a new subsidiary in April 2004, KaiserAnalytical Management Services, Inc., to attempt to take advantage of thesuccessful history of Kaiser in the government services market.

 

**Kaiser-Hill**

 

Our major remaining asset andsource of income is our 50% ownership interest in Kaiser-Hill Company, LLC.  Kaiser-Hill was formed solely for theperformance of the current and former Rocky Flats contracts.  CH2M Hilldesignates three of the five members of Kaiser-Hill’s Board of Managers and wedesignate two members.

 

Kaiser-Hill currently serves as the general contractorat the U.S. Department of Energy’s Rocky Flats site near Denver, Colorado(Closure Contract). Kaiser-Hill has performed since 1995 at this site, a formerDepartment of Energy nuclear weapons production facility. Kaiser-Hill isworking to stabilize and safely store radioactive materials at the site andother locations, clean up areas contaminated with hazardous and radioactivewaste, and restore much of the 6,000 acre site to the public.  The level of success experienced byKaiser-Hill in achieving timely closure of the Rocky Flats site, and the costof achieving such closure, are the primary determinants of our long-termfinancial performance.

 

**Kaiser AnalyticalManagement Services, Inc.**

 

In April of 2004, KaiserAnalytical Management Services, Inc. (KAMS) was established as a wholly ownedsubsidiary of Kaiser Group International, Inc. KAMS was created as a vehicle for privatizing the Analytical ServicesDivision of Kaiser-

 

13

----

 

Hill Company, LLC.  KAMS providesanalytical management services such as sample planning, sample management,records management, performance assessment and data management in the generalareas of health and safety, geotechnical, environmental and waste management,and deactivation and decommissioning.

 

On July 1, 2004, KAMSbegan providing its services as a subcontractor at the U.S. Department ofEnergy’s Rocky Flats closure site in Colorado. KAMS receives a fixed management fee for these services plus a smallbase fee and efficiency incentives built on laboratory sample costs.

 

Management hasimplemented a marketing plan aimed at gaining contract awards at other siteswithin the Department of Energy complex.

 

**OUTLOOK**

 

*Potential**Kaiser-Hill Distributions and the Nova Hut Disputes*.  As we look forward, by far the mostsignificant factor in determining the value of our common stock will be theperformance of Kaiser-Hill and its success in collecting that fee that may bedue to Kaiser-Hill from the DOE.  Althoughmuch less significant, another material uncertainty affecting our futureresults is the outcome of the disputes we have in arbitration with Nova Hut.

 

The timing and level offuture distributions from Kaiser-Hill are subject to many uncertainties, but ifKaiser-Hill continues to perform in line with its current level of performanceand that performance is recognized by the DOE, Kaiser-Hill’s fee payments fromthe DOE in respect of completion of the Closure Contract could be at the upperranges of the fee potential under that contract.  At those levels of fee payments toKaiser-Hill, we could receive from Kaiser-Hill, during the period of 2005through physical project completion and the date Kaiser-Hill has been paid infull by DOE, cash distributions in a range as high as $100 million to $125million.  This is not to predict actualdistributions to us at these levels, but merely to outline what is possible inoptimistic case scenarios.  There aremany risks and uncertainties that could prevent the receipt of this level ofdistributions from Kaiser-Hill, and the timing of fee payments from the DOE toKaiser-Hill that would enable such distributions is also subject to manyuncertainties.  See “Risk FactorsRelating to Kaiser Holdings and Forward-Looking Statements.”

 

Apart from Kaiser-Hill,the principal uncertainty that will affect our performance is the outcome ofour disputes with Nova Hut.  As discussedelsewhere, we have pending against Nova Hut an arbitration before theInternational Chamber of Commerce.  Ouraggregate claims are for $67.5 million, and Nova Hut has asserted counterclaimsof $49.0 million.  It is not possible topredict the outcome of these disputes, but we feel our claims are stronger thanNova Hut’s.  Our assessment could bewrong, but we are determined to see these disputes through to conclusionbecause we believe we are entitled to a substantial positive recovery.  The arbitration process is now underway.  At present, we do not expect to receive anyrecovery from Nova Hut until late 2005 at the earliest.

 

*Possible Preferred StockRedemptions. *As ofSeptember 30, 2004, we had outstanding New Preferred with an aggregateliquidation preference of $27 million. Subject to a number of uncertainties, including finalization of the USfederal government budget for 2005, we presently expect to receive significantdistributions from Kaiser-Hill during the fourth quarter of 2004 and in early2005.  We expect to use thosedistributions and other available cash to redeem New Preferred with an aggregateliquidation preference of approximately $12 million during the first quarter of2005.  Thus, we expect our outstandingNew Preferred to be reduced to approximately $15 million by the end of thefirst quarter of 2005.

 

Based on progress to datein Kaiser-Hill’s performance under its Closure Contract with the DOE andassuming a continuation of that performance, we presently expect greateroverall cash distributions from Kaiser-Hill during 2005 than in 2004.  Although we cannot be certain, we are optimisticthat these distributions will enable us to redeem the majority of our NewPreferred in 2005.

 

*Possible Deregistration.*We have fewer than 300 stockholders of record. Consistent with other steps recently taken to reduce our costs, ourBoard has decided to “deregister” our common stock.  This will suspend our reporting obligationsunder the Securities Exchange Act of 1934, meaning that we will no longer haveto file with the Securities and Exchange Commission certain reports and forms,including Forms 10-K, 10-Q and 8-K and proxy statements.  We expect to decide the timing ofderegistration during the next few weeks. After we deregister, we will continue to announce earnings and otherdevelopments on a quarterly basis, but the extent of our disclosures will beless detailed than would be the case if we had remained registered.  In addition, upon deregistration, our commonand preferred stock will no longer be quoted on the Over the Counter

 

14

----

 

Bulletin Board, but will instead be quoted in the “Pink Sheets.”  This may make our stock less liquid.  We will announce by press release additionalinformation concerning deregistration after we have developed a definitivetimeline for that step.

 

*Corporate and Capital Structure*.  In light of our history and currentactivities, our corporate and capital structures are not as tax-efficient as wewould like.  We have evaluated from timeto time both the possible refinancing of our New Preferred and possible changesto our corporate and tax structure. Because of limitations on our ability to borrow and our view that we maybe able to redeem all of the outstanding New Preferred by the end of 2005, wedo not presently plan to attempt to refinance the New Preferred.  Similarly, because of tax law requirements,limitations in the New Preferred as to how we use available cash, and thenature of our shareholder base, we have not identified an alternative to ourcurrent corporate and tax structure that we believe is practical to effect.  As a result, we do not presently plan toattempt to effect changes to that structure.

 

**RESULTS OF RETAINED OPERATIONS FOR THE THREE AND NINEMONTHS ENDED SEPTEMBER 30, 2004 AND 2003**

 

*Equity Income In Earnings of Affiliate*

 

Our major remaining source of income is a 50% ownership in Kaiser-Hill.  The financial information contained hereinfor Kaiser-Hill is reflected on the equity basis.

 

*Closure Contract Provisions for Revenue and PerformanceAward*

 

Theeconomic terms of the Closure Contract provide that Kaiser-Hill will earnrevenue equal to the actual cost of physical completion plus a performance feebased on a combination of factors involving the actual cost of completing thesite closure project and the actual date of physical completion, both ascompared to contracted targets.  On March24, 2004 Kaiser-Hill received a contract modification that motivates safecontinuing positive performance by increasing the maximum fee ceiling that maybe earned under the Closure Contract. The same contract modification reduces the minimum fee floor andincludes other provisions related to work scope changes.  The potential fee to be earned pursuant tothe Closure Contract as recently modified ranges from $75.0 million to $560.0million based on Kaiser-Hill’s cost to complete the site closure being withinthe range of completion cost of $3.1 billion and $4.9 billion, and completionat various dates between 2005 and 2007. For project costs saved below the target level, Kaiser-Hill retains avarying percentage share, ranging from 20% to 30%, as additional incentivefee.  Similarly, for project costsincurred above a target level, Kaiser-Hill’s incentive fee is reduced by the30% share.

 

Kaiser-Hill’sfavorable performance on the Closure Contract since its inception in Februaryof 2000 has resulted in a trend of cautious but continuously improvingestimates of completion dates, cost estimates and potential fee earningopportunities.   As of September 30, 2004,Kaiser-Hill’s cost estimate to complete the project is $3.7 billion, with anestimated completion date of December 2006, resulting in a potential fee of$424 million.  As reflected in the “Outlook”discussion above, Kaiser-Hill has goals of further improving its ultimateproject performance; however, these goals are subject to substantial risks, andthe ability to accurately predict the ultimate results are highlyuncertain.  See “Risk Factors Relating toKaiser Holdings and Forward-Looking Statements” below.  In the event that Kaiser-Hill is able tocomplete physical performance of the Closure Contract within cost and timethresholds that would yield fees in excess of the $424 million currentlyestimated, there may be uncertainty with regard to the timeframe of the actualreceipt of such fees by Kaiser-Hill.  Additionally,there may remain significant uncertainties involving the timeframe necessary tocompletely “close-out” the contract with the Department of Energy as contractcost and compliance audits will be required.   Kaiser-Hill will continue to periodically consider the appropriatenessof financial statement reserves to address the uncertainties associated withsuch matters.

 

For the three and nine monthperiods ended September 30, 2004 and 2003, the equity income in earnings ofaffiliate is net of $0.9 million and $2.7 million, respectively, ofamortization of the excess of our carrying value of our investment inKaiser-Hill over our ownership percentage of the underlying Kaiser-Hillequity.  We increased the carrying valueof this investment by $21.1 million as part of our adoption of Fresh-Startreporting as of December 31, 2000 and will continue to amortize that differenceover the estimated life of the Kaiser-Hill investment of approximately 6 years.

 

*Closure Contract Billing Provisions*

 

****Since the inception of the ClosureContract in February 2000 through September 30, 2004, Kaiser-Hill has invoicedDOE for the performance fee based on the contract provisions, and has collectedapproximately $140.0 million in fees from the DOE****.

 

15

----

 

Fee payments made by DOEto Kaiser-Hill, less certain non-reimbursable costs, will continue to bedistributed to the joint venture owners upon receipt.  Kaiser-Hill has historically incurredexpenses that are not reimbursable by the DOE pursuant to the Federal regulations.  Accordingly, such expenses, which Kaiser-Hillestimates could approximate up to 15% - 20% of the total award fee, arededucted from the total fee earned and collected by Kaiser-Hill prior to anydistributions to either of its two owners. Since inception of the Closure Contract through September 30, 2004,Kaiser-Hill has distributed $57.0 million to each of its two owners.  Adjustedfor the effects of the 50% retainage holdback, Kaiser-Hill has distributed $3.5million per quarter to each of its two owners in 2004.  Similar to 2002 and 2003, Kaiser-Hill isanticipating that DOE will approve a non-recurring fee payment during thefourth quarter of 2004 acknowledging Kaiser-Hill’s continued favorableprogression on the project. Historically, the fourth quarter fee payment has ranged from anadditional $10.0 million to $16.0 million above the typically recurringquarterly fee payment.  However, thereare no assurances as to the amount or timing of any additional fourth quarterfee payment.

 

In the future, asKaiser-Hill continues to accrue performance fees based on its currentlyprojected total, less reserves deemed appropriate in the circumstances, andremains subject to a 50% retainage holdback on its performance fee invoicing,the level of unbilled accounts receivable on its balance sheet will begin toincrease substantially.  Kaiser-Hill willclassify the difference between recorded performance fees and the collectedfees as long-term unbilled accounts receivable on its balance sheet, which willbe included as a component of Investment in Affiliate on the Company’s balancesheet.  The Closure Contract alsocontains provisions for DOE to release portions of the retainage holdback priorto contract completion if the DOE deems appropriate.  Kaiser-Hill is not able to estimate whetherany of the retainage holdback will be released prior to contract completion.

 

*Administrative Expenses*

 

Administrativeexpenses for the three and nine months ended September 30, 2004 were $1.0million and $4.1 million, respectively, a decrease of $1.1 million and $0.9million, respectively, compared to the three and nine months ended September30, 2003.  The decrease in administrativeexpense is due to decreases in payroll, legal and general administrativeexpenses.  In September 2004, managementmade a series of personnel cuts to further reduce administrative expenses.

 

Ourcost to provide certain post-employment medical****benefits to a capped group of retirees is also treated as anadministrative expense.  In the three andnine month periods ended September 30, 2004, the expense related to this planwas $0.2 million and $0.7 million, respectively, compared to $0.2 million and$0.6 million for the three and nine month periods ended September 30, 2003,respectively.

 

*Reserve forSettlement of Class 4 Claims*

 

Inthe first quarter of 2004, we recorded $1.4 million liability for the remainingunresolved Class 4 claims.

 

*InterestIncome*

 

Interestincome for the three and nine months ended September 30, 2004 was $0.2 millionand $0.5 million, respectively, which results in no change compared to thethree months ended September 30, 2003 and a decrease of  $0.1 million compared with the nine monthsended September 30, 2003.  The decreaseis primarily due to the reduction in average outstanding interest earning bankbalances.

 

*Interest Expense*

 

As a result of theadoption of FAS 150 effective July 1, 2003 and the classification of the Series 1 Redeemable Cumulative Preferred Stock (NewPreferred) as a liability, preferred stock dividends of $0.5 million and $1.6million for the three and nine months ended September 30, 2004, respectively, havebeen shown as interest expense.  Asrequired by FAS 150, prior dividends have not been reclassified.

 

*Income TaxExpense*

 

Werecorded an income tax expense of $0.3 million and $2.1 million, respectively,on operating income from continuing operations of $0.3 million and $3.7million, respectively, during the three and nine months ended September 30,2004.  Our effective income tax rate of 100%and 55% for the three and nine months ended September 30, 2004, respectively,is reflective of the non-deductibility of certain expenditures, primarilyinterest expense on the New Preferred, for federal income tax purposes.  For the three and nine months ended September30, 2003, we recorded an income tax expense of $0.9 million and

 

16

----

 

$3.3 million, respectively,  on operating income from continuingoperations of $1.5 million and $7.7 million, respectively.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*Operating Activities*

 

Weused $8.4 million and $7.0 million of cash during the nine months ended September30, 2004 and 2003, respectively, primarily for the extinguishment ofobligations arising out of our bankruptcy, including professional fees, retireebenefits and various other wind-down expenditures.  The increase in the use of operating cash forthe nine months ended September 30, 2004 compared to the nine months ended September30, 2003 is due to the effect of preferred dividends of $1.6 million beingincluded in continuing operations in 2004 and an increase in professional feesrelated to the pending Nova Hut arbitration.

 

*Investing Activities*

 

Wereceived $10.4 million in distributions from Kaiser-Hill during the nine monthperiod ended September 30, 2004 compared to $9.0 million in the nine month periodended September 30, 2003.  The increaseof Kaiser-Hill cash distributions is a result of the continued favorableprogress in its performance.

 

*Financing Activities*

 

Duringthe nine months ended September 30, 2004 and 2003, we paid $1.6 million and$2.3 million, respectively, in dividends on our New Preferred.  Due to the adoption of FAS 150 effective July1, 2003, $1.6 million and $0.7 million of preferred stock dividends have beenshown as interest expense for the nine months ended September 30, 2004 and 2003,respectively, and are no longer reflected as preferred stock dividends on thestatement of cash flows.

 

Duringthe nine months ended September 30, 2004, we redeemed $8.3 million liquidationpreference of our New Preferred.  Pursuantto the terms of the Plan of Reorganization, the Company used $3.1 million inexcess restricted cash in addition to $5.2 million of unrestricted cash to fundthis redemption.

 

Duringthe nine months ended September 30, 2003, we redeemed $15.5 million liquidationpreference of our New Preferred, net of $1.4 million liquidation preference ofshares held as treasury stock.  Pursuantto the terms of the Plan of Reorganization, the Company used $8.9 million inexcess restricted cash in addition to $5.2 million of unrestricted cash tofacilitate this redemption.

 

*Liquidity and Capital Resource Outlook*

 

We currently have no debtas a result of the effectiveness of the Plan of Reorganization. However, as a resultof the adoption of FAS 150 effective July 1, 2003, and due to the mandatorilyredeemable provisions of the New Preferred, the New Preferred has been shown asa long term liability.  We have financedthe initial bankruptcy distribution requirements and follow-on working capitalneeds in part through the use of the available cash and distributions fromKaiser-Hill and from other asset sale proceeds. Based on (i) currentexpectations for operating activities and results, (ii) expected Kaiser-Hilldistributions, (iii) our current available cash position, (iv) recent trendsand projections in liquidity and capital needs, and (v) current expectations oftotal allowed claims upon the completion of the bankruptcy proceedings,management believes we have sufficient liquidity to cover the required cashdistributions resulting from the resolution of claims in the bankruptcyprocess, our future operating needs and income tax requirements, as well as thedividend or interest requirements applicable to the our preferred stock.  Furthermore, as allowed Class 4 claims areresolved, we will continue to review the timing of additional partial preferredstock redemptions.

 

Wehave obligations to pay dividends on outstanding New Preferred at September 30,2004.  Accordingly, we are required topresent the following table assuming that no preferred stock redemptions aremade until the mandatory redemption date of December 31, 2007, no additionalshares are issued and that all future dividends are paid in cash (irrespective ofthis disclosure requirement, we are not representing intentions with regard tothe timing of New Preferred redemptions). The effect these obligations areexpected to have on our liquidity and cash flow in future periods are asfollows:

 
| ** **                | ** ** | **Total** | ** ** | **Less Than One  Year** | ** ** | **One to Three  Years** | ** ** | **After Three  Years** | ** ** |
|---------------------------|------------|-----------|------------|-------------------------|------------|-------------------------|------------|------------------------|------------|
| Preferred Stock dividends |       | $         | 6,122      |                    | $          | 1,884                   |       | $                      | 3,767      |   | $ | 471 |   |
|                           |            |           |            |                         |            |                         |            |                        |            |  |  |  |  |

 

17

----

 

*Other Matters*

 

Wehave various obligations and liabilities from our continuing operations,including general overhead expenses in connection with maintaining, operatingand winding down the various entities. Additionally, we believe contingent liabilities may exist in the areasdescribed in Note 6 to the Consolidated Financial Statements.

 

**RISKFACTORS RELATING TO KAISER HOLDINGS AND**

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report onForm 10-Q contains, and our periodic filings with the Securities and ExchangeCommission and written or oral statementsmade by our officers and directors to press, potential investors, securitiesanalysts and others, may contain, forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Theseforward-looking statements are not historical facts, but rather are predictionsand generally can be identified by use of statements that include phrases suchas “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “foresee”or other words or phrases of similar import. Similarly, statements that describe or contain information related to matters such as our intent, belief, orexpectation with respect to financial performance, claims resolution, cashavailability, stock redemption plans, contract awards and performance, potentialacquisitions and joint ventures, and cost-cutting measures are forward-lookingstatements. These forward-looking statements often reflect a number ofassumptions and involve known and unknown risks, uncertainties and otherfactors that could cause our actual results to differ materially from thosecurrently anticipated in these forward-looking statements.  In light of these risks and uncertainties,including those described below, the forward-looking events might or might notoccur.

 

**Ourremaining primary source of funding is from Kaiser-Hill distributions, whichare subject to uncertainties that may adversely impact our ability to meet ourobligations on our preferred stock and the potential value of our common stock.**

 

*The fee income we anticipate receiving in the future fromKaiser-Hill is dependent upon the ability of Kaiser-Hill to close the RockyFlats site at a predetermined targeted cost of between $3.1 billion and $4.9billion and closing date ranging from December 31, 2005 to not later than March31, 2007, both of which are subject to operational risks and uncertainties.*

 

Our long-termoutlook is largely dependent on the performance of Kaiser-Hill under itscontract with the Department of Energy. Kaiser-Hill serves as the general contractor at the Rocky Flats sitenear Denver, Colorado, a former nuclear weapons production facility.  Kaiser-Hill’s contract with the Department ofEnergy includes a performance fee based upon a combination of the actual costsincurred to complete the site closure and the actual date of completion of theclosure.  Although unanticipated, ifKaiser-Hill fails to complete the closure within the target cost for theproject, Kaiser-Hill’s fee will be reduced to a level significantly less thanthe fee estimate currently being used to recognize income on the project.

 

Kaiser-Hill hashistorically incurred expenses that are not reimbursable by the Department ofEnergy pursuant to federal regulations. Accordingly such expenses, which Kaiser-Hill estimates could approximateup to 15% - 20% of the total award fee, will be deducted from the total feeprior to any distributions to its two owners. For reasons similar to thosedescribed in the following paragraph, it is difficult to estimate either theamount of net fee to be distributed to the owners of Kaiser-Hill and or theeffect, if any, that such unreimbursable costs would have on our future cashflows.  A decrease in our cash flowscould result in a decrease in the value of our common and preferred stock.

 

*There are substantial performance risks associated withKaiser-Hill’s work at the Rocky Flats site. The performance risks may impact the timing and cost of closing thesite, which in turn could impact our fee income from Kaiser-Hill.*

 

The clean-up and closure of the Departmentof Energy’s Rocky Flats site involvesubstantial performance risks.  Amongother things, Kaiser-Hill’s activities at the Rocky Flats site involve theclean-up, packaging and transportation of nuclear waste, and the demolition anddestruction of facilities where nuclear weapons components were previouslyproduced.  Some of these activities havenot been previously performed elsewhere, and therefore require the developmentof innovative and untested approaches. Kaiser-Hill emphasizes safety in its performance, but the nature of theRocky Flats site and the activities of Kaiser-Hill and its subcontractors atthe site are such that serious injuries, or even deaths, are possible.  Significant safety incidents at the sitecould stop or significantly impede the progress of work being performed at thesite by Kaiser-Hill and its subcontractors. The Department of Energycontract contemplates that all, or substantially all, of the nuclear waste atRocky Flats will be transported to other sites operated or managed by the Departmentof Energy. In addition, third-party objections

 

18

----

 

have arisen from time to time with regard to thetransportation to, and storage of nuclear waste at, certain sites previouslydesignated by the Department of Energy to receive waste from Rocky Flats.  Although the Department of Energy contractcontemplates that the Department of Energy is responsible for providingtransportation and storage sites for nuclear waste from Rocky Flats, an inabilityto store nuclear waste at other Department of Energy sites would pose asubstantial risk to the timely closure of the Rocky Flats site, and couldinterfere with Kaiser-Hill’s ability to earn the fees to which Kaiser-Hillbelieves it should be entitled.  Thisloss of fee income could adversely affect our operating results, which could inturn result in a decrease in the value of our common and preferredstock.

 

*There are potential substantial liabilities and costsassociated with Kaiser-Hill’s Department of Energy contract, which may directlyand indirectly impact our fee income from Kaiser-Hill.*

 

Under the Department of Energy contract, Kaiser-Hill is responsible for,and the Department of Energy will not pay for costs associated with,liabilities caused by the willful misconduct or lack of good faith ofKaiser-Hill’s managerial personnel or the failure to exercise prudent businessjudgment by Kaiser-Hill’s managerial personnel. If Kaiser-Hill were foundliable for any of these reasons, the associated costs could be substantial,which could have an adverse effect on our operating results. A decreasein our operating results could cause a decrease in the value of our common andpreferred stock.

 

*There arerisks associated with potential disputes as to the completion of the closure ofthe Rocky Flats site and the timing and award of fee payments to Kaiser Hill.*

 

When Kaiser-Hillcompletes its activities at the Rocky Flats site, it is possible that therewill be disputes as to whether Kaiser-Hill has satisfied its obligations as tothe closure of the site.  Such disputescould delay or reduce the payment of fees due to Kaiser-Hill.  In addition, the timing and amount ofpayments to Kaiser-Hill could be affected by delays by the Department of Energyor other authorities, limitations in processing payments, Congressional,Department of Energy, or funding of the Rocky Flats project, or dispute relatedto the overall U.S. Federal budget or funding of the Department of Energy.

 

**We face significant contingencies, which may adversely impact ourability to meet our obligations on our preferred stock, to fund our continuingoperations and to undertake new operations.**

 

*We do not have a significant business plan beyondKaiser-Hill and we may undertake new activities with start-up risks.*

 

Our long-term future profitability will be dependent, to a significantextent, on the extent to which we carry out activities other than throughKaiser-Hill. Unless and until we further develop plans for such operations, weare unable to determine either the amount of risk that future operations willinvolve or whether we have the ability to realize long-term profitability. Inconsidering whether we should attempt to develop a new revenue base, we haveestablished a new subsidiary to attempt to take advantage of our successfulhistory of performance in the government services market and the commencementof the process to enable our wholly-owned captive insurance company to offerderivative captive insurance services. Our efforts to develop a revenue base separate from Kaiser-Hill involvestart-up activities with risks peculiar to activities of this type, which mayadversely impact our cash flow and operating results. A decrease in ourcash flows and operating results could result in a decrease in the value of ourcommon and preferred stock.

 

*We may be unable to obtain performance guarantees, which maylimit our ability to undertake new activities.*

 

Given the reorganization history of Kaiser Group Holdings, Inc., we maynot be able to obtain satisfactory contract performance guaranty mechanisms,such as performance bonds and letters of credit, at all or on satisfactoryterms, to the extent such mechanisms are needed for new activities and projects.  These factors could limit the nature of the businessactivities in which we can engage, which may adversely impact our cash flow andoperating results and result in a decrease in the value of our commonand preferred stock.

 

*We may be unable to generate funds to meet our obligationsand we may be unable to access additional capital.*

 

We may be unable to continue to generatesufficient funds to meet our obligations, notwithstanding the significantimprovements in our operations and financial condition.  Although we believe that we will be able to generatesufficient funds to meet our working capital needs for the foreseeable future,our ability to gain access to additional capital, if needed, is not certain.Due to reorganization history of Kaiser Group Holdings, Inc. and currentfinancial markets, it is difficult to predict whether additional capital wouldbe available to us in the event that we were unable to generate funds to meetour obligations.  An inability to gainaccess to additional capital may also limit our ability to undertake newactivities.  Ultimately, an inability

 

19

----

 

to meet our existing obligations or to undertakenew activities could adversely impact our cash flow and operating results.  A decrease in our cash flows andoperating results could result in a decrease in the value of our common andpreferred stock.

 

*Wemay have to issue a substantial number of additional common shares.*

 

On January 20, 2004, the United States Bankruptcy Court for theDistrict of Delaware ruled on a claim in favor of former shareholders of ICTSpectrum Constructors, Inc.  TheBankruptcy Court has refused to reconsider its decision and we haveappealed.  Should we be unsuccessful inour efforts to achieve reversal of the Bankruptcy Court’s ruling, we could berequired to issue to former ICT Spectrum shareholders an additional 247,350common shares, which would then comprise approximately 13.4% of the aggregatecommon shares outstanding.  We believethat issuing such a substantial number of additional common shares would have amaterially dilutive effect on the value of common shares presently outstanding.

 

*Inthe event of a change of control, we may not have the financial resources toredeem preferred stock.*

 

Our preferred stock is redeemable at the option of theholder upon a change of control as defined in the terms of the preferredstock.  We are not presently aware of anyevents that would cause a change of control. However, based on a Report on Form 4 dated April 3, 2003, which wasfiled with the Securities and Exchange Commission by Tennenbaum & Co., LLCon April 3, 2003, we believe that Tennenbaum & Co., LLC and Michael E.Tennenbaum together own approximately 47.1% of our common stock.  The terms of our preferred stock provide thata change of control occurs when, among other things, a person or “group”(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934)directly or indirectly acquires “beneficial ownership” (as defined in Rule13d-3 under the Securities Exchange Act of 1934) of more than 50% of allclasses of our common equity (defined in the terms of our preferred stock ascapital stock entitled to vote in the election of directors).

 

In the event that we arerequired to redeem preferred stock due to a change of control, we may not haveavailable capital to redeem the stock.  Our ability to gain access to additional capitalfrom outside sources, if needed, is not certain.  The inability to gain access to additionalcapital may limit our ability to meet the redemption obligations with respectto the preferred stock.

 

**ITEM 3.   QUANTITATIVE AND QUALITATIVE INFORMATIONABOUT MARKET RISK**

 

Wedo not believe that we have significant exposures to market risk as we do notpresently have any debt.  The interestrate risk associated with our obligation to fund a capped retiree medicalobligation is not sensitive to interest rate risk other than via thedetermination of the present value of our remaining obligation thereunder.  A 10% increase or decrease in the averageannual prime rate would result in a decrease in the carrying value of the planobligation but would not change the actual cost of the plan.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

Asof September 30, 2004, an evaluation was performed under the supervision andwith the participation of the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asdefined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act).  Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that the Company’s disclosure controls and procedures were effectiveas of September 30, 2004.  There were nosignificant changes in the Company’s internal control over financial reportingthat occurred during the period covered by this report that have materiallyaffected, or that are reasonably likely to materially affect, our internalcontrol over financial reporting.

 

20

----

 

** PART II - OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Aspreviously reported in the Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

**ITEM 2. UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

(a)  None

(b)  Not applicable

(c)  None

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

 

(a)  Not applicable

(b)  Not applicable

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

Notapplicable

 

**ITEM 5.  OTHER INFORMATION**

 

(a)  None

(b)  None

 

**ITEM 6.  EXHIBITS**

 

**Exhibit No.2—Plan of Acquisition, reorganization, arrangement, liquidation or succession**

 

2(a)Second Amended Plan of Reorganization (Incorporated by reference to Exhibit 2 toCurrent Report on Form 8-K (Registrant No.1-12248) filed with the Commission on December 14, 2000)

 

**Exhibit No.3—Articles of Incorporation and By-laws of the Registrant**

 

3(a)  Certificate of Incorporation of Kaiser GroupHoldings, Inc. (Incorporated by reference to Exhibit 3(i) to Current Report on Form8-K (Registrant No. 1-12248) filed with the Commission on December 14, 2000)

 

3(b)  By-laws of Kaiser Group Holdings, Inc.(Incorporated by reference to Exhibit 3(ii) to Current Report on Form 8-K(Registrant No. 1-12248) filed with the Commission on December 14, 2000)

 

**Exhibit No.4—Instruments Defining the Rights of Security Holders, including Indentures**

 

4(a)  Form of Put Agreement relating to preferredstock of Kaiser Group Holdings, Inc. (Incorporated by reference to Exhibit 4 toCurrent Report on Form 8-K (Registrant No. 1-12248) filed with the Commissionon December 14, 2000)

 

**Exhibit No.10 — Material Contracts**

 

10(a)  Kaiser Group International, Inc. EmployeeStock Ownership Plan (as amended and restated as of January 1, 1996)  (Incorporated by reference to Exhibit No.10(b) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

1.  Amendment No. 1 with the effective date ofJanuary 1, 1998  (Incorporated byreference to Exhibit No. 10(b)(1) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the Commission on April 17, 2000)

 

2.  Amendment No. 2 with the effective date ofJanuary 1, 1996  (Incorporated by reference to Exhibit No. 10(b)(2) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

21

----

 

3.  Amendment No. 3 dated April 19, 1999.  (Incorporated by reference to Exhibit No.10(b)(3) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

4.  Amendment No. 4 dated June 25, 1999.(Incorporated by reference to Exhibit No. 10(b)(4) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April17, 2000)

 

10(b)Trust Agreement with Vanguard Fiduciary Trust Company dated as of August 31,1995, for ICF Kaiser International, Inc. Employee Stock Ownership Plan(Incorporated by reference to Exhibit No. 10(c) to Registration Statement onForm S-1 (Registrant No. 33-64655) filed with the Commission on November 30,1995)

 

10(c) ICF KaiserInternational, Inc. Retirement Plan (as amended and restated as of March 1,1993) (and further amended with respect to name change only as of June 26,1993) (Incorporated by reference to Exhibit No. 10(d) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 1994 filedwith the Commission on October 15, 1993)

 

1.  Amendment No. 1 dated April 24, 1995(Incorporated by reference to Exhibit No. 10(d)(1) to Annual Report onForm 10-K (Registrant No. 1- 12248) filed with the Commission on May23, 1995)

 

2.  Amendment No. 2 dated December 15, 1995(Incorporated by reference to Exhibit No. 10(d)(2) to Transition Report on Form10-K (Registrant No. 1-12248) for the transition period from March 1, 1995 toDecember 31, 1995 filed with the Commission on March 29, 1996)

 

3.  Amendment No. 3 dated December 13, 1996(Incorporated by reference to Exhibit No. 10(d)(3) to Registration Statement onForm S-1 (Registrant No. 333-19519) filed with the Commission on January 10,1997)

 

4.  Amendment No. 4 dated April 19, 1999(Incorporated by reference to Exhibit No. 10(d)(4) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

5.  Amendment No. 5 dated June 25, 1999(Incorporated by reference to Exhibit No. 10(d)(5) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

6.  Amendment No. 6 dated August 30, 1999(Incorporated by reference to Exhibit No. 10(d)(6) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

7.  Amendment No. 7 dated April 13, 2000(Incorporated by reference to Exhibit 10(d)(7) on Form 8-K(Registrant No. 1-12248) filed with the Commission on May 2, 2000)

 

8.  Amendment No. 8 dated June 8, 2000(Incorporated by reference to Exhibit 10(d)(8) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) for the second quarter of fiscal 2000 filed with theCommission on September 6, 2000)

 

9.  Amendment No. 9 dated June 19, 2003(Incorporated by reference to Exhibit 10(c)(9) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) for the second quarter of fiscal 2003 filed with theCommission on August 14, 2003)

 

10.  Amendment No. 10 dated March 17, 2004(Incorporated by reference to Exhibit 10(c)(10) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) for the first quarter of fiscal 2004filed with the Commission on May 24, 2004)

 

10(d)Trust Agreement with Vanguard Fiduciary Trust Company dated as of August 31,1995, for ICF Kaiser International, Inc. Retirement Plan (Incorporated byreference to Exhibit No. 10(e) to Registration Statement on Form S-1(Registrant No. 33-64655) filed with the Commission on November 30, 1995)

 

10(e)       ICF Kaiser International, Inc. Section401(k) Plan (as amended and restated as of March 1, 1993) (and further amendedwith respect to name change only as of June 26, 1993) (Incorporated byreference to Exhibit No. 10(f) to Quarterly Report on Form 10-Q (Registrant No.1-12248) for the second quarter of fiscal 1994 filed with the Commission onOctober 15, 1993)

 

1.  Amendment No. 1 dated April 24, 1995(Incorporated by reference to Exhibit No. 10(p)(1) to Annual Report onForm 10-K (Registrant No. 1-12248) for fiscal 1995 filed with theCommission on May 23, 1995)

 

22

----

 

2.  Amendment No. 2 dated December 15, 1995(Incorporated by reference to Exhibit No. 10(p)(2) to Transition Report on Form10-K (Registrant No. 1-12248) for the transition period from March 1, 1995 toDecember 31, 1995 filed with the Commission on March 29, 1996)

 

3.  Amendment No. 3 dated December 13, 1996(Incorporated by reference to Exhibit No. 10(q)(3) to Registration Statement onForm S-1 (Registrant No. 333-19519) filed with the Commission on January 10,1997)

 

4.  Amendment No. 4 dated April 8, 1999(Incorporated by reference to Exhibit No. 10(k)(4) to Annual Report on Form10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

5.  Amendment No. 5 dated June 25, 1999(Incorporated by reference to Exhibit No. 10(k)(5) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April 17,2000)

 

6.  Amendment No. 6 dated April 13, 2000(Incorporated by reference to Exhibit 10(k)(6) on Form 8-K(Registrant No. 1-12248) filed with the Commission on May 2, 2000)

 

7.  Amendment dated January 1, 2001 (Incorporatedby reference to Exhibit No. 10(m)(7) to Annual Report on Form 10-K (RegistrantNo. 1-2248) filed with the Commission on March 30, 2001)

 

8.  Amendment No. 8 dated December 10, 2002(Incorporated by reference to Exhibit 10(e)(8) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) for the second quarter of fiscal 2003 filed with theCommission on August 14, 2003)

 

9.  Amendment No. 9 dated June 19, 2003(Incorporated by reference to Exhibit 10(e)(9) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) for the second quarter of fiscal 2003 filed with theCommission on August 14, 2003)

 

10.  Amendment No. 10 dated March 17, 2004(Incorporated by reference to Exhibit 10(e)(10) to Quarterly Report on Form10-Q (Registrant No. 1-12248) for the first quarter of fiscal 2004 filed withthe Commission on May 24, 2004)

 

11.  Amendment No. 11 dated November 11, 2004

 

10(f)  Trust Agreement with Vanguard Fiduciary TrustCompany dated as of March 1, 1989, for the ICF Kaiser International, Inc.Section 401(k) Plan (Incorporated by reference to Exhibit No. 28(b) toRegistration Statement on Form S-8 (Registrant No. 33-51460) filed with theCommission on August 31, 1992)

 

10(g)Contract between Kaiser-Hill Company, LLC and the U.S. Department of Energydated January 24, 2000 (Incorporated by reference to Exhibit No. 10(o) toAnnual Report on Form 10-K (Registrant No. 1-12248) filed with the Commissionon April 17, 2000)

 

1.  Modification M116 to Contract#DE-AC34-00RF01904, effective March 24, 2004 (Incorporated by reference toExhibit 10(g)(1) to Annual Report on Form 10-K (Registrant No. 1-12248) filedwith the Commission on March 30, 2004)

 

10(h)  Assignment of Membership Interest in HuntersBranch Leasing, LLC by and between Kaiser Holdings Unlimited, Inc. (Assignor) and Nutley Partners, LC (Assignee),dated January 1, 2001 (Incorporated by reference to Exhibit No. 10(r) toAnnual Report on Form 10-K (Registrant No. 1-12248) filed with the Commissionon April 2, 2001)

 

10(i) Subcontract between The S.M. StollerCorporation and Kaiser Group Holdings, Inc. dated September 30, 2004 (Incorporatedby reference to Exhibit No. 10(i) to Quarterly Report on Form 10-Q (RegistrantNo. 1-12248) for the second quarter of fiscal 2004 filed with the Commission onAugust 13, 2004)

 

**Exhibit No.10—Material Contracts (management contracts, compensatory plans, or arrangements)**

 

10(j)  Kaiser Group Holdings, Inc. 2002 EquityCompensation Plan, as amended (Incorporated by reference to Exhibit No. 10 toRegistration Statement on Form S-8 (Registration No. 333-107912) filed with theCommission on August 13, 2003)

 

10(k)  Amended and Restated Employment Agreement withJohn T. Grigsby, Jr., President and Chief Executive Officer, effective as ofDecember 19, 2000 (Incorporated by reference to Exhibit No. 10(m) toRegistration Statement on Form S-4(Registrant No. 333-100640) filed with the Commission on October 18,2002)

 

23

----

 

10(l) TransitionAgreement between Kaiser Group Holdings, Inc. and John T. Grigsby, Jr.effective as of August 31, 2004 (Incorporated by reference to Exhibit 99 to CurrentReport on Form 8-K (Registration No. 1-12248) filed with the Commission onSeptember 1, 2004)

 

**Exhibit 14— Corporate Code of Conduct**

 

14(a)  Kaiser Group Holdings, Inc. Corporate Code ofConduct (Incorporated by reference to Exhibit 14.1 to Current Report onForm 8-K (Registrant No. 1-12248) filed with the Commission on January 13,2004)

 

**Exhibit No.21 — Consolidated Subsidiaries of the Registrant as of November 1, 2004**

 

**Exhibit No.31.1 — Certification of the Principal Executive Officer**

 

Pursuant to Rule 13a-14(a) and 15d-14(a) of theSecurities Exchange Act of 1934

 

**Exhibit No.31.2 — Certification of the Principal Financial Officer**

 

Pursuant to Rule 13a-14(a) and 15d-14(a) of theSecurities Exchange Act of 1934

 

**Exhibit No.32.1 — Certification of the Principal Executive Officer**

 

Pursuant to 18 U.S.C. Section 1350

 

**Exhibit No.32.2 — Certification of the Principal Financial Officer**

 

Pursuant to 18 U.S.C. Section 1350

 

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Quarterly Report on Form 10-Q to be signed on its behalf bythe undersigned thereunto duly authorized.

 
|                     | **KAISER  GROUP HOLDINGS, INC.**                                                                                  |   |
|--------------------------|-------------------------------------------------------------------------------------------------------------------|--------|
|                     | (Registrant)                                                                                                      |   |
|                     |                                                                                                              |
| Date:  November 15, 2004 |                                                                                                              |
|                     |                                                                                                              |
|                     | /s/  Marian P. Hamlett                                                                                            |   |
|                     | Marian  P. Hamlett                                                                                                |
|                     | Executive  Vice President and Chief Financial  Officer (Duly authorized officer and principal  financial officer) |
|                          |                                                                                                                   |        |  |

 

24

----