**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**Form 10-K**

 

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

 

**For the fiscal year ended December 31,2005**

 

**Commission File No. 1-12248**

 

**KAISER GROUPHOLDINGS, INC.**

**(successor issuer to Kaiser Group International, Inc.)**

(Exactname of registrant as specified in its charter)

 

**Delaware**

(State orother jurisdiction ofincorporation or organization)

 

**54-2014870**

(I.R.S.EmployerIdentification No.)

 

| **9300 Lee Highway, Fairfax, Virginia**  | ** ** | **22031-1207** |
|------------------------------------------|------------|----------------|
| (Address of principal executive offices) |       | (Zip Code)     |

 

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

 

Name ofeach exchange on which registered:

**None**

 

Securities registered pursuant to Section 12(b) of the Act:

**None**

 

Securities registered pursuant to Section 12(g) of the Act:

**Common Stock, par value $0.01 per share**

 

Indicate by check mark if the registrant is a well-knownseasoned issuer, as defined by Rule 405 of the Securities Act.

Yes o  No ý

 

Indicate by checkmark if the registrant is not requiredto file reports pursuant to Section 13 or 15(d) of the Act.

Yes o  No ý

 

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

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of the registrant’s knowledge,in definitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

 
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý |
|---------------------------|---------------------|------------------------------|

 

Indicate by check mark whether the registrantis a shell company (as defined by Rule 12b-2 of the Act.)  Yes o  No ý

 

The aggregate market value of the votingcommon equity held by non-affiliates as of June 30, 2005, based on theclosing sales price of the Common Stock as quoted on the Pink Sheets, was$19,421,028. For purposes of this computation, all officers, directors, and 5percent beneficial owners of the registrant (as indicated in Item 12) aredeemed to be affiliates. Such determination should not be deemed an admissionthat such directors, officers, or 5 percent beneficial owners are, in fact,affiliates of the registrant.

 

As of March 20, 2006, there were1,787,640 shares of Common Stock outstanding.

 

**APPLICABLE ONLY TO REGISTRANTSINVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:**

 

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

 

The Plan of Reorganization of Kaiser GroupInternational, Inc. under Chapter 11 of the Bankruptcy Code becameeffective on December 18, 2000. The Plan provides, among other things,that holders of shares of common stock of Kaiser Group International, Inc.received shares of common stock of Kaiser Group Holdings, Inc. and thatholders of specified outstanding debt obligations and other specified claimantsreceived cash and shares of preferred stock and common stock of Kaiser GroupHoldings, Inc., all in accordance with the terms set forth in the Plan.The initial distribution of securities occurred as of April 17, 2001.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

**None**

 

 

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**TABLE OF CONTENTS**

 
| **PART I**   |                                                                                                                   |
|-------------------|------------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                   |   |
| Item  1.          | Business                                                                                                               |   |
| Item  1A.         | Risk  Factors                                                                                                          |   |
| Item  1B.         | Unresolved  Staff Comments                                                                                             |   |
| Item  2.          | Properties                                                                                                             |   |
| Item  3.          | Legal  Proceedings                                                                                                     |   |
| Item  4.          | Submission  of Matters to a Vote of Security Holders                                                                   |   |
|              |                                                                                                                   |   |
| **PART II**  |                                                                                                                   |
| ** **        |                                                                                                                   |   |
| Item  5.          | Market  for Registrant’s Common Equity and Related Stockholder Matters and Issuer  Purchases of Equity Securities |   |
| Item  6.          | Selected  Consolidated Financial Data                                                                                  |   |
| Item  7.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |   |
| Item  7A.         | Quantitative  and Qualitative Information about Market Risk                                                            |   |
| Item  8.          | Financial  Statements and Supplementary Data                                                                           |   |
| Item  9.          | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosures                                 |   |
| Item  9A.         | Controls  and Procedures                                                                                               |   |
| Item  9B.         | Other  Information                                                                                                     |   |
|              |                                                                                                                   |   |
| **PART III** |                                                                                                                   |
| ** **        |                                                                                                                   |   |
| Item  10.         | Directors  and Executive Officers of the Registrant                                                                    |   |
| Item  11.         | Executive  Compensation                                                                                                |   |
| Item  12.         | Security  Ownership of Certain Beneficial Owners and Management                                                        |   |
| Item  13.         | Certain  Relationships and Related Transactions                                                                        |   |
| Item  14.         | Principal  Accounting Fees and Services                                                                                |   |
|              |                                                                                                                   |   |
| **PART IV**  |                                                                                                                   |
| ** **        |                                                                                                                   |   |
| Item  15.         | Exhibits,  Financial Statement Schedules                                                                               |   |
|              |                                                                                                                   |   |
|              | Signatures                                                                                                             |   |

 

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**PART I**

 

**Item 1.****                                                           Business**

 

**Corporate History; Overview**

 

Kaiser Group Holdings, Inc. (“Kaiser Group Holdings” or the “Company”)is a Delaware corporation that was formed on December 6, 2000 for thepurpose of owning all of the outstanding stock of Kaiser Group International, Inc.(“Old Kaiser”), which in turn continues to own the stock of its remainingsubsidiaries. On June 9, 2000, Old Kaiser and 38 of its domesticsubsidiaries voluntarily filed for protection under Chapter 11 of the UnitedStates Bankruptcy Code in the District of Delaware (case nos. 00-2263 to00-2301). Old Kaiser emerged from bankruptcy with an approved plan of reorganization(which was its Second Amended Plan of Reorganization and is referred to in thisreport as the “Plan of Reorganization”) that was effective on December 18,2000 (the “Effective Date”). The Company is deemed a “successor issuer” to OldKaiser by virtue of Rule 12g-3(a) under the Securities Exchange Actof 1934. A summary of the Plan of Reorganization for Old Kaiser can be found ina Current Report on Form 8-K dated December 5, 2000 filed by OldKaiser. In this report, unless the contextstates otherwise, the terms “we”, “our” and “Kaiser” refer to Kaiser GroupHoldings (including Old Kaiser as its predecessor) and its subsidiaries.

 

Under the Plan of Reorganization, Old Kaisersold some of its businesses and made payments of cash and stock to various classesof creditors as described in Note 2 to our consolidated financial statementsappearing elsewhere in this report. We now have only a limited number ofactivities, assets and liabilities, primarily consisting of the following:

 

•                  Weown Kaiser-Hill Company, LLC (“Kaiser-Hill”) equally with CH2M Hill CompaniesLtd (“CH2M Hill”.)  Kaiser-Hill is ourmajor source of income. Kaiser-Hill currently serves as the general contractorat the U.S. Department of Energy’s (“DOE” or “Department of Energy”) Rocky Flatssite. Kaiser-Hill has performed for the Department of Energy at this site since1995 and in January 2000 was awarded a new contract to manage the closureof the site. The level of success experienced by Kaiser-Hill in achievingtimely closure of the Rocky Flats site, and the cost of achieving such closure,have been and continue to be the primary determinants of our long-termfinancial performance following the completion of the bankruptcy reorganizationprocess. See “— Kaiser-Hill” below for additional information.

•                  We have a substantial claim, pending resolution,against the owner of a steel mini-mill that we constructed for Nova Hut, s.a. (“NovaHut”) in the Czech Republic. The engineering and construction of the mini-millwas completed in 2000 by our subsidiary, Kaiser Netherlands, B.V. See “— NovaHut” below for additional information about our Nova Hut claim.

•                  We own a captive insurance company that ceased toissue new policies as of October 1, 2000 and has, since then, solely beeninvolved in resolving remaining claims made against previously issued policies.In the fourth quarter of 2004, we received regulatory approval and finalizedthe formation documents of a sponsored captive subsidiary, MS BuildersInsurance Company, to enable our wholly-owned captive insurance company tooffer derivative captive insurance services to third party clients. As of March 20,2006, MS Builders Insurance Company has not written any policies.

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

•                  We formed Kaiser Analytical ManagementServices, Inc. (“KAMS”) in April 2004 to take over the operations ofthe Analytical Services Division of Kaiser-Hill. KAMS provides analyticalmanagement services such as sample planning, sample management, recordsmanagement, performance assessment and data management in the general areas ofhealth and safety, geotechnical, environmental and waste management, anddeactivation and decommissioning. See “Kaiser Analytical Management Services, Inc.”below for additional information.

 

**General Terms and Distribution Status of Plan ofReorganization**

** **

The effectiveness of the Plan of Reorganization as of December 18,2000 did not, in and of itself, complete the bankruptcy process. The process ofresolving claims initially filed in the bankruptcy is ongoing. By far thelargest class of claims (“Class 4”) was made up of creditor claimsother than trade creditor or equity claims. Class 4 claims includedholders of Old Kaiser’s senior subordinated notes due 2003. Holders of Class 4claims allowed by the bankruptcy court received a combination of cash and ourpreferred (“New Preferred”) and common stock (“Kaiser Common Stock”) in respectof their claims. Each Class 4 claimant was entitled to receive one shareof New Preferred and one share of Kaiser Common Stock for each $100 of claims,subject to a reduction in the number of shares of New Preferred issued to suchclaimant by one share for each $55.00 of cash received by the claimant.

 

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The equity class of claims recognized in the Old Kaiser bankruptcyare “Class 5” claims, consisting of holders of Old Kaiser common stock (“OldCommon”) and other “Equity Interests” as defined in the Plan of Reorganization.The Plan of Reorganization provides that holders of Equity Interests receive anumber of shares of Kaiser Common Stock equal to 17.65% of the number of sharesof Kaiser Common Stock issued to allowed Class 4 claimants. In the initialdistribution, one share of Kaiser Common Stock was issued for each 96 shares ofpreviously outstanding Old Common. During 2005, the Company settled asignificant Class 5 claim asserted by the former shareholders of ICTSpectrum Constructors, Inc. (“ICT Spectrum”), which Old Kaiser hadacquired in 1998, and issued an aggregate of 175,003 additional shares ofKaiser Common Stock to such claimants pursuant to the settlement. See Note 10to the consolidated financial statements appearing elsewhere in this report foradditional information.

 

Pursuant to the terms of the Plan of Reorganization, the Company wasrequired to complete its initial bankruptcy distribution within 120 days of theEffective Date. Accordingly, to satisfy approximately $136.8 million of allowedClass 4 claims, the Company effected its initial distribution on April 17,2001. The amount of unresolved Class 4 claims remaining at April 17,2001 was approximately $130.5 million.

 

To address the remaining unresolved claims, the Bankruptcy Court issuedan order on March 27, 2001 establishing an Alternative Dispute Resolution(“ADR”) procedure whereby the remaining claimants and Old Kaiser producedlimited supporting data relative to their respective positions and engaged ininitial negotiation efforts in an attempt to reach an agreed claimdetermination. If necessary, the parties were thereafter required toparticipate in a non-binding mediation before a mediator pre-selected by theBankruptcy Court. All unresolved claims as of March 27, 2001 are subjectto the ADR process. Since April 17, 2001, the date of the initialdistribution, $130.0 million of asserted Class 4 claims have beenwithdrawn, negotiated or mediated to an agreed amount, resulting in cashpayments approximating $2.8 million and issuances of 683 shares of NewPreferred and 823 shares of Kaiser Common Stock. With the settlement of the ICTSpectrum Class 5 claim and the subsequent issuance of 175,003 shares ofKaiser Common Stock to such claimants, at March 20, 2006, there are noremaining unresolved Class 5 claims.

 

As of March 20, 2006, the aggregate amount of unresolved claimswas less than $1.0 million. As demonstrated by the claim settlements completedsince April 17, 2001, and based on the belief that it is in the bestinterest of the Company and its current shareholders, the Company has beensettling certain remaining Class 4 claims entirely for cash payments inlieu of the combination of cash and New Preferred and Kaiser Common Stock ascontemplated in the Plan of Reorganization. The Company intends to continue touse this settlement alternative during the resolution of remaining Class 4claims. The Company expects to resolve the remaining claims, and to reach afinal resolution of issues related to the retiree benefit plans (see Note 13 toour consolidated financial statements appearing elsewhere in this report), bythe end of 2006. Upon such final resolution, the Company expects to take thenecessary steps to close the bankruptcy cases. Upon such closing, theBankruptcy Court would no longer be involved in the administration of theCompany’s affairs, and the Company’s obligation to pay certain fees and submitperiodic reports to the Bankruptcy Court would be terminated. Since closing thecases requires a resolution of all outstanding matters and such resolution issomewhat out of the Company’s control, there is a possibility that the caseswill not be closed within the anticipated time period.

 

In the first quarter of 2004, the Company recorded a $1.4 millionreserve for future claim settlements based upon the Company’s estimate ofunresolved claims at that time. During 2004 and 2005, the Company settledvarious Class 4 claims utilizing approximately $1.0 million of thisreserve. Based upon the Company’s estimate of unresolved claims at December 31,2005, $0.4 million remains in this reserve.

 

**Kaiser-Hill**

 

The primarysource of the Company’s income has historically been our 50% ownership interestin Kaiser-Hill. The remaining 50% interest is owned by CH2M Hill. Kaiser-Hillwas formed solely for the performance of the current and former Rocky Flatsclosure contracts. CH2M Hill designatesthree of the five members of Kaiser-Hill’s Board of Managers, and we designatetwo members.

 

Kaiser-Hill currently serves as thegeneral contractor at the U.S. Department of Energy’s Rocky Flats Site nearDenver, Colorado. Kaiser-Hill has performed clean up and closure activitiessince 1995 at this site, a former Department of Energy nuclear weaponsproduction facility. The level of success experienced by Kaiser-Hill inachieving timely closure of the Rocky Flats site, and the cost of achievingsuch closure, are the primary determinants of the Company’s financialperformance.

 

Effective February 1, 2000, Kaiser-Hillwas awarded a new contract pursuant to which Kaiser-Hill provides services thatwill complete the restoration of the Rocky Flats site and close it toDepartment of Energy occupation. The economic terms of the contract providethat Kaiser-Hill will earn revenue equal to the actual cost of completing the projectplus a performance fee

 

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based on a combination of factors involvingthe actual cost of completing the site closure project and the actual date ofcompleting the project.

 

On March 20, 2004, Kaiser-Hill receiveda contract modification to motivate safe continuing positive performance byincreasing the maximum fee ceiling that Kaiser-Hill could earn under thecontract. The same contract modification reduced the minimum fee floor andincluded other provisions related to work scope changes. The total potentialfee to be earned pursuant to the contract, as so modified ranges from $75.0million to $560.0 million based on Kaiser-Hill’s costs to complete the siteclosure being within the range of completion costs of $3.1 billion and $4.9billion, and completion at various dates between 2005 and 2007. For projectcosts saved below a target level, Kaiser-Hill retains a varying percentageshare ranging from 20% to 30% as additional incentive fee. Similarly, for projectcosts incurred above a target level, Kaiser-Hill’s incentive fee is reduced by30%.

 

On October 13, 2005, Kaiser-Hilldeclared physical completion of the clean up and closure of the DOE’s RockyFlats site. On December 8, 2005, the DOE accepted the physical completionin accordance with the contract. The projected total fee to be earned pursuantto the contract is $510.0 million based on a Kaiser-Hill cost to complete thesite closure of $3.44 billion. As of March 20, 2006, Kaiser-Hill hadreceived $505.0 million of such fee from the DOE.

 

Kaiser-Hill now operates under the closeoutphase of its contract with the DOE, primarily resolving open administrativeissues and providing support to the DOE to achieve regulatory closure of thesite. The closeout phase of the contract is a cost reimbursable phase and isnot fee bearing nor does the closeout phase impact fees earned. See Item 7. – “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” forfurther discussion of this activity.

 

**Nova Hut**

 

Although Old Kaiser sold its Metals Mining and Industry business unitin August 2000, it retained its Netherlands subsidiary, KaiserNetherlands, B.V. (“Kaiser Netherlands”), which had been responsible for aturnkey engineering and construction services contract for the construction ofa steel mini-mill in the Czech Republic for Nova Hut. After construction of themini-mill was completed in 2000, the contract with Nova Hut provided for amaximum of three possible performance tests. The first performance test wascompleted on November 13, 2000. Kaiser Netherlands believes that the firstperformance test was successful and that Nova Hut should have agreed to finalacceptance of the mini-mill and made final payment of amounts accrued by KaiserNetherlands throughout the project, including fee and retention amounts withrelease of performance guarantee instruments. Nova Hut, however, asserted thatthe first test was not successful. Kaiser Netherlands believes that suchcontention may have been put forth in response to severe financialconstraints on Nova Hut’s operations resulting from weakening conditions in theworldwide steel market and the significant amounts that Kaiser Netherlandsbelieved it was contractually due. As of March 20, 2006, this dispute hadnot been resolved, and Kaiser Netherlands continues to pursue legal action toenforce its rights. Initially, from 2001 to 2005, the primary legal venue ofthis dispute had been the Delaware bankruptcy proceeding for Old Kaiser, wherethe Company has asserted claims against Nova Hut and the International FinanceCorporation (“IFC”). The Delaware bankruptcy court had previously ruled thatthe Company, as opposed to Kaiser Netherlands, could proceed with prosecutionof its specific claims against Nova Hut and IFC in the Delaware bankruptcycourt venue. Both Nova Hut and IFC appealed this ruling and, during the firstquarter 2004, the Delaware bankruptcy court’s decision regarding the IFC wasoverturned by the District Court, ruling that the IFC enjoys sovereign immunityfrom prosecution. The Company filed an appeal with the U.S. Court of Appealsfor the Third Circuit regarding this decision in favor of the IFC, and on February 25,2005, the Third Circuit overturned the District Court’s decision. The IFC’srequest for a rehearing of the case by the Third Circuit was refused. The IFCthen petitioned the Delaware bankruptcy court to stay proceedings pendingcompletion of the Kaiser Netherlands-Nova Hut arbitration proceeding discussedbelow. This IFC motion was granted. With regard to the Nova Hut appeal, theDistrict Court has ruled that U.S. bankruptcy proceedings should also be stayedpending completion of arbitration proceedings.

 

In January 2004, Kaiser Netherlands filed arbitration claims againstNova Hut in the amount of $51.1 million with the International Chamber ofCommerce. In November 2004, Kaiser Netherlands’ claim against Nova Hut wasamended to include late interest and other charges and now totals $67.5 million.The arbitration panel has been constituted, and a hearing was held in September 2005.At present, we do not expect a decision to be issued until the second quarterof 2006. Nova Hut has submitted a $49.7 million counterclaim against KaiserNetherlands in the same proceedings before the International Chamber ofCommerce.

 

In December 2003,the International Chamber of Commerce, under the dispute resolution provisionsof the Nova Hut mini-mill subcontract between Kaiser Netherlands and themini-mill’s main equipment supplier, Tippins, Inc., issued a final awardthat was on balance favorable to Kaiser Netherlands. As a result of the ruling,Kaiser Netherlands was relieved of the obligation to pay additional retentionto Tippins, Inc., and Kaiser Netherlands was awarded a net cash settlementof $2.6

 

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million. The Company hasnot recorded this award due to the uncertainties regarding collectibility. However,the Company intends to vigorously pursue collection of this award.

 

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

 

**Kaiser Analytical ManagementServices, Inc.**

 

In April 2004, we established our wholly-owned subsidiary, KaiserAnalytical Management Services, Inc., to take over the operations of theAnalytical Services Division of Kaiser-Hill. KAMS provides analyticalmanagement services such as sample planning, sample management, recordsmanagement, performance assessment and data management in the general areas ofhealth and safety, geotechnical, environmental and waste management, anddeactivation and decommissioning.

 

On July 1, 2004, KAMS began providing its services as asubcontractor at the Department of Energy’s Rocky Flats closure site inColorado. KAMS receives a fixed management fee for these services plus a smallbase fee and efficiency incentives built on laboratory sample costs.

 

Management has implemented a marketing plan aimed at gaining contractawards in the private sector and at other environmental sites within theDepartment of Energy complex, as well as with other agencies and departments ofthe U.S. Government. KAMS will manage its costs and operations consistent withthe success of the marketing efforts.

 

**Retiree Benefit Obligation**

 

We also have the obligation to pay certainmedical, disability and life insurance benefits to a fixed group of retireesfor life. Such plans cover certain individuals who retired prior to 1993. Thereare approximately 500 retirees and dependents currently covered by the plans,the average age of whom is approximately 80. The actuarially determined presentvalue of this obligation as of December 31, 2005, based on the existingcommitments, interest rate assumptions and related medical and death benefitobligations, was $6.9 million, net of an unrecognized actuarial gain of $0.3million. The final valuation of the company’s benefit obligationand the method used to ensure funding will be established through an ongoingclaim resolution proceeding in the Delaware bankruptcy court. See Note 13 to our consolidated financialstatements included elsewhere in this report for additional information.

 

**Other RetainedAssets, Activities and Obligations**

** **

We own a captive insurance company that isnot at this time engaged in issuing new policies but is solely engaged in theprocess of resolving existing claims. Restrictions on the insurance company’scash balances, maintained to support statutory insurance reserves, will bereleased as reserve requirements decrease in the future and to the extent suchcash balances are not used in payment of resolved claims. In the fourth quarterof 2004, we received regulatory approval and finalized the formation documentsof a sponsored captive subsidiary, MS Builders Insurance Company, to enable ourwholly-owned captive insurance company to offer derivative captive insuranceservices to third party clients. As of March 20, 2006, no policies havebeen written by MS Builders Insurance Company.

 

Our Board of Directors (the “Board”) willcontinue to explore opportunities for us with respect to the activities wecurrently conduct and potential new business activities in which we may engagein the future.

 

**Insurance**

** **

We have a risk management and insuranceprogram in place that provides a range of coverages tailored to the needs ofthe reorganized company. Insurance coverages include policies for fiduciary,crime, directors and officers’ liability, property, general liability, workers’compensation and professional liability “runoff” coverage to deal withliabilities arising from past activities and projects, if necessary.

 

We believe that the insurance coverages wemaintain, including self-insurance, protect against risks that are comparableto those of similar businesses of our scope and present operating profile andthat related coverage amounts are economically reasonable. At this time, weexpect to continue to be able to obtain insurance in amounts generallyavailable to firms with a similar profile. Insurance costs are rising, andthere can be no assurance that the insurance coverage and levels maintained byus will continue to be reasonably available. An insured claim, or uninsuredclaim for that matter, arising out of pre-reorganization or post-reorganizationactivities of Old Kaiser, if successful and of sufficient magnitude, could havea material adverse effect on our financial position.

 

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**GovernmentRegulation**

** **

We may, from time to time, eitherindividually or in conjunction with other government contractors operating insimilar types of businesses, be involved in U.S. government investigations foralleged violations of procurement or other federal laws and regulations. Nocharges presently are known to have been filed against us by these agencies.

 

**Employees**

** **

As of March 20, 2006, we hadapproximately 12 full-time equivalent employees, of whom 5 are employed byKaiser Group International, Inc. and 7 are employed by KAMS.

 

**AvailableInformation**

 

The address of our website is http://www.kaisergroup.com.

 

### **Item 1A.**                                                  Risk Factors

 

This Annual Report on Form 10-K contains, and our periodic filingswith the Securities and Exchange Commission and written or oral statements made by our officers and directors to press,potential investors, securities analysts and others, may contain,forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934. These forward-looking statements are not historical facts, but rather arepredictions and generally can be identified by use of statements that includephrases such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,”“foresee” or other words or phrases of similar import. Similarly, statementsthat describe or contain informationrelated to matters such as our intent, belief, or expectation with respect tofinancial performance, claims resolution, cash availability, stock redemptionplans, contract awards and performance, potential acquisitions and jointventures, and cost-cutting measures are forward-looking statements. Theseforward-looking statements often reflect a number of assumptions and involveknown and unknown risks, uncertainties and other factors that could cause ouractual results to differ materially from those currently anticipated in theseforward-looking statements. In light of these risks and uncertainties,including those described below, the forward-looking events might or might notoccur.

 

**Our remaining primary source offunding is distributions from Kaiser-Hill and possible recovery of our claimagainst Nova Hut, which are subject to uncertainties that may adverselyimpact the potential value of our common stock**.

 

*There are risks associated with the resolution ofadministrative issues surrounding certain Kaiser-Hill employee pension andpost-retirement benefits, along with additional administrative contractcloseout issues, that may affect the timing and award of future cashdistributions from Kaiser-Hill to the Company.*

 

On October 13, 2005, Kaiser-Hill declared physical completion ofthe cleanup and closure of the DOE’s Rocky Flats site. As a result, on January 11,2006, Kaiser-Hill received payment from the DOE for all remaining performancefees, less a retained amount equaling $5.0 million, which was retained by theDOE for possible contract contingencies. Kaiser-Hill has further withheld $17.3million in cash from this final distribution, pending resolution with the DOEof administrative issues associated with certain Kaiser-Hill employee pensionand post-retirement benefits, as well as further administrative contractcloseout issues. It is possible that there will be disputes between the DOE andKaiser-Hill as to how these issues should be addressed and dealt with. Suchdisputes could delay or reduce future distributions of cash from Kaiser-Hill tothe Company and could cause a decrease in the value of our common stock.

 

*There arepotential risks associated with U.S. Government audits of Kaiser-Hill whichcould result in disallowed costs or cost reclassifications requiring refunds ofcash from Kaiser-Hill to the DOE.*

 

As the contract between Kaiser-Hill and the DOEcontains cost reimbursement provisions, the costs invoiced by Kaiser-Hill forreimbursement by the DOE are subject to audit by the U.S. Government. Governmentaudits of costs invoiced by Kaiser-Hill are ongoing. Although Kaiser-Hill hashistorically provided its estimates of disallowed costs, uncertainties existwith regard to the government audit of Kaiser-Hill. To the extent that costsare disallowed and cash refunds are made to the DOE, future cash distributionsfrom Kaiser-Hill to the Company would be reduced and could cause adecrease in the value of our common stock.

 

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*We cannot predict the outcome or timing of adecision and a potential award from the International Chamber of Commerce.*

 

The Company has pending an arbitration award decision from theInternational Chamber of Commerce concerning a turnkey engineering andconstruction services contract for construction of a steel mini-mill in theCzech Republic for Nova Hut. In this proceeding, the Company has submitted aclaim for $67.5 million dollars and Nova Hut has submitted a counterclaim for$49.7 million. At present, we do not expect a decision to be issued by theInternational Chamber of Commerce until the second quarter of 2006 and there isno way of predicting what the decision will be. Should an award decision bemade that is not favorable to the Company, such a decision may have anadverse impact on the value of the Company’s common stock. In the case of afavorable decision, the Company will still have to pursue collection of theaward. It is not possible to predict whether any award that is favorable to theCompany (if any) would be collectible or how long collection efforts, even ifsuccessful, would take.

 

**We face significantcontingencies, which may adversely impact our ability to fund ourcontinuing operations and to undertake new operations.**

 

*We may be unsuccessful innegotiating an acceptable benefits funding plan to satisfy our obligation toprovide future benefits to a fixed group of retirees.*

 

The Company remains obligated to continue to fulfill the provisions ofOld Kaiser’s previously curtailed benefits plan, which provides certain medicaland death benefits to a group of retirees. All of the benefits derived from theplan are fully covered by the Company’s self-insurance. Since the December 2000approval of the Plan of Reorganization, the Company has been negotiating withthe Delaware Bankruptcy Court-appointed Official Committee of Retirees (OCR) todesign and implement a benefits funding plan that would provide for all retireebenefit obligations going forward. As of March 20, 2006, no agreement had beenreached on such a plan.

 

The OCR recently has filed a motion seeking approval of an agreement itclaims to have reached with the Company regarding these issues. Since thatfiling, negotiations regarding an acceptable benefits funding plan have continued.Should the Company and the OCR not reach an agreement, it is expected that theOCR will continue to pursue satisfaction of its claim in the DelawareBankruptcy Court in April 2006. The OCR is expected to seek to imposesettlement on the basis of a guaranteed benefits plan through the establishmentof special type of trust commonly referred to as a VEBA, or Voluntary Employees’Beneficiary Association. The Company could potentially incur highadministrative costs, up to $3.0 million, to establish a VEBA to administerretiree benefits on the basis of the criteria requested by the OCR. Suchadministrative costs would be in addition to the present value of the promisedbenefits. The company may also be required to provide for a higher benefitfunding amount than currently estimated, if the bankruptcy court agrees withthe OCR that a lower discount rate should be used to calculate benefits. Forits part, the Company is seeking to negotiate a less costly VEBA or othermechanism to fully underwrite all retiree benefits. At this point, it is notpossible to predict the ultimate outcome of this matter.

 

If we are not successful in negotiating an acceptable benefits fundingplan and a settlement is imposed on us by the Bankruptcy Court, our cash flowsand our operating results could be adversely impacted.

 

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

 

Our long-term future profitability will bedependent, to a significant degree, on the extent to which we carry outactivities other than through Kaiser-Hill, particularly since Kaiser-Hill hasentered the closeout phase of its contract with the DOE, and we have receivedmost of the funds we expect to receive from our investment in Kaiser-Hill. Unlessand until we further develop plans for such operations, we are unable todetermine either the amount of risk that future operations will involve orwhether we have the ability to realize long-term profitability. The businessopportunities we have begun to explore, such as the establishment of KAMS andour completion of the process to enable MS Builders Insurance Company to offerderivative captive insurance services, are in very early stages, may takea long time to develop, and may never be profitable or successful at all. Ourefforts to develop business operations, separate from Kaiser-Hill involvestart-up activities with risks specific to activities of this type, which may adverselyimpact our cash flow and operating results. A decrease in our cash flowsand operating results could result in a decrease in the value of our commonstock.

 

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

 

Given the reorganization history of Old Kaiser,we may not be able to obtain satisfactory contract performance guarantymechanisms, such as performance bonds and letters of credit, on satisfactoryterms or at all, to the extent such mechanisms are needed for new activitiesand projects. These factors could limit the nature of the business activitiesin which we can engage, which may adversely impact our cash flow andoperating results and result in a decrease in the value of our commonstock.

 

6

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*We may beunable to generate funds to meet our cash flow needs, and we may be unableto access additional capital.*

 

We may be unable to continue to generatesufficient funds to meet our cash flow needs. In the event our cash needsexceed our current estimates, we may not be able to obtain additionalcapital to meet those needs on favorable terms, or at all. In particular, dueto the reorganization history of Old Kaiser and current financial markets,additional capital may not be available to us. An inability to gain accessto additional capital could also limit our ability to undertake new activities.Ultimately, an inability to meet our existing obligations or to undertake newactivities could adversely impact our cash flow and operating results. Adecrease in our cash flows and operating results could result in a decrease inthe value of our common stock.

 

*We may have to draw down existing cashbalances to fund current operating cash needs.*

 

In light of physical completion of Kaiser-Hill’s contract with the DOE,until and unless the Company is successful in developing a new revenue basethrough new commercial activities or undertakings, it is anticipated that theCompany will need to rely on existing cash balances to fund its continuingoperations, including overhead costs. This draw down in cash balances couldresult in a decrease in the value of our common stock.

 

**Item 1B.****                                                  UnresolvedStaff Comments**

 

Not applicable.

 

### **Item 2.**                                                           Properties

 

We owned no properties as of December 31, 2005. Weleased properties at that date, which were located at 12303 Airport Way,Broomfield, Colorado, 80021-0007 and 9300 Lee Highway, Fairfax, Virginia22031-1207.

 

## **Item3.**                                                           LegalProceedings

 

On June 9, 2000, Old Kaiser andthirty-eight of its wholly-owned subsidiaries filed petitions for relief under Chapter11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Districtof Delaware in order to facilitate the restructuring of Old Kaiser’s long-termdebt, trade and other obligations. Old Kaiser continued to operate as adebtor-in-possession subject to the Bankruptcy Court’s supervision and ordersuntil its Plan of Reorganization was confirmed on December 5, 2000 andbecame effective on December 18, 2000. The provisions of such plan arefurther described in “General Terms and Distributions Status of Plan ofReorganization” under Item 1 of this Report, in Note 2 to the consolidatedfinancial statements appearing elsewhere in this report, and in a CurrentReport on Form 8-K filed with the Securities and Exchange Commission on December 14,2000 by Old Kaiser.

 

In the course of normal business activities, various claims or chargeshave been asserted and litigation commenced against Old Kaiser arising from orrelated to properties, injuries to persons and breaches of contract, as well asclaims related to acquisitions and dispositions. Such claims are now part ofthe overall bankruptcy proceeding. Claimed amounts may not bear anyreasonable relationship to the merits of the claim or to a final court award.In the opinion of management, an adequate reserve has been provided for finaljudgments, if any, in excess of insurance coverage, that might be renderedagainst Old Kaiser in the event of unsuccessful bankruptcy resolution. Thecontinued adequacy of reserves is reviewed periodically as such mattersprogress.

 

### **Item 4.**                                                           Submission of Matters to a Vote ofSecurity Holders

 

No matter was submitted to a vote to securityholders during the fourth quarter of 2005.

 

**PART II**

 

**Item 5.****                                                           Market for Registrant’s Common Equity and RelatedStockholder Matters**

 

**Market Information**

 

Effective with implementation of Old Kaiser’s Plan of Reorganization,on or about April 17, 2001 each 96 shares of Old Common was exchanged for1 share of Kaiser Common Stock. Prior to December 19, 2004  Kaiser Common Stock was

 

7

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quoted on the Over-the-Counter Bulletin Board (“OTCBB”) under thesymbol “KGHI”. Since December 20, 2004, Kaiser Common Stock has beenquoted on the Pink Sheets Electronic Quotation Service (“Pink Sheets”) underthe symbol “KGHI.PK”. At March 20,2006, there were 836 shareholders of record of the Kaiser Common Stock.

 

The following table sets forth the high andlow sale prices for the Kaiser Common Stock as reported on the OTCBB (through December 19,2004) and Pink Sheets (since December 20, 2004).

 

| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| **Year Ended December 31,** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|                             |       |     |       |     |       |   |   |   |   |
| First Quarter                    |       | $        | 29.00      |     | $          | 23.50 |   | $ | 24.00 |   | $ | 19.00 |   |
| Second Quarter                   |       | 37.00    |       | 27.50    |       | 27.00 |   | 21.00 |   |
| Third Quarter                    |       | 44.00    |       | 28.80    |       | 26.50 |   | 24.00 |   |
| Fourth Quarter                   |       | 43.25    |       | 36.00    |       | 27.00 |   | 23.00 |   |
|                                  |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

Our Transfer Agent and Registrar isComputershare Trust Company, N.A., P.O. Box 43023, Providence, RI02940-3023. The Shareholder Relations telephone number is (781) 575-2726, thehearing impaired number, for callers inside the United States, is (800)952-9245 and for hearing impaired callers outside the United States thetelephone number is (781) 575-2726. The internet address for our Transfer Agentand Registrar is http://www.equiserve.com.

 

We have never paid a cash dividend on ourcommon stock. We anticipate that no cash dividends will be paid on the KaiserCommon Stock for the foreseeable future and that our earnings will be retainedfor use in our business. Any future determination to pay cash dividends will beat the discretion of our Board which determines our dividend policy based onour results of operations, capital requirements, and other factors that ourBoard deems relevant.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

The following table sets forth information asof December 31, 2005 with respect to compensation plans under which equitysecurities of the Company are authorized for issuance:

 
| **Plan Category**                                      | ** ** | **(I)****Number of  securities to be  issued upon exercise  of outstanding  options, warrants  and rights** | ** ** | **(II)****Weighted-  average  exercise price  of outstanding  options,  warrants and  rights** | ** ** | **(III)****Number of securities  remaining available  for future issuance  under equity  compensation plans** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
|                                                   |       |                                                                                                        |       |                                                                                           |       |                                                                                                          |       |
| Equity compensation plans  approved by shareholders    |       | —                                                                                                      |       | —                                                                                         |       | 150,000                                                                                                       |       |
| Equity compensation plans not approved by shareholders |       | —                                                                                                      |       | —                                                                                         |       | —                                                                                                        |       |
| Total                                                  |       | —                                                                                                      |       | —                                                                                         |       | 150,000                                                                                                       |       |

 

**Recent Sales ofUnregistered Securities**

 

During 2005, the Company did not sell any equity securities that werenot registered under the Securities Act of 1933.

 

### **Item 6.**                                                           Selected Consolidated Financial Data

### ** **

Selected consolidated financial data of Kaiser Group Holdings, Inc.for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 have beenderived from our audited consolidated financial statements. This informationshould be read in conjunction with consolidated financial statements and therelated notes thereto appearing elsewhere in this Report and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”.Certain reclassifications have been made to the prior period financialstatements to conform to the presentation used in the December 31,2005 consolidated financial statements appearing elsewhere in this report.

 

8

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**Selected Consolidated Financial Data**

**(in thousands, except per share data)**

 
| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Statement of Operations Data:                         |       |     |       |     |       |     |       |     |       |     |       |
| Gross revenue                                         |       | $        | 1,807      |     | $          | 1,036    |       | $        | —     |     | $          | — |   | $ | — |   |
| Service revenue                                       |       | 630      |       | 288      |       | —   |       | —   |       | —   |       |
| Operating loss                                        |       | (11,263  | )          | (6,364   | )          | (4,918   | )          | (7,028   | )          | (10,792  | )          |
| Income from continuing operations before income taxes |       | 77,457   |       | 9,110    |       | 11,028   |       | 29,165   |       | 7,657    |       |
| Net income (loss)                                     |       | 45,292   |       | 7,375    |       | 4,368    |       | 18,343   |       | (4,957   | )          |
|                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Basic and Diluted Earnings Per  Share:                |       |     |       |     |       |     |       |     |       |     |       |
| Continuing operations                                 |       | $        | 27.86      |     | $          | 4.58     |       | $        | 2.91       |     | $          | 8.54 |   | $ | 1.90 |   |
| Discontinued operations, net of  tax                  |       | —   |       | —   |       | (1.14    | )          | 0.31     |       | (9.05    | )          |
|                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Net earnings (loss) per share                         |       | $        | 27.86      |     | $          | 4.58     |       | $        | 1.77       |     | $          | 8.85 |   | $ | (7.15 | ) |
|                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Weighted average common shares outstanding:           |       |     |       |     |       |     |       |     |       |     |       |
| —basic                                           |       | 1,626    |       | 1,610    |       | 1,606    |       | 1,602    |       | 1,126    |       |
| —diluted                                         |       | 1,626    |       | 1,610    |       | 1,606    |       | 1,602    |       | 1,126    |       |
|                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Balance Sheet Data (end of  period):                  |       |     |       |     |       |     |       |     |       |     |       |
| Total assets                                          |       | $        | 122,024    |     | $          | 72,714   |       | $        | 74,080     |     | $          | 96,195 |   | $ | 80,891 |   |
| Long-term liabilities*                                |       | —   |       | 26,909   |       | 35,175   |       | —   |       | —   |       |
| Mandatorily Redeemable  preferred stock **            |       | —   |       | —   |       | —   |       | 55,942   |       | 62,481   |       |
| Shareholders’ equity                             |       | 79,111   |       | 27,545   |       | 20,077   |       | 17,805   |       | 3,360    |       |

 

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* After the adoption of FAS 150 on July 1,2003, we reclassified mandatorily redeemable preferred stock from mezzanineequity to long term liabilities. At December 31, 2004 and 2003, long termliabilities consist entirely of mandatorily redeemable preferred stock.

 

** After the adoption of FAS 150 (see Note 9to the consolidated financial statements appearing elsewhere in this report),we reclassified mandatorily redeemable preferred stock to long term liabilitiesfrom mezzanine equity.

 

**Item 7.**                                                           Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

** **

***Overview***

** **

**Since the Plan of Reorganization of Old Kaiser underChapter 11 of the Bankruptcy Code became effective on December 18, 2000,we have completed the initial bankruptcy distributions to allowed claimholders,continued to progress in resolving remaining outstanding bankruptcy claims,managed our remaining assets, wound down unnecessary elements of previousactivities and corporate structure, redeemed all of the New Preferred sharesoutstanding and formed two new business opportunities, KAMS and MS BuildersInsurance Company.**

** **

Following the effectiveness of the Plan ofReorganization, we now have only a limited number of activities, assets andliabilities, primarily consisting of the following:

 

•                  We ownKaiser-Hill equally with CH2M Hill. Kaiser-Hill has been our major source ofincome. Kaiser-Hill served as the general contractor at the DOE’s Rocky Flatssite. Kaiser-Hill has performed for the Department of Energy at this site since1995 and in January 2000 was awarded a new contract to manage the closureof the site. The level of success experienced by Kaiser-Hill in achievingtimely closure of the Rocky Flats site, and the cost of achieving such closure,have been and continue to be the primary determinants of our long-termfinancial performance following the completion of the bankruptcy reorganizationprocess.

•                  We have a substantial claim, pending resolution,against the owner of a steel mini-mill that we constructed for Nova Hut in theCzech Republic. The engineering and construction of the mini-mill was completedin 2000 by our subsidiary, Kaiser Netherlands.

•                  We own a captive insurance company that has notbeen issuing new policies since October 1, 2000 and has solely beeninvolved in resolving remaining claims made against previously issued policies.In the fourth quarter of 2004, we received regulatory approval and finalizedthe formation documents of a sponsored captive subsidiary, MS BuildersInsurance Company, to enable our wholly-owned captive insurance company tooffer derivative captive insurance services to third party clients. As of March 20,2006, MS Builders Insurance Company has not written any policies.

 

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

•                  We formed KAMS in April 2004 to takeover the operations of the Analytical Services Division of Kaiser-Hill. KAMSprovides analytical management services such as sample planning, samplemanagement, records management, performance assessment and data management inthe general areas of health and safety, geotechnical, environmental and wastemanagement, and deactivation and decommissioning.

 

***Outlook***

** **

*Potential**Kaiser-HillDistributions, the Nova Hut Disputes and Obligations to Provide Future Benefitsto Retirees*. As we look forward, by far the most significant factorin determining the value of our common stock is the performance of Kaiser-Hilland its success in collecting the remaining fee that may be due toKaiser-Hill from the DOE. Other material uncertainties affecting our futureresults are the outcome of the disputes we have in arbitration with Nova Hutand our obligation to provide futurebenefits to a fixed group of retirees.

 

On October 13, 2005, Kaiser-Hill declared physical completion ofthe clean up and closure of DOE’s Rocky Flats site. On December 8, 2005,the DOE accepted physical completion in accordance with the Rocky Flatscontract and authorized Kaiser-Hill to invoice all remaining performance feesless a retained amount equaling $5.0 million which was retained by the DOE forpossible contract contingencies. On January 11, 2006, Kaiser-Hill receivedpayment for all fees except for the retained amount. As a result of thispayment, on March 1, 2006, the Company received an $80.0 million cashdistribution (representing its 50% share) from Kaiser–Hill. As the $5.0 millionretention is released by the DOE, the Company expects to receive its 50% shareof any distribution of such funds by Kaiser-Hill.

 

Kaiser-Hill has withheld $17.3 million in cash from distribution untiladministrative issues associated with certain Kaiser-Hill employee pension andpost-retirement benefits, as well as further administrative contract closeoutissues, are clarified with the DOE. The Company expects to receive it 50% shareof any distribution of such funds by Kaiser-Hill.

 

Kaiser-Hill recognized a substantial amount of fee income from the DOEupon the declaration of physical completion on October 13, 2005 and,accordingly, the Company’s proportionate share of such income has been recordedin Equity Income in Earnings of Affiliate in the consolidated statement ofoperations for the year ended December 31, 2005. As a result, upon thereceipt of the $80.0 million cash distribution from Kaiser-Hill on March 1,2006, the Company made a corresponding reduction in its investment inKaiser-Hill on its balance sheet.

 

As discussed elsewhere, we have pending against Nova Hut an arbitrationbefore the International Chamber of Commerce. Our aggregate claims are for$67.5 million, and Nova Hut has asserted counterclaims of $49.7 million. It isnot possible to predict the outcome of these disputes, but we feel our claimsare stronger than Nova Hut’s. Our assessment could be wrong, but we aredetermined to see these disputes through to conclusion because we believe weare entitled to a substantial positive recovery. The arbitration process is nowunderway. At present, we do not expect to receive any recovery from Nova Hutuntil the second quarter of 2006 at the earliest, if at all.

 

Also discussed elsewhere, in accordance with the terms and provisionsof the Plan of Reorganization for Old Kaiser, we remain obligated to continueto fulfill the provisions of Old Kaiser’s previously curtailed benefits plan,which provides certain medical and death benefits to a group of retirees. Sincethe December 2000 approval of the Plan of Reorganization, the Company hasbeen negotiating with the Delaware Bankruptcy Court-appointed OfficialCommittee of Retirees (OCR) to design and implement a benefits funding planthat would provide for all retiree benefit obligations going forward. As of March 20,2006, no agreement had been reached on such a plan.

 

The Bankruptcy Court has scheduled a hearing for April 12, 2006 todecide the various issues relating to a retiree benefit plan including theadministrative mechanism to be employed to provide the benefits, the costs toadminister such mechanism, and the discount rate which should be used todetermine the present value of the future benefits and administrative costs. TheOCR and the Company have been directed to file documents reflecting theirrespective views on or before March 31, 2006. Under proposals of the OCR,the Company could potentially incur high administrative costs, up to $3.0million, to establish a VEBA to administer these benefits. Such administrativecosts would be in addition to the cost of providing the promised benefits. Inaddition, the OCR has proposed use of a discount rate which the Companybelieves to be unreasonably low. The Company will request the Court to approvea less costly mechanism to fully underwrite all retiree benefits and use asomewhat higher, market based discount rate. At this point, it is not possibleto predict the ultimate outcome of this matter.

 

*Proposed Reverse Split/Deregistration.*OurKaiser Common Stock is currently registered under the Securities Exchange Actof 1934 (the “Exchange Act”), and consequently we are subject to reportingobligations of the Exchange Act. In special

 

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meetings on March 31, 2005, and June 20, 2005, our Boardunanimously approved a 1-for-20 reverse split of the Kaiser Common Stock. TheCompany, in conjunction with its Board, is reassessing the issues surrounding apossible reverse split and deregistration of the Company. Proceeding with thereverse split would require that we amend the Company’s Certificate ofIncorporation, which requires stockholder approval. If we do proceed, we wouldintend to submit any such proposal to our stockholders for decision at the nextAnnual Meeting of Stockholders. It is anticipated that such a reverse splitwould reduce the number of record holders of Kaiser Common Stock to below 300,which would allow us to terminate our reporting obligations under the ExchangeAct and continue operations as a non-reporting company. In that event, we wouldfile a Form 15 with the Securities and Exchange Commission (“Commission”).Upon filing of the Form 15, our reporting obligations under the ExchangeAct would be suspended, meaning that we would no longer be required to filewith the Commission certain reports and forms, including Forms 10K, 10Q and 8-Kand proxy statements. In such event, thereafter, the Company would provideinformation about its quarterly and annual financial results to its remainingstockholders by other means, such as through its web site and in pressreleases.

 

***CriticalAccounting Policies and Significant Estimates***

** **

**The preparation of financial statements inconformity with U.S. generally accepted accounting principles requires that wemake estimates and assumptions affecting the assets and liabilities (includingcontingent assets and liabilities) reported at the date of the ConsolidatedFinancial Statements and the income statement amounts reported for the periodspresented. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances. Actualresults may differ from these estimates under different assumptions orconditions.**

** **

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

 

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

•                  Incometax provision, deferred tax assets and liabilities.

•                  Use of the equity method of accounting forKaiser-Hill, an affiliate that we have the ability to significantly influencebut not control. In accordance with the equity method of accounting, we recordour proportionate share of the affiliate’s income or losses.

•                  Estimatedfees on the Kaiser-Hill joint venture. Estimating future costs, contractcontingencies and revenues and profits, is a process requiring a high degree ofjudgment. In the event of a change in total estimated contract cost or profit,the cumulative effect of such change is recorded in the period the change inestimate occurs. Now that the contract has been declared complete, additionalrevenue recognition and our profitability from the Kaiser-Hill contract may beadversely affected to the extent that estimated cost to complete or incentiveor award fee estimates are revised upon audit from the U. S. Government. TheKaiser-Hill contract contains incentive provisions for increased or decreasedrevenue and profit based on actual performance against established cost targetsand schedule-related goals. Incentive fees have been included in estimatedcontract revenue at the time the amounts can be reasonably determined and arereasonably assured based on historical experience and other objective criteria.Should total costs of the project be revised based upon the results of U. S.Government audits, previously recognized revenues could be reversed and/orfuture period revenues could be reduced.

•                  Ourliability in connection with a post-employment medical benefit plan for a fixedgroup of retirees. This liability is affected by changes in the discount rate,medical cost trend rates and certain actuarial assumptions. Should actual ratesand results differ from the assumptions used, revisions to the liability wouldbe required resulting in additional income statement charges.

 

**Results ofOperations**

** **

*Years Ended December 31,2005, 2004 and 2003*

 

*Equity IncomeIn Earnings of Affiliate*

 

Our major remaining source of income is a 50% ownership inKaiser-Hill. We own Kaiser-Hill equally with CH2M Hill. The financialinformation contained herein for Kaiser-Hill is reflected on the equity basis. BecauseKaiser-Hill represents a significant portion of our financial position andresults of operations, the audited financial statements of Kaiser-Hill areincluded in this report (see pages F-21 to F-30).

 

*ContractProvisions for Revenue and Performance Award*

 

Kaiser-Hill’s contract with the DOE providesthat Kaiser-Hill earn revenue equal to the actual cost of physical completionplus a performance fee. The performance fee is determined based on (1) Kaiser-Hill’scost to complete the site closure, which must

 

11

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be within the range of $3.1 billion and $4.9billion, (2) the schedule of physical completion, which must bebefore 2007 and (3) Kaiser-Hill’s safety performance. On October 13,2005, Kaiser-Hill declared physical completion of the cleanup and closure ofthe DOE’s Rocky Flats site. At the time of declaration of physical completionon October 13, 2005, Kaiser-Hill’s cost estimate to complete the projectremained at $3.44 billion, which resulted in a performance fee payable toKaiser-Hill projected to be $510.0 million, of which $255.0million had previously been received. On December 8, 2005, the DOEaffirmed Kaiser-Hill’s declaration as required under the contract and the DOEauthorized Kaiser-Hill to invoice all remaining performance fees less aretained amount equaling $5.0 million. On January 11, 2006, Kaiser-Hillreceived payment for all remaining fees except the retained amount.

 

Since Kaiser-Hill declared physical completion, many of the performancerisks have been eliminated, but contract risks and uncertainties remain. As aresult of declaration of physical completion in October 2005, Kaiser-Hillrecognized all remaining performance fees under the contract in 2005 and hasestablished reserves for certain risks and uncertainties related to thecontract (see details described below in “— Closure Contract Billing Provisions”).Kaiser-Hill will reverse these reserves to the extent it is successful inmitigating or eliminating these remaining contract risks and uncertainties.

 

For the years ended December 31,2005, 2004 and 2003, we recorded our 50% equity in Kaiser-Hill’s income of$95.7 million, $20.3 million and $20.0 million, respectively. The differencesin the Kaiser-Hill earnings between 2005 and 2004 were due to the declarationof physical completion on October 13, 2005 and the affirmation by the DOEof completion of the project on December 8, 2005 which resulted inKaiser-Hill recognizing all remaining performance fees under the contract lesscertain established reserves in 2005. The differences in the Kaiser-Hillearnings between 2004 and 2003 were primarily due to the cumulative effects ofaccounting for periodic changes in the projected fee to be earned upon the completionof the project. Kaiser-Hill’s estimate of the final gross performance fee to beearned upon completion of the contract increased from $388.0 million to $429.0million as of December 31, 2003 and 2004, respectively, and then with thedeclaration of physical completion, increased to $510.0 million as of December 31,2005.

 

*ContractBilling Provisions*

 

****From the inception of Kaiser-Hill’s contractwith the DOE in February 2000 through December 31, 2005, Kaiser-Hillinvoiced the DOE for the performance fee based on the contract provisions ofapproximately $505.0 million, and collected an aggregate of approximately$255.0 million in fees from the DOE****. Kaiser-Hillreceived the remaining $250.0 million from the DOE on January 11, 2006.

 

Fee payments made by the DOE to Kaiser-Hill, less certainnon-reimbursable costs, will continue to be distributed to the joint ventureowners upon receipt. Kaiser-Hill has historically incurred expenses that arenot reimbursable by DOE pursuant to applicable Federal regulations. Accordingly,such expenses, which Kaiser-Hill estimates could total up to 15% to 20% of thetotal award fee, are deducted from the total fee earned and collected byKaiser-Hill prior to any distributions to either of its two owners. FromKaiser-Hill’s inception through December 31, 2005, Kaiser-Hill hasdistributed $107.7 million in cash to each of its two owners. On March 1, 2006, Kaiser-Hill distributed $80.0 million in cash to each of its twoowners. The Company expects to receive further distributions in the future asdescribed below.

 

Kaiser-Hill may receive up to anadditional $5.0 million from the DOE, which was withheld from the January 2006fee payment for possible contract contingencies. The Company expects that this$5.0 million will be released by DOE during the first half of 2006. Kaiser-Hillhas also withheld $17.3 million in cash from distribution to each of its twoowners until administrative issues associated with certain Kaiser-Hill employeepension and post-retirement benefits, as well as further administrativecontract closeout issues, are clarified with the DOE. We expect to receive our50% share of any distribution of such funds from Kaiser-Hill.

 

Kaiser-Hill recognized a substantial amount of the fee income from theDOE upon the declaration of physical completion on October 13, 2005 and,accordingly, the Company’s proportionate share of such income was recorded inEquity Income in Earnings of Affiliate in its consolidated statement ofoperations for the year ended December 31, 2005. As a result, upon thereceipt of the $80.0 million distribution from Kaiser-Hill on March 1,2006, the Company made a corresponding reduction in its investment inKaiser-Hill on its balance sheet.

 

Kaiser-Hill now operates under the closeoutphase of its contract with the DOE, primarily resolving open administrativeissues and providing support to the DOE to achieve regulatory closure of thesite. The closeout phase of the contract is a cost reimbursable phase and isnot fee bearing nor does the closeout phase impact fees earned. Effective December 31,2005, Kaiser-Hill terminated its remaining employees. Staff necessary tocomplete closeout activities is expected to be subcontracted or provided byCH2M Hill.

 

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For the years ended December 31, 2005, 2004 and 2003, our equityincome in earnings of affiliate was net of $7.0 million, $3.5 million and $3.5million, respectively, of amortization of the excess of our carrying value ofour investment in Kaiser-Hill over our ownership percentage of the underlyingKaiser-Hill equity. We increased the carrying value of this investment by $21.1million as part of our adoption of fresh-start reporting as required byU.S. Generally Accepted Accounting Principles as of December 31, 2000 andwe were amortizing that difference over the duration of the Kaiser-Hill closurecontract with the DOE. However upon Kaiser-Hill’s declaration of physicalcompletion on October 13, 2005, we wrote off the remaining balance of $7.0million against our equity income in earnings of affiliate.

 

*Interest Income*

 

We earn interest on our available cashbalances. In addition, we earned interest on a note receivable from ICFConsulting Group, Inc. (a division of Old Kaiser that was sold in 1999),through October 5, 2005, when we received payment of the entire principalbalance of and accrued interest on such note. Interest income increasednominally in 2005 compared to 2004 due to an increase in the average cashbalances over the period. Interest income decreased nominally in 2004 comparedto 2003, due to a decline in average cash balances over the period.

 

*AdministrativeExpenses*

 

Administrative expenses for the years ended December 31,2005, 2004 and 2003 consisted largely of salaries, legal and professional feesincurred for activities associated with the bankruptcy proceedings or withwinding down of historical operations, as well as the cost to fund a certainretiree benefit commitment. Administrative expenses for the year ended December 31,2005 compared to December 31, 2004 increased 12.8% or $0.7 million dueprimarily to the increase in legal fees related to the Nova Hut arbitration andthe ICT Spectrum litigation (discussed in more detail below under “Reserve forSettlement with ICT Spectrum”). Administrative expenses for the year ended December 31,2004 compared to December 31, 2003 increased nominally. The net expensefor the retiree medical commitment remained relatively unchanged for the threeyears ended December 31, 2005, 2004 and 2003 at approximately $1.0 millionper year.

 

*Reserve for Settlement with ICT Spectrum*

 

On October 19, 2005, the Company entered into a settlementagreement with the representatives of the former shareholders of ICT Spectrum,who had claimed to be entitled to additional shares of Kaiser Common Stock, tosettle all of their outstanding claims against the Company. On December 6,2005, the Bankruptcy Court granted final approval of the proposed settlementagreement. As a result, the Company issued and distributed 175,003 shares ofKaiser Common Stock to the former shareholders of ICT Spectrum in December 2005.

 

Because a settlement agreement,subject to Bankruptcy Court approval, was reached with the former shareholdersof ICT Spectrum, at September 30, 2005, we recorded a $6.2 million reserveon our balance sheet to account for this non-cash transaction. Upon BankruptcyCourt approval of the settlement agreement in December 2005, and thesubsequent issuance of 175,003 shares to the former shareholders of ICTSpectrum in accordance with the settlement agreement, the Company eliminatedthe reserve.

 

*Reserve for Settlement of Class 4Claims*

 

In the first quarter of 2004, the Company recorded a $1.4 millionreserve for future claim settlements based upon the Company’s estimate ofunresolved claims at that time. During 2004 and 2005, the Company settledvarious Class 4 claims utilizing approximately $1.0 million of thisreserve. Based upon the Company’s estimate of unresolved claims at December 31,2005, $0.4 million remained in this reserve as of such date.

 

*Loss fromDiscontinued Operations*

 

In addition to matters surrounding theresolution of the Nova Hut dispute, Discontinued Operations also reflects thenet income statement activity resulting from the winding down of our discontinuedengineering operations. At December 31, 2003, based upon the lack ofsignificant favorable developments with the Nova Hut claim in the prior twoyears and the time that has elapsed since completion of the project, theCompany established additional reserves to further reduce the net carryingvalue of the remaining Nova Hut project to $3.0 million by recording anadditional reserve of $3.0 million, which was offset by an income tax benefitof $1.1 million, by recording a charge to “Loss from Discontinued Operations”. Thischarge was offset by income from discontinued operations of $0.4million from the collection of foreign accounts receivable, which hadpreviously been fully reserved. The Company had no charges to “Loss fromDiscontinued Operations” during 2005 or 2004.

 

13

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*Income Taxes*

* *

During 2005, we recognized a total incometax expense of $32.2 million allocable to the following results (in thousands):

 
| **Statements of Operations Category**                         | ** ** | **Pre-tax  Income/(Loss)** | ** ** | **Applicable  Income Tax  (Expense)/Benefit** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|
| Income (loss) from continuing operations  before income taxes |       | $                          | 77,457     |                                          | $          | (32,165 | ) |
| Income (loss) from discontinued operations                    |       | —                     |       | —                                        |       |
|                                                          |       |                       |       | $                                             | (32,165    | ) |
|                                                               |            |                            |            |                                               |            |  |  |

* *

During 2004, we recognized a total income taxexpense of $1.7 million allocable to the following results (in thousands):

 
| **Statements of Operations Category**                         | ** ** | **Pre-tax  Income/(Loss)** | ** ** | **Applicable  Income Tax  (Expense)/Benefit** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|
| Income (loss) from continuing operations  before income taxes |       | $                          | 9,110      |                                          | $          | (1,735 | ) |
| Income (loss) from discontinued operations                    |       | —                     |       | —                                        |       |
|                                                          |       |                       |       | $                                             | (1,735     | ) |
|                                                               |            |                            |            |                                               |            |  |  |

 

During 2003, we recognized a total incometax expense of $3.8 million allocable to the following results (in thousands):

 
| **Statements of Operations Category**                         | ** ** | **Pre-tax  Income/(Loss)** | ** ** | **Applicable  Income Tax  (Expense)/Benefit** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|
| Income (loss) from continuing operations  before income taxes |       | $                          | 11,028     |                                          | $          | (4,827 | ) |
| (Loss) income from discontinued operations                    |       | (2,956                     | )          | 1,123                                         |       |
|                                                          |       |                       |       | $                                             | (3,704     | ) |
|                                                               |            |                            |            |                                               |            |  |  |

 

*Treatment of Net Operating Loss Carryforwards*

 

In December 2000 we went through a change in control as definedunder Section 382 of the Internal Revenue Code due to the Chapter 11bankruptcy reorganization. In September 2001 we determined that the changein control met the stringent guidelines of the bankruptcy exception providedunder the Internal Revenue Code. This resulted in our not being subject to thecarryforward limitations of Section 382 of the Internal Revenue Code. However,we were required to reduce certain carryovers that included net operatinglosses and credits. We offset the reduction of the carryforwards with thevaluation allowance previously established for those carryforwards and as aresult, the effective income tax rate for income from continuing operationsdiffered significantly from statutory rates. All remaining net operating losscarryforwards were utilized in 2003.

 

**Liquidity and Capital Resources**

 

*Years Ended December 31, 2005, 2004 and2003*

 

Operating Activities:  We used $21.0 million in cash for operatingactivities in 2005, $9.8 million in 2004 and $10.2 million in 2003. This use ofcash included the following (in thousands):

 
| ** **                                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| General and administrative  costs incurred              |       | $        | 5,920      |     | $          | 5,252    |       | $ | 4,918 |   |
| Payment of income taxes                                 |       | 14,602   |       | 1,916    |       | 4,010    |       |
| Payment of dividends included  in continuing operations |       | 1,518    |       | 2,151    |       | 953      |       |
| Other, net                                              |       | (1,058   | )          | 482      |       | 358      |       |
|                                                    |       |     |       |     |       |     |       |
| Cash used for operating  activities                     |       | $        | 20,982     |     | $          | 9,801    |       | $ | 10,239 |   |

 

Investing Activities:  Our primary investing activity has been thereceipt of funds from our investment in Kaiser-Hill. During the years ended December 31,2005, 2004 and 2003, Kaiser-Hill distributed $43.7 million, $17.5 million and$16.4 million, respectively, to us and to its other 50% owner, CH2M Hill. Foreach of the years ended December 31, 2005 and 2003, we

 

14

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invested $1.0 million and $1.0 million in newcertificates of deposit. In 2004, a $1.0 million certificate of deposit wasreinvested upon maturity.

 

Financing Activities:  Our primary financing activities have beenthe redemption of New Preferred in accordance with the terms of the Plan ofReorganization and the put rights described in Note 9 to theconsolidated financial statements appearing elsewhere in this report. The schedule belowidentifies the redemptions of New Preferred and the source of funds utilized inthe redemption. During the years ended December 31,2005, 2004 and 2003, we redeemed New Preferred as follows (dollars inthousands):

 

| **Date of  Redemption** | ** ** | **Use of  Unrestricted  Cash** | ** ** | **Use of  Restricted  Cash** | ** ** | **Total  Amount of  Redemption** | ** ** | **Number of  Shares  Redeemed** | ** ** |
|-------------------------|------------|--------------------------------|------------|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| November 2005      |       | $                              | 11,409     |                         | $          | —                           |       | $                               | 11,409     |   | 207,431 |   |
| September 2005     |       | 4,715                          |       | 785                          |       | 5,500                            |       | 100,000                         |       |
| April 2005         |       | 10,000                         |       | —                       |       | 10,000                           |       | 181,818                         |       |
| July 2004          |       | 2,478                          |       | 512                          |       | 2,990                            |       | 54,361                          |       |
| February 2004      |       | 2,599                          |       | 2,677                        |       | 5,276                            |       | 95,932                          |       |
| October 2003       |       | 4,650                          |       | 1,594                        |       | 6,244                            |       | 113,530                         |       |
| January 2003       |       | 5,233                          |       | 8,913                        |       | 14,146                           |       | 257,200                         |       |
|                         |            |                                |            |                              |            |                                  |            |                                 |            |  |  |  |

 

Prior to the adoption of FAS 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”, effective July 1, 2003, dividends were not recorded as interestexpense and were reflected below net income on our consolidated statements ofoperations and were reflected in our consolidated statements of cash flows as afinancing activity. During the year ended December 31, 2003, and prior tothe above mentioned adoption of FAS 150, we paid $2.2 million in dividends onour preferred stock. See “Operating Activities” above for the amount ofpreferred stock dividends paid after the adoption of FAS 150.

 

In 2003 we acquired 6,848 shares of NewPreferred for $0.3 million and recorded the purchase as treasury shares.

 

During 2005 and 2004, approximately $81,000and $36,000, respectively, was transferred from unrestricted cash tothe restricted cash which is a reserve for the settlement of unresolved Class 4claims as required in the Plan of Reorganization.

 

*Liquidity andCapital Resources Outlook*

 

We currently have no debt as a result of the effectiveness of the Planof Reorganization. We continue to finance the bankruptcy distributionrequirements and follow-on working capital needs in part through the useof the available cash and distributions from Kaiser-Hill and from other assetsale proceeds. Based on (i) current expectations for operating activitiesand results, (ii) expected Kaiser-Hill distributions, (iii) ourcurrent available cash position, (iv) recent trends and projections inliquidity and capital needs, (v) current expectations of total allowedclaims upon the completion of the bankruptcy proceedings (vi) satisfactionof our obligation to provide future benefits to a fixed group of retirees,management believes we have sufficient liquidity to cover our future operatingneeds and income tax requirements. With theretirement of the remaining outstanding New Preferred on November 17,2005, we no longer have future interest requirements.

 

*Other Matters*

 

We have various obligations and liabilitiesfrom our continuing operations, including general overhead expenses inconnection with maintaining, operating and winding down various entities. Additionally,we believe contingent liabilities may exist in the areas described in Note16 to the consolidated financial statements appearing elsewhere in this reportfor the periods ended December 31, 2005, 2004 and 2003.

 

**RecentAccounting Pronouncements**

 

In June of 2005, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. 154(FAS 154), “Accounting Changes andError Corrections”, a replacement of APB Opinion No. 20, “Accounting Changes” and FASBStatement No. 3, “ReportingAccounting Changes in Interim Financial Statements.”  FAS 154 applies to all voluntarychanges in accounting principle and changes the requirements for accounting forand reporting a change in accounting principle. FAS 154 requires theretrospective application to prior periods financial statements of the directeffect of a voluntary change in accounting principle unless it is impracticable.APB No. 20 required that most voluntary changes in

 

15

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accounting principle be recognized by including innet income of the period of the change the cumulative effect of changing to thenew accounting principle. The Company does not believe the adoption of FAS 154will have a material impact on its financial position, results of operations orcash flows.

 

On May 31, 2003, FASB issued FASBStatement No. 150 (FAS 150), “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity.”  FAS 150 improves the accounting for certainfinancial instruments that, under previous guidance, issuers could account foras equity and requires that those instruments be classified as liabilities (orassets in certain circumstances) in statements of financial position. FAS 150also requires disclosures about alternative ways of settling the instrumentsand the capital structure of entities – all of whose shares are mandatorilyredeemable. FAS 150 was to have been generally effective for all financialinstruments entered into or modified after May 31, 2003, and otherwiseeffective at the beginning of the first interim period beginning after June 15,2003. Recently, the FASB has deferred for an indefinite period the effectivedate for certain instruments and entities. As discussed in Note 9 of theconsolidated financial statements appearing elsewhere in this report, theCompany adopted the provisions of FAS 150 in the third quarter of 2003.

 

In December 2003, the FASB issued FAS No. 132 (Revised 2003),“Employers’ Disclosures about Pensions and Other Postretirement Benefits.” FAS No. 132(R)increases the existing disclosure requirements by requiring more details aboutpension plan assets, benefit obligations, cash flows, benefit costs and relatedinformation. Companies will be required to segregate plan assets by category,such as debt, equity and real estate, and to provide certain expected rates ofreturn and other informational disclosures. The new disclosure requirementsrequired by FAS No. 132(R) were reflected in the December 31, 2004consolidated financial statements appearing elsewhere in this report.

 

**Contractual Obligations**

 

At December 31, 2005, the only known contractual obligations ofthe Company related to a noncancelable operating lease, under which the Companyis obligated to make payments of $48,000 in 2006 and $24,000 in 2007.

 

**Item 7A.****                                                  Quantitative and Qualitative Information aboutMarket Risk**

 

We do not believe we have significantexposures to market risk as we do not presently 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 through thedetermination of the present value of its remaining obligation thereunder. A10% increase or decrease in the average annual prime rate would result in anincrease or decrease in the carrying value of the plan obligation but would notchange the actual cost of the plan.

 

**Item 8.****                                                           FinancialStatements and Supplementary Data**

 

The Financial Statements and SupplementaryData appear on pages F-1 through F-29 and S-1 through S-2 hereto.

 

**Item 9.****                                                           Changesin and Disagreements with Accountants on Accounting and Financial Disclosures**

 

None.

 

**Item 9A.****                                                  Controls and Procedures**

 

As of December 31, 2005, an evaluationwas performed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) or 15d-15(e) underthe Exchange Act). Based on that evaluation, the Company’s management,including the Chief Executive Officer and Chief Financial Officer, concludedthat the Company’s disclosure controls and procedures were effective as of December 31,2005. There were no significant changes in the Company’s internal control overfinancial reporting that occurred during the period covered by this report thathave materially affected, or that are reasonably likely to materially affect,our internal control over financial reporting.

 

**Item 9B.****                                                  OtherInformation**

 

None.

 

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**PART III**

 

**Item 10.****                                                   ****Directors and ExecutiveOfficers of the Registrant**

 

Jon B. Bennett, 49, director of the Company, has been a Director ofInformation Management at Devens Reserve Forces Training Area, a Department ofthe Army installation, since 1998. Mr. Bennett has been a director of theCompany since December 18, 2000. Mr. Bennett was SystemsAdministrator and Analyst at the then Fort Devens from 1995 to 1997, and wasthe senior Budget Analyst at Fort Devens from 1990 to 1995. Mr. Bennettgraduated from Bucknell University (B.A.). Mr. Bennett owns 1,000 sharesof Common Stock. Entities managed by Bennett Management Corporation, which iscontrolled by Mr. Bennett’s brother, James Bennett, are significantholders of Kaiser Common Stock issued by the Company in April 2001, as aresult of their significant holdings of subordinated notes of Old Kaiser.

 

Douglas W. McMinn, 58, has been President andChief Executive Officer of the Company since September 2004. Mr. McMinnhas been a director of the Company since September 2004 and also serves onthe Board of Managers of Kaiser-Hill. Mr. McMinn has been a seniorofficer of the Company and its predecessors for more than 17 years. Mr. McMinnis the Chief Executive Officer of Global Trade & Invest, Inc., afirm which he co-founded to engage in international trading activities and toprovide consulting assistance to companies doing business internationally. Mr. McMinnserved in the United States Government as a staff member in the NationalSecurity Council and as an Assistant Secretary of State for Economic andBusiness Affairs, U.S. Department of State. Mr. McMinnholds an M.L.A. from Johns Hopkins University and an M.A. from Johns HopkinsSchool of Advanced International Studies. Mr. McMinn owns 3,000 shares ofKaiser Common Stock.

 

Mark S. Tennenbaum, 46, has been a directorof the Company since September 2004. Mr. Tennenbaum is a privateinvestor. Prior to that, Mr. Tennenbaum was a co-founder, director andchief financial officer of FrontBridge Technologies, Inc., aprivately-held provider of secure managed messaging services acquired byMicrosoft in 2005, from its inception in 1999 until 2001. Prior to FrontBridgeTechnologies, Inc., Mr. Tennenbaum served as chief financial officerof SoftAware Networks, Inc., a privately-held network distributed hostingservices provider, from June 1998 until its sale to Digital Island in July 2000.Mr. Tennenbaum beneficially owns 200,000 shares of Kaiser Common Stockheld by the Mark S. Tennenbaum Investment Trust. Entities controlled by Mr. Tennenbaum’sfather, Michael E. Tennenbaum, and brother, Andrew R. Tennenbaum, aresignificant holders of Kaiser Common Stock.

 

Frank E. Williams, Jr., 71, is Chairmanof the Board of the Company and also serves on the Board of Managers of Kaiser-Hill.Mr. Williams currently serves as Chairman and principalowner of Williams Enterprises of Georgia, Inc., a holding companycontrolling six subsidiaries active in various facets of the steel industry. Inaddition, Mr. Williams serves as Chairman, CEO, and 50-percent owner ofBosworth Steel Erectors, Inc., a major erector of steel products in theSouthwestern United States, and Chairman and a major shareholder of Wilfab, Inc.,a fabricator of structural steel. Mr. Williams is also Managing Partnerand principal owner of Structural Concrete Products, LLC, a manufacturer ofpre-stressed concrete building systems, and of Industrial Alloy Fabricators(IAF), a fabricator of alloy plate products for the pulp and chemicalindustries. He serves as a member of the Board of Directors of Capital Bank,N.A. and Diamondhead Casino Corporation. Mr. Williams currently serves asa director of Williams Industries, Inc. of Manassas, Virginia, a companyhe founded and of which served as President, CEO and Chairman until November 1994.Williams Industries, Inc. is a public Nasdaq-listed company that owns fivesubsidiaries active in the steel industry, including Williams Bridge Co., oneof the largest fabricators of steel plate for bridge structures in theMid-Atlantic region. Mr. Williamsbeneficially owns 17,950 shares of Kaiser Common Stock.

 

Marian P. Hamlett, 44, is Executive VicePresident and Chief Financial Officer. Ms. Hamlett served as CorporateController of the Company from January 2001 until her appointment as ExecutiveVice President and Chief Financial Officer in April 2004. From 1995 to2001, Ms. Hamlett owned a Certified Public Accounting firm and providedvarious consulting services. Ms. Hamlett also worked in the venturecapital and financial services fields. Ms. Hamlett was a manager withDeloitte & Touche LLP from 1985 to 1991. Ms. Hamlett graduatedfrom Texas Christian University (B.B.A.). Effective March 31, 2006, Ms. Hamlett’semployment with the Company will terminate.

 

Nicholas Burakow, 56, is Senior VicePresident, Secretary and Treasurer. Effective April 1, 2006, Dr. Burakowwill assume the position of Executive Vice President and Chief FinancialOfficer and will continue to serve as Secretary and Treasurer. Dr. Burakowhas been a senior officer of the Company and its predecessors for more than 18years. Prior to joining the Company, Dr. Burakow served for twelve yearsin the U.S. Department of State’s Foreign Service, where his last position wasDirector for Monetary Affairs. Dr. Burakow is also the President of GlobalTrade & Invest, Inc., a firm which he co-founded toengage in international trading activities and to provide consulting assistanceto companies doing business internationally. Dr. Burakow holds a Ph.D. in economics from the University of NotreDame.

 

17

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**Audit Committee**

 

The Audit Committee is responsible for the selection of the Company’sindependent accountants, and reviews and accepts the reports from the Company’sindependent accountants. The Audit Committee met four times during the yearended December 31, 2005. The members of the Audit Committee are Frank E.Williams, Jr. (Chairman), Jon B. Bennett and Mark S. Tennenbaum. At thepresent time each member of the Audit Committee is “independent” as definedunder the National Association of Securities Dealers (“NASD”) listingstandards. The Company’s Board has determined that it does not have an “auditcommittee financial expert,” as defined in applicable rules of the SEC,serving on its audit committee at the present time. Given the small size of theBoard, the Company’s limited operations, and the nature and number of theCompany’s stockholders, the Board has determined that it is not necessary tohave an audit committee financial expert at the present time. The Board may consideradding a person who would qualify as an audit committee financial expert to theBoard and audit committee in the future.

 

**Section 16(a) BeneficialOwnership and Reporting Compliance**

 

The Commission requires public companies to tell their shareholderswhen certain persons fail to report their transactions in the company’s equitysecurities to the Commission on a timely basis. Based upon a review ofCommission Forms 3, 4, and 5 furnished to the Company, and based onrepresentations that no Forms 3, 4, and 5 other than those already filed wererequired to be filed, the Company believes that all Section 16(a) filingrequirements applicable to officers, directors and beneficial owners of morethan 10% of the equity securities of the Company were satisfied with respect tothe year ended December 31, 2005 except that, due to the expiration of theCommission electronic access codes and the delay in obtaining the new codes, a Form 4reporting the purchase of 1,000 shares of common stock by Mr. Williams on January 14,2005 was filed on February 11, 2005. On April 29, 2005, a Form 4was filed by Mr. Bennett regarding a sale of 1,250 shares of Kaiser CommonStock on April 7, 2005. On June 8, 2005, a Form 4 was filed forTennenbaum & Co. LLC regarding a redemption of Preferred Stock by theCompany that occurred on April 22, 2005. On June 27, 2005, a Form 4was filed for Mr. Williams regarding a redemption of Preferred Stock bythe Company that occurred on April 22, 2005.

 

**Corporate Governance Principles and Code ofConduct**

 

The Company’s Board has adopted Corporate Governance Principles for theBoard and a Corporate Code of Conduct, including Policies on Securities LawCompliance and Transactions in Company Securities. The Code of Conduct appliesto all employees, officers and directors and includes, but is not limited to,the substance of the code of ethics required by applicable Commission rules. Copiesof these documents may be obtained by contacting Nicholas Burakow,Corporate Secretary, Kaiser Group Holdings, Inc., 9300 Lee Highway,Fairfax, VA 22031.

 

**Item 11.****                                                   ****Executive Compensation**

 

**Summary Compensation Table**

 

The following table shows the compensationreceived by each person who served as an executive officer of the Companyduring 2005, and the executive officers that were serving as of December 31,2005.

 

**SUMMARY COMPENSATION TABLE**

 
| ** **                                                                   | ** ** | **Annual  Compensation** | ** ** | ** **    | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|---------------|------------|
| **Name, Principal Position  and Period Ended December 31,**             | ** ** | **Salary  ($)**          | ** ** | **Bonus ($)** | ** ** | **Other  Annual  Compensation** | ** ** | **All Other****Compensation (a)** | ** ** |
| Douglas W. McMinn, President and  Chief Executive Officer (b)                |       |                     |       |          |       |   |   |   |   |
| 2005                                                                         |       | $                        | 226,538    |          | $          | 225,000 |   | $ | 26,000 | (c) | $ | 29,885 |   |
| 2004                                                                         |       | $                        | 191,542    |          | 0          |   | 0 |   | $ | 28,000 |   |
| 2003                                                                         |       | —                   |       | —        |       | — |   | — |   |
|                                                                         |       |                     |       |          |       |   |   |   |   |
| Marian P. Hamlett, Executive Vice President  and Chief Financial Officer (d) |       |                     |       |          |       |   |   |   |   |
| 2005                                                                         |       | $                        | 175,000    |          | 0          |   | 0 |   | $ | 30,000 |   |
| 2004                                                                         |       | $                        | 146,077    |          | 0          |   | 0 |   | $ | 28,000 |   |
| 2003                                                                         |       | —                   |       | —        |       | — |   | — |   |
|                                                                              |            |                          |            |               |            |  |  |  |  |  |  |  |  |

 

18

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(a)          These amounts represent the Company’s matchingcontributions under the Section 401(k) Plan maintained by the Company.

(b)         Mr. McMinn was appointed as Presidentand Chief Executive Officer of the Company on September 9, 2004, prior towhich he had served as Senior Vice President. Mr. McMinn does not have anemployment agreement with the Company.

(c)          This amount represents the fair market value,as of the date of grant, of 1,000 shares of Common Stock granted to Mr. McMinnon February 10, 2005.

(d)         Ms. Hamlett was appointed as Executive Vice President and ChiefFinancial Officer of the Company on April 15, 2004, prior to which she hadserved as Corporate Controller. Ms. Hamlett does not have an employmentagreement with the Company. Effective March 31, 2006, Ms. Hamlett’semployment with the Company will terminate. See the discussion under “Employment Contracts and Termination of EmploymentArrangements” below.

 

**Option Grants in 2005 andAggregated Option Exercises in 2005 and December 31, 2005 Option Values**

 

There were no option grants to any of thenamed executive officers identified in the Summary Compensation Table on page 18of this Annual Report on Form 10-K during the years ended December 31,2005. There were no unexercised stock options outstanding for stock of theCompany as of December 31, 2005.

 

**Employment Contracts andTermination of Employment Arrangements**

 

If the Company terminates the employment ofDouglas McMinn, our President and Chief Executive Officer, other than forcause, Mr. McMinn will be entitled to severance equal to nine months'salary.  For each additional six monthsof service after March 9, 2006, such severance amount will be increased byone month's salary, up to a maximum severance amount of one year's salary.

 

On February 8,2006, the Company entered into a Separation Agreement and Release (the “SeparationAgreement”) with Marian P. Hamlett with respect to the termination of heremployment with the Company. Under the terms of the Separation Agreement, Ms. Hamlettwill remain employed, at her current annual salary of $175,000, as the Company’sExecutive Vice President and Chief Financial Officer until March 31, 2006(“the Separation Date.”)  In return for Ms. Hamlett’scompliance with the terms of the Separation Agreement, the Company paid her alump sum of $35,000, on February 16, 2006. In addition, subject to Ms. Hamlett’sexecution of an addendum attached as Exhibit A to the Separation Agreement(the “Addendum”) within twenty-one (21) days following the Separation Date, Ms. Hamlettwill receive a lump sum of $100,000. Pursuant to the terms of the Addendum, Ms. Hamlettagrees to provide consulting services to the Company for a period of threemonths from the Separation Date, for consulting fees of approximately $3,000per month. The Separation Agreement contains standard provisions whereby theCompany and Ms. Hamlett mutually agree to release one another from variouspossible claims and liabilities.

 

**Compensation of Non-employee Directors**

 

Directors who are not employees of theCompany (“Non-employee Directors”) are paid $1,000 for attendance at eachmeeting of the Board; they are paid $500 for attendance at each meeting of acommittee of the Board of which the director is a member. The Chairman of eachcommittee is paid $750 for attendance at each Board committee meeting. Inaddition, each Non-employee Director receives an annual retainer of $20,000,payable in advance in quarterly installments, and is reimbursed for expensesincurred in connection with Board service.

 

Since January 2002, the Company has madeannual grants of 1,000 shares of Kaiser Common Stock, or the equivalentvalue of such shares in cash as of the date of grant, to each member of the Board. Beginning in 2006, the annual stock grantto the Chairman of the Board has been increased to 1,250 shares or the equivalentvalue of such shares in cash as of the date of the grant. For 2006, all otherdirectors received grants of 1,000 shares of Kaiser Common Stock or $40,000 incash. Grants of Kaiser Common Stock are made pursuant to the terms of the 2002Equity Compensation Plan, which was approved by the stockholders at the 2003Annual Meeting of Stockholders. Other than as described above, directors who are employees of the Company do notreceive separate cash compensation for their service as directors.

 

**CompensationCommittee Interlocks and Insider Participation in Compensation Decisions**

 

Mr. Jon B. Bennett (Chairman), Mr. Frank E. Williams, Jr.and  Mr. Mark S. Tennenbaum served as members of the Compensation Committee of theBoard during the year ended December 31, 2005. None of the committeemembers:

(i)                                     was, during the fiscal year, an officer oremployee of Kaiser  or any of itssubsidiaries;

(ii)                                  was formerly an officer of Kaiser or any of itssubsidiaries; or

(iii)                               had any relationship requiring disclosure by Kaiserunder any paragraph of Item 404 of Regulation S-K.

 

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**Item 12.****                                                   ****Security Ownership andCertain Beneficial Owners and Management and Related Stockholder Matters**

 

A person is deemed to be a beneficial ownerof Kaiser Common Stock if that person has voting and/or investment power withrespect to such common stock or has the right to acquire such common stockwithin 60 days. The following table sets forth information as of March 20,2006 regarding each person known by the Company to beneficially own 5% or moreof the outstanding shares of Kaiser Common Stock.

 
| **Name and Address of Beneficial Owners of  More Than 5% of Kaiser Common Stock** | ** ** | **Number of Shares of Kaiser  Common Stock** | ** ** | **Percent of Kaiser  Common Stock** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------|------------|
| James D. Bennett                                                                  |       | 200,000                                      | (a)        | 11.2                                | %          |
| Bennett Management Corporation                                                    |       |                                         |       |                                |       |
| 2 Stamford Plaza, Suite 1501                                                 |       |                                         |       |                                |       |
| 281 Tresser Boulevard                                                             |       |                                         |       |                                |       |
| Stamford, CT 06901                                                                |       |                                         |       |                                |       |
| Michael E. Tennenbaum                                                             |       | 352,899                                      | (b)        | 19.7                                | %          |
| Tennenbaum & Co., LLC                                                    |       |                                         |       |                                |       |
| 2951 28th Street, Suite 210                                                  |       |                                         |       |                                |       |
| Santa Monica, CA 90405                                                            |       |                                         |       |                                |       |
| Andrew R. Tennenbaum Investment Trust                                             |       | 200,000                                      | (c)        | 11.2                                | %          |
| 1318 San Ysidro Drive                                                             |       |                                         |       |                                |       |
| Beverly Hills, CA 90210                                                           |       |                                         |       |                                |       |
| Mark S. Tennenbaum Investment Trust                                               |       | 200,000                                      | (d)        | 11.2                                | %          |
| 445 24th Street                                                                   |       |                                         |       |                                |       |
| Santa Monica, CA 90402                                                            |       |                                         |       |                                |       |

 

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(a)          As reported on a report on Schedule 13D dated September 6,2005, filed with the Commission on September 6, 2005. Includes 132,493shares of Kaiser Common Stock reported to be held by Bennett RestructuringFund, LP and 67,507 shares of Kaiser Common Stock reported to be held byBennett Offshore Restructuring Fund, Inc.

 

(b)         As reported on a report on Form 4 dated January 3, 2006,filed with the Commission on January 4, 2006. Includes 77,924 shares ofKaiser Common Stock reported to be held by Tennenbaum & Co., LLC and274,975 shares of Kaiser Common Stock reported to be held by Michael E.Tennenbaum and Suzanne S. Tennenbaum, as trustees of the Tennenbaum LivingTrust.

 

(c)          As reported on a report on Form 3 dated January 5, 2006,filed with the Commission on January 5, 2006. The trustees of the AndrewR. Tennenbaum Investment Trust are Stephen P. Rader and John Mass.

 

(d)         As reported on a report on Form 3 dated January 5, 2006,filed with the Commission on January 5, 2006. The trustees of the Mark S.Tennenbaum Investment Trust are Stephen P. Rader and John Mass.

 

20

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The following table sets forth information as of March 20, 2006regarding the beneficial ownership of shares of Kaiser Common Stock by eachdirector, by current executive officers named in the Summary Compensation Tableon page 18 of this Annual Report on Form 10-K, and by all directorsand current executive officers as a group. The persons as to whom informationis given in the table below have sole voting and investment power over theshares beneficially owned by them, unless otherwise noted in the footnotesfollowing the table. Unless otherwise indicated, the address of each of thepersons identified in the table below is: c/o Kaiser Group Holdings, Inc., 9300 Lee Highway, Fairfax, VA22031.

 
| **Certain Beneficial Owners of Shares of Kaiser  Common Stock**                 | ** ** | **Number of Shares of  Kaiser Common Stock** | ** ** | **Percent of Kaiser Common Stock  (*Less than 1%)** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------|------------|
| (i) Directors                                                              |       |                                         |       |                                                |       |
| Jon B.  Bennett                                                                 |       | 1,000                                        |       |                                                | *          |
| Douglas W.  McMinn  President and Chief  Executive Officer                      |       | 3,000                                        |       |                                                | *          |
| Mark S.  Tennenbaum                                                             |       | 200,000                                      | (a)        | 11.2                                                | %          |
| Frank E.  Williams, Jr.                                                    |       | 17,950                                       | (b)        | 1.0                                                 | %          |
| (ii) Current  Executive Officers other than Directors                      |       |                                         |       |                                                |       |
| Marian P.  Hamlett  Executive Vice President and Chief  Financial Officer       |       | 0                                            |       |                                                | *          |
| (iii) All  Directors and Current Executive Officers as a Group (5 Persons) |       | 221,950                                      |       | 12.4                                                | %          |

 

----

(a)          Shares are held by the Mark S. Tennenbaum Investment Trust. The addressof the trust is 445 24th Street, Santa Monica, CA  90402.

(b)         As reported on a report on Form 4 dated February 27, 2006,filed with the Commission on March 1, 2006. Includes (1) 8,550shares of Kaiser Common Stock reported to be held by Mr. Williams, (2) 1,000shares of Kaiser Common Stock reported to be held by the Williams FamilyFoundation, (3) 5,800 shares of Kaiser Common Stock reported to be held byWilliams Family LP, (4) 600 shares of Kaiser Common Stock reported to beheld by Mr. Williams as trustee for minor grandchildren and (5) 2,000shares of Kaiser Common Stock reported to be held by Mr. Williams’ spouse.

 

**Item 13.****                                                   ****Certain Relationships andRelated Transactions**

 

At December 31, 2005 and 2003, the Company had an outstandingreceivable from Kaiser-Hill totaling $87,500 and $250,000, respectively,consisting of billings for certain subcontracted services. This receivable isnon-interest bearing. No such amounts were owed to the Company at December 31,2004.

 

At December 31, 2005, 2004 and 2003, the Company had invested fundsin certificates of deposit at Capital Bank, N.A., a financial institution. Mr. FrankE. Williams, Jr., a member of the Board of Directors, serves as a memberof Capital Bank, N.A.’s board of directors. The certificates of depositstotaled $3.0 million, $2.0 million and $1.0 million at December 31, 2005,2004 and 2003, respectively. The certificates of deposit bear a market rate ofinterest.

 

During the fiscal years ended December 31, 2005, 2004 and 2003,the Company paid $241,000, $281,000 and $474,000, respectively, in legal feesto Squire, Sanders & Dempsey L.L.P., a law firm. Mr. James J.Maiwurm, the Chairman of the Company’s Board of Directors during the fiscalyears ended December 31, 2004 and 2003, was a partner at Squire, Sanders &Dempsey L.L.P. during this time. Effective February 18, 2005, Mr. Maiwurmresigned from his position as a member of the Board of the Directors. As of October 19,2005, Squire, Sanders & DempseyL.L.P. no longer represented the Company.

 

21

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**Item 14.****                                                   ****Principal Accountant Feesand Services**

 

*Audit Fees*: Auditfees were for professional services rendered for the audit of the Company’sannual financial statements for the years ended December 31, 2005 and 2004and the reviews of the financial statements included in the Company’s quarterlyreports on Form 10-Q for the years ended December 31, 2005 and 2004.

 

*Tax Fees*: Tax feeswere for services related to tax compliance, consulting and other servicesrendered during the years ended December 31, 2005 and 2004.

 
| ** **                                       | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** |
|--------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| Audit fees                                       |       |            |       |            |       |
| Annual audit of Kaiser Group Holdings, Inc. |       | $               | 80,000     |            | $          | 80,000 |   |
| Audit of Kaiser Netherlands, BV                  |       | —          |       | —          |       |
| Quarterly review procedures                      |       | $               | 37,700     |            | 30,000     |   |
| Registration Statement on Form S-8          |       | —          |       | —          |       |
|                                             |       | 117,700         |       | 110,000         |       |
| Tax fees                                         |       |            |       |            |       |
| Tax compliance work                              |       | —          |       | —          |       |
| Tax consulting – Canada                     |       | —          |       | 7,459           |       |
| Other                                            |       | —          |       | —          |       |
| ** **                                       |       | **—**      |       | 7,459           |       |
| Total                                            |       | $               | 117,700    |            | $          | 117,459 |   |

 

**The Audit Committee approved inadvance the use of PricewaterhouseCoopers LLP for the audit and tax-relatedservices referred to above.**

** **

**Policies With Respect to Approvalof Non-Audit Services**

 

The Audit Committee’s responsibilities includereview and pre-approval of all audit and non-audit services performed by theindependent auditors. In exercising that responsibility with respect toproposed engagements for non-audit services, the Audit Committee’s Charterrequires the Committee to give paramount consideration to the question ofwhether the engagement of the independent auditors to perform thoseservices is likely to create a risk that independence of the independentauditors may be compromised. To that end, the Audit Committee endeavors toexercise its discretion in a manner that will avoid or minimize the risk ofcompromising the independence of the independent auditors.

 

The Audit Committee will typically be inclined toapprove requests to engage the independent auditors to provide those types ofnon-audit services that are closely related to the audit services performed bythe independent auditors, such as audit-related services,tax-compliance/return-preparation services and “due diligence” servicesrelating to transactions that the Company may be considering from time totime. Because such non-audit services bear a close relationship to the auditservices provided by the independent auditors, the Audit Committee believesthat they will not ordinarily present a material risk of compromising theindependence of the independent auditors, subject to the Audit Committee’spolicy concerning the total amount payable to the independent auditors fornon-audit services with respect to any fiscal year.

 

Between meetings of the Audit Committee, theChairman of the Audit Committee is authorized to review, and where consistentwith this policy, to pre-approve non-audit services proposed to be performed bythe independent auditors that are budgeted for fees of $25,000 or less. TheChairman shall report any pre-approval decisions to the Audit Committee as soonas practicable and in any event at its next scheduled meeting.

 

22

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**PART IV**

 

###### **Item 15.**                                                    Exhibits and Financial StatementSchedules

###### ** **

**(a)****                                  Documents filed as part of this Report**

 

**1.****                                      Financial Statements**

 

Consolidated Financial Statements of KaiserGroup Holdings, Inc. and Subsidiaries

 
|   | a. | Report of Independent Accountants                                                                                                                          |   |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | b. | Consolidated Balance Sheets as of December 31, 2005 and December 31,  2004                                                                       |   |
|   | c. | Consolidated Statements of Operations for  the years ended December 31, 2005, 2004 and 2003                                                           |   |
|   | d. | Consolidated Statements of Shareholders’  Equity (Deficit) and Comprehensive Income (Loss) for the years ended December 31,  2005, 2004 and 2003 |   |
|   | e. | Consolidated Statements of Cash Flows for  the years ended December 31, 2005, 2004 and 2003                                                           |   |
|   | f. | Notes to Consolidated Financial Statements.                                                                                                                |   |

 

**2.****                                      Financial Statement Schedules**

 

Supplemental Schedule Relating to theConsolidated Financial Statements of Kaiser Group Holdings Inc. andSubsidiaries for the years ended December 31, 2005, 2004 and 2003.

 
|   | a.     | Financial Statements of Kaiser-Hill  Company, LLC as of December 31, 2005 and 2004.                                                                                                                                                                        |   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                                                            |   |
|   | b.     | (i)                                     Report of Independent Accountants   |   |
|   |   | (ii)                                  Schedule II: Valuation and Qualifying  Accounts |   |

 

All Schedules except the ones listed abovehave been omitted because they are not applicable or not required or becausethe required information is included elsewhere in the financial statements inthis filing.

 

**3.****                                      Exhibits(listed according to the number assigned in the table in Item 601 of RegulationS-K)**

 

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

 

3.1                                 Certificateof Incorporation of Kaiser Group Holdings, Inc. (Incorporated by referenceto Exhibit 3(i) to Current Report on Form 8-K (Registrant No. 1-12248)filed with the Commission on December 14, 2000)

 

3.2                                 By-lawsof Kaiser Group Holdings, Inc. (Incorporated by reference to Exhibit 3(ii) toCurrent Report on Form 8-K (Registrant No. 1-12248) filed with theCommission on December 14, 2000)

 

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

 

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

 

10.2                           Amendment No. 1 to Kaiser Group International, Inc. EmployeeStock Ownership Plan, effective January 1, 1998  (Incorporated by reference to Exhibit No. 10(b)(1) toAnnual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

23

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10.3                           AmendmentNo. 2 to Kaiser Group International, Inc.Employee Stock Ownership Plan, effective January 1, 1996  (Incorporatedby reference to Exhibit No. 10(b)(2) to Annual Report on Form 10-K(Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

10.4                           Amendment No. 3 to Kaiser Group International, Inc. EmployeeStock Ownership Plan, dated April 19, 1999 (Incorporated by reference to Exhibit No. 10(b)(3) toAnnual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

10.5                           Amendment No. 4 to Kaiser Group International, Inc. EmployeeStock Ownership Plan dated June 25, 1999 (Incorporated by reference to Exhibit No. 10(b)(4) toAnnual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

10.6                           Trust Agreement with Vanguard Fiduciary Trust Company, dated as of August 31,1995, in connection with  the ICF KaiserInternational, Inc. Employee Stock Ownership Plan (Incorporated byreference to Exhibit No. 10(c) to Registration Statement on Form S-1(Registrant No. 33-64655) filed with the Commission on November 30,1995)

 

10.7                           ICFKaiser International, Inc. Retirement Plan (as amended and restated as of March 1,1993, and further amended with respect to name change only as of June 26,1993) (Incorporated by reference to Exhibit No. 10(d) toQuarterly Report on Form 10-Q (Registrant No. 1-12248) filed with theCommission on October 15, 1993)

 

10.8                           Amendment No. 1 to ICF KaiserInternational, Inc. Retirement Plan, dated April 24, 1995(Incorporated by reference to Exhibit No. 10(d)(1) to AnnualReport on Form 10-K (Registrant No. 1- 12248) filed with theCommission on May 23, 1995)

 

10.9                           Amendment No. 2 to ICF Kaiser International, Inc.Retirement Plan, dated December 15,1995 (Incorporated by reference to Exhibit No. 10(d)(2) toTransition Report on Form 10-K (Registrant No. 1-12248) for thetransition period from March 1, 1995 to December 31, 1995 filed withthe Commission on March 29, 1996)

 

10.10                     Amendment No. 3 to ICF KaiserInternational, Inc. Retirement Plan, dated December 13, 1996(Incorporated by reference to Exhibit No. 10(d)(3) toRegistration Statement on Form S-1 (Registrant No. 333-19519) filedwith the Commission on January 10, 1997)

 

10.11                     Amendment No. 4 to ICF Kaiser International, Inc.Retirement Plan, dated April 19, 1999(Incorporated by reference to Exhibit No. 10(d)(4) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

10.12                     Amendment No. 5 to ICF Kaiser International, Inc.Retirement Plan, dated June 25, 1999(Incorporated by reference to Exhibit No. 10(d)(5) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

10.13                     Amendment No. 6 to ICF Kaiser International, Inc.Retirement Plan, dated August 30, 1999(Incorporated by reference to Exhibit No. 10(d)(6) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

10.14                     Amendment No. 7 to ICF KaiserInternational, Inc. Retirement Plan, dated April 13, 2000 (Incorporatedby reference to Exhibit 10(d)(7) on Form 8-K (Registrant No. 1-12248)filed with the Commission on May 2, 2000)

 

10.15                     Amendment No. 8to ICF Kaiser International, Inc. Retirement Plan, dated June 8, 2000(Incorporated by reference to Exhibit 10(d)(8) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) filed with the Commission on September 6,2000)

 

10.16                     Amendment No. 9to ICF Kaiser International, Inc. Retirement Plan, dated June 19,2003 (Incorporated by reference to Exhibit 10(c)(9) to QuarterlyReport on Form 10-Q (Registrant No. 1-12248) filed with theCommission on August 14, 2003)

 

10.17                     Amendment No. 10to ICF Kaiser International, Inc. Retirement Plan, dated March 17,2004 (Incorporated by reference to Exhibit 10(c)(10) to QuarterlyReport on Form 10-Q (Registrant No. 1-12248) filed with theCommission on May 24, 2004)

 

24

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10.18                     Trust Agreement with Vanguard Fiduciary Trust Company, dated as of August 31,1995, in connection with the ICF Kaiser International, Inc. RetirementPlan (Incorporated by reference to Exhibit No. 10(e) toRegistration Statement on Form S-1 (Registrant No. 33-64655) filedwith the Commission on November 30, 1995)

 

10.19                     ICF KaiserInternational, Inc. Section 401(k) Plan (as amended and restated asof March 1, 1993, and further amended with respect to name change only asof June 26, 1993) (Incorporated by reference to Exhibit No. 10(f) toQuarterly Report on Form 10-Q (Registrant No. 1-12248) filed with theCommission on October 15, 1993)

 

10.20                     Amendment No. 1 to ICF Kaiser International, Inc. Section 401(k)Plan, dated April 24, 1995(Incorporated by reference to Exhibit No. 10(p)(1) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with the Commissionon May 23, 1995)

 

10.21                     Amendment No. 2 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated December 15, 1995(Incorporated by reference to Exhibit No. 10(p)(2) to TransitionReport on Form 10-K (Registrant No. 1-12248) for the transitionperiod from March 1, 1995 to December 31, 1995 filed with theCommission on March 29, 1996)

 

10.22                     Amendment No. 3 to ICF Kaiser International, Inc. Section 401(k)Plan, dated December 13, 1996(Incorporated by reference to Exhibit No. 10(q)(3) toRegistration Statement on Form S-1 (Registrant No. 333-19519) filedwith the Commission on January 10, 1997)

 

10.23                     Amendment No. 4 to ICF Kaiser International, Inc. Section 401(k)Plan, dated April 8, 1999(Incorporated by reference to Exhibit No. 10(k)(4) to Annual Reporton Form 10-K (Registrant No. 1-12248) filed with the Commission on April 17,2000)

 

10.24                     Amendment No. 5 to ICF Kaiser International, Inc. Section 401(k)Plan, dated June 25, 1999(Incorporated by reference to Exhibit No. 10(k)(5) to AnnualReport on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

10.25                     Amendment No. 6 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated April 13, 2000(Incorporated by reference to Exhibit 10(k)(6) on Form 8-K(Registrant No. 1-12248) filed with the Commission on May 2, 2000)

 

10.26                     Amendment No. 7 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated January 1, 2001(Incorporated by reference to Exhibit No. 10(m)(7) to AnnualReport on Form 10-K (Registrant No. 1-2248) filed with the Commissionon April 2, 2001)

 

10.27                     Amendment No. 8 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated December 10, 2002(Incorporated by reference to Exhibit 10(e)(8) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) filed with the Commission on August 14,2003)

 

10.28                     Amendment No. 9 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated June 19, 2003(Incorporated by reference to Exhibit 10(e)(9) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) filed with the Commission on August 14,2003)

 

10.29                     Amendment No. 10 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated March 17, 2004(Incorporated by reference to Exhibit 10(e)(10) to Quarterly Reporton Form 10-Q (Registrant No. 1-12248) filed with the Commission on May 24,2004)

 

10.30                     Amendment No. 11 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated November 11, 2004(Incorporated by reference to Exhibit 10(e)(11) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) filed with the Commission on November 15,2004)

 

10.31                     Amendment No. 12 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated December 12, 2005

 

10.32                     Amendment No. 13 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated December 30, 2005

 

10.33                     Amendment No. 14 to ICF KaiserInternational, Inc. Section 401(k) Plan, dated January 18, 2006

 

10.34                     Amendment No. 1 to KaiserAnalytical Management Services, Inc. Section 401(k) Plan, dated February 15,2006

 

25

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10.35                     Trust Agreement with Vanguard Fiduciary Trust Company, dated as of March 1,1989, in connection with the ICF Kaiser International, Inc. Section 401(k)Plan (Incorporated by reference to Exhibit No. 28(b) toRegistration Statement on Form S-8 (Registrant No. 33-51460) filedwith the Commission on August 31, 1992)

 

10.36                     Contract between Kaiser-Hill Company, LLC and the U.S. Department ofEnergy dated January 24, 2000 (Incorporated by reference to Exhibit No. 10(o)to Annual Report on Form 10-K (Registrant No. 1-12248) filed with theCommission on April 17, 2000)

 

10.37                     ModificationM116 to Contract between Kaiser-HillCompany, LLC and the U.S. Department of Energy  , effective March 24, 2004 (Incorporatedby reference to Exhibit 10(g)(1) to Annual Report on Form 10-K(Registrant No. 1-12248) filed with the Commission on March 30, 2004)

 

10.38                     Assignment ofMembership Interest in Hunters Branch Leasing, LLC by and between KaiserHoldings Unlimited, Inc. (Assignor)and Nutley Partners, LC (Assignee), dated January 1, 2001 (Incorporatedby reference to Exhibit No. 10(i) to Annual Report on Form 10-K(Registrant No. 1-12248) filed with the Commission on April 2, 2001)

 

10.39                     Subcontract between The S.M. Stoller Corporation and Kaiser GroupHoldings, Inc., dated June 30, 2004 (Incorporated by referenceto Exhibit No. 10(i) to Quarterly Report on Form 10-Q(Registrant No. 1-12248) filed with the Commission on August 13,2004)

 

10.40                     Kaiser GroupHoldings, Inc. 2002 Equity Compensation Plan, as amended (Incorporated byreference to Exhibit No. 10 to Registration Statement on Form S-8(Registration No. 333-107912) filed with the Commission on August 13,2003)

 

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

 

10.42                     TransitionAgreement between Kaiser Group Holdings, Inc. and John T. Grigsby, Jr.effective as of August 31, 2004 (Incorporated by reference to Exhibit 99to Current Report on Form 8-K (Registration No. 1-12248) filed withthe Commission on September 1, 2004)

 

10.43                     SeparationAgreement between Kaiser Group Holdings, Inc. and Marian P. Hamletteffective February 8, 2006 (Incorporated by reference to Exhibit 10.1to Current Report on Form 8-K (Registration No. 1-2248) filed withthe Commission on February 9, 2006.

 

10.44                     Summary of 2006 Annual Executive Officer Compensation

 

21                                    Subsidiariesof the Registrant as of March 20, 2006

 

23.1                           Consentof experts and counsel.

 

31.1                           Certification of ChiefExecutive Officer, pursuant to Rule 13a-14(a) and 15d-14(a) ofthe Securities Exchange Act of 1934, as amended

 

31.2                           Certification of ChiefFinancial Officer, pursuant to Rule 13a-14(a) and 15d-14(a) ofthe Securities Exchange Act of 1934, as amended

 

32.1                           Certification of ChiefExecutive Officer, pursuant to 18 U.S.C. Section 1350

 

32.2                           Certification of ChiefFinancial Officer, pursuant  to 18 U.S.C.Section 1350

 

**THE DOCUMENTS FILED AS EXHIBITS 10.1 THROUGH10.35 AND EXHIBITS 10.40 THROUGH 10.45 REFLECT COMPENSATION ARRANGEMENTS.**

 

26

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this Annual Report on Form 10-K to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | KAISER GROUP HOLDINGS, INC.              |
|--------|-----------------------------------------------|
|   |                                          |
|   |                                          |
|   | By:                                           | /s/ Douglas W. McMinn |   |
|   | Name: Douglas W. McMinn                       |
|   | Title: President and Chief Executive  Officer |

 

March 28, 2006

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this Annual Report on Form 10-K has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 

(1)  Principal executive officer

 
|   | /s/ Douglas W. McMinn                  |   | March 28, 2006 |
|--------|----------------------------------------|--------|---------------------|
|   | Douglas W. McMinn                      |   |
|   | President and Chief Executive  Officer |   |

 

(2)  Principal financial and accountingofficer

 
|   | /s/ Marian P. Hamlett                               |   | March 28, 2006 |
|--------|-----------------------------------------------------|--------|---------------------|
|   | Marian P. Hamlett                                   |   |
|   | Executive Vice President, Chief  Financial Officer, |   |
|   | and Assistant Treasurer                             |   |

 

(3)  Board of Directors

 
|   | /s/ Jon B. Bennett |   | March 28, 2006 |
|--------|--------------------|--------|---------------------|
|   | Jon B. Bennett     |   |
|   | Director           |   |

 
|   | /s/ Douglas W. McMinn |   | March 28, 2006 |
|--------|-----------------------|--------|---------------------|
|   | Douglas W. McMinn     |   |
|   | Director              |   |

 
|   | /s/ Mark S. Tennenbaum |   | March 28, 2006 |
|--------|------------------------|--------|---------------------|
|   | Mark S. Tennenbaum     |   |
|   | Director               |   |

 
|   | /s/ Frank E. Williams, Jr. |   | March 28, 2006 |
|--------|---------------------------------|--------|---------------------|
|   | Frank E. Williams, Jr.     |   |
|   | Director                        |   |

 

27

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**Reportof Independent Auditors**

 

To the Board of Directors and

Shareholders of Kaiser Group Holdings, Inc.

 

We haveaudited the consolidated balance sheet of Kaiser Group Holdings, Inc. andits subsidiaries (the Company) at December 31, 2005, and 2004, and therelated consolidated statements of income and retained earnings and cash flowsfor each of the three years ended in the period ended December 31, 2005. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We did not audit the financial statements of Kaiser-Hill Company,LLC and subsidiary, a 50 percent-owned limited liability corporation which isreflected in the Company’s consolidated balance sheet as an investment in andadvances to joint venture constituting $87.3 million of the consolidated totalassets as of December 31, 2005, and equity income in earnings ofaffiliates of $88.7 million for the year ended December 31, 2005. Thosestatements were audited by other auditors whose report has been furnished tous, and our opinion, insofar as it relates to the amounts included forKaiser-Hill Company, LLC and subsidiary, is based solely on the report of theother auditors.

 

We conductedour audit in accordance with the standards of the Public Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit and the report of the otherauditors provide a reasonable basis for our opinion.

 

In ouropinion, based on our audit and the report of the other auditors, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Kaiser Group Holdings, Inc. and itssubsidiaries at December 31, 2005 and 2004, and the results of itsoperations and its cash flows for each of the three years then ended inconformity with accounting principles generally accepted in the United Statesof America.

 

PricewaterhouseCoopersLLP

 

March 20,2006

McLean,Virginia

 

F-1

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

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                      | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                      |       |                        |       |                        |       |
| Current Assets                                                                                                                  |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                                       |       | $                           | 14,633     |                        | $          | 12,728 |   |
| Certificates of deposit                                                                                                         |       | 2,040                       |       | 1,006                       |       |
| Restricted cash and cash equivalents                                                                                            |       | 3,178                       |       | 3,931                       |       |
| Accounts receivable                                                                                                             |       | 203                         |       | 217                         |       |
| Prepaid expenses and other current assets                                                                                       |       | 606                         |       | 742                         |       |
| Contract receivable, net                                                                                                        |       | 3,000                       |       | 3,000                       |       |
| Total  Current Assets                                                                                                           |       | 23,660                      |       | 21,624                      |       |
|                                                                                                                            |       |                        |       |                        |       |
| Other Assets                                                                                                                    |       |                        |       |                        |       |
| Investment in and advances to joint venture                                                                                     |       | 87,310                      |       | 42,294                      |       |
| Investment in affiliates                                                                                                        |       | 2,800                       |       | 2,800                       |       |
| Notes receivable                                                                                                                |       | —                      |       | 5,894                       |       |
| Deferred tax asset                                                                                                              |       | 8,215                       |       | —                      |       |
| Other long-term assets                                                                                                          |       | 39                          |       | 102                         |       |
| Total Other  Assets                                                                                                             |       | 98,364                      |       | 51,090                      |       |
|                                                                                                                            |       | $                           | 122,024    |                        | $          | 72,714 |   |
| ** **                                                                                                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
|                                                                                                                            |       |                        |       |                        |       |
| Current Liabilities                                                                                                             |       |                        |       |                        |       |
| Accounts payable                                                                                                                |       | $                           | 239        |                        | $          | 169 |   |
| Post retirement benefit plan obligation                                                                                         |       | 6,924                       |       | 6,623                       |       |
| Other accrued expenses                                                                                                          |       | 3,435                       |       | 4,620                       |       |
| Interest payable on preferred stock                                                                                             |       | —                      |       | 313                         |       |
| Deferred tax liability                                                                                                          |       | —                      |       | 5,772                       |       |
| Income taxes payable                                                                                                            |       | 32,315                      |       | 763                         |       |
| Total  Current Liabilities                                                                                                      |       | 42,913                      |       | 18,260                      |       |
|                                                                                                                            |       |                        |       |                        |       |
| Long-term Liabilities                                                                                                           |       |                        |       |                        |       |
| Mandatorily redeemable preferred stock                                                                                          |       | —                      |       | 26,909                      |       |
|                                                                                                                            |       |                        |       |                        |       |
| Total  Liabilities                                                                                                              |       | 42,913                      |       | 45,169                      |       |
|                                                                                                                            |       |                        |       |                        |       |
| Commitments and Contingencies                                                                                                   |       |                        |       |                        |       |
|                                                                                                                            |       |                        |       |                        |       |
| Common stock, par value $.01 per share:                                                                                         |       |                        |       |                        |       |
| Authorized—3,000,000  shares                                                                                               |       |                        |       |                        |       |
| Issued and  outstanding—1,787,640 and 1,610,270 shares at December 31, 2005 and December 31,  2004, respectively |       | 18                          |       | 16                          |       |
| Capital in excess of par                                                                                                        |       | 14,337                      |       | 8,063                       |       |
| Retained earnings                                                                                                               |       | 64,716                      |       | 19,424                      |       |
| Accumulated other comprehensive income  (loss)                                                                                  |       | 40                          |       | 42                          |       |
| Total  Shareholders’ Equity                                                                                                |       | 79,111                      |       | 27,545                      |       |
| Total Liabilities  and Shareholders’ Equity                                                                                |       | $                           | 122,024    |                        | $          | 72,714 |   |

 

See notes to consolidated financial statements.

 

F-2

----

 

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                                                                                                                                     | ** ** | **Year Ended December 31,**              | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                     | ** ** | **(In thousands, except per share  amounts)** | ** ** |
|                                                                                                                                                           |       |                                          |       |   |   |   |   |
| Gross Revenue                                                                                                                                                  |       | $                                             | 1,807      |   | $ | 1,036 |   | $ | — |   |
| Subcontract  and direct material costs                                                                                                                         |       | 1,177                                         |       | 748 |   | — |   |
| Service Revenue                                                                                                                                                |       | 630                                           |       | 288 |   | — |   |
| Operating Expenses                                                                                                                                             |       |                                          |       |   |   |   |   |
| Reserve for  settlement of remaining Class 4 claims                                                                                                       |       | —                                        |       | 1,400 |   | — |   |
| Reserve for  settlement with ICT Spectrum                                                                                                                      |       | 6,196                                         |       | — |   | — |   |
| Reversal of  reserve for Settlement of Remaining Class 4 Claims                                                                                           |       | (223                                          | )          | — |   | — |   |
| Administrative  expenses                                                                                                                                       |       | 5,920                                         |       | 5,252 |   | 4,918 |   |
| Operating Income (Loss)                                                                                                                                        |       | (11,263                                       | )          | (6,364 | ) | (4,918 | ) |
| Other Income (Expense)                                                                                                                                         |       |                                          |       |   |   |   |   |
| Equity  income in earnings of affiliate, net of amortization of $7,048, $3,524 and  $3,524 for years ended December 31, 2005, 2004 and 2003, respectively |       | 88,667                                        |       | 16,806 |   | 16,475 |   |
| Reduction of  reserve for note receivable                                                                                                                      |       | 548                                           |       | — |   | — |   |
| Other income                                                                                                                                                   |       | —                                        |       | 25 |   |   |   |
| Interest  income                                                                                                                                               |       | 710                                           |       | 698 |   | 833 |   |
| Interest  expense for preferred dividends                                                                                                                      |       | (1,205                                        | )          | (2,055 | ) | (1,362 | ) |
| Income From Continuing Operations Before  income tax                                                                                                           |       | 77,457                                        |       | 9,110 |   | 11,028 |   |
| Income tax  expense                                                                                                                                            |       | (32,165                                       | )          | (1,735 | ) | (4,827 | ) |
| Income From Continuing Operations                                                                                                                              |       | 45,292                                        |       | 7,375 |   | 6,201 |   |
| Income  (Loss) from discontinued operations, net of tax                                                                                                        |       | —                                        |       | — |   | (1,833 | ) |
| Net Income                                                                                                                                                     |       | 45,292                                        |       | 7,375 |   | 4,368 |   |
| Preferred stock dividends                                                                                                                                      |       | —                                        |       | — |   | (1,534 | ) |
|                                                                                                                                                           |       |                                          |       |   |   |   |   |
| Income Applicable to Common Shareholders                                                                                                                       |       | $                                             | 45,292     |   | $ | 7,375 |   | $ | 2,834 |   |
|                                                                                                                                                           |       |                                          |       |   |   |   |   |
| Basic and Diluted Earnings (Loss) Per  Common Share:                                                                                                           |       |                                          |       |   |   |   |   |
| Continuing  operations, net of tax                                                                                                                             |       | $                                             | 27.86      |   | $ | 4.58 |   | $ | 2.91 |   |
| Discontinued  operations, net of tax                                                                                                                           |       | —                                        |       | — |   | (1.14 | ) |
|                                                                                                                                                           |       |                                          |       |   |   |   |   |
| Net Earnings Per Share                                                                                                                                         |       | $                                             | 27.86      |   | $ | 4.58 |   | $ | 1.77 |   |
|                                                                                                                                                           |       |                                          |       |   |   |   |   |
| Weighted  average shares for basic and diluted earnings per common share                                                                                       |       | 1,626                                         |       | 1,610 |   | 1,606 |   |

 

See notes to consolidated financialstatements.

 

F-3

----

 

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

**CONSOLIDATED STATEMENT OF SHAREHOLDERS’EQUITY (DEFICIT)**

(Inthousands, except share amounts)

 
| ** **                                                         | ** ** | **Kaiser  Common Stock** | ** **      | ** **    | ** **   | **Accumulated**    | ** ** | **Accumulated** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|-----------------|---------------|--------------|--------------------|------------|-----------------|------------|
| ** **                                                         | ** ** | ** **               | **Capital  In** | ** **    | **Earnings** | ** **         | **Other**  | ** **      |
| ** **                                                         | ** ** | **Shares**               | ** **      | **Par Value** | ** **   | **Excess of  Par** | ** ** | **(Deficit)**   | ** ** | **Comprehensive** | ** ** |
|                                                               |       |                     |            |          |         |               |       |            |       |   |   |
| Balance, December 31, 2002                                    |       | 1,601,661                |            | $             | 16           |               | $          | 8,606           |       | $ | 9,215 |   | $ | (32 | ) |
| Net income                                                         |       | —                   |            | —        |         | —             |       | 4,368           |       | — |   |
| Issuances of common stock                                          |       | 4,208                    |            | —        |         | 22                 |       | —          |       | — |   |
| Foreign currency translation adjustment                            |       | —                   |            | —        |         | —             |       | —          |       | 69 |   |
| Preferred stock dividends                                          |       | —                   |            | —        |         | —             |       | (1,534          | )          | — |   |
| Purchase of preferred treasury  stock below liquidation value |       | —                   |            | —        |         | 65                 |       | —          |       | — |   |
| Class 4 allowed claim settlements                             |       | —                   |            | —        |         | (1,158             | )          | —          |       | — |   |
| Tax adjustment                                                     |       | —                   |            | —        |         | 440                |       | —          |       | — |   |
|                                                               |       |                     |            |          |         |               |       |            |       |   |   |
| Balance, December 31, 2003                                    |       | 1,605,869                |            | $             | 16           |               | $          | 7,975           |       | $ | 12,049 |   | $ | 37 |   |
| Net income                                                         |       | —                   |            | —        |         | —             |       | 7,375           |       | — |   |
| Issuances of common stock                                          |       | 4,000                    |            | —        |         | 88                 |       | —          |       | — |   |
| Foreign currency translation adjustment                            |       | —                   |            | —        |         | —             |       | —          |       | 5 |   |
|                                                               |       |                     |            |          |         |               |       |            |       |   |   |
| Balance, December 31, 2004                                    |       | 1,609,869                |            | $             | 16           |               | $          | 8,063           |       | $ | 19,424 |   | $ | 42 |   |
| Net income                                                         |       | —                   |            | —        |         | —             |       | 45,292          |       | — |   |
| Issuances of common stock                                          |       | 3,000                    |            | —        |         | 78                 |       | —          |       | — |   |
| Settlement of ICT Spectrum claim                                   |       | 175,003                  |            | 2             |         | 6,196              |       | —          |       | — |   |
| Cancellation of common stock, net                                  |       | (232                     | )               | —        |         | —             |       | —          |       | — |   |
| Foreign currency translation adjustment                            |       | —                   |            | —        |         | —             |       | —          |       | (2 | ) |
|                                                               |       |                     |            |          |         |               |       |            |       |   |   |
| Balance, December 31, 2005                                    |       | 1,787,640                |            | $             | 18           |               | $          | 14,337          |       | $ | 64,716 |   | $ | 40 |   |

 

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

**CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOME (LOSS)**

(Inthousands)

 
| ** ** | ** **                               | **Year  Ended December 31,** | ** ** |
|------------|------------------------------------------|-----------------------------------|------------|
| ** ** | ** **                               | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|       | Net Income.                              |                              | $          | 45,292 |   | $ | 7,375 |   | $ | 4,368 |   |
|       | Other Comprehensive Income  (Loss)       |                              |       |   |   |   |   |   |
|       | Foreign currency translation adjustments |                              | (2         | ) | 5 |   | 69 |   |
|       | Total Comprehensive Income               |                              | $          | 45,290 |   | $ | 7,380 |   | $ | 4,437 |   |

 

See notes to consolidated financialstatements.

 

F-4

----

 

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                         | ** ** | **For the year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                       | ** ** |
| Operating Activities                                                               |       |                                     |       |   |   |   |   |
| Net income                                                                         |       | $                                        | 45,292     |   | $ | 7,375 |   | $ | 4,368 |   |
| Adjustments  to reconcile net income to net cash used in operating activities:     |       |                                     |       |   |   |   |   |
| Loss of  discontinued operations, net of tax                                       |       | —                                   |       | — |   | 1,833 |   |
| Reserve for  ICT Spectrum settlement                                               |       | 6,196                                    |       | — |   | — |   |
| Reversal of  note receivable reserve                                               |       | (548                                     | )          | — |   | — |   |
| Deferred  taxes related to continuing operating activities                         |       | (13,987                                  | )          | (723 | ) | 1,518 |   |
| Equity  income in earnings of affiliate                                            |       | (88,667                                  | )          | (16,806 | ) | (16,475 | ) |
| Changes in  operating assets and liabilities, net of acquisitions and dispositions |       |                                     |       |   |   |   |   |
| Accounts  receivables, net                                                         |       | 14                                       |       | (217 | ) | — |   |
| Prepaid  expenses and other current assets                                         |       | 136                                      |       | 229 |   | 1,433 |   |
| Accounts  payable and accrued expenses                                             |       | (664                                     | )          | (237 | ) | (2,558 | ) |
| Income taxes  payable                                                              |       | 31,552                                   |       | 488 |   | (365 | ) |
| Other  operating activities                                                        |       | (306                                     | )          | 90 |   | 7 |   |
|                                                                               |       |                                     |       |   |   |   |   |
| Net Cash  Used in Operating Activities                                             |       | (20,982                                  | )          | (9,801 | ) | (10,239 | ) |
|                                                                               |       |                                     |       |   |   |   |   |
| Investing Activities                                                               |       |                                     |       |   |   |   |   |
| Distributions  from 50% owned affiliate                                            |       | 43,650                                   |       | 17,500 |   | 16,350 |   |
| Purchase of  certificate of deposit                                                |       | (1,000                                   | )          | (1,000 | ) | (1,000 | ) |
| Maturity of  certificate of deposit                                                |       | —                                   |       | 1,000 |   |   |   |
| Collection  of note receivable                                                     |       | 6,442                                    |       | — |   | — |   |
| Net Cash  Provided by Investing Activities                                         |       | 49,092                                   |       | 17,500 |   | 15,350 |   |
| Financing Activities                                                               |       |                                     |       |   |   |   |   |
| Transfer to  restricted cash                                                       |       | (81                                      | )          | (36 | ) | — |   |
| Purchase of  preferred treasury stock                                              |       | —                                   |       | — |   | (311 | ) |
| Transfer  from restricted cash for the redemption of preferred stock               |       | 785                                      |       | 3,189 |   | 10,507 |   |
| Redemption  of preferred stock                                                     |       | (26,909                                  | )          | (8,266 | ) | (20,390 | ) |
| Payment of  preferred stock dividends                                              |       | —                                   |       | — |   | (2,188 | ) |
| Net Cash  Used in Financing Activities                                             |       | (26,205                                  | )          | (5,113 | ) | (12,382 | ) |
| Increase (Decrease) in Cash and Cash  Equivalents                                  |       | 1,905                                    |       | 2,586 |   | (7,271 | ) |
| Cash and Cash Equivalents at Beginning of  Period                                  |       | 12,728                                   |       | 10,142 |   | 17,413 |   |
|                                                                               |       |                                     |       |   |   |   |   |
| Cash and Cash Equivalents at End of Period                                         |       | $                                        | 14,633     |   | $ | 12,728 |   | $ | 10,142 |   |

 

See notes to consolidated financialstatements.

 

F-5

----

 

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.                                       Basis of Presentation

 

Kaiser Group Holdings, Inc. (“Kaiser Group Holdings” or the “Company”)is a Delaware corporation that was formed on December 6, 2000 for thepurpose of owning all of the outstanding stock of Kaiser Group International, Inc.(“Old Kaiser”), which in turn continues to own the stock of its remainingsubsidiaries. On June 9, 2000, Old Kaiser and 38 of its domesticsubsidiaries voluntarily filed for protection under Chapter 11 of the UnitedStates Bankruptcy Code in the District of Delaware (case nos. 00-2263 to00-2301). Old Kaiser emerged from bankruptcy with an approved plan ofreorganization (which was its Second Amended Plan of Reorganization and isreferred to in this report as the “Plan of Reorganization”) that was effectiveon December 18, 2000 (the “Effective Date”). The Company is deemed a “successorissuer” to Old Kaiser by virtue of Rule 12g-3(a) under the SecuritiesExchange Act of 1934. A summary of the Plan of Reorganization for Old Kaisercan be found in a Current Report on Form 8-K dated December 5, 2000filed by Old Kaiser. In this report, unlessthe context states otherwise, the terms “we”, “our” and “Kaiser” refer toKaiser Group Holdings, Inc., (including Old Kaiser as its predecessor) andits subsidiaries.

 

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

 

•                  theownership of a 50% interest in Kaiser-Hill Company, LLC (“Kaiser-Hill”), whichserves as the general contractor at the U.S. Department of Energy’s (“DOE”)Rocky Flats site near Denver, Colorado for the performance of a contract forthe closure of the site (the “Closure Contract”) (See Note 6).

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

•                  a wholly-ownedcaptive insurance company that has not beenissuing new policies since October 1, 2000 and has solely been involved inresolving remaining claims made against previously issued policies. In thefourth quarter of 2004, the Company received regulatory approval and finalizedthe formation documents of a sponsored captive subsidiary, MS BuildersInsurance Company, to enable our wholly-owned captive insurance company tooffer derivative captive insurance services to third party clients. As of March 20,2006, MS Builders Insurance Company has not written any policies.

•                  anongoing obligation to fund a capped, post-retirement medical benefit plan for afixed number of retirees (See Note 13).

•                  a wholly-owned subsidiary, Kaiser AnalyticalManagement Services, Inc. (“KAMS”), which we formed in April 2004to take over the operations of the Analytical Services Division of Kaiser-Hill.KAMS provides analytical management services such as sample planning, samplemanagement, records management, performance assessment and data management inthe general areas of health and safety, geotechnical, environmental and wastemanagement, and deactivation and decommissioning.

 

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

 

The value of the emerged enterprise used for fresh start reporting asof December 31, 2000 was $87.5 million and was determined by managementwith the assistance of independent advisors. The methodology employed involvedestimation of the enterprise value taking into consideration a discounted cashflow analysis. The discounted cash flow analysis was based on a seven-year cashflow projection prepared by management, taking into consideration the terminalvalue of its assets and liabilities as of immediately prior to its emergencefrom bankruptcy on December 18, 2000. Terminal values of assets andliabilities were determined based either on contracted amounts, actuarialpresent values and/or management’s estimates of the outcome of certain operatingactivities. Net after-tax cash flows, assuming a 40% effective tax rate, werediscounted at 17% in order to take into consideration the risks anduncertainties inherent in such projections. The cash flow projections werebased on estimates and assumptions about circumstances and events that had notyet taken place. Estimates and assumptions regarding individual retainedmatters which form the collective composition of the overall enterprisevalue as of December 18, 2000

 

F-6

----

 

are inherently subject to significant economic and competitiveuncertainties and contingencies beyond the control of the Company. Accordingly,there may be differences between projections and actual results becauseevents and circumstances frequently do not occur as expected and may besignificant. More specifically, assumptions within the valuation related to theamount and timing of the ultimate performance and related cash flows of theCompany’s investment in Kaiser-Hill have the greatest impact on the overallenterprise valuation.

 

2.                                       GeneralTerms of Plan and Status of Bankruptcy Distributions

 

The effectiveness of the Plan of Reorganization as of December 18,2000 did not, in and of itself, complete the bankruptcy process. The process ofresolving claims initially filed in the bankruptcy is ongoing. By far thelargest class of claims (“Class 4”) was made up of creditor claimsother than trade creditor or equity claims. Class 4 claims includedholders of Old Kaiser’s senior subordinated notes due 2003. Holders of Class 4claims allowed by the bankruptcy court received a combination of cash and ourpreferred (“New Preferred”) and common stock (“Kaiser Common Stock”) in respectof their claims. Each Class 4 claimant was entitled to receive one shareof New Preferred and one share of Kaiser Common Stock for each $100 of claims,subject to a reduction in the number of shares of New Preferred issued to suchclaimant by one share for each $55.00 of cash received by the claimant.

 

The equity class of claims recognized in the Old Kaiser bankruptcyare “Class 5” claims, consisting of holders of Old Kaiser common stock (“OldCommon”) and other “Equity Interests” as defined in the Plan of Reorganization.The Plan of Reorganization provides that holders of Equity Interests receive anumber of shares of Kaiser Common Stock equal to 17.65% of the number of sharesof Kaiser Common Stock issued to allowed Class 4 claimants. In the initialdistribution, one share of Kaiser Common Stock was issued for each 96 shares ofpreviously outstanding Old Common. During 2005, the Company settled asignificant Class 5 claim asserted by the former shareholders of ICTSpectrum Constructors, Inc. (“ICT Spectrum”), which Old Kaiser hadacquired in 1998, and issued an aggregate of 175,003 additional shares ofKaiser Common Stock to such claimants pursuant to the settlement. (See Note 10)

 

Pursuant to the terms of the Plan of Reorganization, the Company wasrequired to complete its initial bankruptcy distribution within 120 days of theEffective Date. Accordingly, to satisfy approximately $136.8 million of allowedClass 4 claims, the Company effected its initial distribution on April 17,2001. The amount of unresolved Class 4 claims remaining at April 17,2001 was approximately $130.5 million.

 

To address the remaining unresolved claims, the Bankruptcy Court issuedan order on March 27, 2001 establishing an Alternative Dispute Resolution(“ADR”) procedure whereby the remaining claimants and Old Kaiser producedlimited supporting data relative to their respective positions and engaged ininitial negotiation efforts in an attempt to reach an agreed claimdetermination. If necessary, the parties were thereafter required toparticipate in a non-binding mediation before a mediator pre-selected by theBankruptcy Court. All unresolved claims as of March 27, 2001 are subjectto the ADR process. Since April 17, 2001, the date of the initialdistribution, $130.0 million of asserted Class 4 claims have beenwithdrawn, negotiated or mediated to an agreed amount, resulting in cashpayments approximating $2.8 million and issuances of 683 shares of NewPreferred and 823 shares of Kaiser Common Stock. With the settlement of the ICTSpectrum Class 5 claim and the subsequent issuance of 175,003 shares ofKaiser Common Stock to such claimants, no Class 5 claims remain unresolvedat March 20, 2006.

 

As of March 20, 2006, the aggregate amount of unresolved claimswas less than $1.0 million. As demonstrated by the claim settlements completedsince April 17, 2001, and based on the belief that it is in the bestinterest of the Company and its current shareholders, the Company has beensettling certain remaining Class 4 claims entirely for cash payments inlieu of the combination of cash and New Preferred and Kaiser Common Stock ascontemplated in the Plan of Reorganization. The Company intends to continue touse this settlement alternative during the resolution of remaining Class 4claims. The Company expects to resolve the remaining claims, and to reach afinal resolution of issues related to the retiree benefit plans (see Note 13),by the end of 2006. Upon such final resolution, the Company expects to take thenecessary steps to close the bankruptcy cases. Upon such closing, theBankruptcy Court would no longer be involved in the administration of theCompany’s affairs, and the Company’s obligation to pay certain fees and submitperiodic reports to the Bankruptcy Court would be terminated. Since closing ofthe cases requires resolution of all outstanding matters and such resolution issomewhat out of the Company’s control, there is a possibility that the caseswill not be closed with the anticipated time period.

 

In the first quarter of 2004, the Company recorded a $1.4 millionreserve for future claim settlements based upon the Company’s estimate ofunresolved claims at that time. During 2004 and 2005, the Company settledvarious Class 4 claims utilizing approximately $1.0 million of thisreserve. Based upon the Company’s estimate of unresolved claims at December 31,2005, $0.4 million remains in this reserve.

 

F-7

----

 

3.                                       Significant Accounting Policies

 

**Principles of Consolidation: The consolidatedfinancial statements include all majority-owned or controlled subsidiaries. Allsignificant intercompany balances and transactions have been eliminated. Investmentsin unconsolidated affiliated companies and joint ventures are accounted forusing the equity method.**

** **

Revenue Recognition:  The Company earns its revenue from a monthlymanagement fee plus profit sharing contract. The company recognizes revenueearned from the monthly management fee for this contract on a straight-linebasis and recognizes the profit sharing income as the income is earned.

 

Income Taxes: Deferred tax assets andliabilities represent the tax effects of differences between the financialstatement carrying amounts and the tax bases carrying amounts of the Company’sassets and liabilities. These differences are calculated based upon thestatutory tax rates in effect in the years in which the differences areexpected to reverse. The effect of subsequent changes in tax rates on deferredtax balances is recognized in the period in which a tax rate change is enacted.The Company evaluates its ability to realize future benefit from all deferredtax assets and establishes valuation allowances for amounts that may notbe realizable.

 

Earnings Per Share:  Basic earnings per share (“EPS”) is computedby dividing net income by the weighted average number of common sharesoutstanding for the period. Diluted EPS normally includes the weighted-averageeffect of dilutive securities outstanding during the period. Pursuant to thePlan of Reorganization that was effective as of December 18, 2000, allthen-outstanding common stock equivalents were cancelled. As a result, theCompany has no dilutive securities outstanding. In addition, anti-dilutivesecurities were not included in the computation of diluted earnings per share.

 

The effect of preferred dividends of $1.5million has been included in continuing operations in the calculation of basicand diluted earnings per share for the year ended December 31, 2003. Asdiscussed in Note 9, the Company adopted FAS 150 effective July 1, 2003. Therefore,the $1.2 million for the year ended December 31, 2005, the $2.1 millionfor the year ended December 31, 2004 and $1.4 million of preferred stockdividends for the six months ended and December 31, 2003 have been shownas interest expense.

 

Foreign Currency Translation:  Results of operations for foreign entitiesare translated using the average exchange rates during the period. Assets andliabilities are translated to U.S. dollars using the exchange rate in effect atthe balance sheet date. Resulting translation adjustments are reflected net oftax in shareholders’ equity as cumulative translation adjustments.

 

Cash Equivalents and Restricted Cash: TheCompany considers all highly liquid financial instruments purchased withmaturities of three months or less at date of purchase to be cash equivalents.Restricted cash balances consisted of the following at December 31 (inthousands):

 
| ** **                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash reserved for future claim  settlements and accumulated dividends |       | $        | 101        |     | $          | 953 |   |
| Cash balances of wholly owned  insurance subsidiary                   |       | 3,077    |       | 2,978    |       |
|                                                                  |       |     |       |     |       |
|                                                                  |       | $        | 3,178      |     | $          | 3,931 |   |

 

Supplemental cash flow information for theyears ended December 31, is as follows (in thousands):

 
| ** **                                                               | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash payments for income taxes                                           |       | $        | 14,602     |     | $          | 1,916 |   |
| Payments for claims resolutions  from restricted cash                    |       | 150      |       | —   |       |
| Payment of preferred dividends  included in continuing operations        |       | 1,518    |       | 2,151    |       |
| Non cash transactions:                                                   |       |     |       |     |       |
| Issuance of Kaiser Common Stock to directors                             |       | 78       |       | 88       |       |
| Issuance of Kaiser Common Stock in settlement of the ICT Spectrum  claim |       | 6,196    |       | —   |       |
|                                                                          |            |          |            |          |            |  |  |

 

Adoption of FAS 154: In June of 2005, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 154, (FAS 154), “Accounting Changes and Error Corrections”,a replacement of APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in InterimFinancial Statements”. FAS 154 applies to all voluntary changes inaccounting principle and changes the requirements for accounting for andreporting a change in accounting principle. FAS 154 requires the retrospectiveapplication to prior periods financial statements of the direct effect of avoluntary change in accounting principle unless it is impracticable. APB No. 20required

 

F-8

----

 

that most voluntary changes in accounting principlebe recognized by including in net income of the period of the change thecumulative effect of changing to the new accounting principle. The Company doesnot believe the adoption of FAS 154 will have a material impact on itsfinancial position, results of operations or cash flows.

 

Adoption of FAS 150:  On May 31, 2003, FASB issued FASBStatement No. 150 (FAS 150), “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity.”  FAS 150 improves the accounting for certainfinancial instruments that, under previous guidance, issuers could account foras equity and requires that those instruments be classified as liabilities (orassets in certain circumstances) in statements of financial position. FAS 150also requires disclosures about alternative ways of settling the instrumentsand the capital structure of entities – all of whose shares are mandatorilyredeemable. FAS 150 was to have been generally effective for all financialinstruments entered into or modified after May 31, 2003, and otherwiseeffective at the beginning of the first interim period beginning after June 15,2003. Recently, the FASB has deferred for an indefinite period the effectivedate for certain instruments and entities. As discussed in Note 9 of theConsolidated Financial Statements, the Company has adopted the provisions ofFAS 150 in the third quarter of 2003.

 

Adoption of FAS 132:  In December 2003,the FASB issued FAS No. 132 (Revised 2003), “Employers’ Disclosures aboutPensions and Other Postretirement Benefits.” FAS No. 132(R) increases theexisting disclosure requirements by requiring more details about pension planassets, benefit obligations, cash flows, benefit costs and related information.Companies will be required to segregate plan assets by category, such as debt,equity and real estate, and to provide certain expected rates of return andother informational disclosures. The new disclosure requirements required byFAS No. 132(R) were implemented in the December 31, 2004 financialstatements.

 

Use of Estimates: The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosed amounts of contingent assets and liabilities at thedate of the financial statements, and the amounts of revenues and expensesrecognized during the reporting period. Such estimates include those related toallowances for contract and accounts receivable, deferred tax assets andvaluation allowance and other investments, assumptions used to determine theretiree medical obligation and the remaining unresolved claims. Actual resultscould differ from those estimates.

 

Concentrations of Credit Risk: Financialinstruments which potentially subject the Company to concentrations of creditrisk consist primarily of cash and cash equivalents, certificates of depositand accounts receivable. The Company’s cash and cash equivalents andcertificates of deposit are maintained in accounts held in major U.S. banks.

 

Reclassifications:   Certain reclassifications have been made tothe prior period financial statements contained herein in order to conform themto the 2005 presentation.

 

4.                                       Contract Receivable

 

Contract receivable consists entirely of thenet carrying value of the net assets of the Nova Hut project and were asfollows at December 31 (in thousands):

 
| ** **                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Cash                                                 |       | $        | 26         |     | $          | 22 |   |
| Letter of credit cash  collateral drawn by Nova Hut  |       | 11,100   |       | 11,100   |       |
| Retained accounts receivable                         |       | 21,404   |       | 20,624   |       |
| Subcontractor retentions and  other accounts payable |       | (5,180   | )          | (5,698   | )          |
|                                                 |       | 27,350   |       | 26,048   |       |
| Allowance for estimated loss                         |       | (24,350  | )          | (23,048  | )          |
|                                                 |       | $        | 3,000      |     | $          | 3,000 |   |

 

Although Old Kaiser sold its Metals Mining and Industry business unitin August 2000, it retained its Netherlands subsidiary, KaiserNetherlands, B.V. (“Kaiser Netherlands”), which had been responsible for aturnkey engineering and construction services contract for the construction ofa steel mini-mill in the Czech Republic for Nova Hut. After construction of themini-mill was complete in 2000, the contract with Nova Hut provided for a maximumof three possible performance tests. The first performance test was completedon November 13, 2000. Kaiser Netherlands believes that the firstperformance test was successful and that Nova Hut should have agreed to finalacceptance of the mini-mill and made final payment of amounts accrued by KaiserNetherlands throughout the project, including fee and retention amounts withrelease of performance guarantee instruments. Nova Hut, however, asserted thatthe first test was not successful. Kaiser Netherlands believes that suchcontention may have been put forth in response to severe financialconstraints on Nova Hut’s operations resulting from

 

F-9

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weakening conditions in the worldwide steel market and the significantamounts that Kaiser Netherlands believed it was contractually due. As of March 20,2006, this dispute has not been resolved, and Kaiser Netherlands continues topursue legal action to enforce its rights. From 2001 to 2005, the primary legalvenue of this dispute had been the Delaware bankruptcy proceeding for OldKaiser, where the Company has asserted claims against Nova Hut and theInternational Finance Corporation (“IFC”). The Delaware bankruptcy court hadpreviously ruled that the Company, as opposed to Kaiser Netherlands, couldproceed with prosecution of its specific claims against Nova Hut and IFC in theDelaware 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. The Company filed an appeal withthe U.S. Court of Appeals for the Third Circuit regarding this decision infavor of the IFC and, on February 25, 2005, the Third Circuit overturnedthe District Court’s decision. The IFC’s request for a rehearing of the case bythe Third Circuit was refused. The IFC then petitioned the Delaware bankruptcycourt to stay proceedings pending completion of the Kaiser Netherlands-Nova Hutarbitration proceeding discussed below. This IFC motion was granted. Withregard to the Nova Hut appeal, the District Court has ruled that U.S.bankruptcy proceedings should also be stayed pending completion of arbitrationproceedings.

 

In January 2004, Kaiser Netherlands filed arbitration claimsagainst Nova Hut in the amount of $51.1 million with the International Chamberof Commerce (“ICC”). In November 2004, Kaiser Netherlands’ claim againstNova Hut was amended to include late interest and other charges and now totals$67.5 million. The arbitration panel has been constituted, and a hearing washeld in September 2005. At present, we do not expect a decision to beissued until the second quarter of 2006 at the earliest. Nova Hut has submitteda $49.7 million counterclaim against Kaiser Netherlands in these same ICCproceedings.

 

In December 2003,the ICC, under the dispute resolution provisions of the Nova Hut mini-millsubcontract between Kaiser Netherlands and the mini-mill’s main equipmentsupplier, Tippins, Inc., issued a final award that was on balancefavorable 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. TheCompany has not recorded this award due to the uncertainties regardingcollectibility. However, the Company intends to vigorously pursue collection ofthis award.

 

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

 

Based on the Company’s continued concern overNova Hut’s financial difficulties and the lack of a settlement resulting froman earlier bankruptcy court-sponsored mediation in the fourth quarter of 2003,the Company further reduced the carrying value of the remaining Nova Hutcontract receivable from $6.0 million to $3.0 million by recording anadditional reserve of $3.0 million, net of a $1.1 million income tax benefit,through a charge to “Loss from Discontinued Operations.”  This reserve is in addition to a reserverecorded in 2001, which reduced the carrying value of the Nova Hut contractreceivable from $21.6 million to $6.0 million by recording a reserve ofapproximately $9.8 million, net of a $5.8 million income taxbenefit, through a charge to “Lossfrom Discontinued Operations.”  Theseadjustments to the contract receivable carrying value were determined based onthe Company’s late 2003 estimate of Nova Hut’s ability to pay such liability.

 

5.                                       Business Segments and Foreign Operations

 

The Company had no reportable segments at anytime during 2005, 2004 or 2003.

 

Foreign Operations: Because all of theCompany’s international operations are presented in the accompanying Statementsof Operations as “Discontinued Operations,” all of the Company’s reported grossrevenue and operating income (loss) from continuing operations were fromdomestic sources. Remaining foreign assets consist solely of the carrying valueof the net realizable value of the Nova Hut contract matter (See “ContractReceivable” and “Other Contingencies”).

 

6.                                       Investment in and Advances to Joint Venture

 

The Company’s net investment in and advances to joint venture totaled$87.3 million and $42.3 million at December 31, 2005 and 2004,respectively and consisted solely of the Company’s investment in theKaiser-Hill. The Company accounts for its 50% ownership in the Kaiser-Hillinvestment using the equity method.

 

F-10

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** **

**Summarized financial information of Kaiser-Hill wasas follows as of December 31 (in thousands):**

 
| ** **                  | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |     |       |
| Current assets              |       | $        | 296,203    |     | $          | 118,011  |       | $ | 117,714 |   |
| Non-current assets          |       | —   |       | 132,224  |       | 114,701  |       |
| Current liabilities         |       | 121,584  |       | 113,609  |       | 111,936  |       |
| Non-current liabilities     |       | —   |       | 66,134   |       | 55,647   |       |
|                        |       |     |       |     |       |     |       |
| Gross revenue               |       | $        | 707,800    |     | $          | 651,851  |       | $ | 712,270 |   |
| Subcontracts  and materials |       | (412,503 | )          | (377,649 | )          | (379,215 | )          |
| Service  revenue            |       | 295,297  |       | 274,202  |       | 333,055  |       |
| Operating  expenses         |       | (103,904 | )          | (233,574 | )          | (293,056 | )          |
| Other income (expense)      |       | 35       |       | 32       |       | (1       | )          |
| Net income                  |       | $        | 191,428    |     | $          | 40,660   |       | $ | 39,998 |   |

 

On October 13,2005, Kaiser-Hill declared physical completion of the cleanup and closure ofthe DOE’s Rocky Flats site. On December 8, 2005, the DOE affirmedKaiser-Hill’s declaration as required under the Closure Contract and the DOEauthorized Kaiser-Hill to invoice all remaining performance fees less aretained amount equaling $5.0 million. On January 11, 2006, Kaiser-Hillreceived payment for all fees except for the retained amount.

 

Kaiser-Hill recognized a substantial amount of the fee income from theDOE upon the declaration of physical completion on October 13, 2005 and,accordingly, the Company’s proportionate share of such income was recorded inEquity Income in Earnings of Affiliate in its consolidated statement ofoperations for the year ended December 31, 2005. As a result, upon thereceipt of the $80.0 million distribution from Kaiser-Hill on March 1,2006, the Company made a corresponding reduction in its investment inKaiser-Hill on its balance sheet.

 

The Closure Contract provides thatKaiser-Hill will earn revenue equal to the actual cost of physical completionplus a performance fee. The performance is based on (1) Kaiser-Hill’s costto complete the site closure, which must be within the range of $3.1 billionand $4.9 billion, (2) the schedule of physical completion, which mustbe before 2007 and (3) Kaiser-Hill’s safety performance. At the time ofdeclaration of physical completion on October 13, 2005, Kaiser-Hill’s costestimate to complete the project remained at $3.44 billion, which resulted in atotal performance fee payable to Kaiser-Hill projected to be$510.0 million.

 

Since Kaiser-Hill declared physical completion, many of the performancerisks have been eliminated, but contract risks and uncertaintiesremain. As a result of declaration of physical completion in October 2005,Kaiser-Hill recognized all remaining performance fees under the Closure Contractin 2005 and has established reserves for certain risks and uncertaintiesrelated to the Closure Contract. Kaiser-Hill will reverse these reserves to theextent it is successful in mitigating or eliminating these remaining contractrisks and uncertainties.

 

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

 

The Closure Contract further provides that Kaiser-Hill will bereimbursed for the reasonable cost of bonds and insurance allocable to thecontract and for liabilities and expenses incidental to these liabilities,including litigation costs, to third parties not compensated by insurance orotherwise. There is an exception to this reimbursement provision applicable toliabilities caused by the willful misconduct, lack of good faith or failure toexercise prudent business judgment by Kaiser-Hill’s managerial personnel.

 

Kaiser-Hill now operates under the closeoutphase of its contract with the DOE, primarily resolving open administrativeissues and providing support to the DOE to achieve regulatory closure of thesite. The closeout phase of the contract is a cost reimbursable phase and isnot fee bearing nor does the closeout phase impact fees earned. Effective December 31,2005, Kaiser-Hill terminated its remaining employees. Staff necessary tocomplete closeout activities is expected to be subcontracted or provided byCH2M Hill Companies Ltd.

 

F-11

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The difference between the Company’s carrying value of the investmentin Kaiser-Hill and its 50% underlying equity in Kaiser-Hill’s net assets at December 31,2004 was $7.0 million and was being amortized on a straight-line basis through2006. Because Kaiser-Hill declared physical completion of the site on October 13,2005, during 2005 the Company wrote off the remaining $7.0 million unamortizedbalance as a reduction to the equity income of earnings of affiliate.

 

With respect to a revolving credit facility obtained by Kaiser-Hill in November 1999,both parents of Kaiser-Hill granted a first lien security interest to theKaiser-Hill lenders in all of the ownership and equity interest of Kaiser-Hilland have agreed to cure any events of default by Kaiser-Hill on the facility. As of December 31, 2005 and 2004,Kaiser-Hill had $3.0 million and $0, respectively, outstanding on its revolvingcredit.

 

7.                                       Investment in Affiliates

 

In 1997, the Company purchased a 4% ownershipinterest in a limited liability company (the LLC) that leases the land and ownsthe buildings where the Company’s corporate headquarters were located. EffectiveOctober 28, 2000, the Company negotiated a settlement with the other owners of the LLC resolvingvarious issues between the Company and the other owners. As a part of thatresolution, the Company fixed the maximum amount of potential future recoveryof the investment to $2.8 million at whatever time as the property is sold orrefinanced. At December 31, 2005 and 2004, the amount of the investmentremains unchanged.

 

8.                                       Notes Receivable

 

In June 2002, a settlement was reachedbetween the Company and ICF Consulting Group, Inc. (“ICF Consulting”) (adivision of Old Kaiser that was sold in 1999), whereby the Company agreed torestructure certain notes received by ICF Consulting totaling $6.6 million andaccrued interest of $0.7 million, net of reserves, for a new promissory note of$6.4 million (New Note) bearing interest at 8.5% per annum. The New Note wassubordinated to the rights to ICF Consulting’s senior bank lenders. As a part ofthe settlement, ICF Consulting agreed to withdraw all claims against theCompany, release cash in escrow totaling $0.8 million and purchase the Company’s10% ownership in ICF Consulting, having a carrying value of $1.1 million, for$4.5 million.

 

At December 31, 2002, all terms of thesettlement agreement between the Company and ICF Consulting had beenimplemented. Because of uncertainties about the ultimate collectibility of theNew Note and accrued interest, at December 31, 2004, the Company continuedto carry a reserve of $0.5 million against the New Note. On October 5,2005, ICF Consulting paid the New Note plus accrued interest in full. Therefore,during the third quarter of 2005, the Company reversed the $0.5 million reserveagainst the New Note and the Company recorded it as other income.

 

9.                                       Mandatorily Redeemable Preferred Stock

 

On November 17, 2005, the Companyredeemed all of the remaining outstanding shares New Preferred held bynon-affiliates and therefore at December 31, 2005, the Company had noshares of New Preferred outstanding, net of 101,471 treasury shares. At December 31,2004, the Company had 489,249 shares of New Preferred outstanding, net of101,471 treasury shares, with a liquidation preference of $26.9 million.

 

Pursuant to approval by the Company’s Board,in 2002 and 2003 the Company purchased a total of 101,471 shares, net ofredemptions, of outstanding New Preferred at prices ranging from $25.62 to$50.55 per share. The treasury shares have been recorded at liquidationpreference, $55.00 per share, as a reduction to preferred stock and theremaining difference between cost and the liquidation preference was recordedas an increase to paid-in capital. In January 2006, pursuant to approvalby the Company’s Board, the treasury shares were cancelled leaving no sharesoutstanding or in treasury after the cancellation of the 101,471 shares.

 

The Company’s certificate of incorporationauthorizes the issuance of 2,000,000 shares of New Preferred. The New Preferredis shown at liquidation value of $55.00 per share and is a series ofauthorized preferred stock designated as “Series 1 Redeemable CumulativePreferred Stock,” and has a par value of $0.01 per share. The New Preferredranks ahead of Kaiser Common Stock. The certificate of incorporation of theCompany and Delaware law permit the Board of Directors to issue additional series ofpreferred stock, except that the Board of Directors may not authorize theissuance of any securities that rank senior to or on a parity with the NewPreferred without the consent of holders of at least two-thirds of the NewPreferred. New Preferred was originally issued as settlement for Class 4claims. As mentioned in Note 2, because the Company has been settlingcertain remaining Class 4 claims entirely for cash payments in lieu of thecombination of cash and New Preferred and Kaiser Common Stock as contemplatedin the Plan of Reorganization, the Company has no plans to issue additional sharesof New Preferred at December 31, 2005.

 

F-12

----

 

The Company adopted FAS 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity,” effective July 1, 2003. Due to the mandatorily redeemable featureof the New Preferred, described in greater detail below, the New Preferred wasreclassified from mezzanine equity to a long term liability on the consolidatedbalance sheet, and the preferred stock dividends were reclassified to interestexpense on the consolidated statement of operations effective July 1, 2003.There was no transition adjustment recognized upon adoption of FAS 150.

 

Cumulative dividends, classified as interestexpense subsequent to July 1, 2003, on the New Preferred were payable on aquarterly basis, as of April 30, July 31, October 31 and January 31,either in cash at an annual rate of 7% of the liquidation preference per shareor in additional shares of New Preferred at an annual rate of 12% of the pershare liquidation preference. Dividends accrued on the New Preferred commencingwith the initial distribution date, April 17, 2001. Dividends were notpaid to any affiliate of the Company on account of that affiliate’s ownershipof shares of preferred stock as long as there was New Preferred shares held byany non-affiliated entities or parties. Upon the November 17, 2005redemption of the 207,431 shares of remaining outstanding New Preferred held bynon-affiliates, the Company no longer has a dividend payment requirement.

 

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

 

KGP is the Company subsidiary that owns(through a wholly owned subsidiary of KGP) the 50% interest in Kaiser-HillCompany, LLC. KGP was subject to outstanding put rights, expiring on December 31,2007, that obligated it to purchase New Preferred owned by a holder of the putright, at the holder’s option, under three circumstances:

 

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

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

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

 

Though no put rights were ever executed, the Company from time to timereceived distributions from Kaiser-Hill that triggered the put rights –effectively requiring the Company to redeem certain New Preferred. In addition,the Company had certain restricted cash balances available, which pursuant tothe terms of its Plan of Reorganization were required to be used to redeemoutstanding New Preferred. Rather than using the mechanism of the put rights tosatisfy the Company’s obligations to holders of the put rights after a trigger,the Company observed the requirements in the Plan of Reorganization to use certainrestricted cash balances, and in the terms of the New Preferred, to use certainavailable cash, for preferred redemptions. The Company believed this was a morecost-efficient manner of satisfying the obligations associated with the KGP putrights. Upon the November 17, 2005redemption of the 207,431 shares of remaining outstanding New Preferred held bynon-affiliates and the subsequent cancellation of the treasury shares, theCompany no longer has an obligation under the put rights.

 

As of December 31,2005, the Company had redeemed the all of the outstanding shares of NewPreferred as follows (in thousands except share amounts):

 
| **Date of  Redemption** | ** ** | **Use of  Unrestricted  Cash** | ** ** | **Use of  Restricted  Cash** | ** ** | **Total  Amount of  Redemption** | ** ** | **Number of  Shares  Redeemed** | ** ** |
|------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
|                         |       |                                |       |                              |       |                                  |       |                                 |       |
| November 2005           |       | $                                   | 11,409     |                              | $          | —                                |       | $                                    | 11,409     |   | 207,431 |   |
| September 2005          |       | 4,715                               |       | 785                               |       | 5,500                                 |       | 100,000                              |       |
| April 2005              |       | 10,000                              |       | —                            |       | 10,000                                |       | 181,818                              |       |
| July 2004               |       | 2,478                               |       | 512                               |       | 2,990                                 |       | 54,361                               |       |
| February 2004           |       | 2,599                               |       | 2,677                             |       | 5,276                                 |       | 95,932                               |       |
| October 2003            |       | 4,650                               |       | 1,594                             |       | 6,244                                 |       | 113,530                              |       |
| January 2003            |       | 5,233                               |       | 8,913                             |       | 14,146                                |       | 257,200                              |       |
|                              |            |                                     |            |                                   |            |                                       |            |                                      |            |  |  |  |

 

10.                                 Common Stock

 

The Company certificate of incorporationauthorizes the issuance of 3,000,000 shares of Kaiser Common Stock. Pursuant to

 

F-13

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the Plan of Reorganization, holders ofallowed Class 4 claims and allowed Class 5 claims are to receiveshares of Kaiser Common Stock under the Plan of Reorganization.

 

In connection with its initial distribution outof bankruptcy on or about April 17, 2001, The Company issued to holders ofallowed Class 4 claims one share of Kaiser Common Stock for each $100.00of such holder’s respective allowed Class 4 claim. Subsequent to April 17,2001, 823 shares of Kaiser Common Stock have been issued related to thesettlement of claims.

 

In the initial distribution holders ofallowed Class 5 claims received their pro rata portion of Kaiser CommonStock representing 15% of the aggregate amount of Kaiser Common Stock to beoutstanding following distributions to holders of allowed Class 4 claimsand allowed Class 5 claims. This outcome was accomplished by issuing toeach holder of an allowed Class 5 claim its pro rata portion of the numberof shares of Kaiser Common Stock that represents 17.65% of the total number ofshares of Kaiser Common Stock issued from time to time to holders of allowed Class 4claims.

 

The Company has never paid a cash dividend onits common stock. The Company anticipates that for the foreseeable future no cashdividends will be paid on the Kaiser Common Stock and that the Company’searnings will be retained for use in the business. Any future determination topay cash dividends will be at the discretion of our Board which determines ourdividend policy based on our results of operations, capital requirements, andother factors that our Board deems relevant.

 

ICT Spectrum settlement:  The former shareholders of ICT Spectrum areholders of equity interests under the Plan of Reorganization. OnOctober 19, 2005, the Company entered into a settlement agreement with therepresentatives of the former shareholders of ICT Spectrum, who had claimed tobe entitled to additional shares of Kaiser Common Stock, to settle all of theiroutstanding claims against the Company. On December 6, 2005, theBankruptcy Court granted final approval of the proposed settlement agreement. Asa result, the Company issued and distributed 175,003 shares of Kaiser CommonStock to the former shareholders of ICT Spectrum in December 2005.

 

Because an agreement wasreached with the former shareholders of ICT Spectrum, at September 30,2005, the Company recorded a $6.2 million reserve on its balance sheet toaccount for this non-cash transaction. The amount of the reserve was based onthe number of Kaiser Common Stock shares to be issued and the market value ofthe Kaiser Common Stock shares on October 19, 2005, reduced for theestimated dilutive effect of the issuance of the additional Kaiser Common Stockshares. The Kaiser Common Stock shares were charged against this reserve whenthe shares were issued in December 2005.

 

Share reconciliation:  Since 2001, the Company has been attemptingto reconcile the number of shares that were issued by the Company’s transferagent in the initial distribution in 2001. The Company has not previouslyrecognized the issuance of 11,599 shares of Kaiser Common Stock by the transferagent. Because the Company has been unsuccessful in disputing the issuance ofthese shares, during 2005 the Company retroactively restated the numberoutstanding shares to reflect the issuance of the 11,599 shares as of June 2001.

 

11.                                 Leases

 

The Company has the following futurecommitments on material noncancelable operating leases with initial orremaining terms in excess of one year at December 31, 2005:

 
| **Year ending  December 31:** | ** ** | **Amount**                           | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **(dollars in thousands)** | ** ** |
| 2006                                    |       |                                 | $          | 48 |   |
| 2007                                    |       |                                 | 24         |   |
|                                    |       |                                 | $          | 72 |   |

 

The total rental expense for all operatingleases was $110,000 and $118,000 during the years ended December 31, 2005and 2004.

 

12.                                 Income Taxes

 

The components of net income used to computethe expense for income taxes for the years ended December 31 were asfollows (in thousands):

 

F-14

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| ** **                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                           |       |     |       |     |       |     |       |
| Income from continuing operations before income taxes and minority  interests: |       |     |       |     |       |     |       |
| Domestic                                                                       |       | $        | 77,457     |     | $          | 9,110    |       | $ | 11,028 |   |
| Foreign                                                                        |       | —   |       | —   |       | —   |       |
|                                                                           |       | $        | 77,457     |     | $          | 9,110    |       | $ | 11,028 |   |
| (Expense) benefit for income taxes:                                            |       |     |       |     |       |     |       |
| Federal:                                                                       |       |     |       |     |       |     |       |
| Current                                                                        |       | $        | (41,204    | )        | $          | (2,941   | )          | $ | (3,013 | ) |
| Deferred                                                                       |       | 12,957   |       | 1,492    |       | (1,228   | )          |
|                                                                           |       | (28,247  | )          | (1,449   | )          | (4,241   | )          |
| State:                                                                         |       |     |       |     |       |     |       |
| Current                                                                        |       | (5,715   | )          | (462     | )          | (248     | )          |
| Deferred                                                                       |       | 1,797    |       | 176      |       | (338     | )          |
|                                                                           |       | (3,918   | )          | (286     | )          | (586     | )          |
| Foreign:                                                                       |       |     |       |     |       |     |       |
| Current                                                                        |       | —   |       | —   |       | —   |       |
| Deferred                                                                       |       | —   |       | —   |       | —   |       |
|                                                                           |       | $        | (32,165    | )        | $          | (1,735   | )          | $ | (4,827 | ) |

 

The effective income tax expense varied fromthe federal statutory income tax expense because of the following differences(in thousands):

 
| ** **                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                       |       |     |       |     |       |     |       |
| Income tax  expense computed at federal statutory tax rate |       | $        | (27,110    | )        | $          | (3,189   | )          | $ | (3,860 | ) |
|                                                       |       |     |       |     |       |     |       |
| Change in  tax (expense) benefit from:                     |       |     |       |     |       |     |       |
| State income  taxes                                        |       | (2,554   | )          | (343     | )          | (381     | )          |
| Settlement  of ICT Spectrum claim                          |       | (2,169   | )          | —   |       | —   |       |
| Tax free  municipal interest                               |       | 48       |       | —   |       | —   |       |
| Business  meals and entertainment                          |       | (32      | )          | (33      | )          | (27      | )          |
| Restructuring  costs                                       |       | —   |       | (1       | )          | —   |       |
| Penalties  and fines                                       |       | —   |       | (4       | )          | (92      | )          |
| Lobbying  costs                                            |       | (17      | )          | (15      | )          | —   |       |
| Reversals  and other                                       |       | 91       |       | 259      |       | 10       |       |
| Subsidiary  and joint venture adjustments                  |       | —   |       | 2,310    |       | —   |       |
| Preferred  Dividend                                        |       | (422     | )          | (719     | )          | (477     | )          |
|                                                       |       | (5,053   | )          | 1,454    |       | (967     | )          |
|                                                       |       | $        | (32,165    | )        | $          | (1,735   | )          | $ | (4,827 | ) |

 

The tax effects of the principal temporarydifferences and carryforwards that give rise to the Company’s net deferred taxasset (liability) are as follows (in thousands):

 
| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |
| Reserves for  estimated losses on contract receivable |       | $        | 5,035      |     | $          | 4,540 |   |
| Reserves for  retiree benefit plans                   |       | 2,631    |       | 2,517    |       |
| Reserves for  adjustments and allowances              |       | 241      |       | 897      |       |
| Investment  in Kaiser-Hill                            |       | 1,856    |       | (12,281  | )          |
| Write-down  of other investments                      |       | (1,904   | )          | (1,904   | )          |
| Other                                                 |       | 356      |       | 459      |       |
|                                                  |       | $        | 8,215      |     | $          | (5,772 | ) |

 

Because of timing differences between the payment of federal income taxand the recognition of federal income tax for book purposes related to theCompany’s 50% share of equity income in Kaiser-Hill, the Company recorded a netdeferred tax asset totaling $8.2 million at December 31, 2005, compared toa net deferred tax liability of $5.8 million at December 31, 2004.

 

The ability to derive future benefit from some of the elementscontributing to the net deferred tax asset at December 31, 2005 isdependent on the Company’s ability to generate sufficient taxable income priorto expiration. In the fourth quarter of 2002, the Company determined that inaddition to the reduction of tax carryforwards due to the bankruptcy exceptionof Internal Revenue Code (IRC) Sec. 382, the tax basis of various assets alsowas required to be reduced. This created a deferred tax liability that would bedue upon disposition of the assets. The Company believes that the results ofits future operations will be sufficient to assure utilization of the taxbenefits prior to expiration.

 

In December 2000, the Chapter 11 bankruptcy reorganization of theCompany caused a change in control under IRC Sec. 382. In 2001, the Companydetermined that the change in control met the stringent guidelines of thebankruptcy exception provided under the Internal Revenue Code. This resulted inthe Company not being subject to the carryforward limitations of IRC Sec. 382. However,the Company was required to reduce certain carryovers that included netoperating losses and credits. The Company offset the reduction of thecarryforwards with the valuation allowance previously established for thosecarryforwards.

 

F-15

----

 

In 2003 the Company utilized its 2002 net operating loss carryforwardof $1,511,000 and tax credit carryforward of $685,000.

 

13.                                 Retiree Benefit Plans

 

Post Employment Benefit Plan: As of December 31,2005 the Company is required to continue to fulfill the provisions of apreviously curtailed plan which provides certain medical and death benefits toa group of retirees. All of the benefit is fully covered by the Company’sself-insurance. In respect to the retirees covered by the medical and deathbenefit self-insured plan, the benefits are funded to a claims administrator asparticipants’ insurance claims are reimbursed.

 

Because there are no new participants in thisplan, there is no current service cost. The change in the status of the plan asof December 31 was as follows (in thousands):

 
| ** **                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |   |   |
| Benefit obligation at January 1,       |       | $        | 6,623      |     | $          | 6,913 |   |
| Service cost                                |       | —   |       | —   |       |
| Interest cost                               |       | 480      |       | 480      |       |
| Administrative costs reserve                |       | 700      |       | —   |       |
| Benefits paid                               |       | (1,365   | )          | (1,241   | )          |
| Actuarial (gain) loss                       |       | 122      |       | 715      |       |
| Benefit obligation at December 31,     |       | 6.560    |       | 6,867    |       |
| Unrecognized net gain (loss)                |       | 364      |       | (244     | )          |
| Net benefit obligation at December 31, |       | $        | 6,924      |     | $          | 6,623 |   |

 

The net periodic postretirement benefit costconsists of the following:

 
| ** **                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |     |       |
| Funded status:                           |       |     |       |     |       |     |       |
| Service cost                             |       | —   |       | —   |       | —   |       |
| Interest cost                            |       | 480      |       | 480      |       | 470      |       |
| Amortization of prior service costs      |       | —   |       | —   |       | —   |       |
| Amortization of net (gain) loss          |       | (81      | )          | (189     | )          | (200     | )          |
| Net periodic postretirement benefit cost |       | $        | 399        |     | $          | 291      |       | $ | 270 |   |
|                                          |            |          |            |          |            |          |            |  |  |  |

 

At December 31, 2005, the estimatedfuture net benefit payments to be paid out in the next ten years are asfollows:

 
| 2006        |   | $     | 873    |   |
|-------------|--------|-------|--------|--------|
| 2007        |   | 812   |   |
| 2008        |   | 753   |   |
| 2009        |   | 694   |   |
| 2010        |   | 638   |   |
| 2011 - 2015 |   | 2,398 |   |

 

The discount rate used in determining theexpense was 6.0% for 2005, 2004 and 2003. Pursuant to the terms of the planobligations, changes in medical cost trend rates have no financial impact on theactuarial valuation as the cost of the benefit to the participant has exceededthe Company’s commitment. At December 31, 2005, there is a $364,000unrecognized gain related to changes in actuarial assumptions. This gain willbe amortized over three years.

 

Since the December 2000 approval of the Plan of Reorganization,the Company has been negotiating with the Delaware Bankruptcy Court-appointedOfficial Committee of Retirees (OCR) to design and implement a benefits fundingplan that would provide for all retiree benefit obligations going forward. Asof March 20, 2006, no agreement had been reached on such a plan.

 

The Bankruptcy Court has scheduled a hearing for April 12, 2006 todecide the various issues relating to a retiree benefit plan including the administrativemechanism to be employed to provide the benefits, the costs to administer suchmechanism, and the discount rate which should be used to determine the presentvalue of the future benefits and administrative costs. The OCR and the Companyhave been directed to file documents reflecting their respective views on orbefore March 31, 2006. Under proposals of the OCR, the Company couldpotentially incur high administrative costs, up to $3.0 million, to establish aVoluntary Employers’ Beneficiary Association (“VEBA”) to administer thesebenefits. Such administrative costs would be in addition to the cost ofproviding the promised benefits. In addition, the OCR has proposed use of adiscount rate which the Company believes to be unreasonably low. The Companywill request the Court to approve a less costly mechanism to fully underwriteall retiree benefits and use a somewhat higher, market based discount rate. Atthis point, it is not possible to

 

F-16

----

 

predict the ultimate outcome of this matter. However, during 2005 theCompany increased the post retirement plan benefit obligation by $700,000 toallow for the possibility of having to provide for the future administrativecosts.

 

14.                                 Benefits and Compensation Plans

 

The Company sponsors a 401(k) Plan thatallows employees to defer portions of their salary, subject to certainlimitations. Total expense for this plan for the years ended December 31,2005, 2004 and 2003 was $27,000, $14,000 and $177,000, respectively.

 

15.                                 Related partytransactions

 

At December 31, 2005 and 2004, the Company hadan outstanding receivable from Kaiser-Hill totaling $87,500 and $0 consistingof billings for contracted services.

 

At December 31, 2005 and 2004, the Company hasinvested funds in certificates of deposit at a financial institution where oneof the Company’s directors serves on the board. The certificates of depositstotal $3.0 million and $2.0 million at December 31, 2005 and 2004,respectively. The certificates of deposit bear a market rate of interest.

 

16.                                 Other Contingencies

 

The Company has various obligations and liabilities from its continuingoperations, including general overhead expenses in connection with maintaining,operating and winding down the various entities and net assets comprising theCompany. Additionally, the Company believes contingent liabilities may existin the following areas:

 

Nova Hut

 

Although Old Kaiser sold its Metals Mining and Industry business unitin August 2000, it retained its Netherlands subsidiary, KaiserNetherlands, B.V., which had been responsible for a turnkey engineering andconstruction services contract for the construction of a steel mini-mill in theCzech Republic for Nova Hut. After construction of the mini-mill was completein 2000, the contract with Nova Hut provided for a maximum of three possibleperformance tests. The first performance test was completed on November 13,2000. Kaiser Netherlands believes that the first performance test wassuccessful and that Nova Hut should have agreed to final acceptance of themini-mill and made final payment of amounts accrued by Kaiser Netherlandsthroughout the project, including fee and retention amounts with release ofperformance guarantee instruments. Nova Hut, however, asserted that the firsttest was not successful. Kaiser Netherlands believes that such contention may havebeen put forth in response to severe financial constraints on Nova Hut’soperations resulting from weakening conditions in the worldwide steel marketand the significant amounts that Kaiser Netherlands believed it wascontractually due. As of March 20, 2006, this dispute has not beenresolved, and Kaiser Netherlands continues to pursue legal action to enforceits rights. During 2001 to 2005, the primary legal venue of this dispute hadbeen the Delaware bankruptcy proceeding for Old Kaiser, where the Company hasasserted claims against Nova Hut and the International Finance Corporation (“IFC”).The Delaware bankruptcy court had previously ruled that the Company, as opposedto Kaiser Netherlands, could proceed with prosecution of its specific claimsagainst Nova Hut and IFC in the Delaware bankruptcy court venue. Both Nova Hutand IFC appealed this ruling and, during the first quarter 2004, the Delawarebankruptcy court’s decision regarding the IFC was overturned by the DistrictCourt, ruling that the IFC enjoys sovereign immunity from prosecution. TheCompany filed an appeal with the U.S. Court of Appeals for the Third Circuitregarding this decision in favor of the IFC and, on February 25, 2005, theThird Circuit overturned the District Court’s decision. The IFC’s request for arehearing of the case by the Third Circuit was refused. The IFC then petitionedthe Delaware bankruptcy court to stay proceedings pending completion of theKaiser Netherlands-Nova Hut arbitration proceeding discussed below. This IFCmotion was granted. With regard to the Nova Hut appeal, the District Court hasruled that U.S. bankruptcy proceedings should also be stayed pending completionof arbitration proceedings.

 

In January 2004, Kaiser Netherlands filed arbitration claimsagainst Nova Hut in the amount of $51.1 million with the ICC, In November 2004,Kaiser Netherlands’ claim against Nova Hut was amended to include late interestand other charges and now totals $67.5 million. The arbitration panel has beenconstituted, and a hearing was held in September. At present, we do not expecta decision to be issued until the second quarter of 2006. Nova Hut hassubmitted a $49.7 million counterclaim against Kaiser Netherlands in these sameICC proceedings.

 

In December 2003,the ICC, under the dispute resolution provisions of the Nova Hut mini-millsubcontract between Kaiser Netherlands and the mini-mill’s main equipmentsupplier, Tippins, Inc., issued a final award that was on balancefavorable to Kaiser Netherlands. As a result of the ruling, Kaiser Netherlandswas relieved of the obligation to pay additional retention to

 

F-17

----

 

Tippins, and KaiserNetherlands was awarded a net cash settlement of $2.6 million. The Company hasnot recorded this award due to the uncertainties regarding collectibility. However,the Company intends to vigorously pursue collection of this award.

 

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

 

Kaiser-Hill****

 

On October 13, 2005, Kaiser-Hill declared physical completion ofthe cleanup and closure of the DOE’s Rock Flats site and in December 2005,DOE affirmed Kaiser-Hill’s declaration as required under the Closure Contract. UnderKaiser-Hill’s contract with the DOE, Kaiser-Hill is not responsible for, andthe DOE pays all costs associated with, any liability, including, withoutlimitation, any claims involving strict or absolute liability and any civilfine or penalty, expense, or remediation cost, but limited to those of a civilnature, which may be incurred by, imposed on, or asserted againstKaiser-Hill arising out of any act or failure to act, condition, or exposurewhich occurred before Kaiser-Hill assumed responsibility on July 1, 1995(pre-existing conditions). To the extent the acts or omissions of Kaiser-Hillconstitute willful misconduct, lack of good faith, or failure to exerciseprudent business judgment on the part of Kaiser-Hill’s managerialpersonnel and cause or add to any liability, expense, or remediation costresulting from pre-existing conditions, Kaiser-Hill is responsible, but onlyfor the incremental liability, expense, or remediation caused by Kaiser-Hill.

 

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

 

As the contract between Kaiser-Hill and the DOE is cost-reimbursable innature, the costs invoiced by Kaiser-Hill for reimbursement by the DOE aresubject to audit by the U.S. government. Also since the inception ofKaiser-Hill, the Company invoiced certain management oversight costs toKaiser-Hill. Government audits at Kaiser-Hill are ongoing. Although Kaiser-Hilland the Company have historically provided for their estimates of disallowedcosts on cost-reimbursable contracts, uncertainties exist with regard towhether government audits will result in any disallowed costs needing to berefunded to the government customer. The continued adequacy of provisions forreserves with regard to unallowable costs is reviewed regularly.

 

In 2006, Kaiser-Hill received from the DOE a payment representingsubstantially all remaining amounts due to Kaiser-Hill under the terms andconditions of the agreement. Kaiser-Hillmay receive up to an additional $5.0 million from the DOE, which waswithheld from this last fee payment for possible contract contingencies, asmentioned above. The Company expects that this $5.0 million will be released byDOE during the first half of 2006. Additionally, Kaiser-Hill has withheld $17.3million in cash from distribution until administrative issues associated withcertain Kaiser-Hill employee pension and post-retirement benefits, as well asfurther administrative contract closeout issues, are clarified with the DOE. TheCompany expects to receive its 50% share of any distribution of such funds byKaiser-Hill.

 

Post-Retirement Benefit Plan Obligation 

 

In accordance with the terms and provisions of the Plan ofReorganization for Old Kaiser, the Company remains obligated to continue tofulfill the provisions of Old Kaiser’s previously curtailed benefits plan,which provides certain medical and death benefits to a group of retirees. Allof the benefit derived from the plan is fully covered by the Company’sself-insurance. With respect to the retirees covered by the medical and deathself-insured plan, the benefits are funded to a claims administrator asparticipants’ insurance claims are reimbursed.

 

No new participants can be added to the plan. The net present value benefitobligation as of December 31, 2005, was $6.9 million. This amount willcontinue to decrease as the population of covered participants declines for thepurposes of medical benefits and as death benefits are paid out.

 

Since the December 2000 approval of the reorganization plan, theCompany has been negotiating with the Delaware Bankruptcy Court-appointedOfficial Committee of Retirees (OCR) to design and implement a benefits fundingplan that would provide for all retiree benefit obligations going forward. Asof March 20, 2006, no agreement had been reached on such a plan.

 

F-18

----

 

The Bankruptcy Court has scheduled a hearing for April 12, 2006 todecide the various issues relating to a retiree benefit plan including theadministrative mechanism to be employed to provide the benefits, the costs toadminister such mechanism, and the discount rate which should be used todetermine the present value of the future benefits and administrative costs. TheOCR and the Company have been directed to file documents reflecting theirrespective views on or before March 31, 2006. Under proposals of the OCR,the Company could potentially incur high administrative costs, up to $3.0million, to establish a VEBA to administer these benefits. Such administrativecosts would be in addition to the cost of providing the promised benefits. Inaddition, the OCR has proposed use of a discount rate which the Companybelieves to be unreasonably low. The Company will request the Court to approvea less costly mechanism to fully underwrite all retiree benefits and use asomewhat higher, market based discount rate. At this point, it is not possibleto predict the ultimate outcome of this matter.

 

17.                                 SelectedQuarterly Financial Information (Unaudited)

 

For the yearended December 31, 2005:

 
| ** **                                          | ** ** | **Fourth Quarter** | ** ** | **Third Quarter** | ** ** | **Second Quarter** | ** ** | **First Quarter** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|
|                                                |       |                    |       |                   |       |                    |       |                   |       |
| Revenues                                            |       | 262                     |       | 528                    |       | 497                     |       | 520                    |       |
| Operating  Income (Loss)                            |       | (2,057                  | )          | (6,986                 | )          | (1,236                  | )          | (984                   | )          |
| Income from continuing operations before income tax |       | 7,434                   |       | 64,342                 |       | 2,713                   |       | 2,968                  |       |
| Income from  continuing operations                  |       | 4,672                   |       | 37,506                 |       | 1,464                   |       | 1,650                  |       |
| Net income                                          |       | 4,672                   |       | 37,506                 |       | 1,464                   |       | 1,650                  |       |
| Net Income  Applicable to Common Shareholders       |       | 4,672                   |       | 37,506                 |       | 1,464                   |       | 1,650                  |       |
|                                                |       |                    |       |                   |       |                    |       |                   |       |
| Basic and  Diluted Earnings Per Common Share:       |       |                    |       |                   |       |                    |       |                   |       |
| Continuing  operations, net of tax                  |       | $                       | 2.82       |                   | $          | 23.25                   |       | $                      | 0.91       |   | $ | 1.02 |   |
| Net Earnings  Per Common Share                      |       | $                       | 2.82       |                   | $          | 23.25                   |       | $                      | 0.91       |   | $ | 1.02 |   |

 

For the year ended December 31, 2004:

 
| ** **                                          | ** ** | **Fourth Quarter** | ** ** | **Third Quarter** | ** ** | **Second Quarter** | ** ** | **First Quarter** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|
|                                                |       |                    |       |                   |       |                    |       |                   |       |
| Revenues                                            |       | 524                     |       | 512                    |       | —                  |       | —                 |       |
| Operating  Income (Loss)                            |       | (1,043                  | )          | (860                   | )          | (1,816                  | )          | (2,645                 | )          |
| Income from continuing operations before income tax |       | 2,583                   |       | 3,109                  |       | 2,149                   |       | 1,269                  |       |
| Income from  continuing operations                  |       | 3,976                   |       | 1,724                  |       | 1,154                   |       | 521                    |       |
| Net income                                          |       | 3,976                   |       | 1,724                  |       | 1,154                   |       | 521                    |       |
| Net Income  Applicable to Common Shareholders       |       | 3,976                   |       | 1,724                  |       | 1,154                   |       | 521                    |       |
|                                                |       |                    |       |                   |       |                    |       |                   |       |
| Basic and  Diluted Earnings Per Common Share:       |       |                    |       |                   |       |                    |       |                   |       |
| Continuing  operations, net of tax                  |       | $                       | 2.47       |                   | $          | 1.07                    |       | $                      | 0.72       |   | $ | 0.33 |   |
| Net Earnings  Per Common Share                      |       | $                       | 2.47       |                   | $          | 1.07                    |       | $                      | 0.72       |   | $ | 0.33 |   |

 

The results of operations include the effects of the followingnon-recurring and unusual items:

 

2004:  In the fourth quarter of2004, income from continuing operations was favorably impacted by income taxcredits and adjustments to subsidiary taxable income.

 

F-19

----

 

**KAISER-HILLCOMPANY, LLCAND SUBSIDIARY**

** **

ConsolidatedFinancial Statements

 

December 31,2005 and 2004

 

(WithIndependent Auditors’ Report Thereon)

 

F-20

----

 

**IndependentAuditors’ Report**

** **

The MembersKaiser-Hill Company, LLC:

 

Wehave audited the accompanying consolidated balance sheets of Kaiser-HillCompany, LLC and subsidiary (the Company) as of December 31, 2005 and2004, and the related consolidated statements of income, members’ equity, andcash flows for each of the years in the three-year period ended December 31,2005. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of Kaiser-Hill Company, LLC and subsidiary asof December 31, 2005 and 2004, and the results of their operations andtheir cash flows for each of the years in the three-year period ended December 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

**KPMG LLP**

 

February 10, 2006

 

F-21

----

 

**KAISER-HILLCOMPANY, LLC**

**ANDSUBSIDIARY**

 

Consolidated Balance Sheets

 

December 31, 2005 and2004

 

(Dollars in thousands)

 
| **Assets**                                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                 |       |     |       |     |       |
| ** **                                                                                 |       |     |       |     |       |
| Current  assets:                                                                           |       |     |       |     |       |
| Cash and  cash equivalents                                                                 |       | $        | 3,728      |     | $          | 14,740 |   |
| Current  portion of unbilled contract receivables                                          |       | 41,073   |       | 101,327  |       |
| Billed  contract receivable                                                                |       | 250,211  |       | —   |       |
| Receivable  from Members                                                                   |       | 733      |       | 1,483    |       |
| Due from  employees                                                                        |       | —   |       | 3        |       |
| Prepaid  expenses and other current assets                                                 |       | 458      |       | 458      |       |
|                                                                                       |       |     |       |     |       |
| Total  current assets                                                                      |       | 296,203  |       | 118,011  |       |
|                                                                                       |       |     |       |     |       |
| Unbilled  contract receivables, net of current portion                                     |       | —   |       | 131,768  |       |
| Prepaid  expenses, long-term                                                               |       | —   |       | 376      |       |
| Deferred  financing costs, net of accumulated amortization of $525 and $445,  respectively |       | —   |       | 80       |       |
|                                                                                       |       |     |       |     |       |
|                                                                                       |       | $        | 296,203    |     | $          | 250,235 |   |
|                                                                                       |       |     |       |     |       |
| **Liabilities  and Members’ Equity**                                                  |       |     |       |     |       |
| ** **                                                                                 |       |     |       |     |       |
| Current  liabilities:                                                                      |       |     |       |     |       |
| Accounts  payable and payables to subcontractors                                           |       | $        | 45,688     |     | $          | 83,667 |   |
| Current  borrowings under credit facility                                                  |       | 3,000    |       | —   |       |
| Current  portion of employee incentive plan                                                |       | 68,469   |       | 11,031   |       |
| Accrued  vacation                                                                          |       | —   |       | 9,806    |       |
| Accrued  salaries and employee benefits                                                    |       | 4,050    |       | 6,541    |       |
| Payable to  Members                                                                        |       | 376      |       | 2,564    |       |
| Total  current liabilities                                                                 |       | 121,583  |       | 113,609  |       |
|                                                                                       |       |     |       |     |       |
| Employee  incentive plan, net of current portion                                           |       | —   |       | 66,134   |       |
|                                                                                       |       |     |       |     |       |
|                                                                                       |       | 121,583  |       | 179,743  |       |
|                                                                                       |       |     |       |     |       |
| Contingencies  (note 7)                                                                    |       |     |       |     |       |
|                                                                                       |       |     |       |     |       |
| Members’  equity                                                                      |       | 174,620  |       | 70,492   |       |
|                                                                                       |       |     |       |     |       |
|                                                                                       |       | $        | 296,203    |     | $          | 250,235 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-22

----

 

**KAISER-HILLCOMPANY, LLC**

**ANDSUBSIDIARY**

 

Consolidated Statements of Income

 

Years ended December 31, 2005, 2004, and2003

 

(Dollars in thousands)

 
| ** **                                     | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross  revenue                                 |       | $          | 701,693    |       | $          | 651,851    |       | $ | 712,270 |   |
| Subcontractor  costs and direct material costs |       | (313,182   | )          | (377,649   | )          | (379,215   | )          |
|                                           |       |       |       |       |       |       |       |
| Service  revenue                               |       | 388,511    |       | 274,202    |       | 333,055    |       |
|                                           |       |       |       |       |       |       |       |
| Direct cost  of service and overhead           |       | (197,117   | )          | (233,574   | )          | (293,056   | )          |
|                                           |       |       |       |       |       |       |       |
| Operating  income                              |       | 191,394    |       | 40,628     |       | 39,999     |       |
|                                           |       |       |       |       |       |       |       |
| Other income  (expense):                       |       |       |       |       |       |       |       |
| Interest  income                               |       | 309        |       | 132        |       | 113        |       |
| Interest  expense                              |       | (275       | )          | (100       | )          | (114       | )          |
|                                           |       |       |       |       |       |       |       |
| Net income                                     |       | $          | 191,428    |       | $          | 40,660     |       | $ | 39,998 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-23

----

 

**KAISER-HILLCOMPANY, LLC**

**ANDSUBSIDIARY**

 

Consolidated Statements of Members’ Equity

 

Years ended December 31, 2005, 2004, and2003

 

(Dollars in thousands)

 
| ** **                                    | ** ** | ** **              | ** ** | **CH2M HILL** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|--------------------|------------|------------|------------|
| ** **                                    | ** ** | **Kaiser KH**      | ** ** | **Constructors,**  | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Holdings, Inc.** | ** ** | **Inc.**           | ** ** | **Total**  | ** ** |
| ** **                                    | ** ** | ** **              | ** ** | ** **         | ** ** | ** ** | ** ** |
| Members’  equity, December 31, 2002 |       | $                       | 28,767     |               | $          | 28,767     |       | $ | 57,534 |   |
|                                          |       |                    |       |               |       |       |       |
| Net income                                    |       | 19,999                  |       | 19,999             |       | 39,998     |       |
| Distributions                                 |       | (16,350                 | )          | (16,350            | )          | (32,700    | )          |
|                                          |       |                    |       |               |       |       |       |
| Members’  equity, December 31, 2003 |       | 32,416                  |       | 32,416             |       | 64,832     |       |
|                                          |       |                    |       |               |       |       |       |
| Net income                                    |       | 20,330                  |       | 20,330             |       | 40,660     |       |
| Distributions                                 |       | (17,500                 | )          | (17,500            | )          | (35,000    | )          |
|                                          |       |                    |       |               |       |       |       |
| Members’  equity, December 31, 2004 |       | 35,246                  |       | 35,246             |       | 70,492     |       |
|                                          |       |                    |       |               |       |       |       |
| Net income                                    |       | 95,714                  |       | 95,714             |       | 191,428    |       |
| Distributions                                 |       | (43,650                 | )          | (43,650            | )          | (87,300    | )          |
|                                          |       |                    |       |               |       |       |       |
| Members’  equity, December 31, 2005 |       | $                       | 87,310     |               | $          | 87,310     |       | $ | 174,620 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-24

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**KAISER-HILLCOMPANY, LLC**

**ANDSUBSIDIARY**

 

Consolidated Statements of Cash Flows

 

Years ended December 31, 2005, 2004, and2003

 

(Dollars in thousands)

 
| ** **                                                                         | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows  from operating activities:                                             |       |       |       |       |       |       |       |
| Net income                                                                         |       | $          | 191,428    |       | $          | 40,660     |       | $ | 39,998 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |       |       |       |       |       |       |
| Amortization  of deferred financing costs                                          |       | 80         |       | 88         |       | 86         |       |
| Changes in  assets and liabilities:                                                |       |       |       |       |       |       |       |
| Increase in  contract receivables                                                  |       | (58,189    | )          | (19,358    | )          | (37,927    | )          |
| Decrease  (increase) in receivable from Members                                    |       | 750        |       | (917       | )          | 3,050      |       |
| Decrease  (increase) in due from employees                                         |       | 3          |       | (3         | )          | 51         |       |
| Decrease  (increase) in prepaids and other current assets                          |       | —     |       | 21         |       | (29        | )          |
| Decrease in  long-term prepaids                                                    |       | 376        |       | 376        |       | 376        |       |
| (Decrease)  increase in accounts payable and payables to subcontractors            |       | (37,979    | )          | 2,469      |       | 6,282      |       |
| (Decrease)  increase in employee incentive plan                                    |       | (8,696     | )          | 9,351      |       | 28,576     |       |
| (Decrease)  in other accrued expenses                                              |       | (12,297    | )          | (1,010     | )          | (3,852     | )          |
| (Decrease)  increase in payable to Members                                         |       | (2,188     | )          | 1,350      |       | (3,269     | )          |
|                                                                               |       |       |       |       |       |       |       |
| Net cash  provided by operating activities                                         |       | 73,288     |       | 33,027     |       | 33,342     |       |
|                                                                               |       |       |       |       |       |       |       |
| Cash flows  from financing activities:                                             |       |       |       |       |       |       |       |
| Distributions  to Members                                                          |       | (87,300    | )          | (35,000    | )          | (32,700    | )          |
| Proceeds  from credit facility                                                     |       | 201,000    |       | 81,100     |       | 71,300     |       |
| Payments on  credit facility                                                       |       | (198,000   | )          | (81,100    | )          | (71,300    | )          |
|                                                                               |       |       |       |       |       |       |       |
| Net cash  used in financing activities                                             |       | (84,300    | )          | (35,000    | )          | (32,700    | )          |
|                                                                               |       |       |       |       |       |       |       |
| Net  (decrease) increase in cash and cash equivalents                              |       | (11,012    | )          | (1,973     | )          | 642        |       |
|                                                                               |       |       |       |       |       |       |       |
| Cash and  cash equivalents, beginning of year                                      |       | 14,740     |       | 16,713     |       | 16,071     |       |
|                                                                               |       |       |       |       |       |       |       |
| Cash and  cash equivalents, end of year                                            |       | $          | 3,728      |       | $          | 14,740     |       | $ | 16,713 |   |
|                                                                               |       |       |       |       |       |       |       |
| Supplemental  cash flow information:                                               |       |       |       |       |       |       |       |
|                                                                               |       |       |       |       |       |       |       |
| Cash paid  for interest                                                            |       | $          | 195        |       | $          | 12         |       | $ | 26 |   |

 

See accompanying notes toconsolidated financial statements.

 

F-25

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**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

Notes to Consolidated Financial Statements

 

December 31, 2005 and 2004

 

**Organization**

 

Kaiser-Hill Company, LLCand subsidiary (the Company) was formed on October 24, 1994. Theprincipal business of the Company is to procure, execute, deliver, and perform undera contract with the Department of Energy (DOE) to manage the programs andfacilities at Rocky Flats Environmental Technology Site (RFETS) in Golden,Colorado. The mission of the RFETS is directed toward cleanup, deactivation,and preparation for decontamination and disposition of these DOE facilities.

 

The Company is a limitedliability company owned equally by Kaiser KH Holdings, Inc., a whollyowned subsidiary of Kaiser Group Holdings, Inc. (formerly known as KaiserGroup International, Inc.) (Kaiser), and CH2M HILL Constructors, Inc.,an indirect wholly owned subsidiary of CH2M HILL Companies, Ltd.(CH2M HILL) (collectively the Members). Net profits and/or losses anddistributions thereof are allocated equally to the Members.

 

On January 24, 2000,the Company and the DOE entered into a new contract (the Contract)effective February 1, 2000 for the Rocky Flats Closure Project including,disposal of nuclear material, demolition of facilities, environmentalremediation, disposal of waste, and completion of infrastructure and othergeneral site operations.

 

On October 13, 2005,Kaiser-Hill completed the required work under the contract and issued itsformal “declaration of Physical Completion” to the DOE. On December 8,2005, the DOE issued its formal “acceptance” of the physical work at theproject and authorized Kaiser-Hill to invoice all remaining performance feesless a retained amount equaling $5 million. On January 11, 2006,Kaiser-Hill received payment for all fees except for the retained amount.

 

Kaiser-Hill now operatesunder the closeout phase of its contract with the DOE, primarily resolving openadministrative issues and providing support to the DOE to achieve regulatoryclosure of the site. None of the closeout work is fee bearing and has no impacton fees earned.

 

Effective December 31,2005, the Company terminated its remaining employees. Staff necessary to completecloseout activities will be subcontracted or provided by affiliated parentcompanies.

 

**Significant Accounting Policies**

** **

***Principles ofConsolidation***

*** ***

The consolidatedfinancial statements include the Company and its wholly owned subsidiary,Kaiser-Hill Funding Company, LLC. All intercompany accounts and transactionshave been eliminated in the consolidated financial statements.

 

***RevenueRecognition***

*** ***

Under the Contract,revenue is recognized using the percentage-of-completion method whereby revenueis accrued in an amount equal to cost plus management’s best estimate ofincentive fees. During 2005, resulting from completion of the project,Kaiser-Hill recognized all remaining performance fees under the contract andhas established reserves for certain risks and uncertainties associated withthe Contract.

 

F-26

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***Statements of CashFlows***

*** ***

For purposes of theconsolidated statements of cash flows, the Company considers cash and short-terminvestments with original maturities of three months or less to be cash andcash equivalents.

 

The Company maintains itscash accounts primarily with banks located in Colorado, New York, andWashington, D.C. Cash balances are insured by the FDIC up to $100,000 per bank,and cash equivalents are not insured by the FDIC. As of December 31, 2005,the majority of the balance was made up of cash equivalents.

 

***Income Taxes***

*** ***

No provision for thepayment of income taxes has been made in the accompanying consolidatedfinancial statements related to the activities of the Company since the Memberseach report their share of the Company’s taxable income in their respectiveindividual income tax return.

 

***Use of Estimates***

*** ***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of financial statementsand the reported amounts of revenue and expenses during the reporting period.Actual results could differ from those estimates.

 

**Related-Party Transactions**

** **

In 2005 and 2004, theMembers were subcontracted by the Company to perform certain tasks underthe Contract. The “Payable to Members” in the accompanying consolidated balancesheets as of December 31, 2005 and 2004 consists of $87,500 and $0,respectively, to Kaiser and $288,600 and $2,564,000, respectively, to CH2M HILLfor these subcontracted tasks. These payables are noninterest bearing.

 

During 2003, CH2M HILLbegan providing information technology services for the Company at negotiatedrates. Costs incurred related to work performed by CH2M HILL, the majority ofwhich are reimbursable and billed under the Contract and relate to informationtechnology services provided, were approximately $9,751,000 in 2005,$10,869,000 in 2004, and $10,652,000 in 2003.

 

In addition, the Companyperformed approximately $3,597,000 and $3,999,000 of services on behalf of CH2MHILL during 2005 and 2004, respectively.

 

**Contract Receivables**

** **

Contract receivables asof December 31, 2005 represent both billed and unbilled receivables dueunder the Contract. Unbilled receivables result from revenue and estimated feesthat have been earned by the Company but not billed to the DOE as of the end ofthe period. Unbilled receivables can be invoiced at contractually definedintervals and milestones. Management anticipates that the current portion ofunbilled receivables will be billed and collected in less than one year.Current unbilled receivables primarily

 

F-27

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represent allowablecosts, including subcontractor costs that have not been submitted to the DOEfor payment. These costs cannot be invoiced to the DOE until payment has beenmade by the Company to the vendor.

 

As of December 31,2005 and 2004, the Company reported $250.2 million and $0, respectively, ofbilled receivable and $0 and $131.8 million, respectively, of long-termunbilled receivables, all of which represent incentive fee under the Contract.In addition, the Company has current unbilled receivables of $41.0 million and$101.3 million as of December 31, 2005 and 2004, respectively. Thisis comprised of $5 million and $8.1 million, respectively, of incentivefees and $36 million and $93.2 million, respectively, of directreimbursable costs under the Contract. All of these amounts are expected to bebilled in early 2006.

 

The Company’s Contractreceivables result primarily from its long-term Contract with the DOE. As aconsequence, management believes that credit risk is minimal.

 

**Employee Incentive Plan**

** **

In connection with theclosure Contract with the DOE, the Company implemented a salaried employeeincentive plan. There are two components to the plan. The first componentrepresents a cash bonus, which is earned and paid annually. The secondcomponent represents the issuance of performance units. These units areallocated to employees on an annual basis. The value of these units ultimatelydepended on the actual cost incurred for under the Contract. Employees remainedeligible for these units as long as they are employed by the Company or left ingood standing, as defined. Payments made for performance units will be paid incash at the end of the Contract.

 

As of December 31,2005, the Company has 62,892,104 performance units outstanding, and theestimated value to be paid is accrued as employer incentive plan liability. Dueto DOE’s acceptance of physical completion of the Contract, the payments of themajority of the unit bonuses will be made to employees in 2006. The associatedaccrual for these payments is classified as a short-term employee incentiveplan liability in the accompanying consolidated balance sheets.

 

Additionally, the Companyhas accrued $3.7 million for an enhanced schedule incentive payableto the hourly employees represented by United Steel Workers of America underthe collective bargaining agreement. This payment will also be made in 2006 andis also classified as a short-term liability in the accompanying consolidatedbalance sheets.

 

**Business Loan and Security Agreement**

** **

The Company currently hasa Business Loan and Security Agreement (the Agreement) with a bank. Theterm of the Agreement, as modified on December 23, 2005, expires on June 30,2006. The Company, Kaiser, and CH2M HILL granted a first lien security interestto the bank in all of the ownership and equity interest of the Company. As of December 31,2005 and 2004, the Company had $3,000,000 and $0, respectively, outstandingunder the Agreement.

 

Under the modifiedAgreement, the Company has available financing for the payment of the Company’scosts incurred under the Contract. This financing is utilized throughout theyear for periods of less than one month as, under the terms of the Contract,the DOE must pay the Company’s invoices within three

 

F-28

----

 

business days of receipt.The funding level under the Agreement cannot exceed a maximum borrowing basecalculated on the lesser of eligible billed and unbilled government accountsreceivable, as defined, or $20,000,000. Under the terms of the Agreement,interest on the advances is calculated either under a rate based upon LIBOR ora rate based upon the higher of the Federal Funds Rate or the Prime Rate.

 

In connection with theAgreement, the Company incurred $525,000 in loan origination fees, which werecapitalized as deferred financing costs and have been amortized to interestexpense over the life of the Agreement.

 

The Agreement alsocontains various financial covenants, including tangible net worth, fixedcharge ratio, and minimum cash balances requirements, among other restrictions.The Company was in compliance with all restrictive covenants at December 31,2005.

 

**Contingencies**

** **

The Company’sreimbursable costs are subject to audit in the ordinary course of business byvarious U.S. government agencies. Management is not presently aware of anysignificant costs, which have been, or may be, disallowed by any of theseagencies.

 

**Employee Benefit Plans**

** **

In accordance with theContract, the Company participates in several multiple employer benefit planscovering substantially all employees who meet length of service requirements.These plans include two defined benefit pension plan and three definedcontribution plans, the latter of which provide for Company matchingcontributions. The Company contribution amounts for the defined contributionplans were approximately $450,000 and $1,070,000 for 2005 and 2004,respectively. During 2005 and 2004, the Company made combined contributions tothe defined benefit pension plans of $36,034,000 and $4,842,000, respectively.No amounts were contributed to the defined pension benefit plan during 2003 becausethe current level of funding did not require contributions to be made.

 

The Company administersthese benefit plans with benefits equivalent to the RFETS contractor benefitplans maintained by the contractor that preceded the Company at RFETS. Underthe Contract, the Company recognizes the cost of benefit plans when paid, andsuch costs are reimbursed by the DOE. Any excess pension plan assets orunfunded pension plan liability that may currently exist or is remainingat the end of the DOE Contract accrues to or is the responsibility of the DOE.Kaiser-Hill is currently awaiting direction from DOE regarding transfer ofsponsorship and administration of these plans to other parties.

 

F-29

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### **Reportof Independent Accountants on**

### **FinancialStatement Schedule**

### ** **

To Board of Directors and

Shareholders of Kaiser Group Holdings, Inc.

 

Our auditsof the consolidated financial statements referred to in our report dated March 20,2006 appearing in the 2005 Annual Report to Shareholders of Kaiser GroupHoldings, Inc. (which report and consolidated financial statements areincorporated by reference in this Annual Report on Form 10-K) alsoincluded an audit of the financial statement schedule listed in Item 15(a)(2) ofthis Form 10-K. In our opinion, this financial statement schedule presentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements.

 

PricewaterhouseCoopersLLP

 

March 20, 2006

McLean,Virginia

 

S-1

----

 

**SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS**

 

**KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIES**

**(inthousands)**

 
| **Column A**                  | ** ** | **Column B**                              | ** ** | **Column C**                                            | ** ** | **Column D** | ** ** | **Column E** | ** ** | **Column F**                                 | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|---------------------------------------------------|------------|
| **Description**                    | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to Costs  and Expenses** | ** ** | **Other**         | ** ** | **Deductions**    | ** ** | **Balance at  the End of  Period** | ** ** |
|                               |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Year Ended December 31,  2005 |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Deducted  from asset account:      |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Allowance  for doubtful accounts   |       | $                                              | 548        |                                                         | $          | —            |       | $                 | (548       | )(2)                                              | $          | — |   | $ | — |   |
|                               |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Discontinued  operations           |       | 23,048                                         |       | 1,302                                                        |       | —            |       | —            |       | $                                                 | 24,350     |   |
|                               |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
|                               |       | $                                              | 23,596     |                                                         | $          | 1,302             |       | $                 | —     |                                              | $          | — |   | $ | 24,350 |   |
|                               |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Year Ended December 31,  2004 |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Deducted  from asset account:      |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Allowance  for doubtful accounts   |       | $                                              | 548        |                                                         | $          | —            |       | $                 | —     |                                              | $          | — |   | $ | 548 |   |
|                               |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Discontinued  operations           |       | 23,595                                         |       | —                                                       |       | —            |       | (547              | )          | 23,048                                            |       |
|                               |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
|                               |       | $                                              | 24,143     |                                                         | $          | —            |       | $                 | —     |                                              | $          | (547 | ) | $ | 23,596 |   |
|                               |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Year Ended December 31,  2003 |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Deducted  from asset account:      |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Allowance  for doubtful accounts   |       | $                                              | 548        |                                                         | $          | —            |       | $                 | —     |                                              | $          | — |   | $ | 548 |   |
|                               |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
| Discontinued  operations           |       | 17,253                                         |       | 3,000                                                        |       | 3,342             | (1)        | —            |       | 23,595                                            |       |
|                               |       |                                           |       |                                                         |       |              |       |              |       |                                              |       |
|                               |       | $                                              | 17,801     |                                                         | $          | 3,000             |       | $                 | 3,342      |                                              | $          | — |   | $ | 24,143 |   |

 

----

(1)  Reflects reclassified additions to reserves.

 

(2) Reflects the reversal of thereserve.

 

S-2

----