**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

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

 

**Commission File No. 1-12248**

 

**KAISER GROUP HOLDINGS, INC.**

(successor issuer toKaiser Group International, Inc.)

(Exact name of registrant as specified in itscharter)

 

| **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 areacode: **(720) 889-2770**

 

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

 

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

 

**Applicable only to issuer’s involved in bankruptcy proceedings duringthe preceding five years:**

 

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

 

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

 

**Applicable only to corporate issuers:**

 

Indicatethe number of shares outstanding of each of the issuer’s classes of common stockas of the latest practicable date.

 

As ofAugust 6, 2004, there were 1,598,270 shares of Kaiser Group Holdings, Inc.Common Stock, par value $0.01 per share, outstanding.

 

 

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**KAISER GROUP HOLDINGS, INC.**

 

**INDEX TO FORM 10-Q**

 
| **Part I - Financial Information**                                                                  | **Page**                                                                                                               |
|-----------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|
|                                                                                                |                                                                                                                   |   |
| Item 1. Financial Statements:                                                                       |                                                                                                                   |
|                                                                                                |                                                                                                                   |   |
|                                                                                                | Consolidated Balance Sheets - June 30, 2004 and  December 31, 2003                                           | 3 |
|                                                                                                |                                                                                                                   |   |
|                                                                                                | Consolidated Statements of Operations and  Comprehensive Income Three and Six Months Ended June 30, 2004 and 2003 | 4 |
|                                                                                                |                                                                                                                   |   |
|                                                                                                | Consolidated Statements of Cash Flows - Six  Months Ended June 30, 2004 and 2003                                  | 5 |
|                                                                                                |                                                                                                                   |   |
|                                                                                                | Notes to Consolidated Financial Statements                                                                             | 6-12 |
|                                                                                                |                                                                                                                   |   |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 12-19                                                                                                                  |
|                                                                                                |                                                                                                                   |   |
| Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 | 19                                                                                                                     |
|                                                                                                |                                                                                                                   |   |
| Item 4. Controls and Procedures                                                                     | 19                                                                                                                     |
|                                                                                                |                                                                                                                   |   |
| **Part II - Other Information**                                                                     |                                                                                                                   |
|                                                                                                |                                                                                                                   |   |
| Item 1. Legal Proceedings                                                                           | 20                                                                                                                     |
|                                                                                                |                                                                                                                   |   |
| Item 2. Changes in Securities and Use of  Proceeds                                                  | 20                                                                                                                     |
|                                                                                                |                                                                                                                   |   |
| Item 3. Defaults Upon Senior Securities                                                             | 20                                                                                                                     |
|                                                                                                |                                                                                                                   |   |
| Item 4. Submission of Matters to a Vote of  Security Holders                                        | 20                                                                                                                     |
|                                                                                                |                                                                                                                   |   |
| Item 5. Other Information                                                                           | 20                                                                                                                     |
|                                                                                                |                                                                                                                   |   |
| Item 6. Exhibits and Reports on Form 8-K                                                            | 20-23                                                                                                                  |
|                                                                                                |                                                                                                                   |   |
| **Signatures**                                                                                      |                                                                                                                   | 23 |

 

2

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**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.****  FINANCIAL STATEMENTS**

 

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

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                    |       |                    |       |                        |       |
| Current Assets                                                                                                                                                |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                     |       | $                       | 8,800      |                        | $          | 11,151 |   |
| Restricted cash and cash equivalents                                                                                                                          |       | 4,328                   |       | 7,049                       |       |
| Prepaid expenses and other current assets                                                                                                                     |       | 883                     |       | 971                         |       |
| Net assets of discontinued operations                                                                                                                         |       | 3,000                   |       | 3,000                       |       |
| Total Current Assets                                                                                                                                          |       | 17,011                  |       | 22,171                      |       |
|                                                                                                                                                          |       |                    |       |                        |       |
| Other Assets                                                                                                                                                  |       |                    |       |                        |       |
| Investments in and advances to affiliates                                                                                                                     |       | 47,500                  |       | 45,788                      |       |
| Notes receivable                                                                                                                                              |       | 5,894                   |       | 5,894                       |       |
| Other long-term assets                                                                                                                                        |       | 179                     |       | 227                         |       |
|                                                                                                                                                          |       | 53,573                  |       | 51,909                      |       |
| Total Assets                                                                                                                                                  |       | $                       | 70,584     |                        | $          | 74,080 |   |
| ** **                                                                                                                                                    | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                 | ** ** | ** **              | ** ** | ** **                  | ** ** |
|                                                                                                                                                          |       |                    |       |                        |       |
| Current Liabilities                                                                                                                                           |       |                    |       |                        |       |
| Accounts payable                                                                                                                                              |       | $                       | 100        |                        | $          | 304 |   |
| Post retirement benefit plan obligation                                                                                                                       |       | 6,768                   |       | 6,913                       |       |
| Other accrued expenses                                                                                                                                        |       | 5,031                   |       | 4,432                       |       |
| Interest payable on preferred stock                                                                                                                           |       | 348                     |       | 409                         |       |
| Deferred tax liability                                                                                                                                        |       | 4,579                   |       | 6,495                       |       |
| Income taxes payable                                                                                                                                          |       | 2,018                   |       | 275                         |       |
| Total Current Liabilities                                                                                                                                     |       | 18,844                  |       | 18,828                      |       |
|                                                                                                                                                          |       |                    |       |                        |       |
| Long Term Liabilities                                                                                                                                         |       |                    |       |                        |       |
| Mandatorily redeemable preferred stock                                                                                                                        |       | 29,899                  |       | 35,175                      |       |
|                                                                                                                                                          |       |                    |       |                        |       |
| Commitments and Contingencies                                                                                                                                 |       |                    |       |                        |       |
|                                                                                                                                                          |       |                    |       |                        |       |
| Common stock, par value $.01 per share:                                                                                                                       |       |                    |       |                        |       |
| Authorized—3,000,000 shares   Issued and outstanding–1,598,270 and 1,594,270 shares at June 30, 2004  and December 31, 2003, respectively |       | 16                      |       | 16                          |       |
| Capital in excess of par                                                                                                                                      |       | 8,063                   |       | 7,975                       |       |
| Retained earnings                                                                                                                                             |       | 13,724                  |       | 12,049                      |       |
| Accumulated other comprehensive income                                                                                                                        |       | 38                      |       | 37                          |       |
| Total Shareholders’ Equity                                                                                                                               |       | 21,841                  |       | 20,077                      |       |
| Total Liabilities and Shareholders’ Equity                                                                                                               |       | $                       | 70,584     |                        | $          | 74,080 |   |

 

See notes to consolidatedfinancial statements.

 

3

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

**CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME**

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

 
| ** **                                                                                                                                                                                                    | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                                                                                                                    | ** ** | **2004**                                      | ** ** | **2003**                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Gross Revenue.                                                                                                                                                                                                |       | $                                             | —     |                                        | $          | — |   | $ | — |   | $ | — |   |
| Subcontract and direct material costs                                                                                                                                                                         |       | —                                        |       | —                                      |       | — |   | — |   |
| Service Revenue                                                                                                                                                                                               |       | —                                        |       | —                                      |       | — |   | — |   |
| Operating Expenses                                                                                                                                                                                            |       |                                          |       |                                        |       |   |   |   |   |
| Administrative expenses                                                                                                                                                                                       |       | 1,816                                         |       | 1,447                                       |       | 3,061 |   | 2,893 |   |
| Reserve for Settlement of Remaining Class 4  Claims                                                                                                                                                           |       | —                                        |       | —                                      |       | 1,400 |   | — |   |
| Operating Loss                                                                                                                                                                                                |       | (1,816                                        | )          | (1,447                                      | )          | (4,461 | ) | (2,893 | ) |
| Other Income                                                                                                                                                                                                  |       |                                          |       |                                        |       |   |   |   |   |
| Equity income in earnings of affiliate, net  of amortization of $881 for each of the three months ended June 30, 2004  and 2003 and $1,762 for each of the six months ended June 30, 2004 and  2003 |       | 4,322                                         |       | 4,267                                       |       | 8,606 |   | 8,632 |   |
| Interest income                                                                                                                                                                                               |       | 160                                           |       | 207                                         |       | 335 |   | 450 |   |
| Interest expense for preferred dividends                                                                                                                                                                      |       | (517                                          | )          | —                                      |       | (1,087 | ) | — |   |
| Other income                                                                                                                                                                                                  |       | —                                        |       | —                                      |       | 25 |   | — |   |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Income from Continuing Operations Before  Income Tax                                                                                                                                                          |       | 2,149                                         |       | 3,027                                       |       | 3,418 |   | 6,189 |   |
| Income tax expenses                                                                                                                                                                                           |       | (995                                          | )          | (1,161                                      | )          | (1,743 | ) | (2,404 | ) |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Income From Continuing Operations                                                                                                                                                                             |       | 1,154                                         |       | 1,866                                       |       | 1,675 |   | 3,785 |   |
| Loss from discontinued operations, net of  tax                                                                                                                                                                |       | —                                        |       | —                                      |       | — |   | — |   |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Net Income                                                                                                                                                                                                    |       | 1,154                                         |       | 1,866                                       |       | 1,675 |   | 3,785 |   |
| Preferred stock dividends                                                                                                                                                                                     |       | —                                        |       | (702                                        | )          | — |   | (1,532 | ) |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Income (Loss) Applicable to Common  Shareholders                                                                                                                                                              |       | $                                             | 1,154      |                                        | $          | 1,164 |   | $ | 1,675 |   | $ | 2,253 |   |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Basic and Diluted Loss Per Common Share:                                                                                                                                                                      |       |                                          |       |                                        |       |   |   |   |   |
| Continuing operations, net of tax                                                                                                                                                                             |       | $                                             | 0.72       |                                        | $          | 0.73 |   | $ | 1.05 |   | $ | 1.41 |   |
| Discontinued operations, net of tax                                                                                                                                                                           |       | —                                        |       | —                                      |       | — |   | — |   |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Net Income (Loss) Per Share                                                                                                                                                                                   |       | $                                             | 0.72       |                                        | $          | 0.73 |   | $ | 1.05 |   | $ | 1.41 |   |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Weighted average shares for basic and  diluted earnings per common share                                                                                                                                      |       | 1,597                                         |       | 1,595                                       |       | 1,596 |   | 1,594 |   |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Comprehensive Income                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Net Income                                                                                                                                                                                                    |       | $                                             | 1,154      |                                        | $          | 1,866 |   | $ | 1,675 |   | $ | 3,785 |   |
| Other Comprehensive Income (Loss):                                                                                                                                                                            |       |                                          |       |                                        |       |   |   |   |   |
| Realization of gain on securities, net of  tax                                                                                                                                                                |       | —                                        |       | —                                      |       | — |   | — |   |
| Change in cumulative foreign translation  adjustments                                                                                                                                                         |       | (1                                            | )          | (1                                          | )          | 1 |   | 68 |   |
|                                                                                                                                                                                                          |       |                                          |       |                                        |       |   |   |   |   |
| Total Comprehensive Income                                                                                                                                                                                    |       | $                                             | 1,153      |                                        | $          | 1,865 |   | $ | 1,676 |   | $ | 3,853 |   |

 

See notesto consolidated financial statements.

 

4

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

 
| ** **                                                                     | ** ** | **For the Six Months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | **(Unaudited)**                             | ** ** |
| Operating Activities:                                                          |       |                                        |       |   |   |
| Net income                                                                     |       | $                                           | 1,675      |   | $ | 3,785 |   |
| Adjustments to reconcile net income to net  cash used in operating activities: |       |                                        |       |   |   |
| Deferred taxes related to continuing  operating activities                     |       | (1,916                                      | )          | 2,171 |   |
| Equity in earnings of affiliate                                                |       | (8,606                                      | )          | (8,632 | ) |
| Changes in operating assets and  liabilities:                                  |       |                                        |       |   |   |
| Prepaid expenses and other current assets                                      |       | 136                                         |       | 1,174 |   |
| Accounts payable and accrued expenses                                          |       | 430                                         |       | (1,499 | ) |
| Income taxes payable                                                           |       | 1,743                                       |       | 72 |   |
| Other operating activities                                                     |       | 103                                         |       | 24 |   |
| Net Cash Used in Operating Activities                                          |       | (6,435                                      | )          | (2,905 | ) |
| Investing Activities:                                                          |       |                                        |       |   |   |
| Distributions from affiliate                                                   |       | 6,894                                       |       | 6,000 |   |
| Net Cash Provided by Investing Activities                                      |       | 6,894                                       |       | 6,000 |   |
| Financing Activities:                                                          |       |                                        |       |   |   |
| Transfer from restricted cash for the  redemption of preferred stock           |       | 2,646                                       |       | 8,913 |   |
| Payment of preferred stock dividends                                           |       | —                                      |       | (1,701 | ) |
| Redemption of preferred stock                                                  |       | (5,276                                      | )          | (14,146 | ) |
| Purchase of preferred treasury stock                                           |       | —                                      |       | (119 | ) |
| Net Cash Used in Financing Activities                                          |       | (2,630                                      | )          | (7,053 | ) |
| Increase (decrease) in Cash and Cash  Equivalents                              |       | (2,171                                      | )          | (3,958 | ) |
| Cash and Cash Equivalents at Beginning of  Period                              |       | 10,971                                      |       | 17,413 |   |
| Cash and Cash Equivalents at End of Period                                     |       | $                                           | 8,800      |   | $ | 13,455 |   |

 

See notesto consolidated financial statements.

 

5

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.                                       Basis of Presentation

 

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

 

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

 

Kaiser Group Holdings,Inc. is a Delaware holding company that was formed on December 6, 2000 forthe purpose of owning all of the outstanding stock of Kaiser GroupInternational, Inc. (Old Kaiser), which in turn continues to own the stock ofits remaining subsidiaries. On June 9, 2000, Old Kaiser and 38 of itsdomestic subsidiaries voluntarily filed for protection under Chapter 11 of theUnited States Bankruptcy Code in the District of Delaware (case nos. 00-2263 to00-2301). Old Kaiser emerged from bankruptcy with an approved plan ofreorganization (the Second Amended Plan of Reorganization (the Plan)) that waseffective on December 18, 2000 (the Effective Date). The Company is deemeda “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 resolvingremaining bankruptcy claims, the Companyhas only a limited number of activities, assets and liabilities, primarilyconsisting 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 (DOE) Rocky Flats sitenear Denver, Colorado, for the performance of a contract for the closure of thesite (the Closure Contract). (See Note 4 for summarized financial information.)

•                  the closeout and resolution of a completed contract for theengineering and construction of a steel mini-mill for Nova Hut in the CzechRepublic (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 not at this time issuing new policies and issimply involved in resolving remaining claims.

•                  an ongoing obligation to fund a capped, post-employmentmedical benefit plan for a fixed group of retirees.

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

 

The Company adopted fresh startreporting in its consolidated balance sheet as of December 31, 2000. TheAmerican Institute of Certified Public Accountants’ Statement of Position 90-7,“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”(SOP 90-7), requires that, under certain circumstances resulting from abankruptcy, a new entity is created for financial reporting purposes upon theemergence of that entity from bankruptcy. Accordingly, the value of the reorganized enterprise becomes theestablished amount for the emerging balance of shareholders’ equity, and anyaccumulated deficit of the predecessor entity is offset against availablepaid-in-capital to result in an emerging retainedearnings of zero.  Additionally, assetsand liabilities are recorded at their fair values.

 

The value of theemerged enterprise used for fresh start reporting as of December 31, 2000was $87.5 million and was determined by management with the assistance ofindependent advisors.  The methodologyemployed involved estimation of the enterprise value taking into considerationa discounted cash flow analysis.  The discountedcash flow analysis was based on a seven-year cash flow projection prepared bymanagement, taking into consideration the terminal value of its assets andliabilities as of immediately prior to its emergence from bankruptcy onDecember 18, 2000.  Terminal valuesof assets and liabilities were determined based either on contracted amounts,actuarial present values and/or management’s estimates of the outcome ofcertain operating activities. Net after-tax cash flows, assuming a 40%effective tax rate, were discounted at 17% in

 

6

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orderto take into consideration the risks and uncertainties inherent in suchprojections.  The cash flow projectionswere based on estimates and assumptions about circumstances and events that hadnot yet taken place.  Estimates andassumptions regarding individual retained matters which form the collectivecomposition of the overall enterprise value as of December 18, 2000 areinherently subject to significant economic and competitive uncertainties andcontingencies beyond the control of the Company.  Accordingly, there may be differences betweenprojections and actual results because events and circumstances frequently donot occur as expected and may be significant. More specifically, assumptions within the valuation related to theamount and timing of the ultimate performance and related cash flows of theCompany’s investment in Kaiser-Hill have the greatest impact on the overallenterprise valuation.

 

2.             General Terms of Plan and Status of BankruptcyDistributions

 

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

 

In general terms, thePlan contemplated three basic classes of creditors:

 

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

 

•                  Allowed “Class 4claims”, the largest class of claims against the Old Kaiser bankruptcy estate,is made up of creditor claims other than Class 3 claims and equity claims.Class 4 claims included holders of Old Kaiser senior subordinated notes due2003 (Old Subordinated Notes). Holders of allowed Class 4 claims received acombination of cash and Kaiser Holdings preferred and common stock in respectof their claims. Such holders received one share of Kaiser Holdings’ preferredstock (New Preferred) and one share of Kaiser Holdings’ common stock (NewCommon) for each $100 of claims. However, the number of shares of New Preferredissued was reduced by one share for each $55.00 of cash received by the holderof an allowed Class 4 claim.

 

•                  The third classof claims recognized in the Old Kaiser bankruptcy are equity claims, consistingof holders of Old Kaiser common stock (Old Common) and other “Equity Interests”as defined in the Plan. Under the Plan, holders of Equity Interests willreceive a number of shares of New Common equal to 17.65% of the number ofshares of such common stock issued to holders of allowed Class 4 Claims. In theinitial distribution, one share of New Common was issued for each 96 shares ofpreviously outstanding Old Common. Additional distributions of New Common maybe made in the future as additional shares of New Common are issued to holdersof newly allowed Class 4 claims, if any. Apart from holders of Old Common, theonly holders of Equity Interests of which the Company is aware are the formershareholders of ICT Spectrum Constructors, Inc., a corporation acquired bymerger with a subsidiary of Old Kaiser in 1998. The Bankruptcy Court confirmedthe equity nature of those claims.  SeeNote 6 below for information concerning a recent Bankruptcy Court ruling withrespect to these claims.

 

Pursuant to the terms ofOld Kaiser’s Plan, the Company was required to complete its initial bankruptcydistribution within 120 days of the effective date of the Plan.  Accordingly, on April 17, 2001, 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 atApril 17, 2001 was approximately $130.5 million.

 

To address the remainingunresolved claims, the Bankruptcy Court issued an order on March 27, 2001establishing an Alternative Dispute Resolution (ADR) procedure whereby theremaining claimants and Old Kaiser produce limited supporting data relative totheir respective positions and engage in initial negotiation efforts in anattempt to reach an agreed claim determination. If necessary, the parties were thereafter required to participate in anon-binding mediation before a mediator pre-selected by the BankruptcyCourt.  All unresolved claims as ofMarch 27, 2001 are subject to the ADR process. Since April 17, 2001,the date of the initial distribution, $123.5 million of asserted claims havebeen withdrawn, negotiated or mediated to an agreed amount, resulting in cashpayments approximating $2.6 million and issuances of 683 shares of NewPreferred and 823 shares of New Common. As of August 6, 2004, the amountof unresolved claims was approximately $7.0 million. The Company expects toresolve the remaining claims by the fourth quarter of 2004.  The Company currently believes that the totalamount of Class 4 claims ultimately to be allowed in the Old Kaiser bankruptcyproceeding will not exceed

 

7

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$142.0 million.  As demonstrated by the claim settlementscompleted since April 17, 2001, and based on the belief that it is in thebest interest of the Company and its current shareholders, the Company has beensettling certain remaining Class 4 claims entirely for cash payments in lieu ofthe combination of cash and New Preferred and New Common as contemplated in thePlan.  The Company established a reservefor the remaining unresolved claims in the amount of $1.4 million during thefirst quarter of 2004.  The Companyintends to continue to use this settlement alternative during the resolution ofremaining Class 4 claims.

 

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

 

3.                                       Earnings Per Share

 

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

 

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

 

In 2004,the effect of preferred dividends of $0.5 million and $1.1 million has beenincluded in continuing operations in the calculation of basic and dilutedearnings per share for the three and six months ended June 30, 2004.  In 2003, the effect of preferred dividends of$0.7 million and $1.5 million has been included in continuing operations in thecalculation of basic and diluted earnings per share for the three and sixmonths ended June 30, 2003.  Asdiscussed in Note 5, the Company adopted FAS 150 effective July 1,2003.  Therefore, all of the 2004preferred stock dividends have been shown as interest expense.

 

4.                                       Summarized Financial Information ofUnconsolidated Affiliate

 

KaiserGroup owns 50% of Kaiser-Hill Company LLC. Summarized, unaudited financial information of Kaiser-Hill is as followsfor the three and six months ended June 30 (in thousands):

 
| ** **              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |
| Current assets          |       | 108,512  |       | 111,368  |       |
| Non-current assets      |       | 128,213  |       | 99,538   |       |
| Current liabilities     |       | 109,511  |       | 115,941  |       |
| Non-current liabilities |       | 55,647   |       | 28,644   |       |

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|---------------|------------|------------------------|------------|------------------------|------------|
| ** **    | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
|          |       |                   |       |                   |       |   |   |   |   |
| Gross revenue |       | $                      | 161,408    |                   | $          | 175,918 |   | $ | 299,238 |   | $ | 351,773 |   |
| Net income    |       | 10,407                 |       | 10,295                 |       | 20,736 |   | 20,787 |   |
|               |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

5.                                       Mandatorily Redeemable Preferred Stock

 

KaiserHoldings’ certificate of incorporation authorizes the issuance of 2,000,000shares of New Preferred. The Company had New Preferred outstanding with aliquidation preference of $29.9 million and $35.2 million, respectively, atJune 30, 2004 and December 31, 2003, net of $5.6 million of treasurystock at both June 30, 2004 and December 31, 2003.  The New Preferred is a series of authorizedpreferred stock designated as “Series 1 Redeemable Cumulative Preferred Stock,”and has a par value of $0.01 per share. The New Preferred ranks ahead of KaiserHoldings’ New Common.

 

TheCompany adopted FAS 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity” effective July 1,2003.  Due to the mandatorily redeemablefeature of the New Preferred, described in greater detail below, the NewPreferred has been reclassified from mezzanine equity to a long term liabilityon the consolidated balance

 

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sheet,and the preferred stock dividends have been reclassified to interest expense onthe consolidated statement of operations effective July 1, 2003.  There was no transition adjustment recognizedupon adoption of FAS 150.  There were543,610 and 639,542 shares of New Preferred outstanding at June 30, 2004and December 31, 2003, respectively, net of 101,471 treasury shares.  The New Preferred is shown at liquidationvalue of $55 per share.

 

Pursuantto approval by the Company’s Board of Directors, the Company purchased a totalof 101,471 shares, net of redemptions, of outstanding New Preferred at pricesranging from $25.62 to $50.55 per share. The treasury shares have been recorded at liquidation preference, $55per share, as a reduction to preferred stock and the remaining differencebetween cost and the liquidation preference was recorded as an increase topaid-in capital.

 

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

 

Cumulativedividends, classified as interest expense subsequent to July 1, 2003, onthe New Preferred are payable on a quarterly basis, as of April 30,July 31, October 31 and January 31, either in cash at an annualrate of 7% of the liquidation preference per share or in additional shares ofNew Preferred at an annual rate of 12% of the per share liquidation preference.Dividends accrue on the New Preferred commencing with the initial distributiondate, April 17, 2001. Dividends will not be paid to any affiliate ofKaiser Holdings on account of that affiliate’s ownership of shares of preferredstock. If Kaiser Holdings fails to pay a quarterly dividend when due, holdersof New Preferred will have the right to elect an additional director for eachdividend payment missed, up to a maximum of two additional directors, but onlyuntil such dividend is paid or provided for in full.   The dividend due to holders of record onJuly 31, 2004, totaling approximately $0.5 million, was paid onAugust 6, 2004.  At June 30,2004, in addition to the $0.7 million of cash reserves for unresolved claims,the Company had $0.7 million in cash reserved for the payment of accrueddividends on any future issuances of New Preferred issued as a result ofremaining bankruptcy claims resolutions (any New Preferred issued as a resultof claims resolutions also carries the right to dividends retroactively fromApril 17, 2001).

 

The NewPreferred has a liquidation preference of $55 per share plus the amount ofunpaid dividends, if any. Upon the liquidation or dissolution of KaiserHoldings, each holder of New Preferred (other than 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.

 

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

 

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

 

Holders of New Preferredgenerally are entitled to vote with holders of New Common on all matterssubmitted to a vote of shareholders, with each share of New Preferred beingentitled to one-tenth of a vote. In addition, holders of New Preferred have theright to vote separately as a class to exercise their right to elect anadditional director due to a failure to pay a quarterly dividend, to electtwo-thirds of the directors if the New Preferred is not redeemed byDecember 31, 2007, and to consent to the issuance of any senior or paritysecurities. The terms of the New Preferred may not be materially or adverselymodified without the consent of holders of at least two-thirds of the NewPreferred. If the Company or any of its affiliates holds any New Preferred,they will not be entitled to vote that New Preferred.

 

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The Planprovides that Major Stockholders (defined as holders of 10% or more of theoutstanding shares of New Preferred or New Common, or a person who is an“affiliate” of Kaiser Holdings as defined under the Federal securities laws)have certain registration rights. In general, a Major Stockholder may requestKaiser Holdings to register under the Securities Act of 1933 for the sale ofall, but not less than all, of the New Preferred and/or New Common owned by theMajor Stockholder. Upon request for such a registration from a MajorStockholder, Kaiser Holdings is required to give notice to other MajorStockholders and use its best efforts to cause a registration statement to becomeeffective as expeditiously as possible and maintain such registration statementcurrent for a period of 12 months. Major Stockholders are not entitled torequest registration until one year after the Effective Date, and KaiserHoldings is not obligated to file a registration statement in response to arequest from a Major Stockholder until such time as Kaiser Holdings is eligibleto use Form S-3 under the Securities Act of 1933 for such an offering. KaiserHoldings is not required to effect more than one registrationfor Major Stockholders during any twelve-month period. These registrationrights expire on December 31, 2007. The Plan also contemplates that MajorStockholders will have “piggyback” registration rights in connection with aproposed underwritten public offering of Kaiser Holdings New Common or NewPreferred solely for cash and for its own account.

 

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

 

KGP isthe Company subsidiary that owns (through a wholly owned subsidiary of KGP) the50% interest in Kaiser-Hill Company LLC. KGP has outstanding put rights, expiring on December 31, 2007, thatobligate it to purchase New Preferred owned by a holder of the put right, atthe holder’s option, under three circumstances:

 

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

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

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

 

Uponexercise of a put, KGP will pay an exercising holder 100% of the liquidationpreference of the preferred stock that is the subject of the KGP put rights,plus all accrued and unpaid dividends on the preferred stock. KGP will purchaseshares of preferred stock on a pro rata basis based upon the number of sharesof preferred stock as to which puts have been properly exercised, but only upto the amount of the available net after-tax proceeds from triggering events.KGP will not purchase any fractional shares. KGP put rights will not becomeexercisable more frequently than every 12 months unless the cumulative amountof available net after-tax proceeds from triggering events is at least $3million.  KGP put rights are transferableexcept that puts shall cease to be transferable if KGP determines that anyfurther transfer would require registration of the puts as a class ofsecurities under the Securities Exchange Act of 1934. Kaiser Holdings does notpresently plan to arrange for trading of the KGP put rights on the NASDelectronic bulletin board or otherwise.

 

The Company has received distributions fromKaiser-Hill that triggered the put rights – effectively requiring the Companyto redeem certain New Preferred.  Inaddition, the Company had certain restricted cash balances available, whichpursuant to the terms of its Plan of Reorganization are required to be used toredeem outstanding New Preferred.  Ratherthan using the mechanism of the put rights to satisfy the Company’s obligationsto holders of the put rights after a trigger, the Company observed therequirements in the Plan of Reorganization to use certain restricted cashbalances, and in the terms of the New Preferred, to use certain available cash,for preferred redemptions.  The Company believesthis was a more cost-efficient manner of satisfying the obligations associatedwith the KGP put rights and plans to continue to use this redemption process tosatisfy such obligations in the future.

 

As of August 6,2004, the Company has redeemed the following shares of New Preferred (inthousands except per share amounts):

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

 

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6.                                       Other Contingencies

 

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

 

Nova Hut

 

Although Old Kaiser soldits Metals, Mining and Industry business unit in August 2000, it retainedits Netherlands subsidiary, Kaiser Netherlands, B.V., which had beenresponsible for a turnkey engineering and construction services contract forthe construction of a steel mini-mill in the Czech Republic for Nova Hut.  After construction of the mini-mill wascomplete in 2000, the contract with Nova Hut provided for a maximum of threepossible performance tests. The first performance test was completed onNovember 13, 2000. Kaiser Netherlands believes that the first performancetest was successful and that Nova Hut should have agreed to final acceptance ofthe mini-mill and made final payment of amounts accrued by Kaiser Netherlandsthroughout the project, including fee and retention amounts with release ofperformance guarantee instruments.  NovaHut, however, asserted that the first test was not successful. KaiserNetherlands believes that such contention may have been put forth in responseto severe financial constraints on Nova Hut’s operations resulting fromweakening conditions in the worldwide steel market and the significant amountsthat Kaiser Netherlands believed it was contractually due. To date, thisdispute has not been resolved, and Kaiser Netherlands has resorted to legalproceedings to enforce its rights.  Untilrecently, the primary legal venue has been the Delaware bankruptcy proceedingfor Old Kaiser, where the Company has asserted claims against Nova Hut and theInternational Finance Corporation (“IFC”). The Delaware bankruptcy court had previously ruled that the Company, asopposed to Kaiser Netherlands, could proceed with prosecution of its specificclaims against Nova Hut and IFC in the Delaware bankruptcy court venue.  Both Nova Hut and IFC appealed this rulingand, during the first quarter 2004, the Delaware bankruptcy court’s decisionregarding the IFC was overturned by the District Court, ruling that the IFCenjoys sovereign immunity from prosecution.  Kaiser Holdings has filed a notice of appealwith the Third Circuit regarding this decision in favor of the IFC.  The disposition of Kaiser Holdings’ appeal tothe Third Circuit Court is still pending. With regards to the Nova Hut appeal, the District Court has ruled thatU.S. Bankruptcy proceedings should be stayed pending completion ofinternational arbitration proceedings.

 

In January 2004,Kaiser Netherlands filed arbitration claims against Nova Hut in the amount of$51.1 million with the International Chamber of Commerce (“ICC”).  The arbitration panel has been constituted,and the first hearing is scheduled to take place during the third quarter of2004 with the earliest possible final award ruling being issued sometime in2005.  Nova Hut has submitted a $49.7million counterclaim against Kaiser Netherlands in these same ICC proceedings.

 

In December 2003, the ICC, under thedispute resolution provisions of the Nova Hut mini-mill subcontract betweenKaiser Netherlands and the mini-mill’s main equipment supplier, Tippins, Inc.,issued a final award that was on balance favorable to Kaiser Netherlands.  As a result of the ruling, Kaiser Netherlandswas relieved of the obligation to pay additional retention to Tippins andKaiser Netherlands was awarded a net cash settlement of $2.6 million.  The Company has not recorded this award dueto the uncertainties regarding collectibility. However, the Company intends to vigorously pursue collection of thisaward.

 

The continued litigation of these disputeshas had and will continue to have a negative impact on the cash flow of KaiserNetherlands and Kaiser Holdings.

 

The components of the “Net Assets ofDiscontinued Operations” consist entirely of the carrying value of the netassets of the Nova Hut project.  Based onthe Company’s continued concern over Nova Hut’s financial difficulties and thelack of a settlement resulting from an earlier bankruptcy court-sponsoredmediation in the fourth quarter of 2003, the Company further reduced thecarrying value of the remaining Nova Hut project assets from $6.0 million to$3.0 million by recording an additional reserve of $3.0 million, net of a $1.1million income tax benefit, through a charge to “Loss from DiscontinuedOperations”.  This reserve is in additionto a reserve recorded in 2001, which reduced the carrying value of the Nova Hutproject assets from $21.6 million to $6.0 million by recording a reserve ofapproximately $9.8 million, net of a $5.8 million income tax benefit, through acharge to “Loss from Discontinued Operations”. These adjustments to the project asset carrying value have beendetermined based on the Company’s estimate of Nova Hut’s current ability to paysuch liability.

 

Kaiser Hill

 

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

 

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arisingout of any act or failure to act, condition, or exposure which occurred beforeKaiser-Hill assumed responsibility on July 1, 1995 (pre-existingconditions). To the extent the acts or omissions of Kaiser-Hill constitutewillful misconduct, lack of good faith, or failure to exercise prudent businessjudgment on the part of Kaiser-Hill’s managerial personnel and cause or add toany liability, expense, or remediation cost resulting from pre-existingconditions, Kaiser-Hill is responsible, but only for the incremental liability,expense, or remediation caused by Kaiser-Hill.

 

The Kaiser-Hill contractfurther provides that Kaiser-Hill will be reimbursed for the reasonable cost ofbonds and insurance allocable to the Rocky Flats contract and for liabilitiesand expenses incidental to these liabilities, including litigation costs, tothird parties not compensated by insurance or otherwise. There is an exceptionto this reimbursement provision applicable to liabilities caused by the willfulmisconduct, lack of good faith or failure to exercise prudent business judgmentby Kaiser-Hill’s managerial personnel.

 

The clean-upand closure of the DOE’s Rocky Flats site involve substantial performancerisks.  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.  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 storenuclear waste at other DOE sites would pose a substantial risk to the timelyclosure of the Rocky Flats site, and could interfere with Kaiser-Hill’s abilityto earn fees to which Kaiser-Hill believes it should be entitled.

 

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

 

Common Stock

 

On January 20, 2004, the United StatesBankruptcy Court for the District of Delaware ruled on a claim in favor offormer shareholders of ICT Spectrum Constructors, Inc.  The Bankruptcy Court has refused toreconsider its decision and the Company has appealed. Should the Company beunsuccessful in its efforts to achieve reversal of the Bankruptcy Court’sruling, the Company could be required to issue to former ICT Spectrumshareholders an additional 247,350 common shares, which would then compriseapproximately 13.4% of the aggregate common shares outstanding. The Companybelieves that issuing such a substantial number of additional common sharescould be expected to have a materially dilutive effect on the value of commonshares presently outstanding.

 

**I****TEM 2.**** MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**GeneralOverview**

 

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

 

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

 

•                  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 Flats site.  Kaiser-Hill has performed for the Departmentof Energy at this site since 1995 and in January 2000 was awarded a newcontract to manage the closure of the site. The level of success experienced by Kaiser-Hill in achieving timelyclosure of the Rocky Flats site, and the cost of achieving such closure, havebeen and continue to be the primary determinants of our long-term financialperformance following the completion of the reorganization process.  See “Kaiser-Hill” below for additionalinformation on Kaiser-Hill.

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

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

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

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

•                  We formed a new subsidiary in April 2004,Kaiser Analytical Management Services, Inc. (“KAMS”), to attempt to takeadvantage of the successful history of Kaiser in the government servicesmarket.  At July 1, 2004, KAMS beganoperations.

 

**Kaiser-Hill**

 

Our majorremaining asset and source of income is our 50% ownership interest inKaiser-Hill Company, LLC.  Kaiser-Hillwas formed solely for the performance of the current and former Rocky Flatscontracts.  CH2M Hill designates three ofthe five members of Kaiser-Hill’s Board of Managers and we designate twomembers.

 

Kaiser-Hillcurrently serves as the general contractor at the U.S. Department of Energy’sRocky Flats site near Denver, Colorado (Closure Contract). Kaiser-Hill hasperformed since 1995 at this site, a former Department of Energy nuclearweapons production facility. Kaiser-Hill is working to stabilize and safelystore radioactive materials at the site and other locations, clean up areascontaminated with hazardous and radioactive waste, and restore much of the6,000 acre site to the public.  The levelof success experienced by Kaiser-Hill in achieving timely closure of the RockyFlats site, and the cost of achieving such closure, are the primarydeterminants of our long-term financial performance.

 

**RESULTSOF RETAINED OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004AND 2003**

 

*Equity Income InEarnings of Affiliate*

 

Our major remaining source of incomeis a 50% ownership in Kaiser-Hill.  Thefinancial information contained herein for Kaiser-Hill is reflected on theequity basis.

 

*Closure Contract Provisions for Revenue andPerformance Award*

 

Theeconomic terms of the Closure Contract provide that Kaiser-Hill will earnrevenue equal to the actual cost of physical completion plus a performance feebased on a combination of factors involving the actual cost of completing thesite closure project and the actual date of physical completion, both ascompared to contracted targets.  OnMarch 24, 2004 Kaiser-Hill received a contract modification that motivatessafe continuing positive performance by increasing the maximum fee ceiling thatmay be earned under the Closure Contract. The same contract modification reduces the minimum fee floor andincludes other provisions related to work scope changes.  The potential fee to be earned pursuant tothe Closure Contract as recently modified ranges from $75.0 million to $560.0million based on Kaiser-Hill’s cost to complete the site closure being withinthe range of completion cost of $3.1 billion and $4.9 billion, and completionat various dates between 2005 and 2007. For project

 

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costssaved below the target level, Kaiser-Hill retains a varying percentage share,ranging from 20% to 30%, as additional incentive fee.  Similarly, for project costs incurred above atarget level, Kaiser-Hill’s incentive fee is reduced by the 30% share.

 

Kaiser-Hill’sfavorable performance on the Closure Contract since its inception inFebruary of 2000 has resulted in a trend of cautious but continuouslyimproving estimates of completion dates, cost estimates and potential feeearning opportunities.   As ofJune 30, 2004, Kaiser-Hill’s cost estimate to complete the project is $3.7billion, with an estimated completion date of December 2006, resulting ina potential fee of $424 million. Kaiser-Hill has goals of further improving its ultimate project performance;however, goals are not free of risk, and the ability to accurately predict theultimate results are highly uncertain.  See “Risk Factors Relating to Kaiser Holdings and Forward-LookingStatements” below.  In the eventthat Kaiser-Hill is able to complete physical performance of the ClosureContract within cost and time thresholds that would yield fees in excess of the$424 million currently estimated, there may be uncertainty with regard to thetimeframe of the actual receipt of such fees by Kaiser-Hill.  Additionally, there may remain significantuncertainties involving the timeframe necessary to completely “close-out” thecontract with the Department of Energy as contract cost and compliance auditswill be required.    Kaiser-Hill willcontinue to periodically consider the appropriateness of financial statementreserves to address the uncertainties associated with such matters.

 

For the three- and six-monthperiods ended June 30, 2004 and 2003, the equity income in earnings ofaffiliate is net of $0.9 million and $1.8 million, respectively, ofamortization of the excess of our carrying value of our investment inKaiser-Hill over our ownership percentage of the underlying Kaiser-Hillequity.  We increased the carrying valueof this investment by $21.1 million as part of our adoption of Fresh-Startreporting as of December 31, 2000 and will continue to amortize thatdifference over the estimated life of the Kaiser-Hill investment ofapproximately 6 years.

 

*Closure Contract Billing Provisions*

 

Since the inception of theClosure Contract in February 2000 through June 30, 2004, Kaiser-Hill hasinvoiced DOE for the performance fee based on the contract provisions, and hascollected approximately $135.0 million in fees from the DOE.

 

Fee payments made by DOE toKaiser-Hill, less certain non-reimbursable costs, will continue to bedistributed to the joint venture owners upon receipt.  Kaiser-Hill has historically incurredexpenses that are not reimbursable by the DOE pursuant to the Federalregulations.  Accordingly, such expenses,which Kaiser-Hill estimates could approximate up to 15% - 20% of the totalaward fee, are deducted from the total fee earned and collected by Kaiser-Hillprior to any distributions to either of its two owners.  Since inception of the Closure Contractthrough June 30, 2004, Kaiser-Hill has distributed $57.0 million to eachof its two owners.  Adjusted for the effects of the 50% retainageholdback, Kaiser-Hill expects that its performance fee invoices to DOE willyield distributions of $3.5 million per quarter to each of its two owners in2004.  Similar to 2002 and 2003,Kaiser-Hill is anticipating that DOE will approve a non-recurring fee paymentduring the fourth quarter of 2004 acknowledging Kaiser-Hill’s continuedfavorable progression on the project. Historically, the fourth quarter fee payment has ranged from anadditional $10.0 million to $16.0 million above the typically recurringquarterly fee payment.  However, thereare no assurances as to the amount or timing of any additional fourth quarterfee payment.

 

In the future, as Kaiser-Hillcontinues to accrue performance fees based on its currently projected total,less reserves deemed appropriate in the circumstances, and remains subject to a50% retainage holdback on its performance fee invoicing, the level of unbilled accountsreceivable on its balance sheet will begin to increase substantially.  Kaiser-Hill will classify the differencebetween recorded performance fees and the collected fees as long-term unbilledaccounts receivable on its balance sheet, which will be included as a componentof Investment in Affiliate on the Company’s balance sheet.  The Closure Contract also contains provisionsfor DOE to release portions of the retainage holdback prior to contractcompletion if the DOE deems appropriate. Kaiser-Hill is not able to estimate whether any of the retainageholdback will be released prior to contract completion.

 

*AdministrativeExpenses*

 

Administrativeexpenses for the three and six months ended June 30, 2004 were $1.8million and $3.1 million, respectively, a increase of$0.4 million and $0.2 million, respectively, compared to the three and sixmonths ended June 30, 2003.  Theincrease in administrative expense is due primarily to $0.3 million paid in May2004 in connection with the pending Nova Hut arbitration hearing.  Our cost to provide certain post-employmentmedical benefits to a capped group of retirees is also treated as anadministrative expense.  In the three andsix month periods ended June 30, 2004, the expense related to this planwas $0.2 million and $0.5 million, respectively, compared to $0.2 million and$0.3 million for the three and six month periods ended June 30, 2003,respectively.

 

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*Reserve for Settlement of Class 4 Claims*

 

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

 

*Interest Income*

 

Interestincome for the three and six months ended June 30, 2004 was $0.2 millionand $0.3 million, respectively, which results in no change compared to thethree months ended June 30, 2003 and a decrease of  $0.2 million compared with the six monthsended June 30, 2002.  The decreaseis primarily due to the reduction in average outstanding interest earning bankbalances.

 

*InterestExpense*

 

As a result of the adoption ofFAS 150 effective July 1, 2003 and the classification of the Series 1 Redeemable Cumulative Preferred Stock (NewPreferred) as a liability, preferred stock dividends of $0.5 million and $1.1million for the three and six months ended June 30, 2004, respectively,have been shown as interest expense.  Asrequired by FAS 150, prior dividends have not been reclassified.

 

*Income Tax Expense*

 

Werecorded an income tax expense of $1.0 million and $1.7 million, respectively,on operating income from continuing operations of $2.1 million and $3.4million, respectively, during the three and six months ended June 30,2004.  Our effective income tax rate of46% and 51% for the three and six months ended June 30, 2004,respectively, is reflective of the non-deductibility of certain expenditures,primarily interest expense on the New Preferred, for federal income taxpurposes.  For the three and six monthsended June 30, 2003, we recorded an income tax expense of $1.2 million and$2.4 million, respectively,  on operatingincome from continuing operations of $3.0 million and $6.2 million,respectively.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

*Operating Activities*

 

We used$6.4 million and $2.9 million of cash during the six months ended June 30,2004 and 2003, respectively, primarily for the extinguishment of obligationsarising out of our bankruptcy, including professional fees, retiree benefitsand various other wind-down expenditures. The increase in the use of operating cash for the six months endedJune 30, 2004 compared to the six months ended June 30, 2003 is dueto the effect of preferred dividends of $1.1 million being included incontinuing operations in 2004 and an increase in professional fees related tothe pending Nova Hut arbitration.

 

*Investing Activities*

 

Wereceived $6.9 million in distributions from Kaiser-Hill during the six monthperiod ended June 30, 2004 compared to $6.0 million in the six monthperiod ended June 30, 2003.  Theincrease of Kaiser-Hill cash distributions is a result of the continuedfavorable progress in its performance.

 

*Financing Activities*

 

Duringthe six months ended June 30, 2004 and 2003, we paid $1.1 million and $1.7million, respectively, in dividends on our preferred stock.  Due to the adoption of FAS 150 effectiveJuly 1, 2003, $1.1 million of preferred stock dividends have been shown asinterest expense for the six months ended June 30, 2004, and are no longerreflected as preferred stock dividends on the statement of cash flows.

 

Duringthe six months ended June 30, 2004, we redeemed $5.3 million liquidationpreference of our preferred stock.   Pursuant to the terms of the Plan of Reorganization, the Company used$2.6 million in excess restricted cash in addition to $2.7 million ofunrestricted cash to fund this redemption.

 

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

 

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redemption.

 

*Liquidity and Capital Resource Outlook*

 

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

 

We haveobligations to pay dividends on outstanding preferred stock at June 30,2004.  Accordingly, we are required topresent the following table assuming that no preferred stock redemptions aremade until the mandatory redemption date of December 31, 2007, no additionalshares are issued and that all future dividends are paid in cash (irrespectiveof this disclosure requirement, we are not representing intentions with regardto the timing of preferred stock redemptions). However, this table does reflectthat the Company redeemed a total of $3.0 million of New Preferred, or 54,361shares, on July 31, 2004. The effect these obligations are expected tohave on our liquidity and cash flow in future periods are as follows:

 
| ** **                | ** ** | **Total** | ** ** | **Less Than One  Year** | ** ** | **One to Three  Years** | ** ** | **After Three  Years** | ** ** |
|---------------------------|------------|-----------|------------|-------------------------|------------|-------------------------|------------|------------------------|------------|
| Preferred Stock dividends |       | $         | 7,325      |                    | $          | 2,093                   |       | $                      | 4,186      |   | $ | 1,046 |   |
|                           |            |           |            |                         |            |                         |            |                        |            |  |  |  |  |

 

*Other Matters*

 

We havevarious obligations and liabilities from our continuing operations, includinggeneral overhead expenses in connection with maintaining, operating and windingdown the various entities.  Additionally,we believe contingent liabilities may exist in the areas described in Note 6 tothe Consolidated Financial Statements.

 

**RISK FACTORS RELATING TO KAISER HOLDINGS AND**

**FORWARD-LOOKINGSTATEMENTS**

 

This Quarterly Report on Form10-Q contains, and our periodic filings with the Securities and ExchangeCommission and written or oral statementsmade by our officers and directors to press, potential investors, securitiesanalysts and others, may contain, forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. These forward-looking statements are not historical facts, but ratherare predictions and generally can be identified by use of statements thatinclude phrases such as “believe,” “expect,” “anticipate,” “estimate,”“intend,” “plan,” “foresee” or other words or phrases of similar import.  Similarly, statements that describe or contain information related to matters such asour intent, belief, or expectation with respect to financial performance,claims resolution, cash availability, stock redemption plans, contract awardsand performance, potential acquisitions and joint ventures, and cost-cuttingmeasures are forward-looking statements. These forward-lookingstatements often reflect a number of assumptions and involve known and unknownrisks, uncertainties and other factors that could cause our actual results todiffer materially from those currently anticipated in these forward-lookingstatements.  In light of these risks anduncertainties, including those described below, the forward-looking eventsmight or might not occur.

 

**Ourremaining primary source of funding is from Kaiser-Hill distributions, whichare subject to uncertainties that may adversely impact our ability to meet ourobligations on our preferred stock and to permit our consideration and fundingof strategic alternatives for the Company.**

 

*The fee income we anticipate receiving in thefuture from Kaiser-Hill is dependent upon the ability of Kaiser-Hill to closethe Rocky Flats site at a predetermined targeted cost of between $3.1 billionand $4.9 billion and closing date ranging from December 31, 2005 to notlater than March 31, 2007, both of which are subject to operational risksand uncertainties.*

 

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

 

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

 

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

 

The clean-up andclosure of the Department of Energy’s Rocky Flats site involve substantialperformance risks. Among other things, Kaiser-Hill’s activities at the Rocky Flats siteinvolve the clean-up, packaging and transportation of nuclear waste, and thedemolition and destruction of facilities where nuclear weapons components werepreviously produced.  Some of theseactivities have not been previously performed elsewhere, and therefore requirethe development of innovative and untested approaches.  Kaiser-Hill emphasizes safety in itsperformance, but the nature of the Rocky Flats site and the activities ofKaiser-Hill and its subcontractors at the site are such that serious injuries,or even deaths, are possible. Significant safety incidents at the site could stop or significantlyimpede the progress of work being performed at the site by Kaiser-Hill and itssubcontractors.  The Department of Energycontract contemplates that all, or substantially all, of the nuclear waste atRocky Flats will be transported to other sites operated or managed by the Departmentof Energy.  In addition, third-partyobjections have arisen from time to time with regard to the transportation to,and storage of nuclear waste at, certain sites previously designated by theDepartment of Energy to receive waste from Rocky Flats.  Although the Department of Energy contractcontemplates that the Department of Energy is responsible for providingtransportation and storage sites for nuclear waste from Rocky Flats, an inabilityto store nuclear waste at other Department of Energy sites would pose asubstantial risk to the timely closure of the Rocky Flats site, and couldinterfere with Kaiser-Hill’s ability to earn the fees to which Kaiser-Hillbelieves it should be entitled.  Thisloss of fee income could adversely affect our operating results, which could inturn result in a decrease in the value of our common and preferred stock.

 

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

 

Under the Department ofEnergy contract, Kaiser-Hill is responsible for, and the Department of Energywill not pay for costs associated with, liabilities caused by the willfulmisconduct or lack of good faith of Kaiser-Hill’s managerial personnel or thefailure to exercise prudent business judgment by Kaiser-Hill’s managerialpersonnel. If Kaiser-Hill were found liable for any of these reasons, theassociated costs could be substantial, which could have an adverse effect onour operating results. A decrease in our operating results could cause adecrease in the value of our common and preferred stock.

 

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

 

*We do not have a business plan beyond Kaiser-Hill and we mayundertake new activities with start-up risks.*

 

Ourlong-term future profitability will be dependent, to a significant extent, onour ability to develop a business plan for ongoing operations. Unless and untilwe develop such a business plan, we are unable to determine either the amountof risk that future operations will involve or whether we have the ability torealize long-term profitability. In considering whether we should attempt todevelop a new revenue base, our Board of Directors authorized the establishmentof a new subsidiary to attempt to take advantage of our successful history ofperformance in the government services market and the commencement of theprocess to enable our wholly-owned captive insurance company to offerderivative captive insurance services. Our efforts to develop a revenue base separate from Kaiser-Hill mayinvolve start-up activities with risks peculiar to activities of this type,which may adversely impact our cash flow and operating results. A decrease inour cash flows and operating results could result in a decrease in the value ofour common and preferred stock.

 

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

 

Giventhe reorganization history of Kaiser Group Holdings, Inc., we may not be ableto obtain satisfactory contract performance guaranty mechanisms, such asperformance bonds and letters of credit, at all or on satisfactory terms, tothe extent such mechanisms are needed for new 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 the value ofour common and preferred stock.

 

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

 

We may be unable to continue togenerate sufficient funds to meet our obligations, notwithstanding thesignificant improvements in our operations and financial condition.  Although we believe that we will be able togenerate sufficient funds to meet our working capital needs for the foreseeablefuture, our ability to gain access to additional capital, if needed, is not certain.Due to reorganization history of Kaiser Group Holdings, Inc. and currentfinancial markets, it is difficult to predict whether additional capital wouldbe available to us in the event that we were unable to general funds to meetour obligations.  Our inability to gainaccess to additional capital may also limit our ability to undertake newactivities.  Ultimately, our inability tomeet our existing obligations or to undertake new activities could adverselyimpact our cash flow and operating results. A decrease in our cash flows and operating results could result in adecrease in the value of our common and preferred stock.

 

*We mayhave to issue a substantial number of additional common shares.*

 

On January 20, 2004, the United StatesBankruptcy Court for the District of Delaware ruled on a claim in favor offormer shareholders of ICT Spectrum Constructors, Inc.  The Bankruptcy Court has refused toreconsider its decision and we have appealed. Should we be unsuccessful in our efforts to achieve reversal of theBankruptcy Court’s ruling, we could be required to issue to former ICT Spectrumshareholders an additional 247,350 common shares, which would then compriseapproximately 13.4% of the aggregate common shares outstanding.  We believe that issuing such a substantialnumber of additional common shares could be expected to have a materiallydilutive effect on the value of common shares presently outstanding.

 

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

 

Our preferred stock is redeemable at theoption of the holder upon a change of control as defined in the terms of thepreferred stock.  We are not presentlyaware of any events that would cause a change of control.  However, based on a Report on Form 4 datedApril 3, 2003, which was filed with the Securities and Exchange Commissionby Tennenbaum & Co., LLC on April 3, 2003, we believe that Tennenbaum& Co., LLC and Michael E. Tennenbaum together own approximately 47.2% ofour common stock.  The terms of ourpreferred stock provide that a change of control occurs when, among otherthings, a person or “group” (within the meaning of Section 13(d)(3) of theSecurities Exchange Act of 1934) directly or indirectly acquires “beneficialownership” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)of more than 50% of all classes of our common equity (defined in the terms ofour preferred stock as capital stock entitled to vote in the election ofdirectors).

 

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

 

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

 

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

 

**ITEM 4.****  CONTROLS ANDPROCEDURES**

 

As ofJune 30, 2004, an evaluation was performed under the supervision and withthe participation of the Company’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design and

 

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operation of the Company’s disclosure controls and procedures (as defined in Rule13a-15(e) or 15d-15(e) under the Exchange Act). Based on that evaluation, the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, concluded that the Company’sdisclosure controls and procedures were effective as of June 30,2004.  There were no significant changesin the Company’s internal control over financial reporting that occurred duringthe period covered by this report that have materially affected, or that arereasonably likely to materially affect, our internal control over financialreporting.

 

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** PART II - OTHER INFORMATION**

 

**ITEM 1.****  LEGALPROCEEDINGS**

 

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

 

**ITEM 2.****CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

(a)  None

(b)  None

(c)  None

(d)  Not applicable

(e)  Not applicable

 

**ITEM 3.**** DEFAULTS UPON SENIOR SECURITIES**

 

(a)  None

(b)  None

 

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

 

At theMay 5, 2004 Annual Meeting of Shareholders, the only matter up for a vote wasthe election of directors.

 

1.                                       Election for Directors

 

Thefollowing individuals were elected to a one-year term expiring at the 2005Annual Meeting of Shareholders, and the total number of votescast for and withheld for each were as follows:

 
| ** **             | ** ** | **For**   | ** ** | **Withheld** | ** ** | **Total** | ** ** |
|------------------------|------------|-----------|------------|--------------|------------|-----------|------------|
| Jon B. Bennett         |       | 1,588,566 |       | 9,092        |       | 1,597,658 |       |
| John T. Grigsby, Jr.   |       | 1,523,440 |       | 74,218       |       | 1,597,658 |       |
| James J. Maiwurm       |       | 1,522,933 |       | 74,725       |       | 1,597,658 |       |
| Frank E. Williams, Jr. |       | 1,588,551 |       | 9,107        |       | 1,597,658 |       |

 

(*) “Votes Withheld” means thatthe shareholder marked the box on his/her proxy card labeled “withheld.”  This is equivalent to a “No” for all fournominees.  This vote total includessituations in which the shareholder wrote in the name of the director ordirectors he/she did not want to vote for.

 

**ITEM 5.****  OTHERINFORMATION**

 

(a)  None

(b)  None

 

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

 

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

 

2(a)  Second Amended Plan of Reorganization(Incorporated by reference to Exhibit 2 to Current Report on Form 8-K (RegistrantNo. 1-12248) filed with the Commission on December 14, 2000)

 

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

 

3(a)  Certificate of Incorporation of KaiserGroup Holdings, Inc. (Incorporated by reference to Exhibit 3(i) to CurrentReport on Form 8-K (Registrant No. 1-12248) filed with the Commission onDecember 14, 2000)

 

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

 

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

 

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

 

**Exhibit No. 10 — Material Contracts**

 

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

 

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

 

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

 

3.  Amendment No. 3 datedApril 19, 1999.  (Incorporated byreference to Exhibit No. 10(b)(3) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on April 17,2000)

 

4.  Amendment No. 4 datedJune 25, 1999. (Incorporated by reference to Exhibit 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 Fiduciary Trust Company dated as ofAugust 31, 1995, for ICF Kaiser International, Inc. Employee StockOwnership Plan (Incorporated by reference to Exhibit No. 10(c) to RegistrationStatement on Form S-1 (Registrant No. 33-64655) filed with the Commission onNovember 30, 1995)

 

10(c) ICF Kaiser International,Inc. Retirement Plan (as amended and restated as of March 1, 1993) (andfurther amended with respect to name change only as of June 26, 1993)(Incorporated by reference to Exhibit No. 10(d) to Quarterly Report on Form10-Q (Registrant No. 1-12248) for the second quarter of fiscal 1994 filed withthe Commission on October 15, 1993)

 

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

 

2.  Amendment No. 2 datedDecember 15, 1995 (Incorporated by reference to 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 31,1995 filed with the Commission on March 29, 1996)

 

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

 

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

 

5.  Amendment No. 5 datedJune 25, 1999 (Incorporated by reference to Exhibit 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 datedAugust 30, 1999 (Incorporated by reference to Exhibit No. 10(d)(6) to Annual Report on Form 10-K (Registrant No. 1-12248)filed with the Commission on April 17, 2000)

 

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

 

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

 

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

 

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

 

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

 

10(e)                      ICF KaiserInternational, Inc. Section 401(k) Plan (as amended and restated as ofMarch 1, 1993) (and further amended with respect to name change only as ofJune 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 datedApril 24, 1995 (Incorporated by reference to Exhibit No. 10(p)(1) to Annual Report on Form 10-K (Registrant No. 1-12248)for fiscal 1995 filed with the Commission on May 23, 1995)

 

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

 

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

 

4.  Amendment No. 4 datedApril 8, 1999 (Incorporated by reference to Exhibit 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 to Exhibit No. 10(k)(5)to Annual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

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

 

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

 

8.  AmendmentNo. 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 the Commission onAugust 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 the Commission onAugust 14, 2003)

 

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

 

10(f)  Trust Agreementwith Vanguard Fiduciary Trust Company dated as of March 1, 1989, for theICF Kaiser International, Inc. Section 401(k) Plan (Incorporated byreference to Exhibit No. 28(b) to Registration Statement on Form S-8(Registrant No. 33-51460) filed with the Commission on August 31, 1992)

 

10(g)  Contract betweenKaiser-Hill Company, LLC and the U.S. Department of Energy datedJanuary 24, 2000 (Incorporated by reference to Exhibit No. 10(o) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the Commission onApril 17, 2000)

 

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

 

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

 

10(i)  Subcontract betweenThe S.M. Stoller Corporation and Kaiser Group Holdings, Inc. datedJune 30, 2004

 

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

 

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

 

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

 

**Exhibit 14 — Corporate Code of Conduct**

 

14(a)  Kaiser Group Holdings, Inc. Corporate Code ofConduct (Incorporated by reference to Exhibit 14.1 to Current Report on Form8-K (Registrant No. 1-12248) filed with the Commission on January 13,2004)

 

**Exhibit No. 21 — Consolidated Subsidiaries of the Registrant as ofAugust 2, 2004**

 

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

 

Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Actof 1934

 

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

 

Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Actof 1934

 

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

 

Pursuant to 18 U.S.C. Section 1350

 

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

 

Pursuant to 18 U.S.C. Section 1350

 

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

 

None

 

**SIGNATURES**

 

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

 
|                       | **KAISER GROUP HOLDINGS, INC.**                |
|----------------------------|------------------------------------------------|
|                       | (Registrant)                                   |   |
|                       |                                           |
| Date: August 13, 2004 |                                           |
|                       |                                           |
|                       |                                           |
|                       | /s/ Marian P. Hamlett                          |   |
|                       | Marian P. Hamlett                              |
|                       | Executive Vice President and Chief Financial   |
|                       | Officer (Duly authorized officer and principal |
|                       | financial officer)                             |
|                            |                                                |  |  |

 

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