**UNITED STATES**

**1SECURITIES AND EXCHANGECOMMISSION**

**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 March 31, 2005**

 

**Commission File No. 1-12248**

 

**KAISER GROUP HOLDINGS, INC.**

(successor issuer to Kaiser Group International, Inc.)

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **54-2014870**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **9300 Lee Highway, Fairfax, Virginia**                         | ** ** | **22031-1207**                        |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

Registrant’s telephone number including area code:** (703) 934-3413**

 

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

 

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

 

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

 

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

 

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

 

**Applicableonly to corporate issuers:**

 

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

 

Asof May 10, 2005, there were 1,601,270 shares of Kaiser Group Holdings, Inc.Common Stock, par value $0.01 per share, outstanding.

 

 

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**KAISER GROUP HOLDINGS, INC.**

 

**INDEX TO FORM 10-Q**

 

 
| **Part I - Financial  Information**                                                                         |   |
|-------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |   |
| Item 1. Financial  Statements:                                                                              |   |
|                                                                                                        |   |   |
| Consolidated Balance  Sheets -  March 31, 2005 and December 31, 2004                                        |   |
|                                                                                                        |   |   |
| Consolidated  Statements of Operations and Comprehensive Income  Three Months Ended March 31, 2005 and 2004 |   |
|                                                                                                        |   |   |
| Consolidated  Statements of Cash Flows -   Three Months Ended March 31, 2005 and 2004                       |   |
|                                                                                                        |   |   |
| Notes to  Consolidated Financial Statements                                                                 |   |
|                                                                                                        |   |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations        |   |
|                                                                                                        |   |   |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk                                         |   |
|                                                                                                        |   |   |
| Item 4. Controls and  Procedures                                                                            |   |
|                                                                                                        |   |   |
| **Part II - Other Information**                                                                             |   |
|                                                                                                        |   |   |
| Item 1. Legal Proceedings                                                                                   |   |
|                                                                                                        |   |   |
| Item  2. Unregistered Sales of Equity Securities and Use of Proceeds                                        |   |
|                                                                                                        |   |   |
| Item 3.  Defaults Upon Senior Securities                                                                    |   |
|                                                                                                        |   |   |
| Item  4. Submission of Matters to a Vote of Security Holders                                                |   |
|                                                                                                        |   |   |
| Item 5. Other Information                                                                                   |   |
|                                                                                                        |   |   |
| Item 6. Exhibits                                                                                            |   |
|                                                                                                        |   |   |
| **Signatures**                                                                                              |   |
|                                                                                                             |        |  |  |

 

2

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**PART I – FINANCIALINFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

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

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                  | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                                                                                                                                  |       |                |       |                   |       |
| **ASSETS**                                                                                                                                                  |       |                |       |                   |       |
| ** **                                                                                                                                                  |       |                |       |                   |       |
| Current Assets                                                                                                                                              |       |                |       |                   |       |
| Cash and cash  equivalents                                                                                                                                  |       | $                   | 20,283     |                   | $          | 12,728 |   |
| Certificate of  deposit                                                                                                                                     |       | 1,011               |       | 1,006                  |       |
| Restricted cash  and cash equivalents                                                                                                                       |       | 3,988               |       | 3,931                  |       |
| Accounts  receivable                                                                                                                                        |       | 223                 |       | 217                    |       |
| Prepaid expenses  and other current assets                                                                                                                  |       | 994                 |       | 742                    |       |
| Contract  receivable, net                                                                                                                                   |       | 3,000               |       | 3,000                  |       |
| Total Current  Assets                                                                                                                                       |       | 29,499              |       | 21,624                 |       |
|                                                                                                                                                        |       |                |       |                   |       |
| Other Assets                                                                                                                                                |       |                |       |                   |       |
| Investments in  and advances to affiliates                                                                                                                  |       | 38,820              |       | 45,094                 |       |
| Notes receivable                                                                                                                                            |       | 5,894               |       | 5,894                  |       |
| Other long-term  assets                                                                                                                                     |       | 54                  |       | 102                    |       |
|                                                                                                                                                        |       | 44,768              |       | 51,090                 |       |
| Total Assets                                                                                                                                                |       | $                   | 74,267     |                   | $          | 72,714 |   |
| ** **                                                                                                                                                  | ** ** | ** **          | ** ** | ** **             | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                               | ** ** | ** **          | ** ** | ** **             | ** ** |
|                                                                                                                                                        |       |                |       |                   |       |
| Current  Liabilities                                                                                                                                        |       |                |       |                   |       |
| Accounts payable                                                                                                                                            |       | $                   | 152        |                   | $          | 169 |   |
| Post retirement  benefit plan obligation                                                                                                                    |       | 6,523               |       | 6,623                  |       |
| Other accrued  expenses                                                                                                                                     |       | 4,532               |       | 4,620                  |       |
| Interest payable  on preferred stock                                                                                                                        |       | 303                 |       | 313                    |       |
| Deferred tax  liability                                                                                                                                     |       | 5,633               |       | 5,772                  |       |
| Income taxes  payable                                                                                                                                       |       | 946                 |       | 763                    |       |
| Total Current  Liabilities                                                                                                                                  |       | 18,089              |       | 18,260                 |       |
|                                                                                                                                                        |       |                |       |                   |       |
| Long Term  Liabilities                                                                                                                                      |       |                |       |                   |       |
| Mandatorily  redeemable preferred stock                                                                                                                     |       | 26,909              |       | 26,909                 |       |
|                                                                                                                                                        |       |                |       |                   |       |
| Commitments and  Contingencies                                                                                                                              |       |                |       |                   |       |
|                                                                                                                                                        |       |                |       |                   |       |
| Common stock,  par value $.01 per share:                                                                                                                    |       |                |       |                   |       |
| Authorized—3,000,000  shares 

Issued and  outstanding—1,601,270 and 1,598,270 shares at March 31, 2005 and December 31,  2004, respectively |       | 16                  |       | 16                     |       |
| Capital in  excess of par                                                                                                                                   |       | 8,141               |       | 8,063                  |       |
| Retained  earnings                                                                                                                                          |       | 21,074              |       | 19,424                 |       |
| Accumulated  other comprehensive income (loss)                                                                                                              |       | 38                  |       | 42                     |       |
| Total  Shareholders’ Equity                                                                                                                            |       | 29,269              |       | 27,545                 |       |
| Total  Liabilities and Shareholders’ Equity                                                                                                            |       | $                   | 74,267     |                   | $          | 72,714 |   |
|                                                                                                                                                             |            |                     |            |                        |            |  |  |  |

 

See notes to consolidated financial statements.

 

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**KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

**(inthousands, except per share amounts)**

 
| ** **                                                                                                                | ** ** | **For the Three Months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                                                                                | ** ** | **(Unaudited)**                           | ** ** |
|                                                                                                                      |       |                                      |       |   |   |
| Gross Revenue                                                                                                             |       | $                                         | 520        |   | — |   |
| Subcontract and  direct material costs                                                                                    |       | 347                                       |       | — |   |
| Service Revenue                                                                                                           |       | 173                                       |       | — |   |
| Operating  Expenses                                                                                                       |       |                                      |       |   |   |
| Administrative  expenses                                                                                                  |       | 1,157                                     |       | $ | 1,245 |   |
| Reserve for  settlement of remaining class 4 claims                                                                       |       | —                                    |       | 1,400 |   |
| Operating Loss                                                                                                            |       | (984                                      | )          | (2,645 | ) |
| Other Income  (Expense)                                                                                                   |       |                                      |       |   |   |
| Equity income in  earnings of affiliate, net of amortization of $881 for the quarters ended  March 31, 2005 and 2004 |       | 4,226                                     |       | 4,284 |   |
| Interest income                                                                                                           |       | 190                                       |       | 175 |   |
| Interest expense  for preferred dividends                                                                                 |       | (464                                      | )          | (570 | ) |
| Other income                                                                                                              |       | —                                    |       | 25 |   |
|                                                                                                                      |       |                                      |       |   |   |
| Income From  Continuing Operations                                                                                        |       |                                      |       |   |   |
| Before income  tax                                                                                                        |       | 2,968                                     |       | 1,269 |   |
| Income tax  expenses                                                                                                      |       | (1,317                                    | )          | (748 | ) |
|                                                                                                                      |       |                                      |       |   |   |
| Income  Applicable to Common Shareholders                                                                                 |       | $                                         | 1,651      |   | $ | 521 |   |
|                                                                                                                      |       |                                      |       |   |   |
| Basic and  Diluted Earnings Per Common Share:                                                                             |       |                                      |       |   |   |
| Continuing  operations, net of tax                                                                                        |       | $                                         | 1.03       |   | $ | 0.33 |   |
| Discontinued  operations, net of tax                                                                                      |       | —                                    |       | — |   |
|                                                                                                                      |       |                                      |       |   |   |
| Net Earnings  (Loss) Per Share                                                                                            |       | $                                         | 1.03       |   | $ | 0.33 |   |
|                                                                                                                      |       |                                      |       |   |   |
| Weighted average  shares for basic and diluted earnings (loss) per common share                                           |       | 1,600                                     |       | 1,594 |   |
|                                                                                                                      |       |                                      |       |   |   |
| Comprehensive  Income                                                                                                     |       |                                      |       |   |   |
| Net Income                                                                                                                |       | $                                         | 1,651      |   | $ | 521 |   |
| Other  Comprehensive Income (Loss):                                                                                       |       |                                      |       |   |   |
| Change in  cumulative foreign translation adjustment                                                                      |       | (4                                        | )          | 2 |   |
|                                                                                                                      |       |                                      |       |   |   |
| Total  Comprehensive Income                                                                                               |       | $                                         | 1,647      |   | $ | 523 |   |

 

Seenotes to consolidated financial statements.

 

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                     | ** ** | **For the Three Months ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(Unaudited)**                           | ** ** |
| Operating Activities:                                                          |       |                                      |       |   |   |
| Net income                                                                     |       | $                                         | 1,651      |   | $ | 521 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                                      |       |   |   |
| Deferred taxes  related to continuing operating activities                     |       | (139                                      | )          | (252 | ) |
| Equity in  earnings of affiliate                                               |       | (4,226                                    | )          | (4,284 | ) |
| Changes in  operating assets and liabilities:                                  |       |                                      |       |   |   |
| Accounts  receivable, net                                                      |       | (6                                        | )          | — |   |
| Prepaid expenses  and other current assets                                     |       | (252                                      | )          | (19 | ) |
| Accounts payable  and accrued expenses                                         |       | (205                                      | )          | 924 |   |
| Income taxes  payable                                                          |       | 183                                       |       | 859 |   |
| Other operating  activities                                                    |       | 81                                        |       | 60 |   |
| Net Cash Used in  Operating Activities                                         |       | (2,913                                    | )          | (2,191 | ) |
| Investing  Activities:                                                         |       |                                      |       |   |   |
| Distributions  from affiliate                                                  |       | 10,500                                    |       | 3,395 |   |
| Net Cash  Provided by Investing Activities                                     |       | 10,500                                    |       | 3,395 |   |
| Financing  Activities:                                                         |       |                                      |       |   |   |
| Transfer from  restricted cash for the redemption of preferred stock           |       | —                                    |       | 2,646 |   |
| Transfer to  restricted cash                                                   |       | (32                                       | )          | — |   |
| Redemption of  preferred stock                                                 |       | —                                    |       | (5,276 | ) |
| Net Cash Used in  Financing Activities                                         |       | (32                                       | )          | (2,630 | ) |
| Increase  (Decrease) in Cash and Cash Equivalents                              |       | 7,555                                     |       | (1,426 | ) |
| Cash and Cash  Equivalents at Beginning of Period                              |       | 12,728                                    |       | 11,151 |   |
| Cash and Cash Equivalents  at End of Period                                    |       | $                                         | 20,283     |   | $ | 9,725 |   |

 

Seenotes to consolidated financial statements.

 

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.                                       Basis of Presentation

 

The accompanyingconsolidated financial statements of Kaiser Group Holdings, Inc. andsubsidiaries (the Company), except for the December 31, 2004 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 financial statements.  In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been 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, 2004.  Certain reclassifications have been made tothe prior period financial statements to conform them to the presentation usedin the March 31, 2005 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:

 

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

•                  the closeout andresolution of a completed contract for the engineering and construction of asteel mini-mill for Nova Hut in the Czech Republic (Nova Hut project).

•                  the holding ofan interest-bearing promissory note from ICF Consulting Group, Inc. (ICFConsulting), a division that Old Kaiser sold in 1999.

•                  awholly-owned captive insurance company that is not at this time issuing newpolicies and is simply involved in resolving remaining claims. However, we have begun the necessary regulatoryand legal process to enable our wholly-owned captive insurance company to offerderivative captive insurance services to third-party clients through asponsored captive subsidiary.

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

•                  a new subsidiary, Kaiser Analytical ManagementServices, Inc. (“KAMS”), which we formed in April 2004 to take over theoperations of the Analytical Services Division of Kaiser-Hill Company, LLC.  KAMS provides analytical management servicessuch as sample planning, sample management, records management, performanceassessment and data management in the general areas of health and safety,geotechnical, environmental and waste management, and deactivation anddecommissioning.

 

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, undercertain circumstances resulting from a bankruptcy, a new entity is created forfinancial reporting purposes upon the emergence of that entity frombankruptcy.  Accordingly, the value of thereorganized enterprise becomes the established amount for the emerging balanceof shareholders’ equity, and any accumulated deficit of the predecessor entityis offset against available paid-in-capital to result in an emerging retainedearnings of zero.  Additionally, assetsand liabilities are recorded at their fair values.

 

Thevalue of the emerged enterprise used for fresh start reporting as of December31, 2000 was $87.5 million and was determined by management with the assistanceof independent advisors.  The methodologyemployed involved estimation of the enterprise value taking into considerationa discounted cash flow analysis.  Thediscounted cash flow analysis was based

 

6

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on aseven-year cash flow projection prepared by management, taking intoconsideration the terminal value of its assets and liabilities as ofimmediately prior to its emergence from bankruptcy on December 18, 2000.  Terminal values of assets and liabilitieswere determined based either on contracted amounts, actuarial present valuesand/or management’s estimates of the outcome of certain operating activities.Net after-tax cash flows, assuming a 40% effective tax rate, were discounted at17% in order to take into consideration the risks and uncertainties inherent insuch projections.  The cash flowprojections were based on estimates and assumptions about circumstances andevents that had not yet taken place. Estimates and assumptions regarding individual retained matters which formthe collective composition of the overall enterprise value as of December 18,2000 are inherently subject to significant economic and competitiveuncertainties and contingencies beyond the control of the Company.  Accordingly, there may be differences betweenprojections and actual results because events and circumstances frequently donot occur as expected and may be significant. More specifically, assumptions within the valuation related to theamount and timing of the ultimate performance and related cash flows of theCompany’s investment in Kaiser-Hill have the greatest impact on the overallenterprise 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 3claims” against the Old Kaiser bankruptcy estate generally consisted of tradeand similar creditors’ claims of $20,000 or less.  Holders of allowed Class 3 claims receivedcash for their claims.

 

•                  Allowed “Class 4claims”, the largest class of claims against the Old Kaiser bankruptcy estate,is made up of creditor claims other than Class 3 claims and equity claims.Class 4 claims included holders of Old Kaiser senior subordinated notes due2003 (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.

 

•                  The third classof claims recognized in the Old Kaiser bankruptcy are equity claims, consistingof holders of Old Kaiser common stock (Old Common) and other “Equity Interests”as defined in the Plan. Under the Plan, holders of Equity Interests willreceive a number of shares of New Common equal to 17.65% of the number ofshares of such common stock issued to holders of allowed Class 4 Claims. In theinitial distribution, one share of New Common was issued for each 96 shares ofpreviously outstanding Old Common. Additional distributions of New Common maybe made in the future as additional shares of New Common are issued to holdersof newly allowed Class 4 claims, if any. Apart from holders of Old Common, theonly holders of Equity Interests of which the Company is aware are the formershareholders of ICT Spectrum Constructors, Inc., a corporation acquired bymerger with a subsidiary of Old Kaiser in 1998. The Bankruptcy Court confirmedthe equity nature of those claims.  SeeNote 6 below for information concerning a recent Bankruptcy Court ruling withrespect to these 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 theremaining claimants and Old Kaiser produce limited supporting data relative totheir respective positions and engage in initial negotiation efforts in anattempt to reach an agreed claim determination. If necessary, the parties were thereafter required to participate in anon-binding mediation before a mediator pre-selected by the BankruptcyCourt.  All unresolved claims as of March27, 2001 are subject to the ADR process. Since April 17, 2001, the date of theinitial distribution, $126.0 million of asserted claims have been withdrawn,negotiated or mediated to an agreed amount, resulting in cash paymentsapproximating $2.6 million and issuances of 683 shares of New

 

7

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Preferred and 823 sharesof New Common. As of May 10, 2005, the amount of unresolved claims wasapproximately $4.5 million. The Company expects to resolve the remaining claimsby the end of 2005.  The Companycurrently believes that the total amount of Class 4 claims ultimately to beallowed in the Old Kaiser bankruptcy proceeding will not exceed $142.0million.  As demonstrated by the claimsettlements completed since April 17, 2001, and based on the belief that it isin the best interest of the Company and its current shareholders, the Companyhas been settling certain remaining Class 4 claims entirely for cash paymentsin lieu of the combination of cash and New Preferred and New Common ascontemplated in the Plan.  The Companyintends to continue to use this settlement alternative during the resolution ofremaining Class 4 claims.

 

In the first quarter of2004, the Company recorded a $1.4 million liability for future claimsettlements based upon the Company’s estimate of unresolved claimssettlements.  During the 2004, $0.4million was charged against this liability, leaving a remaining balance of $1.0million at March 31, 2005.

 

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 forma dividends,classified as interest expense subsequent to July 1, 2003, on retained sharesof New Preferred) must be used to redeem outstanding shares of NewPreferred.  See Note 5 for a schedule ofpast redemptions of New Preferred and the amount of restricted cash used tofacilitate the redemption.

 

3.                                       Earnings Per Share

 

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

 

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

 

Theeffect of preferred dividends of $0.5 million and $0.6 million has been includedin continuing operations in the calculation of basic and diluted earnings pershare for the three months ended March 31, 2005 and 2004, respectively.

 

4.                                       Summarized Financial Information ofUnconsolidated Affiliate

 

**TheCompany owns 50% of Kaiser-Hill Company, LLC. Summarized unaudited financial information of Kaiser-Hill Company was asfollows as of March 31 (in thousands):**

 
| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |
| Current assets              |       | $        | 125,529    |     | $          | 112,229 |   |
| Non-current assets          |       | 124,153  |       | 121,410  |       |
| Current liabilities         |       | 123,844  |       | 109,831  |       |
| Non-current liabilities     |       | 66,134   |       | 55,647   |       |
|                        |       |     |       |     |       |
| Gross revenue               |       | $        | 173,371    |     | $          | 137,830 |   |
| Subcontracts and  materials |       | (119,068 | )          | (84,152  | )          |
| Service revenue             |       | 54,303   |       | 53,678   |       |
| Operating  expenses         |       | (44,081  | )          | (43,346  | )          |
| Other income (expense)      |       | (9       | )          | (3       | )          |
| Net income                  |       | $        | 10,213     |     | $          | 10,329 |   |
|                             |            |          |            |          |            |  |  |  |  |

 

5.                                       Mandatorily Redeemable Preferred Stock

 

TheCompany’s certificate of incorporation authorizes the issuance of 2,000,000shares of New Preferred. The Company had New Preferred outstanding with aliquidation preference of $26.9 million at both March 31, 2005 and December 31,2004, net of $5.6 million of treasury stock at both March 31, 2005 and December31, 2004.  The New Preferred is a seriesof authorized preferred stock designated as “Series 1 Redeemable CumulativePreferred Stock,” and has a par value of $0.01 per share. The New Preferredranks ahead of the Company’s New Common.

 

TheCompany adopted FAS 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” effective July 1, 2003.  Due to the mandatorily redeemable feature ofthe New Preferred, described in greater detail below, the New Preferred hasbeen reclassified from mezzanine equity to a long term liability on the consolidatedbalance sheet, and the preferred stock dividends have been reclassified tointerest expense on the consolidated statement of operations

 

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effectiveJuly 1, 2003.  There was no transitionadjustment recognized upon adoption of FAS 150. There were 489,249 shares of New Preferred outstanding at March 31, 2005and December 31, 2004, respectively, net of 101,471 treasury shares.  The New Preferred is shown at liquidationvalue of $55 per share.

 

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

 

Thecertificate of incorporation of the Company and Delaware law permit the Boardof Directors to issue additional series of preferred stock, except that theBoard of Directors may not authorize the issuance of any securities that ranksenior to or on a parity with the New Preferred without the consent of holdersof at least two-thirds of the New Preferred.

 

Cumulativedividends, classified as interest expense subsequent to July 1, 2003, on theNew Preferred are payable on a quarterly basis, as of April 30, July 31,October 31 and January 31, either in cash at an annual rate of 7% of theliquidation preference per share or in additional shares of New Preferred at anannual rate of 12% of the per share liquidation preference. Dividends accrue onthe New Preferred commencing with the initial distribution date, April 17,2001. Dividends will not be paid to any affiliate of the Company on account ofthat affiliate’s ownership of shares of preferred stock. If the Company failsto pay a quarterly dividend when due, holders of New Preferred will have theright to elect an additional director for each dividend payment missed, up to amaximum of two additional directors, but only until such dividend is paid orprovided for in full. The dividend due to holders of record on April 30, 2005,totaling approximately $0.3 million, was paid on May 6, 2005.  At March 31, 2005, in addition to the $0.4million of cash reserves for unresolved claims, the Company had $0.6 million incash reserved for the payment of accrued dividends on any future issuances ofNew Preferred issued as a result of remaining bankruptcy claims resolutions(any New Preferred issued as a result of claims resolutions also carries theright to dividends 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 the Company,each holder of New Preferred (other than an affiliate of the Company) isentitled to this per share liquidation preference before any holders of NewCommon or any other junior securities of the Company receive any payment fortheir shares. If, in a liquidation or dissolution setting, assets remainingafter distribution to holders of debt and other obligations are insufficient topay all holders of New Preferred the per share liquidation preference, thensuch assets will be distributed on a proportionate basis to the holders of NewPreferred (other than affiliates of the Company) and any securities ranking ona parity with the New Preferred.

 

TheCompany has the option to redeem the New Preferred at any time, in whole or inpart, at a redemption price of 100% of the liquidation preference per shareplus all accrued and unpaid dividends. The Company is required to offer topurchase the New Preferred at 100% of the liquidation preference per share plusall accrued and unpaid dividends in connection with a change of control of theCompany.  In addition, any net proceedsin excess of $3.0 million in a calendar year received by the Company or any ofits direct or 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, such cash must be used to redeemNew Preferred at a redemption price of 100% of the liquidation preference pershare plus all accrued and unpaid dividends.

 

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

 

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

 

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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-tax proceeds from any cash distributions fromKaiser-Hill that, on a quarterly basis, exceed 2.8 times the amount of cashrequired to pay all past accrued but unpaid cash dividends on the NewPreferred, plus the next scheduled quarterly cash dividend on New Preferred;

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

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

 

Uponexercise of a put, KGP will pay an exercising holder 100% of the liquidationpreference of the New Preferred that is the subject of the KGP put rights, plusall accrued and unpaid dividends on the New Preferred. KGP will purchase sharesof New Preferred on a pro rata basis based upon the number of shares of NewPreferred as to which puts have been properly exercised, but only up to theamount of the available net after-tax proceeds from triggering events. KGP willnot purchase any fractional shares. KGP put rights will not become exercisablemore frequently than every 12 months unless the cumulative amount of availablenet after-tax proceeds from triggering events is at least $3 million.  KGP put rights are transferable except thatputs shall cease to be transferable if KGP determines that any further transferwould require registration of the puts as a class of securities under theSecurities Exchange Act of 1934. The Company does not presently plan to arrangefor trading of the KGP put rights on the NASD electronic bulletin board orotherwise.

 

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

 

As of May 10, 2005, theCompany has redeemed the following shares of New Preferred (in thousands exceptshare amounts):

 

| **Date of  Redemption** | ** ** | **Use of  Unrestricted  Cash** | ** ** | **Use of  Reserve Fund  Cash** | ** ** | **Total  Amount of  Redemption** | ** ** | **Number of  Shares  Redeemed** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                    |       |                           |       |                           |       |                             |       |                            |       |
| April 2005              |       | $                              | 10,000     |                           | $          | —                           |       | $                               | 10,000     |   | 181,818 |   |
| July 2004               |       |                           | 2,478      |                           | 512        |                             | 2,990      |                            | 54,361     |   |
| February 2004           |       | 2,599                          |       | 2,677                          |       | 5,276                            |       | 95,932                          |       |
| October 2003            |       | 4,650                          |       | 1,594                          |       | 6,244                            |       | 113,530                         |       |
| January 2003            |       | 5,233                          |       | 8,913                          |       | 14,146                           |       | 257,200                         |       |
|                         |            |                                |            |                                |            |                                  |            |                                 |            |  |  |  |

 

 

6.                                       Other Contingencies

 

The Company has variousobligations and liabilities from its continuing operations, including generaloverhead expenses in connection with maintaining, operating and winding downthe various entities and net assets comprising the Company.  Additionally, the Company believes contingentliabilities may exist in the following areas:

 

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 construction of a steel mini-mill in the CzechRepublic for Nova Hut.  Afterconstruction of the mini-mill was complete in 2000, the contract with Nova Hutprovided for a maximum of three possible performance tests. The firstperformance test was completed on November 13, 2000. Kaiser Netherlandsbelieves that the first performance test was successful and that Nova Hutshould have agreed to final acceptance of the mini-mill and made final paymentof amounts accrued by Kaiser Netherlands throughout the project, including feeand retention amounts with release of performance guarantee instruments.

 

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Nova Hut, however, asserted that the first test was not successful.Kaiser Netherlands believes that such contention may have been put forth inresponse to severe financial constraints on Nova Hut’s operations resulting fromweakening conditions in the worldwide steel market and the significant amountsthat Kaiser Netherlands believed it was contractually due.  As of March 23, 2005, this dispute has notbeen resolved, and Kaiser Netherlands has resorted to legal proceedings toenforce its rights.  Until recently, theprimary legal venue has been the Delaware bankruptcy proceeding for Old Kaiser,where the Company has asserted claims against Nova Hut and the InternationalFinance Corporation (“IFC”).  TheDelaware bankruptcy court had previously ruled that the Company, as opposed toKaiser Netherlands, could proceed with prosecution of its specific claimsagainst Nova Hut and IFC in the Delaware bankruptcy court venue.  Both Nova Hut and IFC appealed this rulingand, during the first quarter 2004, the Delaware bankruptcy court’s decisionregarding the IFC was overturned by the District Court, ruling that the IFCenjoys sovereign immunity from prosecution. Kaiser Holdings filed a notice of appeal with the Third Circuitregarding this decision in favor of the IFC and on February 25, 2005, the ThirdCircuit overturned the District Court’s decision. The IFC’s request for arehearing of the case by the Third Circuit was refused.  The IFC has now petitioned the DelawareBankruptcy Court to stay proceedings pending completion of the KaiserNetherlands-Nova Hut international arbitration proceeding. With regard to theNova Hut appeal, the District Court has ruled that U.S. Bankruptcy proceedingsshould be stayed pending completion of international arbitration proceedings.

 

In January 2004, Kaiser Netherlands filed arbitration claims againstNova Hut in the amount of $51.1 million with the International Chamber ofCommerce (“ICC”).  In November 2004,Kaiser Netherlands’ claim against Nova Hut was amended to include late interestand other charges and now totals $67.5 million.   The arbitration panel has been constituted,and the proceedings have been initiated. The earliest possible date for a final award ruling being issued is thelast quarter of 2005.  Nova Hut hassubmitted a $49.7 million counterclaim against Kaiser Netherlands in these sameICC proceedings.

 

In December 2003, the ICC, under the dispute resolution provisions ofthe Nova Hut mini-mill subcontract between Kaiser Netherlands and the mini-mill’smain equipment supplier, Tippins, Inc., issued a final award that was onbalance favorable to Kaiser Netherlands. As a result of the ruling, Kaiser Netherlands was relieved of theobligation to pay additional retention to Tippins and Kaiser Netherlands wasawarded a net cash settlement of $2.6 million. The Company has not recorded this award due to the uncertaintiesregarding collectibility.  However, the Companyintends to vigorously pursue collection of this award.

 

The continued litigation of these disputes has had and will continue tohave a negative impact on the cash flow of Kaiser Netherlands and KaiserHoldings.

 

Thecomponents of “Contract receivable, net” consist entirely of the carrying valueof the net assets of the Nova Hut project. Based on the Company’s continuedconcern over Nova Hut’s financial difficulties and the lack of a settlementresulting from an earlier bankruptcy court-sponsored mediation in the fourthquarter of 2003, the Company further reduced the carrying value of theremaining Nova Hut contract receivable from $6.0 million to $3.0 million byrecording an additional reserve of $3.0 million, net of a $1.1 million incometax benefit, through a charge to “Loss from Discontinued Operations”.  This reserve is in addition to a reserverecorded in 2001, which reduced the carrying value of the Nova Hut contractreceivable from $21.6 million to $6.0 million by recording a reserve ofapproximately $9.8 million, net of a $5.8 million income tax benefit, through a charge to “Loss fromDiscontinued Operations”.  Theseadjustments to the contract receivable carrying value were determined based onthe Company’s late 2003 estimate of Nova Hut’s ability to pay such liability.

 

Kaiser Hill

 

Under Kaiser-Hill’s contract with the DOE, Kaiser-Hillis not responsible for, and the DOE pays all costs associated with, anyliability, including, without limitation, any claims involving strict orabsolute liability and any civil fine or penalty, expense, or remediation cost,but limited to those of a civil nature, which may be incurred by, imposed on,or asserted against Kaiser-Hill arising out of any act or failure to act,condition, or exposure which occurred before Kaiser-Hill assumed 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

 

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

 

As the contract 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.

 

Common Stock

 

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

 

**I****TEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS 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 remainingsubsidiaries.  On June 9, 2000, KaiserGroup International, Inc. and 38 of its domestic subsidiaries voluntarily filedfor protection under Chapter 11 of the United States Bankruptcy Code in theDistrict of Delaware (case nos. 00-2263 to 00-2301). Kaiser GroupInternational, Inc. emerged from bankruptcy with a confirmed Plan ofReorganization (the Second Amended Plan of Reorganization (the Plan)) that waseffective on December 18, 2000.  In thisdocument, we frequently use the terms “we” and “Kaiser” to refer to KaiserGroup Holdings, Inc., Kaiser Group International, Inc. and other subsidiarieswe own.

 

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

 

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

•                  the closeout andresolution of a completed contract for the engineering and construction of asteel mini-mill for Nova Hut in the Czech Republic (Nova Hut project).

•                  the holding ofan interest-bearing promissory note from ICF Consulting Group, Inc. (ICFConsulting), a division that Old Kaiser sold in 1999.

•                  awholly-owned captive insurance company that is not at this time issuing newpolicies and is simply involved in resolving remaining claims. However, we have begun the necessary regulatoryand legal process to enable our wholly-owned captive insurance company to offerderivative captive insurance services to third-party clients through asponsored captive subsidiary.

 

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

•                  a new subsidiary, Kaiser Analytical ManagementServices, Inc. (“KAMS”), which we formed in April 2004 to take over theoperations of the Analytical Services Division of Kaiser-Hill Company,LLC.  KAMS provides analytical managementservices such as sample planning, sample management, records management,performance assessment and data management in the general areas of health andsafety, geotechnical, environmental and waste management, and deactivation anddecommissioning.

 

***Outlook***

 

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

 

The timing and level of future distributions from Kaiser-Hill aresubject to many uncertainties, but if Kaiser-Hill continues to perform in linewith its current level of performance and progresses closer to Kaiser-Hill’starget closure of the site in the fourth quarter of 2005 and that performanceis recognized by the DOE, Kaiser-Hill’s fee payments from the DOE in respect ofcompletion of the Closure Contract could be at the upper ranges of the feepotential under that contract.  At thoselevels of fee payments, we could receive from Kaiser-Hill, during the period of2005 through physical project completion and the date Kaiser-Hill has been paidin full by DOE, cash distributions in a range as high as $100 million to $125million.  We are optimistic that overalldistributions in 2005 may exceed $25.0 million. This is not to predict actual distributions to us at these levels, butmerely to outline what is possible in optimistic case scenarios.  There are many risks and uncertainties thatcould prevent the receipt of this level of distributions from Kaiser-Hill, andthe timing of fee payments from the DOE to Kaiser-Hill that would enable suchdistributions is also subject to many uncertainties.  See “Risk Factors Relating to Kaiser Holdingsand Forward-Looking Statements.”

 

Apart from Kaiser-Hill, the principal uncertainty that will affect ourperformance is the outcome of our disputes with Nova Hut.  As discussed elsewhere, we have pendingagainst Nova Hut an arbitration before the International Chamber ofCommerce.  Our aggregate claims are for$67.5 million, and Nova Hut has asserted counterclaims of $49.7 million.  It is not possible to predict the outcome ofthese disputes, but we feel our claims are stronger than Nova Hut’s.  Our assessment could be wrong, but we aredetermined to see these disputes through to conclusion because we believe weare entitled to a substantial positive recovery.  The arbitration process is now underway.  At present, we do not expect to receive anyrecovery from Nova Hut until the first quarter of 2006 at the earliest.

 

*Possible Preferred Stock Redemption. *Our first quarter of 2005distribution from Kaiser-Hill was $10.5 million and compares favorably to firstquarter distributions in 2004 of $3.5 million. We have no assurance that this level of distributions will continue in2005.  However, based on progress to datein Kaiser-Hill’s performance under its Closure Contract with the DOE andassuming a continuation of that performance, we are optimistic that overalldistributions in 2005 will exceed $25.0 million and therefore enable us toredeem the majority of our New Preferred in 2005.

 

*Proposed Reverse Split* Our New Common is currently registered underthe Securities Exchange Act of 1934 (“Exchange Act”) and consequently we aresubject to the Securities and Exchange Commission (“Commission”) reportingobligations of the Exchange Act.  OnMarch 31, 2005 our Board unanimously ratified and approved a one for 20 reversesplit of the Company’s New Common, with fractional shares receiving $29.25 pershare.  The proposed split remains subject to stockholder approval.  We anticipate that the reverse split willreduce the number of record holders of New Common from approximately 1,180 toapproximately 220, which will allow us to file to terminate our reportingobligations and continue future operations as a non-reporting company.  The reverse split will require that we amendthe Company’s Certificate of Incorporation in Delaware which will be subject toa shareholder vote.

 

If we are successful in reducing our number of stockholders below 300,we plan on filing a Form 15 with the Commission.  This will suspend our reporting obligationsunder the Securities Exchange Act of 1934, meaning that we will no longer haveto file with the Commission certain reports and forms, including Forms 10-K,10-Q, 8-K and proxy statements.  Itshould be noted that on May 6, 2005, a motion for a stay of deregistration wasfiled in the Delaware bankruptcy court by the former shareholders of ICTSpectrum Constructors, Inc.  Thebankruptcy court has not ruled on this matter.

 

*Corporate and Capital Structure*.  In light of our history and currentactivities, our corporate and capital structures are not as tax-efficient as wewould like.  We have evaluated from timeto time both the possible refinancing of our New Preferred and possible changesto our corporate and tax structure. Because of limitations on our ability to borrow and our view that we maybe able to redeem the majority of the outstanding New Preferred by the end of2005, we do not presently plan to attempt to

 

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refinance the New Preferred. Similarly, because of tax law requirements, limitations in the New Preferredas to how we use available cash, and the nature of our shareholder base, wehave not identified an alternative to our current corporate and tax structurethat we believe is practical to effect. As a result, we do not presently plan to attempt to effect changes tothat structure.

 

***Critical Accounting Policies andSignificant Estimates***

 

**The preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires that we make estimates and assumptions affecting the assets andliabilities (including contingent assets and liabilities) reported at the dateof the Consolidated Financial Statements and the income statement amountsreported for the periods presented.  Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.**

 

Our accounting measurements that are most affected by our estimates offuture events are:

 

•                  Recoverabilityof accounts receivable, a contract receivable, notes receivable and accruedinterest, and investments.

•                  Income taxprovision, deferred tax assets and liabilities.

•                  Use of the equity method of accounting forKaiser-Hill, an affiliate that we have the ability to significantly influencebut not control.  In accordance with theequity method of accounting, we record our proportionate share of the affiliate’sincome or losses.  The difference betweenthe carrying value of the joint venture investment and our underlying equity isamortized on a straight-line basis over the term of the joint ventureinvestment, estimated at six years.

•                  Estimated feeson the Kaiser-Hill joint venture.  Estimating future costs and, therefore, revenues and profits, is aprocess requiring a high degree of judgment, including assumptions regardingfuture operations of Kaiser-Hill as well as general economic conditions.  In the event of a change in total estimatedcontract cost or profit, the cumulative effect of such change is recorded inthe period the change in estimate occurs. Revenue recognition and our profitability from the Kaiser-Hill contractmay be adversely affected to the extent that estimated cost to complete orincentive or award fee estimates are revised, delivery schedules are delayed,or progress under the contract is otherwise impeded.  Accordingly, our recorded revenues and grossprofits from year to year can fluctuate significantly.   The Kaiser-Hill contract contains incentiveprovisions for increased or decreased revenue and profit based on actualperformance against established cost targets and schedule-related goals.  Incentive fees are included in estimatedcontract revenue at the time the amounts can be reasonably determined and are reasonablyassured based on historical experience and other objective criteria.  Should Kaiser-Hill fail to performsatisfactorily under its contract, previously recognized revenues could bereversed and/or future period revenues could be reduced.

•                  Our liability in connection with apost-employment medical benefit plan for a fixed group of retirees.  This liability is affected by changes in thediscount rate, medical cost trend rates and certain actuarial assumptions.  Should actual rates and results differ fromthe assumptions used, revisions to the liability would be required resulting inadditional income statement charges.

 

**RESULTS OF OPERATIONS**

 

*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 factors involving the actual cost of completing thesite closure project and the actual date of physical completion, both ascompared to contracted targets.  On March24, 2004 Kaiser-Hill received a contract modification that motivates safecontinuing positive performance by increasing the maximum fee ceiling that maybe earned under the Closure Contract. The same contract modification reduces the minimum fee floor and includesother provisions related to work scope changes. The potential fee to be earned pursuant to the Closure Contract asrecently modified ranges from $75.0 million to $560.0 million based onKaiser-Hill’s costs to complete the site closure being within the range ofcompletion costs of $3.1 billion and $4.9 billion, and completion at variousdates between 2005 and 2007.  For projectcosts saved below the target level, Kaiser-Hill retains a varying percentageshare ranging from 20% to 30% as

 

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additionalincentive fee.  Similarly, for projectcosts incurred above a target level, Kaiser-Hill’s incentive fee is reduced bythe 30% share.

 

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 March 31, 2005, Kaiser-Hill’s costestimate to complete the project is $3.4 billion, with an estimated completiondate of late 2005 or early 2006, resulting in a potential fee of $490million.    Kaiser-Hill has goals offurther improving its ultimate project performance; however, goals are not freeof risk, and the ability to accurately predict the ultimate results are highlyuncertain.  See “Risk Factors Relating toKaiser Holdings and Forward-Looking Statements” below.

 

For the three monthsended March 31, 2005, the Company recorded its 50% equity in Kaiser-Hill’sincome, recognizing $4.2 million, a nominal decrease of $0.1 million over theamount recorded for the three months ended March 31, 2004 indicative ofKaiser-Hill’s consistency in estimated costs and dates of completion of theClosure Contract during both quarters.

 

*Closure Contract Billing Provisions*

 

****Since the inception of the ClosureContract in February 2000 through March 31, 2005, Kaiser-Hill has invoiced DOEfor the performance fee based on the contract provisions, and has collected anaggregate of $181.1 million in fees from the DOE****.

 

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, such expenses,which Kaiser-Hill estimates could approximate up to 15% - 20% of the totalaward fee, are deducted from the total fee earned and collected by Kaiser-Hillprior to any distributions to either of its two owners.  Since inception of the Closure Contractthrough March 31, 2005, Kaiser-Hill has distributed $74.6 million to each ofits two owners.  Adjusted for the effects of the 50% retainageholdback on its performance fee invoices, Kaiser-Hill expects that itsperformance fee invoices in 2005 to DOE will yield total distributions inexcess of $17.5 million that was distributed to each of its two owners in 2004.  Similar to 2003 and 2004, Kaiser-Hill isanticipating that DOE will approve a non-recurring fee payment during thefourth quarter of 2005 acknowledging Kaiser-Hill’s continued favorableprogression on the project. Historically, the total fourth quarter fee payment has ranged from anadditional $10.0 million to $16.0 million above the typically recurringquarterly fee payment.  However, thereare no assurances as to the amount or timing of any additional fourth quarterfee payment.

 

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

 

In both of thethree-month periods ended March 31, 2005 and 2004, the equity income inearnings of affiliate is net of $0.9 million of amortization of the excess ofour carrying value of our investment in Kaiser-Hill over our ownership percentageof the underlying Kaiser-Hill equity.  Weincreased the carrying value of this investment by $21.1 million as part of ouradoption of Fresh-Start reporting as of December 31, 2000 and will continue toamortize that difference over the estimated life of the Kaiser-Hill investmentof approximately 6 years.

 

*Administrative Expenses*

 

Administrativeexpenses for the three months ended March 31, 2005 and 2004 were $1.2 million.  Weanticipate further declines in general and administrative spending as remaininglitigation and bankruptcy claims are resolved and if our anticipatedderegistration is successful.  Our costto provide certain post-employment medical****benefitsto a capped group of retirees is also treated as an administrativeexpense.  In the three-month periodsended March 31, 2005 and 2004, the expense related to this plan was $0.2million and $0.3 million, respectively.

 

*Reserve forSettlement of Class 4 Claims*

 

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

 

15

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*InterestIncome*

 

Inboth the three months ended March 31, 2005 and 2004, interest income was $0.2million.  For both the three monthsended, March 31, 2005 and 2004, we recorded $0.1 million in interest incomerelated to the ICF Consulting note.  Theremaining amount of interest income resulted from interest earning bankbalances.

 

*Interest Expense*

 

As a result of the adoption of FAS 150 effective July 1, 2003 and theclassification of the Series 1 RedeemableCumulative Preferred Stock (New Preferred) as a liability, preferredstock dividends of $0.5 million and $0.6 million, respectively, for the threemonths ended March 31, 2005 and 2004, have been shown as interest expense.

 

*Income TaxExpense*

 

Forthe three months ended March 31, 2005 and 2004, we recorded an income taxexpense of $1.3 million and $0.7 million, respectively, on operating incomefrom continuing operations of $3.0 million and $1.3 million, respectively.  Our effective income tax rate of 44% and 59%,respectively, for the three months ended March 31, 2005 and 2004, is reflectiveof the non-deductibility of certain expenditures for federal income taxpurposes and the inclusion of $0.5 million and $0.6 million, respectively, ofnon-deductible preferred dividends on the New Preferred included in operatingincome due to the adoption of FAS 150 effective July 1, 2003.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

*Operating Activities*

 

Weused $2.9 million of cash during the three months ended March 31, 2005 comparedto $2.2 million for the three months ended March 31, 2004.  The $0.8 million increase in the use of cashfor the three months March 31, 2005 compared to the three months ended March31, 2004 was primarily due to the increase of $1.0 million in the payment ofincome taxes in 2005 compared to income tax payments in 2004.

 

*Investing Activities*

 

Wereceived $10.5 million in distributions from Kaiser-Hill during the periodended March 31, 2005 compared to $3.4 million in the period ended March 31,2004.  The increase of Kaiser-Hill cashdistributions is a result of the continued favorable progress in itsperformance and the DOE’s recognition of that progress.

 

*Financing Activities*

 

Duringthe three months ended March 31, 2004, we redeemed $5.3 million liquidationpreference of our preferred stock.    Pursuant to the terms of the Plan ofReorganization, the Company used $2.6 million in excess restricted cash inaddition to $2.7 million of unrestricted cash to fund this redemption.

 

*Liquidity and Capital Resource Outlook*

 

We currently have no debtas a result of the effectiveness of the Plan of Reorganization. However, as aresult of the adoption of FAS 150 effective July 1, 2003, and due to themandatorily redeemable provisions of the New Preferred, the New Preferred hasbeen shown as a long term liability.  Wehave financed the initial bankruptcy distribution requirements and follow-onworking capital needs in part through the use of the available cash anddistributions from Kaiser-Hill and from other asset sale proceeds. Based on (i)current expectations for operating activities and results, (ii) expectedKaiser-Hill distributions, (iii) our current available cash position, (iv)recent trends and projections in liquidity and capital needs, and (v) currentexpectations of total allowed claims upon the completion of the bankruptcyproceedings, management believes we have sufficient liquidity to cover therequired cash distributions resulting from the resolution of claims in thebankruptcy process, our future operating needs and income tax requirements, aswell as the dividend or interest requirements applicable to the our preferredstock.  Furthermore, as allowed Class 4claims are resolved, we will continue to review the timing of additionalpartial preferred stock redemptions.

 

Wehave obligations to pay dividends on outstanding preferred stock at March 31,2005.  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).

 

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However,this table does reflect that the Company redeemed a total of $10.0 million ofNew Preferred, or 181,818 shares, on April 22, 2005.  The effect these obligations are expected tohave on our liquidity and cash flow in future periods are as follows (inthousands):

 
| ** **                | ** ** | **Total** | ** ** | **Less Than One  Year** | ** ** | **One to Three  Years** | ** ** |
|---------------------------|------------|-----------|------------|-------------------------|------------|-------------------------|------------|
| Preferred Stock dividends |       | $         | 3,255      |                    | $          | 1,184                   |       | $ | 2,071 |   |
|                           |            |           |            |                         |            |                         |            |  |  |  |

 

*Other Matters*

 

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

 

**RISKFACTORS RELATING TO KAISER HOLDINGS AND**

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report 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 phrases of similarimport.  Similarly, statements thatdescribe or contain information related tomatters such as our intent, belief, or expectation with respect to financialperformance, claims resolution, cash availability, stock redemption plans,contract awards and performance, potential acquisitions and joint ventures, andcost-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, the forward-lookingevents might or might not occur.

 

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

 

*The fee incomewe anticipate receiving in the future from Kaiser-Hill is dependent upon theability of Kaiser-Hill to close the Rocky Flats site at a predeterminedtargeted cost of between $3.1 billion and $4.9 billion and closing date rangingfrom December 31, 2005 to not later than March 31, 2007, both of which aresubject to operational risks and uncertainties.*

 

Our long-term outlook islargely dependent on the performance of Kaiser-Hill under its contract with theDepartment of Energy.  Kaiser-Hill servesas the general contractor at the Rocky Flats site near Denver, Colorado, aformer nuclear weapons production facility. Kaiser-Hill’s contract with the Department of Energy includes aperformance fee based upon a combination of the actual costs incurred tocomplete the site closure and the actual date of completion of theclosure.  Although unanticipated, ifKaiser-Hill fails to complete the closure within the target cost for theproject, Kaiser-Hill’s fee will be reduced to a level significantly less thanthe fee estimate currently being used to recognize income on the project.

 

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

 

*There 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.*

 

Theclean-up and closure of the Department of Energy’s Rocky Flats site involve substantial performance risks.  Among other things, Kaiser-Hill’s activitiesat the Rocky Flats site involve the clean-up, packaging and transportation ofnuclear waste, and the demolition and destruction of facilities where nuclearweapons components were previously produced. Some of these activities have not been previously performed elsewhere,and therefore require the development of innovative and untestedapproaches.  Kaiser-Hill emphasizes safetyin its performance, but the nature of the Rocky Flats site and the activitiesof

 

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Kaiser-Hilland its subcontractors at the site are such that serious injuries, or evendeaths, are possible.  Significant safetyincidents at the site could stop or significantly impede the progress of workbeing performed at the site by Kaiser-Hill and its subcontractors.  The Department of Energy contract contemplates that all, or substantiallyall, of the nuclear waste at Rocky Flats will be transported to other sitesoperated or managed by the Department of Energy.  In addition, third-partyobjections have arisen from time to time with regard to the transportation to,and storage of nuclear waste at, certain sites previously designated by theDepartment of Energy to receive waste from Rocky Flats.  Although the Department of Energy contractcontemplates that the Department of Energy is responsible for providingtransportation and storage sites for nuclear waste from Rocky Flats, aninability to store nuclear waste at other Department of Energy sites would posea substantial risk to the timely closure of the Rocky Flats site, and couldinterfere with Kaiser-Hill’s ability to earn the fees to which Kaiser-Hillbelieves it should be entitled.  Thisloss of fee income could adversely affect our operating results, which could inturn result in a decrease in the value of our common and preferredstock.

 

*There arepotential substantial liabilities and costs associated with Kaiser-Hill’sDepartment of Energy contract, which may directly and indirectly impact our feeincome from Kaiser-Hill.*

 

Underthe Department of Energy contract, Kaiser-Hill is responsible for, and theDepartment of Energy will not pay for costs associated with, liabilities causedby the willful misconduct or lack of good faith of Kaiser-Hill’s managerialpersonnel or the failure to exercise prudent business judgment by Kaiser-Hill’smanagerial personnel. If Kaiser-Hill were found liable for any of thesereasons, the associated costs could be substantial, which could have an adverseeffect on our operating results. A decrease in our operating resultscould cause a decrease in the value of our common and preferred stock.

 

*There are risks associated withpotential disputes as to the completion of the closure of the Rocky Flats siteand the timing and award of fee payments to Kaiser Hill.*

 

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

 

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

 

*We do not havea significant business plan beyond Kaiser-Hill and we may undertake newactivities with start-up risks.*

 

Ourlong-term future profitability will be dependent, to a significant extent, onthe extent to which we carry out activities other than through Kaiser-Hill.Unless and until we further develop plans for such operations, we are unable todetermine either the amount of risk that future operations will involve orwhether we have the ability to realize long-term profitability. In consideringwhether we should attempt to develop a new revenue base, we have established anew subsidiary to attempt to take advantage of our successful history ofperformance in the government services market and the commencement of theprocess to enable our wholly-owned captive insurance company to offerderivative captive insurance services. Our efforts to develop a revenue base separate from Kaiser-Hill involvestart-up activities with risks peculiar to activities of this type, which mayadversely impact our cash flow and operating results. A decrease in ourcash flows and operating results could result in a decrease in the value of ourcommon and preferred stock.

 

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

 

Giventhe reorganization history of Kaiser Group Holdings, Inc., we may not be ableto obtain satisfactory contract performance guaranty mechanisms, such asperformance bonds and letters of credit, at all or on satisfactory terms, tothe extent such mechanisms are needed for new activities and projects.  These factors could limit the nature of thebusiness activities in which we can engage, which may adversely impact our cashflow and operating results and result in a decrease in the value of ourcommon and preferred stock.

 

*We may beunable to generate funds to meet our obligations and we may be unable to accessadditional capital.*

 

Wemay be unable to continue to generate sufficient funds to meet our obligations,notwithstanding the significant improvements in our operations and financialcondition.  Although we believe that wewill be able to generate sufficient funds to meet our working capital needs forthe foreseeable future, our ability to gain access to additional capital, ifneeded, is not certain. Due to reorganization history of Kaiser Group Holdings,Inc. and current financial markets, it is difficult to predict whetheradditional capital would be available to us in the event that we were unable togenerate funds to meet our obligations.

 

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Aninability to gain access to additional capital may also limit our ability toundertake new activities.  Ultimately, aninability to meet our existing obligations or to undertake new activities couldadversely impact our cash flow 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 mayhave to issue a substantial number of additional common shares.*

 

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

 

*In theevent of a change of control, we may not have the financial resources to redeempreferred stock.*

 

Our preferredstock is redeemable at the option of the holder upon a change of control asdefined in the terms of the preferred stock. We are not presently aware of any events that would cause a change ofcontrol.  However, based on a Report onForm 4 dated April 3, 2003, which was filed with the Securities and ExchangeCommission by Tennenbaum & Co., LLC on April 3, 2003, we believe thatTennenbaum & Co., LLC and Michael E. Tennenbaum together own approximately47.1% of our common stock.  The terms ofour preferred stock provide that a change of control occurs when, among otherthings, a person or “group” (within the meaning of Section 13(d)(3) of theSecurities Exchange Act of 1934) directly or indirectly acquires “beneficialownership” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)of more than 50% of all classes of our common equity (defined in the terms ofour preferred stock as capital stock entitled to vote in the election ofdirectors).

 

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

 

**ITEM 3.  QUANTITATIVEAND 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 in theaverage annual prime rate would result in a decrease in the carrying value ofthe plan obligation but would not change the actual cost of the plan.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

Asof March 31, 2005, an evaluation was performed under the supervision and withthe participation of the Company’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined inRule 13a-15(e) or 15d-15(e) under the Exchange Act).  Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that the Company’s disclosure controls and procedures were effectiveas of March 31, 2005.  There were no significantchanges in the Company’s internal control over financial reporting thatoccurred during the period covered by this report that have materiallyaffected, or that are reasonably likely to materially affect, our internalcontrol 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, 2004.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

(a)  None

(b)  None

(c)  None

 

**ITEM 3.  DEFAULTS UPONSENIOR SECURITIES**

 

(a)  None

(b)  None

 

**ITEM 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

Notapplicable

 

**ITEM 5.  OTHER INFORMATION**

 

(a)  None

(b)  None

 

**ITEM 6.  EXHIBITS**

 

**Exhibit No. 2—Plan ofAcquisition, 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)

 

**Exhibit No. 3—Articles ofIncorporation and 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—InstrumentsDefining the Rights of Security Holders, 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 — MaterialContracts**

 

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 Report on Form10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

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

 

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

 

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

 

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4.  Amendment No. 4 dated June 25, 1999.(Incorporated by reference to Exhibit No. 10(b)(4) to Annual Report on Form10-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.  Amendment No. 1 dated April 24, 1995(Incorporated by reference to Exhibit No. 10(d)(1) to Annual Report on Form10-K (Registrant No. 1- 12248) filed with the Commission on May 23, 1995)

 

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

 

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

 

4.  Amendment No. 4 dated April 19, 1999(Incorporated by reference to Exhibit No. 10(d)(4) to Annual Report on Form10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

5.  Amendment No. 5 dated June 25, 1999(Incorporated by reference to Exhibit No. 10(d)(5) to Annual Report on Form10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

6.  Amendment No. 6 dated August 30, 1999(Incorporated by reference to Exhibit No. 10(d)(6) to Annual Report on Form10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

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

 

8.  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 second quarterof fiscal 2000 filed with the Commission on September 6, 2000)

 

9.  AmendmentNo. 9 dated June 19, 2003 (Incorporated by reference to Exhibit 10(c)(9) toQuarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarterof fiscal 2003 filed with the Commission on August 14, 2003)

 

10.  AmendmentNo. 10 dated March 17, 2004 (Incorporated by reference to Exhibit 10(c)(10) toQuarterly Report on Form 10-Q (Registrant No. 1-12248) for the first quarter offiscal 2004 filed with the Commission on May 24, 2004)

 

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 Kaiser International, Inc. Section 401(k) Plan (asamended and restated as of March 1, 1993) (and further amended with respect toname change only as of June 26, 1993) (Incorporated by reference to Exhibit No.10(f) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the secondquarter of fiscal 1994 filed with the Commission on October 15, 1993)

 

1.  Amendment No. 1 dated April 24, 1995(Incorporated by reference to Exhibit No. 10(p)(1) to Annual Report on Form10-K (Registrant No. 1-12248) for fiscal 1995 filed with the Commission on May23, 1995)

 

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

 

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

 

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

 

5.  Amendment No. 5 dated June 25, 1999(Incorporated by reference to Exhibit No. 10(k)(5) to Annual Report on Form10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

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

 

 7. Amendment dated January 1, 2001 (Incorporated by reference to ExhibitNo. 10(m)(7) to Annual Report on Form 10-K (Registrant No. 1-2248) filed withthe Commission on March 30, 2001)

 

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

 

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

 

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

 

11.  Amendment No. 11 dated November 11, 2004(Incorporated by reference to Exhibit 10(e)(11) to Quarterly Report on Form10-Q (Registrant No. 1-12248) for the third quarter of fiscal 2004 filed withthe Commission on November 15, 2004)

 

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 August 31,1992)

 

10(g) Contract between Kaiser-Hill Company, LLCand the U.S. Department of Energy dated January 24, 2000 (Incorporated byreference to Exhibit No. 10(o) to Annual Report on Form 10-K (Registrant No.1-12248) filed with the Commission on April 17, 2000)

 

1. Modification M116 to Contract #DE-AC34-00RF01904,effective March 24, 2004 (Incorporated by reference to Exhibit 10(g)(1) toAnnual Report on Form 10-K (Registrant No. 1-12248) filed with the Commissionon March 30, 2004)

10(h)  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)

 

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

 

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

 

10(j)  Kaiser Group Holdings,Inc. 2002 Equity Compensation Plan, as amended (Incorporated by reference toExhibit No. 10 to Registration Statement on Form S-8 (Registration No.333-107912) filed with the Commission on August 13, 2003)

 

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

 

10(l) Transition Agreement between Kaiser Group Holdings,Inc. and John T. Grigsby, Jr. effective as of August 31, 2004 (Incorporated byreference to Exhibit 99 to Current Report on Form 8-K (Registration No.1-12248) filed with the Commission on September 1, 2004)

 

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**Exhibit 14 — Corporate Code ofConduct**

 

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

 

**Exhibit No. 21 — ConsolidatedSubsidiaries of the Registrant as of May 1, 2005**

 

**Exhibit No. 31.1 — Certificationof the Principal Executive Officer**

 

Pursuant to Rule13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934

 

**Exhibit No. 31.2 — Certificationof the Principal Financial Officer**

 

Pursuant to Rule13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934

 

**Exhibit No. 32.1 — Certificationof the Principal Executive Officer**

 

Pursuant to 18 U.S.C.Section 1350

 

**Exhibit No. 32.2 — Certificationof the Principal Financial Officer**

 

Pursuant to 18 U.S.C.Section 1350

 

 

**SIGNATURES**

 

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

 
|                | **KAISER GROUP HOLDINGS, INC.**                                                                                   |   |
|---------------------|-------------------------------------------------------------------------------------------------------------------|--------|
|                | (Registrant)                                                                                                      |   |
|                |                                                                                                              |
| Date:  May 16, 2005 |                                                                                                              |
|                |                                                                                                              |
|                |                                                                                                              |
|                | /s/  Marian P. Hamlett                                                                                            |
|                | Marian  P. Hamlett                                                                                                |
|                | Executive  Vice President and Chief Financial  Officer (Duly authorized officer and principal  financial officer) |

 

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