**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended June 30, 2003**

 

**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.) |

 
| **12303 Airport Way, Suite 125, Broomfield, Colorado** |   | **80021-0007** |
|--------------------------------------------------------|--------|----------------|
| (Address of principal  executive offices)              |   | (Zip Code)     |

 

Registrant’s telephone number including area code: **(720) 889-2770**

 

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 inRule 12b-2 of the Exchange Act).  Yes o  No ý

 

**APPLICABLE ONLY TO REGISTRANTS INVOLVEDIN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:**

 

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.

 

Asof August 12, 2003, there were 1,594,062 shares of Kaiser Group Holdings, Inc.Common Stock, par value $0.01 per share, outstanding.

 

 

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**KAISER GROUPHOLDINGS, INC.**

 

**INDEX TO FORM10-Q**

 
| **Part I - Financial Information**                                                                   |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |   |
| Item  1. Financial Statements:                                                                       |
|                                                                                                 |   |
|                                                                                                 | Consolidated Balance Sheets  -  June 30, 2003 and December 31, 2002. |
|                                                                                                 |   |
|                                                                                                 | Consolidated  Statements of Operations and Comprehensive Income  Three and Six Months Ended June 30, 2003 and 2002. |
|                                                                                                 |   |
|                                                                                                 | Consolidated  Statements of Cash Flows -  Six Months Ended June 30, 2003 and 2002. |
|                                                                                                 |   |
|                                                                                                 | 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. Changes in 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 and Reports on Form 8-K                                                            |
|                                                                                                 |   |
| **Signatures**                                                                                       |

 

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**KAISER GROUP HOLDINGS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                                                                                                        |   | **June 30,  2003** |       | **December 31,  2002** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|------------|
|                                                                                                                                                                                                        |   | **(unaudited)**    |       |                   |       |
| **ASSETS**                                                                                                                                                                                                  |   |               | ** ** |                   | ** ** |
| Current Assets                                                                                                                                                                                              |   |               |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                  |   | $                  | 13,455     |                   | $          | 17,413 |   |
| Restricted cash  and cash equivalents                                                                                                                                                                       |   | 9,432              |       | 18,679                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                                  |   | 1,230              |       | 2,404                  |       |
| Net assets of  discontinued operations                                                                                                                                                                      |   | 6,000              |       | 6,000                  |       |
| Total Current  Assets                                                                                                                                                                                       |   | 30,117             |       | 44,496                 |       |
|                                                                                                                                                                                                        |   |               |       |                   |       |
| Other Assets                                                                                                                                                                                                |   |               |       |                   |       |
| Investments in  and advances to affiliates                                                                                                                                                                  |   | 48,295             |       | 45,663                 |       |
| Notes receivable                                                                                                                                                                                            |   | 5,894              |       | 5,894                  |       |
| Other long-term  assets                                                                                                                                                                                     |   | 197                |       | 142                    |       |
|                                                                                                                                                                                                        |   | 54,386             |       | 51,699                 |       |
| Total Assets                                                                                                                                                                                                |   | $                  | 84,503     |                   | $          | 96,195 |   |
|                                                                                                                                                                                                        |   |               | ** ** |                   | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                              |   |               | ** ** |                   | ** ** |
|                                                                                                                                                                                                        |   |               |       |                   |       |
| Current  Liabilities                                                                                                                                                                                        |   |               |       |                   |       |
| Accounts payable                                                                                                                                                                                            |   | $                  | 383        |                   | $          | 922 |   |
| Post retirement  benefit plan obligation                                                                                                                                                                    |   | 7,053              |       | 7,193                  |       |
| Other accrued  expenses                                                                                                                                                                                     |   | 5,548              |       | 6,501                  |       |
| Preferred stock  dividend payable                                                                                                                                                                           |   | 487                |       | 654                    |       |
| Deferred tax  liability                                                                                                                                                                                     |   | 8,709              |       | 6,538                  |       |
| Income taxes  payable                                                                                                                                                                                       |   | 712                |       | 640                    |       |
| Total Current  Liabilities                                                                                                                                                                                  |   | 22,892             |       | 22,448                 |       |
|                                                                                                                                                                                                        |   |               |       |                   |       |
| Commitments and  contingencies                                                                                                                                                                              |   |               |       |                   |       |
|                                                                                                                                                                                                        |   |               |       |                   |       |
| Preferred stock,  par value $.01 per share:                                                                                                                                                                 |   |               |       |                   |       |
| Authorized—2,000,000  shares                                                                                                                                                                           |   |               |       |                   |       |
| Issued and  Outstanding — 756,872 and 1,017,120 shares at June 30, 2003 and December 31,  2002, respectively, net of 97,671 and 119,587 treasury shares; stated at  liquidation value of $55 per share |   | 41,628             |       | 55,942                 |       |
| Common stock,  par value $.01 per share:                                                                                                                                                                    |   |               |       |                   |       |
| Authorized—3,000,000  shares                                                                                                                                                                           |   |               |       |                   |       |
| Issued and  outstanding– 1,594,062 and 1,590,062 shares at June 30, 2003 and December 31,  2002, respectively                                                                                          |   | 16                 |       | 16                     |       |
| Capital in  excess of par                                                                                                                                                                                   |   | 8,465              |       | 8,606                  |       |
| Retained  earnings                                                                                                                                                                                          |   | 11,466             |       | 9,215                  |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                                              |   | 36                 |       | (32                    | )          |
| Total  Shareholders’ Equity                                                                                                                                                                            |   | 19,983             |       | 17,805                 |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                                                                            |   | $                  | 84,503     |                   | $          | 96,195 |   |

 

See notes to consolidated financial statements

 

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**KAISER GROUP HOLDINGS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVEINCOME**

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

 
|                                                                                                                                                                                                |   | **For the  Three Months Ended  June 30,** |   | **For the  Six Months Ended  June, 30** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                                                                                                                |   | **2003**                                  |   | **2002**                                |   | **2003** |   | **2002** |   |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Gross Revenue                                                                                                                                                                                       |   | $                                         | — |                                    | $      | — |   | $ | — |   | $ | — |   |
| Subcontract and  direct material costs                                                                                                                                                              |   | —                                    |   | —                                  |   | — |   | — |   |
| Service Revenue                                                                                                                                                                                     |   | —                                    |   | —                                  |   | — |   | — |   |
| Operating  Expenses                                                                                                                                                                                 |   |                                      |   |                                    |   |   |   |   |   |
| Administrative  expenses                                                                                                                                                                            |   | 1,447                                     |   | 2,641                                   |   | 2,893 |   | 5,269 |   |
| Operating Loss                                                                                                                                                                                      |   | (1,447                                    | )      | (2,641                                  | )      | (2,893 | ) | (5,269 | ) |
| Other Income                                                                                                                                                                                        |   |                                      |   |                                    |   |   |   |   |   |
| Equity income in  earnings of affiliate, net of amortization of $881 for each of the three  months ended June 30, 2003 and 2002 and $1,762 for each of the six months  ended June 30, 2003 and 2002 |   | 4,267                                     |   | 3,382                                   |   | 8,632 |   | 7,026 |   |
| Gain on sale of  securities                                                                                                                                                                         |   | —                                    |   | —                                  |   | — |   | 106 |   |
| Interest income                                                                                                                                                                                     |   | 207                                       |   | 135                                     |   | 450 |   | 259 |   |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Income from  Continuing Operations Before Income Tax                                                                                                                                                |   | 3,027                                     |   | 876                                     |   | 6,189 |   | 2,122 |   |
| Income tax  expenses                                                                                                                                                                                |   | (1,161                                    | )      | (379                                    | )      | (2,404 | ) | (926 | ) |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Income From  Continuing Operations                                                                                                                                                                  |   | 1,866                                     |   | 497                                     |   | 3,785 |   | 1,196 |   |
| Loss from  discontinued operations, net of tax                                                                                                                                                      |   | —                                    |   | (127                                    | )      | — |   | (197 | ) |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Net Income                                                                                                                                                                                          |   | 1,866                                     |   | 370                                     |   | 3,785 |   | 999 |   |
| Preferred stock  dividends                                                                                                                                                                          |   | (702                                      | )      | (1,094                                  | )      | (1,532 | ) | (2,172 | ) |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Income (Loss)  Applicable to Common Shareholders                                                                                                                                                    |   | $                                         | 1,164  |                                    | $      | (724 | ) | $ | 2,253 |   | $ | (1,173 | ) |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Basic and  Diluted Loss Per Common Share:                                                                                                                                                           |   |                                      |   |                                    |   |   |   |   |   |
| Continuing  operations, net of tax                                                                                                                                                                  |   | $                                         | 0.73   |                                    | $      | (0.38 | ) | $ | 1.41 |   | $ | (0.62 | ) |
| Discontinued  operations, net of tax                                                                                                                                                                |   | —                                    |   | (0.08                                   | )      | — |   | (0.12 | ) |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Net Income  (Loss) Per Share                                                                                                                                                                        |   | $                                         | 0.73   |                                    | $      | (0.46 | ) | $ | 1.41 |   | $ | (0.74 | ) |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Weighted average  shares for basic and diluted earnings per common share                                                                                                                            |   | 1,595                                     |   | 1,590                                   |   | 1,594 |   | 1,589 |   |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Comprehensive  Income                                                                                                                                                                               |   |                                      |   |                                    |   |   |   |   |   |
| Net Income                                                                                                                                                                                          |   | $                                         | 1,866  |                                    | $      | 370 |   | $ | 3,785 |   | $ | 999 |   |
| Other Comprehensive  Income (Loss):                                                                                                                                                                 |   |                                      |   |                                    |   |   |   |   |   |
| Realization of  gain on securities, net of tax                                                                                                                                                      |   | —                                    |   | —                                  |   | — |   | (393 | ) |
| Change in  cumulative foreign translation adjustments                                                                                                                                               |   | (1                                        | )      | 23                                      |   | 68 |   | 10 |   |
|                                                                                                                                                                                                |   |                                      |   |                                    |   |   |   |   |   |
| Total  Comprehensive Income                                                                                                                                                                         |   | $                                         | 1,865  |                                    | $      | 393 |   | $ | 3,853 |   | $ | 616 |   |

 

Seenotes to consolidated financial statements.

 

4

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
|                                                                           |   | **For the  Six Months ended  June 30,** |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                                           |   | **2003**                                |   | **2002** |   |
|                                                                           |   | **(Unaudited)**                         |   |
| Operating  Activities:                                                         |   |                                    |   |   |   |
| Net income                                                                     |   | $                                       | 3,785  |   | $ | 999 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |   |                                    |   |   |   |
| Loss of  discontinued operations, net of tax                                   |   | —                                  |   | 197 |   |
| Deferred taxes  related to continuing operating activities                     |   | 2,171                                   |   | (1,423 | ) |
| Gain on sale of  stock                                                         |   | —                                  |   | (106 | ) |
| Equity in  earnings of affiliate                                               |   | (8,632                                  | )      | (7,026 | ) |
| Changes in  operating assets and liabilities:                                  |   |                                    |   |   |   |
| Prepaid expenses  and other current assets                                     |   | 1,174                                   |   | 70 |   |
| Accounts payable  and accrued expenses                                         |   | (1,499                                  | )      | 1,170 |   |
| Income taxes  payable                                                          |   | 72                                      |   | 1,299 |   |
| Other operating  activities                                                    |   | 24                                      |   | 81 |   |
| Net Cash Used in  Operating Activities                                         |   | (2,905                                  | )      | (4,739 | ) |
| Investing  Activities:                                                         |   |                                    |   |   |   |
| Distributions  from affiliate                                                  |   | 6,000                                   |   | 6,450 |   |
| Proceeds from  sale of stock                                                   |   | —                                  |   | 5,961 |   |
| Net Cash  Provided by Investing Activities                                     |   | 6,000                                   |   | 12,411 |   |
| Financing  Activities:                                                         |   |                                    |   |   |   |
| Transfer to  restricted cash                                                   |   | —                                  |   | (626 | ) |
| Transfer from  restricted cash for the redemption of preferred stock           |   | 8,913                                   |   | — |   |
| Payment of  preferred stock dividends                                          |   | (1,701                                  | )      | (2,206 | ) |
| Redemption of  preferred stock                                                 |   | (14,146                                 | )      | — |   |
| Purchase of  preferred treasury stock                                          |   | (119                                    | )      | (244 | ) |
| Net Cash Used in  Financing Activities                                         |   | (7,053                                  | )      | (3,076 | ) |
| Increase  (decrease) in Cash and Cash Equivalents                              |   | (3,958                                  | )      | 4,596 |   |
| Cash and Cash  Equivalents at Beginning of Period                              |   | 17,413                                  |   | 8,848 |   |
| Cash and Cash  Equivalents at End of Period                                    |   | $                                       | 13,455 |   | $ | 13,444 |   |

 

Seenotes to consolidated financial statements.

 

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**KAISER GROUPHOLDINGS, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

1.             Basis of Presentation

 

The accompanyingconsolidated financial statements of Kaiser Group Holdings, Inc. andsubsidiaries (the Company), except for the December 31, 2002 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 statements shouldbe 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, 2002.  Certain reclassifications have been made tothe prior period financial statements to conform them to the presentation usedin the June 30, 2003 financial statements.

 

Kaiser Group Holdings,Inc. is a Delaware holding company that was formed on December 6, 2000 for thepurpose of owning all of the outstanding stock of Kaiser Group International,Inc. (Old Kaiser), which in turn continues to own the stock of its remainingsubsidiaries. On June 9, 2000, Old Kaiser and 38 of its domestic subsidiariesvoluntarily filed for protection under Chapter 11 of the United StatesBankruptcy Code in the District of Delaware (case nos. 00-2263 to 00-2301). OldKaiser emerged from bankruptcy with an approved plan of reorganization (theSecond Amended Plan of Reorganization (the Plan)) that was effective onDecember 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:

 

•                  the ownership of a 50% interest inKaiser-Hill Company, LLC (Kaiser-Hill), which serves as the general contractorat the U.S. Department of Energy’s Rocky Flats Environmental Technology Sitenear Denver, Colorado, for the performance of a contract for the closure of thesite (the Closure Contract). (See note 4 for summarized financial information.)

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

•                  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 no longer issuing new policies and is simplyinvolved in resolving remaining claims.

•                  an ongoingobligation to fund a capped, post-employment medical benefit plan for a fixedgroup of retirees.

 

The Company adopted fresh start reporting in its consolidated balancesheet as of December 31, 2000. The American Institute of Certified PublicAccountants’ Statement of Position 90-7, “Financial Reporting by Entities inReorganization Under the Bankruptcy Code” (SOP 90-7), requires that under certaincircumstances resulting from a bankruptcy, a new entity is created forfinancial reporting purposes upon the emergence of that entity frombankruptcy.  Accordingly, the value ofthe reorganized enterprise becomes the established amount for the emergingbalance of shareholders’ equity, and any accumulated deficit of the predecessorentity is offset against available paid-in-capital to result in an emergingretained earnings of zero. Additionally, assets and liabilities are recorded at their fair values.

 

The value of theemerged enterprise used for fresh start reporting as of December 31, 2000 was$87.5 million and was determined by management with the assistance ofindependent advisors.  The methodologyemployed involved estimation of the enterprise value taking into considerationa discounted cash flow analysis.  Thediscounted cash flow analysis was based on a seven-year cash flow projectionprepared by management, taking into consideration the terminal value of itsassets and liabilities as of immediately prior to its emergence from bankruptcyon December 18, 2000.  Terminal valuesof assets and 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

 

6

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on estimates andassumptions about circumstances and events that had not yet taken place.  Estimates and assumptions regardingindividual retained matters which form the collective composition of theoverall 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 effectiveness of theOld Kaiser Plan of Reorganization as of December 18, 2000 did not, in and ofitself, complete the bankruptcy process. The process of resolving in excess of$500 million of claims initially filed in the bankruptcy is ongoing. Old Kaiserobjected to the majority of the unresolved claims, and if such claims are notsettled via the objection or dispute resolution processes or other means, theywill ultimately be heard and determined by the Bankruptcy Court. Once a claimis resolved with an amount due to the creditor, such portion of the claim isdeemed to be an allowed claim by the Bankruptcy Court (an allowed claim). TheCompany cannot predict with accuracy when the claims resolution process will becomplete or what the total amount of allowed claims will be upon completion.

 

In general terms, thePlan 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 respectof their 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.

 

Pursuant to the terms ofOld Kaiser’s Plan, the Company was required to complete its initial bankruptcydistribution within 120 days of the effective date of the Plan.  Accordingly, on April 17, 2001, the Companyeffected its initial distribution.  Atthat time, there were approximately $136.8 million of Class 4 claims that hadbeen allowed in the bankruptcy process. The amount of unresolved claims remaining at April 17, 2001 wasapproximately $130.5 million.

 

To address the remainingunresolved claims, the Bankruptcy Court issued an order on March 27, 2001establishing an Alternative Dispute Resolution (ADR) procedure whereby the remainingclaimants and Old Kaiser produce limited supporting data relative to theirrespective positions and engage in initial negotiation efforts in an attempt toreach an agreed claim determination.  Ifnecessary, the parties are thereafter required to participate in a non-bindingmediation before a mediator pre-selected by the Bankruptcy Court.  All unresolved claims as of March 27, 2001are subject to the ADR process. Since April 17, 2001, the date of the initialdistribution, $109.2 million of asserted claims have been withdrawn, negotiatedor mediated to an agreed amount, resulting in cash payments approximating $1.4million and issuances of 683 shares of New Preferred and 823 shares of NewCommon. As of August 11, 2003, the amount of unresolved claims wasapproximately $29.5 million. The Company expects that substantial progress willcontinue to be made in the resolution of claims over the balance of 2003.  The Company currently believes that theamount of Class 4 claims ultimately to be allowed in the Old Kaiser bankruptcyproceeding will not exceed $145.0 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

 

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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 intends to continue to use this settlementalternative during its resolution of remaining Class 4 claims, but has noability to determine the effect of the outcome on its overall financialcondition in the event such settlements are accepted in the future.

 

With respect to theunresolved claims, the Plan required that, at the date of the initialdistribution, sufficient cash reserves be retained by the Company such that, ifall remaining unresolved claims were ultimately deemed allowed at theoriginally claimed amount, the Company would be able to satisfy the allowedclaims, including dividends accruing on related preferred stock, since April17, 2001.  The cash reserve requirement,and the fact that the Company had not yet received a substantial cash paymentthe Company asserted it was due from Nova Hut, limited the amount of cashavailable at the time of the initial distribution to the holders of allowedClass 4 claims. The Company determined that an aggregate of $25.0 million, orapproximately $0.09347 per $1.00 of allowed and “deemed allowed” Class 4claims, was available at the time of the initial distribution to allowed Class4 claim holders.  Thus, more shares ofNew Preferred were issued than would have been had the claims resolutionprocess advanced more quickly and had more cash been available from the NovaHut project and/or other sources.  Dueto the proportion of remaining unresolved Class 4 claims in relation to thetotal of all resolved and unresolved claims, approximately $12.3 million of the$25.0 million in available cash was reserved and classified as Restricted Cashon April 17, 2001.

 

From time to time in thefuture, as remaining unresolved claims are resolved, excess cash from the“reserve” fund (including cash added to “reserve” fund in payment of pro formadividends on retained shares of New Preferred) must be used to redeemoutstanding shares of New Preferred.

 

3.             Earnings Per Share

 

Basicearnings per share (EPS) is computed by dividing net income (loss) by theweighted average number of common shares outstanding for the period.  The weighted average shares outstanding forthe period ended June 30, 2003 retroactively adjusts for the conversion of theOld Common to New Common effective with the adoption of fresh-startreporting.  As additional distributionsof New Common are made to holders of newly allowed Class 4 claims, theconversion ratio of 96 shares to one share may be adjusted to reflect the finaltotal number of shares of 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.

 

In2003, the effect of preferred dividends of $0.7 million and $1.5 million hasbeen included in continuing operations in the calculation of basic and dilutedearnings per share for the three and six months ended June 30, 2003,respectively.  In 2002, the effect ofpreferred dividends of $1.1 million and $2.2 million has been included incontinuing operations in the calculation of basic and diluted earnings pershare for the three and six months ended June 30, 2002, respectively.

 

4.             Summarized Financial Information ofUnconsolidated Affiliate

 

Kaiser Group owns 50% of Kaiser-Hill Company LLC.  Summarized, unaudited financial informationof Kaiser-Hill is as follows for the three months ended June 30, 2003 and 2002(in thousands):

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
|                    |   |     |   |     |   |
| Current assets          |   | 111,368  |   | 168,952  |   |
| Non-current assets      |   | 99,538   |   | 17,419   |   |
| Current liabilities     |   | 115,941  |   | 149,802  |   |
| Non-current liabilities |   | 28,644   |   | 12,800   |   |

 
|                       |   | **Three Months Ended** |    | **Six Months Ended** |   |
|----------------------------|--------|------------------------|---------|----------------------|--------|
|                       |   | **June 30, 2003**      |    | **June 30, 2002**    |   | **June 30, 2003** |   | **June 30, 2002** |   |
|                       |   |                   |    |                 |   |   |   |   |   |
| Gross revenue              |   | $                      | 175,918 |                 | $      | 165,909 |   | $ | 351,773 |   | $ | 308,439 |   |
| Subcontracts and materials |   | 114,196                |    | 108,545              |   | 226,398 |   | 201,218 |   |
| Service revenue            |   | 61,722                 |    | 57,364               |   | 125,375 |   | 107,221 |   |
| Operating expenses         |   | (51,458                | )       | (48,884              | )      | (104,618 | ) | (89,732 | ) |
| Other income               |   | 31                     |    | 47                   |   | 30 |   | 87 |   |
| Net income                 |   | $                      | 10,295  |                 | $      | 8,527 |   | $ | 20,787 |   | $ | 17,576 |   |

 

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5.             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 $41.7 million and $55.9 million, respectively, as ofJune 30, 2003 and December 31, 2002 (net of treasury stock of $4.7 million and$6.6 million, respectively).  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 shareand a liquidation preference of $55 per share. The New Preferred ranks ahead ofKaiser Holdings’ New Common.

 

Pursuantto approval by the Company’s Board of Directors, in 2003 and 2002 the Companypurchased 3,048 and 119,587 shares of outstanding New Preferred at pricesranging from $25.62 to $39.05 per share. The purchase of the treasury shares was recorded as a reduction topreferred stock equal to the $55 per share liquidation preference with theremaining difference between cost and the liquidation preference recorded as anincrease 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 on the New Preferred are payable on a quarterly basis, as of April30, July 31, October 31 and January 31, either in cash at an annual rate of 7%of the liquidation preference per share or in additional shares of NewPreferred at an annual rate of 12% of the per share liquidation preference.Dividends accrue on the New Preferred commencing with the initial distributiondate, April 17, 2001. Dividends will not be paid to any affiliate of KaiserHoldings on account of that affiliate’s ownership of shares of preferred stock.If Kaiser Holdings fails to pay a quarterly dividend when due, holders of NewPreferred will have the right to elect an additional director for each dividendpayment missed, up to a maximum of two additional directors, but only untilsuch dividend is paid or provided for in full.   The dividend due to holders of record on July 31, 2003,totaling approximately $0.7 million, was paid on August 7, 2003.  At June 30, 2003, in addition to the $2.8million of cash reserves for unresolved claims, the Company had $2.1 million incash reserved for the payment of accrued dividends on any future issuances ofNew Preferred issued as a result of remaining bankruptcy claim resolutions (anyNew Preferred issued as a result of claim resolutions also carries the right todividends retroactively 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. In addition, any net proceeds in excessof $3 million in a calendar year received by the Company or any of its director indirect subsidiaries from the disposition of assets to an unaffiliatedparty outside of the ordinary course of business must be used to redeem NewPreferred at a redemption price of 100% of the liquidation preference per shareplus all accrued and unpaid dividends. Furthermore, to the extent that certaincategories of cash are received from Nova Hut, it must be used to redeem NewPreferred at a redemption price of 100% of the liquidation preference per shareplus 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 preferred stock 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

 

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modified without theconsent of holders of at least two-thirds of the New Preferred. If the Companyor any of its affiliates holds any New Preferred, they will not be entitled tovote that New Preferred.

 

ThePlan provides that Major Stockholders (defined as holders of 10% or more of theoutstanding shares of New Preferred or New Common, or a person who is an“affiliate” of Kaiser Holdings as defined under the Federal securities laws)have certain registration rights. In general, a Major Stockholder may requestKaiser Holdings to register under the Securities Act of 1933 for the sale ofall, but not less than all, of the New Preferred and/or New Common owned by theMajor Stockholder. Upon request for such a registration from a MajorStockholder, Kaiser Holdings is required to give notice to other MajorStockholders and use its best efforts to cause a registration statement tobecome effective as expeditiously as possible and maintain such registrationstatement current for a period of 12 months. Major Stockholders are notentitled to request registration until one year after the effective date of thePlan, and Kaiser Holdings is not obligated to file a registration statement inresponse to a request from a Major Stockholder until such time as KaiserHoldings is eligible to use Form S-3 under the Securities Act of 1933 for suchan offering. Kaiser Holdings is not required to effect more than oneregistration for Major Stockholders during any twelve-month period. Theseregistration rights expire on December 31, 2007. The Plan also contemplatesthat Major Stockholders will have “piggyback” registration rights in connectionwith a proposed underwritten public offering of Kaiser Holdings New Common orNew Preferred solely for cash and for its own account.

 

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 KGP receives net after-taxproceeds from any cash distributions from Kaiser-Hill that, on a quarterlybasis, exceed 2.8 times the amount of cash required to pay all past accrued butunpaid cash dividends on the New Preferred, plus the next scheduled quarterlycash 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 preferred stock that is the subject of the KGP put rights,plus all accrued and unpaid dividends on the preferred stock. KGP will purchaseshares of preferred stock on a pro rata basis based upon the number of sharesof preferred stock as to which puts have been properly exercised, but only upto the amount of the available net after-tax proceeds from triggering events.KGP will not purchase any fractional shares. KGP put rights will not becomeexercisable more frequently than every 12 months unless the cumulative amountof available net after-tax proceeds from triggering events is at least $3million.  KGP put rights aretransferable except that puts shall cease to be transferable if KGP determinesthat any further transfer would require registration of the puts as a class ofsecurities under the Securities Exchange Act of 1934. Kaiser Holdings does notpresently plan to arrange for trading of the KGP put rights on the NASD electronicbulletin board or otherwise.

 

The Companyreceived distributions from Kaiser-Hill during the fourth quarter of 2002 in anamount that resulted in a trigger of the put rights – effectively requiring anoffer by the Company to redeem certain New Preferred.  In addition, the Company had certain restricted cash balancesavailable, which pursuant to the terms of its Plan of Reorganization, arerequired to be used to redeem outstanding New Preferred.  Rather than using the mechanism of the putrights to satisfy the Company’s obligations to holders of the put rights aftera trigger, the Company observed the requirement in the Plan of Reorganizationto use certain restricted cash balances for preferred redemptions and redeemeda total of $15.5 million of New Preferred, or 307,128 shares, as of January 31,2003.  The Company believes this was amore cost-efficient manner of satisfying the obligations associated with theKGP put rights and plans to continue to use this redemption process to satisfysuch obligations in the future.

 

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 believescontingent liabilities may exist in the following areas:

 

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Nova Hut

 

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 Nova Hut project. After construction of the steel mini-mill was complete in 2000, thecontract with Nova Hut provided for a maximum of three possible performancetests. The first performance test was completed on November 13, 2000. KaiserNetherlands believes that the first performance test was successful and thatNova Hut should have agreed to final acceptance of the mini-mill and made finalpayment of amounts accrued by Kaiser Netherlands throughout the project.  Instead, Nova Hut asserted that the firsttest was not successful.  To date, thisdispute has not been resolved, and the Company has resorted to legalproceedings to enforce its rights and those of its subsidiary.  The primary legal venue at this time is theDelaware bankruptcy proceedings for Old Kaiser, where Old Kaiser has assertedclaims against Nova Hut and the International Finance Corporation (IFC), whilerejecting substantial claims involving contract breach from Nova Hut and theIFC.  The claims filed by Nova Hut andthe IFC in the Delaware bankruptcy court have been withdrawn.  The Company’s claims remain active.  The cost of the litigation of this dispute,as well as the cost of maintaining an ongoing presence in Ostrava, CzechRepublic, has had, and may continue to have, a negative impact on the cash flowof Kaiser Netherlands and the Company.

 

InFebruary 2002, representatives of the Company, Nova Hut and the IFC met underthe auspices of a Delaware bankruptcy court-sponsored mediation.  The details of these discussions are subjectto a confidentiality agreement.  At thedate of this Report, the Company continues to pursue claims against Nova Hutand the IFC through the Delaware bankruptcy court proceedings and thecourt-sponsored mediation.  However,there are still no assurances that settlement will ultimately be achieved inthis matter.

 

Thecomponents of the “Net Assets of Discontinued Operations” consist entirely ofthe carrying value of the net assets of the Nova Hut project.  Based on the Company’s continued concernover Nova Hut’s financial difficulties, the uncertainties of a possiblesettlement arising out of the bankruptcy court-sponsored mediation and theuncertainties of a possible settlement or ruling in the context of a possiblefuture international arbitration proceeding, in the fourth quarter of 2001, theCompany established additional reserves at December 31, 2001 to reduce the netcarrying value of the remaining Nova Hut project to $6.0 million.

 

Kaiser Hill

 

Under Kaiser-Hill’s contract with the DOE, Kaiser-Hill is notresponsible for, and the DOE pays all costs associated with, any liability,including, without limitation, any claims involving strict or absoluteliability and any civil fine or penalty, expense, or remediation cost, butlimited to those of a civil nature, which may be incurred by, imposed on, orasserted against Kaiser-Hill arising out of any act or failure to act,condition, or exposure which occurred before Kaiser-Hill assumed responsibilityon July 1, 1995 (pre-existing conditions). To the extent the acts or omissionsof Kaiser-Hill constitute willful misconduct, lack of good faith, or failure toexercise prudent business judgment on the part of Kaiser-Hill’s managerialpersonnel and cause or add to any liability, expense, or remediation costresulting from pre-existing conditions, Kaiser-Hill is responsible, but onlyfor the incremental liability, expense, or remediation caused by Kaiser-Hill.

 

The Kaiser-Hill contract further provides thatKaiser-Hill will be reimbursed for the reasonable cost of bonds and insuranceallocable to the Rocky Flats contract and for liabilities and expensesincidental to these liabilities, including litigation costs, to third partiesnot compensated by insurance or otherwise. There is an exception to thisreimbursement provision applicable to liabilities caused by the willfulmisconduct, lack of good faith or failure to exercise prudent business judgmentby Kaiser-Hill’s managerial personnel.

 

The clean-up and closure of the DOE’s Rocky Flats siteinvolve substantial performance risks. Among other things, Kaiser-Hill’s activities at the Rocky Flats siteinvolve the clean-up, packaging and transportation of nuclear waste, and thedemolition and destruction of facilities where nuclear weapons components werepreviously produced.  Some of theactivities have not been previously performed elsewhere, and therefore requirethe 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.  The appropriate sites for storage of certainof those nuclear wastes have not yet been identified.  In addition, objections have arisen from time to time with regardto the transportation and storage of nuclear waste at certain sites previouslyscheduled by the DOE to receive waste from Rocky Flats, including the DOE’sSavannah River site in South Carolina. Deliveries of waste to the Savannah River site were delayed as a resultof objections interposed by the

 

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Governor of South Carolina.  Deliveries to the Savannah River site have begun, but it ispossible that similar objections will be raised with respect to thetransportation and storage of waste from Rocky Flats at other DOE sites.  Although the DOE contract contemplates thatthe DOE is responsible for providing transportation and storage sites fornuclear waste from Rocky Flats, an inability to ship plutonium and othernuclear waste to DOE sites would pose a substantial risk to the timely closureof the 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 between Kaiser-Hill and the DOE iscost-reimburseable in nature, the costs invoiced by Kaiser-Hill forreimbursement by the DOE are subject to audit by the U.S. government.  Also since the inception of Kaiser-Hill, theCompany invoiced certain management oversight costs to Kaiser-Hill.  Government audits at Kaiser-Hill are inprocess for the years of the predecessor contract, which ran from 1995 untilJanuary 2000.  Although Kaiser-Hill andthe Company have historically provided for their estimates of disallowed costson cost-reimburseable contracts, uncertainties exist with regard to whethergovernment audits will result in any disallowed costs needing to be refunded tothe government customer.  The continuedadequacy of provisions for reserves with regard to unallowable costs isreviewed regularly.

 

With respect to arevolving credit facility obtained by Kaiser-Hill in November 1999, bothparents of Kaiser-Hill granted a first lien security interest to theKaiser-Hill lenders in all of the ownership and equity interest of Kaiser-Hilland have agreed to cure any events of default by Kaiser-Hill on thefacility.  As of June 30, 2003 and December 31, 2002, Kaiser-Hill had no outstandingbalances on its revolving credit facility.

 

7.             Recent Accounting Pronouncements

 

InDecember 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.148, “Accounting for Stock-Based Compensation-Transition and Disclosure, anamendment of FASB Statement No. 123.” SFAS No. 148 provides alternative methods of transition for a voluntarychange to the fair market value based method of accounting for stock-basedcompensation.  We do not presentlyexpect to make such a voluntary change. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  These amended disclosure requirements areapplicable for financial statements issued for interim periods beginning afterDecember 15, 2002.  The Company hasrecently adopted the 2002 Equity Compensation Plan, however, it does notcurrently have any outstanding stock options requiring disclosures under SFASNo. 148.

 

InNovember 2002, FASB Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107and Rescission of FASB Interpretation No. 34,” (“FIN 45”) was issued.  FIN 45 clarifies the requirements of SFASNo. 5, “Accounting for Contingencies,” relating to guarantors’ accounting for,and disclosure of, the issuance of certain types of guarantees.  The disclosure provisions of FIN 45 areapplicable to interim or annual periods that end after December 15, 2002, anddid not have an impact on the June 30, 2003 financial statements.  The provisions for initial recognition and measurementunder FIN 45 are effective on a prospective basis for guarantees that areissued or modified after December 31, 2002. The initial recognition and measurement provisions under FIN 45 did nothave any impact on our financial statements.

 

OnMay 31, 2003, FASB issued FASB Statement No. 150 (FAS 150), “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity”.  FAS 150 improves theaccounting for certain financial instruments that, under previous guidance, issuerscould account for as equity and requires that those instruments be classifiedas liabilities (or assets in certain circumstances) in statements of financialposition.  FAS 150 also requiresdisclosures about alternative ways of settling the instruments and the capitalstructure of entities – all of whose shares are mandatorily redeemable.  FAS 150 is generally effective for allfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the fist interim period beginningafter June 15, 2003.  The adoption ofFAS 150 will result in the classification of the Company’s preferred stock as aliability effective July 1, 2003.

 

**ITEM 2.****  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**General Overview**

 

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 remaining subsidiaries.  On June 9, 2000, Kaiser Group International,Inc. and 38 of its domestic subsidiaries voluntarily filed

 

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forprotection 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 that was effective on December 18, 2000.  In this document, we frequently use the terms“we” and “Kaiser” to refer to Kaiser Group Holdings, Inc., Kaiser GroupInternational, Inc. and other subsidiaries we own.

 

Underthe Plan of Reorganization, Kaiser Group International, Inc. sold some of itsbusinesses and made payments of cash, stock or notes to various classes ofcreditors.  Currently, we are trying toresolve some outstanding creditor claims through an alternative disputeresolution process.  We have only alimited number of activities, assets and liabilities, primarily consisting ofthe following:

 

•                  We own Kaiser-Hill Company, LLCequally with CH2M Hill Companies Ltd. Kaiser-Hill is our major source of income.  Kaiser-Hill currently serves as the general contractor at theU.S. Department of Energy’s Rocky Flats Environmental Technology Site nearDenver, Colorado.

 

•                  We have a substantial claim, pending resolution,against Nova Hut a.s., the owner of a steel mini-mill for Nova Hut in the CzechRepublic.  The engineering andconstruction of the mini-mill was completed in 2000 by a subsidiary of KaiserGroup 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 of ICF Consulting due June25, 2006 in the principal amount of $6.4 million as a result of thattransaction.

 

•                  We have a wholly-owned captive insurance companythat is no longer issuing new policies and is solely involved in resolvingremaining claims made against previously issued policies.

 

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

 

**Kaiser-Hill**

 

Our major remaining asset and source of income is our 50% ownershipinterest in Kaiser-Hill Company, LLC. Kaiser-Hill was formed solely for the performance of the current andformer Rocky Flats contracts.  CH2M Hill designates three of the fivemembers of Kaiser-Hill’s Board of Managers and we designate two members.

 

Kaiser-Hillcurrently serves as the general contractor at the U.S. Department of Energy’sRocky Flats Environmental Technology Site near Denver, Colorado. Kaiser-Hillhas performed since 1995 at this site, a former Department of Energy nuclearweapons production facility.  Kaiser-Hillis working 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 6,000acre site to the public.  The level ofsuccess experienced by Kaiser-Hill in achieving timely closure of the RockyFlats site, and the cost of achieving such closure, are the primarydeterminants of our long-term financial performance.

 

**RESULTS OF RETAINED OPERATIONS FORTHE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002**

 

*Equity Income In Earnings of Affiliate*

 

Our major remaining source of incomeis a 50% ownership in Kaiser-Hill.  Thefinancial information contained herein for Kaiser-Hill is reflected on theequity 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 the actual cost of completing the site closureproject and the actual date of physical completion, both as compared tocontracted targets.   The potential feeto be earned pursuant to the Closure Contract ranges from $151.0 million to$463.0 million based on Kaiser-Hill’s costs to complete the site closure beingwithin the range of targeted completion cost of $3.6 billion and $4.8 billion,and completion at various dates between 2005 - 2007. Physical completion for atotal cost in excess of the target cost would result in a reduction to thepotential fee because Kaiser-Hill will share 30% in all costs incurred inexcess of the target.  Kaiser-Hill isalso subject to a $20.0 million maximum penalty if the December 31, 2007closure date is not met.

 

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Kaiser-Hill’sfavorable performance on the contract since its inception in February of 2000has resulted in a trend of cautious but continuously improving estimates ofcompletion dates, cost estimates and potential fee earning opportunities.   As of June 30, 2003, Kaiser-Hill’s costestimate to complete the project is $3.75 billion, with an estimated completiondate of December 2006, resulting in a potential fee of $424 million.  Kaiser-Hill has goals of further improvingits ultimate project performance; however, goals are not free of risk, and theability to accurately predict the ultimate results are highly uncertain.  See “Risk Factors Relating to KaiserHoldings and Forward-Looking Statements” below.

 

For the three and sixmonths ended June 30, 2003, the Company recorded its equity in Kaiser-Hill’sincome, recognizing $4.3 million and $8.6 million, respectively, (50% ofKaiser-Hill’s $10.3 million and $20.8 million income, respectively, lessamortization of the intangible asset attributed to Kaiser-Hill of $0.9 millionand $1.8 million, respectively), an increase of $0.9 million and $1.6 million,respectively, over the amount recorded for the three and six months ended June30, 2002.  The increases for the threeand six months ended June 30, 2003 are due to the increasing estimates of theperformance fee to be earned over the duration of Kaiser-Hill’s contract.

 

*Closure Contract Billing Provisions*

 

****Throughout the period of theClosure Contract (beginning in February 2000), Kaiser-Hill has invoiced DOE forthe performance fee based on the target levels within the contract, resultingin fee invoices of approximately $6.1 million per quarter. ****In December 2002,Kaiser-Hill’s continued favorable progress on the project resulted in an awardby the DOE of an additional $10.0 million in fee. Adjusted for the effects ofthe 50% retainage holdback, Kaiser-Hill expects that its performance feeinvoices to DOE will continue to be approximately $7.1 million per quarter.

 

Fee payments made by DOE to Kaiser-Hill, less certain non-reimbursablecosts, will continue to be distributed to the joint venture owners uponreceipt.  Kaiser-Hill has historicallyincurred expenses that are not reimbursable by the DOE pursuant to the Federalregulations.  Accordingly, suchexpenses, which Kaiser-Hill estimates could approximate up to 15% - 20% of thetotal award fee, are deducted from the total fee earned and collected byKaiser-Hill prior to any distributions of net fees to either Kaiser Group orCH2M Hill Companies Ltd.  Since January1, 2003, Kaiser-Hill has been distributing approximately $3.0 million perquarter to each of its two owners based on its fee invoicing level withDOE.  From the commencement of the new Closure Contract through June 30, 2003,Kaiser-Hill has received an aggregate of $82.1 million in fee from the DOE.

 

In the future, asKaiser-Hill continues to accrue performance fee 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-Hillwill classify the difference between recorded performance fee and the collectedfee 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 whether any of the retainageholdback will be released prior to contract completion.

 

For the three- andsix-month periods ended June 30, 2003 and 2002, the equity income in earningsof affiliate is net of $0.9 million and $1.8 million, respectively, ofamortization of the excess of our carrying value of our investment inKaiser-Hill over our ownership percentage of the underlying Kaiser-Hill equity.  We increased the carrying value of thisinvestment by $21.1 million as part of our adoption of Fresh-Start reporting asof December 31, 2000 and will continue to amortize that difference over theestimated life of the Kaiser-Hill investment of approximately 6 years.

 

*Administrative Expenses*

 

Administrativeexpenses for the three and six months ended June 30, 2003 were $1.4 million and$2.9 million, respectively, a decrease of $1.2 million and $2.4 million,respectively, compared to the three and six months ended June 30, 2002.  The decrease in administrative expense isdue primarily to reductions in legal and professional fees.  These decreases result from our progress inwinding down the discontinued operations of Kaiser Group International.  Weanticipate further declines in general and administrative spending as remaininglitigation and bankruptcy claims are resolved.

 

*Gain on Saleof Stock*

 

Wedisposed of our investment in the common stock of Prudential Insurance Companyin February 2002 and recorded a gain of $106,000 at the time of the sale.

 

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*InterestIncome*

 

Interest income for the three and six monthsended June 30, 2003 was $0.2 million and $0.5 million, respectively, anincrease of $0.1 million and $0.2 million, respectively, compared with the sixmonths ended June 30, 2002.  Theincrease is primarily due to the accrual of interest income on the ICFConsulting notes.  At June 30, 2002, wewere not accruing interest income on the ICF Consulting notes due touncertainties over the collectibility of accrued interest.  As of September 30, 2002, we restructuredthe ICF Consulting notes and began accruing interest on the new notes.

 

*Income TaxExpense*

 

Werecorded an income tax expense of $1.2 million and $2.4 million, respectively,on operating income from continuing operations of $1.9 million and $3.8million, respectively, during the three and six months ended June 30,2003.  Our effective income tax rate of39% is reflective of the non-deductibility of certain expenditures for federalincome tax purposes.  For the three andsix months ended June 30, 2002, we recorded an income tax expense of $0.4million and $0.9 million, respectively, on operating income from continuing operations of $0.9 million and $2.1million, respectively.

 

*Loss fromDiscontinued Operations*

 

Theloss from discontinued operations for the three and six months ended June 30,2002 consists of the activities associated with the Nova Hut project.

 

**LIQUIDITY ANDCAPITAL RESOURCES**

 

*Operating Activities*

 

Weused $2.9 million and $4.7 million of cash during the six months ended June 30,2003 and June 30, 2002, respectively, primarily for the extinguishment ofobligations arising out of our bankruptcy, including professional fees, retireebenefits, income taxes and various other wind-down expenditures.

 

*Investing Activities*

 

We received $6.0 million in distributions fromKaiser-Hill during the six month period ended June 30, 2003 compared to $6.5million in the same period ended June 30, 2002.

 

Duringthe first quarter of 2002, we liquidated our holdings of shares of stock ofPrudential Insurance Company and received approximately $6.0 million.  We had acquired the Prudential stock throughthe demutualization transaction effected by the insurance company during thefourth quarter of 2001.

 

*Financing Activities*

 

Duringthe six months ended June 30, 2003, we redeemed $15.5 million liquidationpreference of our preferred stock, net of $1.4 million liquidation preferenceof shares held as treasury stock. Pursuant to the terms of the Plan of Reorganization, the Company used$8.9 million in excess restricted cash in addition to $5.2 million ofunrestricted cash to facilitate this redemption.

 

Duringthe six months ended June 30, 2003 and 2002, we paid $1.7 million and $2.2million, respectively, in dividends on our preferred stock.   During the six months ended June 30, 2002,we acquired 3,000 shares of preferred stock for $0.1 million.  The reduction in dividend expense is due tothe $15.5 million redemption of the outstanding preferred stock in January2003, discussed above.

 

*Liquidity and Capital Resource Outlook*

 

We currently have no debtas a result of the effectiveness of the Plan of Reorganization. We havefinanced the initial bankruptcy distribution requirements and follow-on workingcapital needs in part through the use of the available cash and distributionsfrom Kaiser-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

 

15

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proceedings, managementbelieves we have sufficient liquidity to cover the required cash distributionsresulting from the resolution of claims in the bankruptcy process, our futureoperating needs and income tax requirements, as well as the dividend requirementsapplicable to the our preferred stock. Furthermore, as allowed Class 4 claims are resolved, we will continue toreview the timing of additional partial preferred stock redemptions.

 

Wehave obligations to pay dividends on outstanding preferred stock at June 30,2003.  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 (irrespectiveof this disclosure requirement, we are not representing intentions with regardto the timing of preferred stock redemptions). The effect these obligations are expected to have on our liquidity andcash flow in future periods are as follows:

 
|                      |   | **Total** |   | **Less Than One  Year** |   | **One to Three  Years** |   | **After Three  Years** |   |
|---------------------------|--------|-----------|--------|-------------------------|--------|-------------------------|--------|------------------------|--------|
| Preferred Stock dividends |   | $         | 13,113 |                    | $      | 2,914                   |   | $                      | 5,828  |   | $ | 4,371 |   |
|                           |        |           |        |                         |        |                         |        |                        |        |  |  |  |  |

 

*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.

 

*Recent Accounting Pronouncements*

 

InDecember 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.148, “Accounting for Stock-Based Compensation-Transition and Disclosure, anamendment of FASB Statement No. 123.” SFAS No. 148 provides alternative methods of transition for a voluntarychange to the fair market value based method of accounting for stock-basedcompensation.  We do not presentlyexpect to make such a voluntary change. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No.123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  These amended disclosure requirements areapplicable for financial statements issued for interim periods beginning afterDecember 15, 2002.  The Company hasrecently adopted the 2002 Equity Compensation Plan, however, it does notcurrently have any outstanding stock options requiring disclosures under SFASNo. 148.

 

InNovember 2002, FASB Interpretation No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107and Rescission of FASB Interpretation No. 34,” (“FIN 45”) was issued.  FIN 45 clarifies the requirements of SFASNo. 5, “Accounting for Contingencies,” relating to guarantors’ accounting for,and disclosure of, the issuance of certain types of guarantees.  The disclosure provisions of FIN 45 areapplicable to interim or annual periods that end after December 15, 2002, anddid not have an impact on the June 30, 2003 financial statements.  The provisions for initial recognition and measurementunder FIN 45 are effective on a prospective basis for guarantees that areissued or modified after December 31, 2002. The initial recognition and measurement provisions under FIN 45 did nothave any impact on our financial statements.

 

OnMay 31, 2003, FASB issued FASB Statement No. 150 (FAS 150), “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity”.  FAS 150 improves theaccounting for certain financial instruments that, under previous guidance, issuerscould account for as equity and requires that those instruments be classifiedas liabilities (or assets in certain circumstances) in statements of financialposition.  FAS 150 also requiresdisclosures about alternative ways of settling the instruments and the capitalstructure of entities – all of whose shares are mandatorily redeemable.  FAS 150 is generally effective for allfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the fist interim period beginningafter June 15, 2003.  The adoption ofFAS 150 will result in the classification of the Company’s preferred stock as aliability effective July 1, 2003.

 

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**RISKFACTORS RELATING TO KAISER HOLDINGS AND**

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form 10-Q contains, and our periodic filingswith the Securities and Exchange Commission and written or oral statements made by our officers and directors to press,potential investors, securities analysts and others, may contain,forward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements are nothistorical facts, but rather are predictions and generally can be identified byuse of statements that include phrases such as “believe,” “expect,”“anticipate,” “estimate,” “intend,” “plan,” “foresee” or other words or phrasesof similar import.  Similarly,statements that describe or containinformation related to matters such as our intent, belief, or expectation withrespect to financial performance, claims resolution, cash availability, stockredemption plans, contract awards and performance, potential acquisitions andjoint ventures, and cost-cutting measures are forward-looking statements. Theseforward-looking statements often reflect a number of assumptions and involveknown and unknown risks, uncertainties and other factors that could cause ouractual results to differ materially from those currently anticipated in theseforward-looking statements.  In light ofthese risks and uncertainties, including those described below, theforward-looking events might or might not occur.

 

**Ourlong-term future profitability is significantly tied to Kaiser-Hill, which issubject to uncertainties that may adversely affect our operating results.**

 

*The fee incomewe will receive from Kaiser-Hill is dependent upon the ability of Kaiser-Hillto close the Rocky Flats site at a predetermined targeted cost of between $3.6billion and $4.8 billion and closing date of not later than March 31, 2007,both of which are uncertain.*

 

Our long-term future profitability will be dependent, to a significantextent, on the performance of Kaiser-Hill under its contract with theDepartment of Energy.  Kaiser-Hillserves as the general contractor at the Rocky Flats Environmental Technologysite near Denver, Colorado, a former nuclear weapons production facility.Kaiser-Hill’s contract with the Department of Energy includes a performance feebased upon a combination of the actual costs incurred to complete the siteclosure and the actual date of completion of the closure.  If Kaiser-Hill fails to complete the closurewithin the target cost for the project of between $3.6 billion and $4.8billion, Kaiser-Hill’s fee will be reduced to a level significantly less thanthe fee estimate currently being used to recognize income on the project andfurther reduced by 30% of the costs incurred after the target date of March 31,2007.  Kaiser-Hill is also subject to a$20.0 million maximum penalty if the December 31, 2007 closure date is not met.

 

Kaiser-Hill has historically incurred expenses that are notreimbursable by the Department of Energy pursuant to the federalregulations.  Accordingly such expenses,which Kaiser-Hill estimates could approximate up to 15% - 20% of the totalaward fee, will be deducted from the total fee prior to any distributions ofnet fees to either us or CH2M Hill Companies, Ltd. 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 aresubstantial performance risks associated with Kaiser-Hill’s work at the RockyFlats site.  The performance risks mayimpact the timing and cost of closing the site, which in turn could impact ourfee 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. The appropriate sites for storage of certain of those nuclear wasteshave not yet been identified.  Inaddition, third-party objections have arisen from time to time with regard tothe transportation to, and storage of nuclear waste at, certain sitespreviously designated by the Department of Energy to receive waste from RockyFlats, including the Department of Energy’s Savannah River site in South Carolina.  Deliveries of waste to the Savannah Riversite were delayed as a result of objections interposed by the Governor of SouthCarolina.  Deliveries to the SavannahRiver site have begun, but it is possible that similar objections will beraised with respect to the transportation to, and storage of waste from RockyFlats at, other Department of Energy sites. Although the Department

 

17

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of Energy contract contemplates that theDepartment of Energy is responsible for providing transportation and storagesites for nuclear waste from Rocky Flats, an inability to ship plutonium andother nuclear waste to Department of Energy sites would pose a substantial riskto the timely closure of the Rocky Flats site, and could interfere withKaiser-Hill’s ability to earn the fees to which Kaiser-Hill believes it shouldbe entitled.  This loss of fee incomecould adversely affect our operating results, which could in turn resultin a decrease in the value of our common and preferred stock.

 

*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-Hillis responsible for, and the Department of Energy will not pay for costsassociated with, liabilities caused by the willful misconduct or lack of goodfaith of Kaiser-Hill’s managerial personnel or the failure to exercise prudentbusiness judgment by Kaiser-Hill’s managerial personnel. If Kaiser-Hill werefound liable for any of these reasons, the associated costs could besubstantial, which could have an adverse effect on our operating results. Adecrease in our operating results could cause a decrease in the value of ourcommon and preferred stock.

 

**We facesignificant contingencies, which may adversely impact our ability to meet ourobligations on our preferred stock, to fund our continuing operations and toundertake new operations.**

 

*Our cash flow ispartially dependent on the wind-down of the Nova Hut project and theprobability of receiving our payment from Nova Hut is currently uncertain.*

 

Our cash flow is partially dependent on theresolution of disputes relating to Kaiser Netherlands’ performance under itsfixed-price contract for turnkey engineering and construction services relatingto the Nova Hut project and on the ability of Nova Hut, which is in financialdifficulty, to pay for such services.

 

*We do not havea business plan beyond Kaiser-Hill and the Nova Hut project, and we may or maynot undertake new activities.*

 

Our long-term future profitability will bedependent, to a significant extent, on our ability to develop a business planfor ongoing operations. Unless and until our Board of Directors develops such abusiness plan, we are unable to determine either the amount of risk that futureoperations will involve or whether we have the ability to realize long-termprofitability. It is possible that our ongoing business plan will be limited toresolving issues related to the Nova Hut project and participating in theactivities of Kaiser-Hill.  However, ourBoard of Directors is considering whether we should attempt to develop a newrevenue base.  Such efforts could, forexample, attempt to take advantage of our successful history of performing inthe government services market, both independently and throughKaiser-Hill.  Our efforts to develop arevenue base separate from Kaiser-Hill may involve start-up activities withrisks peculiar to activities of this type, which may adversely impact our cashflow and operating results. A decrease in our cash flows and operatingresults could result in a decrease in the value of our common and preferredstock.

 

*We may beunable to obtain performance guarantees, which may limit our ability toundertake new activities.*

 

Given the reorganization history of Kaiser GroupHoldings, Inc., we may not be able to obtain satisfactory contract performanceguaranty mechanisms, such as performance bonds and letters of credit, at all oron satisfactory terms, to the extent such mechanisms are needed for newprojects.  These factors could limit thenature of the business activities in which we could engage should we decide toattempt to develop a new revenue base apart from Kaiser-Hill, which mayadversely impact our cash flow and operating results and result in adecrease in the value of our common and preferred stock.

 

*We may beunable to generate funds to meet our obligations and we may be unable to accessadditional 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 togenerate sufficient funds to meet our working capital needs for the foreseeablefuture, our ability to gain access to additional capital, if needed, is notcertain. Due to reorganization history of Kaiser Group Holdings, Inc. andcurrent financial markets, it is difficult to predict whether additionalcapital would be available to us in the event that we were unable to generalfunds to meet our obligations.  Ourinability to gain access to additional capital may also limit our ability toundertake new activities.  Ultimately,our inability to meet our existing obligations or to undertake new activitiescould 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.

 

18

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*In the event of a change of control,we may not have the financial resources to redeem preferred stock.*

 

Our preferred stock is redeemable at the option of the holder upon achange of control as defined in the terms of the preferred stock.  We are not presently aware of any eventsthat would cause a change of control. However, based on a Report on Form 4 dated February 12, 2003, which wasfiled with the Securities and Exchange Commission by Tennenbaum & Co., LLCon February 13, 2003, we believe that Tennenbaum & Co., LLC and Michael E.Tennenbaum together own approximately 47.2% of our common stock.  The terms of our preferred stock providethat a change of control occurs when, among other things, a person or “group”(within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934)directly or indirectly acquires “beneficial ownership” (as defined in 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 toadditional capital from 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 INFORMATION ABOUT 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 inthe average annual prime rate would result in a decrease in the carrying valueof the plan obligation but would not change the actual cost of the plan.

 

**ITEM 4.****  CONTROLS AND PROCEDURES**

 

As of the end of theperiod covered by this report, our Chief Executive Officer and Chief FinancialOfficer evaluated, with the participation of our management, the effectivenessof our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and proceduresare effective to ensure that material information is recorded, processed,summarized and reported by our management on a timely basis in order to complywith our disclosure obligations under the Securities Exchange Act of 1934 andthe SEC rules thereunder.  There were nochanges in our internal controls over financial reporting that occurred duringour most recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II - OTHERINFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

Aspreviously reported in the Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

**ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

(a)  None

(b)  None

(c)  None

(d)  Not applicable

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

 

(a)  None

(b)  None

 

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

 

Atthe May 7, 2003 Annual Meeting of Shareholders, the two matters up for votewere the election of directors and the approval of the 2002 Equity CompensationPlan.

 

1.             Election for Directors

 

Thefollowing individuals were elected to a one-year term expiring at the 2004Annual Meeting of Shareholders, and the total number of votes cast for andwithheld for each were as follows:

 
|                   |   | **For**   |   | **Withheld** |   | **Total** |   |
|------------------------|--------|-----------|--------|--------------|--------|-----------|--------|
| Jon B. Bennett         |   | 1,290,103 |   | 2,858        |   | 1,292,961 |   |
| John T. Grigsby, Jr.   |   | 1,288,754 |   | 4,207        |   | 1,292,961 |   |
| James J. Maiwurm       |   | 1,287,803 |   | 5,158        |   | 1,292,961 |   |
| Frank E. Williams, Jr. |   | 1,290,072 |   | 2,889        |   | 1,292,961 |   |

 

(*) “VotesWithheld” means that the shareholder marked the box on his/her proxy cardlabeled “withheld.”  This is equivalentto a “No” for all four nominees.  Thisvote total includes situations in which the shareholder wrote in the name ofthe director or directors he/she did not want to vote for.

 

2.             Approval of the 2002 Equity Compensation Plan

 
| **For**   |   | **Against** |   | **Abstain** |   | **Total** |   |
|-----------|--------|-------------|--------|-------------|--------|-----------|--------|
| 1,009,435 |   | 16,295      |   | 6,753       |   | 1,032,483 |   |

 

**ITEM 5.  OTHER INFORMATION**

 

None

 

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

** **

**(a)  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 to Current Report on Form 8-K (Registrant No. 1-12248) filed with theCommission on December 14, 2000)

 

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

 

3(a)  Certificate ofIncorporation of Kaiser Group Holdings, Inc. (Incorporated by reference toExhibit 3(i) to Current Report on Form 8-K (Registrant No. 1-12248) filed withthe Commission on December 14, 2000)

 

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

 

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

 

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

 

**Exhibit No. 10 — Material Contracts**

 

10(a) Kaiser Group International, Inc. Employee Stock Ownership Plan (asamended and restated as of January 1, 1996)  (Incorporated by reference to Exhibit No. 10(b) to Annual Reporton Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17,2000)

 

1.  Amendment No. 1 with the effective date of January 1, 1998  (Incorporated by reference to Exhibit No. 10(b)(1)to Annual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

2.  AmendmentNo. 2 with the effective date of January 1, 1996  (Incorporated by reference toExhibit No. 10(b)(2) to Annual Report on Form 10-K (Registrant No. 1-12248)filed with the Commission on April 17, 2000)

 

3.  Amendment No. 3 dated April 19, 1999  (Incorporated by reference to Exhibit No. 10(b)(3) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the Commission on April17, 2000)

 

4.  Amendment No. 4 dated June 25, 1999 (Incorporated by reference toExhibit No. 10(b)(4) to Annual Report on Form 10-K (Registrant No. 1-12248)filed with the Commission on April 17, 2000)

 

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

 

10(c) ICF Kaiser International, Inc. Retirement Plan (as amended andrestated as of March 1, 1993) (and further amended with respect to name changeonly as of June 26, 1993) (Incorporated by reference to Exhibit No. 10(d) toQuarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarterof fiscal 1994 filed with the Commission on October 15, 1993)

 

1.  AmendmentNo. 1 dated April 24, 1995 (Incorporated by reference to Exhibit No. 10(d)(1)to Annual Report on Form 10-K (Registrant No. 1- 12248) filed with theCommission on May 23, 1995)

 

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

 

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

 

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

 

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

 

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

 

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

 

8.  AmendmentNo. 8 dated June 8, 2000 (Incorporated by reference to Exhibit 10(d)(8) toQuarterly Report on Form  10-Q (Registrant No. 1-12248) for the secondquarter of fiscal 2000 filed with the Commission on September 6, 2000)

 

9.  AmendmentNo. 9 dated June 19, 2003

 

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

 

10(e)       ICF KaiserInternational, Inc. Section 401(k) Plan (as amended and restated as of March 1,1993) (and further amended with respect to name change only as of June 26,1993) (Incorporated by reference to Exhibit No. 10(f) to Quarterly Report 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 referenceto Exhibit No. 10(p)(1) to Annual Report on Form 10-K (Registrant No. 1-12248)for fiscal 1995 filed with the Commission on May 23, 1995)

 

2.  AmendmentNo. 2 dated December 15, 1995 (Incorporated by reference to Exhibit No. 10(p)(2)to Transition Report on Form 10-K (Registrant No. 1-12248) for the transitionperiod from March 1, 1995 to December 31, 1995 filed with the Commission onMarch 29, 1996)

 

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

 

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

 

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

 

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

 

7.  Amendmentdated January 1, 2001 (Incorporated by reference to Exhibit No. 10(m)(7) toAnnual Report on Form  10-K (Registrant No. 1-2248) filed with theCommission on March 30, 2001)

 

8.  AmendmentNo. 8 dated December 10, 2002

 

9.  AmendmentNo. 9 dated June 19, 2003

 

10(f) Trust Agreement with Vanguard Fiduciary Trust Company dated as of March1, 1989, for the ICF Kaiser International, Inc. Section 401(k) Plan(Incorporated by reference to Exhibit No. 28(b) to Registration Statement onForm S-8 (Registrant No.  33-51460) filed with the Commission on August31, 1992)

 

10(g)  Asset Purchase Agreementbetween The IT Group, Inc. and ICF Kaiser International, Inc. dated March 9,1999 (Incorporated by reference to Exhibit C to Registration Statement on Form8-K (Registrant No. 1- 12248) filed with the Commission on April 23, 1999)

 

10(h) Contract between Kaiser-Hill Company, LLC,a subsidiary of the Corporation, and the U.S. Department of Energy datedJanuary 24, 2000 (Incorporated by reference to Exhibit No. 10(o) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the Commission on April17, 2000)

 

10(i) Master Transaction Agreement between Tyco Group S.a.r.l. and KaiserGroup International, Inc. dated June 9, 2000 (Incorporated by referenceto Exhibit 10(p) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) forthe second quarter of fiscal 2000 filed with the Commission on September 6,2000)

 

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1.  AmendmentNo. 1 to the Master Transaction Agreement betweenTyco Group S.a.r.l. and Kaiser Group International, Inc. dated June 9, 2000 (Incorporatedby reference to Exhibit 10(p)(1) to Quarterly Report on Form 10-Q (RegistrantNo.  1-12248) for the second quarter of fiscal 2000 filed with theCommission on September 6, 2000)

 

10(j) Master Transaction Agreement between Hatch Associates, Inc. and KaiserGroup International, Inc. dated July 6, 2000 (Incorporated by referenceto Exhibit 10(q) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) forthe second quarter of fiscal 2000 filed with the Commission on September 6,2000)

 

10(k)  Assignment of MembershipInterest in Hunters Branch Leasing, LLC by and between Kaiser HoldingsUnlimited, Inc. (Assignor) and NutleyPartners, LC (Assignee), dated January 1, 2001 (Incorporated byreference to Exhibit No. 10(r) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the Commission on April 2, 2001)

 

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

 

10(l)  Kaiser Group Holdings, Inc. 2002 EquityCompensation Plan, as amended (Incorporated by reference to Exhibit 10 toRegistration Statement on Form S-8 (RegistrantNo. 33-51460) filed with the Commission on August 13, 2003)

 

10(m)  Amendedand Restated Employment Agreement with John T. Grigsby, Jr., President andChief Executive Officer, effective as of December 19, 2000 (Incorporated byreference to Exhibit No. 10(m) to Registration Statement on Form S-4(Registrant No. 333-100640) filed with the Commission on October 18, 2002)

 

**Exhibit No. 21—ConsolidatedSubsidiaries of the Registrant as of July 31, 2003**

 

**Exhibit No. 31.1 – Certification ofPrincipal Executive Officer**

Pursuant to Section 302of The Sarbanes-Oxley Act Of 2002

 

**ExhibitNo. 31.2 – Certification of Principal Financial Officer**

Pursuant to Section 302of The Sarbanes-Oxley Act Of 2002

 

**Exhibit No. 32.1 – Certification of Principal ExecutiveOfficer and Principal Financial Officer**

Pursuant18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

**(b)  Reports on Form8-K**

 

On July 17, 2003, the Company filed a CurrentReport on Form 8-K.  Pursuant to Item 5of its Report, the Company disclosedthat it had relocated its principal address from Fairfax, Virginia toBroomfield, Colorado effective as of June 1, 2003.

 

 

**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:  August 14, 2003 |                                                                |
|                   |                                                                |
|                   |                                                                |
|                   | /s/  Marijo L. Ahlgrimm                                             |   |
|                   | Marijo  L. Ahlgrimm                                                 |
|                   | Executive  Vice President and Chief Financial                       |
|                   | Officer  (Duly authorized officer and principal  financial officer) |
|                        |                                                                     |  |  |

 

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