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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, 2001
Commission File No. 1-12248
KAISER GROUP HOLDINGS, INC.
(successor issuer to Kaiser Group International, Inc.)
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
54-2014870
(I.R.S. Employer
Identification No.)
9302 Lee Highway, Fairfax, Virginia
(Address of principal executive offices)
22031-1207
(Zip Code)
Registrant's telephone number, including area code: (703) 934-3600
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
===============================================================================
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 Exchange 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. [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12,13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [X]
The Plan of Reorganization of Kaiser Group International, Inc. under Chapter 11
of the Bankruptcy Code became effective on December 18, 2000. The Plan
provides, among other things, that holders of shares of common stock of Kaiser
Group International, Inc. ("Old Common Stock") received shares of common stock
of Kaiser Group Holdings, Inc. and that holders of specified outstanding debt
obligations and other specified claimants received cash and shares of preferred
stock and common stock of Kaiser Group Holdings, Inc., all in accordance with
the terms set forth in the Plan. The initial distribution of securities
occurred as of April 17, 2001.
The aggregate market value of common stock held by non-affiliates of the
registrant was $4.3 million based on the Over-the-Counter Bulletin Board
average bid and asked prices of $2.71 on March 25, 2002. On March 25, 2002,
there were 1,601,046 shares of common stock outstanding.
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-k for the year ended December 31,
2001 Page 2
PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains, and our periodic filings with the
Securities and Exchange Commission and written or oral statements made by the
Company's officers and directors to press, potential investors, securities
analysts and others, will contain, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 31E of the
Securities Exchange Act of 1934. These forward-looking statements are not
historical facts, but rather are predictions and generally can be identified by
use of statements that include phrases such as "believe," "expect,"
"anticipate," "estimate," "intend," "plan, " "foresee" or other words or
phrases of similar import. Similarly, statements that describe or contain
information related to matters such as our intent, belief, or expectation with
respect to financial performance, claims resolution, cash availability, stock
redemption plans, contract awards and performance, potential acquisitions and
joint ventures, and cost-cutting measures are forward-looking statements. These
forward-looking statements often reflect a number of assumptions and involve
known and unknown risks, uncertainties and other factors that could cause our
actual results to differ materially from those currently anticipated in these
forward-looking statements. In light of these risks and uncertainties, the
forward-looking events might or might not occur.
Important factors that could cause actual results to differ materially from
those suggested by these written or oral forward-looking statements, and could
adversely affect our future financial performance, include the risk factors
discussed in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operation.
ITEM 1. BUSINESS
REORGANIZED CORPORATE HISTORY
Kaiser Group Holdings, Inc. is a Delaware holding company formed on December 6,
2000 for the purpose of owning all of the outstanding stock of Kaiser Group
International, Inc. ("Old Kaiser" or "Kaiser Group International"), which in
turn continues to own the stock of its remaining subsidiaries. On June 9, 2000,
Old Kaiser and 38 of its domestic subsidiaries voluntarily filed for protection
under Chapter 11 of the United States Bankruptcy Code in the District of
Delaware (case nos. 00-2263 to 00-2301). Old Kaiser emerged from bankruptcy with
a confirmed plan of reorganization (the Second Amended Plan of Reorganization
(the "Plan") (Exhibit 2.a to this Report)) that was effective on December 18,
2000. The Company is deemed a "successor issuer" to Old Kaiser by virtue of rule
12-g3(a) under the Securities Exchange Act of 1934. References to the "Company"
or "Kaiser Holdings" in this Report refer to Kaiser Group Holdings, Inc. and its
consolidated subsidiaries. A summary of the Plan for Old Kaiser, as well as
other information relative to the process regarding the initial Plan
distributions of cash and new securities, can be found in a Current Report on
Form 8-K filed on December 14, 2000 with the Securities and Exchange Commission
by Old Kaiser.
Following the completion of the sales of businesses and the effectiveness of
the Plan, the Company has only a limited number of activities, assets and
liabilities, primarily consisting of (further described in this section under
"Overview of Retained Business Operations"):
. the ownership of a 50% interest in Kaiser-Hill Company, LLC
("Kaiser-Hill"), which serves as the general contractor at the U.S.
Department of Energy's Rocky Flats Environmental Technology Site near
Denver, Colorado, for the performance of a contract for the closure of the
site. Kaiser-Hill has performed for DOE at this site since 1995 and in
January 2000 was awarded a new contract to manage the closure of the site
within this 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 radioactive materials at the site
and other locations, to clean up areas contaminated with hazardous and
radioactive waste, and to restore much of the 6,000-acre site to the
public. The Kaiser-Hill joint venture between Old Kaiser and CH2M Hill
Companies, Ltd. was formed solely for the performance of the current and
former Rocky Flats contracts. The level of success experienced by
Kaiser-Hill in achieving closure of the Rocky Flats site, and the cost of
achieving such closure, are the primary determinants of the Company's
long-term financial performance following the completion of the
reorganization process.
. a substantial claim, pending resolution, against the owner of a steel
mini-mill for Nova Hut in the Czech Republic. The engineering and
construction of the mini-mill was completed by a subsidiary of Old Kaiser
in 2000.
. the holding of a minority ownership interest in ICF Consulting Group, Inc.
(a division that Old Kaiser sold in 1999) as well as the interest-bearing
promissory notes and escrowed cash received in connection with that sale.
. a wholly-owned captive insurance company that is no longer issuing new
policies and is solely involved in resolving remaining claims made against
previously issued policies.
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Kaiser Group Holdings, Inc. Report on Form 10-k for the year ended December 31,
2001 Page 3
. an ongoing obligation to fund a capped, post-employment medical benefit
plan for a fixed group of retirees.
GENERAL TERMS AND DISTRIBUTION STATUS OF PLAN OF REORGANIZATION
The effectiveness of the Plan as of December 18, 2000 did not in and of itself
complete the bankruptcy process. The process of resolving in excess of $500
million of claims initially filed in the Old Kaiser bankruptcy process is
ongoing. Old Kaiser objected to the majority of the unresolved claims, and if
such claims are not settled via the objection or dispute resolution processes
or other means, they will ultimately be heard and determined by the Bankruptcy
Court. Once a claim is resolved with an amount due to the creditor, such
portion of the claim is deemed to be an allowed claim by the Bankruptcy Court
(an "Allowed Claim"). The Company cannot predict with accuracy when the claims
resolution process will be complete or what the total amount of Allowed Claims
will be upon completion.
In very general terms, the Plan contemplated three different classes of
creditors:
. Allowed "Class 3 claims" against the Old Kaiser bankruptcy estate -
generally trade and similar creditors' claims of $20,000 or less -
received cash for their claims.
. Allowed "Class 4 claims", the largest class of claims against the Old
Kaiser bankruptcy estate, is made up of creditor claims other than Class 3
claims and equity claims. Class 4 claims included holders of the former
Kaiser Group International senior subordinated notes due 2003 ("Old
Subordinated Notes"). Holders of allowed Class 4 claims received a
combination of cash and Kaiser Holdings preferred and common stock in
respect of their claims. Such holders received one share of preferred stock
("New Preferred") and one share of new common stock ("New Common") for each
$100 of claims. However, the number of shares of New Preferred issued was
reduced by one share for each $55.00 of cash received by the holder of an
allowed Class 4 claim. Under the Plan, fractional shares of New Preferred
and New Common were not issued. Each holder of an Allowed Class 4 claim or
Allowed Equity Interest (see below for discussion of Equity Interest)
received the total number of whole shares of New Preferred or New Common to
which it was entitled. Any remaining entitlement to fractions of shares of
New Preferred or New Common were treated by distributing unallocated shares
of New Preferred and New Common to holders of Allowed Class 4 Claims and
Allowed Equity Interests having the greatest fractional entitlements until
all unallocated fractional shares of New Preferred and New Common were
distributed. Dividends on shares of New Preferred issued under the Plan
will accrue from the initial distribution date. Shares of New Preferred
distributed after the initial distribution date will be entitled to any
dividends that would have accrued from and after the initial distribution
date.
. The third class of claims recognized in the Old Kaiser bankruptcy estate
are equity claims, consisting of holders of former Kaiser Group
International common stock ("Old Common") and other "Equity Interests" as
defined in the Plan. Under the Plan, holders of Equity Interests will
receive a number of shares of New Common of Kaiser Holdings equal to
17.65% of the number of shares of such common stock issued to holders of
allowed Class 4 Claims. In the initial distribution, one share of Kaiser
Holdings New Common was issued for each 96 shares of previously
outstanding Old Common. Additional distributions of Kaiser Holdings
New Common stock may be made in the future as additional shares of New
Common are issued to holders of newly allowed Class 4 claims, if any.
Apart from holders of former Kaiser Group International Old Common, the
only holders of Equity Interests of which the Company is aware are the
former shareholders of ICT Spectrum Constructors, Inc., a corporation
acquired by merger with a subsidiary of Kaiser Group International in
1998. The Bankruptcy Court confirmed the equity nature of those claims.
Pursuant to the terms of Old Kaiser's Plan, the Company was required to
complete its initial bankruptcy distribution within 120 days of the effective
date of the Plan. Accordingly, on April 17, 2001, the Company effected its
initial distribution. At that time, there were approximately $136.8 million of
Class 4 claims that had been allowed in the bankruptcy process. The amount of
unresolved claims remaining at April 17, 2001 was approximately $130.5 million.
With respect to the unresolved claims, the Plan required that, at the date of
the initial distribution, sufficient cash reserves be retained by the Company
such that if all remaining unresolved claims were ultimately deemed allowed at
the originally claimed amount, the Company would be able to satisfy the allowed
claims, including dividends accruing on related New Preferred since April 17,
2001. The cash reserve requirement, and the fact that the Company had not yet
received a substantial cash payment that the Company asserted it was due from
the owner of the Nova Hut steel mini-mill in the Czech Republic, limited the
amount of cash available at the time of the initial distribution to the holders
of allowed Class 4 claims. The Company determined that an aggregate of $25.0
million, or approximately $0.09347 per $1.00 of Allowed and "deemed allowed"
Class 4 claims, was available at the time of the initial distribution to
Allowed Class 4 claim holders. Thus, more shares of New Preferred were issued
than would have been had the claims resolution process advanced more quickly
and had more cash been available from the Nova Hut project and/or other
sources. Due to the proportion of remaining unresolved Class 4 claims in
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Kaiser Group Holdings, Inc. Report on Form 10-k for the year ended December 31,
2001 Page 4
relation to the total of all resolved and unresolved claims, approximately
$12.3 million of the $25.0 million in available cash was reserved on April 17,
2001.
To address the remaining unresolved claims, the Bankruptcy Court issued an
order on March 27, 2001, establishing an Alternative Dispute Resolution ("ADR")
procedure whereby the remaining claimants and Old Kaiser produce limited
supporting data relative to their respective positions and engage in initial
negotiation efforts in an attempt to reach an agreed claim determination. If
necessary, thereafter, the parties are required to participate in a non-binding
mediation before a mediator pre-selected by the Bankruptcy Court. All
unresolved claims are subject to the ADR process. Since April 17, 2001, the
date of initial distribution, $65.5 million of asserted claims have been
withdrawn, negotiated or mediated to an agreed amount, resulting in cash
payments approximating $0.8 million and no additional issuances of New
Preferred or New Common. As of March 15, 2002, the amount of unresolved claims
was approximately $65.0 million. The Company expects that substantial progress
will continue to be made in the resolution of claims over the balance of 2002.
The Company continues to believe that the amount of Class 4 claims ultimately
to be allowed in the Kaiser Group International bankruptcy proceeding will not
exceed $150.0 million. The Company intends to continue to aggressively pursue
settlement alternatives during its resolution of remaining Class 4 claims.
Regardless of the settlement intentions, the Company cannot determine, with
certainty, the effect of the outcome on its overall financial condition in the
event such settlements are or are not accepted in the future.
As discussed above, the exchange ratio of New Common for Old Common (1 new share
for each 96 old shares) and the nature of the distribution of shares of common
stock to holders of Class 4 claims resulted in there being a number of holders
of a relatively small number of shares of Kaiser Holdings common stock.
Therefore, in 2001 the Company initiated an offer to purchase all shares of New
Common distributable to persons who received 99 or fewer shares in the initial
distribution for a price equal to $4.50 per share. The offer expired on June 15,
2001 with 25,650 shares being repurchased by the Company under this plan for a
total of $115,000.
In the case of holders of Old Common, the offer to purchase shares was
conditioned on the holder's agreement to also sell the holder's right to future
distributions of shares of Kaiser Holdings' common stock under the Plan. The
offer price for such distribution rights was $0.50 per share that would
otherwise be distributed. This offer price was determined arbitrarily, based
primarily on the Company's current expectation that future distributions of
shares of Kaiser Holdings' common stock would not exceed 10% of the number of
shares distributed at the present time. Holders who wished to sell their right
to future distributions had to also sell their shares of Kaiser Holdings' common
stock. On June 15, 2001, the Company repurchased 20,002 rights under this plan
for a total cost of $10,000.
The following table depicts the results of the initial distributions to Allowed
Claims pursuant to the Plan of Reorganization:
Distribution Element
--------------------
Liquidation # of # of
----------- ---- -----
Preference of shares of shares of
------------- --------- ---------
of New New New
------ --- ---
Amounts as of Claim Distribution Preferred Preferred Common
----- --------- --------- ------
Initial Distribution Date: Amount Amount Cash Stock Stock Stock
------ ------ ---- ----- ----- -----
($'s in thousands) % $Value
- ------
Amount of Allowed $912 100% $912 $912 -- -- --
Class 3 Claims
Amount of Allowed
Class 4 Claims $136,863 55% $75,275 $12,794 $62,481 1,136,024 1,368,632
Holders of Old Common Stock -- -- -- -- -- 242,257
Buyback of Odd-Lot New
Common Stock -- -- -- -- -- (25,650)
-------- ------- ------- ------- --------- ---------
Totals $137,775 $76,387 $13,706 $62,481 1,136,024 1,585,239
======== ======= ======= ======= ========= =========
From time-to-time in the future, as remaining unresolved claims are resolved,
excess cash to be available from the "reserve" fund (including cash added to
"reserve" fund in payment of pro forma dividends on retained shares of New
Preferred) must be used to redeem outstanding shares of New Preferred.
Preferred Stock Put Rights
Holders of Old Subordinated Notes were offered the opportunity to have a right
to "put" their New Preferred to Kaiser Government Programs, Inc. ("KGP"), which
is the indirect 100% owner of Old Kaiser's 50% interest in Kaiser-Hill, if KGP
receives certain proceeds from Kaiser-Hill. This opportunity was offered in
exchange for the surrender of any remaining rights held by holders of Old
Subordinated Notes as of August 14, 2000 under a guarantee previously issued by
KGP. The KGP exchange offer expired on November 15, 2000, and the holders of
$124,303,000, or 99.4%, principal amount of the Old Subordinated Notes accepted
the exchange offer. On or about April 17, 2001, the holders of Old Subordinated
Notes received certificates representing the KGP put rights. The number of KGP
put rights represented by such certificates corresponded to the
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Kaiser Group Holdings, Inc. Report on Form 10-k for the year ended December 31,
2001 Page 5
number of shares of New Preferred Stock distributed with respect to such Old
Subordinated Notes.
The KGP put rights, expiring on December 31, 2007, obligate KGP to purchase New
Preferred owned by a holder of the KGP put right, at the holder's option, under
three circumstances:
. if KGP receives net after-tax proceeds from any cash distributions from
Kaiser-Hill that, on a quarterly basis, exceed 2.8 times the amount of
cash required to pay all past accrued but unpaid cash dividends on the New
Preferred distributed to holders of Old Subordinated Notes pursuant to the
Plan, plus the next scheduled quarterly cash dividend on New Preferred;
. if KGP receives net after-tax proceeds from any direct or indirect
disposition of any interest in Kaiser-Hill; or
. if KGP receives net after-tax proceeds from an extraordinary distribution
from Kaiser-Hill.
Upon exercise of a put, KGP will pay an exercising holder 100% of the
liquidation preference of the New Preferred that is the subject of the KGP put
rights, plus all accrued and unpaid dividends on the New Preferred. KGP will
purchase shares of New Preferred on a pro rata basis based upon the number of
shares of New Preferred as to which puts have been properly exercised, but only
up to the amount of the available net after-tax proceeds from triggering
events. KGP will not purchase any fractional shares. The number of KGP put
rights represented by such certificates will correspond with the number of
shares of New Preferred distributed with respect to Old Subordinated Notes. KGP
put rights will not become exercisable more frequently than every 12 months
unless the cumulative amount of available net after-tax proceeds from
triggering events is at least $3 million. KGP put rights will be transferable
except that puts shall cease to be transferable if KGP determines that any
further transfer would require registration of the puts as a class of
securities under the Securities Exchange Act of 1934. Kaiser Holdings does not
presently plan to arrange for trading of the KGP put rights on the
over-the-counter bulletin board or otherwise.
Overview of Retained Business Operations
Kaiser-Hill Company, LLC
- ------------------------
Kaiser-Hill is owned equally by Kaiser Group Holdings and CH2M Hill Companies
Ltd. CH2M Hill designates three of the five members of Kaiser-Hill's Board of
Managers, and Kaiser Holdings designates two members. The scope of Kaiser-Hill's
contract with the DOE includes all elements of daily and long-term operations
associated with the ultimate closure of the DOE's Rocky Flats site, including
stabilizing and safely storing or transporting radioactive material, cleaning up
areas contaminated with hazardous and radioactive waste, and restoring much of
the 6,000-acre Rocky Flats site for future use by the public.
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 Rocky Flats Site Closure Contract is primarily cost-reimbursable in nature,
but 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.
The economic terms of the Closure Contract provide that Kaiser-Hill will earn
revenue equal to the actual cost of physical completion in addition to a
performance fee based on a combination of the actual cost of completing the
site closure project and the actual date of physical completion, both as
compared to contracted targets. The potential fee to be earned pursuant to the
Closure Contract terms ranges from $150.0 million to $460.0 million based on
Kaiser-Hill's costs to complete the site closure being within the range of
targeted completion cost of $3.6 billion and $4.8 billion, and completion at
various dates between 2005 - 2007. Completion for a total cost in excess of the
target cost would result in a reduction to the potential 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. From the inception of this
contract in February 2000 until December 31, 2000, uncertainties over the
ability to accurately predict the total cost at completion and date of
completion made management chose a conservative course for revenue recognition
whereby contract fee was recognized for financial reporting purposes at the
minimum level, i.e. the $150.0 million fee level on a straight-line basis over
an estimated period of contract completion ranging from February 1, 2000
through December 31, 2007.
During early 2001, Kaiser-Hill reduced its estimate of total cost at completion
to $4.5 billion from the original $4.8 billion. This reduction in estimated
cost at completion had the financial statement result of increasing its accrual
of the fee to be earned over the contract duration from $150.0 million to
$180.0 million.
Kaiser-Hill continued to make favorable progress on the Closure Contract during
2001 and, during the quarter ended December 31, 2001, amended its estimate for
the physical contract completion date from December 31, 2007 to December 31,
2006 and changed its estimate of the total cost to be incurred during the
Closure Contract duration to be below $4.0 billion. Kaiser-Hill
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Kaiser Group Holdings, Inc. Report on Form 10-k for the year ended December 31,
2001 Page 6
management believes that its schedule progression and reductions in estimated
total costs to date contribute to its being on course to earn a $340.0 million
performance fee over the Closure Contract duration. Because Kaiser-Hill uses
the percentage of completion method for the performance fee recognition on the
Closure Contract, the effect of increasing its performance fee estimate on the
project from $180.0 million to $340.0 million resulted in recording additional
earnings of $15.8 million as a change in estimate in the fourth quarter. This
adjustment was comprised of a revenue increase of $47.8 million, offset by
$32.0 million in project contingency reserves. Despite the uncertainties
relative to Kaiser-Hill performing on the Closure Contract so as to earn a
possible $340.0 million in total performance fee, Kaiser-Hill also has goals of
further improving its ultimate project performance. Goals however should not be
considered free of risk, and the ability to accurately predict the ultimate
results are highly uncertain.
Under Kaiser-Hill's contract with the DOE, Kaiser-Hill is not responsible for,
and the DOE pays, all costs associated with liabilities, 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. There is an exception to this reimbursement provision applicable to
liabilities caused by the willful misconduct, lack of good faith or failure to
exercise prudent business judgment by Kaiser-Hill's managerial personnel.
The level of success experienced by Kaiser-Hill in achieving closure of the
Rocky Flats site on or before December 31, 2006, and the cost of achieving such
closure, are likely to be the primary determinants of the Company's long-term
financial performance following the completion of the reorganization process.
Kaiser Netherlands, B.V.
- ------------------------
Although Old Kaiser sold its Metals, Mining and Industry business unit in August
2000, it retained its Netherlands subsidiary, Kaiser Netherlands, B.V. ("Kaiser
Netherlands"), which had been performing a turnkey engineering and construction
services contract for the construction of a steel mini-mill in the Czech
Republic for Nova Hut. Upon completion of the construction of the mini-mill in
2000, the contract with Nova Hut provided for a maximum of three possible
performance tests to achieve final acceptance. The first performance test was
completed on November 13, 2000. Kaiser Netherlands believes that the first
performance test was successful, that additional tests were not necessary and
that Nova Hut should have agreed to final acceptance of the mini-mill and made
final payment of amounts accrued by Kaiser Netherlands throughout the project.
However, Nova Hut asserted that the first test was not successful. Kaiser
Netherlands believed that such contention may have been put forth by Nova Hut in
response to severe financial constraints on Nova Hut's operations resulting from
weakening conditions in the worldwide steel market and of the relatively
significant amounts that Kaiser Netherlands believed it was contractually due.
To date, this dispute has not been resolved, and Kaiser Netherlands has resorted
to legal proceedings to enforce its rights. The primary legal venue at this time
is the Delaware bankruptcy proceeding for Old Kaiser, where the Company has
asserted claims against Nova Hut and the International Finance Corporation
("IFC"), while rejecting substantial claims involving breach of contract filed
by Nova Hut and the IFC. The litigation of this dispute has had and may continue
to have a negative impact on the cash flow of Kaiser Netherlands and the
Company.
In February 2002, representatives of the Company, Nova Hut and the IFC met
under the auspices of a Delaware bankruptcy court-sponsored mediation. The
details of these discussions are subject to a confidentiality agreement. At the
date of this Report, there are no assurances that settlement will ultimately be
achieved through the bankruptcy court-sponsored mediation that is still in
process.
Other Retained Assets, Activities and Obligations
Kaiser Holdings also owns a 10% interest in ICF Consulting Group, Inc. ("IFC
Consulting"), a privately held entity, that was retained by Old Kaiser when it
sold its Consulting Group in June 1999. In connection with the sale, the Company
accepted two promissory notes as part of the total consideration received.
Principal payments on an escrowed and non-escrowed note, in the amounts of
$3,250,000 and $3,300,000, respectively, are due June 25, 2006. The notes are
subject to reduction in the event that certain divestiture-related contingencies
are not resolved as originally anticipated in the related sale agreement.
Amounts payable by ICF Consulting on such notes are subject to (1) the rights of
holders of ICF Consulting's senior lenders and (2) possible reduction as a
result of indemnification claims asserted by ICF Consulting pursuant to the
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Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001 Page 7
agreements entered into by the parties at the time of Old Kaiser's sale of its
Consulting Group. Initially as a result of a technical default of financial
covenants in its senior credit agreement, ICF Consulting has not made interest
payments on the notes since inception in 1999. The accrued amount of interest
receivable was $1.7 million and $1.1 million as of December 1, 2001 and 2000,
respectively. Under the terms of the notes, overdue interest bears interest at
12 1/2% per annum.
Also resulting from the sale of ICF Consulting, the Company is the beneficiary
of an escrowed cash balance totaling $835,000 that is currently held as
collateral in the event any applicable indemnification claims are made against
the Company by ICF Consulting. On February 12, 2001, ICF Consulting presented
the escrow agent with notice that it has claims for indemnification from the
Company for amounts significantly exceeding the balance of the Escrowed Cash
and the Escrowed Note. The Company has reviewed the indemnification claims and
believes them to be largely without merit and will vigorously defend its right
to be paid the escrowed funds upon their due dates. However, there can be no
assurance that the Company will be successful in this effort. In December 2001,
ICF Consulting proposed a settlement offer to the Company that was far below
the stated value of its claim. The Company rejected the ICF Consulting offer
and proposed an alternative settlement that was also rejected by ICF
Consulting. Based on the Company's perception of the lack of merit in the ICF
Consulting claims, the Company may begin implementation of legal actions to
defend the indemnification claim and to pursue the collection of escrowed cash
and interest that it is due.
The Company owns a captive insurance company that is no longer engaged in
issuing new policies but is solely in the process of resolving existing claims.
Restrictions on the insurance company's cash balances, maintained to support
statutory insurance reserves, will be released as reserve requirements decrease
in the future and to the extent such cash balances are not used in payment of
resolved claims.
The Company also has the obligation to pay certain medical, disability and life
insurance benefits to a fixed group of retirees for life. Such plans cover
certain individuals who retired from the Company prior to 1993. There are
approximately 653 retirees and dependents currently covered by the plan, the
average age of whom is approximately 80. The actuarially determined present
value of this obligation, based on the Company's existing commitments, interest
rate assumptions and related medical benefit insurance policies, is $7.5
million. Although the Company intends to try to reduce its remaining exposures
relative to the costs of this obligation in the future, there can be no
guarantees that this will feasible, nor can the Company estimate the amount of
potential future savings with any reasonable degree of accuracy.
The Company's assets also include those subsidiaries that were not debtors in
Old Kaiser's bankruptcy proceeding. However, many of those subsidiaries are
foreign entities and, except for Kaiser Netherlands which performed services
for the Nova Hut project and those subsidiaries related to Kaiser-Hill,
subsidiaries that were not debtors in Old Kaiser's bankruptcy proceedings do
not have material value. It is anticipated that a number of such subsidiaries
will be dissolved or otherwise cease to exist or become totally inactive.
The Company's Board of Directors will consider whether the Company will engage
in any additional business activities in the future. Among other things, it is
anticipated that the Board of Directors will consider whether the Company
should attempt to take advantage of Old Kaiser's successful history of
performing in the government services market, both independently and through
Kaiser-Hill, in order to develop a new revenue base. In keeping with this
effort, the Company has entered into an alliance with Tyco Infrastructure
Services (formerly Earth Tech) to pursue project opportunities. As of the date
of this Report, no projects have been targeted.
Selected Corporate Operating History for Periods Prior to the Bankruptcy
Reorganization
Old Kaiser was a provider of engineering, construction management, and project
and program management services. The original holding company was incorporated
in Delaware in 1987 under the name American Capital and Research Corporation,
as the successor to ICF Incorporated, a nationwide consulting firm organized in
1969. In 1988, the holding company acquired the Kaiser Engineers business,
which had performed a mixture of public- and private-sector engineering and
construction work since 1914. The name of the holding company was changed
several times since 1987 to and including ICF Kaiser International, Inc. and to
Kaiser Group International Inc. on December 27, 1999.
Old Kaiser's business operations and financial condition were significantly
impaired in 1998 and 1999 as a result of substantial difficulties and financial
losses encountered in the execution by its Engineering and Construction ("E&C")
Group of four large fixed-price contracts to construct nitric acid plants.
Pursuant to a plan intended to restore Old Kaiser to profitability, two other
unrelated operating groups were sold in 1999, a realignment of the retained E&C
Group was paired with substantial reductions in overhead spending, and a
restructuring of the then existing debt was proposed, subject to obtaining
credit arrangements providing adequate working capital.
Although Old Kaiser was able to obtain necessary stockholder approvals and
senior subordinated noteholders agreed to participate in a debt restructuring
plan, consummation of such a plan remained conditioned on Old Kaiser's ability
to obtain a
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001 Page 8
new revolving credit facility satisfactory to Old Kaiser and an unofficial
committee of the senior subordinated noteholders. The proposals ultimately
received from potential lenders did not provide Old Kaiser with a facility that
was compatible with Old Kaiser's projected needs. For this reason and due to the
continued disappointing financial performance of Old Kaiser's engineering
operations, Old Kaiser delayed implementation of the proposed debt restructuring
and reopened negotiations with the unofficial committee of noteholders and
potential lenders. Following additional attempts to effect a debt restructuring
and an evaluation of various potential strategic alternatives, including the
sale of assets or businesses, Old Kaiser announced the intention to sell the
majority of its remaining E&C Group in two separate transactions and to
restructure its debt in a voluntary and pre-arranged bankruptcy proceeding.
Accordingly, on June 9, 2000 the ("Petition Date"), Old Kaiser and 38 of its
wholly-owned domestic subsidiaries (the "Debtor Entities") filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the District of Delaware ("Bankruptcy
Court"). The subsidiaries that did not file petitions for relief under Chapter
11 are referred to herein as the "Non-Debtor Entities". Old Kaiser continued to
operate the Non-Debtor Entities' businesses in the ordinary course and operated
the Debtor Entities' businesses as debtor-in-possession. As such, the Debtor
Entities were authorized to operate their businesses in the ordinary course but
were not allowed to engage in transactions outside the ordinary course of
business without Bankruptcy Court approval. As of December 18, 2000, Old
Kaiser's bankruptcy Plan became effective and the day-to-day operations of its
Debtor Entities were no longer subject to Bankruptcy court supervision.
Upon obtaining the necessary Bankruptcy Court approvals, the sales of the
majority of Old Kaiser's E&C Group were completed as follows:
. Infrastructure and Facilities: The Bankruptcy Court approved the sale of
the Infrastructure and Facilities line of business on July 17, 2000. On
July 28, 2000, Old Kaiser completed the sale of this line of business,
which provided engineering services to clients around the world in the
transit and transportation, facilities management, water/wastewater
treatment, and microelectronics and clean technology sectors. In this
transaction, substantially all of the assets of this business line were
sold to Tyco Group S.A.R.L., the EarthTech unit of Tyco International
Ltd., for a cash purchase price of approximately $30 million.
. Metals, Mining and Industry: The Bankruptcy Court approved the sale of
the Metals, Mining and Industry line of business on August 17, 2000.
Effective as of August 18, 2000, Old Kaiser completed the sale of this
line of business, which provided engineering services to clients around
the world in the alumina/aluminum, iron and steel, and mining industry
sectors. In this transaction, substantially all of the assets of this
business line were sold to Hatch Associates, Inc., a subsidiary of The
Hatch Group of Canada, for a cash purchase price of approximately $7.0
million.
Insurance
Kaiser Holdings has a comprehensive risk management and insurance program in
place that provides a range of coverages tailored to the needs of the
reorganized company. Insurance coverages include policies for fiduciary, crime,
directors and officers liability, property, general liability, worker's comp,
and professional liability "runoff' coverage to deal with liabilities arising
from past activities and projects, if necessary.
Kaiser Holdings believes that the insurance coverages that it maintains,
including self-insurance, protect against risks that are commensurate for
similar businesses of the scope and present operating profile of Kaiser Holdings
and that related coverage amounts are economically reasonable. At this time,
Kaiser Holdings expects to continue to be able to obtain insurance in amounts
generally available to firms with a similar profile. There can be no assurance
that the insurance coverage and levels maintained by Kaiser Holdings will
continue to be reasonably available. An insured claim, or uninsured claim for
that matter, arising out of pre-reorganization or post-reorganization activities
of Old Kaiser, if successful and of sufficient magnitude, could have a material
adverse effect on the Company's financial position.
Government Regulation
Kaiser Holdings 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. No charges presently are
known to have been filed against Old Kaiser by these agencies.
Employees
As of March 31, 2002, the Company had approximately 12 (full and part-time)
employees.
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001 Page 9
ITEM 2. PROPERTIES
The Company's only leased property is located at 9302 Lee Highway, Fairfax,
Virginia 22031-1207, and its telephone number is (703) 934-3600. The majority
of all leased properties were transferred to others as part of asset sale
transactions in 1999 and 2000.
ITEM 3. LEGAL PROCEEDINGS
On June 9, 2000, Old Kaiser and 38 of its wholly owned subsidiaries filed
petitions for relief under Chapter 11 of Title 11 of the U.S. Bankruptcy Code
with the U.S. Bankruptcy Court for the District of Delaware in order to
facilitate the restructuring of Old Kaiser's long-term debt, trade and other
obligations. Old Kaiser continued to operate as a debtor-in-possession subject
to the Bankruptcy Court's supervision and orders until its Plan of
Reorganization was confirmed on December 5, 2000 and became effective on
December 18, 2000. The provisions of such Plan are further described under Item
1 of this Report.
In the course of normal business activities, various claims or charges have
been asserted and litigation commenced against Old Kaiser arising from or
related to properties, injuries to persons, and breaches of contract, as well
as claims related to acquisitions and dispositions. Such claims are now part of
the overall bankruptcy proceeding. 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 the Company in the event of unsuccessful bankruptcy resolution. The
continued adequacy of reserves is reviewed periodically as progress on such
matters ensues.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2001 Annual Meeting of Stockholders of the Company was held on Wednesday,
December 12, 2001, at 9300 Lee Highway, Fairfax, VA 22031-1207. The only matter
voted upon was the election of three directors. The directors elected at the
meeting included Jon B. Bennett, John T. Grigsby, Jr. and James J. Maiwurm. The
results of the election of directors was as follows:
For Withheld
--- --------
Jon B. Bennett 1,390,640 36,751
John T. Grigsby, Jr. 1,350,869 76,522
James J. Maiwurm 1,346,585 80,806
Withheld votes means that the shareholder marked the box on his/her proxy card
labeled "withheld".
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From September 14, 1993 until March 7, 2000, the Old Common of Old Kaiser was
traded on the New York Stock Exchange (NYSE) under the symbol "ICF" and, after
December 27, 1999, under the symbol "KSR". On March 8, 2000, the Old Common
ceased to be listed on the NYSE and began to be traded on the Over-the-Counter
Bulletin Board system under the symbol "KSRG". The Over-the-Counter Bulletin
Board quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions. Effective
with the Company's implementation of Old Kaiser's Plan of Reorganization, on or
about April 17, 2001, each 96 shares of Old Common were exchanged for 1 share
of the Company's New Common. The Company's New Common currently trades on the
Over-the-Counter Bulletin Board system under the symbol "KGHI".
At March 22, 2002, there were 129 shareholders of record of the New Common. The
following table sets forth the high and low sales prices for the Old Common
Stock as reported by the NYSE for 2000 through March 7, 2000, and the range of
high and low bid quotations on the Over-the-Counter Bulletin Board commencing
March 8, 2000 through December 31, 2001. Historical prices per share for the
period January 1, 2001 to the Initial Distribution date of April 17, 2001 have
been adjusted to show the effect of the 96:1 conversion ratio of Old Common to
New Common effected in the Initial Distribution.
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001 Page 10
New Common Old Common
---------- ----------
Stock Price Stock Price
----------- -----------
2001 2000
---- ----
High Low High Low
---- --- ---- ---
Year Ended December 31,
First Quarter................. $ 5.94 $ 1.98 $ 0.90 $ 0.12
Second Quarter................ 2.65 0.99 0.44 0.03
Third Quarter................. 2.45 1.75 0.06 0.03
Fourth Quarter................ 3.10 1.96 0.04 0.02
The Company's Transfer Agent and Registrar is EquiServe Trust Company, N.A,
P.O. 2536, Jersey City, NJ 07303-2536. The Shareholder Relations telephone
number is (201) 324-0498 and the internet address is http://www.equiserve.com.
Old Kaiser never paid cash dividends on its Old Common. Kaiser Holdings
anticipates that no cash dividends will be paid on the New Common for the
foreseeable future and that its earnings will be retained for use in the
business and also be used to pay dividends on and redeem outstanding shares of
New Preferred. The Board of Directors of Kaiser Holdings determines its dividend
policy based on its results of operations, payment of dividends on preferred
stock, financial condition, capital requirements, and other circumstances.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company for the year ended
December 31, 2001 and for Old Kaiser for the years ended December 31, 2000,
1999, 1998 and 1997, has been derived from the Company's and/or Old Kaiser'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, 2001 consolidated
financial statements.
Selected Consolidated Financial Data
(in thousands, except per share data)
Successor Predecessor Company
Company ------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Gross revenue........................................ $ -- $271,385 $643,044 $632,600 $588,700
Service revenue...................................... -- 76,018 186,856 154,500 167,500
Operating (loss)..................................... (10,792) (224) (16,544) (20,722) (90,654)
Income (loss) from continuing operations before
reorganization items, income taxes, minority
interest, extraordinary items and cumulative
effect of accounting change....................... 7,657 (1,736) (35,260) (39,462) (25,162)
Income (loss) before extraordinary items and
cumulative effect of accounting change............ (4,957) 29,762 (5,324) (93,442) (4,987)
Basic and Diluted Earnings (Loss) Per Share:
Continuing operations before extraordinary items
and cumulative effect of accounting change........ $ 1.92 $ 1.74 $ (1.65) $ (1.80) $ (0.96)
Discontinued operations, net of tax.................. (9.11) (0.46) 1.42 (2.07) 0.74
Extraordinary items, net of tax...................... -- 5.35 (0.02) (0.05) --
Cumulative effect of accounting change, net of tax... -- -- -- (0.25) --
-- -- -- ----- --
Total........................................... $ (7.19) $ 6.63 $ (0.25) $ (4.17) $ (0.22)
======= ======= ======== ======== ========
Weighted average common shares outstanding:
--basic........................................... 1,119 23,255 23,823 24,092 22,382
--diluted......................................... 1,119 23,255 23,823 24,092 22,382
Successor Company Predecessor Company
December 31, December 31,
--------------------- ----------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data (end of period):
Total assets........................... $80,891 $106,168 $253,563 $428,071 $399,288
Working capital........................ 23,974 54,131 17,116 3,271 91,121
Long-term liabilities.................. -- -- 131,795 147,152 145,590
Redeemable preferred stock *........... 62,481 -- -- -- --
Shareholders' equity (deficit)......... 3,360 87,500 (69,903) (63,118) 27,327
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001 Page 11
* As the Company had not initiated its initial bankruptcy distribution until
April 17, 2001, as of December 31, 2000, no shares of New Preferred were
actually outstanding as of such date. See table on page 5 for the details of
the initial distribution.
The estimated sum of the claims that ultimately will be allowed in the
bankruptcy proceedings, plus liabilities incurred after the bankruptcy filing,
exceeded the reorganization value of the assets of the emerged entity
immediately before the effective date. Additionally, holders of existing voting
shares immediately before the effective date received less than 50 percent of
the voting shares of the emerged entity, thus triggering a change in control of
the organization. The American Institute of Certified Public Accountants'
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code (SOP 90-7), requires that, under these circumstances,
a new entity is created for financial reporting purposes, and assets and
liabilities should be recorded at their fair values. Additionally, the value of
the reorganized enterprise becomes the established amount for the emerging
balance of stockholders' equity and any accumulated deficit of the predecessor
entity is offset against available paid-in-capital to result in an emerging
retained earnings of zero. This accounting treatment is referred to in this
Report as "fresh-start" reporting. The Company adopted fresh start reporting in
its consolidated balance sheet as of December 31, 2000 and recorded a net
increase to book value totaling $15.2 million resulting from the adjustments to
the individual assets and liabilities in Old Kaiser's Statement of Operations.
Because financial information from previous years was not prepared on a
comparable basis, a black line has been shown to separate new entity
information from prior year information. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
the effects of this reporting adoption.
As of December 18, 2000, the Company recognized a gain of $124.5 million, after
the effects of income taxes, on the forgiveness of pre-petition liabilities
approximating $150.0 million.
The recorded value for the emergent enterprise of $87.5 million was used for
fresh start reporting and was determined by management with the assistance of
independent advisors. The methodology employed involved estimation of
enterprise value taking into consideration a discounted cash flow analysis. The
discounted cash flow analysis was based on a seven-year cash flow projection
prepared by management - taking into consideration the terminal value of its
assets and liabilities as of immediately prior to its emergence from bankruptcy
on December 18, 2000. Terminal values of assets and liabilities were determined
based either on contracted amounts, actuarial present values and/or
management's estimates of the outcome of certain operating activities. These
post-emergent matters consist largely of the retained operations discussed in
this Report. Net after-tax cash flows, assuming a 40% effective tax rate, were
discounted at approximately 17% in order to take into consideration the risks
and uncertainties inherent in such projections. The cash flow projections were
based on estimates and assumptions about circumstances and events that have not
yet taken place. Estimates and assumptions regarding individual retained
matters which form the collective composition of the overall enterprise value
as of December 18, 2000 are inherently subject to significant economic and
competitive uncertainties and contingencies beyond the control of the Company.
Accordingly, there may be differences between projections and actual results
because events and circumstances frequently do not occur as expected and may be
significant. More specifically, assumptions within the valuation related to the
amount and timing of the ultimate performance and related cash flows of
Kaiser-Hill have the greatest impact to the overall enterprise valuation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 7. has been divided into a discussion of events and activities of the
Company after the bankruptcy reorganization (Successor Entity) which was
effective December 18, 2000 (immediately below through page 18) and events of
Old Kaiser prior to that date (on pages 18-24 of this Report).
KAISER GROUP HOLDINGS, INC. (SUCCESSOR ENTITY)
Overview
In the year since the Plan of Reorganization of Kaiser Group International, Inc.
under Chapter 11 of the Bankruptcy Code became effective on December 18, 2000,
Kaiser Holdings consummated the initial bankruptcy distributions to allowed
claimholders, continued to progress in resolving remaining outstanding
bankruptcy claims, performed responsibilities with regard to the management of
its remaining assets, most predominantly being its 50% ownership interest in
Kaiser-Hill Company, LLC and wound down elements of Old Kaiser's previous
activities and corporate structure no longer necessary to Kaiser Holdings.
A summary of the Old Kaiser Plan of Reorganization as well as other information
relative to the process regarding the Plan distributions of the cash and new
securities can be found in summary in Item 1. Business - "General Terms and
Distribution Status of the Plan of Reorganization" and in its entirety in a
Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 14, 2000 by Old Kaiser.
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001 Page 12
Following the completion of the sales of businesses and the effectiveness of
the Plan, the Company has only a limited number of activities, assets and
liabilities, primarily consisting of:
. the ownership of a 50% interest in Kaiser-Hill, which serves as the
general contractor at the U.S. Department of Energy's Rocky Flats
Environmental Technology Site near Denver, Colorado, for the performance
of a contract for the closure of the site. Kaiser-Hill has performed for
DOE at this site since 1995 and in January 2000 was awarded a new contract
to manage the closure of the site within this 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 radioactive
materials 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. The Kaiser-Hill joint venture between Old Kaiser and CH2M Hill
Companies, Ltd. was formed solely for the performance of the current and
former Rocky Flats contracts. The level of success experienced by
Kaiser-Hill in achieving closure of the Rocky Flats site, and the cost of
achieving such closure, are the primary determinants of the Company's
long-term financial performance following the completion of the
reorganization process.
. a substantial claim, pending resolution, against the owner of a steel
mini-mill for Nova Hut in the Czech Republic. The engineering and
construction of the mini-mill was completed by a subsidiary of Old Kaiser
in 2000.
. the holding of a minority ownership interest in ICF Consulting Group, Inc.
(a division that Old Kaiser sold in 1999) as well as the interest-bearing
promissory notes and escrowed cash received in connection with that sale.
. a wholly-owned captive insurance company that is no longer issuing new
policies but is solely involved in resolving existing claims. Restrictions
on the insurance company's cash balances maintained to support statutory
insurance reserves, will be released as reserve requirements decrease in
the future and to the extent that such cash balances are not used in
payment of resolved claims.
. an ongoing obligation to fund a capped, post-employment medical benefit
plan for a fixed group of retirees.
Critical Accounting Policies and Significant Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires that management make estimates and
assumptions affecting the assets and liabilities (including contingent assets
and liabilities) reported at the date of the Consolidated Financial Statements
and the income statement amounts reported for the periods presented. Management
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.
The Company's accounting measurements that are most affected by management's
estimates of future events are:
. Ultimate amount of claims that will be allowed pursuant to the Company's
bankruptcy proceedings. Any future adjustments necessary as a result of
the total claims ultimately allowed being less than or more than the
$150.0 million currently estimated will be recorded in income from
continuing operations.
. Recoverability of net assets of discontinued operations, notes receivable
and accrued interest, and investments.
. We use the equity method of accounting for affiliates that the Company
has the ability to significantly influence but not control. In accordance
with the equity method of accounting, we record our proportionate share of
the affiliate's income or losses. The difference between the carrying
value of the joint venture investment and the Company's underlying equity
is amortized on a straight-line basis over the term of the joint venture
investment, estimated at six years.
. Income tax provision, deferred tax assets and related valuation allowance
. Estimated fees on the Kaiser-Hill joint venture.
Results of Successor Operations
The Company's major remaining source of income is its 50% ownership in
Kaiser-Hill Company L.L.C. which performs all elements of daily and long-term
operations associated with the ultimate closure of the DOE's Rocky Flats site,
including stabilizing and safely storing radioactive material, cleaning up
areas contaminated with hazardous and radioactive waste, and restoring much of
the 6,000-acre Rocky Flats site for future use by the public. Kaiser-Hill is
owned equally by Kaiser Holdings and CH2M Hill Companies Ltd. CH2M Hill
designates three of the five members of Kaiser-Hill's Board of Managers and
Kaiser Holdings designates two members, including the chair of the Board of
Managers. The financial information contained herein for Kaiser-Hill is
reflected on the equity basis. Because Kaiser-Hill represents a significant
portion of the Company's financial position and results of operation, the
audited financial statements of Kaiser-Hill are included in this report (see
pages F-24 to F-35).
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001. Page 13
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 Rocky Flats Site Closure Contract is primarily cost-reimbursable in nature,
but 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, service revenue and direct labor and fringe
benefit costs earned by Kaiser-Hill during the comparable periods herein are
largely reflective of increased levels of reimbursable subcontractor costs
incurred as the contract progressed and as underlying activities changed.
The economic terms of the Closure Contract provide that Kaiser-Hill will earn
revenue equal to the actual cost of physical completion in addition to a
performance fee based on a combination of the actual cost of completing the
site closure project and the actual date of physical completion, both as
compared to contracted targets. The potential fee to be earned pursuant to the
Closure Contract terms ranges from $150.0 million to $460.0 million based on
Kaiser-Hill's costs to complete the site closure being within the range of
targeted completion cost of $3.6 billion and $4.8 billion, and completion at
various dates between 2005 - 2007. Physical completion for a total cost in
excess of the target cost would result in a reduction to the potential 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. From the inception
of this contract in February 2000 until December 31, 2000, uncertainties over
the ability to accurately predict the total cost at completion and date of
completion made management chose a conservative course for revenue recognition
whereby contract fee was recognized for financial reporting purposes at the
minimum level, i.e. the $150.0 million fee level on a straight-line basis over
an estimated period of contract completion ranging from February 1, 2000
through December 31, 2007.
During early 2001, Kaiser-Hill reduced its estimate of total cost at completion
to $4.5 billion from the original $4.8 billion. This reduction in estimated
cost at completion had the financial statement result of increasing its accrual
of the fee to be earned over the contract duration from $150.0 million to
$180.0 million.
Kaiser-Hill continued to make favorable progress on the Closure Contract during
2001 and, during the quarter ended December 31, 2001, amended its estimate for
the physical contract completion date from December 31, 2007 to December 31,
2006 and, changed its estimate of the total cost to be incurred during the
Closure Contract duration to be below $4.0 billion. Kaiser-Hill management
believes that its schedule progression and reductions in estimated total costs
to date contribute to its being on course to earn a $340.0 million performance
fee over the Closure Contract duration. Because Kaiser-Hill uses the percentage
of completion method for the performance fee recognition on the Closure
Contract, the effect of increasing its performance fee estimate on the project
from $180.0 million to $340.0 million resulted in recording additional earnings
of $15.8 million as a change in estimate in the fourth quarter. This adjustment
was comprised of a revenue increase of $47.8 million, offset by $32.0 million
in project contingency reserves. Despite the uncertainties relative to
Kaiser-Hill performing on the contract so as to earn a possible $340.0 million
in total performance fee, Kaiser-Hill also has goals of further improving its
ultimate project performance. Goals however should not be considered free of
risk, and the ability to accurately predict the ultimate results are highly
uncertain.
Through 2000, the Closure Contract allowed Kaiser-Hill to invoice DOE quarterly
for the performance fee based on a $340.0 million target fee pool, less a 50%
retainage. Thereafter, the quarterly invoicing reverted to a formula such that,
unless otherwise approved by DOE, cumulative contract billings may not exceed
the minimum fee of $150.0 million spread over a 7-year timeframe. Based on
DOE's recent acknowledgement of and concurrence with Kaiser-Hill's revised
closure estimates and resulting increase to the estimated performance fee to be
earned over the contract duration, Kaiser-Hill now expects that it will be able
to increase the amount of its performance fee invoices to DOE based on the
$340.0 million. However, such invoices will now be subject to the 50% retainage
holdback payable at contract completion. Adjusted for the effects of the 50%
retainage holdback, Kaiser-Hill expects that its performance fee invoices to
DOE will increase by approximately $0.8 million per quarter effective in the
2nd quarter of 2002. Invoice payments made by DOE to Kaiser-Hill, less certain
Kaiser-Hill reimbursements, will continue to be distributed to the joint
venture owners upon receipt. In the future, as Kaiser-Hill continues to accrue
performance fee based on the $340.0 million level, less reserves deemed
appropriate in the circumstances, and remains subject to a 50% retainage
holdback on its performance fee invoicing, the level of unbilled accounts
receivable on its balance sheet will begin to increase substantially.
Kaiser-Hill will classify the 50% holdback portion of its performance fee
invoicing as long-term unbilled accounts receivable on its balance sheet. The
Closure Contract also contains provisions for DOE to release portions of the
retainage holdback prior to contract completion if the DOE deems appropriate.
Kaiser-Hill is not able to estimate whether any of the retainage holdback will
be released prior to contract completion.
Administrative expenses presented in the Statements of Operations for the year
ended December 31, 2001 consisted largely of costs incurred for activities
associated with the bankruptcy proceedings or with winding down of its
historical operations including: $5.0 million incurred for legal and
professional fees primarily for bankruptcy claims resolution, including the Nova
Hut and IFC claims; $2.8 million incurred for salaries and benefits; $0.9
million incurred for rent, records storage, utilities and repairs and $1.0
million in other administrative expenses, including
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001. Page 14
insurance, securities issuance costs and other. Also included in the $9.7
million of total general and administrative expense is a $1.0 million non-cash
reduction in the amount of statutory self-insurance reserves required by the
Company's wholly-owned insurance subsidiary occurring in the fourth quarter.
General and administrative expenses incurred during the quarter ended December
31, 2001 approximated $1.9 million and represented a significant reduction in
the run rate of such expenses from the previous three quarters. As the Company
continues to make progress on winding down the operations of Old Kaiser and in
resolving remaining bankruptcy claims, it anticipates further declines in
general and administrative spending.
In the fourth quarter of 2001, the Company recorded a $1.1 million impairment
charge related to the Company's 10% interest in ICF Consulting Group, Inc., a
privately held entity, that was retained by Old Kaiser when it sold its
Consulting Group in June 1999. The impairment charge was based on management's
belief of the potential proceeds available to the Company if this investment
was liquidated.
During the year, Old Kaiser benefited from the fact that it had purchased
retirement annuity contracts during the 1980's for a capped group of
employees. Old Kaiser paid 100% of the premiums for the retirement annuity
contracts and such annuities represented the entire amount of this particular
retirement benefit obligation to the covered employees at the time. Having paid
100% of the insurance premiums, Old Kaiser became a mutual stockholder in the
Prudential Insurance Company. Due to the illiquid nature of ownership in a
mutual stockholder organization, Old Kaiser did not have a balance sheet
carrying value ascribed to this asset. During November 2001, however, the
Prudential Insurance Company demutualized its ownership structure through an
initial public offering of its common stock. As a result of the demutualization
of the Prudential stockholdings, the Company became the beneficial holder of
approximately 195,000 shares of Prudential common stock and accordingly
recorded a gain on the demutualization totaling $5.9 million, net of income tax
expense of $2.2 million, in December 2001.
In February 2002, the Company sold the Prudential common shares for $6.08
million in cash proceeds prior to the effects of income tax expense.
Interest income earned in 2001 was, in part, based on available cash balances,
generally, asset sale proceeds remaining from 2000 and from restricted cash
balances maintained for statutory purposes by the Company's wholly-owned
captive insurance subsidiary. As the Company used $13.7 million in cash in
April 2001 for its initial bankruptcy distribution, interest income, declined
by $0.6 million during 2001 compared to 2000 and, will likely decline in the
future based on significant reductions in interest rates during 2001. Interest
income will also decline based on the Plan of Reorganization requiring
potentially large amounts of available cash balances be used for purchasing or
redeeming outstanding preferred stock once all remaining bankruptcy claims are
resolved. Based on the developments in 2001, the Company recorded a $1.0
million reserve for uncertainties related to the collectibility of the ICF
Consulting Group, Inc. promissory notes and the related accrued interest. This
reserve was charged to interest income as it had the effect of reversing the
interest accrued on the notes in the current year.
Expenses presented as Results of Operations from Discontinued Operations
consist of the activities associated with the Nova Hut project. Based on the
Company's continued concern over Nova Hut's financial difficulties and the
uncertainties of a settlement involving the bankruptcy court-sponsored
mediation, the Company reserved approximately $15.6 million of the carrying
value of the remaining Nova Hut project assets from $21.6 million to $6.0
million. The Company also recorded an income tax benefit of $6.2 million
associated with this reserve. Other out-of-pocket costs were incurred for
winding down the project's site operations during early 2001 including
severance and relocation costs for returning project expatriates back to the
United States.
The Company recognized a total income tax benefit of $3.8 million allocable to
the following results (in thousands):
Applicable
Pre-tax Income Tax
Statements of Operations Category Income/(Loss) (Expense)/Benefit
- --------------------------------- ------------- -----------------
Income from continuing operations
before income taxes..................... $ 7,657 $ (2,417)
(Loss) from discontinued operation........ (16,409) 6,212
-----
$ 3,795
=====
In December 2000, the Company went through a change in control under the
Internal Revenue Code Section (IRC) 382 due to the Chapter 11 bankruptcy
reorganization. In September 2001, the Company determined that the change in
control met the stringent guidelines of the bankruptcy exception provided under
the Internal Revenue Code. This resulted in the Company not being subject to the
carryforward limitations of IRC Sec. 382. However, the Company was required to
reduce certain carryovers that
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001. Page 15
included net operating losses and credits. The Company offset the reduction of
the carryforwards with the valuation allowance previously established for those
carryforwards and as a result, the effective income tax rate for income from
continuing operations differed significantly from statutory rates.
Changes in Liquidity and Capital Resources
The Company used $13.3 million of cash for operating activities in 2001,
inclusive of $0.6 million in cash used to satisfy Class 3 bankruptcy claims
(former trade accounts payable not paid until after the Plan of Reorganization
was deemed effective in December 2000). This use of cash was generally for the
$9.7 million in general and administrative expenses incurred in 2001 (see
General and Administrative Expenses) in addition to $3.6 million used for
severance and professional fees incurred prior to 2001 in connection with the
debt restructuring, bankruptcy and winding-down activities in 2000.
During the year ended December 31, 2001, Kaiser-Hill distributed $7.9 million
to the Company and to the other 50% owner - CH2M Hill.
At several times during 2001, but primarily in April as part of its initial
bankruptcy distribution, the Company paid out $13.7 million representing the
cash portion of Class 4 bankruptcy claim resolutions. Also as of April 2001,
the Company transferred $12.3 million to a separate reserve cash account to be
used to fund the cash portion of any remaining Class 4 bankruptcy claims
settlements (including any earned dividends on subsequently issued New
Preferred Stock). In June 2001, the Company used $125,000 to finalize a tender
offer to repurchase odd-lot shares of less than 99 in total holdings at $5.00
per common share. Lastly, the Company used $2.4 million in the payment of 7%
cash dividends accrued on its outstanding preferred stock.
Liquidity and Capital Resource Outlook
The Company currently has no debt as a result of the effectiveness of Old
Kaiser's Plan of Reorganization. The Company is financing its working capital
needs primarily from distributions from its Kaiser-Hill subsidiary. Based on
(i) current expectations for operating activities and results, (ii) its current
available cash position, (iii) recent trends and projections in liquidity and
capital needs, and (iv) current expectations of total Allowed Claims upon the
completion of the bankruptcy proceedings, management believes the Company has
sufficient liquidity to cover the required cash distributions resulting from
the resolution of Claims in the bankruptcy process, the future operating needs
of the Company and the dividend requirements applicable to the New Preferred
Stock. The terms of the New Preferred Stock include provisions for cumulative
dividends, payable quarterly, either in cash at an annual rate of 7% of the
liquidation preference per share or in additional shares of New Preferred Stock
at an annual rate of 12% of the per share liquidation preference.
With respect to a revolving credit facility obtained by Kaiser-Hill in November
1999, both parents of Kaiser-Hill granted a first lien security interest to the
Kaiser-Hill lenders in all of the ownership and equity interest of Kaiser-Hill
and have agreed to cure any events of default by Kaiser-Hill on the facility.
As of December 31, 2001 and 2000, Kaiser-Hill had $0 and $6.0 million in cash
balances outstanding on its revolving credit facility.
The Company has obligations associated with preferred stock dividends at
December 31, 2001. The following table is prepared assuming no preferred stock
redemptions until the mandatory redemption date of December 31, 2007, and that
all dividends are paid in cash. The effect these obligations are expected to
have on our liquidity and cash flow in future periods are as follows (in
thousands):
Less Than One One to Three After Three
Total Year Years Years
----- ---- ----- -----
Preferred Stock dividends... $26,256 $4,376 $8,752 $13,128
OTHER MATTERS
The Company has various obligations and liabilities from its continuing
operations, including general overhead expenses in connection with maintaining,
operating and winding down the various entities comprising the Company.
Additionally, the Company believes contingent liabilities may exist in the
areas described elsewhere in this Report. See Item 1. Business - "Overview of
Retained Operations".
The Company does not believe that it has significant exposures to market risk
as it no longer has any debt. The interest rate risk associated with the
Company's obligation to fund a capped retiree medical obligation is also not
sensitive to interest rate risk other than via the determination of the present
value of its remaining obligation thereunder. A 10% increase or decrease in the
average annual prime rate would result in a decrease in the carrying value of
the plan obligation but would not change the actual cost of the plan.
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001. Page 16
RISK FACTORS RELATING TO KAISER HOLDINGS
The restructuring of Old Kaiser through the bankruptcy process involves a
significant degree of risk, and this Annual Report on Form 10-K and certain
disclosures and reports or statements to be released by Kaiser Holdings or
statements to be made by its officers or directors may contain forward-looking
statements that involve risks and uncertainty. The Company's
actual results could differ materially from those anticipated in such
forward-looking statements as a result of a variety of factors, including those
set forth in the following risk factors and elsewhere in this Report.
Risks Relating to Kaiser Holdings' Business
Kaiser Holdings Is Dependent on Kaiser-Hill's Performance and Wind-Down of Nova
- -------------------------------------------------------------------------------
Hut Project
- -----------
The Company's long-term future profitability will be dependent, to a significant
extent, on Kaiser-Hill's performance under its Closure Contract with the DOE.
Kaiser-Hill serves as the general contractor at the DOE's Rocky Flats
Environmental Technology Site near Denver, Colorado. Rocky Flats is a former DOE
nuclear weapons production facility. Kaiser-Hill's contract with the DOE
includes a performance fee based upon a combination of the actual costs to
complete the site closure and the actual date of completion of the closure. If
Kaiser-Hill fails to complete within the target cost for the project and fails
to complete the project by March 31, 2007, Kaiser Hill's fee will be reduced by
30% of the costs incurred after the target date, up to a maximum of $20 million.
See the discussion under Item 1. Business - "Overview of Retained Business
Operations".
As discussed above under Item 1. Business - "Overview of Retained Business
Operations," Kaiser Holdings' profitability and cash flow will also be
dependent, to a significant extent, on the resolution of disputes relating to
Kaiser Netherlands' performance under its fixed-price contract for turnkey
engineering and construction services relating to a steel mini-mill in the Czech
Republic for Nova Hut and on the ability of Nova Hut, which is in financial
difficulty, to pay for such services.
Risks From Special Federal Regulations
- --------------------------------------
Because Kaiser-Hill provides the Federal government with nuclear energy and
defense-related services, it and a number of its employees are required to have
and maintain security clearances from the Federal government. There can be no
assurance that the required security clearances will be obtained and maintained
in the future. In addition, Kaiser-Hill is subject to foreign ownership,
control and influence regulations imposed by the Federal government and
designed to prevent the release of classified information to contractors
subject to foreign ownership, influence and control. There can be no assurance
that foreign ownership, influence and control concerns will not affect the
ability of Kaiser-Hill to maintain its DOE contract.
Potential Substantial Liabilities and Costs Associated With Kaiser-Hill's DOE
- -----------------------------------------------------------------------------
Contract
- --------
Under the DOE contract, Kaiser-Hill is responsible for, and the DOE will not
pay for costs associated with, 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. If
Kaiser-Hill were found liable for any of these reasons, the associated costs
could be substantial.
Absence of a Business Plan Beyond Kaiser-Hill and Nova Hut Project
- ------------------------------------------------------------------
Apart from the risks associated with Kaiser-Hill's performance under its Closure
Contract with the DOE, the performance of Kaiser Netherlands and resolution of
the dispute regarding the Nova Hut project, and Nova Hut's ability to pay Kaiser
Netherlands, Kaiser Holdings' long-term future profitability will be dependent,
to a significant extent, on its ability to develop a business plan for ongoing
operations. It is possible that Kaiser Holdings' ongoing business plan will be
limited to completing the Nova Hut project and participating in the activities
of Kaiser-Hill. It is also possible that the Board of Directors of Kaiser
Holdings will consider whether the Company should attempt to take advantage of
its successful history of performing in the government services market, both
independently and through Kaiser-Hill, in order to develop a new revenue base.
In keeping with this effort, the Company has entered into an alliance with Tyco
Infrastructure Services (formerly Earth Tech) to pursue project opportunities.
As of the date of this Report, no projects have been targeted.
Ability to Obtain Performance Guaranties
- ----------------------------------------
Given Old Kaiser's history, Kaiser Holdings may not be able to obtain
satisfactory contract performance guaranty mechanisms, such as performance bond
and letters of credit, at all or on satisfactory terms, to the extent such
mechanisms are needed for new or existing projects.
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001. Page 17
Uncertainties Beyond Kaiser Holdings' Control
- ---------------------------------------------
A number of other uncertainties may adversely impact Kaiser Holdings' future
operations including, without limitation, economic recession, adverse regulatory
agency actions, acts of God, or similar circumstances. Many of these factors
will be substantially beyond Kaiser Holdings' control, and a change in any
factor or combination of factors could have a material adverse effect on Kaiser
Holdings' financial condition, cash flows, and results of operations.
Uncertainties Concerning Adequacy of Funds
- ------------------------------------------
There can be no assurance that Kaiser Holdings will be able to
continue to generate sufficient funds to meet its obligations, notwithstanding
the significant improvements in Kaiser Holdings' operations and financial
condition. Although Kaiser Holdings' believes it will be able to generate
sufficient funds to meet its working capital needs for the foreseeable future,
its ability to gain access to additional capital, if needed, cannot be assured.
RISKS RELATED TO OLD KAISER'S REORGANIZATION AND RELATED ESTIMATES AND
ASSUMPTIONS
As with any plan of reorganization or other financial transaction, there are
certain risk factors that must be considered in connection with Kaiser Holdings
in relation to Old Kaiser's reorganization. All risk factors cannot be
anticipated, some events will develop in ways that were not foreseen, and many
or all of the assumptions that have been used in connection with this Report on
Form 10-K and the Plan will not be realized exactly as assumed. Some or all of
such variations may be material.
Some of the principal risks associated with Old Kaiser's reorganization include
the following:
. The total amount of all Allowed Claims in the Bankruptcy Cases may be
materially in excess of the estimated amounts of Allowed Claims assumed in
Kaiser Holdings' financial statements in this Report. The amount and
timing of the distributions that will ultimately be received by any
particular holder of an Allowed Claim in any Class may be materially and
adversely affected should the assumptions be exceeded as to any Class.
. There are substantial uncertainties relating to the resolution of
disputes between Kaiser Netherlands and Nova Hut concerning the Nova Hut
mini-mill project and Nova Hut's financial capacity to pay the substantial
amounts Kaiser Holdings believes is due to Kaiser Netherlands.
. Due to delays in confirmation of the Plan, and the resolution of Claims,
uncertainties concerning the Nova Hut mini-mill project and other factors,
the amount of cash available for distribution under the Plan may be less
than previously anticipated.
. There are substantial uncertainties relating to the resolution of
disputes with ICF Consulting Group, Inc. and the ultimate recoverability
of the Company's notes receivable and related accrued interest.
RESULTS OF OPERATIONS OF OLD KAISER (PREDECESSOR ENTITY) PRIOR TO EFFECTIVENESS
OF PLAN OF REORGANIZATION-PRIOR TO 2001
The following discussion is intended to assist in an understanding of Old
Kaiser's historical financial position and results of operations for each of
the two years ended December 31, 2000 and should be read in conjunction with
the financial statements of the Company appearing elsewhere in this report. The
combined net financial position, operating results and cash flows of the
operating divisions that were divested in 2000 and 1999 have been presented in
the accompanying consolidated financial statements as discontinued operations
for all periods presented.
OVERVIEW
Old Kaiser's business operations and financial condition were significantly
impaired in 1998 and 1999 as a result of substantial difficulties and financial
losses encountered in the execution by its E&C Group of four large fixed-price
contracts to construct nitric acid plants. Pursuant to a plan intended to
restore Old Kaiser to profitability, two other unrelated operating groups were
sold in 1999, a realignment of the retained E&C Group was paired with
substantial reductions in overhead spending, and a restructuring of the then
existing debt was proposed, subject to obtaining credit arrangements providing
adequate working capital.
Although Old Kaiser was able to obtain necessary stockholder approvals and
senior subordinated noteholders agreed to participate in a debt restructuring
plan, consummation of such a plan remained conditioned on Old Kaiser's ability
to obtain a new revolving credit facility satisfactory to Old Kaiser and an
unofficial committee of the senior subordinated noteholders. The proposals
ultimately received from potential lenders did not provide Old Kaiser with a
facility that was compatible with Old
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001. Page 18
Kaiser's projected needs. For this reason and due to the continued
disappointing financial performance of Old Kaiser's engineering operations,
Old Kaiser delayed implementation of the proposed debt restructuring and
reopened negotiations with the unofficial committee of noteholders and
potential lenders. Following additional attempts to effect a debt
restructuring and an evaluation of various potential strategic alternatives,
including the sale of assets or businesses, Old Kaiser announced the intention
to sell the majority of its remaining Engineering and Construction (E&C) Group
in two separate transactions and to restructure its debt in a voluntary and
pre-arranged bankruptcy proceeding.
Accordingly, on June 9, 2000 (the Petition Date), Old Kaiser and 38 of its
wholly-owned domestic subsidiaries (the "Debtor Entities") filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the District of Delaware ("Bankruptcy
Court"). The subsidiaries that did not file petitions for relief under Chapter
11 are referred to herein as the "Non-Debtor Entities". Old Kaiser continued
to operate the Non-Debtor Entities' businesses in the ordinary course and
operated the Debtor Entities' businesses as debtor-in-possession. As such, the
Debtor Entities were authorized to operate their businesses in the ordinary
course but were not allowed to engage in transactions outside the ordinary
course of business without Bankruptcy Court approval. As of December 18, 2000,
Old Kaiser's bankruptcy Plan became effective and the day-to-day operations of
its Debtor Entities were no longer subject to Bankruptcy court supervision.
Upon obtaining the necessary Bankruptcy Court approvals, the sales of the
majority of Old Kaiser's E&C Group were completed as follows:
. Infrastructure and Facilities: The Bankruptcy Court approved the sale of
the Infrastructure and Facilities line of business on July 17, 2000. On
July 28, 2000, Old Kaiser completed the sale of this line of business,
which provided engineering services to clients around the world in the
transit and transportation, facilities management, water/wastewater
treatment, and microelectronics and clean technology sectors. In this
transaction, substantially all of the assets of this business line were
sold to Tyco Group S.A.R.L., the EarthTech unit of Tyco International Ltd.,
for a cash purchase price of approximately $30 million.
. Metals, Mining and Industry: The Bankruptcy Court approved the sale of the
Metals, Mining and Industry line of business on August 17, 2000. Effective
as of August 18, 2000, Old Kaiser completed the sale of this line of
business, which provided engineering services to clients around the world
in the alumina/aluminum, iron and steel, and mining industry sectors. In
this transaction, substantially all of the assets of this business line
were sold to Hatch Associates, Inc., a subsidiary of The Hatch Group of
Canada, for a cash purchase price of approximately $7.0 million.
. During April and June of 1999, Old Kaiser sold its Environmental and
Facilities Management Group (EFM) and its Consulting Group for aggregate
proceeds approximating $145.0 million and reported a net gain of $40.1
million.
The sales of these operating divisions constituted "discontinued operations" in
accordance with generally accepted accounting principles. All Statement of
Operations data contained elsewhere in this Report depict the results of
operations from continuing operations separately from discontinued operations
and related gains/(losses) on the sales of such operations.
Cash proceeds from the 2000 asset sales have subsequently used, in part, to
fund operating liquidity needs, and in part, to pay certain portions of
pre-bankruptcy liabilities, to pay bankruptcy claims settlements and in part
to pay dividends on New Preferred Stock issued pursuant to the bankruptcy
proceedings.
Cash proceeds from the 1999 divestitures were used to complete the nitric acid
projects and to repay cash borrowings from a revolving line of credit that had
been used primarily to fund the project losses as well as working capital needs
of Old Kaiser's other operating units prior to the 1999 divestitures. Also, in
1999, Old Kaiser used some of the proceeds from the divestitures to repurchase
$14.0 million in outstanding Senior Notes at 88% of face value plus accrued
interest.
Results of Predecessor Operations
Administrative Expenses: Amounts presented as Administrative Expenses on the
Statements of Operations consist largely of costs incurred for activities that
were indirectly supporting the business units that were divested earlier in
2000 and 1999 and of internal costs incurred in connection with the
restructurings, bankruptcy proceedings or activities associated with winding
down of its historical operations.
Due to the sale of the majority of Old Kaiser's operations and the reporting of
those operations as discontinued in the accompanying Statements of Operations
for all periods presented, all remaining components of reported revenue and
gross margin are solely attributed to the Company's 50% ownership of
Kaiser-Hill. Prior to June 8, 2000, through a designated majority
representation on Kaiser-Hill's board of managers, the Company had a
controlling interest in Kaiser-Hill and therefore consolidated Kaiser-Hill's
results of operations with those of its only other remaining business segment,
E&C. Effective June 8, 2000, the Company adopted the equity method of
accounting for Kaiser-Hill coincident with its signing of an agreement
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001. Page 19
whereby the other 50% owner assumed the right to designate 3 out of the 5
members of Kaiser-Hill's board of managers. The Company retained the right to
designate 2 out of the 5 members of the Kaiser-Hill board of managers.
Accordingly, the financial information contained herein for Kaiser-Hill is
reflected on a consolidated basis for all periods presented through June 8,
2000, and on the equity basis for financial information applicable for periods
after June 8, 2000.
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, service revenue and direct labor and fringe benefit costs
earned by Kaiser-Hill during the comparable periods below are largely
reflective of increased levels of reimbursable subcontractor cost pass
throughs incurred as the contract progress continued and as activities
underlying contract progress changed. As a result, annual operating results
are not directly comparable because of changes in the underlying performance
milestones that are established annually by the DOE.
The Kaiser-Hill impact to the Company's overall financial results for each of
the two years ended December 31 were as follows (in thousands):
As Previously Consolidated and Reported: 2000 1999
---- ----
Gross Revenue........................................ $ 271,385 $ 643,044
Subcontracts and materials......................... (195,367) (456,188)
--------- ----------
Service Revenue.................................... 76,018 186,856
Operating Expenses:
Direct labor and fringe............................ 64,197 176,334
--------- ----------
Operating Income.................................... $ 11,821 $ 10,522
Interest, net 178 (154)
Other Owner's Interest in Operating Income (5,999) (5,184)
--------- ----------
Subtotal of Consolidated Results 6,000 5,184
Effect of change in accounting to equity method in June 2000:
Equity in unconsolidated earnings of affiliate 4,218 -
--------- ----------
Equity in income of affiliate as if the change to the
equity method had been applied historically $ 10,218 $ 5,184
========= ==========
The net operating results for the Company's 50%-owned portion of the
Kaiser-Hill subsidiary increased by $5.0 million, 2000 versus 1999. The 2000
increase over 1999 was largely due to Kaiser-Hill's recognition of a $7.0
million performance fee that was awarded upon the January, 2000 completion and
closeout of the original Rocky Flats contract. 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. Another reason was that a
smaller overall potential award fee pool was appropriated for fiscal 1999
performance by the DOE (the predecessor contract to the Closure Contract
provided for annual and separate potential fee awards and award criteria) and
that certain elements of the ensuing Closure Contract had the effect of
shifting certain remaining performance elements from the predecessor contract
into the Closure Contract. Since Old Kaiser 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, Old Kaiser 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 Old Kaiser to reverse, in the
fourth quarter of 1999, previously recognized revenue of $5.2 million. This
adjustment merely reflected a change in the timing of when Kaiser-Hill would
earn performance fee as seen by the increase in operating margin during 2000.
Amounts presented as Administrative Expenses on the Statements of Operations
consisted largely of costs incurred for activities that were indirectly
supporting the business units that were divested earlier in 2000 and 1999 and
of internal costs incurred in connection with the restructurings, bankruptcy
proceedings or activities associated with winding down of its historical
operations. Since certain administrative functions were not divested along
with the asset sales, such costs have not been allocated to the results of
discontinued operations.
The restructuring plan implemented in 1999 and late 1998 included actions to
realign and reduce Old Kaiser's post-asset sale overhead costs such that the
remaining levels were appropriate for the needs and size of its continuing
operations. Elements of the overhead reduction plan included an approximate 25%
personnel reduction in Old Kaiser's wholly-owned North American operations with
lesser percentage reductions in international operations, eliminating regional
overhead layers, downsizing facilities, closing 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 Old Kaiser's
organizational structure that existed prior to completing the 1999 asset sales,
the cost reduction elements of this phase of the plan could not begin until
after the divestitures were completed.
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001. Page 20
Declines in depreciation and amortization expense from 1999 to 2000 were
predominantly reflective of the fact that Old Kaiser wrote off significant
amounts of goodwill and other intangible acquisition costs in connection with
the asset sales consummated in 1999 and 2000. As of December 31, 2000, all
such goodwill and intangibles had been eliminated from the balance sheet.
In connection with its plan to re-align itself prior to its decision to
proceed with the voluntary bankruptcy, Old Kaiser incurred charges for
restructuring of $1.9 million and $14.4 million during 2000 and 1999,
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, a charge for business unit divestiture costs and for
anticipated sublease losses and office realignment and closings.
Interest income was earned on available cash balances that were generated
primarily from the unused proceeds from the 1999 asset sales and from the $6.5
million in promissory notes resulting from the asset sales. Prior to those
sales, available cash balances were largely only attributable to Kaiser-Hill
and Old Kaiser's foreign operations. All other cash not required for operations
was historically used to pay down outstanding borrowings. Interest income of
$1.0 million earned on cash balances generated from the unused proceeds of the
2000 divestitures has been classified as a reduction to Reorganization Items in
the Statement of Operations pursuant to the requirements of SOP 90-7, since the
available cash balances were generated as a result of the bankruptcy
proceedings.
The total interest expense incurred in 2000 was primarily attributable to the
13% interest expense accruing on the $125.0 million of outstanding Old
Subordinated Notes through June 9, 2000 (interest stopped accruing on the Old
Subordinated Notes effective as of June 9, 2000, the date of the bankruptcy
filing). The interest on the Old Subordinated Notes for this period was not
paid in 2000 but rather was allowed as a claim of the noteholders along with
the principal amount of their Old Subordinated Notes. Interest expense
approximating $0.1 million was also incurred on the remaining $1.0 million of
Senior Notes that were paid off entirely by Old Kaiser on September 12, 2000.
Net of the write off of unamortized original issue costs, Old Kaiser
recognized an extraordinary loss on the early extinguishment of Senior Notes
totaling $0.1 million.
Prior to 2000, in addition to the $125.0 million in Senior Subordinated Notes,
Old Kaiser carried $14.0 million in outstanding Senior Notes as well as
borrowings on revolving credit facilities. Old Kaiser's average annual
outstanding debt and the related average effective interest rate for 1999 were
$146.7 million and 14.7%.
Other items affecting interest expense in 1999 was the use of some of the
asset sale proceeds in June 1999 to extinguish the entire $30 million balance
on the revolving credit facility and an October 1999 repurchase of an
aggregate principal amount of $14.0 million in outstanding Senior Notes
carrying an effective interest rate of 13%.
The $8.6 million reported in 2000 as reorganization items consisted of
essentially two types of matters:
. Reorganization Matters: During the year ended December 31, 2000, Old
Kaiser incurred approximately $7.6 million in costs associated with its
bankruptcy activities, including third-party professional fees, court
fees, printing and mailing costs, and severance and staff retention
costs. Interest income of approximately $1.0 million, earned on the
available cash proceeds resulting from the asset sales in July and August
2000, has been classified as a reduction to reorganization costs pursuant
to the provisions of SOP 90-7.
. Fresh start adjustments: The Company adopted fresh start reporting (See
Item 6. - "Selected Financial Data") in its consolidated balance sheet as
of December 31, 2000 and recorded a net increase to book value totaling
$15.2 million resulting from the adjustments to the individual assets and
liabilities in Old Kaiser's Statement of Operations. This overall increase
consisted of the write off of the net book value of abandoned fixed assets
and capitalized software, the net increase in the carrying value of
certain long-lived assets - predominantly attributable to the 50%
ownership in Kaiser-Hill, the increase in the carrying value of the
retiree medical obligation to reflect current actuarial estimates, and the
reduction of certain other accrued expenses deemed in excess of the
estimated requirements. The increase in the carrying value of the
Kaiser-Hill investment will be required to be amortized in the future,
over the asset's estimated life, to the extent that such carrying value
exceeds 50% of the underlying Kaiser-Hill equity.
The income tax provision for all periods presented excludes the elements of
Kaiser-Hill's operating income that were owned by another company since
Kaiser-Hill is a flow-through entity for income tax purposes.
The Statements of Operations report numerous unusual transactions in each of
the two periods presented, which pursuant to generally accepted accounting
principles, must be reported separately and distinctly from the ongoing
operating activities of the Company. The effects of these transactions upon
the Statements of Operations are also required to be presented net of
===============================================================================
Kaiser Group Holdings, Inc. Report on Form 10-K for the year ended December 31,
2001. Page 21
related income tax effects. Accordingly, the overall income tax result of Old
Kaiser's activities during the years presented is reflected on various
different line items of the Statements. The following tabular presentation
attempts to identify the financial impact of the unusual transactions along
with its related income tax consequence. In 2000, the Company recognized a
total net income tax benefit of $9.0 million attributable to the following
elements on the Statements of Operations (in thousands):
Pre-tax Applicable Tax
------- --------------
Statements of Operations Category Income/(Loss) (Expense)/Benefit
- --------------------------------- ------------- -----------------
Income from continuing operations before income taxes..... $ 6,875 $ 39,521
(Loss) from discontinued operations....................... (2,072) (894)
(Loss) on the sale of discontinued operations............. (662) (7,007)
Extraordinary gain from the discharge of indebtedness..... 147,206 (22,664)
--------
$ 8,956
========
The asset sales of the E&C Group in 2000 created taxable income totaling $18.5
million, and the reorganization in bankruptcy generated $59.7 million of debt
forgiveness income pursuant to Internal Revenue Code Sec. 108, and thereby
enabled the Company to recognize a benefit in the current year for its current
year operating loss and for certain previously generated net operating loss
carryforwards. Additionally, in 2000, the Company adjusted its income tax
payable downward by $4.7 million, primarily related to a previous over-accrual
for foreign earnings. As of December 31, 2000, the Company carried a valuation
allowance against the entire remaining deferred tax asset available of $13.2
million.
In 1999, Old Kaiser recognized a total net income tax expense of $38.4 million
allocable to the following results (in thousands):
Pre-tax Applicable Tax
------- --------------
Statements of Operations Category Income/(Loss) (Expense)/Benefit
- --------------------------------- ------------- -----------------
(Loss) from continuing operations before income taxes..... $ (35,260) $ 1,150
(Loss) from discontinued operation........................ (1,978) (4,135)
Gain on the sales of discontinued operations.............. 75,878 (35,795)
Extraordinary (loss) on the early extinguishment of debt.. (989) 389
---
$(38,391)
=========
In 1999, Old Kaiser utilized deferred tax assets and the benefit of current
period operating losses of $32.2 million to offset a similar amount of income
tax liability resulting from the gains on sales of discontinued operations.
Old Kaiser did not recognize an income statement benefit for any previously
unbenefitted or future operating losses or future tax deductions at December
31, 1999 since it was not readily assured at that time that it was more likely
than not that Old Kaiser's future operations would generate sufficient taxable
income to be able to realize such benefits. As at December 31, 1999, Old
Kaiser had carried a valuation allowance against the entire remaining deferred
tax asset of