KAISER GROUP HOLDINGS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2004

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		54-2014870
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12303 Airport Way, Suite 125, Broomfield, Colorado		80021-0007
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number including area code: (720) 889-2770

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 ý No o

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

Applicable only to issuer’s 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. Yes ý No o

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. 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.

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of May 20, 2004, there were 1,598,270 shares of Kaiser Group Holdings, Inc. Common Stock, par value $0.01 per share, outstanding.

KAISER GROUP HOLDINGS, INC.

INDEX TO FORM 10-Q

Part I - Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets - March 31, 2004 and December 31, 2003.

Consolidated Statements of Operations and Comprehensive Income Three Months Ended March 31, 2004 and 2003.

Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003.

Notes to Consolidated Financial Statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Item 4. Controls and Procedures

Part II - Other Information

Item 1. Legal Proceedings

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signatures

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	March 31, 2004		December 31, 2003
ASSETS
Current Assets
Cash and cash equivalents	$	9,725	$	11,151
Restricted cash and cash equivalents	4,356		7,049
Prepaid expenses and other current assets	990		971
Net assets of discontinued operations	3,000		3,000
Total Current Assets	18,071		22,171

Other Assets
Investments in and advances to affiliates	46,678		45,788
Notes receivable	5,894		5,894
Other long-term assets	148		227
	52,720		51,909
Total Assets	$	70,791	$	74,080

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	201	$	304
Post retirement benefit plan obligation	6,841		6,913
Other accrued expenses	5,531		4,432
Interest payable on preferred stock	342		409
Deferred tax liability	6,243		6,495
Income taxes payable	1,134		275
Total Current Liabilities	20,292		18,828

Long Term Liabilities
Mandatorily redeemable preferred stock	29,899		35,175
Commitments and Contingencies

Common stock, par value $.01 per share:
Authorized—3,000,000 shares Issued and outstanding—1,594,270 shares at March 31, 2004 and December 31, 2003, respectively	16		16
Capital in excess of par	7,975		7,975
Retained earnings	12,570		12,049
Accumulated other comprehensive income (loss)	39		37
Total Shareholders’ Equity	20,600		20,077
Total Liabilities and Shareholders’ Equity	$	70,791	$	74,080

See notes to consolidated financial statements.

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share amounts)

	For the Three Months ended March 31,
	2004			2003
	(Unaudited)

Gross Revenue	—			—
Subcontract and direct material costs	—			—
Service Revenue	—			—
Operating Expenses
Administrative expenses	$	1,245		$	1,446
Reserve for Settlement of Class 4 Claims	1,400			—
Operating Income (Loss)	(2,645		)	(1,446		)
Other Income (Expense)
Equity income in earnings of affiliate, net of amortization of $881 for the quarters ended March 31, 2004 and 2003	4,284			4,365
Interest income	175			243
Interest expense for preferred dividends	(570		)	—
Other income	25			—
Income From Continuing Operations
Before income tax	1,269			3,162
Income tax (expense)	(748		)	(1,243		)
Income From Continuing Operations	521			1,919
Income (Loss) from discontinued operations, net of tax	—			—
Net Income (Loss)	521			1,919
Preferred stock dividends	—			(812		)

Income (Loss) Applicable to Common Shareholders	$	521		$	1,107

Basic and Diluted Earnings (Loss) Per Common Share:
Continuing operations, net of tax	$	0.33		$	0.69
Discontinued operations, net of tax	—			—
Net Earnings (Loss) Per Share	$	0.33		$	8.91

Weighted average shares for basic and diluted earnings (loss) per common share	1,594			1,590

Comprehensive Income
Net Income	$	521		$	1,919
Other Comprehensive Income (Loss):
Change in cumulative foreign translation adjustment	2			67

Total Comprehensive Income	$	523		$	1,986

See notes to consolidated financial statements.

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	For the Three Months ended March 31,
	2004			2003
	(Unaudited)
Operating Activities:
Net income	$	521		$	1,919
Adjustments to reconcile net income to net cash used in operating activities:
Deferred taxes related to continuing operating activities	(252		)	1,136
Gain on sale of stock	—			—
Equity in earnings of affiliate	(4,284		)	(4,365		)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	(19		)	946
Accounts payable and accrued expenses	924			(1,058		)
Income taxes payable	859			(25		)
Other operating activities	60			95
Net Cash Used in Operating Activities	(2,191		)	(1,352		)
Investing Activities:
Distributions from affiliate	3,395			3,000
Net Cash Provided by Investing Activities	3,395			3,000
Financing Activities:
Transfer from restricted cash for the redemption of preferred stock	2,646			8,913
Payment of preferred stock dividends	—			(986		)
Redemption of preferred stock	(5,276		)	(14,146		)
Net Cash Used in Financing Activities	(2,630		)	(6,219		)
Increase (Decrease) in Cash and Cash Equivalents	(1,426		)	(4,571		)
Cash and Cash Equivalents at Beginning of Period	11,151			17,413
Cash and Cash Equivalents at End of Period	$	9,725		$	12,842

See notes to consolidated financial statements.

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying consolidated financial statements of Kaiser Group Holdings, Inc. and subsidiaries (the Company), except for the December 31, 2003 balance sheet (derived from audited financial statements), are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included.

These statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes and the other information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Certain reclassifications have been made to the prior period financial statements to conform them to the presentation used in the March 31, 2004 financial statements.

Kaiser Group Holdings, Inc. is a Delaware holding company that was formed on December 6, 2000 for the purpose of owning all of the outstanding stock of Kaiser Group International, Inc. (Old Kaiser), 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 an approved plan of reorganization (the Second Amended Plan of Reorganization (the Plan)) that was effective on December 18, 2000 (the Effective Date). The Company is deemed a “successor issuer” to Old Kaiser by virtue of Rule 12g-3(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 can be found in a Current Report on Form 8-K dated December 5, 2000 filed by Old Kaiser.

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

• 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 (DOE) Rocky Flats site near Denver, Colorado, for the performance of a contract for the closure of the site (the Closure Contract). (See Note 4 for summarized financial information.)

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

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

• a wholly-owned captive insurance company that is not at this time issuing new policies and is simply involved in resolving remaining claims.

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

The Company adopted fresh start reporting in its consolidated balance sheet as of December 31, 2000. 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 certain circumstances resulting from a bankruptcy, a new entity is created for financial reporting purposes upon the emergence of that entity from bankruptcy. Accordingly, the value of the reorganized enterprise becomes the established amount for the emerging balance of shareholders’ 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. Additionally, assets and liabilities are recorded at their fair values.

The value of the emerged enterprise used for fresh start reporting as of December 31, 2000 was $87.5 million and was determined by management with the assistance of independent advisors. The methodology employed involved estimation of the 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. Net after-tax cash flows, assuming a 40% effective tax rate, were discounted at 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 had 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 the Company’s investment in Kaiser-Hill have the greatest impact on the overall enterprise valuation.

2. General Terms of Plan and Status of Bankruptcy Distributions

The effectiveness of the Old Kaiser Plan of Reorganization 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 bankruptcy 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 general terms, the Plan contemplated three basic classes of creditors:

• Allowed “Class 3 claims” against the Old Kaiser bankruptcy estate generally consisted of trade and similar creditors’ claims of $20,000 or less. Holders of allowed Class 3 claims 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 Old Kaiser 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 Kaiser Holdings’ preferred stock (New Preferred) and one share of Kaiser Holdings’ 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.

• The third class of claims recognized in the Old Kaiser bankruptcy are equity claims, consisting of holders of Old Kaiser 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 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 New Common was issued for each 96 shares of previously outstanding Old Common. Additional distributions of New Common 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 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 Old Kaiser in 1998. The Bankruptcy Court confirmed the equity nature of those claims. See Note 6 below for information concerning a recent Bankruptcy Court ruling with respect to these 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.

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, the parties were thereafter required to participate in a non-binding mediation before a mediator pre-selected by the Bankruptcy Court. All unresolved claims as of March 27, 2001 are subject to the ADR process. Since April 17, 2001, the date of the initial distribution, $123.0 million of asserted claims have been withdrawn, negotiated or mediated to an agreed amount, resulting in cash payments approximating $2.2 million and issuances of 683 shares of New Preferred and 823 shares of New Common. As of May 10, 2004, the amount of unresolved claims was approximately $7.5 million. The Company expects to resolve the remaining claims by the third quarter of 2004. The Company currently believes that the total amount of Class 4 claims ultimately to be allowed in the Old Kaiser bankruptcy proceeding will not exceed $142.5 million. As demonstrated by the claim settlements completed since April 17, 2001, and based on the belief that it is in the best interest of the Company and its current shareholders, the Company has been settling certain remaining Class 4 claims entirely for cash payments in lieu of the combination of cash and New Preferred and New Common as contemplated in the Plan. The Company intends to continue to use this settlement alternative during the resolution of remaining Class 4 claims.

From time to time in the future, as remaining unresolved claims are resolved, excess cash from the “reserve” fund (including cash added to “reserve” fund in payment of pro forma dividends, classified as interest expense subsequent to July 1, 2003, on retained shares of New Preferred) must be used to redeem outstanding shares of New Preferred. In February 2004, the Company redeemed 95,932 shares of New Preferred by using $2.6 million of restricted cash and $2.7 million of unrestricted cash. In January 2003, the Company redeemed 257,200 shares of outstanding New Preferred by using $8.9 million and $5.2 million of restricted and unrestricted cash, respectively. In October 2003, the Company redeemed 113,530 shares of outstanding New Preferred by using $1.6 million and $4.6 million of restricted and unrestricted cash, respectively

3. Earnings Per Share

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

Diluted EPS normally includes the weighted-average effect of dilutive securities outstanding during the period. Pursuant to the Plan that was effective as of December 18, 2000, all then outstanding common stock equivalents were cancelled. Accordingly, no anti-dilutive information is presented herein.

In 2004, the effect of preferred dividends of $0.6 million has been included in continuing operations in the calculation of basic and diluted earnings per share for the three months ended March 31, 2004. In 2003, the effect of preferred dividends of $0.8 million has been included in continuing operations in the calculation of basic and diluted earnings per share for the three months ended March 31, 2003. As discussed in Note 5, the Company adopted FAS 150 effective July 1, 2003. Therefore, $0.6 million of first quarter preferred stock dividends has been shown as interest expense.

4. Summarized Financial Information of Unconsolidated Affiliate

The Company owns 50% of Kaiser-Hill Company, LLC. Summarized, unaudited financial information of Kaiser-Hill is as follows for the three months ended March 31 (in thousands):

	2004		2003

Current assets	$	112,229	$	116,703
Non-current assets	121,410		85,659
Current liabilities	109,831		111,692
Non-current liabilities	55,647		28,644

Gross revenue	137,830		175,855
Net income	10,329		10,492

5. Mandatorily Redeemable Preferred Stock

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

The Company adopted FAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” effective July 1, 2003. Due to the mandatorily redeemable feature of the New Preferred, described in greater detail below, the New Preferred has been reclassified from mezzanine equity to a long term liability on the consolidated balance sheet, and the preferred stock dividends have been reclassified to interest expense on the consolidated statement of operations effective July 1, 2003. There was no transition adjustment recognized upon adoption of FAS 150. There were 543,610 and 639,542 shares of New Preferred outstanding at March 31, 2004 and December 31, 2003, respectively, net of 101,471 treasury shares. The New Preferred is shown at liquidation value of $55 per share.

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

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

Cumulative dividends, classified as interest expense subsequent to July 1, 2003, on the New Preferred are payable on a quarterly basis, as of April 30, July 31, October 31 and January 31, either in cash at an annual rate of 7% of the liquidation preference per share or in additional shares of New Preferred at an annual rate of 12% of the per share liquidation preference. Dividends accrue on the New Preferred commencing with the initial distribution date, April 17, 2001. Dividends will not be paid to any affiliate of Kaiser Holdings on account of that affiliate’s ownership of shares of preferred stock. If Kaiser Holdings fails to pay a quarterly dividend when due, holders of New Preferred will have the right to elect an additional director for each dividend payment missed, up to a maximum of two additional directors, but only until such dividend is paid or provided for in full. The dividend due to holders of record on April 30, 2004, totaling approximately $0.5 million, was paid on May 7, 2004. At March 31, 2004, in addition to the $0.7 million of cash reserves for unresolved claims, the Company had $0.7 million in cash reserved for the payment of accrued dividends on any future issuances of New Preferred issued as a result of remaining bankruptcy claims resolutions (any New Preferred issued as a result of claims resolutions also carries the right to dividends retroactively from April 17, 2001).

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

The Company has the option to redeem the New Preferred at any time, in whole or in part, at a redemption price of 100% of the liquidation preference per share plus all accrued and unpaid dividends. The Company is required to offer to purchase the New Preferred at 100% of the liquidation preference per share plus all accrued and unpaid dividends in connection with a change of control of Kaiser Holdings. In addition, any net proceeds in excess of $3 million in a calendar year received by the Company or any of its direct or indirect subsidiaries from the disposition of assets to an unaffiliated party outside of the ordinary course of business must be used to redeem New Preferred at a redemption price of 100% of the liquidation preference per share plus all accrued and unpaid dividends. Furthermore, to the extent that certain categories of cash are received from Nova Hut, such cash must be used to redeem New Preferred at a redemption price of 100% of the liquidation preference per share plus all accrued and unpaid dividends.

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

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

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

public offering of Kaiser Holdings New Common or New Preferred solely for cash and for its own account.

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

KGP is the Company subsidiary that owns (through a wholly owned subsidiary of KGP) the 50% interest in Kaiser-Hill Company LLC. KGP has outstanding put rights, expiring on December 31, 2007, that obligate it to purchase New Preferred owned by a holder of the 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, 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 preferred stock that is the subject of the KGP put rights, plus all accrued and unpaid dividends on the preferred stock. KGP will purchase shares of preferred stock on a pro rata basis based upon the number of shares of preferred stock 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. 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 are 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 NASD electronic bulletin board or otherwise.

The Company received distributions from Kaiser-Hill during the third quarter of 2003 and the fourth quarter of 2002 in amounts that triggered the put rights – effectively requiring the Company to redeem certain New Preferred. In addition, the Company had certain restricted cash balances available, which pursuant to the terms of its Plan of Reorganization are required to be used to redeem outstanding New Preferred. Rather than using the mechanism of the put rights to satisfy the Company’s obligations to holders of the put rights after a trigger, the Company observed the requirements in the Plan of Reorganization to use certain restricted cash balances, and in the terms of the New Preferred, to use certain available cash, for preferred redemptions. In January and October 2003 and February 2004, the Company redeemed $14.1 million, $6.2 million and $5.3 million, respectively, liquidation preference of New Preferred, or 257,200, 113,530 and 95,932 shares, respectively. The Company believes this was a more cost-efficient manner of satisfying the obligations associated with the KGP put rights and plans to continue to use this redemption process to satisfy such obligations in the future.

6. Other Contingencies

Kaiser Holdings has various obligations and liabilities from its continuing operations, including general overhead expenses in connection with maintaining, operating and winding down the various entities and net assets comprising Kaiser Holdings. Additionally, the Company believes contingent liabilities may exist in the following areas:

Nova Hut

Although Old Kaiser sold its Metals, Mining and Industry business unit in August 2000, it retained its Netherlands subsidiary, Kaiser Netherlands, B.V., which had been responsible for a turnkey engineering and construction services contract for the construction of a steel mini-mill in the Czech Republic for Nova Hut. After construction of the mini-mill was complete in 2000, the contract with Nova Hut provided for a maximum of three possible performance tests. The first performance test was completed on November 13, 2000. Kaiser Netherlands believes that the first performance test was successful 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, including fee and retention amounts with release of performance guarantee instruments. Nova Hut, however, asserted that the first test was not successful. Kaiser Netherlands believes that such contention may have been put forth in response to severe financial constraints on Nova Hut’s operations resulting from weakening conditions in the worldwide steel market and the 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. Until recently, the primary legal venue has been the Delaware bankruptcy proceeding for Old Kaiser, where the Company has asserted claims against Nova Hut and the International Finance Corporation (“IFC”). The Delaware bankruptcy court had previously ruled that the Company, as opposed to Kaiser Netherlands, could proceed with prosecution of its specific claims against Nova Hut and IFC in the Delaware bankruptcy court venue. Both Nova Hut and IFC appealed this ruling and, during the first quarter 2004, the Delaware bankruptcy court’s decision regarding the IFC was overturned by the District Court, ruling that the IFC

enjoys sovereign immunity from prosecution. Kaiser Holdings has filed a notice of appeal with the Third Circuit regarding this decision in favor of the IFC. With regards to the Nova Hut appeal, the District Court has ruled that U.S. Bankruptcy proceedings should be stayed pending completion of international arbitration proceedings.

In January 2004, Kaiser Netherlands filed arbitration claims against Nova Hut in excess of $40.0 million with the International Chamber of Commerce (“ICC”). The arbitration panel is currently being constituted, and the first hearing should take place during the second or third quarter of 2004 with the earliest possible final award ruling being issued sometime in 2005. Nova Hut has submitted a $49.7 million counterclaim against Kaiser Netherlands in these same ICC proceedings.

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

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

The components of the “Net Assets of Discontinued Operations” consist entirely of the carrying value of the net assets of the Nova Hut project. Based on the Company’s continued concern over Nova Hut’s financial difficulties and the lack of a settlement resulting from an earlier bankruptcy court-sponsored mediation in the fourth quarter of 2003, the Company further reduced the carrying value of the remaining Nova Hut project assets from $6.0 million to $3.0 million by recording an additional reserve of $3.0 million, net of a $1.1 million income tax benefit, through a charge to “Loss from Discontinued Operations”. This reserve is in addition to a reserve recorded in 2001, which reduced the carrying value of the Nova Hut project assets from $21.6 million to $6.0 million by recording a reserve of approximately $9.8 million, net of a $5.8 million income tax benefit, through a charge to “Loss from Discontinued Operations”. These adjustments to the project asset carrying value have been determined based on the Company’s estimate of Nova Hut’s current ability to pay such liability.

Kaiser Hill

Under Kaiser-Hill’s contract with the DOE, Kaiser-Hill is not responsible for, and the DOE pays all costs associated with, any liability, including, without limitation, any claims involving strict 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 clean-up and closure of the DOE’s Rocky Flats site involve substantial performance risks. Among other things, Kaiser-Hill’s activities at the Rocky Flats site involve the clean-up, packaging and transportation of nuclear waste, and the demolition and destruction of facilities where nuclear weapons components were previously produced. Some of the activities have not been previously performed elsewhere, and therefore require the development of innovative and untested approaches. Kaiser-Hill emphasizes safety in its performance, but the nature of the Rocky Flats site and the activities of Kaiser-Hill and its subcontractors at the site are such that serious injuries, or even deaths, are possible. Significant safety incidents at the site could stop or significantly impede the progress of work being performed at the site by Kaiser-Hill and its subcontractors. The DOE contract contemplates that all, or substantially all, of the nuclear waste at Rocky Flats will be transported to other sites operated or managed by the DOE. The appropriate sites for storage of certain of those nuclear wastes have not yet been identified. In addition, objections have arisen from time to time with regard to the transportation and storage of nuclear waste at certain sites previously scheduled by the DOE to receive waste from Rocky Flats. Although the DOE contract contemplates that the DOE is responsible for providing transportation and storage sites for nuclear waste from Rocky Flats, an inability to store nuclear waste at other DOE sites would pose a substantial risk to the timely closure of the Rocky Flats site, and could interfere with Kaiser-Hill’s ability to earn fees to which Kaiser-Hill believes it should be entitled.

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

Common Stock

On January 20, 2004, the United States Bankruptcy Court for the District of Delaware ruled on a claim in favor of former shareholders of ICT Spectrum Constructors, Inc. The Bankruptcy Court has refused to reconsider its decision and the Company has appealed. Should the Company be unsuccessful in its efforts to achieve reversal of the Bankruptcy Court’s ruling, the Company could be required to issue to former ICT Spectrum shareholders an additional 247,350 common shares, which would then comprise approximately 13.4% of the aggregate common shares outstanding. The Company believes that issuing such a substantial number of additional common shares could be expected to have a materially dilutive effect on the value of common shares presently outstanding.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General Overview

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. Kaiser Group International, Inc. continues to own the stock of its remaining subsidiaries. On June 9, 2000, Kaiser Group International, Inc. 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). Kaiser Group International, Inc. emerged from bankruptcy with a confirmed Plan of Reorganization (the Second Amended Plan of Reorganization (the Plan)) that was effective on December 18, 2000. In this document, we frequently use the terms “we” and “Kaiser” to refer to Kaiser Group Holdings, Inc., Kaiser Group International, Inc. and other subsidiaries we own.

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

• We own Kaiser-Hill Company, LLC equally with CH2M Hill Companies Ltd. Kaiser-Hill is our major source of income. Kaiser-Hill currently serves as the general contractor at the U.S. Department of Energy’s Rocky Flats site. Kaiser-Hill has performed for the Department of Energy at this site since 1995 and in January 2000 was awarded a new contract to manage the closure of the site. The level of success experienced by Kaiser-Hill in achieving timely closure of the Rocky Flats site, and the cost of achieving such closure, are the primary determinants of our long-term financial performance following the completion of the reorganization process. See “Kaiser-Hill” below for additional information on Kaiser-Hill.

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

• Until September 30, 2002 we held a minority ownership interest in ICF Consulting Group, Inc. (a division that Kaiser Group International, Inc. sold in 1999). We continue to hold an 8½% subordinated promissory note from ICF Consulting due June 25, 2006 in the principal amount of $6.4 million as a result of that transaction.

• We have a wholly-owned captive insurance company that is not at this time issuing new policies and is solely involved in resolving remaining claims made against previously issued policies. However, we have begun the necessary regulatory and legal process to enable our wholly-owned captive insurance company to offer derivative captive insurance services to third party clients.

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

• We formed a new subsidiary in April 2004 to attempt to take advantage of the successful history of Kaiser in the government services market.

Kaiser-Hill

Our major remaining asset and source of income is our 50% ownership interest in Kaiser-Hill Company, LLC. Kaiser-Hill was formed solely for the performance of the current and former Rocky Flats contracts. CH2M Hill designates three of the five members of Kaiser-Hill’s Board of Managers and we designate two members.

Kaiser-Hill currently serves as the general contractor at the U.S. Department of Energy’s Rocky Flats site near Denver, Colorado (Closure Contract). Kaiser-Hill has performed since 1995 at this site, a former Department of Energy nuclear weapons production facility. Kaiser-Hill is working to stabilize and safely store radioactive materials at the site and other locations, clean up areas contaminated with hazardous and radioactive waste, and restore much of the 6,000 acre site to the public. The level of success experienced by Kaiser-Hill in achieving timely closure of the Rocky Flats site, and the cost of achieving such closure, are the primary determinants of our long-term financial performance.

RESULTS OF RETAINED OPERATIONS

Equity Income In Earnings of Affiliate

Our major remaining source of income is a 50% ownership in Kaiser-Hill. The financial information contained herein for Kaiser-Hill is reflected on the equity basis.

Closure Contract Provisions for Revenue and Performance Award

The economic terms of the Closure Contract provide that Kaiser-Hill will earn revenue equal to the actual cost of physical completion plus a performance fee based on a combination of factors involving the actual cost of completing the site closure project and the actual date of physical completion, both as compared to contracted targets. On March 24, 2004 Kaiser-Hill received a contract modification that motivates safe continuing positive performance by increasing the maximum fee ceiling that may be earned under the Closure Contract. The same contract modification reduces the minimum fee floor and includes other provisions related to work scope changes. The potential fee to be earned pursuant to the Closure Contract as recently modified ranges from $75.0 million to $560.0 million based on Kaiser-Hill’s costs to complete the site closure being within the range of completion costs of $3.1 billion and $4.9 billion, and completion at various dates between 2005 and 2007. For project costs saved below the target level, Kaiser-Hill retains a varying percentage share ranging from 20% to 30% as additional incentive fee. Similarly, for project costs incurred above a target level, Kaiser-Hill’s incentive fee is reduced by the 30% share.

Kaiser-Hill’s favorable performance on the contract since its inception in February of 2000 has resulted in a trend of cautious but continuously improving estimates of completion dates, cost estimates and potential fee earning opportunities. As of March 31, 2004, Kaiser-Hill’s cost estimate to complete the project is $3.7 billion, with an estimated completion date of December 2006, resulting in a potential fee of $424 million. Kaiser-Hill has goals of further improving its ultimate project performance; however, goals are not free of risk, and the ability to accurately predict the ultimate results are highly uncertain. See “Risk Factors Relating to Kaiser Holdings and Forward-Looking Statements” below.

For the three months ended March 31, 2004, the Company recorded its 50% equity in Kaiser-Hill’s income, recognizing $4.3 million, a nominal decrease of $0.1 million over the amount recorded for the three months ended March 31, 2003 indicative of Kaiser-Hill’s consistency in estimated costs and dates of completion of the Closure Contract during both quarters.

Closure Contract Billing Provisions

Since the inception of the Closure Contract in February 2000 through March 31, 2004, Kaiser-Hill has invoiced DOE for the performance fee based on the contract provisions, and has collected an aggregate of $127.0 million in fees from the DOE.

Fee payments made by DOE to Kaiser-Hill, less certain non-reimbursable costs, will continue to be distributed to the joint venture owners upon receipt. Kaiser-Hill has historically incurred expenses that are not reimbursable by the DOE pursuant to the Federal regulations. Accordingly, such expenses, which Kaiser-Hill estimates could approximate up to 15% - 20% of the total award fee, are deducted from the total fee earned and collected by Kaiser-Hill prior to any distributions to either of its two owners. Since inception of the Closure Contract through March 31, 2004, Kaiser-Hill has distributed $50.0 million to each of its two owners. Adjusted for the effects of the 50% retainage holdback, Kaiser-Hill expects that its performance fee invoices to DOE will yield distributions of $3.5 million per quarter to each of its two owners in 2004. Similar to 2002 and 2003, Kaiser-Hill is anticipating that DOE will approve a non-recurring fee payment during the fourth quarter of 2004 acknowledging Kaiser-Hill’s continued favorable progression on the project. Historically, the fourth quarter fee payment has

ranged from an additional $10.0 million to $16.0 million above the typically recurring quarterly fee payment. However, there are no assurances as to the amount or timing of any additional fourth quarter fee payment.

In the future, as Kaiser-Hill continues to accrue performance fees based on its currently projected total, 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 difference between recorded performance fees and the collected fees as long-term unbilled accounts receivable on its balance sheet, which will be included as a component of Investment in Affiliate on the Company’s 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.

In both of the three-month periods ended March 31, 2004 and 2003, the equity income in earnings of affiliate is net of $0.9 million of amortization of the excess of our carrying value of our investment in Kaiser-Hill over our ownership percentage of the underlying Kaiser-Hill equity. We increased the carrying value of this investment by $21.1 million as part of our adoption of Fresh-Start reporting as of December 31, 2000 and will continue to amortize that difference over the estimated life of the Kaiser-Hill investment of approximately 6 years.

Administrative Expenses

Administrative expenses for the three months ended March 31, 2004 were $1.2 million, a decrease of $0.2 million compared to the three months ended March 31, 2003. The decrease in administrative expense is due primarily to reductions in legal and professional fees. These decreases result from our progress in winding down the discontinued operations of Kaiser Group International. We anticipate further declines in general and administrative spending as remaining litigation and bankruptcy claims are resolved. Our cost to provide certain post-employment medical benefits to a capped group of retirees is also treated as an administrative expense. In the three-month periods ended March 31, 2004 and 2003, the expense related to this plan was $0.3 million and $0.2 million, respectively.

Reserve for Settlement of Class 4 Claims

In the first quarter of 2004, we recorded $1.4 million liability for the remaining unresolved Class 4 claims.

Interest Income

In both the three months ended March 31, 2004 and 2003, interest income was $0.2 million. For both the three months ended, March 31, 2004 and 2003, we recorded $0.1 million in interest income related to the ICF Consulting note. The remaining amount of interest income resulted from interest earning bank balances.

Interest Expense

As a result of the adoption of FAS 150 effective July 1, 2003 and the classification of the Series 1 Redeemable Cumulative Preferred Stock (New Preferred) as a liability, preferred stock dividends of $0.6 million have been shown as interest expense. As required by FAS 150, prior dividends have not been reclassified.

Income Tax Expense

We recorded an income tax expense of $0.7 million on operating income from continuing operations of $1.3 million during the three months ended March 31, 2004. Our effective income tax rate of 59% is reflective of the non-deductibility of certain expenditures for federal income tax purposes and the inclusion of $0.6 million of non-deductible preferred dividends on the New Preferred included in operating income due to the adoption of FAS 150 effective July 1, 2003. For the three months ended March 31, 2003, we recorded an income tax expense of $1.2 million on operating income from continuing operations of $3.2 million.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

We used $2.2 million and $1.4 million of cash during the three months ended March 31, 2004 and March 31, 2003, respectively, primarily for the extinguishment of obligations arising out of our bankruptcy, including severances, professional fees, retiree benefits and various other wind-down expenditures. The increase in the use of operating cash for the three months

ended March 31, 2004 compared to the three months ended March 31, 2003 is due to the effect of preferred dividends of $0.6 million being included in continuing operations in 2004.

Investing Activities

We received $3.4 million in distributions from Kaiser-Hill during the period ended March 31, 2004 compared to $3.0 million in the period ended March 31, 2003. The increase of Kaiser-Hill cash distributions is a result of the continued favorable progress in its performance.

Financing Activities

During the three months ended March 31, 2004, we redeemed $5.3 million liquidation preference of our preferred stock. Pursuant to the terms of the Plan of Reorganization, the Company used $2.6 million in excess restricted cash in addition to $2.7 million of unrestricted cash to fund this redemption.

During the three months ended March 31, 2003, we redeemed $15.5 million liquidation preference of our preferred stock, net of $1.4 million liquidation preference of shares held as treasury stock. Pursuant to the terms of the Plan of Reorganization, the Company used $8.9 million in excess restricted cash in addition to $5.2 million of unrestricted cash to facilitate this redemption.

During the three months ended March 31, 2003, we paid $1.0 million, in dividends on our preferred stock. Due to the adoption of FAS 150 effective July 1, 2003, $0.6 million of preferred stock dividends have been shown as interest expense and are no longer reflected as preferred stock dividends on the statement of cash flows.

Liquidity and Capital Resource Outlook

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

We have obligations to pay dividends on outstanding preferred stock at March 31, 2004. Accordingly, we are required to present the following table assuming that no preferred stock redemptions are made until the mandatory redemption date of December 31, 2007, no additional shares are issued and that all future dividends are paid in cash (irrespective of this disclosure requirement, we are not representing intentions with regard to the timing of preferred stock redemptions). The effect these obligations are expected to have on our liquidity and cash flow in future periods are as follows:

	Total		Less Than One Year		One to Three Years		After Three Years
Preferred Stock dividends	$	7,849	$	2,093	$	4,186	$	1,570

Other Matters

We have various obligations and liabilities from our continuing operations, including general overhead expenses in connection with maintaining, operating and winding down the various entities. Additionally, we believe contingent liabilities may exist in the areas described in Note 6 to the Consolidated Financial Statements.

RISK FACTORS RELATING TO KAISER HOLDINGS AND

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains, and our periodic filings with the Securities and Exchange Commission and written or oral statements made by our officers and directors to press, potential investors, securities analysts and others, may contain, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E 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, including those described below, the forward-looking events might or might not occur.

Our remaining primary source of funding is from Kaiser-Hill distributions, which are subject to uncertainties that may adversely impact our ability to meet our obligations on our preferred stock and to permit our consideration and funding of strategic alternatives for the Company.

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

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

Kaiser-Hill has historically incurred expenses that are not reimbursable by the Department of Energy pursuant to federal regulations. Accordingly such expenses, which Kaiser-Hill estimates could approximate up to 15% - 20% of the total award fee, will be deducted from the total fee prior to any distributions to its two owners. For reasons similar to those described in the following paragraph, it is difficult to estimate either the amount of net fee to be distributed to the owners of Kaiser-Hill and or the effect, if any, that such unreimbursable costs would have on our future cash flows. A decrease in our cash flows could result in a decrease in the value of our common and preferred stock.

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

The clean-up and closure of the Department of Energy’s Rocky Flats site involve substantial performance risks. Among other things, Kaiser-Hill’s activities at the Rocky Flats site involve the clean-up, packaging and transportation of nuclear waste, and the demolition and destruction of facilities where nuclear weapons components were previously produced. Some of these activities have not been previously performed elsewhere, and therefore require the development of innovative and untested approaches. Kaiser-Hill emphasizes safety in its performance, but the nature of the Rocky Flats site and the activities of Kaiser-Hill and its subcontractors at the site are such that serious injuries, or even deaths, are possible. Significant safety incidents at the site could stop or significantly impede the progress of work being performed at the site by Kaiser-Hill and its subcontractors. The Department of Energy contract contemplates that all, or substantially all, of the nuclear waste at Rocky Flats will be transported to other sites operated or managed by the Department of Energy. The appropriate sites for storage of certain of those nuclear wastes have not yet been identified. In addition, third-party objections have arisen from time to time with regard to the transportation to, and storage of nuclear waste at, certain sites previously designated by the Department of Energy to receive waste from Rocky Flats. Although the Department of Energy contract contemplates that the Department of Energy is responsible for providing transportation and storage sites for nuclear waste from Rocky Flats, an inability to store nuclear waste at other Department of Energy sites would pose a substantial risk to the timely closure of the Rocky Flats site, and could interfere with Kaiser-Hill’s ability to earn the fees to which Kaiser-Hill believes it should be entitled. This loss of fee income could adversely affect our operating results, which could in turn result in a decrease in the value of our common and preferred stock.

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

Under the Department of Energy contract, Kaiser-Hill is responsible for, and the Department of Energy will not pay for costs associated with, liabilities caused by the willful misconduct or lack of good faith 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, which could have an adverse effect on our operating results. A decrease in our operating results could cause a decrease in the value of our common and preferred stock.

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

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

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

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

Given the reorganization history of Kaiser Group Holdings, Inc., we may not be able to obtain satisfactory contract performance guaranty mechanisms, such as performance bonds and letters of credit, at all or on satisfactory terms, to the extent such mechanisms are needed for new projects. These factors could limit the nature of the business activities in which we could engage should we decide to attempt to develop a new revenue base apart from Kaiser-Hill, which may adversely impact our cash flow and operating results and result in a decrease in the value of our common and preferred stock.

We may be unable to generate funds to meet our obligations and we may be unable to access additional capital.

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

We may have to issue a substantial number of additional common shares.

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

In the event of a change of control, we may not have the financial resources to redeem preferred stock.

Our preferred stock is redeemable at the option of the holder upon a change of control as defined in the terms of the preferred stock. We are not presently aware of any events that would cause a change of control. However, based on a Report on Form 4 dated April 3, 2003, which was filed with the Securities and Exchange Commission by Tennenbaum & Co., LLC on April 3, 2003, we believe that Tennenbaum & Co., LLC and Michael E. Tennenbaum together own approximately 47.2% of our

common stock. The terms of our preferred stock provide that a change of control occurs when, among other things, a person or “group” (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) directly or indirectly acquires “beneficial ownership” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of more than 50% of all classes of our common equity (defined in the terms of our preferred stock as capital stock entitled to vote in the election of directors).

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

ITEM 3. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

We do not believe that we have significant exposures to market risk as we do not presently have any debt. The interest rate risk associated with our obligation to fund a capped retiree medical obligation is not sensitive to interest rate risk other than via the determination of the present value of our remaining obligation there under. 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.

ITEM 4. CONTROLS AND PROCEDURES

As of March 31, 2004, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2004. There were no significant changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As previously reported in the Annual Report on Form 10-K for the year ended December 31, 2003.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) None

(b) None

(d) Not applicable

(e) Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

(a) None

(b) None

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

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

1. Election for Directors

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

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

(*) “Votes Withheld” means that the shareholder marked the box on his/her proxy card labeled “withheld.” This is equivalent to a “No” for all four nominees. This vote total includes situations in which the shareholder wrote in the name of the director or directors he/she did not want to vote for.

ITEM 5. OTHER INFORMATION

(a) None

(b) None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

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

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

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

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

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

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

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

Exhibit No. 10 — Material Contracts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10. Amendment No. 10 dated March 17, 2004

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

10(e) ICF Kaiser International, Inc. Section 401(k) Plan (as amended and restated as of March 1, 1993) (and further amended with respect to name change only as of June 26, 1993) (Incorporated by reference to Exhibit No. 10(f) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the second quarter of fiscal 1994 filed with the Commission on October 15, 1993)

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

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

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

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

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

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

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

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

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

10. Amendment No. 10 dated March 17, 2004

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

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

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

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

Exhibit No. 10—Material Contracts (management contracts, compensatory plans, or arrangements)

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

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

Exhibit 14 — Corporate Code of Conduct

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

Exhibit No. 21 — Consolidated Subsidiaries of the Registrant as of May 1, 2004

Exhibit No. 31.1 — Certification of the Principal Executive Officer

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

Exhibit No. 31.2 — Certification of the Principal Financial Officer

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

Exhibit No. 32.1 — Certification of the Principal Executive Officer

Pursuant to 18 U.S.C. Section 1350

Exhibit No. 32.2 — Certification of the Principal Financial Officer

Pursuant to 18 U.S.C. Section 1350

(b) Reports on Form 8-K

On January 13, 2004, the Company filed a Current Report on Form 8-K. Pursuant to Item 5 of its Report, the Company announced plans for a preferred stock redemption of its Series 1 Redeemable Cumulative Preferred Stock with a redemption date of February 16, 2004. The Company also announced that it will hold its annual meeting of shareholders on Wednesday, May 5, 2004.

On January 26, 2004, the Company filed a Current Report on Form 8-K. Pursuant to Item 5 of its Report, the Company announced that on January 20, 2004, the United States Bankruptcy Court for the District of Delaware rendered a decision in claim litigation involving Kaiser Group Holdings, Inc. and a class comprised of former holders of shares of ICT Spectrum Constructors, Inc.

On March 26, 2004, the Company filed a Current Report on Form 8-K. Pursuant to Item 5 of its Report, the Company announced that on March 24, 2004 Modification Number M116 to Contract # DE-AC34-00RF01904 between Kaiser-Hill Company, LLC, owned 50% by the Registrant, and the U.S. Department of Energy was executed and effective.

On April 19, 2004, the Company filed a Current Report on Form 8-K. Pursuant to Item 5 of its Report, the Company announced the departure of Marijo L. Ahlgrimm as Executive Vice President and Chief Financial Officer and the appointment of Marian P. Hamlett as Executive Vice President and Chief Financial Officer and the appointment of Jeffrey Lehman as Vice President and Assistant Treasurer effective April 15, 2004.

SIGNATURES

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

	KAISER GROUP HOLDINGS, INC.
	(Registrant)

Date: May 24, 2004

	/s/ Marian P. Hamlett
	Marian P. Hamlett
	Executive Vice President and Chief Financial Officer (Duly authorized officer and principal financial officer)