-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PY/VrGKRzTXLQ8dObKCSwpjlJhPgdQ3qz0hRYeAzPeWQObPB1fQJckUkNJCBPXUw OB7te53QJ1OVpy9cloylvw== 0000898430-97-001382.txt : 19970404 0000898430-97-001382.hdr.sgml : 19970404 ACCESSION NUMBER: 0000898430-97-001382 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970403 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAISER VENTURES INC CENTRAL INDEX KEY: 0000729365 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] IRS NUMBER: 940594733 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-18858 FILM NUMBER: 97574146 BUSINESS ADDRESS: STREET 1: 3633 E INLAND EMPIRE BLBD STREET 2: STE 850 CITY: ONTARIO STATE: CA ZIP: 91764-4922 BUSINESS PHONE: 9094838500 MAIL ADDRESS: STREET 1: 3633 E INLAND EMPIRE BLVD STREET 2: STE 850 CITY: ONTARIO STATE: CA ZIP: 91764-4922 FORMER COMPANY: FORMER CONFORMED NAME: KAISER RESOURCES INC DATE OF NAME CHANGE: 19931101 FORMER COMPANY: FORMER CONFORMED NAME: KAISER STEEL RESOURCES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: KAISER STEEL CORP/DE/NEW DATE OF NAME CHANGE: 19881130 10-K405/A 1 FORM 10-K/A, AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K/A NO. 1 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-18858 KAISER VENTURES INC. (Exact name of registrant as specified in its charter) DELAWARE 94-0594733 --------------------- ----------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization Identification No.) 3633 E. INLAND EMPIRE BLVD. SUITE 850 ONTARIO, CA 91764 ----------------------------------------- (Address of principal executive offices and zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (909)483-8500 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK ($.03 PAR VALUE) ----------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained to the best of 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. Yes X No ---------- -------- At March 17, 1997, the aggregate market value of the registrant's Common Stock, $.03 par value, held by non-affiliates of the registrant was $45,983,000. 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 X No --- --- At March 17, 1997, 10,542,548 shares of the registrant's Common Stock, $.03 par value, were outstanding, including 136,919 shares deemed outstanding but reserved for issuance to the general unsecured creditors of Kaiser Steel Corporation. DOCUMENTS INCORPORATED BY REFERENCE: The Company's Proxy Statement for the 1997 Annual Meeting of Stockholders is incorporated into Part III of this Form 10-K. 1. Amendment to Management's Discussion and Analysis of Financial Condition and Results of Operations - Part II, Item 7. Certain references in Management's Discussion and Analysis of Financial Condition and Results of Operations to "joint venture" revenues or income should be more properly called revenues or income from "equity method investments." To correct such references, Management's Discussion and Analysis of Financial Condition and Results of Operations is hereby amended to read as follows: ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECTION 1: OPERATING RESULTS Kaiser Ventures Inc. ("Kaiser" or the "Company") is an emerging asset development company pursuing project opportunities and investments in activities related to water resources, motorsports, property redevelopment and solid waste management. The Company's long-term emphasis is on the further development of its principal assets: (i) a 50.88% interest in Fontana Union Water Company ("Fontana Union"), a mutual water company; (ii) a 12.29% interest in Penske Motorsports, Inc. ("PMI"), a publicly-traded professional motorsports company that has developed the California Speedway ("TCS") on land acquired from the Company; (iii) approximately a 73% interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle Mountain Landfill Project (the "Landfill Project"); (iv) approximately 668 acres of the former Kaiser Steel Corporation ("KSC") steel mill site (the "Mill Site Property"); and (v) the 11,350 acre idle iron ore mine in the California desert (the "Eagle Mountain Site"), which includes the associated 460 acre town of Eagle Mountain ("Eagle Mountain Townsite") and the land leased to MRC for the Landfill Project. The Company is also pursuing other related longer-term growth opportunities on the balance of its Mill Site Property, including the development of a transfer station and materials recovery facility ("Mill Site MRF") and the redevelopment of industrial and commercial parcels of land near TCS and the Mill Site MRF. PRIMARY REVENUE SOURCES ONGOING OPERATIONS The Company's revenues from ongoing operations are generally derived from the development of the Company's long-term projects. Revenues from water resources represent payments under the lease of the Company's interest in Fontana Union to Cucamonga County Water District ("Cucamonga"). Property redevelopment revenues primarily reflect revenues from long-term redevelopment activities at the Mill Site property; housing rental income, aggregate rock sales and lease payments for the minimum security prison at the Eagle Mountain Townsite; and royalty revenues from iron ore shipments from the Company's iron ore mine in California (the "Silver Lake Mine"). Income from equity method investments reflect Kaiser's share of income related to those equity investments (primarily PMI) and joint ventures which the Company accounts for under the equity method. Prior to 1995, waste management revenues reflected the minimum lease payments under MRC's 100-year lease in connection with the Landfill Project. INTERIM ACTIVITIES Revenues from interim activities are generated from various sources primarily related to the Mill Site Property. Significant components of interim activities include rentals under short-term tenant lease arrangements, royalty revenues from the sale of slag to outside contractors, water and wastewater treatment 1 service revenues, revenues from the sale of recyclable materials and other miscellaneous short-term activities. SUMMARY OF REVENUE SOURCES Due to the development nature of certain Company projects and the Company's recognition of revenues from bankruptcy-related and other non-recurring items, historical period-to-period comparisons of total revenues may not be meaningful for developing an overall understanding of the Company. Therefore, the Company believes it is important to evaluate the trends in the components of its revenues as well as the recent developments regarding its long-term ongoing and interim revenue sources. See "Part I, Item 1. Business" for a discussion of recent material events affecting the Company's revenue sources. In addition, due to the concentration of motorsport racing events between April and September, PMI's operations have been, and will continue to be, highly seasonal. Except for one event week-end in October, 1997 at TCS, PMI has no current plans to host events in the first and fourth quarters at its existing facilities. As a result, the Company's reported share of undistributed equity in the earnings of PMI will likely be positive (income) in the second and third quarters and negative (loss) in the first and fourth quarters. RESULTS OF OPERATIONS ANALYSIS OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 An analysis of the significant components of the Company's resource revenues for the years ended December 31, 1996 and 1995 follows:
1996 1995 % Inc. (Dec) ---- ---- ------------ ONGOING OPERATIONS Water resource ........................ $ 4,505,000 $ 4,974,000 (9%) Property redevelopment ................ 1,120,000 998,000 12% Income from equity method investments . 1,539,000 162,000 850% Mill Site land sale ................... 6,371,000 -- -- ----------- ----------- ----------- TOTAL ONGOING OPERATIONS ............ 13,535,000 6,134,000 121% ----------- ----------- ----------- INTERIM ACTIVITIES Lease, service and other .............. 1,879,000 2,774,000 (32%) Asset sales ........................... -- 2,200,000 (100%) ----------- ----------- ----------- TOTAL INTERIM ACTIVITIES ............ 1,879,000 4,974,000 (62%) ----------- ----------- ----------- TOTAL RESOURCE REVENUES ............. $15,414,000 $11,108,000 39% =========== =========== =========== REVENUES AS A PERCENTAGE OF TOTAL RESOURCE REVENUES: Ongoing operations .................... 88% 55% Interim activities .................... 12% 45% ----------- ----------- TOTAL RESOURCE REVENUES ............. 100% 100% =========== ===========
Resource Revenues. Total resource revenues for 1996 were $15,414,000, compared to $11,108,000 for 1995. Revenues from ongoing operations increased 121% during the year to $13,535,000 from $6,134,000 in 1995, while revenues from interim activities declined 62% to $1,879,000 from $4,974,000 in 2 1995. Revenues from ongoing operations as a percentage of total revenues increased to 88% in 1996 from 55% in 1995; however, excluding both the Mill Site land sale in 1996 and the gain on sale of water rights to CSI in 1995, ongoing operations represented 79% and 69% of total revenues in 1996 and 1995, respectively. Ongoing Operations. Water lease revenues under the Company's 102-year take-or-pay lease with Cucamonga were $4,505,000 during 1996 compared to $4,974,000 for 1995. The 9% decrease in water revenues during the year reflects: (a) a reduction affecting all parties under the Colton/Rialto Basin judgment, in the amount of water that Cucamonga (through Fontana Union) can draw from the Colton/Rialto Basin due to low water levels ($269,000); and (b) a likely non-recurring reduction in the Chino Basin agricultural pool transfer relating to increased agricultural usage and the overstatement of estimates in prior years ($201,000). As previously disclosed, Metropolitan Water District of Southern California ("MWD"), effective July 1, 1995, implemented changed rates and a changed rate structure which resulted in the continuing lease interpretation dispute with Cucamonga regarding the extent of the MWD rate increases. Although the Company is continuing to bill Cucamonga at what it believes is the correct MWD rate under the lease with Cucamonga, the Company has elected to reserve the full amount in dispute and report revenues on the basis of amounts actually received from Cucamonga. The total amount of lease payments in dispute as of December 31, 1996 is approximately $748,000. In addition, MWD has stated that it may further refine its rate structure in the near future. Property redevelopment revenues were $1,120,000 for 1996 compared to $998,000 for 1995. The 12% increase from 1995 is primarily as a result of higher iron ore sales from one of the Company's California mines which more than offset reductions in tenant rental income at Eagle Mountain. Mill Site land sale revenues represents the sale of approximately 54.2 net acres of the Mill Site Property, known as the Speedway Business Park, to PMI for $5.0 million in cash and approximately $8.35 million, or 254,298 shares, of PMI common stock. The transaction closed in December 1996. As a result of the transaction, Kaiser increased its ownership of PMI to 1,627,900 shares or approximately 12.29%. Income from equity method investments increased to $1,539,000 for 1996 compared to $162,000 for 1995 as a result of an increase in the amount of project service fees paid by PMI ($488,000) plus the Company's 12.29% (10.56% through November 30, 1996) share of PMI's net income, net of expenses, from April 1, 1996 ($889,000). The Company is recording its investment in PMI on the equity method and began recording its share of PMI's net income concurrent with conversion of the Company's preferred stock into common stock at the end of the first quarter of 1996. Interim Activities. Revenues from interim activities for 1996 were $1,879,000 compared to $4,974,000 for 1995. As noted above, the 62% decrease in revenues from interim activities in 1996 is primarily attributable to the non-recurring $2.2 million gain on the sale of water rights to CSI recorded in 1995; lower slag and scrap revenues ($156,000); service revenues under the amended Services Agreement with CSI ($185,000) and lower miscellaneous revenues ($347,000). It is anticipated that in 1997, these revenues will continue to decline due to the continuing redevelopment of the Mill Site Property. Resource Operating Costs. Resource operating costs are those costs directly related to the resource revenue sources. Total resource operating costs for 1996 declined to $3,312,000 from $3,792,000 in 1995. Operations and maintenance costs for 1996 were $1,092,000 compared to $1,496,000 for 1995. The 27% decrease in 1996 operations and maintenance costs was primarily due to lower expenses associated with the reduced levels of services being provided to CSI and lower property taxes associated with the portion of the Mill Site Property that was contributed to PMI for the development of the TCS. Administrative support 3 expenses for 1996 decreased 3% to $2,220,000 from $2,296,000 for 1995. The decrease was primarily due to lower outside professional costs and lower depreciation expense. Corporate General and Administrative Expenses. Corporate general and administrative expenses for 1996 decreased 9% to $3,837,000 from $4,201,000 for 1995. The decrease was due primarily due to savings realized as a result of the departure of the Company's prior President & CEO at the end of 1995, and the subsequent management realignment. Net Interest Expense (Income). Net interest expense for 1996 was $819,000 compared to $665,000 in 1995. The increase was due primarily to the accelerated amortization of deferred loan fees associated with the Union Bank credit facility being offset by the capitalization of interest expense associated with the development of certain parcels of the Mill Site Property and higher interest income. Income and Income Tax Provision. The Company recorded income before income tax provision of $7,446,000 for 1996, a 204% increase from the $2,450,000 recorded in 1995. A provision for income taxes of $4,877,000 was recorded in 1996 as compared with $1,056,000 in 1995. Over 90% of the tax provisions for 1996 and 1995 are not currently payable due primarily to utilization of the Company's net operating loss carryforwards ("NOL's"). Consequently, pretax income is an important indicator of the Company's performance. Net Income. For 1996, the Company reported net income after extraordinary items of $2,569,000, or $.24 per share, a 84% increase from the $1,394,000, or $.13 per share, reported for 1995. ANALYSIS OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 An analysis of the significant components of the Company's resource revenues for the years ended December 31, 1995 and 1994 follows:
1995 1994 % INC. (DEC) ----------- ----------- ----------- ONGOING OPERATIONS Water resource ........................ $ 4,974,000 $ 4,820,000 3% Property redevelopment ................ 998,000 1,052,000 (5%) Income from equity method investments . 162,000 -- -- Waste management ...................... -- 2,400,000 (100%) ----------- ----------- ----------- TOTAL ONGOING OPERATIONS ............ 6,134,000 8,272,000 (26%) ----------- ----------- ----------- INTERIM ACTIVITIES Lease, service and other .............. 2,774,000 4,199,000 (34%) Asset sales ........................... 2,200,000 -- -- ----------- ----------- ----------- TOTAL INTERIM ACTIVITIES ............ 4,974,000 4,199,000 18% ----------- ----------- ----------- TOTAL RESOURCE REVENUES ............. $11,108,000 $12,471,000 (11%) =========== =========== =========== REVENUES AS A PERCENTAGE OF TOTAL RESOURCE REVENUES: Ongoing operations .................... 55% 66% Interim activities .................... 45% 34% ----------- ----------- TOTAL RESOURCE REVENUES ............. 100% 100% =========== ===========
4 Resource Revenues. Total resource revenues for 1995 were $11,108,000, compared to $12,471,000 for 1994. Revenues from ongoing operations declined 26% during the year to $6,134,000 from $8,272,000 in 1994, while revenues from interim activities increased 18% to $4,974,000 from $4,199,000 in 1994. Revenues from ongoing operations as a percentage of total revenues decreased to 55% in 1995 from 66% in 1994; however, excluding the non-recurring gain on the sale of water rights to CSI, ongoing operations represented 69% of total revenues. Ongoing Operations. Water lease revenues under the Company's lease with Cucamonga were $4,974,000 during 1995 compared to $4,820,000 for 1994. The 3% increase in water revenues during the year reflects the July, 1995, 5.1% increase in water rates of The Metropolitan Water District of Southern California ("MWD") offset by a small decline, from 56.11% in 1994 to 55.53% in 1995, in the Company's effective interest in Fontana Union. The total amount of lease payments in dispute as of December 31, 1995 was approximately $80,000. Property redevelopment revenues were $998,000 for 1995 compared to $1,052,000 for 1994. The 5% reduction from 1994 primarily represents lower aggregate and rocks sale revenues at Eagle Mountain. Income from equity method investments increased to $162,000 as a result of the initial project service fees paid by PMI. There were no waste management revenues during 1995 compared to $2,400,000 in 1994 as a result of the Company's acquisition of a 70% equity interest in MRC effective January 1, 1995, and the elimination of MRC's minimum monthly rent payments to the Company. Elimination of the maximum monthly rent payments will not, however, affect the payments due the Company upon the commencement of landfill operations. Interim Activities. Revenues from interim activities for 1995 were $4,974,000 compared to $4,199,000 for 1994. As noted above, the 18% increase in revenues from interim activities in 1995 is primarily attributable to the $2.2 million gain on the sale of water rights to CSI being partially offset by lower levels of service revenues under the amended Services Agreement with CSI ($1,457,000) and lower miscellaneous revenues ($276,000). Resource Operating Costs. As is noted above, resource operating costs are those costs directly related to the resource revenue sources. Total resource operating costs for 1995 declined to $3,792,000 from $5,163,000 in 1994. Operations and maintenance costs for 1995 were $1,496,000 compared to $1,970,000 for 1994. The 24% decrease in 1995 operations and maintenance costs was primarily due to lower expenses associated with the reduced levels of services being provided to CSI and lower property taxes at the Mill Site Property. Administrative support expenses for 1995 decreased 28% to $2,296,000 from $3,193,000 for 1994. The decrease was primarily due to non-recurring environmental cleanup costs in 1994 relating to two Mill Site tenants that went out of business and lower legal expenses. Corporate General and Administrative Expenses. Corporate general and administrative expenses for 1995 increased 22% to $4,201,000 from $3,430,000 for 1994. The increase was due primarily to expenses related to the departure of the Company's President and CEO and the resulting management realignment. Net Interest Expense (Income). Net interest expense for 1995 was $665,000, compared with net interest income of $155,000 in 1994. The fluctuation was due primarily to lower average cash balances on hand during 1995 and interest expense on the $6.0 million note issued as part of the purchase of properties from the Lusk Joint Ventures in July, 1994. 5 Income and Income Tax Provision. The Company recorded income before income tax provision of $2,450,000 for 1995, a 39% decrease from the $4,033,000 recorded in 1994. A provision for income taxes of $1,056,000 was recorded in 1995 as compared with $1,746,000 in 1994. Over 90% of the tax provisions for 1995 and 1994 are not currently payable due primarily to utilization of the Company's net operating loss carryforwards ("NOL's"). Income Before Extraordinary Loss. For 1995, the Company reported income before extraordinary loss of $1,394,000, or $.13 per share, a decrease of 39% from the $2,287,000, or $.21 per share, reported for 1994. UMWA Extraordinary Loss (Net of Taxes). As previously disclosed, the Company, together with Kaiser Coal and the KSC bankruptcy estate "(KSC Recovery"), settled all outstanding claims with the UMWA Combined Benefit Fund and 1992 Benefit Trust in 1994. The Company's share of the settlement was $3,788,000. As a result, for 1994 the Company recorded an extraordinary loss (net of taxes) of $2,233,000. Net Income. For 1995, the Company reported net income after extraordinary items of $1,394,000, or $.13 per share, a 25 fold increase from the $54,000, or $.01 per share, reported for 1994. COMPREHENSIVE INCOME The Financial Accounting Standards Board ("FASB") proposed, in 1996, a new accounting statement concerning the reporting of comprehensive income. Comprehensive income is defined as the aggregate of all changes in shareholder's equity that occurred during the reporting periods other than changes resulting from equity investments by or dividends and distributions to shareholders. The purpose of the FASB proposal, which has not been adopted by the FASB and is, therefore, not considered a generally accepted accounting principle, is to highlight and disclose all transactions that impact shareholders equity regardless of whether or not they flow through the consolidated income statement. Comprehensive income, which should not be used as a replacement for net income, is a very meaningful performance measure for Kaiser because of the amount of deferred tax expense credited directly to equity caused by the Company's NOL carryforwards and because of the impact of other transactions such as the increase in equity due to the 1996 PMI public offering. Comprehensive income and comprehensive income per share for the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ---- ---- ---- Net Income ....................................... $ 2,569,000 $ 1,394,000 $ 54,000 Deferred tax expense credited to equity .......... 3,945,000 335,000 38,000 Increase in investment in Penske Motorsports, Inc. 6,116,000 -- -- ----------- ----------- ----------- Comprehensive income ............................. 12,630,000 1,729,000 92,000 =========== =========== =========== Comprehensive income per share ................... $ 1.18 $ .16 $ .01 =========== =========== =========== Net Earning per share ............................ $ .24 $ .13 $ .01 =========== =========== ===========
SECTION 2: FINANCIAL POSITION Cash, Cash Equivalents and Short-Term Investments. The Company defines cash equivalents as highly liquid debt instruments with original maturities of 90 days or less. Cash and cash equivalents decreased $2,455,000 to $8,482,000 at December 31, 1996 from $10,937,000 at December 31, 1995. Included in cash and cash equivalents is $1,766,000 and $2,309,000 held solely for the benefit of MRC at December 31, 1996 and 1995, respectively. The decrease in cash and cash equivalents is due primarily to 6 the $9,273,000 in capital expenditures and $6,595,000 in environmental remediation, incurred in 1996 being offset by: (a) $5.0 million in cash from the sale of the Speedway Business Park Property to PMI; (b) net cash proceeds of approximately $3,400,000 from the 1995 CSI and environmental insurance settlements; and (c) $3,000,000 of new borrowings under the Union Bank credit facility. Working Capital. During 1996, current assets decreased $8,811,000 to $11,818,000 while current liabilities decreased $4,750,000 to $13,058,000. The decrease in current assets resulted primarily from the $2,455,000 decrease in cash and cash equivalents, discussed above, plus a $6,356,000 decline in accounts receivable due primarily to the receipt of over $6,000,000 in gross proceeds from the CSI and environmental insurance settlements. The decrease in current liabilities resulted primarily from payments under terms of the CSI Settlement Agreement, and attorney fees arising from the Company's environmental insurance litigation settlement. Current liabilities at December 31, 1996, and 1995 include $1,616,000 and $1,608,000, respectively, in accounts payable and accrued liabilities relating to MRC. As a result, working capital decreased during 1996 by $4,0612,000 to a negative $1,240,000 at December 31, 1996. Real Estate. Real Estate decreased $3.2 million during 1996 primarily because of the sale of Speedway Business Park to PMI in December being partially offset by the development expenditures incurred during 1996. Investments. The increase in investment in PMI is primarily related to the increase in the equity investment in PMI as a result of PMI's initial public offering in March 1996 ($6,513,000); the Company's recording of its share of equity in PMI's undistributed earnings subsequent to the public offering in March ($889,000), and the sale of Speedway Business Park to PMI for cash and $8,352,000 in common stock in PMI in December, 1996. As a result of the initial public offering, the Company increased its recorded investment in PMI, by approximately $6.5 million, to reflect its diluted share of the increase in shareholders equity of PMI that was generated by the public offering. The Company also recorded corresponding increases in deferred income taxes and stockholders equity of approximately $400,000 and $6.1 million, respectively. Other Assets. The increase in other assets is primarily related to approximately $4.0 million of capitalized landfill permitting and development costs for MRC being partially offset by the amortization of deferred loan fees relating to the Union Bank Credit Facility. Environmental Remediation. As is discussed extensively in Part I, "Property Redevelopment, Mill Site Environmental", the Company estimates, based upon current information, that its future remediation and other environmental costs for the balance of its land and related matters, including groundwater and other possible third party claims, will be between approximately $20 million and $32 million, depending both upon the ultimate extent of the environmental remediation and clean-up effort involved and which approved remediation alternatives are eventually selected. In order to provide better information regarding these future remediation and other environmental costs, the Company has elected to restate its balance sheets to show as a separate liability rather than, as previously, an offset to land, the amount of future environmental related costs reflected in its financial statements. The restatement reflects the original $34.7 million remediation adjustment to land; the $6.6 million groundwater remediation reserve recorded in 1988 when the Company emerged from bankruptcy as the reorganized successor of KSC; and the net $12.5 million in environmental insurance litigation settlement proceeds received in 1995 being offset by approximately $21.6 million in remediation and other environmental costs expended through December 31, 1996. The Company's decision to restate its balance sheet is based upon, among other things, the more extensive investigation and remediation activities that have been pursued over the past two years and the Company's ability to better estimate the probable range of future remediation and other environmental costs. 7 As of December 31, 1996, the total short-term and long-term environmental liabilities including remediation reflected on the Company's balance sheet was approximately $32.2 million, the high end of the probable range of future remediation and other environmental costs, which declined from the $39.4 million as of December 31, 1995. The decrease is a result, primarily, of the $7.2 million in remediation and other environmental costs incurred in 1996 on the Mill Site property. Although ongoing environmental investigations are being conducted on the Mill Site Property and management believes it is currently in a position to estimate with some reasonable certainty future investigation and remediation costs, there can be no assurance that the actual amount of environmental remediation expenditures to be incurred will not substantially exceed those currently anticipated or that additional areas of contamination may not be identified. Accordingly, future facts and circumstances could cause these estimates to change significantly. Long-term Debt. As of December 31, 1996, the Company had $8,102,000 in long-term debt comprised of $5,102,000 of debt issued as part of the purchase of properties from the Lusk Joint Ventures in July 1994 and $3.0 million borrowed under the $20,000,000 revolving-to-term credit facility with Union Bank. Long-term Liabilities. The increase in other long-term liabilities is primarily due to $1,237,000 in other additional deferred tax liabilities recorded during 1996. Minority Interest and Other Liabilities. As of December 31, 1996, the Company has recorded $1,618,000 of minority interest relating to MRC in which the Company had approximately a 73% equity interest. Contingent Liabilities. The Company has contingent liabilities more fully described in the notes to the financial statements. SECTION 3: BUSINESS OUTLOOK The statements contained in this Business Outlook are based upon current expectations. In addition to the forward-looking statements and information contained elsewhere in this 10-K Report, these statements are forward-looking and, therefore, actual results may differ materially. On-Going Operations. As noted above, the Company's revenues from ongoing operations are generally derived from the development of the Company's major long-term projects and investments. The development of a number of these projects and investments, such as the 102-year take-or-pay lease with Cucamonga and the 12.29% equity ownership in PMI, are essentially complete and the Company is recognizing significant revenues and income from these investments. The Company expects revenues from these projects and investments to increase moderately over time as certain key economic factors impacting these projects and investments increase. In regard to the lease with Cucamonga, the most significant economic factor affecting future water lease revenues is likely to be adjustments in the MWD rate for untreated and non-interruptible water as available through the Chino Basin Municipal Water District (the "Lease Rate") upon which the lease payments are calculated. The MWD rate established for untreated, non-interruptible water is based on a number of factors, including MWD's need for funds to finance capital improvements and to cover large fixed overhead costs. After increasing at an average of over 9.0% per year during the past 35 years, MWD is projecting that the MWD rate for untreated, non-interruptible water, including all of the changed rates and charges implemented by MWD since July 1, 1995, will likely increase at less than 5.0% per year 8 for the next 3-5 years. This reduction is due to a reduced capital budget, lower overhead, lower borrowing costs and reduced levels of inflation. Also affecting the Company's future water lease revenues is the dispute with Cucamonga regarding the calculation of the Lease Rate. A ruling in favor of the Company would result in the receipt of all or a portion of the $748,000 of lease payments in dispute as of December 31, 1996, which the Company has fully reserved. In regard to the Company's 12.29% investment in PMI, the most significant factors affecting the Company's future equity income from PMI will be the increased revenues and net income generated by PMI from the expansion of its professional motorsports operations. Critical to this expansion is the successful startup of the TCS that is on land acquired from the Company. Construction of TCS is virtually completed and it will hold its first major races, the International Race of Champions and a NASCAR Winston West series race on June 21, 1997, followed by the "NAPA 500" NASCAR Winston Cup race, on June 22, 1997. Three other major events, the "Marlboro 500" CART PPG World Series Event on September 28, 1997 and a NASCAR Busch Series race on October 17, 1997, and a Sears Craftsman Truck Series on October 18, 1997, are also scheduled. The success of these events, coupled with the results of the other ten major racing events schedule for PMI's MIS and Nazareth speedways and PMI's other motorsports related operations, will determine the amount of income from equity method investments the Company reports in the future. The Company is also spending a significant amount of capital in the continued development of its two other major project and investment opportunities: the redevelopment of the remaining approximately 668 acres (gross) of the Company's Mill Site Property and the re-permitting of the Eagle Mountain Landfill by MRC, the Company's 73% owned subsidiary. If it is successful in completing the development of these two projects as planned, the Company expects to generate significant future revenues and net income from them. However, as is noted elsewhere in this Report, there are also numerous risks associated with completing the re-permitting of the Eagle Mountain Landfill and the redevelopment of the remaining Mill Site Property that could materially impact the Company's future revenues and net income from these projects. In regard to the redevelopment of the remaining approximately 668 acres (gross) of the Mill Site Property, the Company is currently undertaking efforts to obtain the entitlement and permits necessary to develop the remaining 668 acres for a variety of possible commercial, industrial and recreational uses. These efforts, which will continue throughout 1997 and into 1998, include the approval of possible changes that would alter and improve the existing access to portions of the Mill Site Property. In support of these efforts, the Company expects to spend, in 1997, up to approximately $7.0 million for required environmental remediation and approximately $3.5 million for real estate entitlement and improvement expenditures. The $7.0 million to be spent in 1997 for required environmental remediation is a component of the $20-32 million estimate to complete all remaining required remediation for the Mill Site Property. In addition, substantial capital expenditures beyond the $3.5 million projected for 1997 will be required to complete the necessary on-site and off-site improvements for the redevelopment of remaining Mill Site property. In regard to the Eagle Mountain Landfill, MRC continues to pursue the activities necessary to re-permit the Landfill Project. The final EIR/EIS has been completed and released and is being reviewed by the Riverside County Planning Commission. Once the Planning Commission completes its review, it will forward the EIR/EIS with its recommendations to the Riverside County Board of Supervisors. The Company expects that the Supervisors will act on the Landfill Project during the middle of 1997; however, there are a number of issues and actions that could delay such action. In addition, even if the Supervisors approve the Landfill Project, the Company anticipates further litigation by the opponents to the Landfill Project in state and federal court in an effort to block the Landfill Project. The Company expects to spend 9 approximately $3.7 million for support of MRC's landfill re-permitting efforts in 1997 and approximately an additional $1.9 million in 1998. Capital Resources. The Company expects that its current cash balances and short-term investments together with: (a) cash provided from operating activities; (b) amounts available under its revolving-to-term credit facility which was increased from $20,000,000 to $30,000,000 subsequent to December 31, 1996 (less $2,832,000 in reductions in the borrowing base and $5,505,000 reserved for financial assurances required by the DTSC and relating to environmental remediation on the Mill Site Property) will be sufficient to satisfy both the Company's near-term operating cash requirements and to enable the Company to continue to fund the development of its long-term projects and investments. As was discussed in more detail above, the Company expects to commit, in 1997, a total of approximately $14.2 million for capital projects and investments. To the extent that additional capital resources are required, such capital will be raised through bank borrowings, partnerships, joint venture arrangements, additional equity or the sales or monetization of assets. Improved Cash Flow from Use of Net Operating Loss Tax Carryforwards. Due to the Company's status as successor to KSC and its use of KSC-related NOLs, income taxes actually paid by the Company are substantially less than the income tax provision reported in its financial statements. The tax benefit associated with the utilization of these NOLs is reflected as an increase to stockholders' equity rather than as an increase to net income. The Company expects that its use of these NOLs will substantially reduce the cash paid for income taxes until these NOLs are fully utilized. The total NOLs at December 31, 1996, are estimated to be approximately $107,000,000 for federal purposes and $11,000,000 for California purposes. The federal NOLs expire in varying amounts over a period from year 2000 to 2010 while the California NOLs expire in year 1997 and 2000. If within a three-year period, 50% or more of the stock of the Company changes ownership, the future annual use of NOLs may be limited. The annual limitation would be calculated as the product of: (i) the highest long-term tax-exempt rate for a designated period prior to the ownership change; and (ii) the market value of the Company at such time. 10 2. Amendment to Financial Statements - Part II, Item 14. It has been determined that there was a misstatement of the amounts between the Real Estate categories of "Land and improvements" and "Real estate underdevelopment" on the Corporation's Consolidated Balance Sheets, although the total remains the same. In addition, a portion of Footnote 10. "Stockholders' Equity" to the Corporation's 1996 Financial Statements dealing with Stock Option and Stock Grant Programs was inadvertently deleted in connection with the electronic filing of the 10-K Report with the Securities and Exchange Commission on March 31, 1997. The full text of the amended financial statements together with notes follows: [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK] 11 REPORT OF INDEPENDENT AUDITORS ------------------------------ Board of Directors Kaiser Ventures Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Kaiser Ventures Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kaiser Ventures Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Riverside, California February 11, 1997 12 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
1996 1995 ---- ---- (As Restated) ASSETS Current Assets Cash and cash equivalents ......................... $ 8,482,000 $ 10,937,000 Accounts receivable and other, net of allowance for doubtful accounts of $1,034,000 and $494,000, respectively .................................... 3,217,000 3,330,000 CSI Settlement receivable ......................... -- 3,661,000 Insurance Settlement receivable ................... 119,000 2,701,000 ------------ ------------ 11,818,000 20,629,000 ------------ ------------ Investment in common stock of Penske Motorsports, Inc. (Fair market value of 1,627,923 shares equal to $41,512,000 as of December 31, 1996) ................ 38,863,000 22,991,000 ------------ ------------ Investment in Fontana Union Water Company .............. 16,108,000 16,108,000 ------------ ------------ Real Estate Land and improvements ............................. 52,116,000 50,902,000 Real estate under development ..................... 6,551,000 10,926,000 ------------ ------------ 58,667,000 61,828,000 ------------ ------------ Other Assets Landfill permitting and development ............... 5,645,000 1,660,000 Buildings and equipment (net) ..................... 2,210,000 2,433,000 Other assets and investments ...................... 756,000 1,154,000 ------------ ------------ 8,611,000 5,247,000 ------------ ------------ Total Assets ........................................... $134,067,000 $126,803,000 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 13 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
1996 1995 ---- ---- (As Restated) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable ................................. $ 2,936,000 $ 4,065,000 Accrued liabilities .............................. 4,125,000 6,268,000 Current portion of long-term debt ................ 240,000 240,000 Environmental remediation ........................ 5,757,000 7,235,000 ------------ ------------ 13,058,000 17,808,000 ------------ ------------ Long-term Liabilities Accrued liabilities .............................. 1,417,000 1,111,000 Deferred tax liabilities ......................... 1,958,000 721,000 Long-term debt ................................... 8,102,000 5,342,000 Environmental remediation ........................ 26,466,000 32,176,000 ------------ ------------ 37,943,000 39,350,000 ------------ ------------ Total Liabilities ...................................... 51,001,000 57,158,000 ------------ ------------ Minority Interest ...................................... 1,618,000 948,000 ------------ ------------ Commitments and Contingencies Stockholders' Equity Common stock, par value $.03 per share, authorized 13,333,333 shares; issued and outstanding 10,488,114 and 10,470,614 respectively ......... 315,000 314,000 Capital in excess of par value ................... 70,437,000 60,256,000 Retained earnings since November 15, 1988 ........ 10,696,000 8,127,000 ------------ ------------ Total Stockholders' Equity ............................. 81,448,000 68,697,000 ------------ ------------ Total Liabilities and Stockholders' Equity ............. $134,067,000 $126,803,000 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 14 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31
1996 1995 1994 ---- ---- ---- RESOURCE REVENUES Ongoing Operations Water resource ..................................... $ 4,505,000 $ 4,974,000 $ 4,820,000 Property redevelopment ............................. 1,120,000 998,000 1,052,000 Income from equity method investments .............. 1,539,000 162,000 -- Mill Site land sale ................................ 6,371,000 -- -- Waste management ................................... -- -- 2,400,000 ------------ ------------ ------------ Total ongoing operations ....................... 13,535,000 6,134,000 8,272,000 ------------ ------------ ------------ Interim Activities Lease, service and other ........................... 1,879,000 2,774,000 4,199,000 Asset sales ........................................ -- 2,200,000 -- ------------ ------------ ------------ Total interim activities ....................... 1,879,000 4,974,000 4,199,000 ------------ ------------ ------------ Total resource revenues ........................ 15,414,000 11,108,000 12,471,000 ------------ ------------ ------------ RESOURCE OPERATING COSTS Operations and maintenance ............................ 1,092,000 1,496,000 1,970,000 Administrative support expenses ....................... 2,220,000 2,296,000 3,193,000 ------------ ------------ ------------ Total resource operating costs ................. 3,312,000 3,792,000 5,163,000 ------------ ------------ ------------ INCOME FROM RESOURCES ................................... 12,102,000 7,316,000 7,308,000 Corporate general and administrative expenses ......... 3,837,000 4,201,000 3,430,000 ------------ ------------ ------------ INCOME FROM OPERATIONS .................................. 8,265,000 3,115,000 3,878,000 Net interest expense (income) ......................... 819,000 665,000 (155,000) ------------ ------------ ------------ INCOME BEFORE INCOME TAX PROVISION AND EXTRAORDINARY LOSS 7,446,000 2,450,000 4,033,000 Income tax provision Currently payable .................................. 92,000 -- 125,000 Deferred tax expense ............................... 840,000 721,000 -- Deferred tax expense credited to equity ............ 3,945,000 335,000 1,621,000 ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY LOSS ........................ 2,569,000 1,394,000 2,287,000 EXTRAORDINARY LOSS (NET OF INCOME TAXES OF $1,705,000) .. -- -- 2,233,000 ------------ ------------ ------------ NET INCOME .............................................. $ 2,569,000 $ 1,394,000 $ 54,000 ============ ============ ============ EARNINGS PER SHARE BEFORE EXTRAORDINARY LOSS ............ $ .24 $ .13 $ .21 ============ ============ ============ NET EARNINGS PER SHARE .................................. $ .24 $ .13 $ .01 ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ........... 10,716,032 10,671,665 10,671,154
The accompanying notes are an integral part of the consolidated financial statements. 15 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31
1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income ......................................... $ 2,569,000 $ 1,394,000 $ 54,000 Provision for income tax which is credited to equity 3,945,000 335,000 38,000 Equity income in Penske Motorsports, Inc. .......... (889,000) -- -- Deferred tax expense ............................... 840,000 721,000 -- Depreciation and amortization ...................... 952,000 436,000 430,000 Extraordinary loss (paid) accrued .................. -- (3,938,000) 3,938,000 Gain on sale of Speedway Business Park ............. (6,371,000) -- -- Gain from the CSI Settlement ....................... -- (2,200,000) -- Allowance for doubtful accounts .................... 36,000 258,000 (148,000) Changes in assets: Receivable and other ............................. 77,000 (755,000) 446,000 Changes in liabilities: Current liabilities .............................. (2,810,000) 798,000 (880,000) Long-term accrued liabilities .................... 306,000 -- -- ------------ ------------ ------------ Net cash flows from operating activities ........... (1,345,000) (2,951,000) 3,878,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Minority interest and other liabilities ............ 670,000 1,538,000 -- Proceeds from the sale of Speedway Business Park ... 5,000,000 -- -- Proceeds from the CSI Settlement ................... 3,661,000 -- -- Capital expenditures ............................... (9,273,000) (1,605,000) (1,334,000) Environmental remediation expenditures ............. (6,595,000) (5,950,000) (1,698,000) Environmental insurance proceeds (net) ............. 2,582,000 13,823,000 -- Investment in Penske Motorsports, Inc. ............. 232,000 (309,000) (250,000) Other investments .................................. (268,000) (184,000) (100,000) Short-term investments and marketable securities ... -- 3,624,000 6,418,000 Investment in Fontana Union Water Co. .............. -- (62,000) -- Purchase of Lusk Joint Venture Properties .......... -- -- (8,814,000) ------------ ------------ ------------ Net cash flows from investing activities ........... (3,991,000) 10,875,000 (5,778,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock ........................... 121,000 166,000 46,000 Borrowing under revolver-to-term credit facility ... 3,000,000 -- -- Principal payments on note payable ................. (240,000) (358,000) (60,000) Payment of loan fees ............................... -- -- (761,000) ------------ ------------ ------------ Net cash flows from financing activities ........... 2,881,000 (192,000) (775,000) ------------ ------------ ------------ NET CHANGES IN CASH AND CASH EQUIVALENTS ............... (2,455,000) 7,732,000 (2,675,000) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ......... 10,937,000 3,205,000 5,880,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR ............... $ 8,482,000 $ 10,937,000 $ 3,205,000 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 16 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK CAPITAL IN -------------------------- EXCESS OF RETAINED SHARES AMOUNT PAR VALUE EARNINGS TOTAL -------------------------------------------------------------------- Balance at December 31, 1993 10,427,962 $ 313,000 $59,672,000 $ 6,679,000 $66,664,000 Provision for income tax, credited to equity ..... -- -- 38,000 -- 38,000 Issuance of shares of common stock ........... 9,400 -- 46,000 -- 46,000 Net Income ............... -- -- -- 54,000 54,000 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1994 10,437,362 313,000 59,756,000 6,733,000 66,802,000 ----------- ----------- ----------- ----------- ----------- Provision for income tax, credited to equity ..... -- -- 335,000 -- 335,000 Issuance of shares of common stock ........... 33,252 1,000 165,000 -- 166,000 Net Income ............... -- -- -- 1,394,000 1,394,000 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1995 10,470,614 314,000 60,256,000 8,127,000 68,697,000 ----------- ----------- ----------- ----------- ----------- Increase in investment in Penske Motorsports, Inc. . due to public offering ... -- -- 6,116,000 -- 6,116,000 Provision for income tax, credited to equity ..... -- -- 3,945,000 -- 3,945,000 Issuance of shares of common stock ........... 17,500 1,000 120,000 -- 121,000 Net Income ............... -- -- -- 2,569,000 2,569,000 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 10,488,114 $ 315,000 $70,437,000 $10,696,000 $81,448,000 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 17 KAISER VENTURES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS On November 16, 1988, the Company began operations as Kaiser Steel Resources, Inc. upon the successful completion of the reorganization of Kaiser Steel Corporation ("KSC") under Chapter 11 of the Bankruptcy Code. The Company has changed its name twice since reorganization in June 1993 and 1995, to Kaiser Resources Inc. and to Kaiser Ventures Inc. ("Kaiser" or the "Company"), respectively. The Company's business focuses on the long-term development of its principal assets including water resources, land and waste management assets. The development of these assets is financed primarily through joint venture and long-term lease arrangements. Ongoing operations refer to those revenue resources which the Company is developing over the long-term while interim activities refer to those revenue resources which are temporary or short-term in nature and which are earned while the Company is evaluating the appropriate long-term use of the asset or property. At December 31, 1996, the Company's long-term emphasis is on the further development of its principal assets: (i) a 50.88% interest in Fontana Union Water Company ("Fontana Union"), a mutual water company; (ii) a 12.29% interest in Penske Motorsports, Inc. ("PMI"), a public professional motorsports company that, among other projects, is developing the California Speedway on land acquired from the Company; (iii) approximately a 73% interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle Mountain Landfill Project (the "Landfill Project"); (iv) approximately 668 acres of the former Kaiser Steel Corporation ("KSC") steel mill site (the "Mill Site Property"); and (v) the 11,350 acre idle iron ore mine in the California desert (the "Eagle Mountain Site"), which includes the associated 460 acre town of Eagle Mountain ("Eagle Mountain Townsite") and the land leased to MRC for the Landfill Project. The Company is also pursuing other related longer-term growth opportunities on the balance of its Mill Site Property, including the development of a transfer station and materials recovery facility on the ("Mill Site MRF") and the redevelopment of industrial and commercial parcels of land adjoining the California Speedway and the Mill Site MRF. The Company's consolidated financial statements include the following significant entities: Fontana Water Resources, Inc., Kaiser Steel Land Development, Inc., Eagle Mountain Reclamation, Inc., Lake Tamarisk Development Corporation, Kaiser Eagle Mountain, Inc. and Mine Reclamation Corporation. See Note 2 below for additional information concerning the Company's subsidiaries. ONGOING OPERATIONS The Company's revenues from ongoing operations are generally derived from the development of the Company's long-term projects. Revenues from water resources represent payments under the lease of the Company's interest in Fontana Union to Cucamonga County Water District ("Cucamonga"). Property redevelopment revenues primarily reflect revenues from long-term development activities at the Mill Site Property; land sales; housing rental income, aggregate rock sales and lease payments for the minimum security prison at the Eagle Mountain Townsite; and royalty revenues from iron ore shipments from the Company's iron ore mine in California (the "Silver Lake Mine"). Income from equity method investments reflect Kaiser's share of income related to those equity investments (primarily PMI) and joint ventures which the Company accounts for under the equity method. Prior to 1995, waste management revenues reflected the minimum lease payments under MRC's 100-year lease in connection with the Landfill Project. 18 INTERIM ACTIVITIES Revenues from interim activities are generated from various sources primarily related to the Mill Site Property. Significant components of interim activities include rentals under short-term tenant lease arrangements, royalty revenues from the sale of slag to outside contractors, water and wastewater treatment service revenues, revenues from the sale of recyclable materials and other miscellaneous short-term activities. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION The stated value of the assets and liabilities of the Company were carried forward from those of KSC except as adjusted in reorganization. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries and majority owned investments, except as specified below. Intercompany accounts and transactions have been eliminated. Fontana Union Water Company ("Fontana Union"). The Company, through its wholly-owned subsidiary Fontana Water Resources, Inc. ("FWR"), owns 50.88% of Fontana Union, a mutual water company, which entitles the Company to its proportionate share of Fontana Union water. The Company has effectively transferred its control in Fontana Union to Cucamonga pursuant to a 102-year lease of its Fontana Union shares ("Cucamonga Lease") which the Company entered into in March 1989 and which was amended in 1989, 1992 and 1993. Therefore, Kaiser receives no direct benefit from nor has any direct exposure to the operations or financial performance of Fontana Union. Consequently, Kaiser's investment in Fontana Union is recorded on the cost method with revenues from the Cucamonga Lease being recorded on a current basis pursuant to the terms and conditions of the Lease. (See Note 9.) KSC Recovery, Inc. ("KSC Recovery"). The Company's wholly-owned subsidiary, KSC Recovery, Inc., which is governed and controlled by a Bankruptcy Court approved Plan of Reorganization, acts solely as an agent for KSC's former creditors in pursuing bankruptcy related adversary litigation and administration of the KSC bankruptcy estate. Kaiser exercises no significant control or influence over nor does Kaiser have any interest in the operations, assets or liabilities of KSC Recovery except as provided by the terms of the approved Plan of Reorganization. In addition, all costs and expenses of KSC Recovery are funded by KSC Recovery's cash on hand and potential future recoveries. It is anticipated that the bankruptcy estate of KSC Recovery expects to make all final distributions within the next 12 to 18 months. Consequently, activity of KSC Recovery is not included in Kaiser's financial statements; however, KSC Recovery is a member of the Kaiser consolidated group for tax purposes and is therefore, included in the consolidated tax return. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with original maturities of 90 days or less to be cash equivalents. The Company maintains its cash balances with high quality financial institutions and are insured by the Federal Deposit Insurance Corporation up to $100,000 at each institution. 19 REAL ESTATE In accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (FASB 121), the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. There has been no requirement to record impairment losses on the Company's assets under FASB 121. Interest and property taxes related to real estate under development are capitalized during periods of development. INVESTMENT IN PENSKE MOTORSPORTS, INC. The Company accounts for its investment in Penske Motorsports, Inc. ("PMI") under the equity method of accounting because the Company exercises significant influence over the operations of PMI through its representation on the Board of Directors and PMI Board Committees. DEFERRED COSTS Included in other assets are deferred loan fees of $761,000 incurred in 1994, which are being amortized over the life of the related loan on a straight-line basis. Amortization of these deferred loan fees, which is included in net interest expense (income) was $666,000, $77,000, and $18,000 for 1996, 1995 and 1994, respectively. Acceleration of amortization of loan fees in 1996 is due to the renegotiation of the revolving-to-term credit facility. BUILDINGS AND EQUIPMENT Buildings and equipment are stated on the cost basis. Depreciation is provided on the straight line method over the estimated useful lives of the respective assets. REVENUE RECOGNITION Revenues are recognized when the Company has completed the earnings process and an exchange transaction has taken place. INCOME TAXES The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary timing differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. PER SHARE AMOUNTS Earnings per share is computed based on the weighted average number of common stock and common stock equivalents (including stock options) outstanding during each period. STOCK OPTIONS The Company accounts for its stock compensation arrangements under the provisions of APB 25, "Accounting for Stock Issued to Employees" and intends to continue to do so. (See Note 10.) 20 FINANCIAL STATEMENT RESTATEMENT AND RECLASSIFICATIONS The 1995 Balance Sheet and certain footnote disclosure has been restated as discussed in the footnote entitled Environmental Remediation Reserve. (See Note 8.) The Company has reclassified certain amounts in its Consolidated Financial Statements for the years ended in 1994 and 1995 in order to conform with the 1996 presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents. The carrying amount approximates fair value because of the short-term maturity of these instruments. Receivables. The carrying amount approximates fair value because of the short-term maturity of these instruments. Long-Term Debt. The carrying approximates fair value based on the current rates offered to the Company for debt of the same remaining maturities. NOTE 3. ACCOUNTS RECEIVABLE Accounts receivable as of December 31 consisted of the following:
1996 1995 ---- ---- Cucamonga County Water District............................... $ 2,099,000 $1,790,000 Penske Motorsports, Inc....................................... 843,000 54,000 Burrtec Waste Industries...................................... 461,000 17,000 Other......................................................... 848,000 1,963,000 ----------- ---------- 4,251,000 3,824,000 Allowance for doubtful accounts............................... (1,034,000) (494,000) ----------- ---------- Total................................................ $ 3,217,000 $3,330,000 =========== ==========
The Company is currently in litigation against Cucamonga over the interpretation of the Cucamonga Lease with regard to the amount payable to the Company pursuant to the terms of the lease. Although the Company is continuing to invoice Cucamonga at what it believes is the correct Metropolitan Water District of Southern California ("MWD") rate under the lease with Cucamonga, the Company has elected to reserve the full amount in dispute and report revenues on the basis of amounts received. The total amount of lease 21 payments in dispute as of December 31, 1996 is approximately $748,000 and is included in the allowance for doubtful accounts. NOTE 4. INVESTMENT IN PENSKE MOTORSPORTS, INC. The Company, as of December 31, 1996, owns 1,627,925 shares, or approximately 12.29% of the common stock of PMI. As discussed in more detail below, the Company's ownership interest in PMI was acquired as a result of: (i) its contribution in November, 1995, to PMI of approximately 480 acres, as adjusted, of the Central Mill Site Property on which the California Speedway ("TCS") has been built; and (ii) the subsequent sale of the Speedway Business Park, totaling approximately 54 acres to PMI in December, 1996. Kaiser recorded no gain or loss as a result of the November 1995 transaction discussed above since the value of the PMI stock that Kaiser received was equal to the book value of the land Kaiser contributed to PMI. PMI is traded on the NASDAQ National Market under the symbol "SPWY". In March, 1996, Penske Motorsports, Inc. ("PMI") effected a recapitalization resulting in PMI ownership of the outstanding shares of Michigan International Speedway, Inc., Pennsylvania International Raceway, Inc., The California Speedway Corporation, Motorsports International Corp., Competition Tire West, Inc. and Competition Tire South, Inc. Subsequent to the recapitalization, PMI completed an initial public offering ("IPO") by issuing 3,737,500 shares of common stock at a price to the public of $24 per share. The proceeds to PMI, after underwriting discounts and commissions and other offering expenses, were approximately $83.1 million. As a result of the IPO, which materially increased the Company's share of PMI's stockholder's equity, the Company has recorded an increase in its equity investment in PMI of $6,513,000 and corresponding increases in deferred income taxes and capital in excess of par value of $397,000 and $6,116,000, respectively. As an additional result of the IPO, when the Company converted its PMI preferred stock into PMI common stock, the Company changed its accounting for this investment from the cost to the equity method of accounting and began recording it's share of undistributed equity in the earnings of PMI effective April 1, 1996. In addition, due to the concentration of motor sport racing events between April and September, PMI's operations have been, and will continue to be, highly seasonal. Except for one event week-end in October, 1997 at TCS, PMI has no current plans to host events in the first and fourth quarters at its existing facilities. As a result, the Company's reported share of undistributed equity in the earnings of PMI will likely be positive (income) in the second and third quarters and negative (loss) in the first and fourth quarters. PMI is a leading promoter and marketer of professional motorsports in the United States as well as an owner and operator of speedway facilities. PMI currently owns: (i) Michigan International Speedway, Inc. which owns and operates the Michigan Speedway ("MIS"), in Brooklyn, Michigan; (ii) The California Speedway Corporation, the developer of TCS near Los Angeles, California; (iii) Pennsylvania International Raceway, Inc. which owns and operates the Nazareth Motor Speedway ("Nazareth") in Nazareth, Pennsylvania; (iv) Motorsports International Corp. ("MIC"), a motorsports apparel and memorabilia company; (v) Competition Tire West, Inc. and Competition Tire South, Inc., distributors of Goodyear racing tires in the mid-west and southern regions of the United States; and (vi) approximately four (4) percent of the stock of North Carolina Motor Speedway, Inc. which owns the North Carolina Motor Speedway, Inc., Rockingham, North Carolina. PMI promoted a total of nine major racing events at MIS and Nazareth in 1996 and currently expects to promote a total of 15 racing events at MIS, Nazareth and TCS in 1997. Of the anticipated 1997 races, 9 are to be sanctioned by the National Association for Stock Car Auto Racing, Inc. ("NASCAR(R)") including 3 associated with the Winston Cup Series professional stock car racing circuit, 3 races with the NASCAR 22 Busch Grand National Series, 1 race associated with the NASCAR Winston West Series, and 2 races associated with the Sears Craftsman Truck Series; 3 races will be sanctioned by Championship Auto Racing Teams, Inc. ("CART(R)"); 2 races will be sanctioned by Automobile Racing Club of America ("ARCA"); and 2 races will be with the International Race of Champions ("IROC"). Total 1996 revenues for PMI, on a consolidated basis were $55.2 million with a net income of $10.9 million, or $.90 per share. The Company's share of undistributed equity in the earnings of PMI for 1996, was $889,000 net of residual transaction expenses. A condensed balance sheet of PMI as of December 31, follows:
1996 1995 ---- ---- Current Assets............................................ $ 33,559,000 $ 8,458,000 Property and Equipment.................................... 140,402,000 61,009,000 Other Assets.............................................. 10,036,000 3,788,000 ------------ ----------- Total Assets..................................... $183,997,000 $73,255,000 ============ =========== Current Liabilities....................................... $ 25,801,000 $15,664,000 Other Liabilities......................................... 3,825,000 1,454,000 Deferred taxes............................................ 8,969,000 9,115,000 Minority Interest......................................... --- 1,210,000 Stockholders' Equity...................................... 145,402,000 45,812,000 ------------ ----------- Total Liabilities and Stockholders' Equity....... $183,997,000 $73,255,000 ============ ===========
NOTE 5. MINE RECLAMATION CORPORATION As previously disclosed, the Company, in January, 1995, acquired a 70% interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle Mountain Landfill Project. Concurrent with this acquisition, MRC and the Company amended the MRC Lease to terminate the minimum monthly rent payments by MRC to the Company. Consequently, the Company did not receive any rent payments from MRC during 1995 or 1996 nor will it in the future until commencement of operations at the Landfill Project. The transaction which was insignificant to the operating results, financial position and total assets of the Company has been treated as a purchase, and the assets acquired and liabilities assumed were recorded at their fair market values. As of December 31, 1996 the Company had provided approximately $4.5 million in equity funding to MRC. In addition, the Company's Board of Directors has committed, subject to their periodic review, an additional $3.7 million of equity funding for MRC during 1997. As a result of these equity fundings, the Company's ownership interest in MRC as of December 31, 1996 is approximately 73%. While the Company has made the decision to invest up to an additional $3.7 million in equity in MRC, the Company is not obligated to provide additional funding to MRC beyond its current commitments. MRC will need additional capital beyond that committed to successfully complete the permitting and development process. 23 NOTE 6. BUILDINGS AND EQUIPMENT (NET) Buildings and equipment (net) as of December 31 consisted of the following:
1996 1995 ---- ---- Buildings and structures ..................................... $ 2,074,000 $ 2,063,000 Machinery and equipment....................................... 1,621,000 1,557,000 ---------- ---------- 3,695,000 3,620,000 Accumulated depreciation...................................... (1,485,000) (1,187,000) ----------- ----------- Total................................................ $ 2,210,000 $ 2,433,000 =========== ===========
NOTE 7. ACCRUED LIABILITIES Accrued liabilities as of December 31 consisted of the following:
1996 1995 ---- ---- Environmental insurance settlement costs...................... $1,313,000 $3,938,000 Compensation and related employee costs....................... 1,353,000 1,475,000 Other ....................................................... 1,459,000 855,000 ---------- ---------- Total.................................................. $4,125,000 $6,268,000 ========== ==========
NOTE 8. ENVIRONMENTAL REMEDIATION RESERVE The Company estimates, based upon current information, that its future remediation and other environmental costs, including groundwater and other possible third party claims, will be between approximately $20 million and $32 million, as determined on an undiscounted basis, depending both upon the ultimate extent of the environmental remediation and clean-up involved and upon which approved remediation alternatives are eventually selected. In order to improve the presentation regarding these future remediation and other environmental costs, the Company has elected to restate all balance sheet information presented to show, as a separate liability rather than as an offset to land, the amount of future remediation and other environmental costs reflected in its financial statements. The restatement reflects the amounts originally recognized when the Company emerged from bankruptcy comprised of a $34.7 million remediation adjustment to land and a $6.6 million groundwater remediation reserve and $12.5 million in environmental insurance litigation settlement proceeds received in 1995, reduced by approximately $21.6 million in remediation and other environmental costs expended through December 31, 1996. The Company's decision to restate its balance sheet information is based upon the more extensive investigation and remediation activities that have been pursued over the past two years and the Company's ability to better estimate the probable range of future remediation and other environmental costs. As of December 31, 1996, the total short-term and long-term environmental remediation liabilities reflected on the Company's balance sheet was approximately $32.2 million, which is the high end of the probable range of future remediation and other environmental costs. Below is a table showing the activity in the remediation liability accounts for the years ended December 31: 24
1996 1995 ---- ---- Beginning Estimated Liability $ 39,411,000 $ 34,529,000 Environmental Insurance Proceeds ............... -- 12,500,000 Remediation Costs Incurred (7,188,000) (7,618,000) ------------ ------------ Ending Estimated Liability .. 32,223,000 39,411,000 Less: Current Portion .... (5,757,000) (7,235,000) ------------ ------------ Long-term Portion ........... $ 26,466,000 $ 32,176,000 ============ ============
In 1995, the additional remediation and other environmental costs identified were offset by the receipt of approximately $12.5 million in net environmental insurance litigation settlement proceeds; therefore, there was no income statement impact from either the additional remediation and other environmental costs identified or the receipt of the insurance litigation proceeds. See Note 15, "Commitments and Contingencies" for further information. NOTE 9. LONG-TERM DEBT As of December 31, 1996, long-term debt consisted of a $5,342,000 note, which includes the current portion of $240,000 secured by a first trust deed issued to Bank of America as part of the Company's purchase of property from the Lusk Joint Ventures and $3,000,000 in borrowings under the Union Bank credit facility. The Bank of America note is payable in quarterly payments of $60,000 plus interest at the their prime rate plus 1.5% (9.75% at December 31, 1996) with all remaining principal and accrued and unpaid interest due and payable on July 28, 1998. The Company, through FWR, had a 9-year, $20,000,000 revolving-to-term credit facility with Union Bank at floating interest rates and collateralized by the Company's shares of Fontana Union and the lease of those shares to Cucamonga. At December 31, 1996, there was $3,000,000 in outstanding loans outstanding under the credit facility. The borrowing base available under the credit facility is limited to the discounted present value of a five year projection of future payments under the Cucamonga Lease, as defined in the credit facility agreement. Under the borrowing base calculations, the maximum amount available was $19,525,000 as of December 31, 1996. The net available funds under the $20,000,000 revolving-to-term credit facility less $5,505,000 reserved for financial assurances required by the DTSC and relating to environmental remediation on the Mill Site Property; and $3,000,000 in outstanding loans was $11,020,000 as of December 31, 1996. On January 30, 1997 the $20,000,000 revolving-to-term credit facility with Union Bank, was increased to $30,000,000. In addition, the term of the facility was extended 2 years to September 30, 2004, and the borrowing base calculation was revised to include 8 years, rather than 5 years, of projections of future payments under the Cucamonga Lease. (See Note 17.) Total interest expense incurred in 1996, 1995, and 1994 was $743,000, $625,000 and $263,000, respectively. 25 NOTE 10. STOCKHOLDERS' EQUITY COMMON STOCK OUTSTANDING At December 31, 1996 and 1995, Kaiser Ventures Inc. common stock has a par value of $0.03 and 13,333,333 authorized shares, of which 10,488,114 and 10,470,614 were outstanding, respectively. In November, 1988, 10,000,000 shares of common stock (after giving effect for a 3 for 1 reverse stock split that took place in 1990) were issued pursuant to the KSC Plan of Reorganization. As of December 31, 1996, 136,919 of these shares are being held for the benefit of the former general unsecured creditors of the predecessor company pending the resolution of disputed bankruptcy claims. The final resolution of these claims will result in the final allocation of the held shares among the unsecured creditor group, which presents no liability to the Company. For financial reporting purposes these shares have been considered issued and outstanding. In February, 1993, the Company completed a stock offering of 2,000,000 shares of its common stock, including 500,000 shares sold by the Company and 1,500,000 shares sold by its two principal stockholders. After the Company's proportionate share of costs of approximately $100,000 incurred in connection with the stock offering, the Company realized net proceeds from the stock offering of approximately $6,000,000. STOCK OPTION AND STOCK GRANT PROGRAMS In October, 1990, the Company's stockholders approved the Amended, Restated and Substituted Kaiser Steel Resources, Inc. 1989 Stock Plan (the "1989 Stock Plan"). The 1989 Stock Plan provided for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock or deferred stock awards. Certain options granted under the 1989 Stock Plan are still outstanding. No compensation expense was incurred by the Company during 1996, 1995 and 1994. In June, 1995, the Company's stockholders approved the 1995 Stock Plan. The 1995 Stock Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock and other stock related incentives. In June, 1996, the 1995 Stock Plan was amended to reserve up to 859,102 shares for issuance upon exercise of stock options, grants of stock and other stock related incentives. As a result of the increase in the 1995 Stock Plan reserve, the Company had 419,691 reserved shares as of December 31, 1996. Grants are generally established at fair market value of the Company's common stock on the date of the grant and the exercise thereof may extend for up to 10 years with various vesting schedules. In addition, under the 1995 Stock Plan, each director when first elected to the Board shall automatically be granted options for 5,000 common stock shares. Each non-employee director who is re-elected or serving an unexpired term as a member of the Board at an annual meeting of holders of stock of the Company will be automatically granted an additional 1,500 stock options. These options have an exercise price equal to the fair market value of the Company's Common Stock on the date of the grant. A summary of the status of the stock option grants under the Company's Stock Plans' as of December 31, 1996 and 1995 and activities during the years ending on those dates is presented below: 26
1996 1995 1994 -------------------------- ------------------------- ------------------------ WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- ----- ------- ----- ------- ----- Outstanding at beginning of year .................... 809,661 $ 11.63 652,836 $ 13.00 493,903 $ 12.39 Granted .................... 639,000 10.87 182,000 5.93 165,000 14.64 Exercised .................. (17,500) 6.89 (17,801) 4.26 (6,067) 8.11 Forfeited .................. -- -- (7,374) 10.09 -- -- ---------- --------- ------- --------- ------- --------- Outstanding at end of year . 1,431,161 $ 11.35 809,661 $ 11.63 652,836 $ 13.00 ========== ======= ======= Options exercisable at year end ..................... 497,791 $ 11.29 425,916 $ 10.97 309,937 $ 11.45 ========== ======= ======= Weighted-average fair value of options granted during the year ................ $ 2.87 $ 1.22
The following table summarizes information about fixed stock options outstanding as of December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- -------------------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGE OF REMAINING AVERAGE AVERAGE EXERCISE PRICES LIFE (YEARS) OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE --------------- ------------ ------- -------------- ------- -------------- $3.00 to $ 7.50 7.7 185,511 $ 5.71 123,741 $ 5.66 $7.51 to $ 17.58 7.8 1,245,650 $12.22 374,050 $ 13.16
The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for the Company's stock-based compensation plans other than for compensation and performance-based stock awards. Had compensation cost for the Company's stock option plan been determined based upon the fair value at the grant date for the awards under the plan consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, ("FAS 123") the effect on the Company's net income and earnings per share would have been adjusted to the pro forma amounts indicated below:
1996 1995 ---- ---- Net Earnings As reported $ 2,569,000 $ 1,394,000 Pro forma $ 2,160,000 $ 1,249,000 Earnings per share As reported $ 0.24 $ 0.13 Pro forma $ 0.20 $ 0.12
27 The Company employed the Black-Scholes option-pricing model in order to calculate the above reduction in net income and earnings per share. The effect on net earnings for 1996 and 1995 is not necessarily representative of the effect in future years. The following table describes the assumptions utilized by the Black-Scholes option-pricing model and the resulting fair value of the options granted:
1996 1995 ---- ---- Volatility .254 .346 Risk-free interest rate 5.74% 6.98% Expected life in years 2.67 2.25 Forfeiture rate 0.00% 0.00% Dividend yield 0.00% 0.00%
In 1988, the Company granted stock options totaling 533,333 shares with a nominal exercise price to certain of its officers as part of the emergence from bankruptcy reorganization. These options became 50% vested at the date of grant with the remaining options ratably vesting through June 1, 1991. As of December 31, 1996, 160,000 of these options remain vested and unexercised. NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid interest during 1996, 1995, and 1994 of $674,000, $607,000 and $144,000, respectively. As a result of the PMI initial public offering in March, 1996, the Company increased its investment in PMI by approximately $6.5 million and recorded corresponding increases in deferred income taxes and stockholders equity of approximately $400,000 and $6.1 million, respectively. During 1996, the Company sold Speedway Business Park to PMI for $13,352,000. The Company received $5,000,000 of the proceeds in cash and $8,352,000 in common stock of PMI. During 1996, the Company capitalized interest and property taxes on property real estate under development of $354,000 and $28,000, respectively. There was no capitalization of interest expense on property taxes during 1995 or 1994. During 1995, in connection with the contribution of the land to PMI, the Company reclassified $22.5 million of land to investment in PMI. During 1994, non-cash investing activities included a $6,000,000 note payable as part of the Company's purchase of properties owned by the Lusk Joint Ventures. 28 NOTE 12. INCOME TAXES The income tax provisions for the years ended December 31, 1996, 1995 and 1994 are composed of the following:
1996 1995 1994 ---- ---- ---- Current tax expense: Federal........................................... $ 56,000 $ --- $ 92,000 State............................................. 36,000 --- 33,000 ----------- ----------- ------------ 92,000 --- 125,000 ----------- ----------- ------------ Deferred tax expense credited to equity: Federal........................................... 3,945,000 335,000 1,371,000 State............................................. --- --- 250,000 ----------- ----------- ------------ 3,945,000 335,000 1,621,000 ----------- ----------- ------------ Deferred tax expense: Federal........................................... --- --- --- State............................................. 840,000 721,000 --- ----------- ----------- ------------ 840,000 721,000 --- ----------- ----------- ------------ Tax benefit of extraordinary item (Note 13): Current tax benefit: Federal........................................... --- --- (92,000) State............................................. --- --- (30,000) ----------- ----------- ------------ --- --- (122,000) ----------- ----------- ------------ Deferred tax benefit credited to equity: Federal........................................... --- --- (1,339,000) State............................................. --- --- (244,000) ----------- ----------- ------------ --- --- (1,583,000) ----------- ----------- ------------ $ 4,877,000 $ 1,056,000 $ 41,000 =========== =========== ============
In accordance with SFAS 109, the tax benefits of all deductible temporary differences and loss carryforwards that existed at the date of a reorganization must be credited directly to additional paid-in capital when the initial recognition of these benefits occurs subsequent to the reorganization. Income taxes paid in 1996 and 1994 were $20,000 and $272,000, respectively. There were no income taxes paid in 1995. Deferred tax liabilities (assets) are comprised of the following as of December 31, 1996 and 1995:
1996 1995 ---- ---- Land held for development............................... $ 2,231,000 $ 4,744,000 Investment in Fontana Union............................. 6,440,000 6,440,000 Investment in Penske Motorsports Inc.................... 11,795,000 9,031,000 Depreciation............................................ 36,000 103,000 ------------ ------------ 20,502,000 20,318,000 ------------ ------------ Groundwater remediation................................. (690,000) (695,000) Insurance Proceeds...................................... (2,165,000) (5,098,000) Investment in MRC....................................... (1,837,000) (1,837,000) Accounts receivable reserve............................. (181,000) (166,000) Other................................................... (1,262,000) (1,219,000) Loss carryforwards...................................... (39,898,000) (45,912,000) ------------ ------------ (46,033,000) (54,927,000) ------------ ------------ Deferred tax asset valuation allowance.................. 27,489,000 35,330,000 ------------ ------------ $ 1,958,000 $ 721,000 ============ ============
29 As indicated above, the net change in the valuation allowance was a reduction of $7,841,000 in 1996. A reconciliation of the effective income tax rate to the federal statutory rate, for financial reporting purposes, is as follows:
1996 1995 1994 ---- ---- ---- Federal statutory rate............................................... 34.0% 34.0% 34.0% Increase resulting from state tax, net of federal benefit............ 5.1 6.1 6.1 Other................................................................ 2.4 3.0 3.0 Additional recognition of pre-reorganization benefits................ 17.5 --- --- Increase in valuation allowance on state NOLs........................ 6.2 --- --- --------- --------- ------ 65.2% 43.1% 43.1% ======== ======== ========
The consolidated Net Operating Loss ("NOL") carryforwards available for federal income tax purposes as of December 31, 1996, are approximately $107,000,000 and will expire over a period from year 2000 through 2010. The amount of NOL carryforwards available for California state tax purposes is approximately $11,000,000 as of December 31, 1996. During 1993, the California Legislature amended the tax code relative to the generation and use of NOL carryforwards available for California state tax purposes. This legislation, among other changes, reduced the NOL carryforwards from 15 years to 5 years. Therefore, the Company's NOL carryforwards available for California state tax purposes now expire in year 1997 and 2000. In addition, there are certain limitations as to the future annual use of NOLs if 50% or more of the stock of the Company changes ownership. The Company also has approximately $2,817,000 of investment tax credit carryforwards available. The credits will expire in the years 1997 through 2000 and can be utilized only after the NOL is exhausted. NOTE 13. EXTRAORDINARY LOSS During the first quarter of 1994, the Company learned that it may have been responsible for the payment of premiums levied pursuant to the Coal Industry Retiree Health Benefit Act of 1992 (the "Coal Act"). This legislation not only imposes liability for premiums on companies currently in the coal mining industry, but also on companies and their successors that were in the coal mining industry. Prior to 1985, coal mines were operated to support the Company's steel making operations. In December 1994, the Company reached an agreement settling all outstanding and future claims under which the Company paid $3,778,000 plus expenses. The settlement was recorded as an extraordinary loss of $2,233,000 (net of tax benefits of $1,705,000) in December 1994. NOTE 14. LEASED ASSETS AND SIGNIFICANT CUSTOMERS LONG-TERM LEASES The Company has long-term lease agreements with Cucamonga pursuant to the Cucamonga Lease (Note 1), Management Training Corporation ("MTC") and California Steel Industries ("CSI"). Minimum lease payments expected to be received by the Company through the next five years are as follows: 30
YEAR ENDING CUCAMONGA CSI SERVICE DECEMBER 31 LEASE MTC LEASE AGREEMENT TOTAL ----------- ----- --------- --------- ----- 1997 $ 4,867,000 $625,000 $ 220,000 $ 5,712,000 1998 $ 4,867,000 $ --- $ 110,000 $ 4,977,000 1999 $ 4,867,000 $ --- $ --- $ 4,867,000 2000 $ 4,867,000 $ --- $ --- $ 4,867,000 2001 $ 4,867,000 $ --- $ --- $ 4,867,000
The amounts for the Cucamonga Lease are based upon: (a) the quantities of water as of December 31, 1996, and as provided for under the Lease; (b) the current disputed lease rate paid by Cucamonga, (which is less than the lease rate the Company bills Cucamonga by approximately $540,000 on an annual basis) and; (c) projections by MWD which forecast no rate increases in the disputed rate over the next 5 years. The net book values of Fontana Union and Eagle Mountain at December 31, 1996 were $16,108,000 and $10,386,000, respectively. Only a portion of Eagle Mountain is being utilized for the MTC Lease. SIGNIFICANT CUSTOMERS The Company received substantial portions of its revenue from the following customers:
YEAR ENDED CUCAMONGA CSI SERVICE DECEMBER 31 LEASE MTC LEASE AGREEMENT MRC LEASE ----------- ----- --------- --------- --------- 1996 $4,505,000 $709,000 $ 217,000 --- 1995 $4,974,000 $699,000 $ 416,000 --- 1994 $4,820,400 $694,000 $1,859,000 $2,400,000
NOTE 15. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL CONTINGENCIES As discussed in Note 8 above, the Company estimates, based upon current information, that its future remediation and other environmental costs, including groundwater and other possible third party claims, will be between approximately $20 million and $32 million, depending upon which approved remediation alternatives are eventually selected. Although ongoing environmental investigations are being conducted on the Company's property, management believes it is currently in a position to estimate with some reasonable certainty future investigation and remediation costs, there can be no assurance that the actual amount of environmental remediation expenditures and incurred will not substantially exceed those currently anticipated or that additional areas of contamination may not be identified. Accordingly, future facts and circumstances could cause these estimates to change significantly. The Company anticipates recovery of the remediation costs incurred through redevelopment of the property, primarily in connection with specific redevelopment projects or joint ventures. Further, the Company has provided certain financial assurances to the DTSC in connection with anticipated remediation activities, the primary one being the dedication of approximately $5.5 million of Kaiser's Union Bank Credit facility. 31 While the Company has monitored certain groundwater wells in the past, the DTSC requested and the Company will implement a supplemental groundwater monitoring system. The Company has settled obligations of groundwater contamination with the California Regional Water Quality Control Board. The settlement required a $1,500,000 cash payment by the Company which was made in February, 1994, and the contribution of 1,000 acre feet of water annually for 25 years to a water quality project. These water rights are unrelated to those leased to Cucamonga. In 1995, the Company contributed 18,000 acre feet of its water in storage thus satisfying the first 18 years of its obligation. The Company remains contingently liable for any impacts the groundwater plume may have on water wells owned by third parties. Recently the City of Ontario, California commenced litigation against the Company alleging that the Company has contaminated one of its municipal wells. The Company believes sufficient amounts have been accrued for this contingency. PENSION PLANS The Company currently sponsors a voluntary qualified 401(k) savings plan and a nonqualified pension plan, available to all full-time employees. Participants may make contributions of up to 15% of their compensation with the Company matching one-half of each participant's contribution up to 6% of compensation. The non-qualified plan mirrors the qualified 401(k) plan. Total expense relative to these plans for the years ended December 31, 1996, 1995 and 1994, was $199,000, $170,000 and $139,000, respectively. LETTERS OF CREDIT At December 31, 1996, the Company had guaranteed letters of credit outstanding on its behalf to third parties totaling $420,000. These letters of credit were issued for reclamation activities performed at two idled coal properties, on behalf of and at the expense of the KSC bankruptcy estate. NOTE 16. LEGAL PROCEEDINGS Significant legal proceedings are summarized as follows: BANKRUPTCY ADVERSARY LITIGATION/CLAIMS The Company's predecessor, KSC, was in reorganization under Chapter 11 of the United States Bankruptcy Code from February, 1987 until November, 1988. Pursuant to the KSC Plan of Reorganization, the Company has established a subsidiary, KSC Recovery, Inc. ("KSC Recovery") see Note 1, which was engaged in the process of pursuing certain legal actions on behalf of the former creditors of KSC and handling the remaining administrative duties of the KSC bankruptcy estate, including claims resolution. From time-to-time, various environmental and similar types of claims such as injury or death from asbestos exposure that relate to KSC pre-bankruptcy activities are asserted against the Company and/or KSC Recovery. In connection with the KSC Plan of Reorganization, the Company, as the reorganized successor to KSC, was discharged from all liabilities that may have arisen prior to confirmation of the KSC Plan of Reorganization, except as otherwise provided by the plan or by law. Although the Company believes there is no ongoing contamination from its activities and that all pre-petition environmental claims were discharged under the KSC Plan of Reorganization, in the event any of these claims are ultimately determined to survive the KSC bankruptcy, it could have a material adverse effect on the Company. 32 OTHER LITIGATION In addition, the Company, in the normal course of its business, is involved in various claims and legal proceedings. Management believes these matters will not have a material adverse effect on the Company's business or financial condition. NOTE 17. SUBSEQUENT EVENT On January 30, 1997 the Company amended its revolving-to-term credit facility with Union Bank. As a result of the amendment, the amount available under the credit facility was increased from $20.0 million to $30.0 million. In addition, the term of the facility was extended 2 years to September 30, 2004, and the borrowing base calculation was revised to include 8 years, rather than 5 years, of projections of future payments under the Cucamonga Lease. The other existing terms and conditions of the credit facility remain in effect. 33 NOTE 18. QUARTERLY FINANCIAL DATA (Unaudited)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1996 Resource revenues .................... $ 2,034,000 $ 2,423,000 $ 2,345,000 $ 8,612,000 Income from operations ............... $ 335,000 $ 658,000 $ 677,000 $ 6,595,000 Income before income tax provision ... $ 224,000 $ 519,000 $ 521,000 $ 6,182,000 Net income ........................... $ 127,000 $ 294,000 $ 296,000 $ 1,852,000 Earnings per share ................... $ .01 $ .03 $ .03 $ .17 1995 Resource revenues .................... $ 1,999,000 $ 2,150,000 $ 2,089,000 $ 4,870,000 Income from operations ............... $ 237,000 $ 243,000 $ 291,000 $ 2,266,000 Income before income tax provision ... $ 88,000 $ 86,000 $ 108,000 $ 2,168,000 Net income ........................... $ 50,000 $ 49,000 $ 62,000 $ 1,233,000 Earnings per share ................... $ .00 $ .00 $ .01 $ .12 1994 Resource revenues .................... $ 2,944,000 $ 2,848,000 $ 3,302,000 $ 3,377,000 Income from operations ............... $ 781,000 $ 882,000 $ 1,105,000 $ 1,092,000 Income before income tax provision and extraordinary loss ............... $ 889,000 $ 998,000 $ 1,146,000 $ 1,000,000 Income before extraordinary loss ..... $ 504,000 $ 566,000 $ 650,000 $ 567,000 Extraordinary loss (net of taxes) .... -- -- -- $ 2,233,000 Net income (loss) .................... $ 504,000 $ 566,000 $ 650,000 $(1,666,000) Earnings (loss) per share Before extraordinary loss ......... $ 0.05 $ 0.05 $ 0.06 $ 0.05 After extraordinary loss .......... $ 0.05 $ 0.05 $ 0.06 $ (0.15)
34 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
BALANCE AT CHARGED TO DEDUCTIONS BEGINNING COSTS AND FROM BALANCE AT CLASSIFICATION OF PERIOD EXPENSES (A) RESERVES (B) END OF PERIOD - -------------------------------------- ---------------- ----------------- ---------------- ------------------- YEAR ENDED DECEMBER 31, 1996 Allowance for losses in collection of current accounts receivable...... $ 494,000 $ 668,000 $ 128,000 $ 1,034,000 =============== =============== ============== ============== YEAR ENDED DECEMBER 31, 1995 Allowance for losses in collection of current accounts receivable...... $ 156,000 $ 423,000 $ 85,000 $ 494,000 =============== =============== ============== ============== YEAR ENDED DECEMBER 31, 1994 Allowance for losses in collection of current accounts receivable...... $ 314,000 $ 149,000 $ 307,000 $ 156,000 =============== =============== ============== ==============
(A) Although the Company is continuing to bill Cucamonga at what it believes is the correct Metropolitan Water District of Southern California ("MWD") rate under the lease with Cucamonga, the Company has elected to reserve the full amount in dispute and report revenues on the basis of amounts received. The total amount of lease payments in dispute for the years ending December 31, 1996 and 1995 are approximately $668,000 and $80,000, respectively. (B) Amount charged off during the year. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to Registrant's 1996 Form 10-K Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 1, 1997 KAISER VENTURES INC. By: /s/ Richard E. Stoddard ------------------------------------- Name: Richard E. Stoddard ------------------------------------- Title: Chief Executive Officer and ------------------------------------- Chairman of the Board ------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment No. 1 to the Registrant's 1996 Form 10-K Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- 1. Principal Executive Officer /s/ Richard E. Stoddard Chief Executive Officer and April 1, 1997 --------------------------- Chairman of the Board Richard E. Stoddard 2. President /s/ Gerald A. Fawcett President and Chief Operating April 1, 1997 --------------------- Officer Gerald A. Fawcett 3. Principal Financial and Accounting Officer /s/ James F. Verhey Sr. Vice President Finance and April 1, 1997 ---------------------------- Chief Finance Officer James F. Verhey 36 SIGNATURE TITLE DATE --------- ----- ---- 4. Directors * Director April 1, 1997 --------------------------- Ronald E. Bitonti * Director April 1, 1997 --------------------------- Todd G. Cole * Director April 1, 1997 --------------------------- Reynold C. MacDonald * Director April 1, 1997 --------------------------- William J. Morgan * Director April 1, 1997 --------------------------- Charles E. Packard * Director April 1, 1997 --------------------------- Thomas S. Rabone * Director April 1, 1997 --------------------------- Lyle B. Stevenson * Director April 1, 1997 --------------------------- Marshall F. Wallach * By: /s/ Richard E. Stoddard Richard E. Stoddard Attorney-In Fact 37
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