**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended September 30, 2003**

 

**Commission FileNo. 1-12248**

 

**KAISER GROUP HOLDINGS, INC.**

(successor issuer to Kaiser GroupInternational, Inc.)

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                                |   | **54-2014870**                        |
|-----------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)             |   | (I.R.S. Employer  Identification No.) |
|                                                                        |   |                                  |
| **12303 Airport  Way, Suite 125, Broomfield, Colorado**                     |   | **80021-0007**                        |
| (Address of principal executive  offices)                                   |   | (Zip Code)                            |
|                                                                        |   |                                  |
| Registrant’s telephone number  including area code: **(720) 889-2770** |

 

Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and (2)has been subject to such filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o No ý

 

**APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVEYEARS:**

 

Indicate by check mark whether the registranthas filed all documents and reports required to be filed by Section 12, 13or 15(d) of the Securities Exchange Act of 1934 subsequent to the distributionof securities under a plan confirmed by a court.  Yes ý No o

 

The Plan of Reorganization of Kaiser GroupInternational, Inc. under Chapter 11 of the Bankruptcy Code became effective onDecember 18, 2000.  The Planprovides, among other things, that holders of shares of common stock of KaiserGroup International, Inc. received shares of common stock of Kaiser GroupHoldings, Inc. and that holders of specified outstanding debt obligations andother specified claimants received cash and shares of preferred stock andcommon stock of Kaiser Group Holdings, Inc., all in accordance with the termsset forth in the Plan. The initial distribution of securities occurred as ofApril 17, 2001.

 

As of November 11, 2003, there were1,594,162 shares of Kaiser Group Holdings, Inc. Common Stock, par value $0.01per 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 -  September 30, 2003 and December 31, 2002                                             |   |
|                                |                                                                                                                          |   |
|                                | Consolidated Statements of Operations and  Comprehensive Income  Three and Nine Months Ended September 30, 2003 and 2002 |   |
|                                |                                                                                                                          |   |
|                                | Consolidated Statements of Cash Flows -  Nine Months Ended September 30, 2003 and 2002                                   |   |
|                                |                                                                                                                          |   |
|                                | Notes to Consolidated Financial Statements                                                                                    |   |
|                                |                                                                                                                          |
|                                | Item 2. Management’s Discussion and Analysis of Financial Condition  and Results of Operations                           |   |
|                                |                                                                                                                          |   |
|                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                            |   |
|                                |                                                                                                                          |   |
|                                | Item 4. Controls and Procedures                                                                                               |   |
|                                |                                                                                                                          |   |
| **Part II - Other Information**     |                                                                                                                          |
|                                |                                                                                                                          |   |
|                                | Item 1. Legal Proceedings                                                                                                     |   |
|                                |                                                                                                                          |   |
|                                | Item 2. Changes in Securities and Use of  Proceeds                                                                            |   |
|                                |                                                                                                                          |   |
|                                | Item 3. Defaults Upon Senior Securities                                                                                       |   |
|                                |                                                                                                                          |   |
|                                | Item 4. Submission of Matters to a Vote of  Security Holders                                                                  |   |
|                                |                                                                                                                          |   |
|                                | Item 5. Other Information                                                                                                     |   |
|                                |                                                                                                                          |   |
|                                | Item 6. Exhibits and Reports on Form 8-K                                                                                      |   |
|                                |                                                                                                                          |
| **Signatures**                      |                                                                                                                          |
|                                     |                                                                                                                               |        |  |  |

 

2

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**KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Inthousands, except share amounts)**

 

 
|                                                                                                                             |   | **September 30,  2003** |       | **December 31,  2002** |       |
|----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|------------|
|                                                                                                                             |   | **(unaudited)**              |       |                        |       |
| **ASSETS**                                                                                                                       |   |                         | ** ** |                        | ** ** |
| Current Assets                                                                                                                   |   |                         |       |                        |       |
| Cash and cash equivalents                                                                                                        |   | $                            | 12,208     |                        | $          | 17,413 |   |
| Restricted cash and cash equivalents                                                                                             |   | 9,431                        |       | 18,679                      |       |
| Prepaid expenses and other current assets                                                                                        |   | 1,167                        |       | 2,404                       |       |
| Net assets of discontinued operations                                                                                            |   | 6,000                        |       | 6,000                       |       |
| Total Current Assets                                                                                                             |   | 28,806                       |       | 44,496                      |       |
|                                                                                                                             |   |                         |       |                        |       |
| Other Assets                                                                                                                     |   |                         |       |                        |       |
| Investments in and advances to affiliates                                                                                        |   | 49,445                       |       | 45,663                      |       |
| Notes receivable                                                                                                                 |   | 5,894                        |       | 5,894                       |       |
| Other long-term assets                                                                                                           |   | 185                          |       | 142                         |       |
|                                                                                                                             |   | 55,524                       |       | 51,699                      |       |
| Total Assets                                                                                                                     |   | $                            | 84,330     |                        | $          | 96,195 |   |
|                                                                                                                             |   |                         | ** ** |                        | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                    |   |                         | ** ** |                        | ** ** |
|                                                                                                                             |   |                         |       |                        |       |
| Current Liabilities                                                                                                              |   |                         |       |                        |       |
| Accounts payable                                                                                                                 |   | $                            | 511        |                        | $          | 922 |   |
| Post retirement benefit plan obligation                                                                                          |   | 6,983                        |       | 7,193                       |       |
| Other accrued expenses                                                                                                           |   | 5,450                        |       | 6,501                       |       |
| Preferred stock dividend payable                                                                                                 |   | —                       |       | 654                         |       |
| Interest payable on preferred stock                                                                                              |   | 484                          |       | —                      |       |
| Deferred tax liability                                                                                                           |   | 7,647                        |       | 6,538                       |       |
| Income taxes payable                                                                                                             |   | 1,217                        |       | 640                         |       |
| Total Current Liabilities                                                                                                        |   | 22,292                       |       | 22,448                      |       |
|                                                                                                                             |   |                         |       |                        |       |
| Long Term Liabilities                                                                                                            |   |                         |       |                        |       |
| Mandatorily redeemable preferred stock                                                                                           |   | 41,419                       |       | —                      |       |
|                                                                                                                             |   |                         |       |                        |       |
| Commitments and Contingencies                                                                                                    |   |                         |       |                        |       |
|                                                                                                                             |   |                         |       |                        |       |
| Preferred stock, par value $.01 per share                                                                                        |   | —                       |       | 55,942                      |       |
|                                                                                                                             |   |                         |       |                        |       |
| Common stock, par value $.01 per share:                                                                                          |   |                         |       |                        |       |
| Authorized—3,000,000 shares                                                                                                 |   |                         |       |                        |       |
| Issued and outstanding—1,594,162 and  1,590,062 shares at September 30, 2003 and December 31, 2002,  respectively |   | 16                           |       | 16                          |       |
| Capital in excess of par                                                                                                         |   | 8,481                        |       | 8,606                       |       |
| Retained earnings                                                                                                                |   | 12,085                       |       | 9,215                       |       |
| Accumulated other comprehensive income  (loss)                                                                                   |   | 37                           |       | (32                         | )          |
| Total Shareholders’ Equity                                                                                                  |   | 20,619                       |       | 17,805                      |       |
| Total Liabilities and Shareholders’ Equity                                                                                  |   | $                            | 84,330     |                        | $          | 96,195 |   |

 

See notes to consolidated financial statements.

 

3

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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 September 30,** |   | **For the  Nine Months Ended   September, 30** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                                                                                                                                                     |   | **2003**                                           |   | **2002**                                       |   | **2003** |   | **2002** |   |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Gross Revenue                                                                                                                                                                                                            |   | $                                                  | — |                                           | $      | — |   | $ | — |   | $ | — |   |
| Subcontract and direct material costs                                                                                                                                                                                    |   | —                                             |   | —                                         |   | — |   | — |   |
| Service Revenue                                                                                                                                                                                                          |   | —                                             |   | —                                         |   | — |   | — |   |
| Operating Expenses                                                                                                                                                                                                       |   |                                               |   |                                           |   |   |   |   |   |
| Administrative expenses                                                                                                                                                                                                  |   | 2,094                                              |   | 1,735                                          |   | 4,987 |   | 7,004 |   |
| Operating Loss                                                                                                                                                                                                           |   | (2,094                                             | )      | (1,735                                         | )      | (4,987 | ) | (7,004 | ) |
| Other Income                                                                                                                                                                                                             |   |                                               |   |                                           |   |   |   |   |   |
| Equity income in earnings of affiliate, net  of amortization of $881 for each of the three months ended September 30,  2003 and 2002 and $2,643 for each of the nine months ended September 30,  2003 and 2002 |   | 4,150                                              |   | 3,678                                          |   | 12,782 |   | 10,704 |   |
| Gain on sale of securities                                                                                                                                                                                               |   | —                                             |   | —                                         |   | — |   | 106 |   |
| Gain on sale of investment                                                                                                                                                                                               |   | —                                             |   | 3,371                                          |   | — |   | 3,371 |   |
| Write-off of notes receivable and accrued  interest                                                                                                                                                                      |   | —                                             |   | (1,320                                         | )      | — |   | (1,320 | ) |
| Interest income                                                                                                                                                                                                          |   | 186                                                |   | 265                                            |   | 636 |   | 524 |   |
| Interest expense for preferred dividends                                                                                                                                                                                 |   | (733                                               | )      | —                                         |   | (733 | ) | — |   |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Income from Continuing Operations Before  Income Tax                                                                                                                                                                     |   | 1,509                                              |   | 4,259                                          |   | 7,698 |   | 6,381 |   |
| Income tax expenses                                                                                                                                                                                                      |   | (892                                               | )      | (1,476                                         | )      | (3,296 | ) | (2,402 | ) |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Income From Continuing Operations                                                                                                                                                                                        |   | 617                                                |   | 2,783                                          |   | 4,402 |   | 3,979 |   |
| Loss from discontinued operations, net of  tax                                                                                                                                                                           |   | —                                             |   | —                                         |   | — |   | (197 | ) |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Net Income                                                                                                                                                                                                               |   | 617                                                |   | 2,783                                          |   | 4,402 |   | 3,782 |   |
| Preferred stock dividends                                                                                                                                                                                                |   | —                                             |   | (1,017                                         | )      | (1,532 | ) | (3,189 | ) |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Income Applicable to Common Shareholders                                                                                                                                                                                 |   | $                                                  | 617    |                                           | $      | 1,766 |   | $ | 2,870 |   | $ | 593 |   |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Basic and Diluted Income (Loss) Per Common  Share:                                                                                                                                                                       |   |                                               |   |                                           |   |   |   |   |   |
| Continuing operations, net of tax                                                                                                                                                                                        |   | $                                                  | 0.39   |                                           | $      | 1.11 |   | $ | 1.80 |   | $ | 0.49 |   |
| Discontinued operations, net of tax                                                                                                                                                                                      |   | —                                             |   | —                                         |   | — |   | (0.12 | ) |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Net Income Per Share                                                                                                                                                                                                     |   | $                                                  | 0.39   |                                           | $      | 1.11 |   | $ | 1.80 |   | $ | 0.37 |   |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Weighted average shares for basic and  diluted earnings  per common share                                                                                                                                           |   | 1,595                                              |   | 1,590                                          |   | 1,594 |   | 1,589 |   |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Comprehensive Income                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Net Income                                                                                                                                                                                                               |   | $                                                  | 617    |                                           | $      | 2,783 |   | $ | 4,402 |   | $ | 3,782 |   |
| Other Comprehensive Income (Loss):                                                                                                                                                                                       |   |                                               |   |                                           |   |   |   |   |   |
| Realization of gain on securities, net of  tax                                                                                                                                                                           |   | —                                             |   | —                                         |   | — |   | (393 | ) |
| Change in cumulative foreign translation  adjustments                                                                                                                                                                    |   | 1                                                  |   | (7                                             | )      | 69 |   | 3 |   |
|                                                                                                                                                                                                                     |   |                                               |   |                                           |   |   |   |   |   |
| Total Comprehensive Income                                                                                                                                                                                               |   | $                                                  | 618    |                                           | $      | 2,776 |   | $ | 4,471 |   | $ | 3,392 |   |

 

See notes to consolidated financialstatements.

 

4

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**KAISER GROUPHOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Inthousands)**

 
|                                                                           |   | **For the  Nine Months ended  September 30,** |   |
|--------------------------------------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                                                           |   | **2003**                                                |   | **2002** |   |
|                                                                           |   | **(Unaudited)**                                         |   |
| Operating  Activities:                                                         |   |                                                    |   |   |   |
| Net income                                                                     |   | $                                                       | 4,402  |   | $ | 3,782 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |   |                                                    |   |   |   |
| Loss of discontinued operations, net of tax                                    |   | —                                                  |   | 197 |   |
| Deferred taxes related to continuing  operating activities                     |   | 1,109                                                   |   | 1,015 |   |
| Gain on sale of securities                                                     |   | —                                                  |   | (106 | ) |
| Gain on sale of investment                                                     |   | —                                                  |   | (3,371 | ) |
| Equity in earnings of affiliate                                                |   | (12,782                                                 | )      | (10,704 | ) |
| Write-off of note receivable and accrued  interest                             |   | —                                                  |   | 1,320 |   |
| Changes in operating assets and  liabilities:                                  |   |                                                    |   |   |   |
| Prepaid expenses and other current assets                                      |   | 1,237                                                   |   | (679 | ) |
| Accounts payable and accrued expenses                                          |   | (1,540                                                  | )      | 1,502 |   |
| Income taxes payable                                                           |   | 577                                                     |   | (278 | ) |
| Other operating activities                                                     |   | 38                                                      |   | 109 |   |
| Net Cash Used in Operating Activities                                          |   | (6,959                                                  | )      | (7,213 | ) |
| Investing Activities:                                                          |   |                                                    |   |   |   |
| Distributions from affiliate                                                   |   | 9,000                                                   |   | 9,000 |   |
| Proceeds from sale of investment                                               |   | —                                                  |   | 4,521 |   |
| Proceeds from sale of stock                                                    |   | —                                                  |   | 5,961 |   |
| Net Cash Provided by Investing Activities                                      |   | 9,000                                                   |   | 19,482 |   |
| Financing Activities:                                                          |   |                                                    |   |   |   |
| Release of restricted cash                                                     |   | —                                                  |   | 1,435 |   |
| Transfer to restricted cash                                                    |   | —                                                  |   | (4,508 | ) |
| Transfer from restricted cash for the  redemption of preferred stock           |   | 8,913                                                   |   | — |   |
| Payment of preferred stock dividends                                           |   | (1,701                                                  | )      | (3,241 | ) |
| Redemption of preferred stock                                                  |   | (14,146                                                 | )      | — |   |
| Purchase of preferred treasury stock                                           |   | (312                                                    | )      | (3,983 | ) |
| Net Cash Used in Financing Activities                                          |   | (7,246                                                  | )      | (10,297 | ) |
| Increase (decrease) in Cash and Cash  Equivalents                              |   | (5,205                                                  | )      | 1,972 |   |
| Cash and Cash Equivalents at Beginning of  Period                              |   | 17,413                                                  |   | 8,848 |   |
| Cash and Cash Equivalents at End of Period                                     |   | $                                                       | 12,208 |   | $ | 10,820 |   |

 

See notes to consolidated financialstatements.

 

5

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

1.                                       Basis of Presentation

 

The accompanyingconsolidated financial statements of Kaiser Group Holdings, Inc. andsubsidiaries (the Company), except for the December 31, 2002 balance sheet(derived from audited financial statements), are unaudited and have beenprepared in accordance with generally accepted accounting principles in theUnited States of America (GAAP) for interim financial information.  Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financialstatements.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included.

 

These statementsshould be read in conjunction with the Company’s audited consolidated financialstatements and footnotes and the other information included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2002.  Certain reclassifications have been made tothe prior period financial statements to conform them to the presentation usedin the September 30, 2003 financial statements.

 

Kaiser GroupHoldings, Inc. is a Delaware holding company that was formed onDecember 6, 2000 for the purpose of owning all of the outstanding stock ofKaiser Group International, Inc. (Old Kaiser), which in turn continues to ownthe stock of its remaining subsidiaries. On June 9, 2000, Old Kaiser and38 of its domestic subsidiaries voluntarily filed for protection under Chapter11 of the United States Bankruptcy Code in the District of Delaware (case nos.00-2263 to 00-2301). Old Kaiser emerged from bankruptcy with an approved planof reorganization (the Second Amended Plan of Reorganization (the Plan)) thatwas effective on December 18, 2000 (the Effective Date). The Company isdeemed a “successor issuer” to Old Kaiser by virtue of Rule 12g-3(a) under theSecurities Exchange Act of 1934. References to the “Company” or “KaiserHoldings” in this report refer to Kaiser Group Holdings, Inc. and itsconsolidated subsidiaries. A summary of the Plan for Old Kaiser can be found ina Current Report on Form 8-K dated December 5, 2000 filed by Old Kaiser.

 

Currently, apart from resolving remaining bankruptcy claims, the Company has only a limited number ofactivities, assets and liabilities, primarily consisting of:

 

•                  the ownership ofa 50% interest in Kaiser-Hill Company, LLC (Kaiser-Hill), which serves as thegeneral contractor at the U.S. Department of Energy’s Rocky Flats EnvironmentalTechnology Site near Denver, Colorado, for the performance of a contract forthe closure of the site (the Closure Contract). (See note 4 for summarizedfinancial information.)

•                  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.

•                  a wholly-ownedcaptive insurance company that is no longer issuing new policies and is simplyinvolved in resolving remaining claims.

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

 

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

 

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

 

6

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on estimates and assumptions about circumstances andevents that had not yet taken place. Estimates and assumptions regarding individual retained matters whichform the collective composition of the overall enterprise value as ofDecember 18, 2000 are inherently subject to significant economic andcompetitive uncertainties and contingencies beyond the control of theCompany.  Accordingly, there may bedifferences between projections and actual results because events andcircumstances frequently do not occur as expected and may be significant.  More specifically, assumptions within thevaluation related to the amount and timing of the ultimate performance andrelated cash flows of the Company’s investment in Kaiser-Hill have the greatestimpact on the overall enterprise valuation.

 

2.                                       GeneralTerms of Plan and Status of Bankruptcy Distributions

 

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

 

In general terms,the Plan 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 received cash 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.

 

Pursuant to theterms of Old Kaiser’s Plan, the Company was required to complete its initialbankruptcy distribution within 120 days of the effective date of the Plan.  Accordingly, on April 17, 2001, theCompany effected its initial distribution. At that time, there were approximately $136.8 million of Class 4 claimsthat had been allowed in the bankruptcy process.  The amount of unresolved claims remaining at April 17, 2001was approximately $130.5 million.

 

To address theremaining unresolved claims, the Bankruptcy Court issued an order onMarch 27, 2001 establishing an Alternative Dispute Resolution (ADR)procedure whereby the remaining claimants and Old Kaiser produce limitedsupporting data relative to their respective positions and engage in initialnegotiation efforts in an attempt to reach an agreed claim determination.  If necessary, the parties are thereafterrequired to participate in a non-binding mediation before a mediatorpre-selected by the Bankruptcy Court.  All unresolved claims as of March 27, 2001 are subject to theADR process. Since April 17, 2001, the date of the initial distribution,$109.2 million of asserted claims have been withdrawn, negotiated or mediatedto an agreed amount, resulting in cash payments approximating $1.4 million andissuances of 683 shares of New Preferred and 823 shares of New Common. As ofNovember 1, 2003, the amount of unresolved claims was approximately $29.5million. The Company expects that substantial progress will continue to be madein the resolution of claims over the balance of 2003.  The Company currently believes that the amount of Class 4 claimsultimately to be allowed in the Old Kaiser bankruptcy proceeding will notexceed $145.0 million.  As demonstratedby the claim settlements completed since April 17, 2001, and based on thebelief that it is in the best interest of the Company and its currentshareholders, the Company has been settling

 

7

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certain remainingClass 4 claims entirely for cash payments in lieu of the combination of cashand New Preferred and New Common as contemplated in the Plan.  The Company intends to continue to use thissettlement alternative during its resolution of remaining Class 4 claims, but hasno ability to determine the effect of the outcome on its overall financialcondition in the event such settlements are accepted in the future.

 

With respect tothe unresolved claims, the Plan required that, at the date of the initialdistribution, sufficient cash reserves be retained by the Company such that, ifall remaining unresolved claims were ultimately deemed allowed at theoriginally claimed amount, the Company would be able to satisfy the allowedclaims, including dividends and, as discussed in Note 5 after the adoption ofFAS 150, interest expense, accruing on related preferred stock, sinceApril 17, 2001.  The cash reserverequirement, and the fact that the Company had not yet received a substantialcash payment the Company asserted it was due from Nova Hut, limited the amountof cash available at the time of the initial distribution to the holders ofallowed Class 4 claims. The Company determined that an aggregate of $25.0million, or approximately $0.09347 per $1.00 of allowed and “deemed allowed”Class 4 claims, was available at the time of the initial distribution toallowed Class 4 claim holders.  Thus,more shares of New Preferred were issued than would have been had the claimsresolution process advanced more quickly and had more cash been available fromthe Nova Hut project and/or other sources. Due to the proportion of remaining unresolved Class 4 claims in relationto the total of all resolved and unresolved claims, approximately $12.3 millionof the $25.0 million in available cash was reserved and classified asRestricted Cash on April 17, 2001.

 

From time to timein the future, as remaining unresolved claims are resolved, excess cash fromthe “reserve” fund (including cash added to “reserve” fund in payment of proforma dividends, classified as interest expense subsequent to July 1,2003, on retained shares of New Preferred) must be used to redeem outstandingshares of New Preferred.  TheJanuary 2003 redemption was funded with $8.9 million and $5.2 million ofrestricted and unrestricted cash, respectively.

 

3.                                       Earnings Per Share

 

Basic earnings per share (EPS) is computed bydividing net income by the weighted average number of common shares outstandingfor the period.  The weighted averageshares outstanding for the period ended September 30, 2003 retroactivelyadjusts for the conversion of the Old Common to New Common effective with theadoption of fresh-start reporting.  Asadditional distributions of New Common are made to holders of newly allowedClass 4 claims, the conversion ratio of 96 shares to one share may be adjustedto reflect the final total number of shares of New Common (as discussed in Note2).

 

Diluted EPS normally includes theweighted-average effect of dilutive securities outstanding during theperiod.  Pursuant to the Plan that waseffective as of December 18, 2000, all then outstanding common stockequivalents were cancelled. Accordingly, no anti-dilutive information is presented herein.

 

In 2003, the effect of preferred dividends of$0.7 million and $2.3 million has been included in continuing operations in thecalculation of basic and diluted earnings per share for the three and ninemonths ended September 30, 2003, respectively.  In 2002, the effect of preferred dividends of $1.0 million and$3.2 million has been included in continuing operations in the calculation ofbasic and diluted earnings per share for the three and nine months endedSeptember 30, 2002, respectively. As discussed in Note 5, the Company adopted FAS 150 effectiveJuly 1, 2003.  Therefore, the $0.7million of third quarter preferred stock dividends has been shown as interestexpense.

 

4.                                       Summarized Financial Information ofUnconsolidated Affiliate

 

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

 
|                     |   | **September 30, 2003** |   | **December 31, 2002** |   |
|--------------------------|--------|-----------------------------|--------|----------------------------|--------|
|                     |   |                        |   |                       |   |
| Current assets           |   | 122,343                     |   | 115,030                    |   |
| Non-current  assets      |   | 106,464                     |   | 78,734                     |   |
| Current  liabilities     |   | 129,780                     |   | 107,586                    |   |
| Non-current  liabilities |   | 28,644                      |   | 28,644                     |   |

 

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|                        |   | **Three Months Ended**      |    | **Nine Months Ended**       |   |
|-----------------------------|--------|-----------------------------|---------|-----------------------------|--------|
|                        |   | **September 30, 2003** |    | **September 30, 2002** |   | **September 30, 2003** |   | **September 30, 2002** |   |
|                        |   |                        |    |                        |   |   |   |   |   |
| Gross revenue               |   | $                           | 180,222 |                        | $      | 182,285 |   | $ | 531,995 |   | $ | 490,724 |   |
| Subcontracts  and materials |   | 119,800                     |    | 120,492                     |   | 346,198 |   | 321,710 |   |
| Service  revenue            |   | 60,422                      |    | 61,793                      |   | 185,797 |   | 169,014 |   |
| Operating  expenses         |   | (50,374                     | )       | (52,723                     | )      | (154,992 | ) | (142,455 | ) |
| Other income                |   | 14                          |    | 47                          |   | 44 |   | 134 |   |
| Net income                  |   | $                           | 10,062  |                        | $      | 9,117 |   | $ | 30,849 |   | $ | 26,693 |   |

 

5.                                       Mandatorily Redeemable Preferred Stock

 

Kaiser Holdings’ certificate of incorporationauthorizes the issuance of 2,000,000 shares of New Preferred. The Company hadNew Preferred outstanding with a liquidation preference of $41.4 million and$55.9 million, respectively, as of September 30, 2003 andDecember 31, 2002 (net of treasury stock of $5.6 million and $6.6 million,respectively).  The New Preferred is aseries of authorized preferred stock designated as “Series 1 RedeemableCumulative Preferred Stock,” and has a par value of $0.01 per share and aliquidation preference of $55 per share. The New Preferred ranks ahead ofKaiser Holdings’ New Common.

 

The Company adopted FAS 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity” effectiveJuly 1, 2003.  Due to themandatorily redeemable feature of the New Preferred, described in greaterdetail below, the New Preferred has been reclassified from mezzanine equity toa long term liability on the consolidated balance sheet, and the preferredstock dividends have been reclassified to interest expense on the consolidatedstatement of operations effective July 1, 2003.  There was no transition adjustment recognized upon adoption ofFAS 150.  There were 753,072 and1,017,120 shares of New Preferred outstanding at September 30, 2003 andDecember 31, 2002, respectively, net of 101,471 and 119,587 treasuryshares, respectively.   The NewPreferred is shown at the liquidation value of $55 per share.

 

Pursuant to approval by the Company’s Boardof Directors, in 2003 and 2002 the Company purchased 6,848 and 119,587 sharesof outstanding New Preferred at prices ranging from $25.62 to $50.55 pershare.  The purchase of the treasuryshares was recorded as a reduction to preferred stock equal to the $55 pershare liquidation preference with the remaining difference between cost and theliquidation preference recorded as an increase to paid-in capital.

 

The certificate of incorporation of KaiserHoldings and Delaware law permit the Board of Directors to issue additionalseries of preferred stock, except that the Board of Directors may not authorizethe issuance of any securities that rank senior to or on a parity with the NewPreferred without the consent of holders of at least two-thirds of the NewPreferred.

 

Cumulative dividends, classified as interestexpense subsequent to July 1, 2003, on the New Preferred are payable on aquarterly basis, as of April 30, July 31, October 31 andJanuary 31, either in cash at an annual rate of 7% of the liquidationpreference per share or in additional shares of New Preferred at an annual rateof 12% of the per share liquidation preference. Dividends accrue on the NewPreferred commencing with the initial distribution date, April 17, 2001.Dividends will not be paid to any affiliate of Kaiser Holdings on account ofthat affiliate’s ownership of shares of preferred stock. If Kaiser Holdingsfails to pay a quarterly dividend when due, holders of New Preferred will havethe right to elect an additional director for each dividend payment missed, upto a maximum of two additional directors, but only until such dividend is paidor provided for in full.   The dividenddue to holders of record on October 31, 2003, totaling approximately $0.6million, was paid on November 7, 2003. At September 30, 2003, in addition to the $2.8 million of cashreserves for unresolved claims, the Company had $2.4 million in cash reservedfor the payment of accrued dividends on any future issuances of New Preferredissued as a result of remaining bankruptcy claim resolutions (any New Preferredissued as a result of claim resolutions also carries the right to dividendsretroactively from April 17, 2001).

 

The New Preferred has a liquidationpreference of $55 per share plus the amount of unpaid dividends, classified asinterest subsequent to July 1, 2003, if any. Upon the liquidation ordissolution of Kaiser Holdings, each holder of New Preferred (other than anaffiliate of Kaiser Holdings) is entitled to this per share liquidationpreference before any holders of New Common or any other junior securities ofKaiser Holdings receive any payment for their shares. If, in a liquidation ordissolution setting, assets remaining after distribution to holders of debt andother obligations are insufficient to pay all holders of New Preferred the pershare liquidation preference, then such assets will be distributed on aproportionate basis to the holders of New Preferred (other than affiliates ofKaiser Holdings) and any securities ranking on a parity with the New Preferred.

 

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The Company has the option to redeem the NewPreferred at any time, in whole or in part, at a redemption price of 100% ofthe liquidation preference per share plus all accrued and unpaid dividends. Inaddition, any net proceeds in excess of $3 million in a calendar year receivedby the Company or any of its direct or indirect subsidiaries from thedisposition of assets to an unaffiliated party outside of the ordinary courseof business must be used to redeem New Preferred at a redemption price of 100%of the liquidation preference per share plus all accrued and unpaid dividends.Furthermore, to the extent that certain categories of cash are received fromNova Hut, it must be used to redeem New Preferred at a redemption price of 100%of the liquidation preference per share plus all accrued and unpaid dividends.

 

All outstanding shares of New Preferred arerequired to be redeemed by the Company on or before December 31, 2007, andif such redemption does not occur, holders of New Preferred will be entitled toelect two-thirds of the directors of the Company. If shares of New Preferredstock are held by any affiliate of the Company, those shares may not beredeemed pursuant to any of the redemption provisions otherwise applicable tothe New Preferred.

 

Holders of New Preferred generally are entitled to vote with holders ofNew Common on all matters submitted to a vote of shareholders, with each share ofNew Preferred being entitled to one-tenth of a vote. In addition, holders ofNew Preferred have the right to vote separately as a class to exercise theirright to elect an additional director due to a failure to pay a quarterlydividend, to elect two-thirds of the directors if the New Preferred is notredeemed by December 31, 2007, and to consent to the issuance of anysenior or parity securities. The terms of the New Preferred may not bematerially or adversely modified without the consent of holders of at leasttwo-thirds of the New Preferred. If the Company or any of its affiliates holdsany New Preferred, they will not be entitled to vote that New Preferred.

 

The Plan provides that Major Stockholders(defined as holders of 10% or more of the outstanding shares of New Preferredor New Common, or a person who is an “affiliate” of Kaiser Holdings as definedunder the Federal securities laws) have certain registration rights. Ingeneral, a Major Stockholder may request Kaiser Holdings to register under theSecurities Act of 1933 for the sale of all, but not less than all, of the NewPreferred and/or New Common owned by the Major Stockholder. Upon request forsuch a registration from a Major Stockholder, Kaiser Holdings is required togive notice to other Major Stockholders and use its best efforts to cause aregistration statement to become effective as expeditiously as possible andmaintain such registration statement current for a period of 12 months. MajorStockholders are not entitled to request registration until one year after theeffective date of the Plan, and Kaiser Holdings is not obligated to file aregistration statement in response to a request from a Major Stockholder untilsuch time as Kaiser Holdings is eligible to use Form S-3 under the SecuritiesAct of 1933 for such an offering. Kaiser Holdings is not required to effectmore than one registration for Major Stockholders during any twelve-monthperiod. These registration rights expire on December 31, 2007. The Planalso contemplates that Major Stockholders will have “piggyback” registrationrights in connection with a proposed underwritten public offering of KaiserHoldings New Common or New Preferred solely for cash and for its own account.

 

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

 

KGP is the Company subsidiary that owns(through a wholly owned subsidiary of KGP) the 50% interest in Kaiser-HillCompany LLC.  KGP has outstanding putrights, expiring on December 31, 2007, that obligate it to purchase NewPreferred owned by a holder of the put right, at the holder’s option, underthree circumstances:

 

•                  if KGP receives net after-taxproceeds from any cash distributions from Kaiser-Hill that, on a quarterlybasis, exceed 2.8 times the amount of cash required to pay all past accrued butunpaid cash dividends on the New Preferred, plus the next scheduled quarterlycash dividend on New Preferred;

•                  if KGP receives net after-tax proceeds from any direct or indirect disposition of any interestin Kaiser-Hill; or

•                  ifKGP receives net after-tax proceeds from an extraordinary distribution fromKaiser-Hill.

 

Upon exercise of a put, KGP will pay anexercising holder 100% of the liquidation preference of the New Preferred thatis the subject of the KGP put rights, plus all accrued and unpaid dividends onthe New Preferred. KGP will purchase shares of New Preferred on a pro ratabasis based upon the number of shares of preferred stock as to which puts havebeen properly exercised, but only up to the amount of the available netafter-tax proceeds from triggering events. KGP will not purchase any fractionalshares. KGP put rights are transferable except that puts shall cease to betransferable if KGP determines that any further transfer would requireregistration of the puts as a class of securities under the Securities ExchangeAct of 1934. Kaiser Holdings does not presently plan to arrange for trading ofthe KGP put rights on the NASD electronic bulletin board or otherwise.

 

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.  Due to the decrease in thenumber of shares of New

 

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Preferred outstanding and related dividend requirement, the Companyanticipates trigger events to occur more frequently.  However, as discussed below, rather than using the mechanism ofthe put rights to satisfy the Company’s obligations to holders of the putrights after a trigger, the Company may satisfy the KGP put rights obligationsthrough redemptions of New Preferred.

 

Redemption ofPreferred Stock

 

Pursuant tothe terms of the Company’s Plan of Reorganization, the Company has anadditional requirement to utilize certain restricted cash balances to redeemoutstanding New Preferred.  Rather thanusing the mechanism of the put rights to satisfy the Company’s obligations toholders of the put rights after a trigger, the Company will utilize the cashreceived related to the triggering event, excess operating cash and observe therequirement in the Plan of Reorganization to use certain restricted cashbalances for preferred redemptions.  TheCompany believes this is a more cost-efficient manner of satisfying theobligations associated with the KGP put rights and plans to continue to usethis redemption process to satisfy such obligations in the future.

 

The Companyreceived distributions from Kaiser-Hill during the third quarter of 2003 in anamount that resulted in a trigger of the put rights – effectively requiring anoffer by the Company to redeem certain New Preferred.  In addition, the Company had certain restricted cash balancesavailable, which pursuant to the terms of its Plan of Reorganization, arerequired to be used to redeem outstanding New Preferred.  Rather than using the mechanism of the putrights to satisfy the Company’s obligations to holders of the put rights aftera trigger, the Company observed the requirements in the Plan of Reorganizationto use certain restricted cash balances, and in the terms of the New Preferred,to use certain available cash, for preferred redemptions.  The Company redeemed a total of $6.2 millionof New Preferred, or 113,530 shares, on October 10, 2003.  The Company believes this was a morecost-efficient manner of satisfying the obligations associated with the KGP putrights and plans to continue to use this redemption process to satisfy suchobligations in the future.

 

During thefourth quarter of 2002, the Company also received distributions from Kaiser-Hillin an amount that resulted in a trigger of the put rights.  Combining the cash received related to thetriggering event, excess operating cash and the excess restricted cash balancesfor preferred redemptions, the Company redeemed a total of $15.5 million of NewPreferred, or 307,128 shares, on January 31, 2003.

 

6.                                       Other Contingencies

 

Kaiser Holdings has various obligations and liabilities from itscontinuing operations, including general overhead expenses in connection withmaintaining, operating and winding down the various entities and net assetscomprising Kaiser Holdings. Additionally, the Company believes contingent liabilities may exist inthe 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 Nova Hut project. After construction of the steel mini-mill was complete in 2000, thecontract with Nova Hut provided for a maximum of three possible performancetests. The first performance test was completed on November 13, 2000.Kaiser Netherlands believes that the first performance test was successful andthat Nova Hut should have agreed to final acceptance of the mini-mill and madefinal payment of amounts accrued by Kaiser Netherlands throughout theproject.  Instead, Nova Hut assertedthat the first test was not successful. To date, this dispute has not been resolved, and the Company hasresorted to legal proceedings to enforce its rights and those of itssubsidiary.  The primary legal venue atthis time is the Delaware bankruptcy proceedings for Old Kaiser, where OldKaiser has asserted claims against Nova Hut and the International FinanceCorporation (IFC), while rejecting substantial claims involving contract breachfrom Nova Hut and the IFC.  The claimsfiled by Nova Hut and the IFC in the Delaware bankruptcy court have been withdrawn.  The Company’s claims remain active.  The cost of the litigation of this disputehas had, and may continue to have, a negative impact on the cash flow of KaiserNetherlands and the Company.

 

The components of the “Net Assets ofDiscontinued Operations” consist entirely of the carrying value of the netassets of the Nova Hut project.  Basedon the Company’s continued concern over Nova Hut’s financial difficulties, theuncertainties of a possible settlement arising out of the bankruptcycourt-sponsored mediation and the uncertainties of a possible settlement orruling in the context of a possible future international arbitrationproceeding, in the fourth quarter of 2001, the Company established additionalreserves at December 31, 2001 to reduce the net carrying value of theremaining Nova Hut project to $6.0 million.

 

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Kaiser Hill

 

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

 

The Kaiser-Hill contract further provides that Kaiser-Hill will bereimbursed for the reasonable cost of bonds and insurance allocable to theRocky Flats contract and for liabilities and expenses incidental to theseliabilities, including litigation costs, to third parties not compensated byinsurance or otherwise. There is an exception to this reimbursement provisionapplicable to liabilities caused by the willful misconduct, lack of good faithor failure to exercise prudent business judgment by Kaiser-Hill’s managerialpersonnel.

 

The clean-up and closure of the DOE’s Rocky Flats site involvesubstantial performance risks.  Amongother things, Kaiser-Hill’s activities at the Rocky Flats site involve theclean-up, packaging and transportation of nuclear waste, and the demolition anddestruction of facilities where nuclear weapons components were previouslyproduced.  Some of the activities havenot been previously performed elsewhere, and therefore require the developmentof innovative and untested approaches. Kaiser-Hill emphasizes safety in its performance, but the nature of theRocky Flats site and the activities of Kaiser-Hill and its subcontractors atthe site are such that serious injuries, or even deaths, are possible.  Significant safety incidents at the sitecould stop or significantly impede the progress of work being performed at thesite by Kaiser-Hill and its subcontractors. The DOE contract contemplates that all, or substantially all, of thenuclear waste at Rocky Flats will be transported to other sites operated ormanaged by the DOE.  The appropriatesites for storage of certain of those nuclear wastes have not yet beenidentified.  In addition, objectionshave arisen from time to time with regard to the transportation and storage ofnuclear waste at certain sites previously scheduled by the DOE to receive wastefrom Rocky Flats.  Although the DOEcontract contemplates that the DOE is responsible for providing transportationand storage sites for nuclear waste from Rocky Flats, an inability to shipplutonium and other nuclear waste to DOE sites would pose a substantial risk tothe timely closure of the Rocky Flats site, and could interfere withKaiser-Hill’s ability to earn fees to which Kaiser-Hill believes it should beentitled.

 

As the contract between Kaiser-Hill and the DOE is cost-reimburseablein nature, the costs invoiced by Kaiser-Hill for reimbursement by the DOE aresubject to audit by the U.S. government. Also since the inception of Kaiser-Hill, the Company invoiced certainmanagement oversight costs to Kaiser-Hill. Government audits at Kaiser-Hill are in process for the years of thepredecessor contract, which ran from 1995 until January 2000.  Although Kaiser-Hill and the Company have historicallyprovided for their estimates of disallowed costs on cost-reimburseablecontracts, uncertainties exist with regard to whether government audits willresult in any disallowed costs needing to be refunded to the governmentcustomer.  The continued adequacy ofprovisions for reserves with regard to unallowable costs is reviewed regularly.

 

With respect to a revolving credit facility obtained by Kaiser-Hill inNovember 1999, both parents of Kaiser-Hill granted a first lien securityinterest to the Kaiser-Hill lenders in all of the ownership and equity interestof Kaiser-Hill and have agreed to cure any events of default by Kaiser-Hill onthe revolving credit facility.  As of September 30, 2003 andDecember 31, 2002, Kaiser-Hill had no outstanding balances on itsrevolving credit facility.

 

7.                                       Recent Accounting Pronouncements

 

In December 2002, the FinancialAccounting Standards Board (FASB) issued SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure, an amendment of FASB StatementNo. 123.”  SFAS No. 148 providesalternative methods of transition for a voluntary change to the fair marketvalue based method of accounting for stock-based compensation.  The Company does not presently expect tomake such a voluntary change.  In addition,SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. These amended disclosure requirements are applicable for financialstatements issued for interim periods beginning after December 15,2002.  The Company has recently adoptedthe 2002 Equity Compensation Plan, however, it does not currently have anyoutstanding stock options requiring disclosures under SFAS No. 148.

 

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In November 2002, FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others, an Interpretation ofFASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No.34,” (“FIN 45”) was issued.  FIN 45clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,”relating to guarantors’ accounting for, and disclosure of, the issuance ofcertain types of guarantees.  Thedisclosure provisions of FIN 45 are applicable to interim or annual periodsthat end after December 15, 2002, and did not have an impact on theSeptember 30, 2003 financial statements. The provisions for initial recognition and measurement under FIN 45 areeffective on a prospective basis for guarantees that are issued or modifiedafter December 31, 2002.  Theinitial recognition and measurement provisions under FIN 45 did not have anyimpact on the Company’s financial statements.

 

On May 31, 2003, FASB issued FASBStatement No. 150 (FAS 150), “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  FAS 150 improves the accounting for certain financial instrumentsthat, under previous guidance, issuers could account for as equity and requiresthat those instruments be classified as liabilities (or assets in certaincircumstances) in statements of financial position.  FAS 150 also requires disclosures about alternative ways ofsettling the instruments and the capital structure of entities – all of whoseshares are mandatorily redeemable.  FAS150 was to have been generally effective for all financial instruments enteredinto or modified after May 31, 2003, and otherwise effective at thebeginning of the first interim period beginning after June 15, 2003.  Recently, the FASB has deferred for anindefinite period the effective date for certain instruments and entities.  As discussed in Note 5, the Company hasadopted the provisions of FAS 150 in the third quarter of 2003.

 

**ITEM2****.  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**General Overview**

 

Kaiser Group Holdings, Inc. is a Delawareholding company formed on December 6, 2000 for the purpose of owning allof the outstanding stock of Kaiser Group International, Inc.  Kaiser Group International, Inc. continuesto own the stock of its remaining subsidiaries.  On June 9, 2000, Kaiser Group International, Inc. and 38 ofits domestic subsidiaries voluntarily filed for protection under Chapter 11 ofthe United States Bankruptcy Code in the District of Delaware (case nos.00-2263 to 00-2301). Kaiser Group International, Inc. emerged from bankruptcywith a confirmed Plan of Reorganization that was effective on December 18,2000.  In this document, we frequentlyuse the terms “we”, the “Company” and “Kaiser” to refer to Kaiser Group Holdings,Inc., Kaiser Group International, Inc. and other subsidiaries we own.

 

Under the Plan of Reorganization, KaiserGroup International, Inc. sold some of its businesses and made payments ofcash, stock or notes to various classes of creditors.  Currently, we are trying to resolve some outstanding creditorclaims through an alternative dispute resolution process.  We have only a limited number of activities,assets and liabilities, primarily consisting of the following:

 

•                  We ownKaiser-Hill Company, LLC equally with CH2M Hill Companies Ltd.  Kaiser-Hill is our major source ofincome.  Kaiser-Hill currently serves asthe general contractor at the U.S. Department of Energy’s Rocky FlatsEnvironmental Technology Site near Denver, Colorado.

 

•                  Wehave a substantial claim, pending resolution, against Nova Hut a.s., the ownerof a steel mini-mill for Nova Hut in the Czech Republic.  The engineering and construction of themini-mill was completed in 2000 by a subsidiary of Kaiser Group International,Inc. called Kaiser Netherlands, B.V.

 

•                  UntilSeptember 30, 2002 we held a minority ownership interest in ICF ConsultingGroup, Inc. (a division that Kaiser Group International, Inc. sold in1999).  We continue to hold an 81⁄2%subordinated promissory note of ICF Consulting due June 25, 2006 in theprincipal amount of $6.4 million as a result of that transaction.

 

•                  Wehave a wholly-owned captive insurance company that is no longer issuing newpolicies and is solely involved in resolving remaining claims made againstpreviously issued policies.

 

•                  Wehave an ongoing obligation to fund a capped, post-employment medical benefitplan for a fixed group of retirees.

 

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**Kaiser-Hill**

 

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

 

Kaiser-Hill currently serves as the general contractorat the U.S. Department of Energy’s Rocky Flats Environmental Technology Sitenear Denver, Colorado. Kaiser-Hill has performed since 1995 at this site, aformer Department of Energy nuclear weapons production facility.  Kaiser-Hill is working to stabilize andsafely store radioactive materials at the site and other locations, clean upareas contaminated with hazardous and radioactive waste, and  restore much of the 6,000 acre site to thepublic.  The level of success experiencedby Kaiser-Hill in achieving timely closure of the Rocky Flats site, and thecost of achieving such closure, are the primary determinants of our long-termfinancial performance.

 

**RESULTSOF RETAINED OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,2003 AND 2002**

 

*Equity Income InEarnings of Affiliate*

 

The financial information containedherein for Kaiser-Hill is reflected on the equity basis.

 

*Closure ContractProvisions for Revenue and Performance Award*

 

The economic terms of the Closure Contractprovide that Kaiser-Hill will earn revenue equal to the actual cost of physicalcompletion plus a performance fee based on a combination of the actual cost ofcompleting the site closure project and the actual date of physical completion,both as compared to contracted targets.  The potential fee to be earned pursuant to the Closure Contract rangesfrom $151.0 million to $463.0 million based on Kaiser-Hill’s costs to completethe site closure being within the range of targeted completion cost of $3.6 billionand $4.8 billion, and completion at various dates between 2005 - 2007. Physicalcompletion for a total cost in excess of the target cost would result in areduction to the potential fee because Kaiser-Hill will share 30% in all costsincurred in excess of the target. Kaiser-Hill is also subject to a $20.0 million maximum penalty if theDecember 31, 2007 closure date is not met.

 

Kaiser-Hill’s favorable performance on thecontract since its inception in February of 2000 has resulted in a trendof cautious but continuously improving estimates of completion dates, costestimates and potential fee earning opportunities.  As of September 30, 2003, Kaiser-Hill’s cost estimate tocomplete the project is $3.75 billion, with an estimated completion date of December 2006,resulting in a potential total fee of $424 million.  Kaiser-Hill has goals of further improving its ultimate projectperformance; however, goals are not free of risk, and the ability to accuratelypredict the ultimate results are highly uncertain.  See “Risk Factors Relating to Kaiser Holdings and Forward-LookingStatements” below.

 

For the three and nine months ended September 30, 2003, theCompany recorded its equity in Kaiser-Hill’s income, recognizing $4.2 millionand $12.8 million, respectively, (50% of Kaiser-Hill’s $10.0 million and $30.9million income, respectively, less amortization of the intangible assetattributed to Kaiser-Hill of $0.9 million and $2.6 million, respectively), anincrease of $0.5 million and $2.1 million, respectively, over the amountrecorded for the three and nine months ended September 30, 2002.  The increases for the three and nine monthsended September 30, 2003 are due to the increasing estimates of theperformance fee to be earned over the duration of Kaiser-Hill’s contract.

 

*Closure ContractBilling Provisions*

 

****From the beginning of the Closure Contract in February 2000through December 31, 2002, Kaiser-Hill invoiced DOE for the performancefee based on the target levels within the contract, resulting in fee invoicesof approximately $6.1 million per quarter. ****In December 2002, Kaiser-Hill’scontinued favorable progress on the project resulted in recognition by the DOEthat Kaiser-Hill would most likely be completing the project earlier than thelatest allowed date and for lower costs than the maximum allowed by the ClosureContract.  This recognition alsoprompted an award by the DOE of an additional $10.0 million in fees payable inDecember 2002. Adjusted for the effects of the 50% retainage holdback,Kaiser-Hill expects that its performance fee invoices to DOE will continue tobe approximately $7.1 million per quarter. Similar to that awarded in 2002, Kaiser-Hill is anticipating that DOEwill approve a non-recurring fee payment for the fourth quarter of 2003 acknowledgingKaiser-Hill’s continued favorable progression on the project.

 

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

 

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the Federal regulations. Accordingly, such expenses, which Kaiser-Hill estimates couldapproximate up to 15% - 20% of the total award fee, are deducted from the totalfee earned and collected by Kaiser-Hill prior to any distributions of net feesto either the Company or CH2M Hill Companies Ltd.  Since January 1, 2003, Kaiser-Hill has been distributingapproximately $3.0 million per quarter to each of its two owners based on itsfee invoicing level with DOE.  From the commencement of the new Closure Contractthrough September 30, 2003, Kaiser-Hill has received an aggregate of $89.2million in fees from the DOE.

 

In the future, as Kaiser-Hill continues to accrue performance feesbased on its currently projected total, less reserves deemed appropriate in thecircumstances, and remains subject to a 50% retainage holdback on itsperformance fee invoicing, the level of unbilled accounts receivable on itsbalance sheet will begin to increase substantially.  Kaiser-Hill will classify the difference between recordedperformance fees and the collected fees as long-term unbilled accountsreceivable on its balance sheet, which will be included as a component ofInvestment in Affiliate on the Company’s balance sheet.  The Closure Contract also containsprovisions for DOE to release portions of the retainage holdback prior tocontract completion if the DOE deems appropriate.  Kaiser-Hill is not able to estimate whether any of the retainageholdback will be released prior to contract completion.

 

For the three- and nine-month periods ended September 30, 2003 and2002, the equity income in earnings of affiliate is net of $0.9 million and$2.6 million, respectively, of amortization of the excess of our carrying valueof our investment in Kaiser-Hill over our ownership percentage of theunderlying 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 willcontinue to amortize that difference over the estimated life of the Kaiser-Hillinvestment of approximately 6 years.

 

*Administrative Expenses*

 

Administrative expenses for thethree and nine months ended September 30, 2003 were $2.1 million and $5.0million, respectively, an increase of $0.4 million and a decrease of $2.0million, respectively, compared to the three and nine months endedSeptember 30, 2002.  The increasefor the three months ended September 30, 2003 compared to the three monthsended September 30, 2002 is due primarily to certain medical expensesassociated with the retiree plan were not properly accrued in the secondquarter and are therefore recorded in the three months ended September 30,2003.  The decrease for the nine monthsended September 30, 2003 compared to the nine months endedSeptember 30, 2002 is due to an overall decrease in administrativeexpenses due primarily to reductions in legal and professional fees.  These decreases result from our progress inwinding down the discontinued operations of Kaiser Group International,Inc.  We anticipate further declines in general and administrative spending asremaining litigation and bankruptcy claims are resolved.

 

*Gain on Sale of Securities*

 

We disposed of our investment in the commonstock of Prudential Insurance Company in February 2002 and recorded a gainof $106,000 at the time of the sale.

 

*Gain on Sale of Investment*

 

On September 30, 2002, the terms of asettlement agreement between the Company and ICF Consulting wereimplemented.  Under this settlement, theCompany restructured the ICF Consulting notes totaling $6.6 million and accruedinterest of $0.7 million, net of reserves, for a new promissory note of $6.4million, resulting in a write-off of $0.8 million and establishment of a $0.5million contingency reserve.  In returnICF Consulting withdrew its claims against the Company, released cash in escrowtotaling $0.8 million and purchased the Company’s 10% ownership in ICF Consulting,carrying value of $1.2 million, for $4.5 million.  The Company recorded a gain of $3.4 million on the sale of theinvestment in ICF Consulting in the third quarter of 2002.

 

*Interest Income*

 

Interest income for the three and nine monthsended September 30, 2003 was $0.2 million and $0.6 million, respectively,a decrease of $0.1 million and an increase of $0.1 million, respectively,compared with the three and nine months ended September 30, 2002.  The decrease for the three-month period isprimarily due to the decline in the average cash balances at September 30,2003 compared to September 30, 2002. The increase for the nine-month period is primarily due to the accrualof interest income on the ICF Consulting notes.  At June 30, 2002, we were not accruing interest income onthe ICF Consulting notes due to uncertainties over the collectibility ofaccrued interest.  As ofSeptember 30, 2002, we restructured the ICF Consulting notes and beganaccruing interest on the new notes.

 

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*Interest Expense*

 

As a result of the adoption of FAS 150 effective July 1, 2003 andthe classification of the Series 1Redeemable Cumulative Preferred Stock (New Preferred) as a liability,preferred stock dividends of $0.7 million have been shown as interestexpense.  As required by FAS 150, priordividends have not been reclassified. Total preferred stock dividends for the nine months ended September 30,2003 were $2.3 million, with $1.5 million shown as preferred stock dividendsand the $0.7 million as interest expense.

 

*Income Tax Expense*

 

We recorded an income tax expense of $0.9million and $3.3 million, respectively, on operating income from continuingoperations of $2.2 million and $8.4 million, respectively, during the three andnine months ended September 30, 2003. Our effective income tax rate of 59% and 43% for the three and ninemonths ended September 30, 2003 is reflective of the non-deductibility ofcertain expenditures for federal income tax purposes including the dividends onthe New Preferred, which have been shown as interest expense as of July 1,2003 upon adoption of FAS 150.  For thethree and nine months ended September 30, 2002, we recorded an income taxexpense of $1.5 million and $2.4 million, respectively,  on operating income from continuingoperations of $4.3 million and $6.4 million, respectively.

 

*Loss from Discontinued Operations*

 

The loss from discontinued operations for thenine months ended September 30, 2002 consists of the activities associatedwith the Nova Hut project.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

*OperatingActivities*

 

We used $7.0 million and $7.2 million of cashduring the nine months ended September 30, 2003 and September 30,2002, respectively, primarily for the extinguishment of obligations arising outof our bankruptcy, including professional fees, retiree benefits, income taxesand various other wind-down expenditures.

 

*InvestingActivities*

 

We received $9.0 million in distributionsfrom Kaiser-Hill during both the nine-month periods ended September 30,2003 and September 30, 2002.

 

During the first quarter of 2002, weliquidated our holdings of shares of stock of Prudential Insurance Company andreceived approximately $6.0 million.  Wehad acquired the Prudential stock through the demutualization transactioneffected by the insurance company during the fourth quarter of 2001.

 

*FinancingActivities*

 

During the nine months endedSeptember 30, 2003, we redeemed $15.5 million liquidation preference ofour preferred stock, net of $1.4 million liquidation preference of shares heldas treasury stock.  Pursuant to theterms of the Plan of Reorganization, the Company used $8.9 million in excessrestricted cash in addition to $5.2 million of unrestricted cash to facilitatethis redemption.

 

During the nine months endedSeptember 30, 2003 and 2002, we paid $1.7 million and $3.2 million,respectively, in dividends on our preferred stock.  Due to the adoption of FAS 150 effective July 1, 2003, $0.7million of preferred stock dividends have been shown as interest expense andare no longer reflected as preferred stock dividends on the statement of cashflows.  During the nine months endedSeptember 30, 2003 and 2002, we acquired 6,800 and 119,587 shares ofpreferred stock for $0.3 million and $4.0 million, respectively.  The reduction in dividend expense is due tothe $15.5 million redemption of the outstanding preferred stock inJanuary 2003, discussed above.

 

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*Liquidity andCapital Resource Outlook*

 

We currently have no debt as a result of the effectiveness of the Planof Reorganization. However, as a result of the adoption of FAS 150 effectiveJuly 1, 2003, and due to the mandatorily redeemable provisions of the NewPreferred, the New Preferred has been shown as a long term liability.  We have financed the initial bankruptcydistribution requirements and follow-on working capital needs in part throughthe use of the available cash and distributions from Kaiser-Hill and from otherasset sale proceeds. Based on (i) current expectations for operating activitiesand results, (ii) expected Kaiser-Hill distributions, (iii) our currentavailable cash position, (iv) recent trends and projections in liquidity andcapital needs, and (v) current expectations of total allowed claims upon thecompletion of the bankruptcy proceedings, management believes we havesufficient liquidity to cover the required cash distributions resulting fromthe resolution of claims in the bankruptcy process, our future operating needsand income tax requirements, as well as the dividend or interest requirementsapplicable to the our preferred stock. Furthermore, as allowed Class 4 claims are resolved, we will continue toreview the timing of additional partial preferred stock redemptions.

 

We have obligations to pay interest onoutstanding preferred stock at September 30, 2003 which will be shown asinterest expense effective July 1, 2003. Accordingly, we are required to present the following table assumingthat no preferred stock redemptions are made until the mandatory redemptiondate of December 31, 2007, no additional shares are issued and that allfuture dividends are paid in cash (irrespective of this disclosure requirement,we are not representing intentions with regard to the timing of preferred stockredemptions).  However, this table doesreflect that the Company redeemed a total of $6.2 million of New Preferred, or113,530 shares, on October 10, 2003. The effect these obligations are expected to have on our liquidity and cashflow in future periods are as follows:

 
|                       |   | **Total** |   | **Less Than One  Year** |   | **One to Three  Years** |   | **After Three  Years** |   |
|----------------------------|--------|-----------|--------|-------------------------|--------|-------------------------|--------|------------------------|--------|
| Preferred  Stock dividends |   | $         | 13,113 |                    | $      | 2,547                   |   | $                      | 4,924  |   | $ | 3,078 |   |
|                            |        |           |        |                         |        |                         |        |                        |        |  |  |  |  |

 

*Other Matters*

 

We have various obligations and liabilitiesfrom our continuing operations, including general overhead expenses inconnection with maintaining, operating and winding down the variousentities.  Additionally, we believecontingent liabilities may exist in the areas described in Note 6 to theConsolidated Financial Statements.

 

*RecentAccounting Pronouncements*

 

In December 2002, the FinancialAccounting Standards Board (FASB) issued SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure, an amendment of FASBStatement No. 123.”  SFAS No. 148provides alternative methods of transition for a voluntary change to the fairmarket value based method of accounting for stock-based compensation.  We do not presently expect to make such avoluntary change.  In addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  These amendeddisclosure requirements are applicable for financial statements issued forinterim periods beginning after December 15, 2002.  The Company has recently adopted the 2002Equity Compensation Plan, however, it does not currently have any outstandingstock options requiring disclosures under SFAS No. 148.

 

In November 2002, FASB InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others, an Interpretation ofFASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No.34,” (“FIN 45”) was issued.  FIN 45clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,”relating to guarantors’ accounting for, and disclosure of, the issuance ofcertain types of guarantees.  Thedisclosure provisions of FIN 45 are applicable to interim or annual periodsthat end after December 15, 2002, and did not have an impact on theSeptember 30, 2003 financial statements. The provisions for initial recognition and measurement under FIN 45 areeffective on a prospective basis for guarantees that are issued or modifiedafter December 31, 2002.  Theinitial recognition and measurement provisions under FIN 45 did not have anyimpact on our financial statements.

 

On May 31, 2003, FASB issued FASBStatement No. 150 (FAS 150), “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  FAS 150 improves the accounting for certain financial instrumentsthat, under previous guidance, issuers could account for as equity and requiresthat those instruments be classified as liabilities (or assets in certaincircumstances) in statements of financial position.  FAS 150 also requires disclosures about alternative ways ofsettling the instruments and the capital structure of entities – all of whoseshares are mandatorily redeemable.  FAS150 was to

 

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have been generally effective for allfinancial instruments entered into or modified after May 31, 2003, andotherwise effective at the beginning of the first interim period beginningafter June 15, 2003.  Recently, theFASB has deferred for an indefinite period the effective date for certaininstruments and entities.  As discussedin Note 5, the Company has adopted the provisions of FAS 150 in the thirdquarter of 2003.

 

**RISK FACTORS RELATING TO KAISER HOLDINGS ANDFORWARD-LOOKING STATEMENTS**

 

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 theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  These forward-looking statementsare not historical facts, but rather are predictions and generally can beidentified by use of statements that include phrases such as “believe,” “expect,”“anticipate,” “estimate,” “intend,” “plan,” “foresee” or other words or phrasesof similar import.  Similarly,statements that describe or containinformation related to matters such as our intent, belief, or expectation withrespect to financial performance, claims resolution, cash availability, stockredemption plans, contract awards and performance, potential acquisitions andjoint ventures, and cost-cutting measures are forward-looking statements. Theseforward-looking statements often reflect a number of assumptions and involveknown and unknown risks, uncertainties and other factors that could cause ouractual results to differ materially from those currently anticipated in theseforward-looking statements.  In light ofthese risks and uncertainties, including those described below, theforward-looking events might or might not occur.

 

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

 

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

 

Our long-termfuture profitability will be dependent, to a significant extent, on theperformance of Kaiser-Hill under its contract with the Department ofEnergy.  Kaiser-Hill serves as thegeneral contractor at the Rocky Flats Environmental Technology site nearDenver, Colorado, a former nuclear weapons production facility. Kaiser-Hill’scontract with the Department of Energy includes a performance fee based upon acombination of the actual costs incurred to complete the site closure and theactual date of completion of the closure. If Kaiser-Hill fails to complete the closure within the target cost forthe project of between $3.6 billion and $4.8 billion, Kaiser-Hill’s fee will bereduced to a level significantly less than the fee estimate currently beingused to recognize income on the project and further reduced by 30% of the costsincurred after the target date of March 31, 2007.  Kaiser-Hill is also subject to a $20.0million maximum penalty if the December 31, 2007 closure date is not met.

 

Kaiser-Hill hashistorically incurred expenses that are not reimbursable by the Department ofEnergy pursuant to the 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 fee priorto any distributions of net fees to either us or CH2M Hill Companies, Ltd. Forreasons similar to those described in the following paragraph, it is difficultto estimate either the amount of net fee to be distributed to the owners ofKaiser-Hill and or the effect, if any, that such unreimbursable costs wouldhave on our future cash flows.  Adecrease in our cash flows could result in a decrease in the value of ourcommon and preferred stock.

 

*There aresubstantial performance risks associated with Kaiser-Hill’s work at the RockyFlats site.  The performance risks mayimpact the timing and cost of closing the site, which in turn could impact ourfee income from Kaiser-Hill.*

 

The clean-up and closure of the Department of Energy’s Rocky Flats site involve substantialperformance risks.  Among other things,Kaiser-Hill’s activities at the Rocky Flats site involve the clean-up,packaging and transportation of nuclear waste, and the demolition anddestruction of facilities where nuclear weapons components were previouslyproduced.  Some of these activities havenot been previously performed elsewhere, and therefore require the developmentof innovative and untested approaches. Kaiser-Hill emphasizes safety in its performance, but the nature of theRocky Flats site and the activities of Kaiser-Hill and its subcontractors atthe site are such that serious injuries, or even deaths, are possible.  Significant safety incidents at the sitecould stop or significantly impede the progress of work being performed at the siteby Kaiser-Hill and its subcontractors. The Department of Energycontract contemplates that all, or substantially all, of the nuclear waste atRocky

 

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Flats will be transported to other sites operated or managed by the Departmentof Energy. The appropriate sites for storage of certain of those nuclear wasteshave not yet been identified.  Inaddition, third-party objections have arisen from time to time with regard tothe transportation to, and storage of nuclear waste at, certain sitespreviously designated by the Department of Energy to receive waste from RockyFlats.  Although the Department ofEnergy contract contemplates that the Department of Energy is responsible forproviding transportation and storage sites for nuclear waste from Rocky Flats,an inability to ship plutonium and other nuclear waste to Department of Energysites would pose a substantial risk to the timely closure of the Rocky Flatssite, and could interfere with Kaiser-Hill’s ability to earn the fees to whichKaiser-Hill believes it should be entitled. This loss of fee income could adversely affect our operating results,which could in turn result in a decrease in the value of our common andpreferred stock.

 

*There are potential substantialliabilities and costs associated with Kaiser-Hill’s Department of Energycontract, which may directly and indirectly impact our fee income fromKaiser-Hill.*

 

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

 

**We face significantcontingencies, which may adversely impact our ability to meet our obligationson our preferred stock, to fund our continuing operations and to undertake newoperations.**

 

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

 

Our cash flow is partially dependent on the resolution of disputesrelating to Kaiser Netherlands’ performance under its fixed-price contract forturnkey engineering and construction services relating to the Nova Hut projectand on the ability of Nova Hut, which is in financial difficulty, to pay forsuch services.

 

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

 

Our long-term future profitability will be dependent, to a significantextent, on our ability to develop a business plan for ongoing operations.Unless and until our Board of Directors develops such a business plan, we areunable to determine either the amount of risk that future operations willinvolve or whether we have the ability to realize long-term profitability. Itis possible that our ongoing business plan will be limited to resolving issuesrelated to the Nova Hut project and participating in the activities ofKaiser-Hill.  However, our Board ofDirectors is considering whether we should attempt to develop a new revenuebase.  Such efforts could, for example,attempt to take advantage of our successful history of performing in thegovernment services market, both independently and through Kaiser-Hill.  Our efforts to develop a revenue baseseparate from Kaiser-Hill may involve start-up activities with risks peculiarto activities of this type, which may adversely impact our cash flow andoperating results. A decrease in our cash flows and operating resultscould result in a decrease in the value of our common and preferred stock.

 

*We may be unable toobtain performance guarantees, which may limit our ability to undertake newactivities.*

 

Given the reorganization history of Kaiser Group Holdings, Inc., we maynot be able to obtain satisfactory contract performance guaranty mechanisms,such as performance bonds and letters of credit, at all or on satisfactoryterms, to the extent such mechanisms are needed for new projects.  These factors could limit the nature of thebusiness activities in which we could engage should we decide to attempt todevelop a new revenue base apart from Kaiser-Hill, which may adversely impactour cash flow and operating results and result in a decrease in thevalue of our common and preferred stock.

 

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

 

We may be unable to continue to generate sufficient funds to meet ourobligations, notwithstanding the significant improvements in our operations andfinancial condition.  Although webelieve that we will be able to generate sufficient funds to meet our workingcapital needs for the foreseeable future, our ability to gain access toadditional capital, if needed, is not certain. Due to reorganization history ofKaiser Group Holdings, Inc. and current financial markets, it is difficult topredict whether additional capital would be available to us in the event thatwe were unable to general funds to meet our obligations.

 

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Our inability to gain access to additional capital may also limit ourability to undertake new activities. Ultimately, our inability to meet our existing obligations or toundertake new activities could adversely impact our cash flow and operatingresults.  A decrease in our cashflows and operating results could result in a decrease in the value of ourcommon and preferred stock.

 

*Inthe event of a change of control, we may not have the financial resources toredeem preferred 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 February 12, 2003, which was filed with the Securities andExchange Commission by Tennenbaum & Co., LLC on February 13, 2003, webelieve that Tennenbaum & Co., LLC and Michael E. Tennenbaum together ownapproximately 47.2% of our common stock. The terms of our preferred stock provide that a change of control occurswhen, among other things, a person or “group” (within the meaning of Section 13(d)(3)of the Securities Exchange Act of 1934) directly or indirectly acquires“beneficial ownership” (as defined in Rule 13d-3 under the Securities ExchangeAct of 1934) of more than 50% of all classes of our common equity (defined inthe terms of our preferred stock as capital stock entitled to vote in theelection of directors).

 

In the event that we are required to redeem preferred stock due to achange of control, we may not have available capital to redeem the stock.  Ourability to gain access to additional capital from outside sources, if needed,is not certain.  The inability to gainaccess to additional capital may limit our ability to meet the redemptionobligations with respect to the preferred stock.

 

**ITEM3****.   QUANTITATIVE AND QUALITATIVE INFORMATIONABOUT MARKET RISK**

 

We do not believe that we have significantexposures to market risk as we do not presently have any debt.  The interest rate risk associated with ourobligation to fund a capped retiree medical obligation is not sensitive to interestrate risk other than via the determination of the present value of ourremaining obligation there under.  A 10%increase or decrease in the average annual prime rate would result in adecrease in the carrying value of the plan obligation but would not change theactual cost of the plan.

 

**ITEM4****.  CONTROLS AND PROCEDURES**

 

As of the end of the periodcovered by this report, our Chief Executive Officer and Chief Financial Officerevaluated, with the participation of our management, the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)under the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and proceduresare effective to ensure that material information is recorded, processed,summarized and reported by our management on a timely basis in order to complywith our disclosure obligations under the Securities Exchange Act of 1934 andthe SEC rules thereunder.  There were nosignificant changes in our internal controls over financial reporting thatoccurred during the fiscal quarter ended September 30, 2003 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PARTII****- OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

As previously reported in the Annual Reporton Form 10-K for the year ended December 31, 2002.

 

**ITEM 2.  CHANGES INSECURITIES AND USE OF PROCEEDS**

 

(a) None

(b) None

(c) None

(d) Not applicable

 

**ITEM 3.  DEFAULTS UPONSENIOR SECURITIES**

 

(a) None

(b) None

 

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

 

None

 

**ITEM 5.  OTHER INFORMATION**

 

None

 

**ITEM 6.  EXHIBITS ANDREPORTS ON FORM 8-K**

 

**(a)  Exhibits**

 

**ExhibitNo. 2—Plan of Acquisition, reorganization, arrangement, liquidation orsuccession**

 

2(a) Second Amended Plan of Reorganization(Incorporated by reference to Exhibit 2 to Current Report on Form8-K (Registrant No. 1-12248) filedwith the Commission on December 14, 2000)

 

**ExhibitNo. 3—Articles of Incorporation 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 onDecember 14, 2000)

 

**ExhibitNo. 4—Instruments Defining the Rights of Security Holders, including Indentures**

 

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

 

**ExhibitNo. 10 — Material Contracts**

 

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

 

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

 

2.  Amendment No. 2 with theeffective date of January 1, 1996  (Incorporated by reference to Exhibit No.10(b)(2) to Annual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

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

 

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

 

10(b) Trust Agreement with Vanguard FiduciaryTrust Company dated as of August 31, 1995, for ICF Kaiser International,Inc. Employee Stock Ownership Plan (Incorporated by reference to Exhibit No.10(c) to Registration Statement on Form S-1 (Registrant No. 33-64655) filedwith the Commission 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 namechange only as of June 26, 1993) (Incorporated by reference to Exhibit No.10(d) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the 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(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 referenceto Exhibit No. 10(d)(2) to Transition Report on Form 10-K (Registrant No. 1-12248)for the transition period from March 1, 1995 to December 31, 1995filed 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 onJanuary 10, 1997)

 

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

 

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

 

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

 

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

 

8.  Amendment No. 8 datedJune 8, 2000 (Incorporated by reference to Exhibit 10(d)(8) to QuarterlyReport on Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal2000 filed with the Commission on September 6, 2000)

 

9.  Amendment No. 9 datedJune 19, 2003 (Incorporated by reference to Exhibit 10(c)(9) to QuarterlyReport on Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal2003 filed with the Commission on August 14, 2003)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

7.  Amendment dated January 1, 2001(Incorporated by reference to Exhibit No. 10(m)(7) to Annual Report on Form10-K (Registrant No. 1-2248) filed with the Commission on March 30, 2001)

 

8.  Amendment No. 8 dated December 10, 2002(Incorporated by reference to Exhibit 10(e)(8) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) for the second quarter of fiscal 2003 filed with 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(f) Trust Agreement with Vanguard Fiduciary Trust Company dated as ofMarch 1, 1989, for the ICF Kaiser International, Inc. Section 401(k)Plan (Incorporated by reference to Exhibit No. 28(b) to Registration Statementon Form S-8 (Registrant No. 33-51460) filed with the Commission onAugust 31, 1992)

 

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

 

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)

 

**ExhibitNo. 10—Material Contracts (management contracts, compensatory plans, or arrangements.)**

 

10(i)  Kaiser Group Holdings,Inc. 2002 Equity Compensation Plan, as amended (Incorporated by reference toExhibit 10 to Registration Statement on Form S-8 (Registrant No. 33-51460) filed with the Commission on August 13,2003)

 

10(j)  Amended and RestatedEmployment Agreement with John T. Grigsby, Jr., President and Chief ExecutiveOfficer, effective as of December 19, 2000 (Incorporated by reference toExhibit No. 10(m) to Registration Statement on Form S-4 (Registrant No.333-100640) filed with the Commission on October 18, 2002)

 

**ExhibitNo. 21—Consolidated Subsidiaries of the Registrant as of November 1, 2003**

 

**ExhibitNo. 31.1 – Certification of Principal Executive Officer**

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

 

**Exhibit No. 31.2 – Certification of PrincipalFinancial Officer**

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

 

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

Pursuant 18 U.S.C. Section 1350, asAdopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

**(b)  Reports on Form 8-K**

 

On August 7, 2003 the Company filed aCurrent Report on Form 8-K for the purpose of including as an exhibit adescription of its capital stock.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this QuarterlyReport on Form 10-Q to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                         | **KAISER  GROUP HOLDINGS, INC.**                                                                                  |   |
|------------------------------|-------------------------------------------------------------------------------------------------------------------|--------|
|                         | (Registrant)                                                                                                      |   |
|                         |                                                                                                              |
| Date: November 14, 2003 |                                                                                                              |
|                         |                                                                                                              |
|                         | /s/ Marijo L. Ahlgrimm                                                                                            |   |
|                         | Marijo L. Ahlgrimm                                                                                                |
|                         | Executive Vice President and Chief  Financial  Officer (Duly authorized officer and principal  financial officer) |

 

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