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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 1-12248
KAISER GROUP INTERNATIONAL, INC.
(formerly ICF Kaiser International, Inc.)
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
54-1437073
(I.R.S. Employer
Identification No.)
9300 Lee Highway, Fairfax, Virginia
(Address of principal executive offices)
22031-1207
(Zip Code)
Registrant's telephone number, including area code: (703) 934-3300
Name of each exchange on which registered:
None
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Preferred Stock Purchase Rights
Page 1
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No. _____
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates of the
registrant was $4,944,912 million based on the Over-the-Counter Bulletin Board
closing price of $0.25 on April 13, 2000.
On April 13, 2000, there were 23,419,828 shares of Common Stock
outstanding.
Page 2
PART I
Item 1. Business
Corporate History
Kaiser Group International, Inc., through its operating subsidiaries, is a
provider of engineering, construction management, and project and program
management services and has performed a mixture of public- and private-sector
engineering and construction work since the inception of its predecessor, Kaiser
Engineers, in 1914. The "Company" or "Kaiser" in this Report refers to Kaiser
Group International, Inc. and/or any of its consolidated subsidiaries.
Incorporated in Delaware in 1987 under the name American Capital and Research
Corporation, it is the successor to ICF Incorporated, a nationwide consulting
firm organized in 1969. In 1988, the Company acquired the Kaiser Engineers
business. Reflecting a return to its historical business focus, the Company's
name was changed on December 27, 1999 from ICF Kaiser International, Inc. to
Kaiser Group International, Inc.
Kaiser also owns a 50% interest in Kaiser-Hill Company, LLC, which serves
as the integrated management contractor at the U.S. Department of Energy's
(DOE's) Rocky Flats Environmental Technology Site. Kaiser-Hill has performed at
DOE's Rocky Flats Environmental Technology Site near Denver, Colorado since 1995
and was recently awarded a new contract to manage the closure of the site within
the next decade. Rocky Flats is a former DOE nuclear weapons-production
facility, and under the new closure contract, Kaiser-Hill is working to
stabilize and safely store more than 14 tons of plutonium at the site, to clean
up areas contaminated with hazardous and radioactive waste, and to restore much
of the 6,000-acre site to the public.
Recent History
The components of Kaiser's business underwent significant change during
1999 as a result of actions aimed at the restoration of the Company's financial
condition that had been damaged by substantial difficulties encountered in its
execution of four large fixed-price contracts to construct nitric acid plants in
1998 and early 1999. As discussed in Item 7. Management's Discussion and
Analysis, the changes included the sale and divestiture of two of its operating
groups, namely, its Environment and Facilities Management Group (EFM) and its
Consulting Group. The Company has also been focused on realigning and
rightsizing its remaining operations, resolving its liquidity issues and
restructuring its debt and equity. Unless otherwise noted, all discussions
contained in this Report reflect only the historical business operations of the
Company's non-divested and continuing operations, namely its Engineering
Operations and the operations of the Kaiser-Hill subsidiary. "Engineering
Operations" referenced hereafter in this Report refer to the Company's business
activities not conducted through the Kaiser-Hill subsidiary.
BUSINESS
Overview of Services and Markets
Kaiser's Engineering Operations are focused on serving clients in two
categories: Infrastructure and Facilities, comprised of transit and
transportation, facilities management, water/wastewater treatment and
microelectronics and clean technology business lines, and Metals, Mining and
Industry, comprised of alumina/aluminum; iron and steel and mining industry
business lines.
Infrastructure and Facilities
Transit and Transportation - Kaiser's transit and transportation services
support the planning, design, engineering, and construction of heavy- and light-
rail transit systems, high-speed rail, peoplemovers, bus systems, highways and
bridges, and airport improvements. Kaiser is developing state-of-the-art
transit systems for 20 cities worldwide and designing major highway projects
throughout the United States and in selected international markets. Domestic
growth is driven by the Federal Transportation Equity Act for the 21st Century.
Passed in July 1998, the bill authorized $217 billion of spending during the
next six years in transit and highway programs. Significant opportunities also
exist internationally as developing countries seek to improve their transit
systems. Current projects include
Page 3
transit systems in Seattle, New York, Los Angeles, the Philippines, Portugal and
Turkey; a passenger rail line in Portugal; and multi-million dollar highway and
bridge improvements in California, Florida, Massachusetts, and Oklahoma.
Facilities and Water/Wastewater - Kaiser provides engineering services to
public- and private-sector clients who need to modernize or maintain facilities;
design and build new capacity for the future; or improve existing operational
and environmental conditions. Future growth in this area of activity will be
based in part on the trend toward outsourcing by both private- and public-sector
clients. Kaiser's largest project of this type involves serving, through
Kaiser-Hill Company, LLC, as the integrating management contractor at the DOE
Rocky Flats site, a former nuclear weapons production facility near Denver,
Colorado. In another significant project, Kaiser serves as construction manager
for the $3.4 billion Boston Harbor cleanup project that is currently scheduled
to continue through December 31, 2002.
Microelectronics and Clean Technology - Kaiser also provides design/build
services for the microelectronics, semiconductor, biotechnology, and
telecommunication industries. Kaiser has constructed or remodeled over seven
million square feet of manufacturing, office, and other facilities, including
more than 500,000 square feet of cleanrooms, from class 1 to class 10,000.
Following a contraction over the past several years, this market is expected to
experience growth over the next two years, driven primarily by the automotive
industry and advanced technology manufacturers' needs for increased
manufacturing capacity and capabilities. A major project is the construction
management services for a semiconductor facility expansion for Motorola in
Arizona.
Metals, Mining and Industry
Alumina/Aluminum - Kaiser provides design and construction services for
expansion and modernization of some of the world's largest alumina and aluminum
facilities in locations from Kentucky to the Middle East and Australia.
Kaiser's areas of expertise include bauxite mining and handling; alumina
refining; aluminum reduction; and fabrication and rolling. Domestic
opportunities involve maintaining and retrofitting existing plants and replacing
aging production capacity with newer, more efficient, and environmentally
responsible facilities. Outside of the United States, there will be greater
focus on building new facilities. Current projects include detailed design,
engineering, procurement, and construction management for the expansion of a
$500 million alumina refinery in Western Australia, and a $180 million alumina
refinery in Louisiana.
Iron and Steel - Kaiser supports the iron and steel industry by providing
traditional services such as engineering, design, and project and construction
management for plant expansions, modernizations, and greenfield development.
Kaiser is the sole U.S. domestic designer and builder of coke ovens and coke
oven machinery, and is active in the development of mini-mills as an
alternative, cost-effective method of making steel. For example, Kaiser is
providing turnkey engineering and construction services for the new $262 million
thin-slab casting mini-mill project for Nova Hut, a.s. in Ostrava, Czech
Republic.
Mining and Industry - Kaiser offers a full range of engineering,
procurement and construction management services to this industry sector.
Current contracts include projects in the nickel, coal, silicon, iron ore,
magnesium, mineral sands, natural gas and gold industries. Activities in this
business line are carried out predominantly through the Company's operations in
Australia. Opportunities for growth in this business line are largely dependent
on commodity prices, which drive client investment and, in turn, opportunities
for the Company in connection with expansion and modernization of existing
facilities and construction of new facilities.
Most of the Company's Engineering Operations contract backlog is related to
public- and private-sector engineering and construction projects that span from
several months to several years in duration. The Company's Engineering
Operations ended 1999 with $202.0 million in contract backlog. The Company
expects to work off 49% of this amount in 2000.
Kaiser-Hill Company, LLC is equally owned by Kaiser and CH2M Hill Companies
Ltd.; Kaiser designates a majority of the members of Kaiser-Hill's Board of
Managers. The scope of Kaiser-Hill's contract with the DOE includes all
elements of daily and long-term operations, as well as ultimate closure of the
site, including stabilizing and safely storing more than 14 tons of plutonium,
cleaning up areas contaminated with hazardous and radioactive waste, and
restoring much of the 6,000-acre site for future use by the public.
Page 4
Kaiser-Hill's prior contract with the DOE was originally scheduled to
expire on September 2000. On January 24, 2000, Kaiser-Hill was awarded the
follow-on Rocky Flats contract pursuant to which Kaiser-Hill is providing
services that will complete the restoration of the Rocky Flats site and close it
to DOE occupation (the Closure Contract). The Closure Contract became effective
February 1, 2000 and terminated the remaining period of the former contract as
of January 31, 2000. The economic terms of the Closure Contract are
significantly different from the former contract in that Kaiser-Hill, in
addition to continuing to earn revenue from the reimbursement of the actual
costs of its services, will also earn a performance fee based on a combination
of the actual costs of completion and on the actual date of physical completion.
The Closure Contract will reimburse Kaiser-Hill for the costs it incurs to
complete the site closure, currently estimated to range between $3.6 billion and
$4.8 billion and, in addition, will pay Kaiser-Hill an incentive fee ranging
from $150.0 million to $460.0 million, depending on Kaiser-Hill's ability to
control the incurred costs at completion to within the targeted range and its
ability to meet the closure goal anytime between March 31, 2006 - March 31,
2007. If Kaiser-Hill attains physical completion above target cost, the fee
will be reduced by 30% of all contract costs incurred after such date up to a
maximum of $20.0 million.
General Information about Kaiser
Competition and Contract Award Process
The market for Kaiser's services is highly competitive. Kaiser competes
with many other engineering and construction, program and project management
services firms ranging from small firms to large multi-national firms having
substantially greater financial, managerial and marketing resources than Kaiser.
Other competitive factors include quality of services, technical qualifications,
reputation, geographic presence, price, financial stability and the availability
of key professional personnel.
Private-Sector Work. Competition for private-sector work generally is
based on several factors, including quality of work, reputation, price and
marketing approach. Kaiser's objective is to establish and maintain a strong
competitive position in its areas of operations by adhering to its basic
philosophy of delivering high-quality work in a timely fashion within its
clients' budgetary constraints.
Public-Sector Work. Most of Kaiser's contracts with public-sector clients
are awarded through a competitive bidding process that places no limit on the
number or type of bidders. The process usually begins with a government request
for proposals that delineates the size and scope of the proposed contract.
Proposals are evaluated by the government on the basis of technical merit,
including responses to mandatory solicitation provisions, corporate and
personnel qualifications, experience, and cost. Kaiser believes that its
experience and ongoing work strengthen its technical qualifications and thereby
enhance its ability to compete successfully for future government work.
Teaming Arrangements and Joint Ventures. In both the private and public
sectors, Kaiser, acting either as a prime contractor or as a subcontractor, may
join with other firms to form a team or a joint venture that competes for a
single contract or submits a single proposal. Because a team of firms or a
joint venture almost always can offer a stronger set of qualifications than any
firm standing alone, these arrangements often are very important to the success
of a particular competition or proposal. Kaiser maintains a large network of
business relationships with other companies and has drawn repeatedly upon these
relationships to form winning teams.
Contract Structure. Kaiser operates under a number of different types of
contract structures with its private- and public-sector clients, the most common
of which are cost plus and fixed price. Under cost plus contracts, Kaiser's
costs are reimbursed with a fee, either fixed or percentage of cost, and/or an
incentive or award fee offered to provide inducement for effective project
management. A variation of cost plus contracts are time-and-materials contracts
under which Kaiser is paid at a specified fixed hourly rate for direct labor
hours worked. Under fixed price contracts, Kaiser is paid a predetermined
amount for all services provided as detailed in the design and performance
specifications agreed to at the project's inception, and under which Kaiser
retains more performance risk than under cost plus contracts. While these fixed
price contracts can result in higher profit margins, they also can be costly if
Kaiser experiences cost overruns that are not recoverable from the client.
Page 5
Customers
Kaiser's domestic clients include the DOE and other federal departments and
agencies; major corporations in the transportation, steel, aluminum, mining, and
manufacturing industries; utilities; and a variety of state and local government
agencies throughout the United States and in other areas of the world. The DOE
accounted for approximately 74% of Kaiser's consolidated gross revenue for the
year ended December 31, 1999, approximately 63% for the year ended December 31,
1998, and approximately 64% for the year ended December 31, 1997.
Kaiser's international clients include both private firms and foreign
government agencies. For the years ended December 31, 1999, 1998, and 1997,
foreign clients accounted for approximately 11.5%, 12.2%, and 17.0% of Kaiser's
consolidated gross revenue, respectively. For information concerning gross
revenue, operating income, and identifiable assets of Kaiser's business by
geographic area during 1999, 1998 and 1997, see Note 5 to the consolidated
financial statements.
Contract Backlog
The aggregate amount of gross contract revenue remaining to be earned
pursuant to signed contracts extending beyond the current date is referred to as
contract backlog. Kaiser believes that contract backlog is not an absolute
predictor of future gross or service revenue for any particular periods as the
status of contract funding, especially in contracts with certain governmental
agencies, can be unilaterally altered. Most of Kaiser's contract backlog
relates to Kaiser-Hill's Rocky Flats Closure Contract.
Potential Liabilities Involving Clients and Third Parties
In performing services for its clients, Kaiser could potentially be liable
for breach of contract, personal injury, property damage, and negligence,
including improper or negligent performance or design, failure to meet
specifications, and breaches of express or implied warranties. The damages
available to a client, should it prevail in its claims, are potentially large
and could include consequential damages.
Under Kaiser-Hill's contract with the DOE, Kaiser-Hill is not responsible
for, and the DOE pays all costs associated with, any liability, including,
without limitation, any claims involving strict or absolute liability and any
civil fine or penalty, expense, or remediation cost, but limited to those of a
civil nature, which may be incurred by, imposed on, or asserted against Kaiser-
Hill arising out of any act or failure to act, condition, or exposure which
occurred before Kaiser-Hill assumed responsibility on July 1, 1995 ("pre-
existing conditions"). To the extent the acts or omissions of Kaiser-Hill
constitute willful misconduct, lack of good faith, or failure to exercise
prudent business judgment on the part of Kaiser-Hill's managerial personnel and
cause or add to any liability, expense, or remediation cost resulting from pre-
existing conditions, Kaiser-Hill is responsible, but only for the incremental
liability, expense, or remediation caused by Kaiser-Hill.
The Kaiser-Hill contract further provides that Kaiser-Hill will be
reimbursed for the reasonable cost of bonds and insurance allocable to the Rocky
Flats contract and for liabilities and expenses incidental to these liabilities,
including litigation costs, to third parties not compensated by insurance or
otherwise. The exception to this reimbursement provision applies to liabilities
caused by the willful misconduct or lack of good faith of Kaiser-Hill's
managerial personnel or the failure to exercise prudent business judgment by
Kaiser-Hill's managerial personnel.
Page 6
Insurance
Kaiser has a comprehensive risk management and insurance program that
provides a structured approach to protecting Kaiser. Included in this program
are coverages for:
. general, automobile, pollution impairment, and professional liability;
. workers' compensation; and
. employers and property liability.
Kaiser believes that the insurance it maintains, including self-insurance,
is in amounts and protects against risks as is customarily maintained by similar
businesses operating in comparable markets. At this time, Kaiser expects to
continue to be able to obtain insurance in amounts generally available to firms
in its industry. There can be no assurance that the insurance coverage and
levels maintained by Kaiser will continue, and if insurance of these types is
not available, it could have a material adverse effect on Kaiser.
Kaiser has pollution insurance coverage on an occurrence basis, in amounts
and on terms that are economically reasonable, against possible liabilities that
may be incurred in connection with its conduct of its environmental business.
An uninsured claim arising out of Kaiser's environmental activities, however, if
successful and of sufficient magnitude, could have a material adverse effect on
Kaiser.
Government Regulation
In the past, Kaiser had a number of cost-reimbursement contracts with the
U.S. government, the costs of which are subject to audit and adjustment by the
applicable U.S. government agency. Most of these contracts were entered into by
Kaiser's former EFM and Consulting Groups, which were divested in 1999.
However, in conjunction with these divestitures, Kaiser indemnified certain
elements of the sales and has retained many of the liabilities associated with
the pre-divestiture performance of these contracts. As a result of pending
audits related to fiscal years 1986 forward, the government has asserted, among
other things, that some costs claimed as reimbursable under government contracts
either were not allowable or not allocated in accordance with federal
procurement regulations. Kaiser is actively working with the government to
resolve these issues. Kaiser has provided for its estimate, in its financial
statements, of the potential effect of issues that have been quantified,
including its estimate of disallowed costs for the periods currently under audit
and for periods not yet audited. Many of the issues, however, have not been
quantified by the government or Kaiser, and others are qualitative in nature,
and their potential financial impact is not quantifiable by the government or
Kaiser at this time. This provision will be reviewed periodically as
discussions with the government progress.
Kaiser may, from time to time, either individually or in conjunction with
other government contractors operating in similar types of businesses, be
involved in U.S. government investigations for alleged violations of procurement
or other federal laws and regulations. Kaiser currently is the subject of a
number of U.S. government investigations and is cooperating with the responsible
government agencies involved. No charges presently are known to have been filed
against Kaiser by these agencies.
Employees
As of March 31, 2000, Kaiser had approximately 3,388 employees, 2,748 in
North America and 640 in numerous international sites. The Company believes
that its relations with its employees are good. Of this total, 2,048 persons
are employed at Kaiser-Hill's Rocky Flats site in Colorado. A total of 1,447 of
the Rocky Flats employees are represented by the United Steelworkers of America,
Local 8031; almost all of the union employees are contracted out to other
companies working at Rocky Flats. The Company believes that its relations with
the union are good.
Page 7
Item 2. Properties
Kaiser's activities are carried out through operating subsidiaries in 36
offices throughout the world. Kaiser's headquarters are located at 9300 Lee
Highway, Fairfax, Virginia 22031-1207, and its telephone number is (703) 934-
3300. Kaiser's operations are organized into North American and International
regions. The North American regional headquarters is located in Fairfax,
Virginia, and the International regional headquarters is located at Q.V. 1
Building, George's Terrace, Perth WA 6000 Australia, telephone 61-89-366-5366.
Other domestic offices include Chandler, Arizona; Los Angeles, San Diego,
and Oakland, California; Rocky Flats, Colorado; Washington, DC; Jacksonville,
Lake City, Miami, Orlando, and Tampa, Florida; Marietta, Georgia; Boise, Idaho;
Gramercy, Louisiana; Baltimore, Maryland; Boston, Massachusetts; New York City,
New York; Oklahoma City, Oklahoma; Pittsburgh, Pennsylvania; Richmond,
Virginia; and Seattle, Washington. The Company's other international offices
include Brisbane and Gladstone, Australia; Ostrava and Prague, Czech Republic;
London, England; Hong Kong; Budapest, Hungary; Rio de Janeiro and Sao Paulo,
Brazil; Manila, the Philippines; Lisbon, Portugal; Cairo, Egypt and Istanbul,
Turkey.
Kaiser's operations are conducted in leased facilities or in facilities
provided by the Federal government or other clients. Because Kaiser's
operations generally do not require the maintenance of unique facilities,
suitable office space is available for lease in all of the geographic areas
currently served. Kaiser believes that adequate space to conduct its operations
will be available for the foreseeable future. For information concerning an
investment by Kaiser in Fairfax, Virginia land and buildings where Kaiser's
headquarters are located, see Notes 7 and 12 to the consolidated financial
statements included in this Report.
Item 3. Legal Proceedings
In the course of Kaiser's normal business activities, various claims or
charges have been asserted and litigation commenced against Kaiser arising from
or related to properties, injuries to persons, and breaches of contract, as well
as claims related to acquisitions and dispositions. Claimed amounts may not
bear any reasonable relationship to the merits of the claim or to a final court
award. In the opinion of management, an adequate reserve has been provided for
final judgments, if any, in excess of insurance coverage, that might be rendered
against Kaiser in the event of litigation. See Note 15 to the consolidated
financial statements included in this Report.
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Shareholders of the Company was held on
Thursday, November 4, 1999, at the headquarters of the Company, 9300 Lee
Highway, Fairfax, VA 22031. The matters voted on were (i) the election of three
directors, (ii) the approval of the issuance of shares of preferred stock and
common stock in connection with an exchange offer for outstanding debt (the
"Stock Issuance Proposal"), (iii) the approval of an amendment to the
certificate of incorporation to effect a reverse split of Company's outstanding
common stock in a ratio that would have resulted in 5,000,000 shares of common
stock being outstanding (the "Reverse Split Proposal"), (iv) the approval of
amendments to the Company's certificate of incorporation and bylaws
(collectively, the "Shareholder Democracy Proposal"), (v) the approval of an
amendment to the Company's certificate of incorporation and bylaws to provide
that no new shareholder rights plan (sometimes referred to as a "poison pill")
shall be adopted without the approval of the shareholders (the "Rights Plan
Proposal"), (vi) the approval of amendments to the Company's certificate of
incorporation to eliminate provisions related to the terms of series of
preferred stock that are no longer outstanding (the "Obsolete Preferred Stock
Proposal"), (vii) the approval of amendments to the Company's Stock Incentive
Plan (the "Stock Incentive Plan Proposal"), (viii) the approval of the quasi-
reorganization of the Company's financial statements, pursuant to which the
Company would adjust its capital accounts to eliminate the accumulated deficit
in retained earnings from past unprofitable operations and establish a new
retained earnings account for the accumulation of future earnings (the "Quasi-
Reorganization Proposal") and (ix) the ratification of the appointment of
PricewaterhouseCoopers LLP as the Company's independent public accountants for
the fiscal year ending December 31, 1999. The number of votes cast for, against,
or withheld, as well as the number of abstention and broker non-votes for each
of the above-described matters are set forth below:
Page 8
Total Total Total
Votes Votes For Votes Total
Votes For % Withheld (*) Non-Votes
----- --- - ------------ ---------
1. Election of Directors
Thomas C. Jorling 19,163,638 80.443% 3,227,286 0
James J. Maiwurm 19,400,552 81.437% 2,990,372 0
Hazel R. O'Leary 18,058,476 75.804% 4,332,448 0
(*) "Votes Withheld" means that the shareholder marked the box on his/her proxy
card labeled "withheld." This vote total includes situations in which the
shareholder wrote in the name of the individual director for whom he/she did not
want to vote.
% of
Total Total Total Total Total
Votes Cast Votes Cast Votes Cast Broker Votes
For For Against Non-Votes Abstain
--- --- ------- --------- -------
2. Stock Issuance Proposal 14,883,708 86.420% 2,338,814 4,867,348 301,054
3. Reverse Split Proposal 20,722,437 93.540% 1,431,162 0 237,325
4. Shareholder Democracy Proposal 16,374,226 95.204% 824,838 4,867,348 324,512
5. Rights Plan Proposal 16,146,164 94.125% 1,007,801 4,867,348 369,611
6. Obsolete Preferred Stock Proposal 21,005,487 96.001% 874,946 0 510,491
7. Stock Incentive Plan Proposal 14,920,946 87.355% 2,163,878 4,867,348 438,752
8. Quasi-Reorganization Proposal 16,147,432 94.080% 1,016,121 4,867,348 360,023
9. Ratification of Accountants 20,677,851 94.441% 1,217,098 0 495,975
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
From September 14, 1993 until March 7, 2000, the Common Stock was traded on
the New York Stock Exchange (NYSE) under the symbols "ICF" and "KSR". On
December 27, 1999, coincident with the Company's name change, the NYSE symbol
was changed to "KSR". On March 8, 2000, the Common Stock ceased to be listed on
the NYSE and began to be traded on the Over-the-Counter Bulletin Board system
under the symbol "KSRG". At April 13, 2000, there were 1,455 shareholders of
record and the closing price of the Common Stock as reported by the Over-the-
Counter Bulletin Board was $0.25. The following table sets forth, for the
periods indicated, the high and low sales prices for the Common Stock as
reported by the NYSE:
Common Stock Price
------------------
1999 1998
---- ----
High Low High Low
--------- --------- ---------- --------
Year Ended December 31,
First Quarter................................... $1.500 $0.813 $3.000 $2.063
Second Quarter.................................. 0.813 0.250 3.063 2.180
Third Quarter................................... 0.500 0.313 2.313 1.125
Fourth Quarter.................................. 0.813 0.281 1.813 1.188
The Company's Transfer Agent and Registrar is EquiServe, First Chicago
Trust Division (formerly First Chicago Trust Company of New York), P.O. Box
2536, Jersey City, NJ 07303-2536. The Shareholder Relations telephone number is
(201) 324-0498, and the First Chicago Web site address is http://www.fctc.com.
The Company has never paid cash dividends on its Common Stock and
anticipates that no cash dividends will be paid on its Common Stock for the
foreseeable future and that the Company's earnings will be retained for use in
the business. The Board of Directors determines the Company's Common Stock
dividend policy based on the Company's results of operations, payment of
dividends on preferred stock, financial condition, capital requirements, and
other circumstances. The Company's debt agreements currently do not permit
dividends to be paid on its capital stock. See Note 9 to the consolidated
financial statements.
Item 6. Selected Financial Data
Page 9
The selected consolidated financial data of the Company for the years ended
December 31, 1999, 1998, 1997, 1996, and the ten months ended December 31, 1995,
have been derived from the Company's audited consolidated financial statements.
This information should be read in conjunction with the consolidated financial
statements and the related notes thereto appearing elsewhere in this Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Certain reclassifications have been made to the prior period
financial statements to conform to the presentation used in the December 31,
1999 consolidated financial statements.
Selected Consolidated Financial Data
(in thousands, except per share data)
Ten
Months
Ended
December
Year Ended December 31, 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Statement of Operations Data:
Gross revenue................................................ $870,267 $ 999,721 $926,916 $809,643 $532,600
Service revenue.............................................. 295,451 211,762 300,986 308,016 240,996
Operating income (loss)...................................... (22,732) (97,001) 3,069 720 (6,900)
Loss from continuing operations before
income taxes, minority interest, extraordinary item
and cumulative effect of accounting change............. (41,448) (115,741) (12,439) (11,216) (18,197)
Loss before extraordinary item and
cumulative effect of accounting change.................. (5,924) (93,442) (4,987) (7,851) (12,668)
Basic and Diluted Earnings (Loss) Per Share:
Continuing operations before extraordinary item and
cumulative effect of accounting change...................... $ (2.00) $ (4.34) $ (0.62) $ (0.36) $ (0.60)
Discontinued operations, net of tax.......................... 1.78 0.47 0.40 0.62 0.71
Extraordinary item, net of tax............................... (0.03) (0.05) -- -- --
Cumulative effect of accounting change, net of tax........... -- (0.25) -- -- --
-------- --------- -------- -------- --------
Total.................................................. $ (0.25) $ (4.17) $ (0.22) $ 0.26 $ 0.11
======== ========= ======== ======== ========
Weighted average common shares outstanding:
--basic............................................ 23,823 24,092 22,382 22,035 21,132
--diluted.......................................... 23,823 24,092 22,382 22,057 21,606
Balance Sheet Data (end of period):
Total assets................................................. $253,563 $ 428,071 $399,288 $369,462 $370,179
Working capital.............................................. 17,108 3,271 91,121 113,898 84,589
Long-term liabilities........................................ 131,795 147,152 145,590 161,951 125,818
Redeemable preferred stock................................... -- -- -- -- 19,787
Shareholders' equity (deficit)............................... (69,903) (63,118) 27,327 34,892 28,427
Page 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
During 1999, management continued to execute various elements of a
restructuring plan aimed at restoring the Company to profitability following the
difficulties caused primarily by problems in its execution of four large fixed-
price contracts to construct nitric acid plants in 1998 and early 1999. In
summary, the components of the restructuring plan developed by management and
the Board of Directors included the following:
. Divesting operating units and reinvesting the proceeds in the Company to
provide working capital necessary to stabilize the retained business
activities;
. Reducing the Company's overhead cost structure that would remain after the
divestitures of the operating units referenced above; and
. Revising the Company's capital structure in order to eliminate barriers to
securing new business and improve access to new sources of working capital.
Elements of the restructuring plan were initiated in the third quarter of
1998; however, the majority of the progress was achieved during 1999.
Achievements toward each plan element are described below.
Divesting Operating Units
. Sale of the Environment and Facilities Management Group (EFM): On April 9,
1999, the Company sold the majority of the active contracts and
investments, and transferred a substantial number of employees, of EFM to
The IT Group, Inc. (IT) for a cash purchase price of $82.0 million, less
$8.0 million which was retained by IT for EFM's working capital
requirements. The Company then completed EFM contracts that were not sold
to IT. Net of income tax expense of $24.5 million, the Company recognized a
gain of $12.0 million from the sale.
. Sale of the Consulting Group: On June 30, 1999, the Company sold 90% of its
Consulting Group to CM Equity Partners, L.P. and the Group's management for
$64.0 million in cash and $6.6 million of interest-bearing notes. The
Company retained a 10% ownership interest in the new and independent
consulting company, now known as ICF Consulting Group, Inc. Net of income
tax expense of $11.2 million, the Company recognized a gain of $30.3
million from the sale.
The Company finalized its accounting for the divestitures of its EFM and
Consulting Groups as well as for the sale of certain assets of a small business
unit sold earlier in the year during the fourth quarter and recorded a
reduction to the net gain on the sales of $6.2 million primarily for the income
tax effects of the transactions and for the write-off of certain additional
divested assets (Note 4 and Note 16).
The cash proceeds from the sales of the EFM and Consulting Groups, net of
transaction costs, and from the liquidation of the retained EFM assets, were, in
part, used to pay down all cash borrowings on the Company's revolving line of
credit. The balance was used for working capital purposes and held for use in
the debt restructuring element of the plan.
The combined net financial position, operating results and cash flows of
the EFM and Consulting Groups have been presented in the accompanying
consolidated financial statements as discontinued operations for the entire
year. All prior period operating results and cash flows have also been
reclassified to conform to the current year presentation.
Reducing Overhead and Improving Profitability
The restructuring plan included actions to realign and reduce the Company's
post-divestiture cost structure. Elements of the cost reduction plan included an
approximate 25% personnel reduction in the Company's wholly-owned North American
operations with lesser percentage reductions in its International operations,
eliminating regional overhead layers, downsizing facilities, closing of
marginally profitable office locations, discontinuing certain business
offerings, improving direct labor utilization on projects and enhancing project
controls to minimize risks of future contract losses. Because of certain
centralized aspects of the Company's organizational structure that existed prior
to completing the
Page 11
divestitures discussed above, the cost reduction elements of this phase of the
plan could not begin until after the divestitures were completed. The results of
the cost reduction plan have been positive - reducing administrative expenses by
more than $20.0 million on an annualized basis when comparing the fourth quarter
of 1999 to that of 1998. Although the majority of the reduction initiatives have
been enacted, the Company remains focused on appropriately controlling overhead
spending.
Revising the Capital Structure
The Company has not yet completed the last element of its plan, the
restructuring of its outstanding debt.
In September 1999, the Company reached an agreement in principle with the
majority of the holders of its $15.0 million in Senior Notes and the holders of
its $125.0 million Senior Subordinated Notes. On October 1, 1999, the Company
commenced an asset sale offer/exchange offer to implement a restructuring of its
$125.0 million Senior Subordinated Notes. On October 9, the Company completed
the first element of the debt restructuring by using proceeds from its recently
completed asset sales to repurchase $14.0 million of its $15.0 million in
outstanding Senior Notes for 88% of their face value. The Company also paid the
accrued interest on the repurchased notes.
By November 3, 1999, the Company had received notice of participation in
the asset sale offer/exchange offer by the holders of approximately 99% of the
principal amount of its $125.0 million Senior Subordinated Notes. On November 4,
1999, the Company obtained the necessary approvals of its common shareholders to
be able to effect the proposed restructuring. The detailed elements of the plan
are described in the Company's Prospectus dated October 1, 1999. In general
terms, the plan contemplated the cash repurchase of at least $35.0 million of
the Senior Subordinated Notes and the exchange of 2,600,000 shares of new
redeemable convertible preferred stock (liquidation preference of $65.0 million)
and up to $25.0 million in new unsecured 15% Senior Notes to be due December 31,
2002 for the balance of the Senior Subordinated Notes.
Consummation of the approved debt restructuring plan was conditioned on the
Company's ability to obtain a new bank revolving credit facility satisfactory to
the Company and an unofficial committee of the Senior Subordinated Noteholders.
The proposals ultimately received from potential lenders did not provide the
Company with a facility that was compatible with the Company's needs. Due to the
fact that the Company could not secure an acceptable credit facility and on
continued financial underperformance of its Engineering Operations, on December
31, 1999, the Company paid the scheduled interest payment on the $126.0 million
in remaining notes and decided to delay implementation of the proposed debt
restructuring and re-open negotiations with its noteholders and potential
lenders.
The Company has continued negotiations with representatives of its Senior
Subordinated Notes and, while it has no assurance, believes it may be able to
implement a modified restructuring of those notes. Such a transaction could
involve an exchange of Senior Subordinated Notes for a combination of new common
stock and newly issued preferred stock. The Company believes that such a
restructuring would substantially improve its financial condition and provide a
basis for ongoing operations and continuation of the Company's turnaround.
However, such a restructuring would result in substantially more dilution of the
equity of existing common stockholders than the restructuring proposed during
the fall of 1999. Such a restructuring may be accomplished through consensual
insolvency proceedings.
While continuing negotiations with representatives of its Senior
Subordinated Noteholders, the Company has been exploring strategic alternatives
for the Company, including the possible sale of certain of its assets or
businesses. That process is still underway. The Company currently expects to be
able to reach a conclusion with respect to its strategic direction and begin to
implement its reorganization prior to the end of the second quarter of 2000.
Page 12
Results of Operations
The Company's business is comprised primarily of its Engineering Operations
and its 50% interest in the Kaiser-Hill subsidiary. The following discussion
separately addresses the operating results of the two, largely different
operations. In all cases, conforming changes to current period presentation
formats have been made in the historical results presented.
Kaiser-Hill
Kaiser-Hill is a 50% owned joint venture between Kaiser Group
International, Inc. and CH2M Hill, formed solely to perform the U.S. Department
of Energy's (DOE) Rocky Flats Closure Project (the Rocky Flats Contract)
initially awarded in late 1995. The Kaiser-Hill operating results for each of
the years ended December 31 were as follows (in thousands):
Kaiser-Hill 1999 1998 1997
--------- --------- ---------
Gross Revenue.................... $ 643,044 $ 632,600 $ 588,700
Subcontracts and materials..... (456,188) (478,100) (421,200)
--------- --------- ---------
Service Revenue.................. 186,856 154,500 167,500
Operating Expenses:..............
Direct labor and fringe........ 176,582 138,300 145,500
Depreciation/amortization...... 89 -- --
--------- --------- ---------
Operating Income................. $ 10,185 $ 16,200 $ 22,000
========= ========= =========
The Rocky Flats Contract is primarily cost-reimbursable in nature, but it
also contains certain minimum and incentive fee elements based on qualitative
and quantitative factors of actual performance levels compared to annually
negotiated and established benchmarks or milestones. Accordingly, fluctuations
in gross revenue earned by Kaiser-Hill during the comparable periods above are
largely reflective of increased levels of reimbursable subcontractor costs,
i.e., pass-throughs, being incurred as the contract progress continued and as
the term of the contract neared its original completion date of June 30, 2000.
Although annual operating results are not directly comparable because of changes
in the underlying performance milestones that are established annually by the
DOE, the service revenue and operating income decreases from 1998 to 1999 are
largely the result of the January 24, 2000 award of the new Rocky Flats Closure
Contract, effective February 1, 2000. The Closure Contract shifted certain
remaining performance elements from the original contract into the new contract.
Since the Company had been recognizing the performance fee of the original
contract using the percentage of completion basis and since performance elements
were shifted out of the original contract into the Closure Contract, the Company
had to revise downward its estimate of its earnings under the original contract.
The downward revision, due to the shift in contract performance elements, caused
the Company to reverse, in the fourth quarter of 1999, previously recognized
revenue of $5.2 million. This adjustment merely reflects a change in the timing
of when Kaiser-Hill will earn performance fee. The service revenue decrease from
1997 to 1998 of $13.0 million is due to a lower incentive fee pool being
available for award in 1998 as compared to 1997. The DOE made the benchmarks to
earning the 1998 incentive fee pools more difficult - indirectly reducing the
amount of incentive fee potentially payable to Kaiser-Hill.
On January 24, 2000, Kaiser-Hill was awarded the follow-on Rocky Flats
Contract pursuant to which Kaiser-Hill will provide services through to closure
of the Rocky Flats site (the Closure Contract). The Closure Contract became
effective February 1, 2000, essentially terminating the remaining period of the
original contract. The economic terms of the Closure Contract are significantly
different from the original contract in that Kaiser-Hill will earn revenue based
on the actual cost of physical completion and will earn a performance fee based
on a combination of the actual cost of completion and the actual date of
physical completion, both as compared to contracted targets. The Closure
Contract fee may range from $150.0 million to $460.0 million based on Kaiser-
Hill's costs falling within the range of targeted completion cost of $3.6
billion to $4.8 billion, respectively, if completed within various dates between
March 31, 2006 - March 31, 2007. Physical completion above the target cost would
result in a reduction to the fee whereby Kaiser-Hill will share 30% in all costs
incurred after such date, subject to a maximum Kaiser-Hill liability of $20.0
million. Until such time as Kaiser-Hill can reasonably predict the likely
outcome of the total fee to be earned by contract completion, the fee will be
accrued at the minimum on a straight-line basis from February 1, 2000 through
December 31, 2007. Estimated changes in the earned fee will be recognized as
contract to date adjustments at such time as the estimate is revised. The
Closure Contract currently provides for Kaiser-Hill to invoice DOE quarterly
based on a $340.0 million target fee
Page 13
pool, less a 50% retainage for 2000. Thereafter, the quarterly invoicing will
revert to a formula such that cumulative contract billings would not exceed the
minimum fee of $150.0 million spread over a 7 year timeframe, with retainages.
All invoice payments made by DOE to Kaiser-Hill will be distributed to the joint
venture owners immediately upon receipt, less certain Kaiser-Hill
reimbursements.
Engineering Operations
The Engineering Operations provide design, engineering, procurement, and
construction and project management services to domestic and international
clients in the infrastructure, facilities, metals, mining and industrial
markets. The operating results for each of the years ended December 31 was as
follows (in thousands):
1999 1998 1997
---------- --------- ---------
Gross Revenue............................ $ 227,223 $ 367,121 $ 338,216
Subcontracts and materials............. (123,108) (239,694) (200,131)
Provision for contract losses.......... -- (76,210) (6,900)
Equity income of affiliates............ 4,480 6,045 2,301
--------- -------- --------
Service Revenue.......................... 108,595 57,262 133,486
Operating Expenses:
Direct labor and fringe................ 67,896 79,562 79,971
Selling, general and administrative.... 54,052 65,534 63,851
Depreciation/amortization.............. 5,180 8,288 8,595
Restructuring charges.................. 14,384 17,079 ---
---------- --------- ---------
Operating (Loss)......................... $ (32,917) $(113,201) $ (18,931)
========== ========= =========
Gross Revenue: Gross revenue represents the amount of goods and services
provided to the customer through primary contract relationships. Often included
as a component of gross revenue, and reimbursed by the customers, are costs of
certain services which the Company subcontracts to and procures from third
parties, including direct project costs and materials. These costs are excluded
from gross revenue to derive the Company's service revenue. Engineering
Operations derive the majority of their economic benefit, however, in the form
of engineering, procurement and construction management services performed
directly - this element is referred to as service revenue and is used as the
basis for managing the Engineering Operations.
The majority of the gross revenue fluctuations noted above are attributable
to the completion or near completion of several large fixed price projects that
also contained large amounts of construction materials and passed through
subcontractor costs. Such costs are included in the Company's gross revenues;
however, they typically have nominal effect on project profitability. More
specifically:
. the large fixed-price Nitric Acid projects were completed in the first
quarter of 1999 and resulted in gross revenue of $14.4 million in 1999
compared to $47.9 million and $55.1 million in 1998 and 1997, respectively.
. the large fixed-price project to construct the Nova Hut steel mini-mill in
the Czech Republic generated gross revenue of $54.2 million in 1999 versus
$77.8 million and $76.7 million in 1998 and 1997, respectively. The large
gross revenue earning phases of the Nova Hut project neared completion as of
December 31, 1999.
. the acquisition on March 19, 1998, of ICT Spectrum Constructors, Inc., a
construction contractor based in Boise, Idaho, specializing in construction
management of fabrication plants and other facilities for semiconductor and
microelectronics customers, resulting in $17.6 million and $87.2 million in
gross revenue in 1999 and 1998, respectively.
The Engineering Operations ended 1999 with approximately $202.0 million in
signed contract backlog.
Service Revenue: Apart from the fluctuations resulting from large project
completions, the Company's engineering operations experienced softness in 1999
compared to prior years in new business development in certain areas, including
all business lines in the Asia-Pacific region and within the iron and steel and
microelectronics business lines in North America. The operating performance
during the fourth quarter was also down from the prior quarter due to the
nearing completion of certain foreign projects during the third quarter of 1999
without equal replacements commencing immediately in the
Page 14
fourth quarter. These developments, in addition to the contract fluctuations
noted above, accounted for service revenue declines of $25.0 million in 1999
compared to 1998 and of $31.8 million compared to 1997 (after adjusting 1998 and
1997 service revenue results for the effects of the large project losses
recognized therein).
Operating gross margins - service revenue less direct labor and fringe
costs -as a percent of service revenue have declined slightly over the past
three years. The different types of services provided by the Engineering
Operation's business units typically attract different average operating
margins. As the business mix changes slightly from year to year, the
consolidating operating margins fluctuate with the relative shifts in underlying
service base composition. Adjusting 1998 and 1997 results for the effects of the
large contract losses recognized in those years, and excluding equity income in
affiliates, the gross margins as a percent of service revenue were 34.8%, 37.5%
and 42.1% during the years 1999, 1998 and 1997, respectively. The decreased 1999
operating gross margin is reflective of the fact that the 13% and 15% annual
reductions in direct labor spending from 1998 and 1997 compared to 1999 did not
parallel the pace of reductions in service revenue.
The decrease in 1999 equity in income from affiliates from 1998 levels
reflects the culmination of an alumina refinery project in Australia. A year
earlier, it was also this project that accounted for the increase of $3.7
million in 1998 compared to 1997. The project was awarded in late 1997.
Operating Expenses: The restructuring plan implemented in 1999 and late
1998 included actions to realign and reduce the Company's post-divestiture
overhead cost structure such that the remaining levels more appropriately fit
the needs and size of its continuing operations. Elements of the overhead
reduction plan included an approximate 25% personnel reduction in the Company's
wholly-owned North American operations with lesser percentage reductions in
International operations, eliminating regional overhead layers, downsizing
facilities, closing of marginally profitable office locations, discontinuing
certain business offerings, improving direct labor utilization on projects and
enhancing project controls to minimize risks of future contract losses. Because
of certain centralized aspects of the Company's organizational structure that
existed prior to completing the divestitures discussed above, the cost reduction
elements of this phase of the plan could not begin until after the divestitures
were completed. To date, the results from the cost reduction plan have been
positive- administrative expenses have been reduced by more than $20.0 million
on an annualized basis when comparing the fourth quarter of 1999 to that of 1998
and a $11.5 million absolute reduction from 1998 to 1999. Although the majority
of the reduction initiatives have been enacted, the Company remains focused on
controlling overhead spending.
In connection with its plan of reorganization discussed in the Overview,
the Company recorded charges for restructuring costs of $14.4 million and $17.1
million during 1999 and 1998, respectively. Components of the charges included
amounts for severance and related matters, the write-off of goodwill associated
with the discontinuance of operations from a prior acquisition, a write-down of
the impairment of certain long-term investments, professional fees associated
with the debt restructuring (recognized in the fourth quarter), a charge for
business unit divestiture costs and for anticipated sublease losses and office
realignment and closings (see Note 3 to the consolidated financial statements).
These restructuring charges have been presented individually on the Consolidated
Statements of Operations.
Interest: The Company's average annual outstanding debt and the related
average effective interest rates for 1999, 1998, and 1997 were $146.7 million
and 14.7%, $151.7 million and 13.3%, and $140.8 million and 13.0%, respectively.
The rate of interest expense increased significantly in 1999 due to the
incurrence of rollover loan origination fees and points associated with
noncompliance with the terms of the revolving credit facility in early 1999 in
addition to higher base interest rates contained in the such credit facility as
compared to the former facility. Interest expense in 1997 was offset partially
by a one-time, $0.9 million reduction realized from the Company's favorable
resolution and reversal of a previously established liability for potential
interest costs associated with a foreign income tax matter.
Interest income is earned on available cash balances that were generated
primarily from the unused proceeds from the divestitures earlier in 1999 and
prior to those sales, largely only by Kaiser-Hill and foreign operations. All
other cash not required for operations was historically used to pay down
outstanding cash borrowings.
Page 15
Income Tax Expense: The income tax provision for all periods presented
excludes the minority's interest in Kaiser-Hill's operating income because it is
owned partially by another company and is a flow-through entity for income tax
purposes.
In 1999, the Company recognized total income tax expense of $38.4 million
allocable to the following results (in thousands):
Applicable Tax
Statement of Operations Category Income/(Loss) (Expense)/Benefit
-------------------------------- ------------- -----------------
Loss from continuing operations before income taxes................ $ (41,448) $ (1,110)
Income from discontinued operations................................ 4,210 (1,875)
Gain on the sales of discontinued operations....................... 75,878 (35,795)
Extraordinary loss on the early extinguishment of debt............. (989) 389
Also in 1999, the Company utilized deferred tax assets and the benefit of
current period losses totaling $33.6 million to offset a similar amount of
income tax liability resulting from the gain on the sales of discontinued
operations. The Company will not recognize an income statement benefit for any
previously unbenefitted or future operating losses or future tax deductions
until such time as management believes it is more likely than not that the
Company's future operations will generate sufficient taxable income to be able
to realize such benefits. As of December 31, 1999, the Company had provided a
valuation allowance against the entire remaining deferred tax asset of $39.9
million.
In 1998, the Company recorded an income tax benefit of $18.6 million on a
loss from continuing operations before income taxes of $115.7 million. The
Company recognized a $23.6 million valuation allowance against the total future
deferred tax benefit of the operating loss and any other future tax deductions
sufficient to ensure that the balance of the net deferred tax asset at December
31, 1998 would be completely utilized by the income tax gains that were
anticipated from sales of the operating divisions anticipated for completion in
1999.
Other 1998 changes in income tax expense versus 1997 include a $1.8 million
foreign income tax expense established for the anticipated repatriation to the
U.S. of Australian earnings, used for domestic working capital needs, and a $0.7
million provision for the permanent book-tax difference expected for the
redemption of $1.8 million in non-recourse loans to officers and former
employees, which were collateralized solely by shares of the Company's common
stock. At the inception of the loans, the collateral value exceeded the loans'
face value.
In 1997, the Company recognized a tax benefit of $9.4 million on pre-tax
loss from continuing operations of $12.4 million. Approximately $1.9 million of
the tax benefit was as a result of completing a study of historic research and
experimental expenditures for certain open tax years, enabling the Company to
recognize a benefit for research tax credits.
Extraordinary Items: In 1999, the Company had two early debt
extinguishments as defined by generally accepted accounting principles.
Effective upon the completion of the sale of the Consulting Group on June 30,
1999, the Company's revolving credit line was terminated. A charge of $0.8
million, net of income tax effects, was recognized for the write off of the
unamortized balance of capitalized costs incurred to originally obtain the
facility.
As part of its efforts to restructure its Notes, the Company repurchased
$14.0 million of the $15.0 million outstanding in Senior Notes for 88% of face
value in October 1999. After adjusting the amount of the repurchase discount by
the write off of the unamortized original issue discount on the notes and the
unamortized balance of capitalized costs incurred to originally issue the notes,
and costs incurred in the purchase the net gain on the repurchase was $0.2
million, net of related income tax effects.
Cumulative Effect of Accounting Change: In April 1998, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants issued Statement of Position 98-5 Reporting on the Costs of Start-Up
Activities (SOP 98-5). The SOP requires costs of organization and start-up
activities to be expensed as incurred. The Company elected early adoption of the
Statement effective April 1, 1998 and, at that time, reported the cumulative
effect of the change as a one-time, non-cash charge of $6.0 million after tax,
or $0.25 per share. The Company's amortization expense in 1998 was reduced by
$1.6 million because the cumulative charge included balances for items that were
previously amortized.
Page 16
Liquidity and Capital Resources
Operating activities: During 1999, the Company funded approximately $22.0
million of the $66.0 million in estimated nitric acid project cost overruns
identified in 1998, the remainder had been funded in 1998. Kaiser-Hill generated
$8.6 million in operating cash flows in 1999; versus $10.1 million in 1998. The
Company's nonrecurring restructuring activities used approximately $16.9 million
in cash for severance payments, lease restructuring costs etc. and professional
fees associated with its total debt restructuring initiatives, debt
extinguishments, and corporate reorganization and realignment activities. The
Company paid net interest expense of $18.7 million in 1999. Lastly, the
Company's Engineering Operations used cash of approximately $18.9 million in
its continuing operations. This usage was reflective, in part, of the fact
that the Company did not complete the majority of the overhead cost reductions
until the third and fourth quarters of 1999 and, in part, of the continued
operating weaknesses and business downturns in the Asia-Pacific region, in the
North American iron and steel and microelectronics business lines.
Excluding the $10.1 million in operating cash flows generated by Kaiser-
Hill in 1998, the Company's remaining $40.0 million used in operations
predominantly funded the nitric acid project overruns. Positive operating cash
flows of $26.2 million in 1997 were generated in part due to increased activity
in large commercial projects that had provisions in the contract terms for
milestone-based payments which were collected prior to actual contract
performance. Differences in the timing of the cash payments made to suppliers on
some of these large projects versus the collection of customer trade receivables
also contributed favorably to the 1997 operating cash flows.
Investing activities: Net of fees associated with completing the 1999
divestiture transactions, proceeds from the sales of the EFM and Consulting
Groups totaled $145.0 million. Proceeds of $2.4 million were received in 1998
from a 1997 installment sale of the Company's ownership interest in a pulverized
coal injection operation. Investments in fixed assets and software development,
including capitalized labor, were made in 1999, 1998 and 1997 totaling $2.1
million,$3.6 million and $4.6 million, respectively.
With the intent of significantly restructuring fixed operating leases for
the Company's corporate headquarters, the Company paid $1.5 million on November
12, 1997, for a 4% ownership interest in a limited liability company (the LLC)
that leases the land and owns the buildings leased primarily by the Company for
its corporate headquarters. The Company is committed to make additional annual
capital contributions to the LLC totaling $600,000 annually during each of the
first three years and $700,000 annually during each of the fourth through ninth
years of the LLC. The ownership in the LLC will increase to 16% in fixed annual
2.4% increments in each of the eleventh through fifteenth years of the
agreement.
Financing activities: Upon the closing of the sale of its EFM Group in
April, 1999, the Company paid off the outstanding balance on its revolving
credit facility of $36.0 million and used an additional $10.0 million to cash
collateralize certain outstanding contract performance guarantee letters of
credit. On June 30, 1999, the Company was required to cash collateralize an
additional $13.0 million so as to cover all $23.0 million of the Company's then
outstanding letters of credit. On October 9, 1999, the Company repurchased $14.0
million of its $15.0 million of Senior Notes at 88% of face value. As of
December 31, 1999 and April 14, 2000, the Company had no revolving credit
facilities and no debt other than its remaining Senior and Senior Subordinated
Notes totaling $126.0 million in principal amount. At December 31, 1999, the
Company had $13.1 million in total outstanding letters of credit, all fully
collateralized by restricted cash balances.
In 1998, the Company realized that it was going to incur significant cost
overruns on the nitric acid projects. Due to the significant risks, difficulties
and uncertainties involved in estimating the total costs to complete these large
fixed price projects, the Company revised and increased the total completed
project cost estimates several times in 1998. Given the completion cost
uncertainties and the inability to finitely determine the impact of the losses
on the Company's liquidity and financing sources, management immediately pursued
options for additional financing sources and flexibilities. In addition to
seeking a replacement working capital facility, the Company's Board of Directors
also began considering and pursuing other strategic alternatives, including, but
not limited to, the sale of portions of the Company.
Page 17
On December 18, 1998, the Company successfully entered into a new revolving
credit facility (the Revolver) which offered cash borrowings and letters of
credit up to an aggregate of $60 million. After obtaining the Revolver, the
Company again increased the estimate of the total nitric acid projects cost
overruns it expected to incur and need to fund prior to the completion of the
projects, by an additional $19 million. This material adverse change to the
Company's financial condition triggered a technical event of default pursuant to
the Revolver's terms. The lender permitted the Company to borrow and obtain
letters of credit pursuant to all other terms of the Revolver, primarily
conditioned on the Revolver provision that proceeds from asset sales be used to
repay outstanding cash borrowings. That provision combined with the fact that
the Company was actively pursuing the sale of significant operating assets was
sufficient assurance for the lenders to continue to permit the use of the
facility until such time as an asset sale was completed. On April 9, 1999, the
Company completed the sale of its EFM Group (see Note 4 to the Consolidated
Financial Statements) and used $36 million of the sale proceeds to extinguish
outstanding Revolver cash borrowings plus $10 million to cash collateralize
outstanding letters of credit. The Company also received an amendment to the
Revolver (the Amended Revolver) providing for cash borrowing and letters of
credit up to an aggregate of $30 million. The Amended Revolver expired on June
30, 1999 - essentially upon the Company's completion of the sale of its
Consulting Group. Also in connection with the expiration, the Company was
required to use an additional $13.0 million of the asset sale proceeds to
collateralize letters of credit that were outstanding under the expired
facility. As of April 14, 2000, $12.6 million in outstanding letters of credit
remain collateralized and will continue to be so until such time as the Company
can secure a replacement credit facility with sufficient letter of credit
capacity.
The distributions of Kaiser-Hill earnings to the minority interest owner in
1999, 1998 and 1997 totaled $3.3 million, $10.3 million and $13.9 million,
respectively. Kaiser-Hill had a $50 million receivables purchase facility to
support its working capital requirements, containing elements for certain
program fees, specified minimum tangible net worth requirements, and default
provisions for delinquent receivables, which expired, on an extended basis, on
September 30, 1999. On November 2, 1999, Kaiser-Hill subsequently obtained its
own revolving credit facility from Bank of America, N.A. that provides for up to
$35.0 million in total availability, such amount not to subject to exceed the
sum of eligible portions of Kaiser-Hill's eligible billed and unbilled accounts
receivable on the DOE Rocky Flats contract. The facility matures six years from
inception. Both parents of Kaiser-Hill have agreed to cure any events of default
by Kaiser-Hill on the facility. The facility includes provisions for interest
and charges commensurate with market pricing as well as affirmative and negative
financial covenants.
Liquidity and Capital Resource Outlook
The Company currently has no working capital facility and is financing its
Engineering Operations' working capital through the use of the residual cash
proceeds from the sale of its Consulting Group completed in June 1999 as well as
from distributions from its Kaiser-Hill subsidiary. Based on (i) current
expectations for near-term operating results, (ii) its current available cash
position and (iii) recent trends and projections in liquidity and capital needs,
management believes the Company has sufficient short-term liquidity to bridge
current operating needs until the implementation of a modified debt
restructuring, assuming that such a restructuring can be accomplished within the
reasonably near term. As noted above, there is no assurance that a successful
restructuring can be accomplished.
Actions remaining critical to the Company's long-term liquidity include
completing a restructuring of its $125.0 million Senior Subordinated Notes prior
to the next interest payment due date of June 30, 2000, securing a sufficient
working capital facility with acceptable terms, obtaining successful outcomes
regarding significant contingent liabilities (see Other Matters), and improving
operating results. Management believes that, if these steps can be achieved, the
Company will have sufficient liquidity generated by improved operating results,
substantially decreased interest expense and borrowings on its new credit
facility to meet its longer-term working capital requirements.
As discussed in the Overview, the Company has been engaged in ongoing
negotiations with representatives of the holders of its $125.0 million Senior
Subordinated Notes and believes it could implement a modified restructuring of
those notes. Such a transaction could involve an exchange of Senior Subordinated
Notes for a combination of common stock and newly issued preferred stock on
terms that would permit the Company to retain available cash and not require a
new bank credit agreement. The Company believes such a restructuring would
substantially improve its financial condition and provide a basis for ongoing
operations and continuation of the Company's turnaround. However, such a
Page 18
restructuring would result in substantially more dilution of the equity of
existing common stockholders than the restructuring proposed during the fall of
1999 and may involve a consensual insolvency filing, which could entail
additional delays in implementation.
As also discussed above, while continuing negotiations with representatives
of holders of its Senior Subordinated Notes, the Company has also been exploring
strategic alternatives for the Company. Such alternatives could include
generating funds for debt restructuring or longer-term objectives and operating
needs through divestitures of additional operating assets, replacing the
Company's long-term debt, and negotiating additional equity infusions. This
evaluation of alternatives is still underway. The Company currently expects to
be able to reach a conclusion with respect to its strategic direction and begin
to implement its reorganization prior to the end of the second quarter of 2000.
The Company expects its financial condition to be materially affected by
the implementation of any debt restructuring or strategic alternative. The
consummation of either a debt restructuring or other strategic alternatives
could be completed through a "prepackaged" plan of reorganization under Chapter
11 of the U.S. Bankruptcy Code. If such a plan were selected as the mechanism
for completing the Company's restructuring, the Company expects that it would
have the support of the largest holders of its Senior Subordinated Notes and,
therefore, be able to implement the plan relatively promptly. If the Company
commences such a proceeding, the goals of any such plan would be to (i) minimize
adverse effects on Kaiser's ongoing operations, trade creditors and employees
and (ii) result in a financially strengthened and stable organization for
purposes of ongoing operations.
Other Matters
Bath Contingency: In March 1998, the Company entered into a $187 million
maximum price contract with Bath Iron Works to construct a ship building
facility. In May 1998, the Company subsequently learned that estimated costs to
perform the contract as reflected in actual proposed subcontracts were
approximately $30 million higher than the cost estimates originally used as the
basis for contract negotiation between the Company and the customer. After
learning this, the Company advised the customer that it was not required to
perform the contract in accordance with its terms as a result of a mutual
mistake among them in negotiating that contract. In October 1998, the customer
presented an initial draft of a claim against the Company requesting payment for
estimated damages and entitlements pursuant to the terminated contract. The
customer has also subsequently asserted a claim based on alleged differing site
conditions that allegedly should have been identified by the Company. In March
2000, Bath filed a combined claim against the Company in U.S. District Court in
the District of Maine requesting payment for $38 million. The Company continues
to object to Bath's allegations and is vigorously defending its position.
Although no resolution has been reached, management has recorded a provision in
the financial statements for the Company's proposed settlement of the non-
insured portion of the loss.
Acquisition Contingency: The Kaiser common shares exchanged for the stock
of ICT Spectrum in the March, 1998 acquisition carry the guarantee that the fair
market value of each share of stock will reach $5.36 by March 1, 2001. In the
event that the fair market value does not attain the guaranteed level, the
Company is obligated to make up the shortfall either through the payment of cash
or by issuing additional shares of common stock with a total value equal to the
shortfall, depending upon the Company's preference. Pursuant to the terms of the
Agreement, however, the total number of contingently issuable shares of common
stock cannot exceed an additional 1.5 million.
In December, 1999, the Company and certain former Company employees and
shareholders of ICT Spectrum agreed to amend the applicable agreements in a
manner that had the result of reducing the amount of the taxable gain created by
former shareholder-employees' involuntary departures from the Company. As
permitted per the agreement, the shareholders agreed to allow the Company to
retain some of the vested shares as payment of the income tax withholding in
lieu of cash. In total, the Company retained 255,669 shares and recorded the
transaction as a $1.37 million reduction to goodwill and paid-in-capital.
Given that the quoted fair market value of the Company's common stock at
December 31, 1999 was $0.37 per share, and that the Company's current debt
instruments restrict the amount of cash that can be used for acquisitions, the
assumed issuance of an additional 1.5 million shares (now adjusted downward by
the 255,669 retained shares to 1,244,331), would not completely extinguish the
remaining purchase price contingency. In this event, the Company will need to
fund the contingency in cash and
Page 19
would need to obtain an amendment to current debt instruments or replace them in
order to complete a cash fill-up. Any future distribution of cash or common
stock would be recorded as a charge to the Company's paid-in-capital.
Until the earlier of the contingent purchase price resolution or March 1,
2001, any additional shares assumed to be issued because of shortfalls in fair
market value will be included in the Company's diluted earnings per share
calculations, unless they are antidilutive. The exchanged shares also contain
restrictions preventing their sale prior to March 1, 2001.
On March 29, 1999, one ex-ICT Spectrum shareholder, individually and on
behalf of all others similarly situated, filed a class action lawsuit in the
U.S. District Court for the District of Idaho alleging false and misleading
statements made in a private offering memorandum, and otherwise, in connection
with the Company's acquisition of ICT Spectrum in 1998. The Company subsequently
filed a motion to dismiss the case. On March 14, 2000, the court ordered the
defendant to address certain claim deficiencies. Upon receipt of the claim
amendments, the court is expected to complete the ruling relative to the
Company's motion.
Litigation, Claims and Assessments Contingencies: In the course of the
Company's normal business activities, various claims or charges have been
asserted and litigation commenced against the Company arising from or related to
properties, injuries to persons, and breaches of contract, as well as claims
related to acquisitions and dispositions. Claimed amounts may not bear any
reasonable relationship to the merits of the claim or to a final court award. In
the opinion of management, adequate reserves have been provided for final
judgments, if any, in excess of insurance coverage, that might be rendered
against the Company in such litigation. The continued adequacy of reserves is
reviewed periodically as progress on such matters ensues.
The Company may from time to time, either individually or in conjunction
with other government contractors operating in similar types of businesses, be
involved in U.S. government investigations for alleged violations of procurement
or other federal laws and regulations. The Company currently is the subject of a
number of U.S. government investigations and is cooperating with the responsible
government agencies involved. No charges presently are known to have been filed
against the Company by these agencies. The Company has provided for its estimate
of the potential effect of these investigations, and the continued adequacy of
reserves is reviewed periodically as progress on such matters ensues.
Prior to the divestitures of its EFM and Consulting Groups, the Company had
a substantial number of cost-reimbursement contracts with the U.S. government,
the costs of which are subject to audit by the U.S. government. As a result of
pending audits related to fiscal years 1986 forward, the government has
asserted, among other things, that certain costs claimed as reimbursable under
government contracts either were not allowable or not allocated in accordance
with federal procurement regulations. The Company is actively working with the
government to resolve these issues. The Company has provided for its estimate of
the potential effect of issues that have been quantified, including its estimate
of disallowed costs for the periods currently under audit and for periods not
yet audited. Neither the government nor the Company, however, has quantified
many of the issues, and others are qualitative in nature, and their potential
financial impact is not quantifiable by the government or the Company at this
time. The adequacy of provisions for reserves is reviewed periodically as
progress with the government on such matters ensues.
Contract warranties and performance guaranty contingencies: In the course
of the Company's normal business activities, many of its contracts contain
provisions for warranties and performance guarantees. As progress on contracts
ensues, the Company regularly updates the estimates of the costs to perform such
contingencies and reserves a proportionate amount of the total related contract
value until such time as the contingency is resolved.
Year-2000 Readiness: The Company, to date, has not experienced any
material systems failures related to the Year 2000 (Y2K) rollover. Our
remediation plan for the Y2K issue is discussed in detail in the Company's 1998
Annual Report to Shareholders and in 1999 Forms 10-Q. The Company will continue
to monitor and address any issues that may arise from internal systems or those
of third parties. The Company's cumulative costs since inception of the Y2K
initiative were $6.4 million through December 31, 1999. These costs were largely
comprised of the costs to replace financial accounting and
Page 20
other software applications. Apart from the system replacement costs, other
costs related to Y2K have not had a material adverse effect on the Company's
results of operation or financial condition.
Market Risk
The Company does not believe that it has significant exposures to market
risk. The majority of its foreign contracts are denominated and executed in the
applicable local currency. The interest rate risk associated with the majority
of the Company's borrowing activities is fixed, however, a 10% increase or
decrease in the average annual prime rate would result in an increase or
decrease of .72% multiplied by the weighted-average amount of fluctuating rate
borrowings outstanding during a period.
Forward-Looking Statements
From time to time, certain disclosures in reports and statements released
by the Company, or statements made by its officers or directors, will be forward
- -looking in nature. These forward-looking statements may contain information
related to the Company's intent, belief, or expectation with respect to contract
awards and performance, potential acquisitions and joint ventures, and cost-
cutting measures. In addition, these forward-looking statements contain a number
of factual assumptions made by the Company regarding, among other things, future
economic, competitive, and market conditions. Because the accurate prediction of
any future facts or conditions may be difficult and involve the assessment of
events beyond the Company's control, actual results may differ materially from
those expressed or implied in such forward-looking statements.
The Company is availing itself of the safe harbor provisions provided in
the Private Securities Litigation Reform Act of 1995 by cautioning readers that
forward-looking statements, including those that use words such as the Company
"believes," "anticipates," "expects," "estimates," and "believes", are
subject to certain risks and uncertainties which could cause actual results of
operations to differ materially from expectations. These forward-looking
statements will be contained in the Company's federal securities laws filings or
in written or oral statements made by the Company's officers and directors to
press, potential investors, securities analysts, and others. Any such written or
oral forward-looking statements should be considered in context with the risk
factors discussed below:
. The Company must significantly revise its capital structure, in the form of a
debt to equity conversion or a combination of other equity investments, joint
ventures or asset sales. The inability of the Company to accomplish one or a
combination of transactions described above would have a material adverse
effect on the business.
. The Company requires access to a revolving credit line to fund short-term
borrowing needs and provide letter of credit capacity required in connection
with certain projects. Kaiser may not be able to generate collateral to
support a borrowing base of sufficient size to obtain such credit or may not
be able to improve operating results enough to be able to obtain such credit.
. The Company may not be able to obtain satisfactory contract performance
guarantee mechanisms, such as performance bonds.
. The Company's financial performance is significantly tied to Kaiser-Hill
Company, LLC, which is subject to uncertainties that may adversely affect its
and the Company's operating results.
. The Company may not be able to maintain the existing volume or size of
contracts and may not be able to realize increased contract performance
levels.
. The Company is involved in a number of fixed-price contracts under which the
Company can benefit from cost savings or performance efficiencies. The
Company's revenue and profit recognition policies are based on making a
series of assumptions including aspects relative to contract pricing and
performance capabilities. The Company's contract to construct the Nova Hut
steel min-mill in the Czech Republic includes such aspects. In the event that
such assumptions cannot be met or change as contract progress ensues, the
Company may have to make downward adjustments to revenue and profit already
recognized in the financial statements. Possible results of changes in such
assumptions could include the inability to realize all contract performance
fees or other incentives already recognized as revenue in the financial
statements, and may result in other unrecoverable cost overruns.
Page 21
. The Company may not be awarded new contracts for which it is competing in
its established markets or these awards may be delayed. In addition, the
Company may not be able to win contracts in new markets it chooses to
target. General economic conditions in the international arena, especially
Asia and Latin America, could negatively impact the Company's current
international business and its ability to expand in international markets.
. The Company may not be able to make acquisitions and/or enter into joint
ventures, and if made, acquisitions and joint ventures may take more time
to contribute favorably to the Company's financial results than was
formerly assumed. The Company is highly leveraged and is subject to
restrictive covenants that limit its ability to fund potential acquisitions
and joint ventures beyond certain levels established in its debts
agreements.
. A portion of the Company's business is generated either directly or
indirectly as a result of federal and state laws, regulations, and
programs; a reduction in the number or scope of these laws, regulations or
programs could materially affect the Company's business.
. The Company's ability to attract and retain business is closely related to
its ability to attract and retain key management and operating personnel.
The market for professionals of the types employed by the Company is quite
competitive. The Company may not be able to attract and retain personnel
necessary for successful operations.
. The Company has several significant contingent liabilities arising out of
prior operations and contracts, its 1998 acquisition of ICT Spectrum
Constructors, Inc. and the dispositions of its Environment and Facilities
Management and Consulting Groups. Adverse resolution of one or more of
those contingencies could adversely affect the Company's financial
performance and condition.
. Certain of the Company's environmental work poses risks of large civil and
criminal liabilities for violations of environmental laws and regulations,
and liabilities to customers and to third parties for damages arising from
the Company's performing environmental services to its clients. A large
fine or penalty imposed on the Company could negatively impact contract
performance fees under certain existing contracts or otherwise negatively
affect the Company's financial results.
. The Company generally grants uncollateralized credit to its customers and
is therefore subject to risks of financial instability on the part of its
customers. In certain cases, the Company secures project specific insurance
policies related to various insurable risks such as certain non-payment due
to insolvency of the customer. Negative changes in the financial condition
of its customers could expose the Company to adverse financial
consequences.
Item 7.a Quantitative and Qualitative Information about Market Risk
See "Market Risk" in Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data appear on pages F-1
through F-29 and S-1 hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Page 22
The Board of Directors currently consists of the following eight directors.
All directors' terms expire at the Annual Meeting in 2000.
Jarrod M. Cohen
James O. Edwards
Thomas C. Jorling
James J. Maiwurm
Hazel R. O'Leary
Keith M. Price
James T. Rhodes
Michael E. Tennenbaum
Jarrod M. Cohen, 34, is the Managing Director of J.M. Cohen and Company
since January 1999. He was the Managing Director, head of Proprietary Investing,
and head of Risk Management for Cowen and Company from April 1996 to December
1998. Previously, from September 1989 until April 1996, Mr. Cohen was the
Portfolio Manager for the Cowen Opportunity Fund and Co-head of Cowen Small Cap
Approach. An agreement between Mr. Cohen and the Company is described on page
31of this Report. Mr. Cohen has been a Director of the Company since May 1,
1998.
James O. Edwards, 56, was Chairman of the Board and Chief Executive Officer
of Kaiser Group International, Inc. or its predecessors from 1985 to 1998. In
1974, he joined ICF Incorporated, the predecessor of Kaiser Group International,
Inc., and was its Chairman and Chief Executive Officer from 1985 until the 1987
establishment of ICF Kaiser International, Inc. Mr. Edwards graduated from
Northwestern University (B.S.I.E.) and Harvard University (M.B.A., High
Distinction, George F. Baker Scholar).
Thomas C. Jorling, 59, has been Vice President, Environmental Affairs, of
International Paper Company since 1994. Mr. Jorling was the Commissioner of the
New York State Department of Environmental Conservation from 1987 to 1994. Prior
to that, Mr. Jorling was a professor of environmental studies and director of
the center for environmental studies at Williams College in Massachusetts. In
addition, Mr. Jorling served from 1977 to 1979 as Assistant Administrator for
Water and Hazardous Material at the U.S. Environmental Protection Agency. Mr.
Jorling has been a Director of the Company since 1995. Mr. Jorling graduated
from the University of Notre Dame (B.S.), Washington State University (M.S.),
and Boston College (LL.B.).
James J. Maiwurm, 51, Chairman of the Board, President and Chief Executive
Officer. Mr. Maiwurm has been President and Chief Executive Officer of Kaiser
since April 19, 1999. Mr. Maiwurm was elected to, and as Chairman of, the Board
of Directors of the Company in June 1999. Mr. Maiwurm serves as chairman of the
board of managers of Kaiser-Hill Company, LLC, which performs the performance
based integrating management services at the Department of Energy's Rocky Flats
Environmental Technology site near Denver, Colorado. From August 1998 until
elected as Kaiser's President and Chief Executive Officer, Mr. Maiwurm was a
partner of Squire Sanders & Dempsey L.L.P., Washington, D.C., and from 1990 to
1998 was a partner of Crowell & Moring LLP, Washington, D.C. Both law firms
serve as counsel to Kaiser. Mr. Maiwurm is a member of the Board of trustees of
Davis Memorial Goodwill Industries, Washington, D.C., a non-profit entity, and
is a member of the board of directors of Workflow Management, Inc., and
integrated graphic arts company providing documents, envelopes and commercial
printing to businesses in North America, the stock of which is traded on the
Nasdaq National Market System.
Hazel R. O'Leary, 62, has been chief operating officer of Blaylock
Partners, L.P., an investment banking firm, since February 2000. Prior to that
Mrs. O'Leary had been Chairman of the firm of O'Leary Associates, Inc. from the
time she left her position as Secretary of the Department of Energy (DOE) in
January 1997. President Clinton selected Mrs. O'Leary to be the Secretary of
Energy in December 1992, and she assumed her duties in January 1993. During her
four-year tenure as Secretary, Mrs. O'Leary effectively downsized DOE's number
of employees by 27 percent and its budget by $10 billion over five years and
focused all of DOE's activities around five areas: science and technology,
national security, energy research, environmental quality, and economic
productivity. Immediately before her appointment as Secretary of Energy, Mrs.
O'Leary was president of the wholly owned natural gas subsidiary of Northern
States Power (NSP), a $2 billion diversified utility holding company
headquartered in Minneapolis; she had been executive vice president of the
holding company from 1989 to 1992. Mrs. O'Leary has over 25 years of experience
in sustainable energy policy and large project development. She
Page 23
has been a Director of the Company since March 1997. She also currently serves
on the Board of Directors of AES Company, the global power company, UAL, which
is the parent of United Airlines, and on the non-profit Boards of The Arms
Control Association, Morehouse College (Atlanta), and The Keystone Center. Mrs.
O'Leary graduated from Fisk University (B.A.) and Rutgers University Law School
(J.D.).
Keith M. Price, 63, has been a Director of the Company since May 1997. He
has been a consultant to various U.S. and international engineering and
construction companies since 1994. From 1991 to 1994, he was first Managing
Director of Transportation Systems and Engineering and then Managing Director of
Operations for Transmanche-Link, a joint venture of ten major European
contractors that held a contract to design, manufacture, and construct the
tunnel transportation for the Chunnel, an $11 billion project that links England
to France. Prior to his positions with Transmanche-Link, Mr. Price had a 27-year
career with Morrison-Knudsen where he held a number of senior management
positions and was a director. Mr. Price graduated from Pepperdine University
(M.B.A.).
James T. Rhodes, 58, has been the Chairman and Chief Executive Officer of
the Institute of Nuclear Power Operations (INPO) since March 1998. INPO is a
nonprofit corporation established by the nuclear utility industry in 1979 to
promote the highest levels of safety and reliability in the operation of nuclear
electric generating plants. Dr. Rhodes retired as President and Chief Executive
Officer of Virginia Power in August 1997. He joined Virginia Power in 1971 as a
nuclear physicist and held increasingly responsible positions throughout that
company. In 1985 he became senior vice president-power operations and in 1988,
senior vice president-finance; in 1989 he was elected President and CEO. Prior
to joining Virginia Power, Dr. Rhodes worked as a project engineer in the U.S.
Army Nuclear Power Program from 1964 to 1968. Prior to his retirement from
Virginia Power, Dr. Rhodes was a director of the Edison Electric Institute,
NationsBank, N.A., the Nuclear Energy Institute, the Southeastern Electric
Exchange, and Virginia Power. Dr. Rhodes has been a Director of Kaiser Group
International, Inc. since February 1998. Dr. Rhodes graduated from North
Carolina State University (B.S.), Catholic University (M.S.), and Purdue
University (Ph.D., Atomic Energy Commission Fellow ).
Michael E. Tennenbaum, 64, has been the Managing Member of Tennenbaum &
Co., LLC since June 1996. Mr. Tennenbaum also is currently the Chief Executive
of Tennenbaum Securities, LLC, and he has held this position since May 1997.
Previously, from February 1993 until June 1996, Mr. Tennenbaum was a Senior
Managing Director of Bear, Stearns & Co., Inc. In addition, Mr. Tennenbaum was
previously a member of the Board of Directors of Bear, Stearns & Co., Inc. and
also held the position of Vice Chairman, Investment Banking. Mr. Tennenbaum's
responsibilities at Bear, Stearns & Co., Inc. included managing the firm's Risk
Arbitrage, Investment Research, and Options Departments. Mr. Tennenbaum has
served on the Boards of Directors of Arden Group, Inc.; Bear, Stearns & Co.,
Inc.; Jenny Craig, Inc.; Sun Gro Horticulture, Inc.; and Tosco Corporation. Mr.
Tennenbaum graduated from the Georgia Institute of Technology (B.S.I.E.) and
Harvard University (M.B.A., with Distinction). Mr. Tennenbaum has been a
Director of the Company since May 1, 1998.
Executive Officers
S. Robert Cochran, 46, has been Executive Vice President and President,
North America since April 1999. Mr. Cochran serves on the board of managers of
Kaiser-Hill Company, LLC, which performs the performance based integrating
management services at the Department of Energy's Rocky Flats Environmental
Technology Site near Denver, Colorado. Prior to that, he was Senior Vice
President of Hazwaste Industries, Inc. & Earth Technology Incorporated, focusing
primarily on business development in the hazardous and radioactive site cleanup
area. He was Senior Vice President and partner with Interface Incorporated;
served as Vice President of PEI/IT; was senior project and geotechnical group
manager with JRB/SAIC; and for Versar, Inc., worked as a senior project
geologist. He is a registered professional geologist.
Richard A. Leupen, 46, has been Executive Vice President and President,
International since April 1999. Prior thereto, he was President of the Engineers
& Constructors Group of Kaiser Group since August, 1998 and held senior
management positions in that Group since 1995. Prior to joining the Company, Mr.
Leupen held management positions with Protech Pty. Ltd., Weda Bay Minerals Ltd
(Calgary), Strand Mining Pty Ltd (Singapore), and Strand Management Pty Limited
as well as serving as director of a number of Kaiser subsidiaries and
affiliates. Mr. Leupen graduated from the University of South Wales in Australia
(B.S.).
Page 24
Timothy P. O'Connor, 35, has been Executive Vice President and Chief
Financial Officer of Kaiser Group International, Inc. since 1998. He had been
Treasurer of the Company since May 1997 and has been employed by Kaiser in
various financial positions since 1995. Mr. O'Connor serves on the board of
managers of Kaiser-Hill Company, LLC, which performs the performance based
integrating management services at the Department of Energy's Rocky Flats
Environmental Technology site near Denver, Colorado. From 1990 until 1995, Mr.
O'Connor was employed by Lockheed Martin Corporation of Bethesda, Maryland,
where he held a number of financial positions. Prior to that, Mr. O'Connor
worked for General Electric Company and Lazard Freres and Co. of New York. Mr.
O'Connor, who is a Certified Cash Manager, graduated from the University of
Delaware (B.S.).
Section 16(a) Beneficial Ownership Reporting Compliance
The U.S. Securities and Exchange Commission (SEC) requires the Company to
tell its shareholders when certain persons fail to report their transactions in
the Company's equity securities to the SEC on a timely basis. During the fiscal
year ended December 31, 1999, Mr. Edwards failed to timely file a report on Form
4 regarding the grant of restricted stock. Such filing has since been made.
Based upon a review of SEC Forms 3, 4, and 5, and based on representations that
no Forms 3, 4, and 5 other than those already filed were required to be filed,
the Company believes that all Section 16(a) filing requirements applicable to
its officers, directors, and beneficial owners of more than 10% of its equity
securities other than the delinquencies disclosed in this paragraph were timely
met.
Page 25
Item 11. Executive Compensation
The following table shows the compensation received by each person who
served as the Company's Chief Executive Officer ("CEO") during fiscal 1999, the
four other most highly compensated executive officers of the Company who were
serving as of December 31, 1999 and two other most highly compensated executive
officers who were no longer serving the Company as of December 31, 1999 (the
"Named Executive Officers") for the three years ended December 31, 1999.
SUMMARY COMPENSATION TABLE
Long-term Compensation
----------------------
Annual Awards
------ ------
Compensation
------------
(e)
---
(a) (b) Securities (f)
------- ---------- ---
Name, Principal (c) (b) Underlying All Other
--------------- --- --- ---------- ---------
Position, and Salary Bonus Options Compensation
------------- ------ ----- ------- ------------
Fiscal Period ($) ($)(a) (#)(a) (c)
------------- --- ------ ------ ---
James J. Maiwurm, Current Chairman,
President and CEO(d)
Fiscal 1999.................... $252,406 $250,296 0 $ 2,548
Keith M. Price, Former President and
CEO(e)
Fiscal 1999...................... $213,186 $ 50,000 0 $705,751
Fiscal 1998...................... $141,347 $ 50,000 200,000 options $ 52,068
S. Robert Cochran, Executive Vice
President(f)
Fiscal 1999 ..................... $245,583 $151,973 0 $ 13,264
Fiscal 1998...................... $200,013 $ 25,000 50,000 options $ 13,384
Fiscal 1997...................... $182,307 $ 15,000 9,900 options $ 13,138
Richard Leupen, Executive Vice
President(g)
Fiscal 1999...................... $291,266 $204,887 0 $ 99,246
Fiscal 1998...................... $207,357 $146,000 200,000 options $ 57,514
Fiscal 1997...................... $168,064 $ 80,000 9,900 options $ 25,151
Timothy P. O'Connor, Executive Vice
President, CFO(h)
Fiscal 1999...................... $238,848 $344,298 0 $ 12,641
Fiscal 1998...................... $200,013 $ 58,000 60,000 options $ 9,995
Fiscal 1997...................... $118,890 $ 7,500 6,000 options $ 7,567
Marijo L. Ahlgrimm, Senior Vice
President and Controller(i)
Fiscal 1999...................... $163,229 $ 88,322 0 $ 9,016
Fiscal 1998...................... $115,003 $ 0 0 $ 2,212
Fiscal 1997...................... $ 6,635 $ 0 6,000 options $ 0
- ----------------
(a) Cash bonuses are reported for the year of service, for which the cash bonus
was earned, even if pre-paid or paid in a subsequent year. Restricted stock
and options are reported for the year of service for which the stock and/or
options were earned, even if the grant date falls in a subsequent fiscal
year. No dividends are paid on any shares of restricted stock.
(b) Any amounts shown in the "Other Annual Compensation" column do not include
any perquisites or other personal benefits because the aggregate amount of
such compensation for each of the Named Executive Officers did not exceed
the lesser of (i) $50,000 or (ii) 10% of the combined salary and bonus for
the Named Executive Officer for the stated fiscal period.
(c) The Company's 1999 contributions to the Named Executive Officers pursuant
to the Company's Retirement Plan will not be made until September 2000 and
hence is not included herein.
(d) On June 1, 1999, Mr. Maiwurm entered into an employment agreement with the
Company. For a full description of the terms of the agreement, refer to the
discussion under "Certain Relationships and Related Transactions-Executive
Officers" on page 34 of this Report.
(e) Mr. Price was appointed President and CEO of the Company as of August 5,
1998. On April 27, 1999, Mr. Price and the Company mutually agreed to
terminate his employment effective April 30, 1999. As a result of these
agreements, the information for fiscal 1999 and 1998, represents all
Page 26
compensation paid to or earned by Mr. Price during the periods commencing
on his hire date through the period covering his termination. For a fuller
description of the terms of these agreements, refer to the discussion under
"Certain Relationships and Related Transactions--Current Directors" on
page 32 of this Report. The amount in column (d) represents a signing bonus
paid to Mr. Price in connection with his agreeing to serve as President and
CEO of the Company. The amounts in column (f) of the table for Mr. Price
comprise the following:
Fiscal 1999 $677,450 Severance
$ 2,400 Company match under the Company's Section 401(k) Plan
$ 793 Spouse travel
$ 25,108 Relocation expenses
Fiscal 1998 $ 1,757 Company match under the Company's Section 401(k) Plan
$ 3,770 Spouse travel
$ 943 Car allowance
$ 45,598 Relocation expenses
(f) On June 1, 1999, Mr. Cochran entered into an employment agreement with the
Company. For a full description of the terms of the agreement, refer to
the discussion under "Certain Relationships and Related Transactions-
Executive Officers" on page 34 of this Report. The amounts shown in column
(f) of the table for Mr. Cochran comprise the following:
Fiscal 1999 $ 3,200 Company match under the Company's Section 401(k) Plan
$10,164 Company Retirement Plan Contribution for 1998 made in September 1999
Fiscal 1998 $ 3,200 Company match under the Company's Section 401(k) Plan
$10,184 Company Retirement Plan Contribution for 1997 made in September 1998
Fiscal 1997 $ 3,646 Company match under the Company's Section 401(k) Plan
$ 9,492 Company Retirement Plan Contribution for 1997 made in September 1997
(g) On June 1, 1999, Mr. Leupen entered into an amended employment agreement
with the Company. For a full description of the terms of related
agreements, refer to the discussion under "Certain Relationships and
Related Transactions- Executive Officers" on page 34 of this Report. The
amounts shown in column (f) of the table for Mr. Leupen comprise the
following:
Fiscal 1999 $ 2,508 Company match under the Company's Section 401(k) Plan
$37,090 Company Retirement Plan contribution for 1998 made in September 1999
$22,063 Relocation expenses
$12,461 Car Allowance
$25,124 Spouse travel
Fiscal 1998 $ 1,385 Company match under the Company's Section 401(k) Plan
$ 7,897 Company Retirement Plan contribution for 1997 made in September 1998
$31,452 Relocation expenses
$11,191 Car Allowance
$ 5,589 Spouse travel
Fiscal 1997 $10,247 Company Retirement Plan contribution for 1997
$14,904 Car Allowance
(h) On June 1, 1999, Mr. O'Connor entered into an employment agreement with the
Company. For a full description of the terms of the agreement, refer to
the discussion under "Certain Relationships and Related Transactions-
Executive Officers" on page 35 of this Report. The amounts shown in column
(f) of the table for Mr. O'Connor comprise the following:
Fiscal 1999 $ 2,577 Company match under the Company's Section 401(k) Plan
$10,064 Company Retirement Plan Contribution for 1998 made in September 1999
Fiscal 1998 $ 2,500 Company match under the Company's Section 401(k) Plan
$ 7,495 Company Retirement Plan Contribution for 1997 made in September 1998
Fiscal 1997 $ 2,378 Company match under the Company's Section 401(k) Plan
$ 5,189 Company Retirement Plan Contribution for 1997 made in September 1997