UNITED STATES

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, 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

(State or other jurisdiction of
incorporation or organization)

54-2014870

(I.R.S. Employer
Identification No.)

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

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

Name 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 ý No o

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. ý

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates, based on the closing sales price of the Common Stock on the Over-the-Counter Bulletin Board on June 30, 2004, was $12,663,893. For purposes of this computation, all officers, directors, and 5 percent beneficial owners of the registrant (as indicated in Item 12) are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant.

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. 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.

As of March 23, 2005, there were 1,598,270 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement to be prepared in connection with the 2005 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

PART I

Item 1. Business

Corporate History; 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 (“DOE” or “Department of Energy”) 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 “Closure Contract”). The level of success experienced by Kaiser-Hill in achieving timely closure of the Rocky Flats site, and the cost of achieving such closure, have been and continue to be 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 Kaiser Netherlands, B.V., a subsidiary of Kaiser Group International, Inc. See “Nova Hut” below for additional information.

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

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

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

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 bankruptcy is ongoing. By far the largest class of claims (“Class 4”) was made up of creditor claims other than trade creditor and equity claims. Class 4 claims included holders of Kaiser Group International, Inc.’s senior subordinated notes due 2003 (“Old Subordinated Notes”). Holders of allowed Class 4 claims received a combination of cash and our preferred (“New Preferred”) and common stock (“New Common”) in respect of their claims. Such holders received one share of New Preferred and one share of 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.

Pursuant to the terms of the Plan, we were required to complete our initial bankruptcy distribution within 120 days of the effective date of the Plan. Accordingly, on April 17, 2001, we effected our initial distribution of cash, New Preferred and New Common to holders of Class 4 claims allowed by the Bankruptcy Court. At that time, there were approximately $136.8 million of allowed Class 4 claims. 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 we 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 became subject to the ADR process. Since April 17, 2001, the date of the initial distribution, $126.0 million of asserted claims have been withdrawn, negotiated or mediated to an agreed amount, resulting in cash payments approximating $2.6 million and issuances of 683 shares of New Preferred and 823 shares of New Common. As of March 23, 2005, the amount of unresolved claims was approximately $4.5 million. We expect to resolve the remaining claims by the end of 2005 and currently believe that the total amount of Class 4 claims ultimately to be allowed in the Old Kaiser bankruptcy proceeding will not exceed $142.0 million. As demonstrated by the claim settlements completed since April 17, 2001, and based on the belief that it is in the Company’s and its shareholders’ best interest, we have 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. We intend to continue to use this settlement alternative during its resolution of remaining Class 4 claims.

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

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. As of March 23, 2005, we have redeemed the following shares of New Preferred (in thousands except share amounts):

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

July 2004	$	2,478	$	512	$	2,990	54,361
February 2004	2,599		2,677		5,276		95,932
October 2003	4,650		1,594		6,244		113,530
January 2003	5,233		8,913		14,146		257,200

Kaiser-Hill

Our major remaining asset and primary 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. Kaiser-Hill has performed since 1995 at this site, a former Department of Energy nuclear weapons production facility. Kaiser-Hill is working to safely stabilize, package and ship radioactive materials, remediate facilities contaminated with hazardous and radioactive waste, and restore much of the 6,000-acre site to its natural state for future use as a national wildlife refuge. 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.

Effective February 1, 2000, Kaiser-Hill was awarded a new contract pursuant to which Kaiser-Hill provides services that will complete the restoration of the Rocky Flats site and close it to Department of Energy occupation. The economic terms of the contract provide that Kaiser-Hill will earn revenue equal to the actual cost of completing the project 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 completing the project.

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 total 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 a 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 a 30% share. See Item 7. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of this activity.

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 filed a notice of appeal with the Third Circuit regarding this decision in favor of the IFC and on February 25, 2005, the Third Circuit overturned the District Court’s decision. The IFC has asked for a rehearing of the case by the Third Circuit. With regard 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 the amount of $51.1 million with the International Chamber of Commerce (“ICC”). In November 2004, Kaiser Netherlands’ claim against Nova Hut was amended to include late interest and other charges and now totals $67.5 million. The arbitration panel has been constituted, and the proceedings have been initiated. The earliest possible date for a final award ruling being issued is the last quarter of 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.

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 contract receivable 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 contract receivable 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 contract receivable carrying value were determined based on the Company’s late 2003 estimate of Nova Hut’s ability to pay such liability.

Kaiser Analytical Management Services, Inc.

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

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

Management has implemented a marketing plan aimed at gaining contract awards at other sites within the Department of Energy complex. KAMS will manage its cost and operations consistent with the success of these marketing efforts.

Other Retained Assets, Activities and Obligations

Until September 30, 2002, we owned a 10% interest in ICF Consulting Group, Inc., a privately held entity, that was retained by Kaiser Group International, Inc. when it sold its Consulting Group in June 1999. In September 2002 we consummated a settlement of outstanding disputes with ICF Consulting. As a result of that transaction, we continue to hold an 8½% subordinated note from ICF Consulting due June 25, 2006 in the principal amount of $6.4 million, net of a $0.5 million reserve for uncollectibility.

We own a captive insurance company that is not at this time engaged in issuing new policies but is solely engaged 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. In the fourth quarter of 2004, we received regulatory approval and finalized the formation documents of a sponsored captive subsidiary, MS Builders Insurance Company (MS Builders), to enable our wholly-owned captive insurance company to offer derivative captive insurance services to third party clients. As of March 23, 2005, no new policies have been written by MS Builders.

We also have 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 prior to 1993. There are approximately 873 retirees and dependents currently covered by the plans, the average age of whom is approximately 80. The actuarially determined present value of this obligation as of December 31, 2004, based on the existing commitments, interest rate assumptions and related medical benefit insurance policies, was $6.9 million, net of an unrecognized actuarial loss of $0.2 million. Although we intend to attempt to reduce remaining exposures relative to the costs of this obligation in the future, there can be no guarantee that this will be feasible, nor can we estimate the amount of potential future savings with any reasonable degree of accuracy.

Our Board of Directors will continue to consider whether we will engage in any additional business activities in the future.

Insurance

We have a 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, workers’ comp, and professional liability “runoff” coverage to deal with liabilities arising from past activities and projects, if necessary.

We believe that the insurance coverages we maintain, including self-insurance, protect against risks that are comparable to those of similar businesses of our scope and present operating profile and that related coverage amounts are economically reasonable. At this time, we expect to continue to be able to obtain insurance in amounts generally available to firms with a similar profile. Insurance costs are rising, and there can be no assurance that the insurance coverage and levels maintained by us 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 Kaiser Group International, Inc., if successful and of sufficient magnitude, could have a material adverse effect on our financial position.

Government Regulation

We 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

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information

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

The following table sets forth the high and low sale prices for the New Common as reported on the Over-the-Counter Bulletin Board.

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

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

Kaiser Group International, Inc. never paid cash dividends on its Old Common. We anticipate that no cash dividends will be paid on the New Common for the foreseeable future and that our earnings will be retained for use in the business and, consistent with the terms of the New Preferred and the KGP put rights described in Note 8 to the Consolidated Financial Statements, be used to pay dividends on and redeem outstanding shares of New Preferred. Our Board of Directors determines our dividend policy based on its results of operations, required payment of dividends on New Preferred, financial condition, capital requirements, and other circumstances.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2004 with respect to compensation plans under which equity securities of the Company are authorized for issuance:

Plan Category	(I) Number of securities to be issued upon exercise of outstanding options and warrants	(II) Weighted- average exercise price of outstanding options and warrants	(III) Number of securities remaining available for future issuance under plans

Equity compensation plans approved by shareholders	—	—	150,000
Equity compensation plans not approved by shareholders	—	—	—
Total	—	—	150,000

Selected Consolidated Financial Data

(in thousands, except per share data)

	Successor Company												Predecessor Company
	2004			2003			2002			2001			2000
Statement of Operations Data:
Gross revenue	$	1,036		$	—		$	—		$	—		$	271,385
Service revenue	288			—			—			—			76,018
Operating loss	(6,364		)	(4,918		)	(7,028		)	(10,792		)	(224		)
Income (loss) from continuing operations before reorganization items, income taxes, minority interest, extraordinary items and cumulative effect of accounting change	9,110			11,028			29,165			7,657			(1,736		)
Income (loss) before extraordinary items and cumulative effect of accounting change	7,375			4,368			18,343			(4,957		)	29,762

Basic and Diluted Earnings per share:
Continuing operations before extraordinary items and cumulative effect of accounting change	$	4.62		$	2.92		$	8.60		$	1.92		$	1.74
Discontinued operations, net of tax	—			(1.14		)	0.31			(9.11		)	(0.46		)
Extraordinary items, net of tax	—			—			—			—			5.35

Total	$	4.62		$	1.78		$	8.91		$	(7.19	)	$	6.63

Weighted average common shares outstanding:
—basic	1,597			1,594			1,590			1,119			23,255
—diluted	1,597			1,594			1,590			1,119			23,255

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

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

** After the adoption of FAS 150 (see Note 3 to the Consolidated Financial Statements), we reclassified mandatorily redeemable preferred stock to long term liabilities from mezzanine equity. Additionally, as we did not complete the initial bankruptcy distribution until April 17, 2001, no shares of New Preferred were actually outstanding as December 31, 2000.

We adopted fresh start reporting in our 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 be 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 emerging retained earnings of zero. Additionally, assets and liabilities were recorded at their fair values.

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

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 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 that 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

Overview

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

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

• We own Kaiser-Hill Company, 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, have been and continue to be 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.

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

• We formed Kaiser Analytical Management Services, Inc. (KAMS) in April 2004 to take over the operations of the Analytical Services Division of Kaiser-Hill Company, LLC. KAMS provides analytical management services such as sample planning, sample management, records management, performance assessment and data management in the general areas of health and safety, geotechnical, environmental and waste management, and deactivation and decommissioning.

Outlook

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

may be due to Kaiser-Hill from the DOE. Although much less significant, another material uncertainty affecting our future results is the outcome of the disputes we have in arbitration with Nova Hut.

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

Apart from Kaiser-Hill, the principal uncertainty that will affect our performance is the outcome of our disputes with Nova Hut. As discussed elsewhere, we have pending against Nova Hut an arbitration before the International Chamber of Commerce. Our aggregate claims are for $67.5 million, and Nova Hut has asserted counterclaims of $49.7 million. It is not possible to predict the outcome of these disputes, but we feel our claims are stronger than Nova Hut’s. Our assessment could be wrong, but we are determined to see these disputes through to conclusion because we believe we are entitled to a substantial positive recovery. The arbitration process is now underway. At present, we do not expect to receive any recovery from Nova Hut until late 2005 at the earliest.

Possible Preferred Stock Redemptions. In the fourth quarter of 2004, we received $7.0 million from Kaiser-Hill which was in line with prior years’ fourth quarter distributions of $7.4 million in the fourth quarter of 2003 and $6.7 million in the fourth quarter of 2002, but below our expectations previously reported in our September 30, 2004 Form 10-Q. Because the actual fourth quarter distribution from Kaiser-Hill was below our expectations, we reduced the amount of our planned redemption of New Preferred to $10.0 million from $12.0 million, as previously reported in the September 30, 2004 Form 10-Q. This $10.0 million redemption of our New Preferred will occur on April 22, 2005.

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

Possible Deregistration. Based upon advice from our transfer agent, we reported in our September 30, 2004 Form 10-Q that we believed that we had fewer than 300 stockholders of record and, based upon that belief, on December 20, 2004 we filed a Form 15 with the Securities and Exchange Commission to deregister under the Securities Exchange Act of 1934. After further review of our stockholder records, we now believe that we have in excess of 300 stockholders of record, and therefore, on February 17, 2005 we filed an Amended Form 15 with the Securities and Exchange Commission withdrawing the Form 15 filed with the Commission on December 20, 2004.

Continuing the commitment to reduce our overhead costs, on March 16, 2005 our Board formed a special committee to review options for reducing the number of stockholders of record to less than 300, which would allow us to proceed with the deregistration process. If we are successful in reducing our number of stockholders below 300, we plan on filing a new Form 15 with the Commission. This will suspend our reporting obligations under the Securities Exchange Act of 1934, meaning that we will no longer have to file with the Commission certain reports and forms, including Forms 10-K, 10-Q, 8-K and proxy statements. If we were to deregister, we would continue to announce earnings and other developments on a quarterly basis, but the extent of our disclosures would be less detailed than would be the case if we were to remain registered. We will announce by press release additional information concerning possible deregistration of the Company.

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

Critical Accounting Policies and Significant Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires that we 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. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

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

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

• Income tax provision, deferred tax assets and liabilities.

• Use of the equity method of accounting for Kaiser-Hill, an affiliate that we have 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 our underlying equity is amortized on a straight-line basis over the term of the joint venture investment, estimated at six years.

• Estimated fees on the Kaiser-Hill joint venture. Estimating future costs and, therefore, revenues and profits, is a process requiring a high degree of judgment, including assumptions regarding future operations of Kaiser-Hill as well as general economic conditions. In the event of a change in total estimated contract cost or profit, the cumulative effect of such change is recorded in the period the change in estimate occurs. Revenue recognition and our profitability from the Kaiser-Hill contract may be adversely affected to the extent that estimated cost to complete or incentive or award fee estimates are revised, delivery schedules are delayed, or progress under the contract is otherwise impeded. Accordingly, our recorded revenues and gross profits from year to year can fluctuate significantly. The Kaiser-Hill contract contains incentive provisions for increased or decreased revenue and profit based on actual performance against established cost targets and schedule-related goals. Incentive fees are included in estimated contract revenue at the time the amounts can be reasonably determined and are reasonably assured based on historical experience and other objective criteria. Should Kaiser-Hill fail to perform satisfactorily under its contract, previously recognized revenues could be reversed and/or future period revenues could be reduced.

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

Results of Operations

Years Ended December 31, 2004, 2003 and 2002

Equity Income In Earnings of Affiliate

Our major remaining source of income is a 50% ownership in Kaiser-Hill Company, LLC, which performs all elements of daily and long-term operations associated with the ultimate closure of the Department of Energy’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 to its natural state for future use by the public. The financial information contained herein for Kaiser-Hill is reflected on the equity basis. Because Kaiser-Hill represents a significant portion of our financial position and results of operations, the audited financial statements of Kaiser-Hill are included in this report (see pages F-21 to F-31).

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 total potential fee to be earned pursuant to the Closure Contract, as modified on March 24, 2004, ranges from $75.0 million to $560.0 million based on Kaiser-Hill’s cost to complete the site

closure being within the range of completion cost 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 Closure 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 December 31, 2004, Kaiser-Hill’s cost estimate to complete the project is $3.7 billion, with an estimated completion date of September 2006, resulting in a potential fee of $429.0 million. As reflected in the “Outlook” discussion above, Kaiser-Hill is targeting closure of the site in late 2005 to early 2006; however, these goals are subject to substantial risks, and the ability to accurately predict the ultimate results are highly uncertain. See “Risk Factors Relating to Kaiser Holdings and Forward-Looking Statements” below. In the event that Kaiser-Hill is able to complete physical performance of the Closure Contract within cost and time thresholds that would yield fees in excess of the $429.0 million currently estimated, there may be uncertainty with regard to the timeframe of the actual receipt of such fees by Kaiser-Hill. Additionally, there may remain significant uncertainties involving the timeframe necessary to completely “close-out” the contract with the Department of Energy as contract cost and compliance audits will be required. Kaiser-Hill will continue to periodically consider the appropriateness of financial statement reserves to address the uncertainties associated with such matters.

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

For the years ended December 31, 2004, 2003 and 2002, the equity income in earnings of affiliate is net of $3.5 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 duration of the Kaiser-Hill closure contract with the DOE.

Closure Contract Billing Provisions

Since the inception of the Closure Contract in February 2000 through December 31, 2004, Kaiser-Hill has invoiced DOE for the performance fee based on the contract provisions, and has collected an aggregate of $160.1 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 December 31, 2004, Kaiser-Hill has distributed $64.1 million to each of its two owners.

In the first quarter of 2005, acknowledging Kaiser-Hill’s continued favorable progression on the project, the DOE approved a non-recurring fee payment, which resulted in a first quarter 2005 distributions to each of its two owners of $10.5 million. For the remaining quarters of 2005, after adjusting for the effects of the 50% retainage holdback, Kaiser-Hill plans that its performance fee invoices to DOE will yield distributions of $3.5 million in each quarter to each of its two owners. Similar to 2004 and 2003, Kaiser-Hill is anticipating that DOE will continue to acknowledge Kaiser-Hill’s favorable progress and approve an additional non-recurring fee payment during the fourth quarter of 2005. 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.

Gain on Demutualization and Gain on Sale of Security

During 2002, we sold our investment in Prudential Insurance Company common stock which resulted in a gain of $0.1 million which was recorded on sale of security.

Gain on Sale of Investment

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

Write-off of Notes Receivable and Accrued Interest

As a result of the above-mentioned settlement agreement with ICF Consulting in September 2002, we recorded the new ICF Consulting note of $6.4 million and wrote off the remaining balance in the notes receivable and accrued interest totaling $0.7 million. In light of the fact that ICF Consulting had defaulted on the previously held ICF Consulting notes and the subordinated nature of the new note, we have also recorded a reserve of $0.5 million due to uncertainties as to the ultimate collectibility of the new note and accrued interest.

Interest Income

We earn interest on our available cash balances and on the note receivable from ICF Consulting (see above discussion related to settlement with ICF Consulting). Interest income decreased 16% or $0.1 million in 2004, due to a decline in average cash balances. Interest income increased nominally in 2003, in spite of a decline in average cash balances, due to a full year of accrual of interest on the ICF Consulting note receivable.

Administrative Expenses

Administrative expenses for the years ended December 31, 2004, 2003 and 2002 consisted largely of salaries, legal and professional fees incurred for activities associated with the bankruptcy proceedings or with winding down of historical operations as well as the cost to fund a certain retiree benefit commitment. Administrative expenses for the year ended December 31, 2004 compared to December 31, 2003 increased nominally. In September 2004, management made a series of personnel and other cuts in order to reduce administrative expenses in the future. Administrative expenses for the year ended December 31, 2003 compared to December 31, 2002 declined by $2.1 million primarily due to a reduction in legal and professional fees incurred for bankruptcy claims resolution. The expense for the retiree medical commitment remained relatively unchanged for the three years ended December 31, 2004, 2003, and 2002 at approximately $1.0 million per year.

Reserve for Settlement of Class 4 Claims

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

Loss from Discontinued Operations

In addition to matters surrounding the resolution of the Nova Hut dispute, Discontinued Operations also reflects the net income statement activity resulting from the winding down of the discontinued engineering operations. At December 31, 2003, based upon the lack of significant favorable developments with the Nova Hut claim in the prior two years and the time that has elapsed since completion of the project, the Company established additional reserves to further reduce the net carrying value of the remaining Nova Hut project to $3.0 million by recording an additional reserve of $3.0 million offset by an income tax benefit of $1.1 million, through a charge to “Loss from Discontinued Operations”. This charge is offset by income from discontinued operations of $0.4 million from the collection of foreign accounts receivable, which had previously been fully reserved.

During 2002, we successfully prosecuted an aged claim against a former subcontractor and collected an account receivable,

from a previous foreign engineering project, that had previously been written off. Net of legal fees, these activities resulted in the Company’s collection of $0.6 million.

Income Taxes

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

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

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

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

During 2002, we recognized a total income tax expense of $11.6 million allocable to the following results (in thousands):

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

Treatment of Net Operating Loss Carryforwards

In December 2000 we went through a change in control as defined under Internal Revenue Code (IRC) Section 382 due to the Chapter 11 bankruptcy reorganization. In September 2001 we determined that the change in control met the stringent guidelines of the bankruptcy exception provided under the Internal Revenue Code. This resulted in our not being subject to the carryforward limitations of IRC Sec. 382. However, we were required to reduce certain carryovers that included net operating losses and credits. We 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. All remaining net operating loss carryforwards were utilized in 2003.

Liquidity and Capital Resources

Years Ended December 31, 2004, 2003 and 2002

Operating Activities: We used $9.8 million in cash for operating activities in 2004, $10.2 million in 2003 and $6.3 million in 2002. This use of cash included the following:

	2004		2003		2002
General and administrative costs incurred	$	5,252	$	4,918	$	7,028
Payment of income taxes	1,916		4,010		930
Payment of dividends included in continuing operations	2,151		953		—
Other, net	482		358		(1,695		)

Cash used for operating activities	$	9,801	$	10,239	$	6,263

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

Financing Activities: Our primary financing activities have been the redemption of New Preferred in accordance with the terms of the Kaiser Group International Plan of Reorganization and the KGP put rights described in Note 8 to the Consolidated Financial Statements. The schedule below identifies the redemptions of New Preferred and the source of funds utilized in the redemption. During the years ended December 31, 2004 and 2003, we redeemed New Preferred as follows:

Date of Redemption	Use of Unrestricted Cash		Use of Reserve Fund Cash		Total Amount of Redemption		Number of Shares Redeemed
July 2004	$	2,478	$	512	$	2,990	54,361
February 2004	2,599		2,677		5,276		95,932
October 2003	4,650		1,594		6,244		113,530
January 2003	5,233		8,913		14,146		257,200

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

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

In 2003 we acquired 6,848 shares of New Preferred for $0.3 million and 2002 we acquired 119,587 shares of New Preferred for $4.0 million. As a result of the Prudential stock sale and the sale of the investment in ICF Consulting discussed above, we are required, in accordance with the Plan, to use a portion of the proceeds from any asset sales solely for the redemption of the outstanding preferred stock. Pursuant to this requirement, we earmarked approximately $4.5 million of the sale proceeds as reserve fund cash to be used for the future preferred stock redemptions. This amount is included “Use of Reserve Fund Cash” in the schedule above detailing the New Preferred redemptions.

During 2004, approximately $40,000 was transferred from unrestricted cash to the reserve fund to reserve for the payment of pro forma dividends on unresolved claims. During 2002, $0.8 million of restricted cash was released as a part of the settlement agreement with ICF Consulting and $0.6 million of restricted cash in our captive insurance company was released from restriction by the insurance regulators.

Liquidity and Capital Resources Outlook

We currently have no debt as a result of the effectiveness of the Plan of Reorganization. We continue to finance the 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 our future operating needs and income tax requirements, as well as the dividend requirements applicable to our preferred stock. Furthermore, we will continue to review the timing of additional partial preferred stock redemptions.

We have obligations to pay interest on outstanding preferred stock at December 31, 2004, which has been shown as interest expense effective July 1, 2003. Accordingly, we are required to present the following table assuming that no additional 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 additional preferred stock redemptions). The effect these obligations are expected to have on our liquidity and cash flow in future periods are as follows (in thousands):

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

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

Other Matters

We have various obligations and liabilities from our continuing operations, including general overhead expenses in connection with maintaining, operating and winding down various entities. Additionally, we believe contingent liabilities may exist in the areas described in Note 15 to the Consolidated Financial Statements for the periods ended December 31, 2004, 2003 and 2002.

Recent Accounting Pronouncements

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

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

On May 31, 2003, FASB issued FASB Statement No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as liabilities (or assets in certain circumstances) in statements of financial position. FAS 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities — all of whose shares are mandatorily redeemable. FAS 150 was to have been generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Recently, the FASB has deferred for an indefinite period the effective date for certain instruments and entities. As discussed in Note 8 of the Consolidated Financial Statements, the Company has adopted the provisions of FAS 150 in the third quarter of 2003.

In December 2003, the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132(R) increases the existing disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. The new disclosure requirements required by SFAS No. 132(R) are effective for us for the year ending after June 15, 2004.

RISK FACTORS RELATING TO KAISER HOLDINGS AND

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 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 the potential value of our common stock.

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. 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.

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

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

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 significant 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 the extent to which we carry out activities other than through Kaiser-Hill. Unless and until we further develop plans for such operations, we are unable 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, we have established 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 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 activities and projects. These factors could limit the nature of the business activities in which we can engage, 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 generate funds to meet our obligations. An inability to gain access to additional capital may also limit our ability to undertake new activities. Ultimately, an 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 would have a materially dilutive effect on the value of common shares presently outstanding.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Documents filed as part of this Report

1. Financial Statements

Consolidated Financial Statements of Kaiser Group Holdings, Inc. and Subsidiaries

a.	Report of Independent Accountants
b.	Consolidated Balance Sheets as of December 31, 2004 and December 31, 2003
c.	Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
d.	Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Income (Loss) for the years ended December 31, 2004, 2003 and 2002
e.	Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
f.	Notes to Consolidated Financial Statements

2. Financial Statement Schedules

Supplemental Schedule Relating to the Consolidated Financial Statements of Kaiser Group Holdings Inc. and Subsidiaries for the years ended December 31, 2004, 2003 and 2002.

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

b.	(i)	Report of Independent Accountants
	(ii)	Schedule II: Valuation and Qualifying Accounts

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

3. Exhibits (listed according to the number assigned in the table in Item 601 of Regulation S-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 (Incorporated by reference to Exhibit 10(c)(10) to Quarterly Report on Form 10-Q (Registrant No. 1-12248) for the first quarter of fiscal 2004 filed with the Commission on May 24, 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)

SIGNATURES

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

	KAISER GROUP HOLDINGS, INC.


	By:	/s/ Douglas W. McMinn
	Name: Douglas W. McMinn
	Title: President and Chief Executive Officer

March 29, 2005

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

(1) Principal executive officer

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

(2) Principal financial and accounting officer

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

(3) Board of Directors

/s/ Jon B. Bennett		March 29, 2005
Jon B. Bennett	Director

/s/ Douglas W. McMinn		March 29, 2005
Douglas W. McMinn	Director

/s/ Mark S. Tennenbaum		March 29, 2005
Mark S. Tennenbaum	Director

/s/ Frank E. Williams, Jr.		March 29, 2005
Frank E. Williams, Jr.	Director

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	December 31, 2004		December 31, 2003
ASSETS
Current Assets
Cash and cash equivalents	$	12,728	$	10,142
Certificate of deposit	1,006		1,009
Restricted cash and cash equivalents	3,931		7,049
Accounts receivable	217		—
Prepaid expenses and other current assets	742		971
Contract receivable, net	3,000		3,000
Total Current Assets	21,624		22,171

Other Assets
Investments in and advances to affiliates	45,094		45,788
Notes receivable	5,894		5,894
Other long-term assets	102		227
	51,090		51,909
Total Assets	$	72,714	$	74,080

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	169	$	304
Post retirement benefit plan obligation	6,623		6,913
Other accrued expenses	4,620		4,432
Interest payable on preferred stock	313		409
Deferred tax liability	5,772		6,495
Income taxes payable	763		275
Total Current Liabilities	18,260		18,828

Long-term Liabilities
Mandatorily redeemable preferred stock	26,909		35,175

Commitments and Contingencies

Common stock, par value $.01 per share:
Authorized—3,000,000 shares
Issued and outstanding—1,598,270 and 1,594,270 shares at December 31, 2004 and December 31, 2003, respectively	16		16
Capital in excess of par	8,063		7,975
Retained earnings	19,424		12,049
Accumulated other comprehensive income (loss)	42		37
Total Shareholders’ Equity	27,545		20,077
Total Liabilities and Shareholders’ Equity	$	72,714	$	74,080

See notes to consolidated financial statements.

F-2

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2004			2003			2002
	(In thousands, except per share amounts)

Gross Revenue	$	1,036		$	—		$	—
Subcontract and direct material costs	748			—			—
Service Revenue	288			—			—
Operating Expenses
Reserve for settlement of remaining Class 4 claims	1,400			—			—
Administrative expenses	5,252			4,918			7,028
Operating Income (Loss)	(6,364		)	(4,918		)	(7,028		)
Other Income (Expense)
Equity income in earnings of affiliate, net of amortization of $3,524 for each of the years ended December 31, 2004, 2003 and 2002	16,806			16,475			33,233
Gain on sale of investment	—			—			3,371
Gain on sale of security	—			—			106
Write-off of notes receivable and accrued interest	—			—			(1,320		)
Other income	25
Interest income	698			833			803
Interest expense for preferred dividends	(2,055		)	(1,362		)	—
Income From Continuing Operations Before Income Tax	9,110			11,028			29,165
Income tax expense	(1,735		)	(4,827		)	(11,319		)
Income From Continuing Operations	7,375			6,201			17,846
Income (Loss) from discontinued operations, net of tax	—			(1,833		)	497
Net Income	7,375			4,368			18,343
Preferred stock dividends	—			(1,534		)	(4,171		)

Income Applicable to Common Shareholders	$	7,375		$	2,834		$	14,172

Basic and Diluted Earnings Per Common Share:
Continuing operations, net of tax	$	4.62		$	2.92		$	8.60
Discontinued operations, net of tax	—			(1.14		)	0.31

Net Earnings Per Share	$	4.62		$	1.78		$	8.91

Weighted average shares for basic and diluted earnings per common share	1,597			1,594			1,590

See notes to consolidated financial statements.

F-3

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)

(In thousands, except share amounts)

	Old Common Stock						Capital In Excess of Par			Accumulated Earnings (Deficit)			Accumulated Other Comprehensive
		Par		New Common Stock
	Shares	Value		Shares	Par Value

Balance, December 31, 2001	—	$	—	1,585,239	$	16	$	7,947		$	(4,957	)	$	354
Net income	—	—		—	—		—			18,343			—
Issuances of new common stock	—	—		4,823	—		10			—			—
Issuance of preferred stock in settlement of allowed class 4 claims	—	—		—	—		(38		)	—			—
Foreign currency translation Adjustment	—	—		—	—		—			—			7
Unrealized gain on securities Available for sale	—	—		—	—		—			—			(393		)
Preferred stock dividends	—	—		—	—		—			(4,171		)	—
Purchase of preferred treasury stock below liquidation value	—	—		—	—		2,594			—			—
Class 4 allowed claim settlements	—	—		—	—		(291		)	—			—
Tax adjustment	—	—		—	—		(1,616		)	—			—

Balance, December 31, 2002	—	$	—	1,590,062	$	16	$	8,606		$	9,215		$	(32	)
Net income	—	—		—	—		—			4,368			—
Issuances of new common stock	—	—		4,208	—		22			—			—
Foreign currency translation Adjustment	—	—		—	—		—			—			69
Preferred stock dividends	—	—		—	—		—			(1,534		)	—
Purchase of preferred treasury stock below liquidation value	—	—		—	—		65			—			—
Class 4 allowed claim settlements	—	—		—	—		(1,158		)	—			—
Tax adjustment	—	—		—	—		440			—			—

Balance, December 31, 2003	—	$	—	1,594,270	$	16	$	7,975		$	12,049		$	37
Net income	—	—		—	—		—			7,375			—
Issuances of new common stock	—	—		4,000	—		88			—			—
Foreign currency translation Adjustment	—	—		—	—		—			—			5
Balance, December 31, 2004	—	$	—	1,598,270	$	16	$	8,063		$	19,424		$	42

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Year Ended December 31,
	2004		2003		2002

Net Income (Loss)	$	7,375	$	4,368	$	18,343
Other Comprehensive Income (Loss)
Foreign currency translation adjustments	5		69		7
Unrealized gain on securities, net of tax	—		—		(393		)

Total Comprehensive Income (Loss)	$	7,380	$	4,437	$	17,957

See notes to consolidated financial statements.

F-4

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the year ended December 31,
	2004			2003			2002
	(in thousands)
Operating Activities
Net income	$	7,375		$	4,368		$	18,343
Adjustments to reconcile net income (loss) to net cash Used in operating activities:
Loss of discontinued operations, net of tax	—			1,833			259
Gain on sale of investments	—			—			(3,371		)
Deferred taxes related to continuing operating activities	(723		)	1,518			10,746
Gain on sale of stock	—			—			(106		)
Equity in unconsolidated affiliate	(16,806		)	(16,475		)	(33,233		)
Changes in operating assets and liabilities, net of acquisitions and dispositions
Accounts receivables, net	(217		)	—			—
Prepaid expenses and other current assets	229			1,433			(561		)
Accounts payable and accrued expenses	(237		)	(2,558		)	1,926
Income taxes payable	488			(365		)	(498		)
Other operating activities	90			7			232

Net Cash Used in Continuing Operating Activities	(9,801		)	(10,239		)	(6,263		)
Investing Activities
Distributions from 50% owned affiliate	17,500			16,350			15,650
Purchase of certificate of deposit	(1,000		)	(1,000		)
Maturity of certificate of deposit	1,000
Proceeds from sale of investment	—			—			4,521
Proceeds from sale of securities	—			—			5,961
Net Cash Provided by Investing Activities	17,500			15,350			26,132
Financing Activities
Release of restricted cash	—			—			1,435
Transfer to restricted cash	(36		)	—			(4,508		)
Purchase of preferred treasury stock	—			(311		)	(3,983		)
Transfer from restricted cash for the redemption of preferred stock	3,189			10,507			—
Redemption of preferred stock	(8,266		)	(20,390		)	—
Payment of preferred stock dividends	—			(2,188		)	(4,248		)
Net Cash Used in Financing Activities	(5,113		)	(12,382		)	(11,304		)
Increase (Decrease) in Cash and Cash Equivalents	2,586			(7,271		)	8,565
Cash and Cash Equivalents at Beginning of Period	10,142			17,413			8,848

Cash and Cash Equivalents at End of Period	$	12,728		$	10,142		$	17,413

See notes to consolidated financial statements.

F-5

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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 6 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. 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 through a sponsored captive subsidiary.

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

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

The Company adopted fresh start reporting in its consolidated 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

F-6

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, $126.0 million of asserted claims have been withdrawn, negotiated or mediated to an agreed amount, resulting in cash payments approximating $2.6 million and issuances of 683 shares of New Preferred and 823 shares of New Common. As of March 23, 2005, the amount of unresolved claims was approximately $4.5 million. The Company expects to resolve the remaining claims by the end of 2005. 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 $142.0 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.

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

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. See Note 5 for a schedule of past redemptions of New Preferred and the amount of restricted cash used to facilitate the redemption.

3. Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include all majority-owned or controlled subsidiaries. Investments in unconsolidated affiliated companies and joint ventures are accounted for using the equity method. 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 estimated term of the joint venture investment. All significant intercompany balances and transactions have been eliminated.

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

Income Taxes: Deferred tax assets and liabilities represent the tax effects of differences between the financial statement carrying amounts and the tax bases carrying amounts of the Company’s assets and liabilities. These differences are calculated based upon the statutory tax rates in effect in the years in which the differences are expected to reverse. The effect of subsequent changes in tax rates on deferred tax balances is recognized in the period in which a tax rate change is enacted. The Company evaluates its ability to realize future benefit from all deferred tax assets and establishes valuation allowances for amounts that may not be realizable.

Earnings Per Share: Basic EPS is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. The weighted average shares outstanding for the year ended December 31, 2001 retroactively adjusts for the conversion of the Old Common to New Common effective with the adoption of fresh-start reporting. As additional distributions of Kaiser Holdings common stock are made to holders of newly allowed Class 4 claims, the conversion ratio of 96 shares 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.

The effect of preferred dividends of $1.5 million and $4.2 million has been included in continuing operations in the calculation of basic and diluted earnings per share for the year ended December 31, 2003 and 2002, respectively. As discussed in Note 8, the Company adopted FAS 150 effective July 1, 2003. Therefore, the $2.1 million for the year ended December 31, 2004 and $1.4 million of preferred stock dividends for the six months ended and December 31, 2003 have been shown as interest expense.

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

Cash Equivalents and Restricted Cash: The Company considers all highly liquid financial instruments purchased with maturities of three months or less at date of purchase to be cash equivalents. Restricted cash balances consisted of the following at December 31 (in thousands):

	2004		2003

Cash reserved for future claim settlements and accumulated dividends	$	953	$	1,349
Cash reserved for future New Preferred redemptions	—		2,756
Cash balances of wholly owned insurance subsidiary	2,978		2,944

	$	3,931	$	7,049

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

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

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

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

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

Adoption of FAS 142: The Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets effective January 1, 2002. Under FAS 142, intangible assets with indefinite lives will no longer be amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Recognized intangible assets with determinable useful lives will continue to be amortized. The Company’s only intangible asset relates to its investment in Kaiser-Hill recorded upon the adoption of fresh-start reporting. This intangible asset of $21.1 million is being amortized on a straight-line basis through 2006, which is the date currently estimated for Kaiser-Hill’s completion of the Closure Contract. Total accumulated amortization as of December 31, 2004 was $14.1 million. The amortization expense associated with this intangible is recorded as a reduction to the equity income in earnings of affiliate on the consolidation statement of operations. The estimate amortization expense for the remaining life of this intangible asset is:

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

Adoption of FAS 150: On May 31, 2003, FASB issued FASB Statement No. 150 (FAS 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” FAS 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as liabilities (or assets in certain circumstances) in statements of financial position. FAS 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities – all of whose shares are

F-9

mandatorily redeemable. FAS 150 was to have been generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. Recently, the FASB has deferred for an indefinite period the effective date for certain instruments and entities. As discussed in Note 8, the Company has adopted the provisions of FAS 150 in the third quarter of 2003.

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent assets and liabilities at the date of the financial statements, and the amounts of revenues and expenses recognized during the reporting period. Such estimates include those related to allowances for contract, notes and accounts receivable and accrued interest, deferred tax assets and valuation allowance and other investments, assumptions used to determine the retiree medical obligation, the amortization period for the excess value attributed to the Kaiser-Hill investment and the remaining Allowed Claims. Actual results could differ from those estimates.

Concentrations of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, certificate of deposit and accounts receivable. The Company’s cash and cash equivalents and certificate of deposit are maintained in accounts held in major U.S. banks. Concentrations of credit risk relative to accounts receivable are related to our only source of revenue is derived from one contract with a U.S. company.

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

4. Contract receivable

Contract receivable consists entirely of the net carrying value of the net assets of the Nova Hut project and were as follows at December 31:

	2004			2003

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

Although Old Kaiser sold its Metals Mining and Industry business 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. As of March 23, 2005, 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 filed a notice of appeal with the Third Circuit regarding this decision in favor of the IFC and on February 25, 2005, the Third Circuit overturned the District Court’s decision. The IFC has asked for a rehearing of the case by the Third Circuit. With regard to the Nova Hut appeal, the District Court has ruled that U.S. Bankruptcy proceedings should be stayed pending completion of international arbitration proceedings.

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

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.

5. Business Segments and Foreign Operations

The Company had no reportable segments at any time during 2004, 2003 or 2002.

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

6. Joint Ventures and Affiliated Companies

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

Kaiser Hill: The Company accounts for its 50% ownership in the Kaiser-Hill Company LLC investment using the equity method. At December 31, 2004 and 2003, the Company’s investment in Kaiser-Hill totaled $42.3 million and $43.0 million, respectively. The difference between the Company’s carrying value of the investment in Kaiser-Hill and its 50% underlying equity in Kaiser-Hill’s net assets was $7.0 million and $10.6 million, respectively, as of December 31, 2004 and 2003 and is being amortized on a straight-line basis through 2006 (the date currently estimated for Kaiser-Hill’s completion of the Closure Contract.)

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

	2004			2003			2002

Current assets	$	118,011		$	117,714		$	115,030
Non-current assets	132,224			114,701			78,734
Current liabilities	113,609			111,936			107,586
Non-current liabilities	66,134			55,647			28,644

Gross revenue	$	651,851		$	712,270		$	732,718
Subcontracts and materials	(377,649		)	(379,215		)	(367,355		)
Service revenue	274,202			333,055			365,363
Operating expenses	(233,574		)	(293,056		)	(291,986		)
Other income (expense)	32			(1		)	137
Net income	$	40,660		$	39,998		$	73,514

Under the Closure Contract, 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

F-11

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 Closure Contract further provides that Kaiser-Hill will be reimbursed for the reasonable cost of bonds and insurance allocable to the 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.

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, 2004 and 2003, Kaiser-Hill had no balances outstanding on its revolving credit.

Other: In 1997, the Company purchased a 4% ownership interest in a limited liability company (the LLC) that leases the land and owns the buildings where the Company’s corporate headquarters were located. Effective October 28, 2000, the Company negotiated a settlement with the other owners of the LLC resolving various issues between the Company and the other owners. As a part of that resolution, the Company fixed the maximum amount of potential future recovery of the investment to $2.8 million at whatever time as the property is sold or refinanced. At December 31, 2004 and 2003, the amount of the investment remains unchanged.

7. Notes receivable

In June 2002, a settlement was reached between the Company and ICF Consulting, whereby the Company agreed to restructure the ICF Consulting notes totaling $6.6 million and accrued interest of $0.7 million, net of reserves, for a new promissory note of $6.4 million (New Note) bearing interest at 8.5% per annum. The New Note is subordinated to the rights to ICF Consulting’s senior bank lenders. As a part of the settlement, ICF Consulting agreed to withdraw all claims against the Company, release cash in escrow totaling $0.8 million and purchase the Company’s 10% ownership in ICF Consulting, carrying value of $1.1 million, for $4.5 million.

At December 31, 2002, all terms of the settlement agreement between the Company and ICF Consulting had been implemented. Due to uncertainties about the ultimate collectibility of the New Note and accrued interest, and considering the fact that ICF Consulting had defaulted on the previously held ICF Consulting notes, the Company has recorded a reserve of $0.5 million against the New Note. There have been no changes to the status of this note receivable at December 31, 2004.

8. Mandatorily Redeemable Preferred Stock

The Company’s 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 $26.9 million and $35.2 million, respectively, at December 31, 2004 and 2003, net of $5.6 million of treasury stock at both December 31, 2004 and 2003. 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 the Company’s 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 489,249 and 639,542 shares of New Preferred outstanding at December 31, 2004 and 2003, respectively, net of 101,471 treasury shares. The New Preferred is shown at liquidation value of $55 per share.

Pursuant to approval by the Company’s Board of Directors, in 2002 and 2003, 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

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

The certificate of incorporation of the Company 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 the Company on account of that affiliate’s ownership of shares of preferred stock. If the Company fails to pay a quarterly dividend when due, holders of New Preferred will have the right to elect an additional 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 January 31, 2005, totaling approximately $0.5 million, was paid on February 7, 2005. At December 31, 2004, in addition to the $0.4 million of cash reserves for unresolved claims, the Company had $0.5 million in cash reserved for the payment of accrued dividends on 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 the Company, each holder of New Preferred (other than an affiliate of the Company) is entitled to this per share liquidation preference before any holders of New Common or any other junior securities of the Company 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 the Company) 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 the Company. In addition, any net proceeds in excess of $3.0 million in a calendar year received by the Company or any of its direct 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 New Preferred 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.

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;

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• 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. 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. The Company does not presently plan to arrange for trading of the KGP put rights on the NASD electronic bulletin board or otherwise.

The Company from time to time has received distributions from Kaiser-Hill that triggered the put rights – effectively requiring the Company to redeem certain New Preferred. In addition, the Company had certain restricted cash balances available, which pursuant 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. 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.

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

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

July 2004	$	2,478	$	512	$	2,990	54,361
February 2004	2,599		2,677		5,276		95,932
October 2003	4,650		1,594		6,244		113,530
January 2003	5,233		8,913		14,146		257,200

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

9. New Common Stock

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

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

Holders of Allowed Class 5 Equity Interests received their pro rata portion of New Common representing 15% of the aggregate amount of New Common to be outstanding following distributions to holders of Allowed Class 4 Claims and Allowed Class 5 Equity Interests. This outcome was accomplished by issuing to each holder of an Allowed Class 5 Equity Interest its pro rata portion of the number of shares of New Common that represents 17.65% of the total number of shares of New Common issued from time to time to holders of Allowed Class 4 Claims.

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

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estimate.

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

10. Leases

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

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

The total rental expense for all operating leases was $118,000 and $133,000 during the years ended December 31, 2004 and 2003.

11. Income Taxes

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

	2004			2003			2002
Income from continuing operations before income taxes and minority interests:
Domestic	$	9,110		$	11,028		$	29,165
Foreign	—			—			—
	$	9,110		$	11,028		$	29,165

(Expense) benefit for income taxes:
Federal:
Current	$	(2,941	)	$	(3,013	)	$	(243	)
Deferred	1,492			(1,228		)	(9,711		)
	(1,449		)	(4,241		)	(9,954		)

State:
Current	(462		)	(248		)	(121		)
Deferred	176			(338		)	(1,244		)
	(286		)	(586		)	(1,365		)

Foreign:
Current	—			—			—
Deferred	—			—			—
	$	(1,735	)	$	(4,827	)	(11,319		)

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

	2004			2003			2002

Income tax (expense) benefit computed at federal statutory tax rate	$	(3,189	)	$	(3,860	)	$	(10,208	)

Change in tax (expense) benefit from:
State income taxes	(343		)	(381		)	(886		)
Valuation allowance	—			—			—
Business meals and entertainment	(33		)	(27		)	(26		)
Restructuring costs	(1		)	—			(36		)
Penalties and fines	(4		)	(92		)	(32		)
Lobbying costs	(15		)	—			(72		)
Reversals and other	259			10			(59		)
Subsidiary and joint venture adjustments	2,310			—			—
Preferred Dividend	(719		)	(477		)	—
	1,454			(967		)	(1,111		)
	$	(1,735	)	$	(4,827	)	$	(11,319	)

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

	2004			2003

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

The ability to derive future benefit from some of the elements contributing to the net deferred tax liability at December 31, 2004 is dependent on the Company’s ability to generate sufficient taxable income prior to expiration. In the fourth quarter of 2002, the Company determined that in addition to the reduction of tax carryforwards due to the bankruptcy exception of Internal Revenue Code (IRC) Sec. 382, the tax basis of various assets also was required to be reduced. This created a deferred tax liability that would be due upon disposition of the assets. The Company believes that the results of its future operations will be sufficient to assure utilization of the tax benefits prior to expiration.

In December 2000, the Chapter 11 bankruptcy reorganization of the Company caused a change in control under IRC Sec. 382. In 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 included net operating losses and credits. The Company offset the reduction of the carryforwards with the valuation allowance previously established for those carryforwards.

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

12. Retiree Benefit Plans

Post Employment Benefit Plan: As of December 31, 2004 the Company is required to continue to fulfill the provisions of a previously curtailed plan which provides certain medical and dental benefits to a group of retirees. All of the benefit is fully covered by the Company’s self-insurance. In respect to the retirees covered by the medical and dental self-insured plan, the benefits are funded to an insurance company as participants’ insurance claims are reimbursed. In respect to the retirees covered by a death benefit, the benefits are funded directly by the Company.

F-16

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

	2004			2003

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

The net periodic postretirement benefit cost consists of the following:

	2004			2003			2002

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

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

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

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

13. Benefits and Compensation Plans

The Company sponsors a 401(k) Plan that allows employees to defer portions of their salary, subject to certain limitations. Total expense for this plan for the years ended December 31, 2004 and 2003 was $0 and $177,000, respectively.

14. Related party transactions

At December 31, 2004 and 2003, Kaiser Holdings had an outstanding receivable from Kaiser-Hill totaling $0 and $250,000 consisting of billings for contracted services.

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

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

15. Other Contingencies

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 and net assets comprising The Company. Additionally, the Company believes contingent liabilities may exist in the following areas:

F-17

Nova Hut

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.

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.

F-18

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. 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 shares of New Common, which would then comprise approximately 13.4% of the aggregate shares of New Common outstanding. The Company believes that issuing such a substantial number of additional shares of New Common could be expected to have a materially dilutive effect on the value of shares of New Common presently outstanding.

16. Selected Quarterly Financial Information (Unaudited)

For the year ended December 31, 2004:	Fourth Quarter			Third Quarter			Second Quarter			First Quarter

Revenues	524			512			—			—
Operating Income (Loss)	(1,043		)	(860		)	(1,816		)	(2,645		)
Income from continuing operations before income tax	2,583			3,109			2,149			1,269
Income (loss) from continuing operations	3,976			1,724			1,154			521
Net income (loss)	3,976			1,724			1,154			521
Net Income (Loss) Applicable to Common Shareholders	3,976			1,724			1,154			521

Basic and Diluted Earnings (Loss) Per Common Share:
Continuing operations, net of tax	$	2.49		$	1.08		$	0.72		$	0.33
Net Earnings (Loss) Per Common Share	$	2.49		$	1.08		$	0.72		$	0.33

F-19

For the year ended December 31, 2003:	Fourth Quarter			Third Quarter			Second Quarter			First Quarter

Operating Income (Loss)	69			(2,094		)	(1,447		)	(1,446		)
Income from continuing operations before income tax	3,330			1,509			3,027			3,162
Income (loss) from continuing operations	1,799			617			1,866			1,919
Income (Loss) from Discontinued Operations, net of tax	(1,833		)	—			—			—
Net income (loss)	(34		)	617			1,866			1,919
Preferred stock dividends	—			—			(702		)	(832		)
Net Income (Loss) Applicable to Common Shareholders	(34		)	617			1,164			1,087

Basic and Diluted Earnings (Loss) Per Common Share:
Continuing operations, net of tax	$	1.12		$	0.39		$	0.73		$	0.68
Discontinued operations, net of tax	(1.14		)	—			—			—
Net Earnings (Loss) Per Common Share	$	(0.02	)	$	0.39		$	0.73		$	0.68

For the year ended December 31, 2002:	Fourth Quarter			Third Quarter			Second Quarter			First Quarter

Operating Income (Loss)	(24		)	(1,735		)	(2,641		)	(2,628		)
Income (loss) from continuing operations before income tax	22,784			4,259			876			1,246
Income (loss) from continuing operations	13,867			2,783			497			699
Income (Loss) from Discontinued Operations, net of tax	694			—			(127		)	(70		)
Net income (loss)	14,561			2,783			370			629
Preferred stock dividends	(982		)	(1,017		)	(1,094		)	(1,078		)
Net Income (Loss) Applicable to Common Shareholders	13,579			1,766			(724		)	(449		)

Basic and Diluted Earnings (Loss) Per Common Share:
Continuing operations, net of tax	$	8.11		$	1.11		$	(0.38	)	$	(0.24	)
Discontinued operations, net of tax	0.43			—			(0.08		)	(0.04		)
Net Earnings (Loss) Per Common Share	$	8.54		$	1.11		$	(0.46	)	$	(0.28	)

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

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

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

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

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

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

F-20

KAISER-HILL COMPANY, LLC

AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2004 and 2003

(Amounts in thousands of dollars)

	2004		2003
Assets

Current assets:
Cash and cash equivalents	$	14,740	16,713
Current portion of unbilled contract receivables	101,327		99,956
Receivable from Members	1,483		566
Due from employees	3		—
Prepaid expenses and other current assets	458		479

Total current assets	118,011		117,714

Unbilled contract receivables, net of current portion	131,768		113,781
Prepaid expenses, long-term	376		752
Deferred financing costs, net of accumulated amortization of $445 and $357, respectively	80		168
	$	250,235	232,415

Liabilities and Members’ Equity

Current liabilities:
Accounts payable and payables to subcontractors	$	83,667	81,198
Current portion of employee incentive plan	11,031		12,167
Accrued vacation	9,806		10,550
Accrued salaries and employee benefits	6,541		6,807
Payable to Members	2,564		1,214
Total current liabilities	113,609		111,936

Employee incentive plan, net of current portion	66,134		55,647
	179,743		167,583
Members’ equity	70,492		64,832

Contingencies (note 7)

	$	250,235	232,415

See accompanying notes to consolidated financial statements.

F-23

KAISER-HILL COMPANY, LLC

AND SUBSIDIARY

Consolidated Statements of Income

Years ended December 31, 2004, 2003, and 2002

(Amounts in thousands of dollars)

	2004			2003		2002

Gross revenue	$	651,851		712,270		732,718
Subcontractor costs and direct material costs	(377,649		)	(379,215	)	(367,355	)

Service revenue	274,202			333,055		365,363

Direct cost of service and overhead	(233,574		)	(293,056	)	(291,986	)

Operating income	40,628			39,999		73,377

Other income (expense):
Interest income	132			113		232
Interest expense	(100		)	(114	)	(95	)

Net income	$	40,660		39,998		73,514

See accompanying notes to consolidated financial statements.

F-24

KAISER-HILL COMPANY, LLC

AND SUBSIDIARY

Consolidated Statements of Members’ Equity

Years ended December 31, 2004, 2003, and 2002

(Amounts in thousands of dollars)

	Kaiser KH Holdings, Inc.			CH2M HILL Constructors, Inc.		Total
Members’ equity, December 31, 2001	$	7,660		7,660		15,320

Net income	36,757			36,757		73,514
Distributions	(15,650		)	(15,650	)	(31,300	)
Members’ equity, December 31, 2002	28,767			28,767		57,534

Net income	19,999			19,999		39,998
Distributions	(16,350		)	(16,350	)	(32,700	)
Members’ equity, December 31, 2003	32,416			32,416		64,832

Net income	20,330			20,330		40,660
Distributions	(17,500		)	(17,500	)	(35,000	)
Members’ equity, December 31, 2004	$	35,246		35,246		70,492

See accompanying notes to consolidated financial statements.

F-25

KAISER-HILL COMPANY, LLC

AND SUBSIDIARY

Consolidated Statements of Cash Flows

Years ended December 31, 2004, 2003, and 2002

(Amounts in thousands of dollars)

	2004			2003		2002
Cash flows from operating activities:
Net income	$	40,660		39,998		73,514
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization	88			86		88
Changes in assets and liabilities:
Increase in contract receivables	(19,358		)	(37,927	)	(44,331	)
(Increase) decrease in receivable from Members	(917		)	3,050		(2,424	)
(Increase) decrease in due from employees	(3		)	51		63
Decrease (increase) in prepaids and other current assets	21			(29	)	1,664
Decrease (increase) in long-term prepaids	376			376		(1,128	)
Increase (decrease) in accounts payable and payables to subcontractors	2,469			6,282		(19,792	)
Increase in employee incentive plan	9,351			28,576		17,138
(Decrease) increase in other accrued expenses	(1,010		)	(3,852	)	848
Increase (decrease) in payable to Members	1,350			(3,269	)	2,283

Net cash provided by operating activities	33,027			33,342		27,923

Cash flows from financing activities:
Distributions to Members	(35,000		)	(32,700	)	(31,300	)
Proceeds from credit facility	81,100			71,300		37,700
Payments on credit facility	(81,100		)	(71,300	)	(37,700	)

Net cash used in financing activities	(35,000		)	(32,700	)	(31,300	)

Net (decrease) increase in cash and cash equivalents	(1,973		)	642		(3,377	)

Cash and cash equivalents, beginning of year	16,713			16,071		19,448

Cash and cash equivalents, end of year	$	14,740		16,713		16,071

Supplemental cash flow information:
Cash paid for interest	$	12		26		7

See accompanying notes to consolidated financial statements.

F-26

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

(in thousands)

Column A	Column B		Column C		Column D			Column E			Column F
Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses		Other			Deductions			Balance at the End of Period

Year Ended December 31, 2004 Deducted from asset account:
Allowance for doubtful accounts	$	548	$	—	$	—		$	—		$	548

Discontinued operations	23,595		—		—			(547		)	$	23,048

	$	24,143	$	—	$	—		$	(547	)	$	23,596

Year Ended December 31, 2003 Deducted from asset account:
Allowance for doubtful accounts	$	548	$	—	$	—		$	—		$	548

Discontinued operations	17,253		3,000		3,342		(1)	—			$	23,595

	$	17,801	$	3,000	$	3,342		$	—		$	24,143

Year Ended December 31, 2002 Deducted from asset account:
Allowance for doubtful accounts	$	—	$	—	$	548	(1)	$	—		$	548

Discontinued operations	20,105		—		—			(2,852		)	$	17,253

	$	20,105	$	—	$	548		$	(2,852	)	$	17,801

(1) Reflects reclassified additions to reserves.

S-2

	PART I

Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders

	PART II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6.	Selected Consolidated Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Information about Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A.	Controls and Procedures
Item 9B.	Other Information

	PART III

Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accounting Fees and Services

	PART IV

Item 15.	Exhibits and Financial Statement Schedules

	Signatures

SECURITIES AND EXCHANGE COMMISSION

Item 2. Properties

Item 3. Legal Proceedings

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

Item 6. Selected Consolidated Financial Data

Item 15. Exhibits and Financial Statement Schedules

KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES

Report of Independent Accountants on

Financial Statement Schedule