**UNITEDSTATES**

##### **SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

**Form 10-K**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscalyear ended December 31, 2004**

 

**Commission File No. 1-12248**

 

**KAISERGROUP HOLDINGS, INC.**

**(successor issuer to Kaiser GroupInternational, Inc.)**

(Exact name of registrant as specified in itscharter)

 

**Delaware**

(State or other 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 telephonenumber including area code: **(703) 934-3413**

 

Name of each exchange on which registered:

**None**

 

Securities registeredpursuant to Section 12(b) of the Act:

**None**

 

Securities registeredpursuant to Section 12(g) of the Act:

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   ý

 

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

 

Theaggregate market value of the voting and non-voting common equity held bynon-affiliates, based on the closing sales price of the Common Stock on theOver-the-Counter Bulletin Board on June 30, 2004, was $12,663,893.  For purposes of this computation, allofficers, directors, and 5 percent beneficial owners of the registrant (asindicated in Item 12) are deemed to be affiliates.  Such determination should not be deemed anadmission that such directors, officers, or 5 percent beneficial owners are, infact, affiliates of the registrant.

 

**APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGSDURING THE PRECEDING FIVE YEARS:**

 

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

 

ThePlan of Reorganization of Kaiser Group International, Inc. under Chapter11 of the Bankruptcy Code became effective on December 18, 2000.  The Plan provides, among other things, thatholders of shares of common stock of Kaiser Group International, Inc.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.

 

Asof March 23, 2005, there were 1,598,270 shares of Common Stockoutstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portionsof the Registrant’s definitive proxy statement to be prepared in connectionwith the 2005 Annual Meeting of Shareholders are incorporated by reference intoPart III of this Annual Report on Form 10-K.

 

 

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**TABLE OFCONTENTS**

 
|      | **PART I**                                                                             |   |
|-----------|---------------------------------------------------------------------------------------------|--------|
|      |                                                                                        |   |
| Item 1.   | Business                                                                                    |   |
| 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                 |   |
| 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  and Financial Statement Schedules                                                 |   |
|      |                                                                                        |   |
|      | Signatures                                                                                  |   |

 

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**PART I**

 

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

 

**CorporateHistory; Overview**

 

KaiserGroup Holdings, Inc. is a Delaware holding company formed on December 6,2000 for the purpose of owning all of the outstanding stock of Kaiser GroupInternational, Inc.  Kaiser GroupInternational, Inc. continues to own the stock of its remainingsubsidiaries.  On June 9, 2000,Kaiser Group International, Inc. and 38 of its domestic subsidiariesvoluntarily filed for protection under Chapter 11 of the United StatesBankruptcy Code in the District of Delaware (case nos. 00-2263 to 00-2301).Kaiser Group International, Inc. emerged from bankruptcy with a confirmedPlan of Reorganization (the Second Amended Plan of Reorganization (the “Plan”))that was effective on December 18, 2000. In this document, we frequently use the terms “we” and “Kaiser” to referto Kaiser Group Holdings, Inc., Kaiser Group International, Inc. andother subsidiaries we own.

 

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

 

•                  We own Kaiser-Hill Company, LLCequally with CH2M Hill Companies Ltd. Kaiser-Hill is our major source of income.  Kaiser-Hill currently serves as the generalcontractor at the U.S. Department of Energy’s (“DOE” or “Department of Energy”)Rocky Flats site.  Kaiser-Hill hasperformed for the Department of Energy at this site since 1995 and in January 2000was awarded a new contract to manage the closure of the site (the “ClosureContract”).  The level of successexperienced by Kaiser-Hill in achieving timely closure of the Rocky Flats site,and the cost of achieving such closure, have been and continue to be theprimary determinants of our long-term financial performance following thecompletion of the reorganization process. See “Kaiser-Hill” below for additional information on Kaiser-Hill.

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

•                  Until September 30, 2002 we held a minorityownership interest in ICF Consulting Group, Inc. (a division that KaiserGroup International, Inc. sold in 1999). We continue to hold an 81⁄2% subordinated promissory note from ICFConsulting due June 25, 2006 in the principal amount of $6.4 million as aresult of that transaction.

•                  We own a captive insurance company that has not beenissuing new policies and has solely been involved in resolving remaining claimsmade against previously issued policies. However, in the fourth quarter of 2004, we received regulatory approvaland finalized the formation documents of a sponsored captive subsidiary, MSBuilders Insurance Company, to enable our wholly-owned captive insurancecompany to offer derivative captive insurance services to third party clients.  As of March 23, 2005, no new policieshave been written.

•                  Wehave an ongoing obligation to fund a capped post-employment medical benefitplan 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 Company, LLC.  KAMS provides analytical management servicessuch as sample planning, sample management, records management, performanceassessment and data management in the general areas of health and safety,geotechnical, environmental and waste management, and deactivation anddecommissioning.  See “Kaiser AnalyticalManagement Services, Inc.” below for additional information.

 

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

** **

The effectiveness of thePlan as of December 18, 2000 did not in and of itself complete thebankruptcy process.  The process ofresolving in excess of $500 million of claims initially filed in the bankruptcyis ongoing.  By far the largest class ofclaims (“Class 4”) was made up of creditor claims other than tradecreditor and equity claims. Class 4 claims included holders of KaiserGroup International, Inc.’s senior subordinated notes due 2003 (“OldSubordinated Notes”). Holders of allowed Class 4 claims received acombination of cash and our preferred (“New Preferred”) and common stock (“NewCommon”) in respect of their claims. Such holders received one share of NewPreferred and one share of New Common for each $100 of claims. However, thenumber of shares of New Preferred issued was reduced by one share for each$55.00 of cash received by the holder of an allowed Class 4 claim.

 

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Pursuant to the terms of the Plan, we were required to complete ourinitial bankruptcy distribution within 120 days of the effective date of thePlan.  Accordingly, on April 17,2001, we effected our initial distribution of cash, New Preferred and NewCommon to holders of Class 4 claims allowed by the Bankruptcy Court.  At that time, there were approximately $136.8million of allowed Class 4 claims. The amount of unresolved claims remaining at April 17, 2001 wasapproximately $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 we produce limitedsupporting data relative to their respective positions and engage in initialnegotiation efforts in an attempt to reach an agreed claim determination.  If necessary, the parties were thereafterrequired to participate in a non-binding mediation before a mediatorpre-selected by the Bankruptcy Court. All unresolved claims as of March 27, 2001 became subject to theADR process. Since April 17, 2001, the date of the initial distribution,$126.0 million of asserted claims have been withdrawn, negotiated or mediatedto an agreed amount, resulting in cash payments approximating $2.6 million andissuances of 683 shares of New Preferred and 823 shares of New Common. As of March 23,2005, the amount of unresolved claims was approximately $4.5 million. We expectto resolve the remaining claims by the end of 2005 and currently believe thatthe total amount of Class 4 claims ultimately to be allowed in the OldKaiser bankruptcy proceeding will not exceed $142.0 million.  As demonstrated by the claim settlementscompleted since April 17, 2001, and based on the belief that it is in theCompany’s and its shareholders’ best interest, we have been settling certainremaining Class 4 claims entirely for cash payments in lieu of thecombination of cash and New Preferred and New Common as contemplated in thePlan.  We intend to continue to use thissettlement alternative during its resolution of remaining Class 4 claims.

 

In the first quarter of 2004, the Company recorded a $1.4 millionliability for future claim settlements based upon the Company’s estimate ofunresolved claims settlements.  During2004, $0.4 million was charged against this liability, leaving a remainingbalance of $1.0 million at December 31, 2004.

 

From time to time in the future, as remaining unresolved claims areresolved, excess cash from the “reserve” fund (including cash added to “reserve”fund in payment of pro forma dividends, classified as interest expensesubsequent to July 1, 2003, on retained shares of New Preferred) must beused to redeem outstanding shares of New Preferred.  As of March 23, 2005, we have redeemedthe following shares of New Preferred (in thousands except share amounts):

 

| **Date of  Redemption** | ** ** | **Use of  Unrestricted  Cash** | ** ** | **Use of  Reserve Fund  Cash** | ** ** | **Total  Amount of  Redemption** | ** ** | **Number of  Shares  Redeemed** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                    |       |                           |       |                           |       |                             |       |                            |       |
| 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                         |       |
|                         |            |                                |            |                                |            |                                  |            |                                 |            |  |  |  |

 

**Kaiser-Hill**

 

Our majorremaining asset and primary source of income is our 50% ownership interest inKaiser-Hill Company, LLC. Kaiser-Hill was formed solely for the performance of the current andformer Rocky Flats contracts.  CH2M Hill designates three of the five membersof Kaiser-Hill’s Board of Managers, and we designate two 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 since 1995 at this site, a formerDepartment of Energy nuclear weapons production facility.  Kaiser-Hill is working to safely stabilize,package and ship radioactive materials, remediate facilities contaminated withhazardous and radioactive waste, and restore much of the 6,000-acre siteto its natural state for future use as a national wildlife refuge.  The level of success experienced byKaiser-Hill in achieving timely closure of the Rocky Flats site, and the costof achieving such closure, are the primary determinants of our long-termfinancial performance.

 

EffectiveFebruary 1, 2000, Kaiser-Hill was awarded a new contract pursuant to whichKaiser-Hill provides services that will complete the restoration of the RockyFlats site and close it to Department of Energy occupation.  The economic terms of the contract providethat Kaiser-Hill will earn revenue equal to the actual cost of completing theproject plus a performance fee based on a combination of factors involving theactual cost of completing the site closure project and the actual date ofcompleting the project.

 

On March 24,2004 Kaiser-Hill received a contract modification that motivates safecontinuing positive performance by increasing the maximum fee ceiling that maybe earned under the Closure Contract. The same contract modification reduces

 

2

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theminimum fee floor and includes other provisions related to work scopechanges.  The total potential fee to beearned pursuant to the Closure Contract as recently 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 project costs saved below a target level,Kaiser-Hill retains a varying percentage share ranging from 20% to 30% asadditional incentive fee.  Similarly, forproject costs incurred above a target level, Kaiser-Hill’s incentive fee isreduced by a 30% share.  See Item 7. – “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” forfurther discussion of this activity.

 

**Nova Hut**

 

Although Old Kaiser soldits Metals Mining and Industry business unit in August 2000, it retainedits Netherlands subsidiary, Kaiser Netherlands, B.V., which had beenresponsible for a turnkey engineering and construction services contract forthe construction of a steel mini-mill in the Czech Republic for Nova Hut.  After construction of the mini-mill wascomplete in 2000, the contract with Nova Hut provided for a maximum of threepossible performance tests. The first performance test was completed on November 13,2000. Kaiser Netherlands believes that the first performance test was successfuland that Nova Hut should have agreed to final acceptance of the mini-mill andmade final payment of amounts accrued by Kaiser Netherlands throughout theproject, including fee and retention amounts with release of performanceguarantee instruments.  Nova Hut,however, asserted that the first test was not successful. Kaiser Netherlandsbelieves that such contention may have been put forth in response to severefinancial constraints on Nova Hut’s operations resulting from weakeningconditions in the worldwide steel market and the significant amounts thatKaiser Netherlands believed it was contractually due. To date, this dispute hasnot been resolved, and Kaiser Netherlands has resorted to legal proceedings toenforce its rights.  Until recently, theprimary legal venue has been the Delaware bankruptcy proceeding for Old Kaiser,where the Company has asserted claims against Nova Hut and the InternationalFinance Corporation (“IFC”).  TheDelaware bankruptcy court had previously ruled that the Company, as opposed toKaiser Netherlands, could proceed with prosecution of its specific claimsagainst Nova Hut and IFC in the Delaware bankruptcy court venue.  Both Nova Hut and IFC appealed this rulingand, during the first quarter 2004, the Delaware bankruptcy court’s decisionregarding the IFC was overturned by the District Court, ruling that the IFCenjoys sovereign immunity from prosecution. Kaiser Holdings filed a notice of appeal with the Third Circuitregarding this decision in favor of the IFC and on February 25, 2005, theThird Circuit overturned the District Court’s decision.  The IFC has asked for a rehearing of the caseby the Third Circuit.  With regard to theNova Hut appeal, the District Court has ruled that U.S. Bankruptcy proceedingsshould be stayed pending completion of international arbitration proceedings.

 

In January 2004,Kaiser Netherlands filed arbitration claims against Nova Hut in the amount of$51.1 million with the International Chamber of Commerce (“ICC”).  In November 2004, Kaiser Netherlands’claim against Nova Hut was amended to include late interest and other chargesand now totals $67.5 million.   Thearbitration panel has been constituted, and the proceedings have beeninitiated.  The earliest possible datefor a final award ruling being issued is the last quarter of 2005.  Nova Hut has submitted a $49.7 millioncounterclaim against Kaiser Netherlands in these same ICC proceedings.

 

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

 

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

 

Basedon the Company’s continued concern over Nova Hut’s financial difficulties andthe lack of a settlement resulting from an earlier bankruptcy court-sponsoredmediation in the fourth quarter of 2003, the Company further reduced thecarrying value of the remaining Nova Hut contract receivable from $6.0 millionto $3.0 million by recording an additional reserve of $3.0 million, net of a$1.1 million income tax benefit, through a charge to “Loss from DiscontinuedOperations”.  This reserve is in additionto a reserve recorded in 2001, which reduced the carrying value of the Nova Hutcontract receivable from $21.6 million to $6.0 million by recording a reserveof approximately $9.8 million, net of a $5.8 million income tax benefit, through a charge to “Loss fromDiscontinued Operations”.  Theseadjustments to the contract receivable carrying value were determined based onthe Company’s late 2003 estimate of Nova Hut’s ability to pay such liability.

 

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**Kaiser Analytical Management Services, Inc.**

 

In April 2004,Kaiser Analytical Management Services, Inc. (KAMS) was established as awholly owned subsidiary of Kaiser Group International, Inc.  KAMS was created as a vehicle for taking overthe operations of the Analytical Services Division of Kaiser-Hill Company,LLC.  KAMS provides analytical managementservices such as sample planning, sample management, records management,performance assessment and data management in the general areas of health andsafety, geotechnical, environmental and waste management, and deactivation anddecommissioning.

 

On July 1, 2004,KAMS began providing its services as a subcontractor at the U.S. Department ofEnergy’s Rocky Flats closure site in Colorado. KAMS receives a fixed management fee for these services plus a smallbase fee and efficiency incentives built on laboratory sample costs.

 

Management hasimplemented a marketing plan aimed at gaining contract awards at other siteswithin the Department of Energy complex. KAMS will manage its cost and operations consistent with the success ofthese marketing efforts.

 

**Other RetainedAssets, Activities and Obligations**

** **

UntilSeptember 30, 2002, we owned a 10%interest in ICF Consulting Group, Inc., a privately held entity, that wasretained by Kaiser Group International, Inc. when it sold its ConsultingGroup in June 1999.  In September 2002we consummated a settlement of outstanding disputes with ICF Consulting.  As a result of that transaction, we continueto hold an 81⁄2% subordinated note from ICF Consulting due June 25, 2006 inthe principal amount of $6.4 million, net of a $0.5 million reserve foruncollectibility.

 

Weown a captive insurance company that is not at this time engaged in issuing newpolicies but is solely engaged in the process of resolving existingclaims.  Restrictions on the insurancecompany’s cash balances, maintained to support statutory insurance reserves,will be released as reserve requirements decrease in the future and to theextent such cash balances are not used in payment of resolved claims. In thefourth quarter of 2004, we received regulatory approval and finalized theformation documents of a sponsored captive subsidiary, MS Builders InsuranceCompany (MS Builders), to enable our wholly-owned captive insurance company tooffer derivative captive insurance services to third party clients.  As of March 23, 2005, no new policieshave been written by MS Builders.

 

Wealso have the obligation to pay certain medical, disability and life insurancebenefits to a fixed group of retirees for life. Such plans cover certain individuals who retired prior to 1993.  There are approximately 873 retirees anddependents currently covered by the plans, the average age of whom isapproximately 80.  The actuariallydetermined present value of this obligation as of December 31, 2004, basedon the existing commitments, interest rate assumptions and related medical benefitinsurance policies, was $6.9 million, net of an unrecognized actuarial loss of$0.2 million.  Although we intend toattempt to reduce remaining exposures relative to the costs of this obligationin the future, there can be no guarantee that this will be feasible, nor can weestimate the amount of potential future savings with any reasonable degree ofaccuracy.

 

OurBoard of Directors will continue to consider whether we will engage in anyadditional business activities in the future.

 

**Insurance**

** **

Wehave a risk management and insurance program in place that provides a range ofcoverages tailored to the needs of the reorganized company.  Insurance coverages include policies forfiduciary, crime, directors and officers’ liability, property, generalliability, workers’ comp, and professional liability “runoff” coverage to dealwith liabilities arising from past activities and projects, if necessary.

 

Webelieve that the insurance coverages we maintain, including self-insurance,protect against risks that are comparable to those of similar businesses of ourscope and present operating profile and that related coverage amounts areeconomically reasonable. At this time, we expect to continue to be able toobtain insurance in amounts generally available to firms with a similarprofile.  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 uninsured claim for that matter, arising out ofpre-reorganization or post-reorganization activities of Kaiser GroupInternational, Inc., if successful and of sufficient magnitude, could havea material adverse effect on our financial position.

 

**GovernmentRegulation**

** **

Wemay, from time to time, either individually or in conjunction with othergovernment contractors operating in similar types of businesses, be involved inU.S. government investigations for alleged violations of procurement or otherfederal laws and

 

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regulations.  No charges presently are known to have beenfiled against Kaiser Group International, Inc. or our other subsidiariesby these agencies.

 

**Employees**

** **

Asof March 23, 2005, we had approximately 14 full-time equivalent employeesof which 4 are employed by Kaiser Group International, Inc. and 10 areemployed by KAMS.

 

**Company Website Information**

 

Theaddress of our website is http://www.kaisergroup.com.

 

### **Item 2.**                                                           Properties

 

We owned no properties at December 31, 2004, and leasedproperties at that date were located at 12303 Airport Way, Broomfield,Colorado, 80021-0007 and 9300 Lee Highway, Fairfax, Virginia 22031-1207.

 

### **Item 3.**                                                           Legal Proceedings

 

On June 9,2000, Kaiser Group International, Inc. and 38 of its wholly ownedsubsidiaries filed petitions for relief under Chapter 11 of the U.S. BankruptcyCode with the U.S. Bankruptcy Court for the District of Delaware in order tofacilitate the restructuring of Kaiser Group International Inc.’s long-termdebt, trade and other obligations. Kaiser Group International, Inc.continued to operate as a debtor-in-possession subject to the Bankruptcy Court’ssupervision and orders until its Plan of Reorganization was confirmed on December 5,2000 and became effective on December 18, 2000. The provisions of suchPlan are further described under Item 1 of this Report, in Note 2 to theConsolidated Financial Statements, and in a Current Report on Form 8-Kfiled with the Securities and Exchange Commission on December 14, 2000 byKaiser Group International, Inc.

 

In the course of normal business activities, various claims or chargeshave been asserted and litigation commenced against Kaiser Group International, Inc.arising from or related to properties, injuries to persons, and breaches ofcontract, as well as claims related to acquisitions and dispositions. Suchclaims are now part of the overall bankruptcy proceeding. Claimed amounts maynot bear any reasonable relationship to the merits of the claim or to a finalcourt award. In the opinion of management, an adequate reserve has beenprovided for final judgments, if any, in excess of insurance coverage, thatmight be rendered against Kaiser Group International, Inc. in the event ofunsuccessful bankruptcy resolution. The continued adequacy of reserves isreviewed periodically as progress on such matters ensues.

 

### **Item 4.**                    Submission of Matters to aVote of Security Holders

 

Nomatter was submitted to a vote to security holders during the fourth quarter of2004.

 

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**PART II**

 

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

 

**Market Information**

 

Effective withimplementation of Kaiser’s Plan of Reorganization, on or about April 17,2001 each 96 shares of Old Common were exchanged for 1 share of NewCommon.  As of December 2004, NewCommon is quoted in the over the counter pink sheets under the symbol “KGHI.PK”.  At March 23,2005, there were 943 shareholders of record of the New Common.

 

Thefollowing table sets forth the high and low sale prices for the New Common asreported on the Over-the-Counter Bulletin Board.

 

| ** **                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| ** **                   | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| Year Ended December 31, |       |     |       |     |       |   |   |   |   |
| First Quarter                |       | $        | 24.00      |     | $          | 19.00 |   | $ | 8.00 |   | $ | 4.70 |   |
| Second Quarter               |       | 27.00    |       | 21.00    |       | 13.00 |   | 6.10 |   |
| Third Quarter                |       | 26.50    |       | 24.00    |       | 21.50 |   | 12.20 |   |
| Fourth Quarter               |       | 27.00    |       | 23.00    |       | 22.80 |   | 15.00 |   |
|                              |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

OurTransfer Agent and Registrar is EquiServe Trust Company, N.A, P.O. Box 219045,Kansas City, MO 64121-9045.  TheShareholder Relations telephone number is (816) 843-4299, the hearingimpaired numbers are (800) 952-9245 and (781) 575-2692 for callers outside of the United States, and the internetaddress is http://www.equiserve.com.

 

KaiserGroup International, Inc. never paid cash dividends on its OldCommon.  We anticipate that no cashdividends will be paid on the New Common for the foreseeable future and thatour earnings will be retained for use in the business and, consistent with theterms of the New Preferred and the KGP put rights described in Note 8 to theConsolidated Financial Statements, be used to pay dividends on and redeemoutstanding shares of New Preferred.  OurBoard of Directors determines our dividend policy based on its results ofoperations, required payment of dividends on New Preferred, financialcondition, capital requirements, and other circumstances.

 

**Securities Authorized for Issuance Under EquityCompensation Plans**

 

Thefollowing table sets forth information as of December 31, 2004 withrespect to compensation plans under which equity securities of the Company areauthorized for issuance:

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

 

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**Recent Sales of Unregistered Securities**

 

During 2004, the Company did not sell any equity securities that werenot registered under the Securities Act of 1933.

 

### **Item 6.**                                                        SelectedConsolidated Financial Data

### ** **

Selected consolidated financial data of Kaiser Group Holdings, Inc.for the years ended December 31, 2004, 2003, 2002 and 2001 and of KaiserGroup International, Inc. for the year ended December 31, 2000, havebeen derived from our and/or Kaiser Group International, Inc.’s auditedconsolidated financial statements. This information should be read inconjunction with the Consolidated Financial Statements and the related notesthereto appearing elsewhere in this Report and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”. Certainreclassifications have been made to the prior period financial statements toconform to the presentation used in the December 31, 2004 Consolidated FinancialStatements.

 

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**SelectedConsolidated Financial Data**

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

 
| ** **                                                                                                                                                              | ** ** | **Successor  Company** | ** ** | ** ** | **Predecessor  Company** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------|--------------------------|------------|
| ** **                                                                                                                                                              | ** ** | **2004**               | ** ** | **2003**   | ** **               | **2002**   | ** ** | **2001** | ** ** | ** ** | **2000** | ** ** |
| Statement of Operations Data:                                                                                                                                           |       |                   |       |       |                     |       |   |   |   |   |   |   |
| Gross revenue                                                                                                                                                           |       | $                      | 1,036      |       | $                        | —     |   | $ | — |   | $ | — |   |   | $ | 271,385 |   |
| Service revenue                                                                                                                                                         |       | 288                    |       | —     |                     | —     |   | — |   |   | 76,018 |   |
| Operating loss                                                                                                                                                          |       | (6,364                 | )          | (4,918     | )                        | (7,028     | ) | (10,792 | ) |   | (224 | ) |
| Income (loss) from continuing  operations before reorganization items, income taxes, minority interest,  extraordinary items and cumulative effect of accounting change |       | 9,110                  |       | 11,028     |                     | 29,165     |   | 7,657 |   |   | (1,736 | ) |
| Income (loss) before  extraordinary items and cumulative effect of accounting change                                                                                    |       | 7,375                  |       | 4,368      |                     | 18,343     |   | (4,957 | ) |   | 29,762 |   |
|                                                                                                                                                                    |       |                   |       |       |                     |       |   |   |   |   |   |   |
| Basic and Diluted Earnings per  share:                                                                                                                                  |       |                   |       |       |                     |       |   |   |   |   |   |   |
| Continuing operations before  extraordinary items and cumulative effect of accounting change                                                                            |       | $                      | 4.62       |       | $                        | 2.92       |   | $ | 8.60 |   | $ | 1.92 |   |   | $ | 1.74 |   |
| Discontinued operations, net  of tax                                                                                                                                    |       | —                 |       | (1.14      | )                        | 0.31       |   | (9.11 | ) |   | (0.46 | ) |
| Extraordinary items, net of  tax                                                                                                                                        |       | —                 |       | —     |                     | —     |   | — |   |   | 5.35 |   |
|                                                                                                                                                                    |       |                   |       |       |                     |       |   |   |   |   |   |   |
| Total                                                                                                                                                                   |       | $                      | 4.62       |       | $                        | 1.78       |   | $ | 8.91 |   | $ | (7.19 | ) |   | $ | 6.63 |   |
|                                                                                                                                                                    |       |                   |       |       |                     |       |   |   |   |   |   |   |
| Weighted average common shares  outstanding:                                                                                                                            |       |                   |       |       |                     |       |   |   |   |   |   |   |
| —basic                                                                                                                                                             |       | 1,597                  |       | 1,594      |                     | 1,590      |   | 1,119 |   |   | 23,255 |   |
| —diluted                                                                                                                                                           |       | 1,597                  |       | 1,594      |                     | 1,590      |   | 1,119 |   |   | 23,255 |   |

 
| ** **                                 | ** ** | **Successor  Company** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **2004**               | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Balance Sheet Data (end of  period):       |       |                   |       |   |   |   |   |   |   |   |   |
| Total assets                               |       | $                      | 72,714     |   | $ | 74,080 |   | $ | 96,195 |   | $ | 80,891 |   | $ | 106,168 |   |
| Working capital                            |       | 3,364                  |       | 3,343 |   | 22,048 |   | 23,974 |   | 54,131 |   |
| Long-term liabilities*                     |       | 26,909                 |       | 35,175 |   | — |   | — |   | — |   |
| Mandatorily Redeemable  preferred stock ** |       | —                 |       | — |   | 55,942 |   | 62,481 |   | — |   |
| Shareholders’ equity                  |       | 27,545                 |       | 20,077 |   | 17,805 |   | 3,360 |   | 87,500 |   |
|                                            |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*After the adoption of FAS 150 on July 1, 2003, we reclassified mandatorilyredeemable preferred stock from mezzanine equity 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 3 to the Consolidated FinancialStatements), we reclassified mandatorily redeemable preferred stock to longterm liabilities from mezzanine equity. Additionally, as we did not complete the initial bankruptcy distributionuntil April 17, 2001, no shares of New Preferred were actually outstandingas December 31, 2000.

 

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

 

Since the financialinformation as of and subsequent to December 31, 2000, has been preparedas if it is of a new reporting entity and is not comparable to that of previousyears, a black line has been used to separate new entity information from priorentity information.  Financial informationwith regard to activity occurring prior to December 31, 2000, has beenmarked as “Predecessor”, and financial information with regard to activity asof December 31, 2000, and thereafter is marked herein as “Successor”.

 

The value of the emergedenterprise used for fresh start reporting as of December 31, 2000, was$87.5 million and was determined by management with the assistance ofindependent advisors. The methodologyemployed involved estimation of enterprise value taking into consideration adiscounted cash flow analysis.  Thediscounted cash flow analysis was based on a

 

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seven-yearcash flow projection prepared by management, taking into consideration theterminal value of its assets and liabilities as of immediately prior to itsemergence from bankruptcy on December 18, 2000. Terminal values of assetsand liabilities were determined based either on contracted amounts, actuarialpresent values and/or management’s estimates of the outcome of certainoperating activities. These post-emergent matters consist largely of theretained operations discussed in this Report. Net after-tax cash flows,assuming a 40% effective tax rate, were discounted at approximately 17% inorder to take into consideration the risks and uncertainties inherent in suchprojections. The cash flow projections were based on estimates and assumptionsabout circumstances and events that have not yet taken place. Estimates andassumptions regarding individual retained matters that form the collectivecomposition of the overall enterprise value as of December 18, 2000, areinherently subject to significant economic and competitive uncertainties andcontingencies beyond the control of the Company. Accordingly, there may bedifferences between projections and actual results because events andcircumstances frequently do not occur as expected and may be significant. Morespecifically, assumptions within the valuation related to the amount and timingof the ultimate performance and related cash flows of Kaiser-Hill have thegreatest impact to the overall enterprise valuation.

 

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

** **

***Overview***

** **

**In the four years since the Plan of Reorganizationof Kaiser Group International, Inc. under Chapter 11 of the BankruptcyCode became effective on December 18, 2000, we have consummated theinitial bankruptcy distributions to allowed claimholders, continued to progressin resolving remaining outstanding bankruptcy claims, managed our remaining assets,wound down unnecessary elements of previous activities and corporate structure,redeemed a significant portion of the number of New Preferred sharesoutstanding and formed two new business opportunities, Kaiser AnalyticalManagement Services, Inc. and MS Builders Insurance Company.**

** **

Followingthe effectiveness of the Plan, we now have only a limited number of activities,assets and liabilities, primarily consisting of the following:

 

•                  We own Kaiser-Hill Company, LLCequally with CH2M Hill Companies Ltd. Kaiser-Hill is our major source of income.  Kaiser-Hill currently serves as the generalcontractor at the U.S. Department of Energy’s Rocky Flats site.  Kaiser-Hill has performed for the Departmentof Energy at this site since 1995 and in January 2000 was awarded a newcontract to manage the closure of the site. The level of success experienced by Kaiser-Hill in achieving timelyclosure of the Rocky Flats site, and the cost of achieving such closure, havebeen and continue to be the primary determinants of our long-term financialperformance following the completion of the reorganization process.  See “Kaiser-Hill” below for additionalinformation on Kaiser-Hill.

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

•                  Until September 30, 2002 we held a minorityownership interest in ICF Consulting Group, Inc. (a division that KaiserGroup International, Inc. sold in 1999). We continue to hold an 81⁄2% subordinated promissory note from ICFConsulting due June 25, 2006 in the principal amount of $6.4 million as aresult of that transaction.

•                  We own a captive insurance company that has notbeen issuing new policies and has solely been involved in resolving remainingclaims made against previously issued policies. However, in the fourth quarter of 2004, we received regulatory approvaland finalized the formation documents of a sponsored captive subsidiary, MSBuilders Insurance Company, to enable our wholly-owned captive insurancecompany to offer derivative captive insurance services to third party clients.  As of March 23, 2005, no new policieshave been written.

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

•                  Weformed Kaiser Analytical Management Services, Inc. (KAMS) in April 2004to take over the operations of the Analytical Services Division of Kaiser-HillCompany, LLC.  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.

** **

***Outlook***

** **

*Potential**Kaiser-Hill Distributions and the Nova Hut Disputes*.  As we look forward, by far the mostsignificant factor in determining the value of our common stock will be theperformance of Kaiser-Hill and its success in collecting the fee that

 

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may be due to Kaiser-Hillfrom the DOE.  Although much lesssignificant, another material uncertainty affecting our future results is theoutcome of the disputes we have in arbitration with Nova Hut.

 

The timing and level offuture distributions from Kaiser-Hill are subject to many uncertainties, but ifKaiser-Hill continues to perform in line with its current level of performanceand progresses closer to Kaiser-Hill’s target closure of the site in late 2005or early 2006 and that performance is recognized by the DOE, Kaiser-Hill’s feepayments from the DOE in respect of completion of the Closure Contract could beat the upper ranges of the fee potential under that contract.  At those levels of fee payments, we couldreceive from Kaiser-Hill, during the period of 2005 through physical projectcompletion and the date Kaiser-Hill has been paid in full by DOE, cashdistributions in a range as high as $100 million to $125 million.  This is not to predict actual distributionsto us at these levels, but merely to outline what is possible in optimisticcase scenarios.  There are many risks anduncertainties that could prevent the receipt of this level of distributionsfrom Kaiser-Hill, and the timing of fee payments from the DOE to Kaiser-Hillthat would enable such distributions is also subject to manyuncertainties.  See “Risk FactorsRelating to Kaiser Holdings and Forward-Looking Statements.”

 

Apart from Kaiser-Hill,the principal uncertainty that will affect our performance is the outcome ofour disputes with Nova Hut.  As discussedelsewhere, we have pending against Nova Hut an arbitration before theInternational Chamber of Commerce.  Ouraggregate claims are for $67.5 million, and Nova Hut has asserted counterclaimsof $49.7 million.  It is not possible topredict the outcome of these disputes, but we feel our claims are stronger thanNova Hut’s.  Our assessment could bewrong, but we are determined to see these disputes through to conclusionbecause we believe we are entitled to a substantial positive recovery.  The arbitration process is now underway.  At present, we do not expect to receive any recoveryfrom Nova Hut until late 2005 at the earliest.

 

*PossiblePreferred Stock Redemptions. *Inthe fourth quarter of 2004, we received $7.0 million from Kaiser-Hill which wasin line with prior years’ fourth quarter distributions of $7.4 million in thefourth quarter of 2003 and $6.7 million in the fourth quarter of 2002, butbelow our expectations previously reported in our September 30, 2004 Form 10-Q.  Because the actual fourth quarterdistribution from Kaiser-Hill was below our expectations, we reduced the amountof our planned redemption of New Preferred to $10.0 million from $12.0 million,as previously reported in the September 30, 2004 Form 10-Q.  This $10.0 million redemption of our New Preferredwill occur on April 22, 2005.

 

Our first quarter of 2005distribution from Kaiser-Hill was $10.5 million and compares favorably to firstquarter distributions in 2004 and 2003 of $3.5 million and $3.0 million,respectively.  We have no assurance thatthis level of distributions will continue in 2005.  However, based on progress to date inKaiser-Hill’s performance under its Closure Contract with the DOE and assuminga continuation of that performance, we are optimistic that overalldistributions in 2005 will exceed the $17.5 million that Kaiser-Hill distributedin 2004 and therefore enable us to redeem the majority of our New Preferred in2005.

 

*PossibleDeregistration.*  Basedupon advice from our transfer agent, we reported in our September 30, 2004Form 10-Q that we believed that we had fewer than 300 stockholdersof record and, based upon that belief, on December 20, 2004 we filed a Form 15with the Securities and Exchange Commission to deregister under the SecuritiesExchange Act of 1934.  After furtherreview of our stockholder records, we now believe that we have in excess of 300stockholders of record, and therefore, on February 17, 2005 we filed anAmended Form 15 with the Securities and Exchange Commission withdrawingthe Form 15 filed with the Commission on December 20, 2004.

 

Continuing the commitmentto reduce our overhead costs, on March 16, 2005 our Board formed a specialcommittee to review options for reducing the number of stockholders of recordto less than 300, which would allow us to proceed with the deregistrationprocess.  If we are successful inreducing our number of stockholders below 300, we plan on filing a new Form 15with the Commission.  This will suspendour reporting obligations under the Securities Exchange Act of 1934, meaningthat we will no longer have to file with the Commission certain reports andforms, including Forms 10-K, 10-Q, 8-K and proxystatements.  If we were to deregister, wewould continue to announce earnings and other developments on a quarterlybasis, but the extent of our disclosures would be less detailed than would bethe case if we were to remain registered. We will announce by press release additional information concerning possiblederegistration of the Company.

 

*Corporateand Capital Structure*. In light of our history and current activities, our corporate andcapital structures are not as tax-efficient as we would like.  We have evaluated from time to time both thepossible refinancing of our New Preferred and possible changes to our corporateand tax structure.  Because oflimitations on our ability to borrow and our view that we may be able to redeemthe majority of the outstanding New Preferred by the end of 2005, we do notpresently plan to attempt to refinance the New Preferred.  Similarly, because of tax law requirements,limitations in the New Preferred as to how we use available cash, and thenature of our shareholder base, we have not identified an alternative to ourcurrent corporate and tax structure that we believe is practical toeffect.  As a result, we do not presentlyplan to attempt to effect changes to that structure.

 

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***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 onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.**

** **

Our accountingmeasurements that are most affected by our estimates of future events are:

 

•      Recoverability of accounts receivable, acontract receivable, notes receivable and accrued interest, and investments.

•      Income tax provision, deferred tax assetsand liabilities.

•      Use of the equity method of accounting forKaiser-Hill, an affiliate that we have the ability to significantly influencebut not control.  In accordance with theequity method of accounting, we record our proportionate share of theaffiliate’s income or losses.  Thedifference between the carrying value of the joint venture investment and ourunderlying equity is amortized on a straight-line basis over the term of thejoint venture investment, estimated at six years.

•                  Estimated fees on the Kaiser-Hilljoint venture.   Estimating future costsand, therefore, revenues and profits, is a process requiring a high degree ofjudgment, including assumptions regarding future operations of Kaiser-Hill aswell as general economic conditions.  Inthe event of a change in total estimated contract cost or profit, thecumulative effect of such change is recorded in the period the change inestimate occurs.  Revenue recognition andour profitability from the Kaiser-Hill contract may be adversely affected tothe extent that estimated cost to complete or incentive or award fee estimatesare revised, delivery schedules are delayed, or progress under the contract isotherwise impeded.  Accordingly, ourrecorded revenues and gross profits from year to year can fluctuatesignificantly.   The Kaiser-Hill contractcontains incentive provisions for increased or decreased revenue and profitbased on actual performance against established cost targets andschedule-related goals.  Incentive feesare included in estimated contract revenue at the time the amounts can bereasonably determined and are reasonably assured based on historical experienceand other objective criteria.  ShouldKaiser-Hill fail to perform satisfactorily under its contract, previously recognizedrevenues could be reversed and/or future period revenues could be reduced.

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

** **

**Results ofOperations**

** **

*Years Ended December 31, 2004, 2003 and 2002*

 

*Equity Income In Earnings of Affiliate*

 

Our major remaining source of income is a 50% ownership inKaiser-Hill Company, LLC, which performs all elements of daily and long-termoperations associated with the ultimate closure of the Department of Energy’sRocky Flats site, including stabilizing and safely storing radioactivematerial, cleaning up areas contaminated with hazardous and radioactive waste,and restoring much of the 6,000-acre Rocky Flats site to its naturalstate for future use by the public.  Thefinancial information contained herein for Kaiser-Hill is reflected on theequity basis.  Because Kaiser-Hillrepresents a significant portion of our financial position and results ofoperations, the audited financial statements of Kaiser-Hill are included inthis report (see pages F-21 to F-31).

 

*Closure Contract Provisions for Revenue and PerformanceAward*

 

Theeconomic terms of the Closure Contract provide that Kaiser-Hill will earnrevenue equal to the actual cost of physical completion plus a performance feebased on a combination of factors involving the actual cost of completing thesite closure project and the actual date of physical completion, both ascompared to contracted targets.  On March 24,2004 Kaiser-Hill received a contract modification that motivates safecontinuing positive performance by increasing the maximum fee ceiling that maybe earned under the Closure Contract. The same contract modification reduces the minimum fee floor andincludes other provisions related to work scope changes.  The total potential fee to be earned pursuantto the Closure Contract, as modified on March 24, 2004, ranges from $75.0million to $560.0 million based on Kaiser-Hill’s cost to complete the site

 

11

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closurebeing within the range of completion cost of $3.1 billion and $4.9 billion, andcompletion at various dates between 2005 and 2007.  For project costs saved below the targetlevel, Kaiser-Hill retains a varying percentage share, ranging from 20% to 30%,as additional incentive fee.  Similarly,for project costs incurred above a target level, Kaiser-Hill’s incentive fee isreduced by the 30% share.

 

Kaiser-Hill’sfavorable performance on the Closure Contract since its inception in February of2000 has resulted in a trend of cautious but continuously improving estimatesof completion dates, cost estimates and potential fee earningopportunities.   As of December 31,2004, Kaiser-Hill’s cost estimate to complete the project is $3.7 billion, withan estimated completion date of September 2006, resulting in a potentialfee of $429.0 million.  As reflected inthe “Outlook” discussion above, Kaiser-Hill is targeting closure of thesite in late 2005 to early 2006; however,these goals are subject to substantial risks, and the ability to accuratelypredict the ultimate results are highly uncertain.  See “Risk Factors Relating to Kaiser Holdingsand Forward-Looking Statements” below. In the event that Kaiser-Hill is able to complete physical performanceof the Closure Contract within cost and time thresholds that would yield feesin excess of the $429.0 million currently estimated, there may be uncertaintywith regard to the timeframe of the actual receipt of such fees byKaiser-Hill.  Additionally, there mayremain significant uncertainties involving the timeframe necessary tocompletely “close-out” the contract with the Department of Energy as contractcost and compliance audits will be required.   Kaiser-Hill will continue to periodically consider the appropriatenessof financial statement reserves to address the uncertainties associated withsuch matters.

 

For the years ended December 31, 2004, 2003 and 2002, we recordedour 50% equity in Kaiser-Hill’s income of $20.3 million, $20.0 million and $36.8million, respectively.  Fluctuations inthe Kaiser-Hill earnings between 2004, 2003 and 2002 are primarily due to thecumulative effects of accounting for periodic changes in the projected fee tobe earned upon the completion of the project. Kaiser-Hill’s estimate of the final gross performance fee to be earnedupon completion of the contract has increased from $363.0 million to $388.0million to $429.0 million as of December 31, 2002, 2003 and 2004,respectively.  The changes in estimate ofthe completion fees are typically generated during the fourth quarter of eachyear as management completes its annual assessment of project performance.  In addition to the changes in estimate,Kaiser-Hill released project contingency reserves during 2002 that had theeffect of increasing their net earnings by more than just the change in feeestimate thus the larger net income fluctuation in 2002.

 

For the years ended December 31,2004, 2003 and 2002, the equity income in earnings of affiliate is net of $3.5million of amortization of the excess of our carrying value of our investmentin Kaiser-Hill over our ownership percentage of the underlying Kaiser-Hillequity.  We increased the carrying valueof this investment by $21.1 million as part of our adoption of Fresh-Startreporting as of December 31, 2000 and will continue to amortize thatdifference over the duration of the Kaiser-Hill closure contract with the DOE.

 

*Closure Contract Billing Provisions*

 

****Sincethe inception of the Closure Contract in February 2000 through December 31,2004, Kaiser-Hill has invoiced DOE for the performance fee based on the contractprovisions, and has collected an aggregate of $160.1 million in fees from theDOE****.

 

Fee payments made by DOEto Kaiser-Hill, less certain non-reimbursable costs, will continue to be distributedto the joint venture owners upon receipt. Kaiser-Hill has historically incurred expenses that are not reimbursableby the DOE pursuant to the Federal regulations. Accordingly, such expenses, which Kaiser-Hill estimates couldapproximate up to 15% - 20% of the total award fee, are deducted from the totalfee earned and collected by Kaiser-Hill prior to any distributions to either ofits two owners.  Since inception of theClosure Contract through December 31, 2004, Kaiser-Hill has distributed $64.1million to each of its two owners.

 

Inthe first quarter of 2005, acknowledging Kaiser-Hill’s continued favorableprogression on the project, the DOE approved a non-recurring fee payment, whichresulted in a first quarter 2005 distributions to each of its two owners of$10.5 million. For the remaining quarters of 2005, after adjusting for theeffects of the 50% retainage holdback, Kaiser-Hill plans that its performancefee invoices to DOE will yield distributions of $3.5 million in each quarter toeach of its two owners.  Similar to 2004and 2003, Kaiser-Hill is anticipating that DOE will continue to acknowledgeKaiser-Hill’s favorable progress and approve an additional non-recurring feepayment during the fourth quarter of 2005. Historically, the fourth quarter fee payment has ranged from anadditional $10.0 million to $16.0 million above the typically recurringquarterly fee payment.  However, thereare no assurances as to the amount or timing of any additional fourth quarterfee payment.

 

In the future, asKaiser-Hill continues to accrue performance fees based on its currentlyprojected total, less reserves deemed appropriate in the circumstances, andremains subject to a 50% retainage holdback on its performance fee invoicing,the level of unbilled accounts receivable on its balance sheet will begin toincrease substantially.  Kaiser-Hill willclassify the difference between recorded performance fees and the collectedfees as long-term unbilled accounts receivable on its balance sheet, which willbe included as a component of Investment in Affiliate on the Company’s balancesheet.  The Closure Contract also

 

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contains provisions forDOE to release portions of the retainage holdback prior to contract completionif the DOE deems appropriate. Kaiser-Hill is not able to estimate whether any of the retainageholdback will be released prior to contract completion.

 

*Gain on Demutualization and Gain on Sale of Security*

 

During2002, we sold our investment in Prudential Insurance Company common stock whichresulted in a gain of $0.1 million which was recorded on sale of security.

 

*Gain on Sale of Investment*

 

On September 30,2002, the terms of a settlement agreement with ICF Consulting Group, Inc.(ICF Consulting) were implemented.  Underthis settlement, we restructured the ICF Consulting notes totaling $6.6 millionand accrued interest of $0.7 million, net of reserves, for a new subordinatedpromissory note of $6.4 million, resulting in a write-off of $0.8 million andestablishment of a $0.5 million contingency reserve.  In return, ICF Consulting withdrew its claimsagainst us, released cash in escrow totaling $0.8 million and purchased our 10%ownership in ICF Consulting, carrying value of $1.1 million, for $4.5million.  We recorded a gain of $3.4million on the sale of the investment in ICF Consulting.

 

*Write-off of Notes Receivable and Accrued Interest*

 

As a result of the above-mentioned settlementagreement with ICF Consulting in September 2002, we recorded the new ICFConsulting note of $6.4 million and wrote off the remaining balance in thenotes receivable and accrued interest totaling $0.7 million.  Inlight of the fact that ICF Consulting had defaulted on the previously held ICFConsulting notes and the subordinated nature of the new note, we have alsorecorded a reserve of $0.5 million dueto uncertainties as to the ultimate collectibility of the new note and accruedinterest.

 

*Interest Income*

 

Weearn interest on our available cash balances and on the note receivable fromICF Consulting (see above discussion related to settlement with ICFConsulting).  Interest income decreased16% or $0.1 million in 2004, due to a decline in average cash balances.  Interest income increased nominally in 2003,in spite of a decline in average cash balances, due to a full year of accrualof interest on the ICF Consulting note receivable.

 

*Administrative Expenses*

 

Administrativeexpenses for the years ended December 31, 2004, 2003 and 2002 consistedlargely of salaries, legal and professional fees incurred for activitiesassociated with the bankruptcy proceedings or with winding down of historicaloperations as well as the cost to fund a certain retiree benefitcommitment.  Administrative expenses forthe year ended December 31, 2004 compared to December 31, 2003increased nominally.  In September 2004,management made a series of personnel and other cuts in order to reduceadministrative expenses in the future.  Administrative expenses for the year ended December 31,2003 compared to December 31, 2002 declined by $2.1 million primarily dueto a reduction in legal and professional fees incurred for bankruptcy claimsresolution.  The expense for the retireemedical commitment remained relatively unchanged for the three years ended December 31,2004, 2003, and 2002 at approximately $1.0 million per year.

 

*Reserve for Settlement of Class 4 Claims*

 

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

 

*Loss from Discontinued Operations*

 

Inaddition to matters surrounding the resolution of the Nova Hut dispute,Discontinued Operations also reflects the net income statement activityresulting from the winding down of the discontinued engineeringoperations.  At December 31, 2003, basedupon the lack of significant favorable developments with the Nova Hut claim inthe prior two years and the time that has elapsed since completion of theproject, the Company established additional reserves to further reduce the netcarrying value of the remaining Nova Hut project to $3.0 million by recordingan additional reserve of $3.0 million offset by an income tax benefit of $1.1million, through a charge to “Loss from Discontinued Operations”.  This charge is offset by income fromdiscontinued operations of $0.4 million from the collection of foreign accountsreceivable, which had previously been fully reserved.

 

During2002, we successfully prosecuted an aged claim against a former subcontractorand collected an account receivable,

 

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froma previous foreign engineering project, that had previously been writtenoff.  Net of legal fees, these activitiesresulted in the Company’s collection of $0.6 million.

 

*Income Taxes*

* *

During 2004, we recognized a total incometax expense 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 from continuing operations before income  taxes |       | $                          | 9,110      |                                          | $          | (1,735 | ) |
| Income/(Loss) from discontinued operations             |       | —                     |       | —                                        |       |
|                                                   |       |                       |       |                                          | $          | (1,735 | ) |

 

During 2003, werecognized a total income taxexpense 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 from continuing operations before income  taxes |       | $                          | 11,028     |                                          | $          | (4,827 | ) |
| Income/(Loss) from discontinued operations             |       | (2,956                     | )          | 1,123                                         |       |
|                                                   |       |                       |       | $                                             | (3,704     | ) |
|                                                        |            |                            |            |                                               |            |  |  |

 

During 2002, werecognized a total income taxexpense of $11.6 million allocable to the following results (in thousands):

 
| **Statements of Operations Category**                  | ** ** | **Pre-tax  Income/(Loss)** | ** ** | **Applicable  Income Tax  (Expense)/Benefit** | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------------|------------|
| Income from continuing operations before income  taxes |       | $                          | 29,165     |                                          | $          | (11,319 | ) |
| Income/(Loss) from discontinued operations             |       | 847                        |       | (350                                          | )          |
|                                                   |       |                       |       | $                                             | (11,669    | ) |
|                                                        |            |                            |            |                                               |            |  |  |

 

*Treatmentof Net Operating Loss Carryforwards*

 

In December 2000 wewent through a change in control as defined under Internal Revenue Code (IRC) Section 382due to the Chapter 11 bankruptcy reorganization.  In September 2001 we determined that thechange in control met the stringent guidelines of the bankruptcy exceptionprovided under the Internal Revenue Code.  This resulted in our not being subject to the carryforward limitationsof IRC Sec. 382.  However, we wererequired to reduce certain carryovers that included net operating losses andcredits.  We offset the reduction of thecarryforwards with the valuation allowance previously established for thosecarryforwards, and, as a result, the effective income tax rate for income fromcontinuing operations differed significantly from statutory rates.  All remaining net operating loss carryforwardswere utilized in 2003.

 

**Liquidity and Capital Resources**

 

*YearsEnded December 31, 2004, 2003 and 2002*

 

OperatingActivities:  We used $9.8 million in cashfor operating activities in 2004, $10.2 million in 2003 and $6.3 million in2002.  This use of cash included thefollowing:

 
| ** **                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| General and administrative  costs incurred              |       | $        | 5,252      |     | $          | 4,918    |       | $ | 7,028 |   |
| Payment of income taxes                                 |       | 1,916    |       | 4,010    |       | 930      |       |
| Payment of dividends included  in continuing operations |       | 2,151    |       | 953      |       | —   |       |
| Other, net                                              |       | 482      |       | 358      |       | (1,695   | )          |
|                                                    |       |     |       |     |       |     |       |
| Cash used for operating  activities                     |       | $        | 9,801      |     | $          | 10,239   |       | $ | 6,263 |   |

 

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InvestingActivities:  Our primary investingactivity has been and will continue to be the receipt of funds fromKaiser-Hill.    During the years ended December 31,2004, 2003 and 2002, Kaiser-Hill distributed $17.5 million, $16.4 million and $15.7million, respectively, each to us and to the other 50% owner, CH2M Hill.  For the year ended December 31, 2003, weinvested $1.0 million in a certificate of deposit.  This certificate of deposit matured in 2004and was reinvested.  For the year ended December 31,2002, we also received $4.5 million from the sale of our investment in ICFConsulting and $6.0 million from the sale of our Prudential securities.

 

FinancingActivities:  Our primary financingactivities have been the redemption of New Preferred in accordance with theterms of the Kaiser Group International Plan of Reorganization and theKGP put rights described in Note 8 to the Consolidated FinancialStatements.  The schedule belowidentifies the redemptions of New Preferred and the source of funds utilized inthe redemption.  During the years ended December 31, 2004 and 2003, we redeemed NewPreferred as follows:

 

| **Date of  Redemption** | ** ** | **Use of  Unrestricted  Cash** | ** ** | **Use of  Reserve Fund  Cash** | ** ** | **Total  Amount of  Redemption** | ** ** | **Number of  Shares  Redeemed** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| 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                         |       |
|                         |            |                                |            |                                |            |                                  |            |                                 |            |  |  |  |

 

As mentioned in “Outlook: Potential Kaiser-HillDistributions and the Nova Hut Disputes” above, the timing and level of futuredistributions from Kaiser-Hill will impact our ability to redeem New Preferredin the future.

 

Priorto the adoption of FAS 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity”, effective July 1, 2003, dividends were not recorded asinterest expense and were reflected below net income on the ConsolidatedStatements of Operations and were reflected in the Consolidated Statements ofCash Flows as a financing activity. During the years ended December 31, 2003 and 2002 and prior to theabove mentioned adoption of FAS 150, we paid $2.2 million and $4.2 million,respectively, in dividends on our preferred stock.  See “Operating Activities” above for theamount of preferred stock dividends paid after the adoption of FAS 150.

 

In 2003we acquired 6,848 shares of New Preferred for $0.3 million and 2002 we acquired119,587 shares of New Preferred for $4.0 million.  As a result of the Prudential stock sale andthe sale of the investment in ICF Consulting discussed above, we are required,in accordance with the Plan, to use a portion of the proceeds from any assetsales solely for the redemption of the outstanding preferred stock.  Pursuant to this requirement, we earmarkedapproximately $4.5 million of the sale proceeds as reserve fund cash to be usedfor the future preferred stock redemptions. This amount is included “Use of Reserve Fund Cash” in the schedule abovedetailing the New Preferred redemptions.

 

During2004, approximately $40,000 was transferred from unrestricted cash tothe reserve fund to reserve for the payment of pro forma dividends onunresolved claims.  During 2002, $0.8 million of restrictedcash was released as a part of the settlement agreement with ICF Consulting and$0.6 million of restricted cash in our captive insurance company was releasedfrom restriction by the insurance regulators.

 

*Liquidity and Capital Resources Outlook*

 

We currently have no debtas a result of the effectiveness of the Plan of Reorganization. We continue to financethe bankruptcy distribution requirements and follow-on working capital needs inpart through the use of the available cash and distributions from Kaiser-Hilland from other asset sale proceeds. Based on (i) current expectations foroperating activities and results, (ii) expected Kaiser-Hill distributions,(iii) our current available cash position, (iv) recent trends andprojections in liquidity and capital needs, and (v) current expectationsof total allowed claims upon the completion of the bankruptcy proceedings,management believes we have sufficient liquidity to cover our future operatingneeds and income tax requirements, as well as the dividend requirementsapplicable to our preferred stock. Furthermore, we will continue to review the timing of additional partialpreferred stock redemptions.

 

Wehave obligations to pay interest on outstanding preferred stock at December 31,2004, which has been shown as interest expense effective July 1, 2003.  Accordingly, we are required to present thefollowing table assuming that no additional preferred stock redemptions aremade until the mandatory redemption date of December 31, 2007, noadditional shares are issued and that all future dividends are paid in cash(irrespective of this disclosure requirement, we are not representing

 

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intentionswith regard to the timing of additional preferred stock redemptions). The effect these obligations are expected to haveon our liquidity and cash flow in future periods are as follows (in thousands):

 
| ** **                | ** ** | **Total** | ** ** | **Less Than  One  Year** | ** ** | **One to  Three  Years** | ** ** |
|---------------------------|------------|-----------|------------|--------------------------|------------|--------------------------|------------|
| Preferred Stock dividends |       | $         | 5,651      |                     | $          | 1,884                    |       | $ | 3,767 |   |
|                           |            |           |            |                          |            |                          |            |  |  |  |

 

Theabove table does not reflect the April 22, 2005 scheduledredemption of $10.0 million of New Preferred, or 181,818 shares.  The redemption of 181,818 shares will reduceour annual dividend requirement by $0.7 million.

 

*Other Matters*

 

Wehave various obligations and liabilities from our continuing operations,including general overhead expenses in connection with maintaining, operatingand winding down various entities. Additionally, we believe contingent liabilities may exist in the areasdescribed in Note 15 to the Consolidated Financial Statements for the periodsended December 31, 2004, 2003 and 2002.

 

**Recent Accounting Pronouncements**

 

In January 2003,the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) 46,“Consolidation of Variable Interest Entities,” which provides guidance on whento consolidate variable interest entities. In December 2003, FASB revisedFIN 46 with FIN 46R. In addition to conforming to previously issued FASB StaffPositions, FIN 46R deferred the implementation date for certain variableinterest entities. The Company adopted the provisions of FIN 46R immediatelyfor entities created after December 31, 2003. For entities created before December 31,2003, the Company will adopt FIN 46R in the first quarter of 2005, as requiredby FIN 46R.  The Company does notcurrently have any entities that would be considered variable interest entitiesunder FIN 46R.

 

Adoptionof FAS 123 (Revised):  In December 2004,the FASB issued FAS No. 123 (Revised) “Share-Based Payment,” whichreplaces FAS No. 123 and supercedes APB No. 25, “Accounting for StockIssued to Employees”. FAS 123(R) is effective as of the beginning of thefirst interim or annual reporting period that begins after December 15,2005.  FAS 123(R) requires that thecosts resulting from all share-based payment transactions be recognized in thefinancial statements. FAS 123(R) applies to all awards granted after therequired effective date, but does not apply to awards granted in periods beforethe requiredeffective date, except if prior awards are modified, repurchased orcancelled after the effective date. FAS 123(R) also amends FAS No. 95,“Statement of Cash Flows,” to require that excess tax benefits be reported as afinancing cash inflow rather than as a reduction of taxes paid.  The Company will adopt FAS No. 123(R) onJuly 1, 2005 and management is currently assessing the impact on theCompany’s consolidated financial statements.

 

On May 31,2003, FASB issued FASB Statement No. 150 (FAS 150), “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity.”  FAS 150 improves the accountingfor certain financial instruments that, under previous guidance, issuers couldaccount for as equity and requires that those instruments be classified asliabilities (or assets in certain circumstances) in statements of financialposition.  FAS 150 also requiresdisclosures about alternative ways of settling the instruments and the capitalstructure of entities — all of whose shares are mandatorily redeemable.  FAS 150 was to have been generally effectivefor all financial instruments entered into or modified after May 31, 2003,and otherwise effective at the beginning of the first interim period beginningafter June 15, 2003.  Recently, theFASB has deferred for an indefinite period the effective date for certaininstruments and entities.  As discussedin Note 8 of the Consolidated Financial Statements, the Company has adopted theprovisions of FAS 150 in the third quarter of 2003.

 

In December 2003,the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures aboutPensions and Other Postretirement Benefits.” SFAS 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 bySFAS No. 132(R) are effective for us for the year ending after June 15,2004.

 

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**RISK FACTORS RELATING TO KAISERHOLDINGS AND**

**FORWARD-LOOKING STATEMENTS**

 

This Annual Report on Form 10-Kcontains, and our periodic filings with the Securities and Exchange Commissionand written or oral statements made by ourofficers and directors to press, potential investors, securities analysts andothers, may contain, forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934.  These forward-lookingstatements are not historical facts, but rather are predictions and generallycan be identified by use of statements that include phrases such as “believe,” “expect,”“anticipate,” “estimate,” “intend,” “plan,” “foresee” or other words or phrasesof 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 ofthese risks and uncertainties, including those described below, theforward-looking events might or might not occur.

 

**Our remaining primary source offunding is from Kaiser-Hill distributions, which are subject to uncertaintiesthat may adversely impact our ability to meet our obligations on our preferredstock and the potential value of our common stock.**

 

*The fee income we anticipate receiving in the futurefrom Kaiser-Hill is dependent upon the ability of Kaiser-Hill to close the RockyFlats site at a predetermined targeted cost of between $3.1 billion and $4.9billion and closing date ranging from December 31, 2005 to not later than March 31,2007, both of which are subject to operational risks and uncertainties.*

 

Our long-term outlook is largely dependent on the performance ofKaiser-Hill under its contract with the Department of Energy.  Kaiser-Hill serves as the general contractorat the Rocky Flats site near Denver, Colorado, a former nuclear weaponsproduction facility.  Kaiser-Hill’scontract with the Department of Energy includes a performance fee based upon acombination of the actual costs incurred to complete the site closure and theactual date of completion of the closure. Although unanticipated, if Kaiser-Hill fails to complete the closurewithin the target cost for the project, Kaiser-Hill’s fee will be reduced to alevel significantly less than the fee estimate currently being used torecognize income on the project.

 

Kaiser-Hill has historically incurred expenses that are notreimbursable by the Department of Energy pursuant to federal regulations.  Accordingly such expenses, which Kaiser-Hillestimates could approximate up to 15% - 20% of the total award fee, will bededucted from the total fee prior to any distributions to its two owners. Forreasons similar to those described in the following paragraph, it is difficultto estimate either the amount of net fee to be distributed to the owners ofKaiser-Hill and or the effect, if any, that such unreimbursable costs wouldhave on our future cash flows.  Adecrease in our cash flows could result in a decrease in the value of ourcommon and preferred stock.

 

*There are substantial performance risks associated withKaiser-Hill’s work at the Rocky Flats site. The performance risks may impact the timing and cost of closing thesite, which in turn could impact our fee income from Kaiser-Hill.*

 

The clean-up and closure of the Departmentof Energy’s Rocky Flats site involvesubstantial performance risks.  Amongother things, Kaiser-Hill’s activities at the Rocky Flats site involve theclean-up, packaging and transportation of nuclear waste, and the demolition anddestruction of facilities where nuclear weapons components were previouslyproduced.  Some of these activities havenot been previously performed elsewhere, and therefore require the developmentof innovative and untested approaches. Kaiser-Hill emphasizes safety in its performance, but the nature of theRocky Flats site and the activities of Kaiser-Hill and its subcontractors atthe site are such that serious injuries, or even deaths, are possible.  Significant safety incidents at the sitecould stop or significantly impede the progress of work being performed at thesite by Kaiser-Hill and its subcontractors. The Department of Energycontract contemplates that all, or substantially all, of the nuclear waste atRocky Flats will be transported to other sites operated or managed by the Departmentof Energy. In addition, third-party objections have arisen from time to time withregard to the transportation to, and storage of nuclear waste at, certain sitespreviously designated by the Department of Energy to receive waste from RockyFlats.  Although the Department of Energycontract contemplates that the Department of Energy is responsible forproviding transportation and storage sites for nuclear waste from Rocky Flats,an inability to store nuclear waste at other Department of Energy sites wouldpose a substantial risk to the timely closure of the Rocky Flats site, and couldinterfere with Kaiser-Hill’s ability to earn the fees to which Kaiser-Hillbelieves it should be entitled.  Thisloss of fee income could adversely affect our operating results, which could inturn result in a decrease in the value of our common and preferredstock.

 

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*There are potential substantial liabilitiesand costs associated with Kaiser-Hill’s Department of Energy contract, whichmay directly and indirectly impact our fee income from Kaiser-Hill.*

 

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

 

*There arerisks associated with potential disputes as to the completion of the closure ofthe Rocky Flats site and the timing and award of fee payments to Kaiser Hill.*

 

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

 

**We face significant contingencies, which may adversely impact ourability to meet our obligations on our preferred stock, to fund our continuingoperations and to undertake new operations.**

 

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

 

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

 

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

 

Given the reorganization history of Kaiser Group Holdings, Inc., we maynot be able to obtain satisfactory contract performance guaranty mechanisms,such as performance bonds and letters of credit, at all or on satisfactoryterms, to the extent such mechanisms are needed for new activities andprojects.  These factors could limit thenature of the business activities in which we can engage, which may adverselyimpact our cash flow and operating results and result in a decrease inthe value of our common and preferred stock.

 

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

 

We may be unable to continue to generate sufficient funds to meet ourobligations, notwithstanding the significant improvements in our operations andfinancial condition.  Although we believethat we will be able to generate sufficient funds to meet our working capitalneeds for the foreseeable future, our ability to gain access to additionalcapital, if needed, is not certain. Due to reorganization history of KaiserGroup Holdings, Inc. and current financial markets, it is difficult to predictwhether additional capital would be available to us in the event that we wereunable to generate funds to meet our obligations.  An inability to gain access to additionalcapital may also limit our ability to undertake new activities.  Ultimately, an inability to meet our existingobligations or to undertake new activities could adversely impact our cash flowand operating results.  A decreasein our cash flows and operating results could result in a decrease in the valueof our common and preferred stock.

 

*Wemay have to issue a substantial number of additional common shares.*

 

On January 20, 2004, the United States Bankruptcy Court for the Districtof Delaware ruled on a claim in favor of former shareholders of ICT SpectrumConstructors, Inc.  The Bankruptcy Courthas refused to reconsider its decision and we have appealed.  Should we be unsuccessful in our efforts toachieve reversal of the Bankruptcy Court’s ruling, we could be required toissue to former ICT Spectrum shareholders an additional 247,350 common shares,which would then comprise approximately 13.4% of the aggregate common sharesoutstanding.  We believe that issuingsuch a substantial number of additional common shares would have a materiallydilutive effect on the value of common shares presently outstanding.

 

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*Inthe event of a change of control, we may not have the financial resources toredeem preferred stock.*

 

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

 

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

 

**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 interest rate risk associated with ourobligation to fund a capped retiree medical obligation is not sensitive tointerest rate risk other than through the determination of the present value ofits 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-31 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, 2004, an evaluation wasperformed 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) under theExchange Act).  Based on that evaluation,the Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, concluded that the Company’s disclosure controls andprocedures were effective as of December 31, 2004.  There were no significant changes in theCompany’s internal control over financial reporting that occurred during theperiod covered by this report that have materially affected, or that arereasonably likely to materially affect, our internal control over financialreporting.

 

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

 

None.

 

**PART III**

 

**Items 10, 11, 12, 13 and 14.**

 

Information required by Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K is incorporated by reference from our definitive Proxy Statement for our 2005 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year, except that the information required by Item 10 with respect to executive officers of the Company is included in Item 4A of Part I of this Annual Report on Form 10-K.

 

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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, 2004 and December 31, 2003                                                                            |   |
| c. | Consolidated Statements of Operations for  the years ended December 31, 2004, 2003 and 2002                                                           |   |
| d. | Consolidated Statements of Shareholders’  Equity (Deficit) and Comprehensive Income (Loss) for the years ended December  31, 2004, 2003 and 2002 |   |
| e. | Consolidated Statements of Cash Flows for  the years ended December 31, 2004, 2003 and 2002                                                           |   |
| 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, 2004, 2003 and 2002.

 
| a.     | Financial Statements of Kaiser-Hill  Company, LLC as of December 31, 2004 and 2003 and for the three years ended  December 31, 2002 |                                            |
|--------|-------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------|
|   |                                                                                                                                |                                            |   |
| 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)**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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**Exhibit No. 10 — Material Contracts**

 

10(a) Kaiser Group International, Inc. Employee Stock Ownership Plan (asamended and restated as of January 1, 1996) (Incorporated by reference to Exhibit No. 10(b) to Annual Report on Form10-K (Registrant No. 1-12248) filed with the Commission on April 17, 2000)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8.  Amendment No. 8 dated June 8,2000 (Incorporated by reference to Exhibit 10(d)(8) to Quarterly Report on Form10-Q (Registrant No. 1-12248) for the second quarter of fiscal 2000 filed withthe Commission on September 6, 2000)

 

9.  Amendment No. 9 dated June19, 2003 (Incorporated by reference to Exhibit 10(c)(9) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 2003 filedwith the Commission on August 14, 2003)

 

10.  Amendment No. 10 dated March17, 2004 (Incorporated by reference to Exhibit 10(c)(10) to Quarterly Report onForm 10-Q (Registrant No. 1-12248) for the first quarter of fiscal 2004 filedwith the Commission on May 24, 2004)

 

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

 

21

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10(e)                      ICFKaiser International, Inc. Section 401(k) Plan (as amended and restated as ofMarch 1, 1993) (and further amended with respect to name change only as of June26, 1993) (Incorporated by reference to Exhibit No. 10(f) to Quarterly Reporton Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 1994filed with the Commission on October 15, 1993)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8.  AmendmentNo. 8 dated December 10, 2002 (Incorporated by reference to Exhibit 10(e)(8) toQuarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarterof fiscal 2003 filed with the Commission on August 14, 2003)

 

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

 

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

 

11.  AmendmentNo. 11 dated November 11, 2004 (Incorporated by reference to Exhibit 10(e)(11)to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the third quarterof fiscal 2004 filed with the Commission on November 15, 2004)

 

10(f) Trust Agreement with Vanguard Fiduciary Trust Company dated as of March1, 1989, for the ICF Kaiser International, Inc. Section 401(k) Plan(Incorporated by reference to Exhibit No. 28(b) to Registration Statement onForm S-8 (Registrant No. 33-51460) filed with the Commission on August 31,1992)

 

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

 

1. Modification M116 to Contract #DE-AC34-00RF01904, effective March24, 2004 (Incorporated by reference to Exhibit 10(g)(1) to Annual Report onForm 10-K (Registrant No. 1-12248) filed with the Commission on March 30, 2004)

 

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

 

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

 

22

----

 

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

 

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

 

10(k) Amended and Restated Employment Agreement with John T. Grigsby,Jr., President and Chief Executive Officer, effective as of December 19, 2000(Incorporated by reference to Exhibit No. 10(m) to Registration Statement onForm S-4 (Registrant No. 333-100640) filed with the Commission on October 18,2002)

 

10(l) Transition Agreement between Kaiser Group Holdings, Inc. and JohnT. Grigsby, Jr. effective as of August 31, 2004 (Incorporated by reference toExhibit 99 to Current Report on Form 8-K (Registration No. 1-12248) filed withthe Commission on September 1, 2004)

 

**Exhibit 14 — Corporate Code of Conduct**

 

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

 

**Exhibit No. 21 — Consolidated Subsidiaries ofthe Registrant as of March 1, 2005**

 

**Exhibit No. 31.1 — Certification of thePrincipal Executive Officer**

 

Pursuant toRule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934

 

**Exhibit No. 31.2 — Certification of thePrincipal Financial Officer**

 

Pursuant toRule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934

 

**Exhibit No. 32.1 — Certification of thePrincipal Executive Officer**

 

Pursuant to18 U.S.C. Section 1350

 

**Exhibit No. 32.2 — Certification of thePrincipal Financial Officer**

 

Pursuant to18 U.S.C. Section 1350

 

23

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis Annual Report on Form 10-K to be signed on its behalf by the undersigned,thereunto duly authorized.

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

 

March 29, 2005

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Annual Report on Form 10-K has been signed below bythe following persons on behalf of the Registrant and in the capacities and onthe dates indicated.

 

(1) Principal executive officer

 
| /s/ Douglas W. McMinn |   |                                   |   |   | March 29, 2005 |
|-----------------------|--------|----------------------------------------|--------|--------|----------------|
| Douglas W. McMinn     |   | President  and Chief Executive Officer |   |   |

 

(2) Principal financial and accountingofficer

 
| /s/ Marian P. Hamlett |   |                                                                         |   |   | March 29, 2005 |
|-----------------------|--------|------------------------------------------------------------------------------|--------|--------|----------------|
| Marian P. Hamlett     |   | Executive Vice President,  Chief Financial Officer,  and Assistant Treasurer |   |   |

 

(3) Board of Directors

 
| /s/ Jon B. Bennett         |   |     |   |   | March 29, 2005 |
|----------------------------|--------|----------|--------|--------|----------------|
| Jon B. Bennett             |   | Director |   |   |
|                       |   |     |   |   |
| /s/ Douglas W. McMinn      |   |     |   |   | March 29, 2005 |
| Douglas W. McMinn          |   | Director |   |   |
|                       |   |     |   |   |
| /s/ Mark S. Tennenbaum     |   |     |   |   | March 29, 2005 |
| Mark S. Tennenbaum         |   | Director |   |   |
|                       |   |     |   |   |
| /s/ Frank E. Williams, Jr. |   |     |   |   | March 29, 2005 |
| Frank E. Williams, Jr.     |   | Director |   |   |

 

24

----

 

**Reportof Independent Auditors**

 

To the Board of Directors and

Shareholders of Kaiser Group Holdings, Inc.

 

We have auditedthe consolidated balance sheet of Kaiser Group Holdings, Inc and itssubsidiaries (the Company) at December 31, 2004, and 2003, and the relatedconsolidated statements of income and retained earnings and cash flows for eachof the three years ended in the period ended December 31, 2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. We did not audit thefinancial statements of Kaiser-Hill Company, LLC and subsidiary, a 50percent-owned limited liability corporation which is reflected in the Company’sconsolidated balance sheet as an investment in and advances to affiliatesconstituting $42.2 million of the consolidated total assets as of December 31,2004, and equity income in earnings of affiliates of $16.8 million for the yearended December 31, 2004.  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 standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit and the report of the other auditors provide a reasonable basisfor our opinion.

 

In our opinion, based onour audit and the report of the other auditors, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Kaiser Group Holdings, Inc and its subsidiaries atDecember 31, 2004 and 2003, and the results of its operations and its cashflows for each of the three years then ended in conformity with accountingprinciples generally accepted in the United States of America.

 
| March 18, 2005   |
|------------------|
| McLean, Virginia |

 

F-1

----

 

**KAISER GROUP HOLDINGS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands, except shareamounts)**

** **
| ** **                                                                                                           | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                           |       |                   |       |                   |       |
| Current Assets                                                                                                       |       |                   |       |                   |       |
| Cash and cash equivalents                                                                                            |       | $                      | 12,728     |                   | $          | 10,142 |   |
| Certificate of deposit                                                                                               |       | 1,006                  |       | 1,009                  |       |
| Restricted cash and cash equivalents                                                                                 |       | 3,931                  |       | 7,049                  |       |
| Accounts receivable                                                                                                  |       | 217                    |       | —                 |       |
| Prepaid expenses and other current assets                                                                            |       | 742                    |       | 971                    |       |
| Contract receivable, net                                                                                             |       | 3,000                  |       | 3,000                  |       |
| Total Current Assets                                                                                                 |       | 21,624                 |       | 22,171                 |       |
|                                                                                                                 |       |                   |       |                   |       |
| Other Assets                                                                                                         |       |                   |       |                   |       |
| Investments in and advances to affiliates                                                                            |       | 45,094                 |       | 45,788                 |       |
| Notes receivable                                                                                                     |       | 5,894                  |       | 5,894                  |       |
| Other long-term assets                                                                                               |       | 102                    |       | 227                    |       |
|                                                                                                                 |       | 51,090                 |       | 51,909                 |       |
| Total Assets                                                                                                         |       | $                      | 72,714     |                   | $          | 74,080 |   |
|                                                                                                                 |       |                   |       |                   |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                        | ** ** | ** **             | ** ** | ** **             | ** ** |
| ** **                                                                                                           | ** ** | ** **             | ** ** | ** **             | ** ** |
| Current Liabilities                                                                                                  |       |                   |       |                   |       |
| Accounts payable                                                                                                     |       | $                      | 169        |                   | $          | 304 |   |
| Post retirement benefit plan obligation                                                                              |       | 6,623                  |       | 6,913                  |       |
| Other accrued expenses                                                                                               |       | 4,620                  |       | 4,432                  |       |
| Interest payable on preferred stock                                                                                  |       | 313                    |       | 409                    |       |
| Deferred tax liability                                                                                               |       | 5,772                  |       | 6,495                  |       |
| Income taxes payable                                                                                                 |       | 763                    |       | 275                    |       |
| Total Current Liabilities                                                                                            |       | 18,260                 |       | 18,828                 |       |
|                                                                                                                 |       |                   |       |                   |       |
| Long-term Liabilities                                                                                                |       |                   |       |                   |       |
| Mandatorily redeemable preferred stock                                                                               |       | 26,909                 |       | 35,175                 |       |
|                                                                                                                 |       |                   |       |                   |       |
| Commitments and Contingencies                                                                                        |       |                   |       |                   |       |
|                                                                                                                 |       |                   |       |                   |       |
| Common stock, par value $.01 per share:                                                                              |       |                   |       |                   |       |
| Authorized—3,000,000 shares                                                                                     |       |                   |       |                   |       |
| Issued and outstanding—1,598,270 and  1,594,270 shares at December 31, 2004 and December 31, 2003, respectively |       | 16                     |       | 16                     |       |
| Capital in excess of par                                                                                             |       | 8,063                  |       | 7,975                  |       |
| Retained earnings                                                                                                    |       | 19,424                 |       | 12,049                 |       |
| Accumulated other comprehensive income  (loss)                                                                       |       | 42                     |       | 37                     |       |
| Total Shareholders’ Equity                                                                                      |       | 27,545                 |       | 20,077                 |       |
| Total Liabilities and Shareholders’ Equity                                                                      |       | $                      | 72,714     |                   | $          | 74,080 |   |

 

See notes to consolidated financial statements.

 

F-2

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**KAISER GROUP HOLDINGS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                                                                                                           | ** ** | **Year Ended December 31,**                    | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2004**                                       | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                                 |       | **(In  thousands, except per share  amounts)** |       |
|                                                                                                                                 |       |                                           |       |   |   |   |   |
| Gross Revenue                                                                                                                        |       | $                                              | 1,036      |   | $ | — |   | $ | — |   |
| Subcontract and direct material costs                                                                                                |       | 748                                            |       | — |   | — |   |
| Service Revenue                                                                                                                      |       | 288                                            |       | — |   | — |   |
| Operating Expenses                                                                                                                   |       |                                           |       |   |   |   |   |
| Reserve for settlement of remaining Class 4  claims                                                                                  |       | 1,400                                          |       | — |   | — |   |
| Administrative expenses                                                                                                              |       | 5,252                                          |       | 4,918 |   | 7,028 |   |
| Operating Income (Loss)                                                                                                              |       | (6,364                                         | )          | (4,918 | ) | (7,028 | ) |
| Other Income (Expense)                                                                                                               |       |                                           |       |   |   |   |   |
| Equity income in earnings of affiliate, net  of amortization of $3,524 for each of the years ended December 31, 2004, 2003  and 2002 |       | 16,806                                         |       | 16,475 |   | 33,233 |   |
| Gain on sale of investment                                                                                                           |       | —                                         |       | — |   | 3,371 |   |
| Gain on sale of security                                                                                                             |       | —                                         |       | — |   | 106 |   |
| Write-off of notes receivable and accrued  interest                                                                                  |       | —                                         |       | — |   | (1,320 | ) |
| Other income                                                                                                                         |       | 25                                             |       |   |   |   |   |
| Interest income                                                                                                                      |       | 698                                            |       | 833 |   | 803 |   |
| Interest expense for preferred dividends                                                                                             |       | (2,055                                         | )          | (1,362 | ) | — |   |
| Income From Continuing Operations Before  Income Tax                                                                                 |       | 9,110                                          |       | 11,028 |   | 29,165 |   |
| Income tax expense                                                                                                                   |       | (1,735                                         | )          | (4,827 | ) | (11,319 | ) |
| Income From Continuing Operations                                                                                                    |       | 7,375                                          |       | 6,201 |   | 17,846 |   |
| Income (Loss) from discontinued operations,  net of tax                                                                              |       | —                                         |       | (1,833 | ) | 497 |   |
| Net Income                                                                                                                           |       | 7,375                                          |       | 4,368 |   | 18,343 |   |
| Preferred stock dividends                                                                                                            |       | —                                         |       | (1,534 | ) | (4,171 | ) |
|                                                                                                                                 |       |                                           |       |   |   |   |   |
| Income Applicable to Common Shareholders                                                                                             |       | $                                              | 7,375      |   | $ | 2,834 |   | $ | 14,172 |   |
|                                                                                                                                 |       |                                           |       |   |   |   |   |
| Basic and Diluted Earnings Per Common  Share:                                                                                        |       |                                           |       |   |   |   |   |
| Continuing operations, net of tax                                                                                                    |       | $                                              | 4.62       |   | $ | 2.92 |   | $ | 8.60 |   |
| Discontinued operations, net of tax                                                                                                  |       | —                                         |       | (1.14 | ) | 0.31 |   |
|                                                                                                                                 |       |                                           |       |   |   |   |   |
| Net Earnings Per Share                                                                                                               |       | $                                              | 4.62       |   | $ | 1.78 |   | $ | 8.91 |   |
|                                                                                                                                 |       |                                           |       |   |   |   |   |
| Weighted average shares for basic and diluted  earnings per common share                                                             |       | 1,597                                          |       | 1,594 |   | 1,590 |   |

 

See notes to consolidated financialstatements.

 

F-3

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**KAISER GROUP HOLDINGS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENT OFSHAREHOLDERS’ EQUITY (DEFICIT)**

(In thousands, except shareamounts)

 
|                                                                       |   | **Old Common Stock** |   | ** **           |   |          |      | **Capital In  Excess of Par** |   | **Accumulated  Earnings  (Deficit)** |   | **Accumulated  Other  Comprehensive** |   |
|----------------------------------------------------------------------------|--------|----------------------|--------|----------------------|--------|---------------|-----------|-------------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|
| ** **                                                                 |   | **Par**              |   | **New Common Stock** |
| **Shares**                                                                 |   | **Value**            |   | **Shares**           |   | **Par Value** |
|                                                                       |   |                 |   |                 |   |          |      |                          |   |                                 |   |                                  |   |   |   |
| Balance, December 31, 2001                                                 |   | —               |   | $                    | — |          | 1,585,239 |                          | $      | 16                                   |   | $                                     | 7,947  |   | $ | (4,957 | ) | $ | 354 |   |
| Net income                                                                 |   | —               |   | —               |   | —        |      | —                        |   | —                               |   | 18,343                                |   | — |   |
| Issuances of new common stock                                              |   | —               |   | —               |   | 4,823         |      | —                        |   | 10                                   |   | —                                |   | — |   |
| Issuance of preferred stock in  settlement of allowed class 4  claims |   | —               |   | —               |   | —        |      | —                        |   | (38                                  | )      | —                                |   | — |   |
| Foreign currency translation  Adjustment                                   |   | —               |   | —               |   | —        |      | —                        |   | —                               |   | —                                |   | 7 |   |
| Unrealized gain on securities  Available for sale                          |   | —               |   | —               |   | —        |      | —                        |   | —                               |   | —                                |   | (393 | ) |
| Preferred stock dividends                                                  |   | —               |   | —               |   | —        |      | —                        |   | —                               |   | (4,171                                | )      | — |   |
| Purchase of preferred treasury  stock below liquidation value              |   | —               |   | —               |   | —        |      | —                        |   | 2,594                                |   | —                                |   | — |   |
| Class 4 allowed claim  settlements                                         |   | —               |   | —               |   | —        |      | —                        |   | (291                                 | )      | —                                |   | — |   |
| Tax adjustment                                                             |   | —               |   | —               |   | —        |      | —                        |   | (1,616                               | )      | —                                |   | — |   |
|                                                                       |   |                 |   |                 |   |          |      |                          |   |                                 |   |                                  |   |   |   |
| Balance, December 31, 2002                                                 |   | —               |   | $                    | — |          | 1,590,062 |                          | $      | 16                                   |   | $                                     | 8,606  |   | $ | 9,215 |   | $ | (32 | ) |
| Net income                                                                 |   | —               |   | —               |   | —        |      | —                        |   | —                               |   | 4,368                                 |   | — |   |
| Issuances of new 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                                                 |   | —               |   | $                    | — |          | 1,594,270 |                          | $      | 16                                   |   | $                                     | 7,975  |   | $ | 12,049 |   | $ | 37 |   |
| Net income                                                                 |   | —               |   | —               |   | —        |      | —                        |   | —                               |   | 7,375                                 |   | — |   |
| Issuances of new common stock                                              |   | —               |   | —               |   | 4,000         |      | —                        |   | 88                                   |   | —                                |   | — |   |
| Foreign currency translation  Adjustment                                   |   | —               |   | —               |   | —        |      | —                        |   | —                               |   | —                                |   | 5 |   |
| Balance, December 31, 2004                                                 |   | —               |   | $                    | — |          | 1,598,270 |                          | $      | 16                                   |   | $                                     | 8,063  |   | $ | 19,424 |   | $ | 42 |   |

 

**KAISER GROUP HOLDINGS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**

(In thousands)

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                       |       |                        |       |   |   |   |   |
| Net Income (Loss)                          |       | $                           | 7,375      |   | $ | 4,368 |   | $ | 18,343 |   |
| Other Comprehensive Income  (Loss)         |       |                        |       |   |   |   |   |
| Foreign currency translation  adjustments  |       | 5                           |       | 69 |   | 7 |   |
| Unrealized gain on securities,  net of tax |       | —                      |       | — |   | (393 | ) |
|                                       |       |                        |       |   |   |   |   |
| Total Comprehensive Income  (Loss)         |       | $                           | 7,380      |   | $ | 4,437 |   | $ | 17,957 |   |

 

See notes to consolidated financialstatements.

 

F-4

----

 

##### **KAISERGROUP HOLDINGS, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                            | ** ** | **For the year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                  |       | **(in  thousands)**                 |       |
| Operating Activities                                                                  |       |                                |       |   |   |   |   |
| Net income                                                                            |       | $                                   | 7,375      |   | $ | 4,368 |   | $ | 18,343 |   |
| Adjustments to reconcile net income (loss)  to net cash Used in operating activities: |       |                                |       |   |   |   |   |
| Loss of discontinued operations, net of tax                                           |       | —                              |       | 1,833 |   | 259 |   |
| Gain on sale of investments                                                           |       | —                              |       | — |   | (3,371 | ) |
| Deferred taxes related to continuing  operating activities                            |       | (723                                | )          | 1,518 |   | 10,746 |   |
| Gain on sale of stock                                                                 |       | —                              |       | — |   | (106 | ) |
| Equity in unconsolidated affiliate                                                    |       | (16,806                             | )          | (16,475 | ) | (33,233 | ) |
| Changes in operating assets and  liabilities, net of acquisitions and dispositions    |       |                                |       |   |   |   |   |
| Accounts receivables, net                                                             |       | (217                                | )          | — |   | — |   |
| Prepaid expenses and other current assets                                             |       | 229                                 |       | 1,433 |   | (561 | ) |
| Accounts payable and accrued expenses                                                 |       | (237                                | )          | (2,558 | ) | 1,926 |   |
| Income taxes payable                                                                  |       | 488                                 |       | (365 | ) | (498 | ) |
| Other operating activities                                                            |       | 90                                  |       | 7 |   | 232 |   |
|                                                                                  |       |                                |       |   |   |   |   |
| Net Cash Used in Continuing Operating  Activities                                     |       | (9,801                              | )          | (10,239 | ) | (6,263 | ) |
| Investing Activities                                                                  |       |                                |       |   |   |   |   |
| Distributions from 50% owned affiliate                                                |       | 17,500                              |       | 16,350 |   | 15,650 |   |
| Purchase of certificate of deposit                                                    |       | (1,000                              | )          | (1,000 | ) |   |   |
| Maturity of certificate of deposit                                                    |       | 1,000                               |       |   |   |   |   |
| Proceeds from sale of investment                                                      |       | —                              |       | — |   | 4,521 |   |
| Proceeds from sale of securities                                                      |       | —                              |       | — |   | 5,961 |   |
| Net Cash Provided by Investing Activities                                             |       | 17,500                              |       | 15,350 |   | 26,132 |   |
| Financing Activities                                                                  |       |                                |       |   |   |   |   |
| Release of restricted cash                                                            |       | —                              |       | — |   | 1,435 |   |
| Transfer to restricted cash                                                           |       | (36                                 | )          | — |   | (4,508 | ) |
| Purchase of preferred treasury stock                                                  |       | —                              |       | (311 | ) | (3,983 | ) |
| Transfer from restricted cash for the  redemption of preferred stock                  |       | 3,189                               |       | 10,507 |   | — |   |
| Redemption of preferred stock                                                         |       | (8,266                              | )          | (20,390 | ) | — |   |
| Payment of preferred stock dividends                                                  |       | —                              |       | (2,188 | ) | (4,248 | ) |
| Net Cash Used in Financing Activities                                                 |       | (5,113                              | )          | (12,382 | ) | (11,304 | ) |
| Increase (Decrease) in Cash and Cash  Equivalents                                     |       | 2,586                               |       | (7,271 | ) | 8,565 |   |
| Cash and Cash Equivalents at Beginning of  Period                                     |       | 10,142                              |       | 17,413 |   | 8,848 |   |
|                                                                                  |       |                                |       |   |   |   |   |
| Cash and Cash Equivalents at End of Period                                            |       | $                                   | 12,728     |   | $ | 10,142 |   | $ | 17,413 |   |

 

See notes to consolidated financialstatements.

 

F-5

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**KAISER GROUP HOLDINGS, INC. ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

1.                                       Basis of Presentation

 

Kaiser GroupHoldings, Inc. is a Delaware holding company that was formed on December 6,2000 for the purpose of owning all of the outstanding stock of Kaiser GroupInternational, Inc. (Old Kaiser), which in turn continues to own the stock ofits remaining subsidiaries. On June 9, 2000, Old Kaiser and 38 of 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 (the Second Amended Plan of Reorganization (the Plan)) that waseffective on December 18, 2000 (the Effective Date). The Company is deemed a “successorissuer” to Old Kaiser by virtue of Rule 12g-3(a) under the Securities ExchangeAct of 1934. References to the “Company” or “Kaiser Holdings” in this reportrefer to Kaiser Group Holdings, Inc. and its consolidated subsidiaries. Asummary of the Plan for Old Kaiser can be found in a Current Report on Form 8-Kdated December 5, 2000 filed by Old Kaiser.

 

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

 

•                  the ownership ofa 50% interest in Kaiser-Hill Company, LLC (Kaiser-Hill), which serves as thegeneral contractor at the U.S. Department of Energy’s (DOE) Rocky Flats sitenear Denver, Colorado, for the performance of a contract for the closure of thesite (the Closure Contract). (See Note 6 for summarized financial information.)

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

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

•                  a wholly-owned captive insurancecompany that is not at this time issuing new policies and is simply involved inresolving remaining claims. However, wehave begun the necessary regulatory and legal process to enable ourwholly-owned captive insurance company to offer derivative captive insuranceservices to third-party clients through a sponsored captive subsidiary.

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

•                  anew subsidiary, Kaiser Analytical Management Services, Inc. (“KAMS”), which weformed in April 2004 to take over the operations of the AnalyticalServices Division of Kaiser-Hill Company, LLC. KAMS provides analytical management services such as sample planning,sample management, records management, performance assessment and datamanagement in the general areas of health and safety, geotechnical,environmental and waste management, 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 that, undercertain circumstances resulting from a bankruptcy, a new entity is created forfinancial reporting purposes upon the emergence of that entity frombankruptcy.  Accordingly, the value ofthe reorganized enterprise becomes the established amount for the emergingbalance of shareholders’ equity, and any accumulated deficit of the predecessorentity is offset against available paid-in-capital to result in an emergingretained earnings of zero.  Additionally,assets and liabilities are recorded at their fair values.

 

The value of the emerged enterprise used for fresh startreporting as of December 31, 2000 was $87.5 million and was determined bymanagement with the assistance of independent advisors.  The methodology employed involved estimationof the enterprise value taking into consideration a discounted cash flowanalysis.  The discounted cash flowanalysis was based on a seven-year cash flow projection prepared by management,taking into consideration the terminal value of its assets and liabilities asof immediately prior to its emergence from 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 certainoperating activities. Net after-tax cash flows, assuming a 40% effective taxrate, were discounted at 17% in order to take into consideration the risks anduncertainties inherent in such projections. The cash flow projections were based on estimates and assumptions aboutcircumstances and events that had not yet taken place.  Estimates and assumptions regardingindividual retained matters which form the collective composition of theoverall enterprise value as of December 18, 2000 are inherently subject tosignificant economic and competitive uncertainties and contingencies beyond thecontrol of the Company.  Accordingly,there may be differences between projections and actual results because eventsand circumstances frequently do not occur as expected and may besignificant.  More specifically,assumptions within the

 

F-6

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valuation related to the amount and timing of the ultimateperformance and related cash flows of the Company’s investment in Kaiser-Hillhave the greatest impact on the overall enterprise valuation.

 

2.                                       GeneralTerms of Plan and Status of Bankruptcy Distributions

 

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

 

In general terms,the Plan contemplated three basic classes of creditors:

 

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

 

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

 

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

 

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

 

To address theremaining unresolved claims, the Bankruptcy Court issued an order on March 27,2001 establishing an Alternative Dispute Resolution (ADR) procedure whereby theremaining claimants and Old Kaiser produce limited supporting data relative totheir respective positions and engage in initial negotiation efforts in anattempt to reach an agreed claim determination. If necessary, the parties were thereafter required to participate in anon-binding mediation before a mediator pre-selected by the BankruptcyCourt.  All unresolved claims as of March27, 2001 are subject to the ADR process. Since April 17, 2001, the date of theinitial distribution, $126.0 million of asserted claims have been withdrawn,negotiated or mediated to an agreed amount, resulting in cash paymentsapproximating $2.6 million and issuances of 683 shares of New Preferred and 823shares of New Common. As of March 23, 2005, the amount of unresolved claims wasapproximately $4.5 million. The Company expects to resolve the remaining claimsby the end of 2005.  The Companycurrently believes that the total amount of Class 4 claims ultimately to beallowed in the Old Kaiser bankruptcy proceeding will not exceed $142.0 million.  As demonstrated by the claim settlementscompleted since 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 in lieu ofthe combination of cash and New Preferred and New Common as contemplated in thePlan.  The Company intends to continue touse this settlement alternative during the resolution of remaining Class 4claims.

 

F-7

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

 

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

 

3.                                       Significant Accounting Policies

 

**Principles of Consolidation: The consolidatedfinancial statements include all majority-owned or controlled subsidiaries.Investments in unconsolidated affiliated companies and joint ventures areaccounted for using the equity method. The difference between the carryingvalue of the joint venture investment and the Company’s underlying equity isamortized on a straight-line basis over the estimated term of the joint ventureinvestment. All significant intercompany balances and transactions have beeneliminated.**

** **

Revenue Recognition:  The Company earns its revenue from a monthlymanagement fee plus profit sharing contract. The company recognizes revenue earned from the monthly management feefor this contract on a straight-line basis and recognizes the profit sharingincome 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 not berealizable.

 

Earnings Per Share:  Basic EPS is computed by dividing net income(loss) by the weighted average number of common shares outstanding for theperiod.  The weighted average shares outstandingfor the year ended December 31, 2001 retroactively adjusts for the conversionof the Old Common to New Common effective with the adoption of fresh-startreporting.  As additional distributionsof Kaiser Holdings common stock are made to holders of newly allowed Class 4claims, the conversion ratio of 96 shares may be adjusted to reflect the finaltotal number of shares of New Common (as discussed in Note 2).

 

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

 

The effect of preferred dividends of $1.5million and $4.2 million has been included in continuing operations in thecalculation of basic and diluted earnings per share for the year ended December31, 2003 and 2002, respectively. As discussed in Note 8, the Company adoptedFAS 150 effective July 1, 2003.  Therefore,the $2.1 million for the year ended December 31, 2004 and $1.4 million ofpreferred stock dividends for the six months ended and December 31, 2003 havebeen shown as 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):

 
| ** **                                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                  |       |     |       |     |       |
| Cash reserved for future claim  settlements and accumulated dividends |       | $        | 953        |     | $          | 1,349 |   |
| Cash reserved for future New  Preferred redemptions                   |       | —   |       | 2,756    |       |
| Cash balances of wholly owned  insurance subsidiary                   |       | 2,978    |       | 2,944    |       |
|                                                                  |       |     |       |     |       |
|                                                                  |       | $        | 3,931      |     | $          | 7,049 |   |

 

F-8

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Supplemental cash flow information for theyears ended December 31, is as follows:

 
| ** **                                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Cash payments for income taxes                                    |       | $        | 1,916      |     | $          | 4,010 |   |
| Payment of preferred dividends  included in continuing operations |       | 2,151    |       | 953      |       |
| Non cash transactions:                                            |       |     |       |     |       |
| Issuance of New Common Stock to  directors                        |       | 88       |       | 22       |       |
|                                                                   |            |          |            |          |            |  |  |

 

Marketable Securities:  In December 2001, the Company recorded a gainon the stock demutualization of a non-affiliated insurance company.  The gain was calculated based upon the fairvalue of the securities on the date of the insurance company’s initial publicoffering. These securities were sold in February 2002.  Investments classified as available for saleare measured at fair value in the financial statements with unrealized gainsand losses reported, net of tax, in other comprehensive income (loss).

 

Adoptionof FIN 46:  In January 2003, theFinancial Accounting Standards Board (FASB) issued Interpretation (FIN) 46, “Consolidationof Variable Interest Entities,” which provides guidance on when to consolidatevariable interest entities. In December 2003, FASB revised FIN 46 with FIN46R. In addition to conforming to previously issued FASB Staff Positions, FIN46R deferred the implementation date for certain variable interest entities.The Company adopted the provisions of FIN 46R immediately for entities createdafter December 31, 2003. For entities created before December 31, 2003,the Company will adopt FIN 46R in the first quarter of 2005, as required by FIN46R.   The Company does not currentlyhave any entities that would be considered variable interest entities under FIN46R.

 

Adoptionof FAS 123 (Revised):  InDecember 2004, the FASB issued FAS No. 123 (Revised) “Share-BasedPayment,” which replaces FAS No. 123 and supercedes APB No. 25, “Accountingfor Stock Issued to Employees”. FAS 123(R) is effective as of thebeginning of the first interim or annual reporting period that begins afterDecember 15, 2005.  FAS 123(R)requires that the costs resulting from all share-based payment transactions berecognized in the financial statements. FAS 123(R) applies to all awardsgranted after the required effective date, but does not apply to awards grantedin periods before the requiredeffective date, except if prior awards are modified, repurchased orcancelled after the effective date. FAS 123(R) also amends FASNo. 95, “Statement of Cash Flows,” to require that excess tax benefits bereported as a financing cash inflow rather than as a reduction of taxespaid.  The Company will adopt FASNo. 123(R) on July 1, 2005 and management is currently assessing theimpact on the Company’s consolidated financial statements.

 

Adoption of FAS 132 (Revised): In December 2003, the FASB issued FAS No. 132 (Revised 2003), “Employers’Disclosures about Pensions and Other Postretirement Benefits.” FASNo. 132(R) increases the existing disclosure requirements by requiringmore details about pension plan assets, benefit obligations, cash flows,benefit costs and related information. Companies are required to segregate planassets by category, such as debt, equity and real estate, and to providecertain expected rates of return and other informational disclosures. TheCompany has adopted the new SFAS No. 132(R) disclosure requirements forthe year ending December 31, 2004.

 

# **Adoption of FAS 142:  The Company adopted Statement of FinancialAccounting Standards No. 142 (FAS 142), *Goodwilland Other Intangible Assets*effective January 1, 2002.  Under FAS 142, intangible assets withindefinite lives will no longer be amortized but are reviewed annually (or morefrequently if impairment indicators arise) for impairment.  Recognized intangible assets with determinableuseful lives will continue to be amortized. The Company’s only intangible asset relates to its investment inKaiser-Hill recorded upon the adoption of fresh-start reporting.  This intangible asset of $21.1 million isbeing amortized on a straight-line basis through 2006, which is the datecurrently estimated for Kaiser-Hill’s completion of the Closure Contract. Totalaccumulated amortization as of December 31, 2004 was $14.1 million.  The amortization expense associated with thisintangible is recorded as a reduction to the equity income in earnings ofaffiliate on the consolidation statement of operations.  The estimate amortization expense for theremaining life of this intangible asset is:**

 

| **Year ending  December 31:** | ** ** | **Amount**                 | ** ** |
|-------------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **(dollars in thousands)** | ** ** |
| 2005                          |       | $                          | 3,524      |   |
| 2006                          |       | 3,524                      |       |
|                          |       | $                          | 7,048      |   |

 

Adoption of FAS 150: On May 31, 2003, FASBissued FASB Statement No. 150 (FAS 150), “Accounting for Certain FinancialInstruments with 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 150 also requires disclosures aboutalternative ways of settling the instruments and the capital structure ofentities – all of whose shares are

 

F-9

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mandatorily redeemable.  FAS 150 was to have been generally effectivefor all financial instruments entered into or modified after May 31, 2003, andotherwise effective at the beginning of the first interim period beginningafter June 15, 2003.  Recently, the FASBhas deferred for an indefinite period the effective date for certaininstruments and entities.  As discussedin Note 8, the Company has adopted the provisions of FAS 150 in the thirdquarter of 2003.

 

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 to allowances for contract, notesand accounts receivable and accrued interest, deferred tax assets and valuationallowance and other investments, assumptions used to determine the retireemedical obligation, the amortization period for the excess value attributed tothe Kaiser-Hill investment and the remaining Allowed 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, certificate of deposit andaccounts receivable. The Company’s cash and cash equivalents and certificate ofdeposit are maintained in accounts held in major U.S. banks. Concentrations ofcredit risk relative to accounts receivable are related to our only source ofrevenue is derived from one contract with a U.S. company.

 

Reclassifications:   Certain reclassifications have been made tothe prior-period financial statements contained herein in order to conform themto the 2004 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:

 
| ** **                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                 |       |     |       |     |       |
| Cash                                                 |       | $        | 22         |     | $          | 22 |   |
| Letter of credit cash  collateral drawn by Nova Hut  |       | 11,100   |       | 11,100   |       |
| Retained accounts receivable                         |       | 20,624   |       | 20,703   |       |
| Subcontractor retentions and  other accounts payable |       | (5,698   | )          | (5,230   | )          |
|                                                 |       | 26,048   |       | 26,595   |       |
| Allowance for estimated loss                         |       | (23,048  | )          | (23,595  | )          |
|                                                 |       | $        | 3,000      |     | $          | 3,000 |   |

 

Although Old Kaiser sold its Metals Mining and Industry business unitin August 2000, it retained its Netherlands subsidiary, Kaiser Netherlands,B.V., which had been responsible for a turnkey engineering and constructionservices contract for the construction of a steel mini-mill in the CzechRepublic for Nova Hut.  Afterconstruction of the mini-mill was complete in 2000, the contract with Nova Hutprovided for a maximum of three possible performance tests. The firstperformance test was completed on November 13, 2000. Kaiser Netherlandsbelieves that the first performance test was successful and that Nova Hutshould have agreed to final acceptance of the mini-mill and made final paymentof amounts accrued by Kaiser Netherlands throughout the project, including feeand retention amounts with release of performance guarantee instruments.  Nova Hut, however, asserted that the firsttest was not successful. Kaiser Netherlands believes that such contention mayhave been 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 23, 2005,this dispute has not been resolved, and Kaiser Netherlands has resorted tolegal proceedings to enforce its rights. Until recently, the primary legal venue has been the Delaware bankruptcyproceeding for Old Kaiser, where the Company has asserted claims against NovaHut and the International Finance Corporation (“IFC”).  The Delaware bankruptcy court had previouslyruled that the Company, as opposed to Kaiser Netherlands, could proceed withprosecution of its specific claims against Nova Hut and IFC in the Delawarebankruptcy 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.  Kaiser Holdings filed a notice of appeal withthe Third Circuit regarding this decision in favor of the IFC and on February25, 2005, the Third Circuit overturned the District Court’s decision. The IFChas asked for a rehearing of the case by the Third Circuit.  With regard to the Nova Hut appeal, theDistrict Court has ruled that U.S. Bankruptcy proceedings should be stayedpending completion of international arbitration proceedings.

 

In January 2004, KaiserNetherlands filed arbitration claims against Nova Hut in the amount of $51.1million with the International Chamber of Commerce (“ICC”).  In November 2004, Kaiser Netherlands’ claimagainst Nova Hut was

 

F-10

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amended to include lateinterest and other charges and now totals $67.5 million.   The arbitration panel has been constituted,and the proceedings have been initiated. The earliest possible date for a final award ruling being issued is thelast quarter of 2005.  Nova Hut hassubmitted a $49.7 million counterclaim against Kaiser Netherlands in these sameICC proceedings.

 

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

 

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

 

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 2004, 2003 or 2002.

 

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 foreignassets consist solely of the carrying value of the net realizable value of theNova Hut contract matter (See “Net Assets of Discontinued Operations” and “OtherContingencies”).

 

6.                                       Joint Ventures and Affiliated Companies

 

**The Company’s net investments in/or amounts due fromjoint ventures and affiliated companies totaled $45.1 million and $45.8 millionat December 31, 2004 and 2003, respectively.**

** **

**Kaiser Hill:  The Company accounts for its 50% ownership in the Kaiser-Hill CompanyLLC investment using the equity method. At December 31, 2004 and 2003, the Company’s investment in Kaiser-Hilltotaled $42.3 million and $43.0 million, respectively.  The difference between the Company’s carryingvalue of the investment in Kaiser-Hill and its 50% underlying equity inKaiser-Hill’s net assets was $7.0 million and $10.6 million, respectively, asof December 31, 2004 and 2003 and is being amortized on a straight-line basisthrough 2006 (the date currently estimated for Kaiser-Hill’s completion of theClosure Contract.)**

** **

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

 
| ** **                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |     |       |
| Current assets             |       | $        | 118,011    |     | $          | 117,714  |       | $ | 115,030 |   |
| Non-current assets         |       | 132,224  |       | 114,701  |       | 78,734   |       |
| Current liabilities        |       | 113,609  |       | 111,936  |       | 107,586  |       |
| Non-current liabilities    |       | 66,134   |       | 55,647   |       | 28,644   |       |
|                       |       |     |       |     |       |     |       |
| Gross revenue              |       | $        | 651,851    |     | $          | 712,270  |       | $ | 732,718 |   |
| Subcontracts and materials |       | (377,649 | )          | (379,215 | )          | (367,355 | )          |
| Service revenue            |       | 274,202  |       | 333,055  |       | 365,363  |       |
| Operating expenses         |       | (233,574 | )          | (293,056 | )          | (291,986 | )          |
| Other income (expense)     |       | 32       |       | (1       | )          | 137      |       |
| Net income                 |       | $        | 40,660     |     | $          | 39,998   |       | $ | 73,514 |   |

 

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, expense,or

 

F-11

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remediation cost, butlimited to those of a civil nature, which may be incurred by, imposed on, orasserted against Kaiser-Hill arising out of any act or failure to act,condition, or exposure which occurred before Kaiser-Hill assumed responsibilityon July 1, 1995 (“pre-existing conditions”). To the extent the acts oromissions of Kaiser-Hill constitute willful misconduct, lack of good faith, orfailure to exercise prudent business judgment on the part of Kaiser-Hill’smanagerial personnel and cause or add to any liability, expense, or remediationcost resulting from pre-existing conditions, Kaiser-Hill is responsible, butonly for the incremental liability, expense, or remediation caused byKaiser-Hill.

 

The 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.

 

With respect to a revolving credit facility obtained by Kaiser-Hill inNovember 1999, both parents of Kaiser-Hill granted a first lien securityinterest to the Kaiser-Hill lenders in all of the ownership and equity interestof Kaiser-Hill and have agreed to cure any events of default by Kaiser-Hill onthe facility.  As of December 31, 2004 and 2003, Kaiser-Hill had no balances outstandingon its revolving credit.

 

Other: In 1997, the Company purchased a 4% ownership interest in a limitedliability company (the LLC) that leases the land and owns the buildings wherethe Company’s corporate headquarters were located.  Effective October 28, 2000, the Companynegotiated a settlement with the otherowners of the LLC resolving various issues between the Company and the otherowners.  As a part of that resolution,the Company fixed the maximum amount of potential future recovery of theinvestment to $2.8 million at whatever time as the property is sold orrefinanced.  At December 31, 2004 and2003, the amount of the investment remains unchanged.

 

7.                                       Notes receivable

 

In June 2002, a settlement was reachedbetween the Company and ICF Consulting, whereby the Company agreed torestructure the ICF Consulting notes totaling $6.6 million and accrued interestof $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 is subordinated to the rights to ICF Consulting’s seniorbank lenders.  As a part of thesettlement, ICF Consulting agreed to withdraw all claims against the Company,release cash in escrow totaling $0.8 million and purchase the Company’s 10%ownership in ICF Consulting, 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.   Due to uncertainties aboutthe ultimate collectibility of the New Note and accrued interest, andconsidering the fact that ICF Consulting had defaulted on the previously heldICF Consulting notes, the Company has recorded a reserve of $0.5 millionagainst the New Note.  There have been nochanges to the status of this note receivable at December 31, 2004.

 

8.                                       Mandatorily Redeemable Preferred Stock

 

The Company’s certificate of incorporationauthorizes the issuance of 2,000,000 shares of New Preferred. The Company hadNew Preferred outstanding with a liquidation preference of $26.9 million and$35.2 million, respectively, at December 31, 2004 and 2003, net of $5.6 millionof treasury stock at both December 31, 2004 and 2003.  The New Preferred is a series of authorizedpreferred stock designated as “Series 1 Redeemable Cumulative Preferred Stock,”and has a par value of $0.01 per share. The New Preferred ranks ahead of theCompany’s New Common.

 

The Company adopted FAS 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity”effective July 1, 2003.  Due to themandatorily redeemable feature of the New Preferred, described in greaterdetail below, the New Preferred has been reclassified from mezzanine equity toa long term liability on the consolidated balance sheet, and the preferredstock dividends have been reclassified to interest expense on the consolidatedstatement of operations effective July 1, 2003. There was no transition adjustment recognized upon adoption of FAS150.  There were 489,249 and 639,542shares of New Preferred outstanding at December 31, 2004 and 2003,respectively, net of 101,471 treasury shares. The New Preferred is shown at liquidation value of $55 per share.

 

Pursuant to approval by the Company’s Boardof Directors, in 2002 and 2003, the Company purchased a total of 101,471shares, net of redemptions, of outstanding New Preferred at prices ranging from$25.62 to $50.55 per share.  The treasuryshares have been recorded at liquidation preference, $55 per share, as areduction to preferred stock and the remaining

 

F-12

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difference between cost and the liquidationpreference was recorded as an increase to paid-in capital.

 

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

 

Cumulative dividends, classified as interestexpense subsequent to July 1, 2003, on the New Preferred are payable on aquarterly basis, as of April 30, July 31, October 31 and January 31, either incash at an annual rate of 7% of the liquidation preference per share or inadditional shares of New Preferred at an annual rate of 12% of the per shareliquidation preference. Dividends accrue on the New Preferred commencing withthe initial distribution date, April 17, 2001. Dividends will not be paid toany affiliate of the Company on account of that affiliate’s ownership of sharesof preferred stock. If the Company fails to pay a quarterly dividend when due,holders of New Preferred will have the right to elect an additional directorfor each dividend payment missed, up to a maximum of two additional directors,but only until such dividend is paid or provided for in full.   The dividend due to holders of record onJanuary 31, 2005, totaling approximately $0.5 million, was paid on February 7,2005.  At December 31, 2004, in additionto the $0.4 million of cash reserves for unresolved claims, the Company had$0.5 million in cash reserved for the payment of accrued dividends on anyfuture issuances of New Preferred issued as a result of remaining bankruptcyclaims resolutions (any New Preferred issued as a result of claims resolutionsalso carries the right to dividends retroactively from April 17, 2001).

 

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

 

The Company has the option to redeem the NewPreferred at any time, in whole or in part, at a redemption price of 100% ofthe liquidation preference per share plus all accrued and unpaid dividends. TheCompany is required to offer to purchase the New Preferred at 100% of theliquidation preference per share plus all accrued and unpaid dividends inconnection with a change of control of the Company.  In addition, any net proceeds in excess of$3.0 million in a calendar year received by the Company or any of its direct orindirect subsidiaries from the disposition of assets to an unaffiliated partyoutside of the ordinary course of business must be used to redeem New Preferredat a redemption price of 100% of the liquidation preference per share plus allaccrued and unpaid dividends. Furthermore, to the extent that certaincategories of cash are received from Nova Hut, such cash must be used to redeemNew Preferred at a redemption price of 100% of the liquidation preference pershare plus all accrued and unpaid dividends.

 

All outstanding shares of New Preferred arerequired to be redeemed by the Company on or before December 31, 2007, and ifsuch redemption does not occur, holders of New Preferred will be entitled toelect two-thirds of the directors of the Company. If shares of New Preferredare held by any affiliate of the Company, those shares may not be redeemedpursuant to any of the redemption provisions otherwise applicable to the NewPreferred.

 

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

 

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

 

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

 

**•**                  if KGP receives net after-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;

 

F-13

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

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

 

Upon exercise of a put, KGP will pay an exercisingholder 100% of the liquidation preference of the New Preferred that is thesubject of the KGP put rights, plus all accrued and unpaid dividends on the NewPreferred. KGP will purchase shares of New Preferred on a pro rata basis basedupon the number of shares of New Preferred as to which puts have been properlyexercised, but only up to the amount of the available net after-tax proceedsfrom triggering events. KGP will not purchase any fractional shares. KGP putrights will not become exercisable more frequently than every 12 months unlessthe cumulative amount of available net after-tax proceeds from triggeringevents is at least $3 million. KGP put rights are transferable except that putsshall cease to be transferable if KGP determines that any further transferwould require registration of the puts as a class of securities under theSecurities Exchange Act of 1934. The Company does not presently plan to arrangefor trading of the KGP put rights on the NASD electronic bulletin board orotherwise.

 

The Companyfrom time to time has received distributions from Kaiser-Hill that triggeredthe put rights – effectively requiring the Company to redeem certain NewPreferred. In addition, the Company had certain restricted cash balancesavailable, which pursuant to the terms of its Plan of Reorganization arerequired to be used to redeem outstanding New Preferred. Rather than using themechanism of the put rights to satisfy the Company’s obligations to holders ofthe put rights after a trigger, the Company observed the requirements in thePlan of Reorganization to use certain restricted cash balances, and in theterms of the New Preferred, to use certain available cash, for preferredredemptions. The Company believes this was a more cost-efficient manner of satisfyingthe obligations associated with the KGP put rights and plans to continue to usethis redemption process to satisfy such obligations in the future.

 

As of March 23,2005, the Company has redeemed the following shares of New Preferred (inthousands except share amounts):

 
| **Date of  Redemption** | ** ** | **Use of  Unrestricted  Cash** | ** ** | **Use of  Reserve Fund  Cash** | ** ** | **Total  Amount of  Redemption** | ** ** | **Number of  Shares  Redeemed** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                    |       |                           |       |                           |       |                             |       |                            |       |
| 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                         |       |
|                         |            |                                |            |                                |            |                                  |            |                                 |            |  |  |  |

 

On March 16, 2005, the Company’s Board ofDirectors approved the redemption of $10.0 million of New Preferred, or 181,818shares, on April 22, 2005. The entire redemption will be funded through the useof unrestricted cash.

 

9.             NewCommon Stock

 

The Company certificate of incorporationauthorizes the issuance of 3,000,000 shares of New Common. Pursuant to theCompany’s Plan, holders of Allowed Class 4 Claims and Allowed Class 5 EquityInterests are to receive shares of New Common Stock under the Plan.

 

In connection with its initial distributionout of bankruptcy on or about April 17, 2001, The Company issued to holders ofAllowed Class 4 Claims one share of New Common for each $100.00 of such holder’srespective Allowed Class 4 Claim. Subsequent to April 17, 2001, 823 shares ofNew Common have been issued related to the settlement of claims.

 

Holders of Allowed Class 5 Equity Interestsreceived their pro rata portion of New Common representing 15% of the aggregateamount of New Common to be outstanding following distributions to holders ofAllowed Class 4 Claims and Allowed Class 5 Equity Interests. This outcome wasaccomplished by issuing to each holder of an Allowed Class 5 Equity Interestits pro rata portion of the number of shares of New Common that represents17.65% of the total number of shares of New Common issued from time to time toholders of Allowed Class 4 Claims.

 

All shares of New Common, at issuance, wereduly authorized, fully paid and non-assessable. The holders of such shares willhave no preemptive or other rights to subscribe for additional shares. The NewCommon has a par value of $0.01 per share. Based on its current estimates of theaggregate amount of Allowed Class 4 Claims and cash available for distribution,The Company expects to ultimately issue no more than 1,715,000 shares of NewCommon to holders of Allowed Class 4 Claims and Allowed Class 5 EquityInterests. See Note 14 below with respect to Bankruptcy Court ruling that couldaffect this

 

F-14

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estimate.

 

Old Kaiser never paid cash dividends on itsOld Common. The Company anticipates that for the foreseeable future no cash dividendswill be paid on the New Common and that The Company’ earnings will be utilizedto redeem New Preferred or retained for use in the business. The Board ofDirectors of The Company will determine its dividend policy based on itsresults of operations, payment of dividends on, and redemption of, NewPreferred, financial condition, capital requirements, and other circumstances.

 

10.           Leases

 

The Company has the following futurecommitments on material noncancelable operating leases with initial or remainingterms in excess of one year at December 31, 2004:

 

| **Year ending  December 31:** | ** ** | **Amount**                 | ** ** |
|-------------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **(dollars in thousands)** | ** ** |
| 2005                          |       | $                          | 48         |   |
| 2006                          |       | 48                         |       |
| 2007                          |       | 24                         |       |
|                          |       | $                          | 120        |   |

 

The total rental expense for all operatingleases was $118,000 and $133,000 during the years ended December 31, 2004 and2003.

 

11.           IncomeTaxes

 

The components of net income (loss) used tocompute the (expense) benefit for income taxes for the years ended December 31were as follows (in thousands):

 
| ** **                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income from continuing  operations before income taxes and minority interests: |       |     |       |     |       |     |       |
| Domestic                                                                       |       | $        | 9,110      |     | $          | 11,028   |       | $ | 29,165 |   |
| Foreign                                                                        |       | —   |       | —   |       | —   |       |
|                                                                           |       | $        | 9,110      |     | $          | 11,028   |       | $ | 29,165 |   |
|                                                                           |       |     |       |     |       |     |       |
| (Expense) benefit for income  taxes:                                           |       |     |       |     |       |     |       |
| Federal:                                                                       |       |     |       |     |       |     |       |
| Current                                                                        |       | $        | (2,941     | )        | $          | (3,013   | )          | $ | (243 | ) |
| Deferred                                                                       |       | 1,492    |       | (1,228   | )          | (9,711   | )          |
|                                                                           |       | (1,449   | )          | (4,241   | )          | (9,954   | )          |
|                                                                           |       |     |       |     |       |     |       |
| State:                                                                         |       |     |       |     |       |     |       |
| Current                                                                        |       | (462     | )          | (248     | )          | (121     | )          |
| Deferred                                                                       |       | 176      |       | (338     | )          | (1,244   | )          |
|                                                                           |       | (286     | )          | (586     | )          | (1,365   | )          |
|                                                                           |       |     |       |     |       |     |       |
| Foreign:                                                                       |       |     |       |     |       |     |       |
| Current                                                                        |       | —   |       | —   |       | —   |       |
| Deferred                                                                       |       | —   |       | —   |       | —   |       |
|                                                                           |       | $        | (1,735     | )        | $          | (4,827   | )          | (11,319 | ) |

 

F-15

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The effective income tax (expense) benefitvaried from the federal statutory income tax (expense) benefit because of thefollowing differences (in thousands):

 
| ** **                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                 |       |     |       |     |       |     |       |
| Income tax (expense) benefit computed at  federal statutory tax rate |       | $        | (3,189     | )        | $          | (3,860   | )          | $ | (10,208 | ) |
|                                                                 |       |     |       |     |       |     |       |
| Change in tax (expense) benefit from:                                |       |     |       |     |       |     |       |
| State income taxes                                                   |       | (343     | )          | (381     | )          | (886     | )          |
| Valuation allowance                                                  |       | —   |       | —   |       | —   |       |
| Business meals and entertainment                                     |       | (33      | )          | (27      | )          | (26      | )          |
| Restructuring costs                                                  |       | (1       | )          | —   |       | (36      | )          |
| Penalties and fines                                                  |       | (4       | )          | (92      | )          | (32      | )          |
| Lobbying costs                                                       |       | (15      | )          | —   |       | (72      | )          |
| Reversals and other                                                  |       | 259      |       | 10       |       | (59      | )          |
| Subsidiary and joint venture adjustments                             |       | 2,310    |       | —   |       | —   |       |
| Preferred Dividend                                                   |       | (719     | )          | (477     | )          | —   |       |
|                                                                 |       | 1,454    |       | (967     | )          | (1,111   | )          |
|                                                                 |       | $        | (1,735     | )        | $          | (4,827   | )          | $ | (11,319 | ) |

 

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):

 
| ** **                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |
| Reserves for adjustments and allowances       |       | $        | 7,954      |     | $          | 8,045 |   |
| Vacation and incentive compensation  accruals |       | —   |       | 67       |       |
| Investment in Kaiser-Hill                     |       | (12,281  | )          | (12,693  | )          |
| Write-down of other investments               |       | (1,904   | )          | (1,914   | )          |
| Other                                         |       | 459      |       | —   |       |
|                                          |       | $        | (5,772     | )        | $          | (6,495 | ) |

 

The ability toderive future benefit from some of the elements contributing to the netdeferred tax liability at December 31, 2004 is dependent on the Company’sability to generate sufficient taxable income prior to expiration. In thefourth quarter of 2002, the Company determined that in addition to thereduction of tax carryforwards due to the bankruptcy exception of InternalRevenue Code (IRC) Sec. 382, the tax basis of various assets also was requiredto be reduced. This created a deferred tax liability that would be due upondisposition of the assets. The Company believes that the results of its futureoperations will be sufficient to assure utilization of the tax benefits priorto expiration.

 

In December 2000,the Chapter 11 bankruptcy reorganization of the Company caused a change incontrol under IRC Sec. 382. In 2001, the Company determined that the change incontrol met the stringent guidelines of the bankruptcy exception provided underthe Internal Revenue Code. This resulted in the Company not being subject tothe carryforward limitations of IRC Sec. 382. However, the Company was requiredto reduce certain carryovers that included net operating losses and credits. TheCompany offset the reduction of the carryforwards with the valuation allowancepreviously established for those carryforwards.

 

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

 

12.           RetireeBenefit Plans

 

Post Employment Benefit Plan: As of December31, 2004 the Company is required to continue to fulfill the provisions of apreviously curtailed plan which provides certain medical and dental 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 dentalself-insured plan, the benefits are funded to an insurance company asparticipants’ insurance claims are reimbursed. In respect to the retireescovered by a death benefit, the benefits are funded directly by the Company.

 

F-16

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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):

 
| ** **                              | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit obligation at January  1,       |       | $          | 6,913      |       | $          | 7,193 |   |
| Service cost                            |       | —     |       | —     |       |
| Interest cost                           |       | 480        |       | 470        |       |
| Benefits paid                           |       | (1,241     | )          | (1,107     | )          |
| Actuarial (gain) loss                   |       | 715        |       | 925        |       |
| Benefit obligation at December  31,     |       | 6,867      |       | 7,481      |       |
| Unrecognized net gain (loss)            |       | (244       | )          | (568       | )          |
| Net benefit obligation at  December 31, |       | $          | 6,623      |       | $          | 6,913 |   |

 

The net periodic postretirement benefit costconsists of the following:

 
| ** **                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |     |       |
| Funded status:                            |       |     |       |     |       |     |       |
| Service cost                              |       | —   |       | —   |       | —   |       |
| Interest cost                             |       | 480      |       | 470      |       | 502      |       |
| Amortization of prior service  costs      |       | —   |       | —   |       | —   |       |
| Amortization of net (gain) loss           |       | (189     | )          | (200     | )          | (200     | )          |
| Net periodic postretirement  benefit cost |       | $        | 291        |     | $          | 270      |       | $ | 302 |   |
|                                           |            |          |            |          |            |          |            |  |  |  |

 

At December 31, 2004, the estimated futurenet benefit payments to be paid out in the next ten years are as follows:

 
| 2005        |   | $     | 905    |   |
|-------------|--------|-------|--------|--------|
| 2006        |   | 859   |   |
| 2007        |   | 815   |   |
| 2008        |   | 769   |   |
| 2009        |   | 722   |   |
| 2010 - 2014 |   | 2,903 |   |

 

The discount rate used in determining theexpense was 6.0% for 2004 and 2003 and 6.5% for 2002. Pursuant to the terms ofthe plan obligations, changes in medical cost trend rates have no financialimpact on the actuarial valuation as the cost of the benefit to the participanthas exceeded the Company’s commitment. At December 31, 2004, there is a$244,000 unrecognized loss related to changes in actuarial assumptions. Thisloss will be amortized over three years.

 

13.           Benefitsand 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, 2004and 2003 was $0 and $177,000, respectively.

 

14.           Relatedparty transactions

 

AtDecember 31, 2004 and 2003, Kaiser Holdings had an outstanding receivable fromKaiser-Hill totaling $0 and $250,000 consisting of billings for contractedservices.

 

AtDecember 31, 2004 and 2003, the Kaiser Holdings has invested funds incertificates of deposit at a financial institution where one of Kaiser Holdings’directors serves on the board. The certificates of deposits total $2.0 millionand $1.0 million at December 31, 2004 and 2003, respectively. The certificatesof deposit bear a market rate of interest.

 

During the years ended December 31, 2004,2003 and 2002, Kaiser Holdings paid $281,000, $474,000 and $862,000,respectively, of legal fees to a law firm for which one of Kaiser Holdings’directors is a partner.

 

15.           OtherContingencies

 

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 exist inthe following areas:

 

F-17

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Nova Hut

 

Although Old Kaiser sold its Metals Mining and Industry business unitin August 2000, it retained its Netherlands subsidiary, Kaiser Netherlands,B.V., which had been responsible for a turnkey engineering and constructionservices contract for the construction of a steel mini-mill in the CzechRepublic for Nova Hut. After construction of the mini-mill was complete in2000, 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 mayhave been 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. To date, this dispute has not been resolved, and KaiserNetherlands has resorted to legal proceedings to enforce its rights. Untilrecently, the primary legal venue has been the Delaware bankruptcy proceedingfor Old Kaiser, where the Company has asserted claims against Nova Hut and theInternational Finance Corporation (“IFC”). The Delaware bankruptcy court 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. Kaiser Holdings filed a notice ofappeal with the Third Circuit regarding this decision in favor of the IFC andon February 25, 2005, the Third Circuit overturned the District Court’sdecision. The IFC has asked for a rehearing of the case by the Third Circuit. Withregard to the Nova Hut appeal, the District Court has ruled that U.S.Bankruptcy proceedings should be stayed pending completion of internationalarbitration proceedings.

 

In January 2004, KaiserNetherlands filed arbitration claims against Nova Hut in the amount of $51.1million with the International Chamber of Commerce (“ICC”). In November 2004,Kaiser Netherlands’ claim against Nova Hut was amended to include late interestand other charges and now totals $67.5 million. The arbitration panel has been constituted, and the proceedings havebeen initiated. The earliest possible date for a final award ruling beingissued is the last quarter of 2005. Nova Hut has submitted a $49.7 millioncounterclaim against Kaiser Netherlands in these same ICC proceedings.

 

In December 2003, theICC, 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 balance favorable toKaiser Netherlands. As a result of the ruling, Kaiser Netherlands was relievedof the obligation to pay additional retention to Tippins and Kaiser Netherlandswas awarded a net cash settlement of $2.6 million. The Company has not recordedthis award due to the uncertainties regarding collectibility. However, theCompany 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 Kaiser Holdings.

 

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 inaddition to a reserve recorded in 2001, which reduced the carrying value of theNova Hut contract receivable from $21.6 million to $6.0 million by recording areserve of approximately $9.8 million, net of a $5.8 millionincome tax benefit, through a chargeto “Loss from Discontinued Operations”. These adjustments to the contractreceivable carrying value were determined based on the Company’s late 2003estimate of Nova Hut’s ability to pay such liability.

 

Kaiser Hill

 

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

 

F-18

----

 

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

 

The clean-up and closure of the DOE’s Rocky Flats site involvesubstantial performance risks. Among other things, Kaiser-Hill’s activities atthe Rocky Flats site involve the clean-up, packaging and transportation ofnuclear waste, and the demolition and destruction of facilities where nuclearweapons components were previously produced. Some of the activities have notbeen previously performed elsewhere, and therefore require the development ofinnovative and untested approaches. Kaiser-Hill emphasizes safety in itsperformance, but the nature of the Rocky Flats site and the activities ofKaiser-Hill and its subcontractors at the site are such that serious injuries,or even deaths, are possible. Significant safety incidents at the site couldstop or significantly impede the progress of work being performed at the siteby Kaiser-Hill and its subcontractors. The DOE contract contemplates that all,or substantially all, of the nuclear waste at Rocky Flats will be transportedto other sites operated or managed by the DOE. In addition, objections havearisen from time to time with regard to the transportation and storage ofnuclear waste at certain sites previously scheduled by the DOE to receive wastefrom Rocky Flats. Although the DOE contract contemplates that the DOE isresponsible for providing transportation and storage sites for nuclear wastefrom Rocky Flats, an inability to store nuclear waste at other DOE sites would posea substantial risk to the timely closure of the Rocky Flats site, and couldinterfere with Kaiser-Hill’s ability to earn fees to which Kaiser-Hill believesit should be entitled.

 

As the contract between Kaiser-Hill and the DOE is cost-reimburseable 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 in process for the years ofthe predecessor contract, which ran from 1995 until January 2000. AlthoughKaiser-Hill and the Company have historically provided for their estimates ofdisallowed costs on cost-reimburseable contracts, uncertainties exist withregard to whether government audits will result in any disallowed costs needingto be refunded to the government customer. The continued adequacy of provisionsfor reserves with regard to unallowable costs is reviewed regularly.

 

Common Stock

 

On January 20, 2004, the United States Bankruptcy Court for theDistrict of Delaware ruled on a claim in favor of former shareholders of ICTSpectrum Constructors, Inc. The Bankruptcy Court has refused to reconsider itsdecision and the Company has appealed. Should the Company be unsuccessful inits efforts to achieve reversal of the Bankruptcy Court’s ruling, the Companycould be required to issue to former ICT Spectrum shareholders an additional247,350 shares of New Common, which would then comprise approximately 13.4% ofthe aggregate shares of New Common outstanding. The Company believes thatissuing such a substantial number of additional shares of New Common could beexpected to have a materially dilutive effect on the value of shares of NewCommon presently outstanding.

 

16.           Selected QuarterlyFinancial Information (Unaudited)

 
| **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 (loss) from continuing operations             |       | 3,976              |       | 1,724             |       | 1,154              |       | 521               |       |
| Net income (loss)                                    |       | 3,976              |       | 1,724             |       | 1,154              |       | 521               |       |
| Net Income (Loss) Applicable to Common  Shareholders |       | 3,976              |       | 1,724             |       | 1,154              |       | 521               |       |
|                                                 |       |               |       |              |       |               |       |              |       |
| Basic and Diluted Earnings (Loss) Per  Common Share: |       |               |       |              |       |               |       |              |       |
| Continuing operations, net of tax                    |       | $                  | 2.49       |              | $          | 1.08               |       | $                 | 0.72       |   | $ | 0.33 |   |
| Net Earnings (Loss) Per Common Share                 |       | $                  | 2.49       |              | $          | 1.08               |       | $                 | 0.72       |   | $ | 0.33 |   |

 

F-19

----

 
| **For the year ended December 31, 2003:**               | ** ** | **Fourth Quarter** | ** ** | **Third Quarter** | ** ** | **Second Quarter** | ** ** | **First Quarter** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|
|                                                    |       |               |       |              |       |               |       |              |       |
| Operating Income (Loss)                                 |       | 69                 |       | (2,094            | )          | (1,447             | )          | (1,446            | )          |
| Income from continuing operations before income tax     |       | 3,330              |       | 1,509             |       | 3,027              |       | 3,162             |       |
| Income (loss) from continuing operations                |       | 1,799              |       | 617               |       | 1,866              |       | 1,919             |       |
| Income (Loss) from Discontinued Operations,  net of tax |       | (1,833             | )          | —            |       | —             |       | —            |       |
| Net income (loss)                                       |       | (34                | )          | 617               |       | 1,866              |       | 1,919             |       |
| Preferred stock dividends                               |       | —             |       | —            |       | (702               | )          | (832              | )          |
| Net Income (Loss) Applicable to Common  Shareholders    |       | (34                | )          | 617               |       | 1,164              |       | 1,087             |       |
|                                                    |       |               |       |              |       |               |       |              |       |
| Basic and Diluted Earnings (Loss) Per  Common Share:    |       |               |       |              |       |               |       |              |       |
| Continuing operations, net of tax                       |       | $                  | 1.12       |              | $          | 0.39               |       | $                 | 0.73       |   | $ | 0.68 |   |
| Discontinued operations, net of tax                     |       | (1.14              | )          | —            |       | —             |       | —            |       |
| Net Earnings (Loss) Per Common Share                    |       | $                  | (0.02      | )                 | $          | 0.39               |       | $                 | 0.73       |   | $ | 0.68 |   |

 
| **For the year ended December 31, 2002:**                   | ** ** | **Fourth Quarter** | ** ** | **Third Quarter** | ** ** | **Second Quarter** | ** ** | **First Quarter** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|
|                                                        |       |               |       |              |       |               |       |              |       |
| Operating Income (Loss)                                     |       | (24                | )          | (1,735            | )          | (2,641             | )          | (2,628            | )          |
| Income (loss) from continuing  operations before income tax |       | 22,784             |       | 4,259             |       | 876                |       | 1,246             |       |
| Income (loss) from continuing operations                    |       | 13,867             |       | 2,783             |       | 497                |       | 699               |       |
| Income (Loss) from Discontinued Operations,  net of tax     |       | 694                |       | —            |       | (127               | )          | (70               | )          |
| Net income (loss)                                           |       | 14,561             |       | 2,783             |       | 370                |       | 629               |       |
| Preferred stock dividends                                   |       | (982               | )          | (1,017            | )          | (1,094             | )          | (1,078            | )          |
| Net Income (Loss) Applicable to Common  Shareholders        |       | 13,579             |       | 1,766             |       | (724               | )          | (449              | )          |
|                                                        |       |               |       |              |       |               |       |              |       |
| Basic and Diluted Earnings (Loss) Per  Common Share:        |       |               |       |              |       |               |       |              |       |
| Continuing operations, net of tax                           |       | $                  | 8.11       |              | $          | 1.11               |       | $                 | (0.38      | ) | $ | (0.24 | ) |
| Discontinued operations, net of tax                         |       | 0.43               |       | —            |       | (0.08              | )          | (0.04             | )          |
| Net Earnings (Loss) Per Common Share                        |       | $                  | 8.54       |              | $          | 1.11               |       | $                 | (0.46      | ) | $ | (0.28 | ) |

 

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

 

2004: In the fourth quarter of 2004, income from continuing operationswas favorably impacted by income tax credits and adjustments to subsidiarytaxable income.

 

2003: In the fourth quarter of 2003, loss from discontinued operationswas unfavorably impacted by the write down of net assets of discontinued operationsto $3.0 million by a charge to loss from discontinued operations totaling $3.0million offset by income from discontinued operations of $0.4 million from thesuccessful resolution of a claim against a former subcontractor and through thecollection of foreign accounts receivable, which had previously been fullyreserved.

 

At June 30, 2003, the Company adopted FAS 150 and preferred stockdividends were reclassified to interest expense.

 

2002: In the fourth quarter of 2002, income from continuing operationswas favorably impacted by the change in estimate related to the Kaiser-Hillcontract that increased the estimated performance fee by $34.8 million. Incomefrom discontinued operations was favorably affected by the successfulresolution of a claim against a former subcontractor and through the collectionof foreign accounts receivable, which had previously been fully reserved.

 

In the third quarter of 2002, income from continuing operations wasimpacted by the Company’s sale of its 10% interest in ICF Consulting resultingin a gain of $3.4 million, offset by the restructuring of the notes receivableand establishment of a reserve on the new note with ICF Consulting with a lossof $1.3 million, for a net positive impact of $2.1 million.

 

F-20

----

 

**KAISER-HILL COMPANY, LLCAND SUBSIDIARY**

** **

ConsolidatedFinancial Statements

 

December 31,2004 and 2003

 

(With IndependentAuditors’ Report Thereon)

 

F-21

----

 

**Independent Auditors’Report**

** **

The Members Kaiser-Hill Company, LLC:

 

We have audited the accompanying consolidated balance sheets ofKaiser-Hill Company, LLC and subsidiary (the Company) as ofDecember 31, 2004 and 2003, and the related consolidated statements ofincome, members’ equity, and cash flows for the three-year period endedDecember 31, 2004. These consolidated financial statements and thesupplementary consolidating information referred to below are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and supplementaryconsolidating information based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesconsideration of internal control over financial reporting as a basis for designingaudit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no such opinion. Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Kaiser-Hill Company, LLC and subsidiary as of December 31, 2004 and2003, and the results of their operations and their cash flows for thethree-year period ended December 31, 2004, in conformity with accountingprinciples generally accepted in the United States of America.

 

 

**KPMG LLP**

 

 

February 7, 2005

 

F-22

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

** **

Consolidated Balance Sheets

 

December 31, 2004 and 2003

 

(Amounts in thousands of dollars)

 
| ** **                                                                                | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                           |       |       |       |       |       |
| Cash and cash equivalents                                                                 |       | $          | 14,740     |       | 16,713     |   |
| Current portion of unbilled  contract receivables                                         |       | 101,327    |       | 99,956     |       |
| Receivable from Members                                                                   |       | 1,483      |       | 566        |       |
| Due from employees                                                                        |       | 3          |       | —     |       |
| Prepaid expenses and other current  assets                                                |       | 458        |       | 479        |       |
|                                                                                      |       |       |       |       |       |
| Total current assets                                                                      |       | 118,011    |       | 117,714    |       |
|                                                                                      |       |       |       |       |       |
| Unbilled contract receivables,  net of current portion                                    |       | 131,768    |       | 113,781    |       |
| Prepaid expenses, long-term                                                               |       | 376        |       | 752        |       |
| Deferred financing costs, net  of accumulated amortization of $445 and $357, respectively |       | 80         |       | 168        |       |
|                                                                                      |       | $          | 250,235    |       | 232,415    |   |
|                                                                                      |       |       |       |       |       |
| **Liabilities and Members’ Equity**                                                  |       |       |       |       |       |
| ** **                                                                                |       |       |       |       |       |
| Current liabilities:                                                                      |       |       |       |       |       |
| Accounts payable and payables  to subcontractors                                          |       | $          | 83,667     |       | 81,198     |   |
| Current portion of employee  incentive plan                                               |       | 11,031     |       | 12,167     |       |
| Accrued vacation                                                                          |       | 9,806      |       | 10,550     |       |
| Accrued salaries and employee  benefits                                                   |       | 6,541      |       | 6,807      |       |
| Payable to Members                                                                        |       | 2,564      |       | 1,214      |       |
| Total current liabilities                                                                 |       | 113,609    |       | 111,936    |       |
|                                                                                      |       |       |       |       |       |
| Employee incentive plan, net  of current portion                                          |       | 66,134     |       | 55,647     |       |
|                                                                                      |       | 179,743    |       | 167,583    |       |
| Members’ equity                                                                      |       | 70,492     |       | 64,832     |       |
|                                                                                      |       |       |       |       |       |
| Contingencies (note 7)                                                                    |       |       |       |       |       |
|                                                                                      |       |       |       |       |       |
|                                                                                      |       | $          | 250,235    |       | 232,415    |   |

 

See accompanying notes toconsolidated financial statements.

 

F-23

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

** **

Consolidated Statements of Income

 

Years ended December 31, 2004, 2003, and 2002

 

(Amounts in thousands of dollars)

 
| ** **                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Gross revenue                                  |       | $          | 651,851    |       | 712,270    |       | 732,718    |   |
| Subcontractor costs and direct  material costs |       | (377,649   | )          | (379,215   | )          | (367,355   | )          |
|                                           |       |       |       |       |       |       |       |
| Service revenue                                |       | 274,202    |       | 333,055    |       | 365,363    |       |
|                                           |       |       |       |       |       |       |       |
| Direct cost of service and  overhead           |       | (233,574   | )          | (293,056   | )          | (291,986   | )          |
|                                           |       |       |       |       |       |       |       |
| Operating income                               |       | 40,628     |       | 39,999     |       | 73,377     |       |
|                                           |       |       |       |       |       |       |       |
| Other income (expense):                        |       |       |       |       |       |       |       |
| Interest income                                |       | 132        |       | 113        |       | 232        |       |
| Interest expense                               |       | (100       | )          | (114       | )          | (95        | )          |
|                                           |       |       |       |       |       |       |       |
| Net income                                     |       | $          | 40,660     |       | 39,998     |       | 73,514     |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-24

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

Consolidated Statements of Members’ Equity

 

Years ended December 31, 2004, 2003, and 2002

 

(Amounts in thousands of dollars)

 
| ** **                               | ** ** | **Kaiser KH  Holdings, Inc.** | ** ** | **CH2M HILL  Constructors,  Inc.** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|-----------|------------|
| Members’ equity, December 31,  2001 |       | $                             | 7,660      |                               | 7,660      |      | 15,320     |   |
|                                     |       |                          |       |                               |       |      |       |
| Net income                               |       | 36,757                        |       | 36,757                             |       | 73,514    |       |
| Distributions                            |       | (15,650                       | )          | (15,650                            | )          | (31,300   | )          |
| 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     |   |

 

See accompanying notes toconsolidated financial statements.

 

F-25

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

Consolidated Statements of Cash Flows

 

Years ended December 31, 2004, 2003, and 2002

 

(Amounts in thousands of dollars)

 
| ** **                                                                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from operating  activities:                                             |       |     |       |     |       |     |       |
| Net income                                                                         |       | $        | 40,660     |     | 39,998     |     | 73,514     |   |
| Adjustments to reconcile net  income to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Amortization                                                                       |       | 88       |       | 86       |       | 88       |       |
| Changes in assets and  liabilities:                                                |       |     |       |     |       |     |       |
| Increase in contract  receivables                                                  |       | (19,358  | )          | (37,927  | )          | (44,331  | )          |
| (Increase) decrease in  receivable from Members                                    |       | (917     | )          | 3,050    |       | (2,424   | )          |
| (Increase) decrease in due  from employees                                         |       | (3       | )          | 51       |       | 63       |       |
| Decrease (increase) in  prepaids and other current assets                          |       | 21       |       | (29      | )          | 1,664    |       |
| Decrease (increase) in  long-term prepaids                                         |       | 376      |       | 376      |       | (1,128   | )          |
| Increase (decrease) in  accounts payable and payables to subcontractors            |       | 2,469    |       | 6,282    |       | (19,792  | )          |
| Increase in employee incentive  plan                                               |       | 9,351    |       | 28,576   |       | 17,138   |       |
| (Decrease) increase in other  accrued expenses                                     |       | (1,010   | )          | (3,852   | )          | 848      |       |
| Increase (decrease) in payable  to Members                                         |       | 1,350    |       | (3,269   | )          | 2,283    |       |
|                                                                               |       |     |       |     |       |     |       |
| Net cash provided by operating  activities                                         |       | 33,027   |       | 33,342   |       | 27,923   |       |
|                                                                               |       |     |       |     |       |     |       |
| Cash flows from financing  activities:                                             |       |     |       |     |       |     |       |
| Distributions to Members                                                           |       | (35,000  | )          | (32,700  | )          | (31,300  | )          |
| Proceeds from credit facility                                                      |       | 81,100   |       | 71,300   |       | 37,700   |       |
| Payments on credit facility                                                        |       | (81,100  | )          | (71,300  | )          | (37,700  | )          |
|                                                                               |       |     |       |     |       |     |       |
| Net cash used in financing  activities                                             |       | (35,000  | )          | (32,700  | )          | (31,300  | )          |
|                                                                               |       |     |       |     |       |     |       |
| Net (decrease) increase in  cash and cash equivalents                              |       | (1,973   | )          | 642      |       | (3,377   | )          |
|                                                                               |       |     |       |     |       |     |       |
| Cash and cash equivalents,  beginning of year                                      |       | 16,713   |       | 16,071   |       | 19,448   |       |
|                                                                               |       |     |       |     |       |     |       |
| Cash and cash equivalents, end  of year                                            |       | $        | 14,740     |     | 16,713     |     | 16,071     |   |
|                                                                               |       |     |       |     |       |     |       |   |
| Supplemental cash flow  information:                                               |       |     |       |     |       |     |       |   |
| Cash paid for interest                                                             |       | $        | 12         |     | 26         |     | 7          |   |

 

See accompanying notes toconsolidated financial statements.

 

F-26

----

 

**KAISER-HILL COMPANY, LLC**

**AND SUBSIDIARY**

 

Notes to Consolidated Financial Statements

 

December 31, 2004 and 2003

 

**(1)**                     Organization

** **

Kaiser-Hill Company, LLC and subsidiary (the Company)was formed on October 24, 1994. The principal business of the Company isto procure, execute, deliver, and perform under a contract with the Departmentof Energy (DOE) to manage the programs and facilities at Rocky FlatsEnvironmental Technology Site (RFETS) in Golden, Colorado. The mission of theRFETS is directed toward cleanup, deactivation, and preparation fordecontamination and disposition of these DOE facilities.

 

The Company is a limited liability company ownedequally by Kaiser KH Holdings, Inc., a wholly owned subsidiary of Kaiser GroupHoldings, Inc. (formerly known as Kaiser Group International, Inc.) (Kaiser),and CH2M HILL Constructors, Inc., an indirect wholly owned subsidiary of CH2MHILL Companies, Ltd. (CH2M HILL) (collectively the Members). Net profits and/orlosses and distributions thereof are allocated equally to the Members.

 

At December 31, 2004, the Company employedapproximately 794 hourly workers and approximately 306 salaried workers.Approximately 70% of the hourly employees are represented by United SteelWorkers of America under a collective bargaining agreement, which expires onJanuary 15, 2007.

 

On January 24, 2000, the Company and the DOEentered into a new contract (the Contract) effective February 1, 2000. TheContract is in effect until the “physical completion” of the Rocky FlatsClosure Project including, disposal of nuclear material, demolition offacilities, environmental remediation, disposal of waste, and completion ofinfrastructure and other general site operations. Under the Contract, theCompany has the opportunity to earn an additional fee if the total costsincurred are below the Contract target cost or the completion of the siteclosure is before March 31, 2007. In addition, the Companycan lose a portion of its fee if the costs exceed the Contract target cost orthe site closure is after March 31, 2007. A contract modification signed in 2004 adjusted themaximum and minimum fee available, to be earned by the Company through the dateof closure, to $560 million and $75 million, respectively.

 

**(2)**                     Significant Accounting Policies

 

***(a)***       Principles of Consolidation

 

The consolidated financial statements include theCompany and its wholly owned subsidiary, Kaiser-Hill Funding Company, LLC. Allintercompany accounts and transactions have been eliminated in the consolidatedfinancial statements. Certain prior year amounts have been reclassified toconform with current year presentation.

 

***(b)***       Revenue Recognition

 

Under the Contract, revenue is recognized using thepercentage-of-completion method whereby revenue is accrued in an amount equalto cost plus management’s best estimate of incentive fees. Incentive fees areestimated based on projected total Contract costs and site closure date. TheCompany continually monitors its progress toward the completion dates and itsestimated costs at completion and will modify its estimates of fees to beearned as needed. Changes in these estimates could have a significant effect onfuture earnings of the Company. During 2004, management 

 

F-27

----

 

revised its estimate of projected cost at completionbased upon the Company’s current progress under the Contract. The new contractmodification, and the change in estimate, resulted in approximately $45,000,000of additional incentive fees to be recognized over the life of the Contract.

 

***(c)***        Statements of Cash Flows

 

For purposes of the consolidated statements of cashflows, the Company considers cash in checking and short-term investments withoriginal maturities of three months or less to be cash and cash equivalents.

 

The Company maintains its cash accounts primarily withbanks located in Colorado, New York, and Washington, D.C. Cash balances areinsured by the FDIC up to $100,000 per bank and cash equivalents are notinsured by the FDIC. As of December 31, 2004, the majority of the cashbalance was made up of cash equivalents.

 

***(d)***       Income Taxes

 

No provision for the payment of income taxes has beenmade in the accompanying consolidated financial statements related to theactivities of the Company since the Members each report their share of theCompany’s taxable income in their respective individual income tax return.

 

***(e)***        Use of Estimates

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of financial statements and the reported amounts ofrevenue and expenses during the reporting period. Actual results could differfrom those estimates.

 

As discussed in note 2(b), revenue under theContract is recognized using the percentage-of-completion method wherebyrevenue is accrued in an amount equal to cost plus management’s best estimateof incentive fees. Incentive fees are estimated based on projected totalContract costs and site closure date. Changes in these estimates could have asignificant effect on the future earnings of the Company.

 

**(3)**                     Related-Party Transactions

 

In 2004 and 2003, the Members were subcontracted bythe Company to perform certain tasks under the Contract. The “Payable toMembers” in the accompanying consolidated balance sheets as of December 31,2004 and 2003 consists of $-0- and $250,000, respectively, to Kaiser and$2,564,000 and $398,000, respectively, to CH2M HILL for these subcontractedtasks. These payables are noninterest bearing.

 

During 2003, CH2M HILL began providing informationtechnology services for the Company at negotiated rates. Costs incurred relatedto work performed by CH2M HILL, the majority of which are reimbursable andbilled under the Contract and relate to information technology servicesprovided, were approximately $10,869,000 in 2004, $10,652,000 in 2003, and$473,000 in 2002.

 

F-28

----

 

In addition, the Company performed approximately$3,999,000 and $4,892,000 of services on behalf of CH2M HILL during 2004 and2003, respectively.

 

**(4)**                     Contract Receivables

 

Contract receivables as of December 31, 2004 and2003 primarily represent unbilled receivables due under the Contract. Unbilledreceivables result from revenue and estimated fees that have been earned by theCompany but not billed to the DOE as of the end of the period. Unbilledreceivables can be invoiced at contractually defined intervals and milestones.Management anticipates that the current portion of unbilled receivables will bebilled and collected in less than one year. Current unbilled receivablesprimarily represent allowable costs, including subcontractor costs, that havenot been submitted to the DOE for payment. These costs cannot be invoiced tothe DOE until payment has been made by the Company to the vendor. In addition,under the terms of the Contract, the Company receives a cash payment of 50% ofthe incentive fee due on a quarterly basis. These quarterly payments increasedslightly during the last year and a lump sum additional fee payment was releasedat the end of the year, both are evidence of DOE’s recognition of acceleratedwork progress. The remainder of the incentive fee, based on projected costs atcompletion and final closure date, is to be paid by the DOE within 90 daysafter the completion of the Contract. As such, these amounts are classified asnoncurrent in the accompanying consolidated balance sheets. As discussed above,any modifications or changes in the cost estimates or the site closure datewill impact these outstanding amounts and could increase or decrease suchamounts.

 

As of December 31, 2004 and 2003, the Company has$131.8 million and $113.8 million, respectively, of long-termunbilled receivables that represent incentive fee under the Contract. These canbe billed at the completion of the Contract. In addition, the Company hascurrent unbilled receivables of $101.3 million and $100.0 million asof December 31, 2004 and 2003, respectively. This is comprised of $8.1million and $7.9 million, respectively, of incentive fees and $93.2 millionand $92.1 million, respectively, of direct reimbursable costs under theContract. All of these amounts are expected to be billed in early 2005.

 

The Company’s Contract receivables result primarilyfrom its long-term Contract with the DOE. As a consequence, management believesthat credit risk is minimal.

 

**(5)**                     Employee Incentive Plan

** **

In connection with the closure Contract with the DOE,the Company implemented an employee incentive plan. There are two components tothe plan. The first component represents a cash bonus, which is earned and paidannually. The second component represents the issuance of performance units.These units are allocated to employees on an annual basis. The value of theseunits ultimately depends on the actual cost achieved and the closure date andrange from $0 to approximately $1 per unit. Employees remain eligible for theseunits as long as they are employed by the Company or left in good standing, asdefined. Payments made for performance units will be paid in cash at the end ofthe Contract.

 

As of December 31, 2004, the Company has issuedapproximately 64,288,000 performance units and the estimated value to be paidis accrued as employer incentive plan liability. The payments of the unit bonuswill take place upon closure of the Contract, and therefore, the associatedaccrual is classified as a long-term employee incentive plan liability in theaccompanying consolidated balance sheets.

 

F-29

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Additionally, the Company has accrued$3.7 million for an enhanced schedule incentive payable to the hourlyemployees represented by United Steel Workers of America under the collectivebargaining agreement. This payment will also take place upon closure of theContract and is also classified as a long-term liability in the accompanyingconsolidated balance sheets.

 

**(6)**                     Business Loan and Security Agreement

 

The Company currently has a Business Loan and SecurityAgreement (the Agreement) with a bank. The term of the Agreement is through December 31,2005. 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 ofDecember 31, 2004 and 2003, the Company had no amounts outstanding under theAgreement.

 

Under the Agreement, the Company has availabletemporary financing for the payment of the Company’s costs incurred under theContract. This financing is utilized throughout the year for periods of lessthan one month as, under the terms of the Contract, the DOE must pay theCompany’s invoices within three business days of receipt. The funding levelunder the Agreement cannot exceed a maximum borrowing base calculated on thelesser of eligible billed and unbilled government accounts receivable, asdefined, or $35,000,000. Under the terms of the Agreement, interest on theadvances is calculated either under a rate based upon LIBOR or a rate basedupon the higher of the Federal Funds Rate or the Prime Rate.

 

In connection with the Agreement, the Company incurred$525,000 in loan origination fees, which are capitalized as deferred financingcosts and are being amortized to interest expense over the life of theAgreement.

 

The Agreement also contains various financialcovenants, including tangible net worth, fixed charge ratio, and minimum cashbalances requirements, among other restrictions. The Company was in compliancewith all restrictive covenants at December 31, 2004.

 

**(7)**                     Contingencies

 

The Company’s reimbursable costs are subject to auditin the ordinary course of business by various U.S. government agencies.Management is not presently aware of any significant costs, which have been, ormay be, disallowed by any of these agencies.

 

**(8)**                     Employee Benefit Plans

 

In accordance with the Contract, the Company participatesin several multiple employer benefit plans covering substantially all employeeswho meet length of service requirements. These plans include a defined benefitpension plan and two defined contribution plans, the latter of which providefor Company matching contributions. Additionally, in 2004 the Company assumedresponsibility for a second defined benefit pension plan for the SecurityPolice Officers previously provided by subcontract. The Company contributionamounts for the defined contribution plans were approximately $1,070,000 and$1,227,000 for 2004 and 2003, respectively. During 2004, the Company madecombined contributions to the defined benefit pension plans of $4,842,000. Noamounts were contributed to the defined pension benefit plan during 2003because the current level of funding did not require contributions to be made.

 

F-30

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The Company administers these benefit plans withbenefits equivalent to the RFETS contractor benefit plans maintained by thecontractor that preceded the Company at RFETS. Under the Contract, the Companyrecognizes the cost of benefit plans when paid, and such costs are reimbursedby the DOE. Any excess pension plan assets or unfunded pension plan liabilitywhich may currently exist or is remaining at the end of the DOE Contractaccrues to or is the responsibility of the DOE.

 

F-31

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### ** **

### **Report of Independent Accountants on**

### **FinancialStatement Schedule**

### ** **

To Board of Directors and

Shareholdersof Kaiser Group Holdings, Inc.

 

Our audits of the consolidated financialstatements referred to in our report dated March 18, 2005 appearing in the 2004Annual Report to Shareholders of Kaiser Group Holdings, Inc. (which report andconsolidated financial statements are incorporated by reference in this AnnualReport on Form 10-K) also included an audit of the financial statement schedulelisted in Item 15(a)(2) of this Form 10-K. In our opinion, this financialstatement schedule presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements.

 

PricewaterhouseCoopers LLP

 

March 18, 2005

 

S-1

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**SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS**

 

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

**(in thousands)**

 
| **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, 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 |   |
|                                                       |       |                                 |       |                                         |       |         |       |           |       |                               |       |
| Year Ended December 31, 2002 Deducted from  asset account: |       |                                 |       |                                         |       |         |       |           |       |                               |       |
| Allowance for doubtful accounts                            |       | $                                    | —     |                                         | $          | —       |       | $              | 548        | (1)                                | $          | — |   | $ | 548 |   |
|                                                       |       |                                 |       |                                         |       |         |       |           |       |                               |       |
| Discontinued operations                                    |       | 20,105                               |       | —                                       |       | —       |       | (2,852         | )          | $                                  | 17,253     |   |
|                                                       |       |                                 |       |                                         |       |         |       |           |       |                               |       |
|                                                       |       | $                                    | 20,105     |                                         | $          | —       |       | $              | 548        |                               | $          | (2,852 | ) | $ | 17,801 |   |

 

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(1) Reflects reclassified additions to reserves.

 

S-2

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