-----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, Hc3mYBF3gjqS7lfHaqJoC1dkRv451jk1o8oxyunBzl3TIEqauXwlV3np+iepd4k9 3vrwGlrASaJDpqRWf5it/g== 0001017062-98-000706.txt : 19980401 0001017062-98-000706.hdr.sgml : 19980401 ACCESSION NUMBER: 0001017062-98-000706 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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 SEC ACT: SEC FILE NUMBER: 000-18858 FILM NUMBER: 98580280 BUSINESS ADDRESS: STREET 1: 3633 E INLAND EMPIRE BLVD 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 1 FORM 10K405 - FISCAL YEAR END 12/31/1997 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K (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, 1997 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: Name of Each Exchange Title of Each Class on which Registered ----------------------------- ----------------------- COMMON STOCK ($.03 PAR VALUE) Nasdaq Stock Market(SM) 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 ___ --- The aggregate market value of the registrant's Common Stock, $.03 par value, held by non-affiliates of the registrant was approximately $51,203,719 based upon the average of the bid and ask prices of registrant's Common Stock on the Nasdaq Stock Market(SM) at March 20, 1998, or $10.875 per share. 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 20, 1998, 10,612,815 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 1998 Annual Meeting of Stockholders is incorporated into Part III of this Form 10-K. TABLE OF CONTENTS TO FORM 10-K ------------------------------ PART I
Item 1. BUSINESS.......................................................... 1 Item 2. PROPERTIES........................................................ 29 Item 3. LEGAL PROCEEDINGS................................................. 32 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................................... 35 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................... 36 Item 6. SELECTED FINANCIAL DATA........................................... 37 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 38 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 49 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 49 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................... 50 Item 11. EXECUTIVE COMPENSATION............................................ 50 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................... 50 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 50 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................................. 51
i PART I FORWARD LOOKING INFORMATION EXCEPT FOR THE HISTORICAL STATEMENTS AND DISCUSSIONS CONTAINED HEREIN, STATEMENTS CONTAINED IN THIS 10-K REPORT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ANY 10-K, ANNUAL REPORT TO STOCKHOLDERS, 10-Q OR 8-K REPORT OF THE COMPANY MAY INCLUDE FORWARD- LOOKING STATEMENTS. IN ADDITION, OTHER WRITTEN OR ORAL STATEMENTS, WHICH CONSTITUTE FORWARD-LOOKING STATEMENTS, HAVE BEEN MADE AND MAY BE MADE IN THE FUTURE BY THE COMPANY. WHEN USED OR INCORPORATED BY REFERENCE IN THIS 10-K REPORT OR IN OTHER WRITTEN OR ORAL STATEMENTS, THE WORDS "ANTICIPATE," "ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD- LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED, EXPECTED OR PROJECTED. FOR EXAMPLE, ACTUAL RESULTS COULD MATERIALLY DIFFER FROM THOSE PROJECTED AS A RESULT OF FACTORS SUCH AS, BUT NOT LIMITED TO: GENERAL ECONOMIC CONDITIONS IN THE UNITED STATES AND SOUTHERN CALIFORNIA; THE IMPACT OF FEDERAL, STATE, AND LOCAL LAWS AND REGULATIONS ON THE COMPANY'S DEVELOPMENT ACTIVITIES; THE IMPACT OF WEATHER ON THE COMPANY'S CONSTRUCTION RELATED ACTIVITIES; THE DISCOVERY OF UNANTICIPATED ENVIRONMENTAL CONDITIONS ON ANY OF THE COMPANY'S PROPERTIES; THE FAILURE OF THE BANKRUPTCY DISCHARGE GRANTED TO THE COMPANY TO ADDRESS CLAIMS AND LITIGATION THAT RELATE TO THE PRE-BANKRUPTCY ACTIVITIES OF KAISER STEEL CORPORATION; OR THE FAILURE TO OBTAIN ANY REQUIRED APPROVAL OR PERMIT FOR THE PROPOSED EAGLE MOUNTAIN LANDFILL PROJECT OR DEVELOPMENT OF THE COMPANY'S REAL ESTATE. READERS ARE CAUTIONED NOT TO PUT UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY INTENTION TO UPDATE OR REVISE ANY FORWARD- LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. ITEM 1. BUSINESS GENERAL Kaiser Ventures Inc. ("Kaiser" or the "Company", including its wholly-owned subsidiaries unless otherwise provided herein) is an asset development company based in Southern California. The Company is the reorganized successor to Kaiser Steel Corporation ("KSC") which was an integrated steel manufacturer that filed for bankruptcy protection in 1987. Today, the Company's principal assets include: (i) a 50.88% ownership interest in Fontana Union Water Company ("Fontana Union") which is leased to Cucamonga County Water District ("Cucamonga") pursuant to a 102-year take-or-pay lease; (ii) an 11.51% ownership interest in Penske Motorsports, Inc. ("PMI"), a publicly traded motorsports company; (iii) approximately 629 acres (gross) of the former KSC steel mill site (the "Mill Site Property") which is currently undergoing redevelopment; (iv) a 50% joint venture interest in the West Valley Material Recovery Facility and Transfer Station ("WVMRF"), a transfer station and recycling facility located on land acquired from the Company; (v) an approximate 73% ownership interest in Mine Reclamation Corporation ("MRC"), the company seeking to permit a rail-haul municipal solid waste landfill (the "Landfill Project"); and (vi) 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 property which is leased to MRC for the Landfill Project. 1 In addition, the Company's financial position is enhanced by approximately $113 million of federal net operating loss tax carryforwards ("NOLs"), as of December 31, 1997, which arose through the KSC bankruptcy reorganization and which are expected to reduce most of the Company's federal tax liability in the near future. The Company also has approximately $2.4 million of California net operating loss carryforwards as of December 31, 1997. The federal NOL's expire between the year 2000 through 2010 while the California NOL's expire between year 2000 through 2002. The Company's primary business strategy is to convert its existing under-utilized assets into equity in new businesses joint ventures, long-term leases, or by contributing assets in exchange for an ownership interest in operating companies. This strategy enables the Company to minimize its capital investment, reduce its risk, and benefit from the operational expertise of its strategic partners or lessees. This strategy is illustrated by the successful development of the Company's Fontana Union water rights into a long-term, take- or-pay lease with Cucamonga, and by the Company's contribution of Mill Site property to PMI for construction of the California Speedway ("TCS") in exchange for an ownership interest in PMI. The Company will continue to focus on its existing projects and asset base while seeking additional growth opportunities, primarily through strategic joint ventures or acquisitions. While this is the Company's general philosophy, the Company may choose to become more directly involved in a particular project, such as the Landfill Project, when appropriate, or if the Company believes its active participation will enhance long-term shareholder value. To support the development of its current long-term projects and assets, the Company is also engaged in a number of short-term interim activities on the Mill Site Property including month-to-month property rentals and the sale of existing slag and other materials at the site. These interim activities have historically generated a material portion of the Company's revenues and enabled the Company to remain profitable in each full fiscal year since emerging from the KSC bankruptcy. The Company anticipates that short-term property rentals and other interim revenues will continue to decline as development of the remaining Mill Site Property proceeds. SUMMARY OF SIGNIFICANT DEVELOPMENTS IN 1997 During 1997, a number of material events occurred which affected the Company, therefore, readers are encouraged to read this Report it in its entirety in order to adequately understand the impact of these events on the Company. In Management's opinion, three material events were particularly significant: (a) the San Diego Court's ruling relative to the Landfill Project's environmental impact report ("EIR"); (b) the filing of revised Form 13D's related to the Company's two largest shareholders: the New Kaiser Voluntary Employee Benefit Association ("VEBA") and the Pension Benefit Guarantee Corporation ("PBGC"); and (c) the creation of a special committee by the Board of Directors to evaluate strategic alternatives and transactions with respect to the Company and its assets. In regard to the Landfill Project, MRC received the necessary land use and environmental approvals from the Riverside County Board of Supervisors on September 9, 1997. Subsequently, two separate legal actions were pursued by opponents to the Eagle Mountain Landfill Project which argued that the environmental impact report ("EIR") approved by Riverside County was defective. The first action challenged the County's and MRC's assertion that the new EIR satisfied the requirements of the July, 1994 decisions of San Diego County Superior Court Judge Judith McConnell. The second action was the commencement of a new lawsuit in Riverside County. The environmental challenges in the new lawsuit were dismissed on December 16, 1997. However, with respect to the first action, the San Diego County Superior Court issued, on December 31, 1997, a tentative ruling that preliminarily concluded that the new EIR was deficient in several areas. On February 17, 1998, the Court issued its final ruling. In its final ruling, the Court reversed itself with regard to several items in its tentative ruling which were initially 2 determined adverse to the Landfill Project. However, the Court still concluded that the new EIR was deficient in two areas: the Landfill Project's impacts on the threatened desert tortoise and Joshua Tree National Park. For more detailed information on this matter, please see "Municipal Solid Waste Management Landfill Project." As a result of the Court's final ruling, the Company and MRC are currently evaluating their available options with respect to the Landfill Project. These options include, but are not limited to: (i) appealing the Court's decision; (ii) taking the actions believed necessary to correct the deficiencies in the EIR in compliance with the Court's decision; (iii) indefinitely postponing the Landfill Project in some manner; or (iv) a combination of these or other alternatives. Depending upon the course of action ultimately selected by MRC and the Company, there could be a material adverse impact to the financial statements of the Company, including a possible write down of the Company's investment in MRC to the lower of cost or fair market value. The Company anticipates a final decision on what course of action will be taken by MRC and the Company by mid-1998. In regard to the revised Form 13D's filed by VEBA and the investment advisor of the PBGC, they disclosed that a Cooperation Agreement was entered into between the PBGC's and VEBA's respective investment advisors. A copy of the Cooperation Agreement was filed with the Form 13D's. The VEBA and PBGC own 33% and 20% of the Company's stock respectively. The Cooperation Agreement provides, among other things, that the parties are considering pursuing one or more strategies involving the Company and its assets. Such alternatives include distributing the PMI stock, securitizing and/or distributing the payments from the Cucamonga Lease, pursuing the full development and operation of the Eagle Mountain Landfill Project, selling or merging the Company, or jointly selling the Company stock owned by PBGC and VEBA. In addition, the Company's Board of Directors appointed a special committee (the "Special Committee") to evaluate and consider pursuing, among other things, various strategic alternatives and transactions with respect to the Company and its assets. The Special Committee has retained outside legal counsel and the investment banking firm of Merrill Lynch to assist it in its work. These events, as well as other events, such as the successful opening of TCS on property formerly owned by the Company, are discussed in more detail in this Report. WATER RESOURCES Background. Municipalities in Southern California traditionally have long depended on the availability of water from Northern California and the Colorado River for significant portions of their water supply. Heavy usage of and competing demands for these traditional sources, however, have decreased the reliability of these imported sources and forced municipalities to seek alternative water supplies. In addition, it is increasingly expensive to obtain and deliver these imported water supplies. As a result, locally available Southern California water resources continue to be increasingly important and valuable. The Company, through a wholly-owned subsidiary, Fontana Water Resources, Inc. ("FWR"), owns 50.88% of Fontana Union, a mutual water company, which was a primary local source of water for KSC's former steel making operations. Fontana Union owns water rights to produce water from four distinct surface and subsurface sources of water near Fontana, California, including: (i) adjudicated surface and streambed flow rights from the Lytle Creek area of the San Gabriel Mountains; (ii) adjudicated rights to the Chino Basin subsurface aquifer; (iii) adjudicated rights to the Colton/Rialto 3 Basin subsurface aquifer; and (iv) unadjudicated rights to a subsurface aquifer accessed by a well at the base of Lytle Creek (Well No. 22). Kaiser's ownership of Fontana Union entitles the Company to receive, annually, its proportionate share of Fontana Union's water which historically totals approximately 34,000 acre feet per year (an acre foot equals approximately 325,000 gallons). In addition, when other shareholders of Fontana Union do not take their annual proportionate shares of water, the unclaimed water for each year from those shareholders is divided pro rata among those shareholders that do take such water. Currently, the Company's pro rata interest in unclaimed water raises its effective overall share from 50.88% to approximately 55.66%. Over time, the Company expects this supplemental source of water to be reduced or eliminated as minority shareholders who do not currently utilize all their water begin to use, sell, or lease their water interests. Lease to Cucamonga County Water District. In 1989, the Company leased its shares of Fontana Union stock to Cucamonga, a local water district with an "A-" credit rating from Moody's Investor Services. Under the terms of the 102-year take-or-pay lease (the "Cucamonga Lease"), Cucamonga is entitled to receive all of the Company's proportionate share of water from the foregoing sources. Cucamonga pays the Company for all of the Company's share of water based upon fixed quantities of water at a rate of 68.13% of the Metropolitan Water District of Southern California's (the "MWD") charge for untreated, non-interruptible water as available through Chino Basin Municipal Water District. Thus, on a quarterly basis, Cucamonga pays for its proportionate share of the agreed upon annual quantities regardless of fluctuations in actual water flows and actual receipt and use of water, except in certain limited situations as discussed in more detail below. During 1997 and 1996, the Cucamonga Lease generated $5.1 million and $4.5 million, respectively, in revenues to the Company. Because of the 102-year lease agreement, which gives Cucamonga all of the Company's ownership rights in Fontana Union, the Company does not consolidate the accounts of Fontana Union for financial reporting purposes. Substantially all risks and costs of producing the water are borne by Cucamonga. Under the Cucamonga Lease, the Company and Cucamonga agreed that the gross annual quantity of Fontana Union water from all sources (except the annual Chino Basin agricultural pool transfer for which the Company accrues revenues for its share in the 4th quarter), is approximately 34,000 acre feet or approximately 8,500 acre feet per quarter. Fixing the average quantities of water stabilized the Company's revenues and Cucamonga's payments. The water quantities under the Cucamonga Lease were fixed based on the historical average of water available from the applicable water sources according to over 80 years of records. The agreed upon quantities of water paid for under the Cucamonga Lease cannot be adjusted or modified except in certain limited circumstances. However, there are limited circumstances in which the amount of water can be adjusted. As an example, in 1996, the agreed upon quantity of water from one source of water, the Colton/Rialto wells, was temporarily reduced in accordance with the terms of the Cucamonga Lease. Under the terms of the Cucamonga Lease, Cucamonga pays the Company based upon a presumed annual production of 3,000 acre feet from the Colton/Rialto wells through 1997 and beginning in 1998 and thereafter 3,100 acre feet, provided that the water level in certain index wells is above a certain level. This amount is a component of the 34,000 acre feet of annual water described above. In the second quarter of 1996, the Company was informed that the average water level in the index wells dropped below the specified level thereby resulting in a reduction in production and the agreed upon quantity under the Cucamonga Lease to a maximum of 920 acre feet. With this reduction in production from the Colton/Rialto wells, the gross revenues to the Company pursuant to the Cucamonga Lease declined in 1996 by approximately 4 $269,000. However, in the fourth quarter of 1996, the wells again began pumping at their historical levels. Thus, revenues generated from the Rialto/Colton wells during 1997 were again based upon an annual production of 3,000 acre feet. Another source of water leased by the Company to Cucamonga pursuant to the Cucamonga Lease is the Company's proportionate share of water from what is known as the Chino Basin agriculture pool transfers. These transfers represent that portion of water allocated to agricultural users in the Chino Basin, which is not used by such agricultural users in a particular water year. As a result, the Company through Fontana Union is entitled to a share of this surplus water, which Cucamonga pays for under the Cucamonga Lease. The historical average of annual agricultural pool transfers to Fontana Union has been approximately 4,000 acre feet but the amount has fluctuated in recent years. Agricultural pool transfers were only 2,557 acre feet for the 1995/96 water year apparently due to increased and more accurate reporting of water usage by the agricultural interests during the year. For the most recent water year, the 1996/97 water year, the agricultural transfer was 3,832 acre feet. For the 1997/98 water year, it is anticipated that the agricultural pool transfer will be in the range of 3,500 to 4,000 acre feet. See "Part 1, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a complete discussion of the revenues derived pursuant to the Cucamonga Lease. The Company's future lease revenue increases are primarily dependent upon any adjustments in the MWD water rates and other fees upon which the lease rate is calculated. The MWD rate established for untreated, non-interruptible water is based on a number of factors, including the MWD need for funds to finance capital improvements and to cover its fixed operational and overhead costs. The MWD water rate has increased at an average rate in excess of 8.6% per year over the last 25 years. The MWD rate increases are often cyclical in nature depending upon such factors as water availability, consumption, capital projects and available reserves. Recent effective rate increases, as of July 1 of each year, have been 12.7% in 1991, 21.2% in 1992, 18.2% in 1993, 5.3% in 1994. As discussed in more detail below, in 1995 a dispute arose as to MWD's rate increase and the amount payable to the Company under the terms of the Cucamonga Lease. Cucamonga asserted that the rate increases for the years 1995, 1996 and 1997 were substantially less than those asserted by the Company. Past rate increases are not necessarily indicative of future rate increases by MWD. On July 1, 1995, MWD implemented changed rates and a new rate structure. As a result of these changes, the Company asserted that all the changed rates and items implemented by MWD, which must be paid in order to receive untreated, non- interruptible water from MWD, are to be included in the calculation of the MWD rate payable under the terms of the Cucamonga Lease. Cucamonga disputed the Company's interpretation of the Cucamonga Lease which would result in a rate increase greater than 2.7%, the 1995 rate of increase Cucamonga asserted was the appropriate rate increase. Similarly, there is a dispute over the MWD rate and thus the Cucamonga Lease rate for 1996 and 1997. Cucamonga asserted there was no rate increase in 1996 and only a 1.5% increase in 1997, while the Company believes that there would have been greater increases in the Cucamonga Lease rate in 1996 and 1997 if the Cucamonga Lease is interpreted in accordance with Company's understanding of the Cucamonga Lease. Alternatively, the Company asserted that the MWD rate as defined in the Cucamonga Lease had been discontinued, requiring the parties to negotiate a new lease rate in accordance with the terms of the Cucamonga Lease. Because the Company and Cucamonga were unable to resolve this dispute, in 1996 the Company instituted litigation against Cucamonga in San Bernardino County Superior Court. A trial on the matter was held in March, 1998. After a five-day trial, the Court concluded that the rate on which the Cucamonga Lease had been based was discontinued effective July 1, 1995. 5 Therefore, the terms of the Cucamonga Lease require the parties to negotiate in good faith a new substitute rate. If the parties are unable to agree on a substitute rate, the matter is referred to arbitration. There is no specified time period in which the new substitute rate must be established. Cucamonga has, to date, paid its obligations under the Cucamonga Lease on a timely basis, but at a level that reflects the lower rates that the Company has been disputing. The Company bills Cucamonga for the full amount it asserts it is entitled to receive under the Cucamonga Lease, but has elected to create a reserve for the amount in dispute. Therefore, water revenues are reported in the amounts actually received from Cucamonga. Consequently, the recently announced court decision does not affect the Company's financial statements but it may have a positive impact on the future revenues the Company receives from Cucamonga. Pursuant to the Cucamonga Lease, if any of the Fontana Union water sources become sufficiently contaminated as to be unusable after treatment and/or blending, Cucamonga is not obligated to pay for the quantities of available but unusable water. The Company is aware of only one limited source of water that has been affected by contamination. Two water wells owned by Fontana Union have been closed because of contamination apparently originating from the Mid-Valley Landfill owned by San Bernardino County. The closure of these two wells has, to date, not impacted and is not currently anticipated to impact the payments received by the Company pursuant to the Cucamonga Lease. However, the Company will closely monitor the situation to make sure that it is prepared to undertake the activities necessary to protect itself from any revenue loss due to the contamination of these two wells. In addition, if any of Fontana Union's water rights are challenged by a third party, the Company and Cucamonga are obligated to share the costs of defending such challenge. Cucamonga also has an option to purchase the Company's Fontana Union shares in the second half of year 2042, at a price generally based upon a multiple of 15 times the then current annual lease payment, as well as the right to purchase all of the Company's Fontana Union shares for $1.00 in the year 2092. The Company employed a consulting organization in its search for a lessee of its Fontana Union shares. The consulting agreement calls for a commission payment of 5.42% of each payment received by the Company. The Company views the Cucamonga Lease as a mature, stable asset with its primary variable being future MWD water rate changes. Accordingly, the Company, in a continuing effort to maximize shareholder value, regularly evaluates various alternatives with respect to the Cucamonga Lease. These alternatives include, but are not limited to, retention, sale, securitization and monetization of the Cucamonga Lease. The Fontana Union shares and the Cucamonga Lease are currently pledged as collateral for the Company's revolving-to-term credit facility with Union Bank. INVESTMENT IN PENSKE MOTORSPORTS, INC. The Company owns 1,627,923 shares, or approximately 11.51% 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 TCS was built and successfully commenced operations in June 1997; and (ii) the subsequent sale of the Speedway Business Park, totaling approximately 54 acres to PMI in December 1996. In March 1996, PMI became a publicly traded company. PMI is traded on the Nasdaq National Market under the symbol "SPWY". 6 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, which owns and operates TCS near Los Angeles, California; (iii) Pennsylvania International Raceway, Inc. which owns and operates the Nazareth Motor Speedway ("Nazareth") in Nazareth, Pennsylvania; (iv) North Carolina Motor Speedway, Inc. which owns and operates the North Carolina Motor Speedway ("NCMS") in Rockingham, North Carolina; (v) a forty-five percent (45%) interest in Homestead-Miami, LLC, the operator of the Metro-Dade Homestead Motorsports Complex: in Dade County, Florida; (vi) Motorsports International Corp. ("MIC"), a motorsports apparel and memorabilia company; and (vii) 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. On March 27, 1998, PMI announced the sale of its seven percent (7%) interest in Grand Prix of Long Beach, Inc. (Nasdaq:GPLB), the organizer and operator of the annual CART PPG Cup Race run on the streets of Long Beach, California and the owner and operator of Gateway International Raceway in Madison, Illinois and Memphis Motorsports Park in Millington, Tennessee to Dover Downs Entertainment, Inc. for a reported $5,270,000. PMI, excluding Homestead-Miami Speedway, promoted a total of 17 major racing events at MIS, Nazareth, TCS and NCMS in 1997 and expects to promote a total of 19 major racing events at these speedways in 1998. Of the seventeen 1997 events, 11 were stock car races, 9 of which were sanctioned by National Association of Stock Car Racing ("NASCAR"), 4 (including an Indy Lights Series event) were Indy car races sanctioned by Championship Auto Racing Teams, Inc. ("CART"), and 2 were Craftsman Truck Series races sanctioned by NASCAR. NASCAR events promoted by PMI in 1997 included 4 NASCAR races associated with the Winston Cup Series, 4 races associated with the NASCAR Busch Grand National Series, and 2 races associated with the NASCAR Craftsman Truck Series. PMI's 1998 scheduled racing events at all of its facilities, excluding GPLB, are as follows:
DATE RACE CIRCUIT FACILITY February 21 GM Goodwrench Service Plus 200 NASCAR Busch Grand National North Carolina Speedway February 22 GM Goodwrench Service Plus 400 NASCAR Winston Cup North Carolina Speedway March 15 PPG-Dayton Indy Lights Homestead-Miami Speedway March 15 Marlboro Grand Prix of Miami CART/Fed EX Championship Homestead-Miami Speedway Presented by Toyota April 4 NASCAR Slim Jim All-Pro Homestead-Miami Speedway April 4 Florida Dodge Dealers 400 NASCAR Craftsman Truck Homestead-Miami Speedway April 25 Kool, Toyota Atlantic Championship Nazareth Speedway April 26 PPG-Dayton Indy Lights Nazareth Speedway April 26 Bosch Spark Plug Grand Pix Presented CART/FedEx Championship Nazareth Speedway By Toyota May 2 Auto Club 200 NASCAR Winston West California Speedway May 2 IROC Round II IROC California Speedway May 3 California 500 Presented by NAPA NASCAR Winston Cup California Speedway May 16 USRRC/F2000 Homestead-Miami Speedway May 17 USRRC NTB Trans Am Homestead-Miami Speedway May 17 USRRC Can-Am GT Homestead-Miami Speedway May 17 First Union 200 NASCAR Busch Grand National Nazareth Speedway May 17 NASCAR Featherlite Modified Tour Nazareth Speedway June 13 ARCA 200 ARCA Michigan Speedway June 13 IROC Round II IROC Michigan Speedway June 14 Miller Lite 400 NASCAR Winston Cup Michigan Speedway July 12 NASCAR Slim Jim All-Pro Nazareth Speedway July 12 NAPA AutoCare 200 NASCAR Craftsman Truck Nazareth Speedway July 18 No Fear Challenge NASCAR Craftsman Truck California Speedway
7 July 18 NASCAR Winston West California Speedway July 19 Kenwood Home & Car Audio 300 NASCAR Busch Grand National California Speedway July 25 Detroit News 100 PPG-Dayton Indy Lights Michigan Speedway July 26 US 500 Presented by Toyota CART/FedEx Championship Michigan Speedway August 15 Pepsi 200 Presented by DeVilbiss NASCAR Busch Grand National Michigan Speedway August 16 Pepsi 400 Presented by DeVilbiss NASCAR Winston Cup Michigan Speedway October 31 PPG-Dayton Indy Lights California Speedway October 31 ACDelco 200 NASCAR Busch Grand National North Carolina Speedway November 1 Marboro 500 Presented by Toyota CART/FedEx Championship California Speedway November 1 ACDelco 400 NASCAR Winston Cup North Carolina Speedway November 14 NASCAR Goody's Dash Homestead-Miami Speedway November 15 NASCAR Slim Jim All-Pro Homestead-Miami Speedway November 15 Jiffy Lube Miami 300 NASCAR Busch Grand National Homestead-Miami Speedway
A complete discussion of PMI, its business and financial results, is found in the Form 10-K Report for the year ended December 31, 1997 prepared and filed by PMI. Total 1997 revenues for PMI, on a consolidated basis, were $109.8 million with a net income of $16.4 million. After a fourteen percent (14%) increase in average shares outstanding, 1997 earnings per share increased thirty two percent (32%) from $.90 per share in 1996 to $1.19 per share in 1997. As discussed below, the Company began accounting for its share of PMI's net income as of April 1, 1996. The Company's share of PMI's net income for 1997 was $1,840,000 plus a management fee of $162,000, which ended in the first quarter of 1997. The following table sets forth the range of the low and high reported bid price of PMI's common stock for the quarter indicated, as reported on the NASDAQ National Market System.
1997 LOW HIGH ------------- ------------- Fourth Quarter $24.38 $33.88 Third Quarter $32.50 $34.58 Second Quarter $27.25 $32.38 First Quarter $25.00 $30.75
On March 20, 1998, the range of the low and high reported bid price of PMI's common stock were $31.38 and $33.00, respectively. Agreements Affecting the Company's Ownership Interest in PMI. In connection with the November 22, 1995 transaction whereby the Company acquired its initial ownership interest in PMI, and in connection with the sale of Speedway Business Park in December 1996, the Company entered into several agreements that affect the Company's ownership interest in PMI. The November 22, 1995 Organization Agreement contains, among other things, the terms and conditions pursuant to which the Company acquired its initial ownership interest in PMI. The Organization Agreement was later amended at the time of PMI's initial public offering in March 1996. Pursuant to the Organization Agreement, the Company has certain continuing indemnification obligations including one with respect to various environmental matters. The Organization Agreement also grants to PMI a right of first refusal to participate in any transaction or opportunity that directly relates to the conduct or ownership of a motorsports complex that comes to the Company, PSH Corp. or an affiliate of either, excluding International Speedway Corporation ("ISC"), an owner of twenty percent (20%) of the stock of PSH Corp., the majority owner of PMI. PSH Corp., PMI and the Company also entered into a Shareholders Agreement (the "Shareholders Agreement") at the time of the November 22, 1995 transaction. It was subsequently amended in March 8 1996. The Shareholders Agreement provides that if PSH Corp. desires to transfer any shares of capital stock of PMI for consideration to an unrelated third party, PSH Corp. must first offer such shares to the Company on the same terms and conditions as the proposed transfer. The Shareholders Agreement also provides that if the Company desires to transfer any shares of capital stock of PMI for consideration to an unrelated third party, the Company must first offer such shares to PSH Corp. at a price equal to the average of the Nasdaq National Market closing price of PMI's shares for the previous thirty calendar days. However, with the Company's consent, PSH Corp. has effectively transferred its right of first refusal to ISC. Thus, ISC has the right to purchase such shares on the same terms and conditions as PSH Corp.. If ISC elects not to purchase such shares, then PSH Corp. has the right to purchase such shares on the same terms and conditions as the proposed transfer. In either case, if the non-transferring party elects not to purchase such shares, then the transferring party may transfer its shares to the unrelated third party. The Shareholders Agreement also provides that PSH Corp. will vote its PMI shares in the election of directors for one nominee of the Company to the Board of Directors of PMI. Richard E. Stoddard, the Company's Chairman of the Board and Chief Executive Officer, is on the Board of Directors of PMI and is one of the three board members constituting PMI's Executive Committee and also serves on the Compensation Committee. Finally, under the terms of the Shareholders Agreement, PMI continued to pay the Company a fee of $162,000 through the first quarter of 1997, the last quarter before the opening of TCS. The Company also entered into a Registration Rights Agreement with PMI pursuant to which PMI granted incidental registration rights to the Company, subject to certain limitations, each time PMI files a registration statement with the Securities and Exchange Commission in connection with the sale of its common stock. In December 1996, as a part of the sale of Speedway Business Park to PMI, the Company and PMI entered into a Conditional Demand Registration Rights Agreement. In summary, this agreement requires PMI, in the event there should ever be an event of default on a loan secured by the PMI stock and the lender forecloses on the PMI stock, subject to certain limitations and conditions, to register the shares of PMI stock owned by such lenders. PROPERTY REDEVELOPMENT MILL SITE PROPERTY Background. From 1942 through 1983, KSC operated a steel mill in Southern California near the junction of the Interstate 10 and Interstate 15 freeways and approximately three miles to the northeast of Ontario International Airport. The Mill Site Property is located approximately 45 miles east of Los Angeles in one of California's fastest growing regions, and is served by two major railroads, the Burlington Northern Santa Fe and the Union Pacific (formerly Southern Pacific). The Mill Site Property consists of four distinct parcels of land: the Central Mill Site (originally approximately 595 acres (gross)), the South Mill Site (approximately 290 acres (gross)), the West End Property (approximately 240 acres (gross)) and the Valley Boulevard Property (approximately 42 acres (gross)). The property also includes approximately 35 acres used for the San Sevine flood control channel. As discussed in more detail above, approximately 534 acres of the Central Mill Site Property are now owned by PMI. (See "Part I, Item 1. Business - Investment in PMI"). In addition, as discussed in more detail below, approximately 16 acres were sold during 1997 to a third party and approximately 23 acres were contributed for the benefit of the WVMRF. The map on the following page illustrates the location of these four parcels and the Company's current ownership of such parcels. 9 [Map illustrating property owned by the Company in San Bernardino County, California and Map Illustrating Proposed Major Improvements to the Property] 10 The Mill Site Property has its own water rights, originally 2,930 acre feet per year that are entirely distinct from the Company's interest in Fontana Union. A portion of these water rights, 1,300 acre feet, was sold as a part of a settlement of litigation and other claims with an adjoining landowner, and another portion, 475 acre feet, was contributed with the property now owned by The California Speedway Corporation. Thus, the Company now owns 1,155 acre feet of annual water rights associated with the Mill Site Property of which 630 acre feet are jointly owned with California Steel Industries ("CSI"). CSI has the right of first use of the 630 acre feet, with payment to the Company, through June 30, 2004, with the Company having the right of first use thereafter. Mill Site Redevelopment Plan. The Company is continuing with its plans to redevelop the balance of the Mill Site Property. After: (i) completion of the transactions with PMI; (ii) taking into account the land to be used for the WVMRF; and (iii) the sale of one of the NAPA lots to an affiliate of Budway Enterprises, Inc., the Company now owns approximately 629 acres (gross). However, depending upon the final redevelopment plan and after taking into account slope loss, rail road easements, the San Sevaine flood control channel, proposed streets and highway improvements, the sewer treatment facility, and other similar items, the Company anticipates having approximately 500 useable acres available for development. The remaining Napa Lot, which constitutes approximately a 15 acre portion of the Central Mill Site Property, and the WVMRF site, as discussed below, have already received the entitlements and permits necessary for their development. However, the balance of the Mill Site Property owned by the Company, requires various entitlements and permits from San Bernardino County prior to redevelopment. The entitlement and permitting process formally commenced in the second quarter of 1997 with the Company filing an application for the "Kaiser Commerce Center" Specific Plan with San Bernardino County for all of its property except for approximately 26 acres within the City of Rancho Cucamonga and the approximately 135 acres of property commonly referred to as the "East Slag Pile" property. The Specific Plan application identified a wide variety of potential uses for the property. Possible uses include a rail-served distribution and commercial park, an inter-modal rail truck distribution center, warehousing, a commercial truck stop, as well as commercial and recreational uses. Of course, the final use for any specific parcel of the Mill Site Property will be dependent upon the real estate market and the needs of potential tenants, buyers and users of a particular parcel, subject to the general limitations imposed by the final Specific Plan. If development of the Kaiser Commerce Center occurs as provided in the proposed Specific Plan, it will have a major impact on the local economy. In an economic study prepared by The Natelson Company, Inc. and released in the first quarter of 1998, it is projected that over 9,500 permanent new jobs and approximately $575 million per year in additional economic activity in San Bernardino County will be generated by the project's full development, with 5,200 of those jobs created on site. There are no assurances, however, that the Kaiser Commerce Center will ultimately be approved for development as currently proposed or as to the timing and scope of ultimate development. Separately and in addition to the permitting and entitlement process with the County, the Company is working with the California Department of Transportation and San Bernardino County to design and obtain approval for an improved interchange at Etiwanda Avenue and the I-10 Freeway. Such freeway improvements near the Mill Site Property would also involve the realignment of at least one existing street and the construction of other street improvements. 11 As a result of additional technical studies and review, the entire entitlement and permitting process is currently anticipated to be completed by the third quarter of this year and involve an expenditure of approximately $1.5 million. In addition, as discussed in more detail below, the Company will continue to evaluate and undertake the required environmental remediation of portions of the Mill Site Property. The approximately 405 (net) aces that comprise the Kaiser Commerce Center contained limited areas with affected soils that require remediation. Significant capital funds will be required to implement the infrastructure and access improvements discussed above. However, the Company will seek to minimize its capital investments for these improvements by structuring joint ventures and leases or by contributing portions of the land for an ownership interest in operating companies seeking to develop the land. In addition, the Company will seek other sources of funds, if available, such as local tax increment financing as well as Federal highway improvement funds. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information. To further encourage development of the Mill Site Property, the Company and the San Bernardino County Economic Development Department jointly sought and obtained the designation of the Mill Site Property, with the exception of the approximately 26 acre Rancho Cucamonga parcel, as a Recycling Market Development Zone ("RMDZ"). RMDZ's are intended to create incentives to attract businesses that recycle or utilize recycled products. Development of Central Mill Site-Napa Lots and WVMRF site. The portions of the Central Mill Site Property still owned by the Company are one of the Napa Lots (approximately 15 acres) and portions of the property on which the WVMRF is to be expanded. These parcels are debt free and are described in greater detail below. NAPA Lots. Adjoining TCS are approximately 31 acres of property, called the "Napa Lots", that were ultimately developed into two industrial zoned, rail- served lots. On September 30, 1997, one of the Napa Lots, of approximately 15.7 acres, was sold to an affiliate of Budway Enterprises Inc. ("Budway"), a distributor of steel and other products, for approximately $2,943,000, or approximately $4.30 per square foot resulting in a gain of $656,000 which has been deferred. At closing, the Company received $1,500,000 in cash, less closing adjustments. The balance of the purchase price of approximately $1,443,000 is represented by a promissory note from the buyer. The note requires a payment of approximately $554,000 in principal in nine equal monthly installments plus interest at ten percent (10%) per annum with the remaining principal balance of approximately $909,000 payable $25,000 per quarter plus interest at the same ten percent (10%) rate. The note is secured by a lien on the property sold and by the guarantee of Budway and one of its individual owners. The Company has subordinated its note receivable to approximately $6.0 million in construction and permanent financing for a warehouse and distribution center being built on the property. Although the Company considers the sale to have been fully consummated during 1997, generally accepted accounting principles require the gain to be deferred and recognized under the cost recovery method, i.e., once proceeds received from the buyer exceed the Company's basis in the property sold. The remaining NAPA Lot of approximately 15 acres does have some impacted soil stock piled on a portion of the lot. Once this soil is removed and environmental clearance is received, the lot will be available for sale. 12 The WVMRF. In June, 1997, the Company through its wholly-owned subsidiary, Kaiser Recycling Corporation ("KRC"), contributed approximately 23 acres to West Valley MRF, LLC, the limited liability company owned fifty percent (50%) by the Company and fifty percent (50%) by Burrtec Waste Industries, Inc. As discussed in greater detail below under "Waste Management-West Valley MRF", West Valley MRF, LLC constructed and began operation of a materials recycling and waste transfer facility in the second half of 1997. Approximately 7 acres of the Central Mill Site are still currently reserved for possible contribution to West Valley MRF, LLC if expansion of the MRF requires such property. However, a portion of the reserved property includes the Mill Site tar pits which must be remediated and, therefore, may not ultimately be available for development. (See "Mill Site Environmental Matters" below). West End and Valley Boulevard Properties. The West End Properties (approximately 240 acres (gross)) is located to the West of the Central Mill Site Property across the San Sevaine Channel. The Valley Boulevard Property (approximately 42 acres (gross)) is located South of the Central Mill Site and adjoins the I-10 Freeway. In 1989 and 1990, the Company entered into joint venture agreements with Lusk Ontario Industrial Partners II, a California limited partnership, whose general partner was The Lusk Company (collectively "Lusk"), with respect to the West End Property and the Valley Boulevard Property. In July 1994, the Company, through a wholly owned subsidiary, Kaiser Steel Land Development, Inc., purchased the properties out of the Lusk Joint Ventures for a total consideration of $15,000,000. The Company paid approximately $9,000,000 in cash at closing and Lusk carried back $6,000,000 pursuant to a promissory note secured, solely, by a first deed of trust on the properties. The principal amount of the note accrues interest at 1.5% over the prime rate. Principal payments of $60,000 plus accrued interest are to be made quarterly with a balloon payment due on the fourth anniversary of the note, July 28, 1998. The Company currently anticipates drawing on its existing credit facility to repay the obligation on its due date. See also "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K Report. The West End Property has no known material environmental remediation requirements although two limited areas require further investigation and may require limited remediation. On the West End Property there are several older metal warehouse buildings which are rented out to a variety of short term tenants and which will need to be demolished as the redevelopment of the West End Property proceeds. In the second half of 1997, the Company began the activities necessary to demolish one of the major remaining buildings, Fabrication No. 3 Building, and related structures. Such activities included terminating leases with certain tenants in and surrounding the Fabrication No. 3 Building and conducting various environmental surveys. The actual demolition of Fabrication No. 3 Building and related structures commenced in the first quarter of 1998. The Company also provides railroad switching services for many of the tenants on this property. The Company believes that the West End Property could be redeveloped in a variety of ways, including a modern industrial, rail-served distribution and commercial park, once the appropriate permitting and entitlements are obtained and assuming that economic conditions justify the redevelopment. The development of the West End Property will involve substantial expenditures for grading and infrastructure improvement. The Valley Boulevard Property has no known environmental remediation requirements and can be easily redeveloped. If the proposed freeway and street improvements are made, the Valley Boulevard Property will have increased freeway access and visibility. This property could serve as a location for a hotel, fast food restaurants and other similar types of businesses where freeway visibility and access are important. 13 South Mill Site. The South Mill Site consists of approximately 290 acres and is debt free. This property was used by KSC primarily as a storage area for slag, a non-hazardous rock-like byproduct of iron and steel production, as well as for the Company's sewage and wastewater treatment plants. The sewer treatment plant is discussed in more detail below. The Company's hazardous treatment plant was closed in mid-1994 in connection with the expiration of the Company's contract to treat the waste of an adjacent property owner. These uses have historically provided the Company with interim revenues and positive cash flow while waiting to begin redevelopment of the property. The west portion of the South Mill Site, known as the West Slag Pile, was used only for the storage of slag. There is no known environmental remediation required with respect to this property although additional investigation will be required. Although the slag is being removed and sold by a third party contractor, thereby, producing a current revenue stream for the Company, the amount of slag is such that it is unlikely to be cleared in less than 5-10 years without cost to the Company. However, if the West Slag Pile, West End Property and the street and freeway improvements are constructed as currently contemplated, it is anticipated that most of the remaining slag will be utilized in the grading and construction process. As noted above, the Company is currently pursuing the possible use of this portion of the property as a commercial truck stop and other related uses. The eastern portion of the South Mill Site known as the East Slag Pile, is also mostly covered by slag. However, up to approximately 40 acres in the southeast corner of this property will require some form of remediation as discussed in "Mill Site Environmental Matters" below. Although the Company is exploring uses of the property that may not require the complete removal of the hazardous materials and slag, the definitive redevelopment of this entire property is likely to be delayed until any required remediation is completed. Depending upon the type of environmental remediation required, this property could have potential commercial and recreational uses. In addition to the area of the East Slag Pile requiring remediation, the Company applied to the California Environmental Protection Agency Department of Toxic Substance Control ("DTSC") to use up to approximately 6.5 acres of the South Mill Site as a corrective action management unit ("CAMU") in which certain types of impacted materials from other locations from the Mill Site Property would be stored and capped. Approval of the CAMU was received in February 1998. See "Mill Site Environmental Matters" below. Sewer Services. The Company operates a sewage treatment facility on the South Mill Site that serves property historically owned by the Company or KSC. The Company currently provides sanitary sewer services to CSI, an adjoining landowner, from its sewage treatment plant located on the northeastern end of the South Mill site property for a total revenue in 1997 of $223,000. CSI is also obligated to pay a substantial portion of the operating costs of the sewer treatment plant. In addition, pursuant to a Sewer Services Agreement, the Company has agreed to provide sanitary sewer treatment services for the wastewater generated by the property owned by The California Speedway Corporation. In consideration for such services, The California Speedway Corporation pays to the Company an annual fee of $88,800 in quarterly installments, which commenced in April 1997, adjusted annually by increases in the consumer price index. The agreement also grants an option to The California Speedway Corporation to purchase the Company's wastewater treatment facility in certain circumstances such as if the Company terminates the Sewer Services Agreement or the Company discontinues providing sewer treatment services. In order to provide this sewer service, the Company 14 has expanded the capacity of and refurbished the treatment plant at a cost of approximately $2.3 million. Approximately $988,000 of the $2.3 million of the costs to upgrade the sewer treatment plant were paid by The California Speedway Corporation. The sewer treatment facility also currently serves the West Valley MRF and is anticipated to serve the former Mill Site as it is developed if alternatives are not otherwise available on a cost effective basis. Completion of the improvements to the sewer treatment facility, totaling approximately $213,000 will be undertaken in 1998. MILL SITE ENVIRONMENTAL MATTERS The operation of a steel mill by the Company's predecessor, KSC, resulted in known contamination of limited portions of the Company's Mill Site Property. The Company is subject to a 1988 consent order (the "Consent Order") with the DTSC, which requires the Company to investigate and remediate hazardous materials on the Mill Site Property. Under the Consent Order, the phased remediation was originally scheduled to be completed by July 1998. However, in late 1997, the Company was granted a seven (7) year extension to complete its required obligations under the Consent Order. The Consent Order, as amended, provides for a general outline of the known tasks and the timing of performing such tasks. Any particular item of investigation and/or remediation can be modified with the consent of the DTSC. During 1997, the Company undertook a number of activities with regard to environmental matters. These activities included, but were not limited to, remediation of impacted soil on the site of the WVMRF, investigation of the sewer treatment facility and adjacent areas, investigation of buildings planned for demolition for such items as asbestos containing materials and lead based paint, and preparation of a draft supplemental groundwater study. The Company also undertook preliminary investigations of available and alternative technologies for remediation of the tar pits located on the Central Mill Site and the landfill in the East Slag Pile. In addition, the Company expended considerable effort in seeking approval for a CAMU with the DTSC. The CAMU was approved by the DTSC in February 1998. The CAMU will be in the northeast portion of the East Slag Pile on land that was previously used by a bankrupt former tenant of KSC for a waste pickling facility and will be used for the on-site disposal of affected soils and materials from the balance of the Mill Site Property. Upon termination of the use of the CAMU, the CAMU will be capped and closed in compliance with the DTSC's policies. The CAMU is a less expensive alternative than transporting the affected soils and materials to an off-site disposal facility. While the Company has monitored certain groundwater wells in the past, the DTSC requested and the Company intends to implement a supplemental groundwater investigation study. In 1997, a draft supplemental ground water study was furnished to the DTSC for its review and comment. It is currently anticipated that the DTSC and the Company will agree in 1998 on the methodology and scope of the supplemental groundwater investigation. As a part of the supplemental study of groundwater, in late 1996, the Company drilled the first two test wells on the on property owned by TCS, i.e., the Central Mill Site. Initial results from these two test wells were positive for the Company in that they did not indicate any groundwater contamination that would require remediation. In addition, the Company previously settled certain obligations of groundwater contamination with the California Regional Water Quality Control Board. The settlement required a $1.5 million cash 15 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's cost for investigation, remediation, site cleanup, and all other environmental related activities for 1997 totaled approximately $1.5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Form 10-K Report for additional information. While there are a number of smaller environmentally-related Mill Site projects such as disposing inactive PCB transformers and removing or containing of some asbestos containing materials, based on currently know information, the major outstanding environmental issues to be addressed that will likely involve material expenditures are: (i) the approximately 7 acre parcel containing the tar pits which parcel is located adjacent to the Mill Site MRF property; (ii) the East Slag Pile waste management unit (sometimes referred to as the East Slag Pile landfill); (iii) remediation of the sewer treatment plant, as appropriate; (iv) additional groundwater monitoring including groundwater related items; (v) completion of the above described CAMU; and (vi) investigation and possible remediation of two limited areas on the West End Property. The Company estimates, based upon current information, that its future remediation and other environmental costs for the balance of its land and related matters will be between approximately $20 million and $31 million (i.e., the original high range of the estimate of approximately $32 million less 1997 expenditures), depending both upon the ultimate extent of the environmental remediation and clean-up involved and upon which approved remediation alternatives are eventually selected. The Company anticipates recovery of the future remediation costs incurred through redevelopment of the property, primarily in connection with specific redevelopment projects or joint ventures. This range assumes a capping alternative can be used for the East Slag Pile waste management unit on the East Slag Pile and the tar pits parcel and that the CAMU can accept all the impacted soil currently scheduled for deposit into the CAMU. As of December 31, 1997, the total short-term and long-term environmental remediation liability reflected on the Company's balance sheet was approximately $30.7 million, the high end of the probable range of future remediation and other environmental costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Form 10-K Report. Although ongoing environmental investigations are being conducted on the Company's 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. 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 $4.8 million of Kaiser's Union Bank Credit facility. See Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Company is also involved, from time-to-time, in legal proceedings concerning environmental matters. In February 1996, the City of Ontario, California served a complaint on the Company alleging 16 that the Company is liable for environmental contamination of one of its municipal wells. See "Part I, Item 3. Legal Proceedings." EAGLE MOUNTAIN TOWNSITE The Eagle Mountain Townsite, which is owned debt free by Kaiser and covers approximately 460 acres, consists of more than 300 houses (of which approximately 100 have been renovated for current occupancy), a water supply and sewage treatment system, an office building, machine shops, school facilities and other structures. When the Eagle Mountain iron ore mine was operational, the Eagle Mountain Townsite provided housing for mine employees and their families. Except for many buildings and relating piping having asbestos containing materials, there is no known material environmental remediation required at Eagle Mountain. The Company's wholly-owned subsidiary, Kaiser Eagle Mountain, Inc., owns and operates the Eagle Mountain Townsite. The Company currently leases a portion of the Eagle Mountain Townsite to a private company, which operates a minimum security prison for the State of California. In order to redevelop the Eagle Mountain Townsite, the Company has filed a Specific Plan with the County of Riverside. The Townsite Specific Plan is included in the processing of the Landfill Project. If the land exchange with the United States Bureau of Land Management (the "BLM") is completed (see page 27 "Proposed BLM Land Exchange" in this Form 10-K Report), the Eagle Mountain Townsite will expand to approximately 1,100 acres. OTHER REDEVELOPMENT OPPORTUNITIES Other Property Ownership and Development. The Company owns a number of real estate parcels and mineral deposits in the California desert, including the Morris Lode Properties, an active iron ore mine leased to a third party (the "Silver Lake Mine"), and improved and unimproved property at Lake Tamarisk, an unincorporated community located approximately eight miles from the Eagle Mountain site. MUNICIPAL SOLID WASTE MANAGEMENT THE WEST VALLEY MRF West Valley MRF, LLC. In 1989, the California legislature enacted legislation, AB 939, which currently requires all municipalities to recycle or divert 25% of their solid waste streams from landfills by the year 1995 and 50% by the year 2000. In addition, counties are required to demonstrate to the State of California that they have at least 15 years of available landfill capacity. An alternative to these requirements is the transportation of solid waste to an independent or municipally-owned materials recovery facility, commonly referred to as "MRF", which will separate recyclable materials for either storage or sale to a variety of users. The residue waste from the recycling process is disposed of at landfills. In response to this potential market opportunity, the Company and Burrtec Waste Industries, Inc. ("Burrtec"), a local waste hauler, entered into a joint venture agreement (the "MRF Joint Venture") in 1989 to construct and operate a rail-served regional solid waste transfer station and MRF to be located on approximately 30 acres of the Central Mill Site (the "WVMRF"). From 1989 through 1996 Burrtec and the Company secured the necessary permits and entitlements to build and operate a MRF and unsuccessfully sought to be integrated into San Bernardino County's Municipal waste system. 17 In 1997, the Company and Burrtec restructured their MRF joint venture whereby a limited liability company, West Valley MRF, LLC was formed to construct and operate the WVMRF. Effective June 19, 1997, a wholly-owned subsidiary of the Company, Kaiser Recycling Corporation ("KRC") and West Valley Recycling & Transfer, Inc. ("WVRT"), Burrtec's wholly owned subsidiary, entered into a Members Operating Agreement ("MOA") which is substantially the equivalent of a joint venture agreement but for a limited liability company. Other ancillary and related agreements to the MOA were also entered into as of June 19, 1997. Pursuant to the terms of the MOA, KRC contributed an approximately 23 acre parcel of the Mill Site on which Phase 1 of the WVMRF was constructed and WVRT contributed all of the goodwill of Burrtec's recycling business that was operated out of Riverside County entitling West Valley MRF, LLC to all revenues generated from such business after the closing date. Under the terms of the MOA, KRC and the Company remain responsible for any pre-existing environmental conditions and WVRT is responsible for environmental issues that may arise related to the future deposit or release, if any, of hazardous substances. The MOA also addresses such items as the terms and conditions for the contribution of up to approximately 7 acres of additional property by KRC to West Valley MRF, LLC; future capital and financing transactions; the governance of West Valley MRF, LLC through the creation and operation of an Executive Committee; voting rights; indemnification obligations between the members of West Valley MRF, LLC; the daily operation of the WVMRF by WVRT pursuant to a separate Operation and Maintenance Agreement; distribution of cash flow in various circumstances; rights of first refusal and various rights related to a sale or deemed sale of a member's ownership interest in West Valley MRF, LLC and the terms of any such sale, including a non-completion provision in certain circumstances; events of default; remedies upon the occurrence of an event of default by KRC or WVRT including the possible purchase of a member's interest in West Valley MRF, LLC at a discount from appraised value; and termination and dissolution of West Valley MRF, LLC. The Company and Burrtec have each given their separate Performance Guaranty Agreement pursuant to which they respectively guaranty the prompt performance of their respective subsidiary's obligations under the MOA and in the case of Burrtec, also under the Operations and Maintenance Agreement which deals with the daily operation of the WVMRF by WVRT. Financing, Construction and Operation of the WVMRF. Phase 1 of the WVMRF, which includes a 62,000 square foot building, sorting equipment, and related facilities for waste transfer and recycling services, was constructed and equipped, at a total cost of approximately $10.3 million, in the last half of 1997. It became operational on a limited basis in late October 1997 and became fully operational as of January 1998. The WVMRF currently receives and processes approximately 800 to 1,000 tons per day of non-hazardous commercial and municipal solid waste. Phase 1 of the WVMRF is permitted to receive and process up to 2,000 tons per day (six days a week) of solid waste. Upon the construction of future phases, the WVMRF could receive and process up to 5,000 tons per day of commercial and municipal solid waste. Most of the financing for Phase I was obtained through the issuance and sale of $9,500,000 in California Pollution Control Financing Authority (the "Authority") Variable Rate Demand Solid Waste Disposal Revenue Bonds Series 1997A (the "Bonds"). This tax-exempt financing transaction represented by the Bonds, which effectively closed on June 25, 1997, are limited obligations of the Authority payable solely from and secured by a pledge and lien on, the loan payments made by West Valley MRF, LLC and funds that may be drawn on an irrevocable direct pay letter of credit issued by Union Bank of California, N.A. ("Union Bank"). Neither the faith and credit nor the taxing power of the State of California or any political subdivision thereof is pledged to the payment of the principal or interest on the Bonds. The Bonds are backed by a letter of credit issued by Union Bank. Pursuant to a Guaranty Agreement with 18 Union Bank, the Company and KRC are liable for fifty percent (50%) of the principal and interest on the Bonds in the event of a default by West Valley MRF, LLC. Burrtec and its affiliates in effect are also liable under a separate Guaranty Agreement with Union Bank for the other fifty percent (50%) of the principal and interest on the Bonds in the event of a default by Borrower. Fitch Investors Service rated the Bonds upon issuance as "AA-/F-1+." The interest rate for the Bonds varies weekly and has averaged approximately 3.5% per annum since inception. The Bonds have a stated maturity date of June 1, 2012, although the West Valley MRF, LLC is required pursuant to an agreement with Union Bank to annually redeem a portion of the Bonds on a stated schedule. Beginning in 1998, the West Valley MRF, LLC is required to redeem $100,000 in principal amount of the Bonds with the annual redemption increasing to a maximum of $940,000 in the year 2011. West Valley MRF, LLC and Union Bank have executed a Reimbursement Agreement, which among other things, sets the terms and conditions whereby the West Valley MRF, LLC is: (i) required to repay Union Bank in the event of a draw under the letter of credit; (ii) grants the Bank certain security interests in the property of West Valley MRF, LLC; (iii) establishes the redemption schedule for the Bonds; and (iv) sets forth certain financial and other covenants West Valley MRF, LLC must comply with during the term of the Bonds. The Company and KRC have also provided to Union Bank an Environmental Guaranty Agreement pursuant to which they are jointly and severally liable for any liability that may be imposed on Union Bank for pre-existing environmental conditions on the Borrower's property acquired from KRC that the Borrower fails to timely address. See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Potential Dispute with San Bernardino County. San Bernardino County recently asserted that the WVMRF's current operations are in violation of the MRF's conditional use permit because much of the waste processed at the WVMRF is deposited into Orange County, California landfills. One of the purported conditions in the WVMRF's conditional use permit states that the residue from the MRF is to be deposited into San Bernardino County landfills until November 23, 1998. West Valley MRF, LLC believes that this purported condition is invalid and not enforceable for a variety of reasons. However, if upheld, the violation of such condition could lead to the revocation of the conditional use permit under which the WVMRF operates. San Bernardino County has initiated discussions with the West Valley MRF, LLC to determine if there can be a mutually acceptable arrangement pursuant to which the WVMRF can be integrated into the County's landfill system without adversely impacting the economics of the WVMRF. Litigation could result if these negotiations do not reach a mutually acceptable conclusion. Competition. Although other entities have proposed to develop MRFs that would serve the same broad geographic area as that of the Mill Site MRF, the Company believes that none of them has yet completed the permitting process. However, Burrtec does own and operate a MRF in Agua Mansa, California located approximately 15 miles from the WVMRF that could compete in very limited areas for waste that might otherwise go to the WVMRF. Agua Mansa is currently anticipated to have little if any impact in the WVMRF. LANDFILL PROJECT Background. Many of Southern California's current landfills are located in urban areas and are old, unlined, and lack current environmental safeguards. Furthermore, it is becoming increasingly expensive and difficult to permit and open new landfills or to expand existing landfills in urban areas due to 19 political opposition and stringent government regulations, including recent federal regulations. The Company believes that Southern California will begin to face a shortage of safe, permitted landfill capacity beginning in the next decade. However, the anticipated shortage in landfill capacity that was originally predicted to occur in the 1980's and early 1990's did not develop as anticipated because several regional landfills were expanded and a number of other landfills were seeking to expand their permitted capacity. In addition, the anticipated life of many existing landfills also increased because of better landfill management techniques and reduced waste tonnage due to recycling and the recent California recession. The Eagle Mountain Site. The Company's 11,350 acre Eagle Mountain site, located in the remote California desert approximately 200 miles east of Los Angeles, consists of three large open pit mines, the Eagle Mountain Townsite and a 52-mile private rail line that accesses the site. The Company has leased approximately 4,654 acres of the idled mine site and the rail line to MRC for development of a rail-haul solid-waste landfill (the "Landfill Project"). As discussed in more detail below, effective as of January 1, 1995, the Company, through a wholly-owned subsidiary, Eagle Mountain Reclamation, Inc. ("EMR"), became a 70% shareholder in MRC and, through subsequent investments in MRC, is currently an approximately 73% shareholder in MRC. In anticipation of Southern California's ultimate need for new environmentally safe landfill capacity, MRC in 1988 began the planning and permitting for a 20,000 ton per day rail-haul, non-hazardous solid waste landfill at Kaiser's Eagle Mountain Site. The Company believes that the Eagle Mountain Site has many unique attributes which make it particularly well-suited for a rail-haul, solid waste landfill including, but not limited to, its remote location, arid climate, available and suitable materials for the proposed liner system and daily cover, and rail access. Current plans for operation of the landfill anticipate that non-hazardous household solid waste will initially be delivered to MRFs and transfer facilities throughout Southern California by municipalities and independent waste haulers. Recyclable and hazardous materials will be separated at these facilities, and the remaining non-hazardous solid waste will be transported, primarily by rail, in closed and locked containers to the Eagle Mountain landfill. MRC currently anticipates that the landfill's initial operations, depending upon the level of disposal fees, could commence with a minimum of approximately 4,000 tons of solid waste per day. Founding, Ownership and Restructuring of MRC. MRC was formed in 1982 by waste industry professionals to address the anticipated solid waste disposal problem in Southern California. In order to utilize Kaiser's Eagle Mountain Site, the Company, through its subsidiary Kaiser Eagle Mountain, Inc., entered into a lease with MRC in 1988 for the development of the Landfill Project (the "MRC Lease"). In 1990, a subsidiary of Browning Ferris Industries ("BFI"), purchased a 50% interest in MRC. BFI provided a majority of MRC's funding subsequent to its initial investment, which resulted in BFI becoming the majority owner of MRC. As of August 1, 1994, the ownership of MRC was restructured as part of BFI's withdrawal from MRC. As part of the restructuring, BFI returned to MRC all of its common and preferred stock in MRC and paid off all of MRC's outstanding bank indebtedness leaving MRC substantially debt free. In addition, BFI provided MRC with funds in excess of $5,000,000 to be used to fund ongoing development activities. BFI also agreed to leave in place certain financial assurances associated with the permits that had been granted to MRC through August 1, 1996. Those financial assurances were never used. 20 MRC was further restructured effective January 1, 1995, when the Company through Eagle Mountain Reclamation ("EMR"), a wholly-owned subsidiary separate from the subsidiary that owns the land at Eagle Mountain, acquired common stock in MRC representing a 70% ownership interest. This transaction was effective as of January 1, 1995. In exchange for the ownership interest, the MRC Lease was amended to eliminate MRC's obligation to pay minimum rent. MRC forgave all current contingent non-recourse obligations the Company would have had to repay MRC out of future royalties. Operation and Financing of MRC. With the acquisition of the equity interest in MRC, the Company, through MRC, has taken a more active role in the permitting of the Landfill Project and in assisting MRC, as appropriate, in raising the funds necessary to complete the permitting process. The completion of the Landfill Project is dependent upon, among other things, MRC's continuing ability to raise additional equity capital. Although neither the Company nor any subsidiary of the Company has any obligation to invest funds in MRC, the Company has continued, to date, to make investments in MRC. Through a series of private placements with existing MRC shareholders, from July 1995 through December 31, 1997, a total of $10.8 million has been raised by MRC, with Kaiser contributing approximately $8.1 million of that amount. Due to the uncertainty associated with the Landfill Project, the Company is evaluating its continuing investment in MRC. In this regard, the Company has agreed to advance funds to MRC for a limited period in 1998 pending the Company's determination, in light of the San Diego County Superior Court's recent ruling, of what course of action to pursue with regard to the Landfill Project. It is anticipated that the initial 1998 advance will total up to approximately $900,000 and that the Company may invest additional funds in MRC during 1998 depending upon what course of action the Company may ultimately decide to pursue. MRC continues to pursue other financing from prospective investors as well as other means of raising funds or commitments such as the sale of capacity rights, air space or disposal agreements. MRC Lease. In connection with the reorganization of MRC, the MRC Lease was amended effective July 29, 1994, and again amended effective January 1, 1995, with the Company's acquisition of a 70% interest in MRC. Under the terms of the MRC Lease, as amended to date, MRC is responsible for substantially all project costs and activities, including landfill design, permitting, construction and operation. MRC has also agreed to indemnify the Company against claims arising from MRC's activities, including any environmental damage that may be caused to the leased property by MRC's operations. The MRC Lease also provides, among other things that: (i) the Company must give MRC notice of any proposed sale of its interest in the Eagle Mountain property, and MRC has a right of first refusal to purchase such interest under certain circumstances; (ii) the Company and MRC may not participate in another project that employs a railroad in connection with the storage or disposal of solid waste in counties surrounding the landfill; and (iii) MRC has certain rights to terminate the MRC Lease including: (a) upon the Company's default under the terms of the MRC Lease; (b) upon 180 days notice at any time during the six month period immediately following the receipt of all the necessary permits for the Landfill Project; and (c) at any time upon two year's notice. The MRC Lease was again amended as of January 1, 1996. The amendment reduced the amount of land that MRC leases from the Company by approximately 50%. MRC continues to lease from the Company all the real property necessary for the Project. The Company maintains and may exercise all rights it has under the MRC Lease, including the right to re-acquire the land leased to MRC through its subsidiary, Kaiser Eagle Mountain, Inc., for the Landfill 21 Project. In the event the Company re-acquires the Landfill Project, depending upon the circumstances, such as upon MRC's default due to lack of funds, the non-BFI shareholders, at the time of the July 1994 amendment to the MRC Lease, shall have the right to continue in the project in some manner. Lease Economics. Until January 1, 1995, MRC paid to the Company a minimum monthly rent. This rent was $200,000 per month during 1994 and was originally scheduled to increase to $300,000 a month in December 1995. However, in conjunction with the Company's acquisition of its equity interest in MRC, the MRC Lease was amended effective January 1, 1995, to eliminate the minimum monthly rent. The elimination of the minimum monthly rent did not change the future royalty payments due the Company upon the commencement of landfill operations. Once the landfill is operational, under the current terms of the MRC Lease, the Company will receive, as landlord of the Eagle Mountain Site, the greater of (i) a royalty of $2.00 per ton of waste received; or (ii) a royalty payment calculated as a designated percentage of the landfill tipping fees charged by MRC. The future royalty payment paid to the Company by MRC is based on MRC's gross collections, which are basically equivalent to the tipping fees to be charged by MRC at the landfill. In calculating gross collections, MRC may deduct certain items, including any federal or state fees, the host fees paid to Riverside County and other charges imposed or required to be collected at the landfill. Certain other revenues are also excluded from the definition of gross collections, including any MRC revenue from salvage, recycling or reclamation operations or from the disposal of waste from certain areas near the Landfill Project. In addition to the royalty payment, the Company will receive an additional $0.15 royalty for every ton of waste transported to the landfill on the Company's 52-mile rail line. The following table illustrates the royalty payment formula set forth in the MRC Lease. Monthly Average % Fee Net # Days Royalty = Daily X Payable to X Tipping X in Payment Tonnage Kaiser Fee Per Ton Operation
Average Daily Tonnage/1/ Tipping Fee Percentage Payable to Kaiser - ---------------------------------- -------------------------------------------------------- 0 - 3,500 10.0% on all tonnage during applicable month 3,501 - 4,999 10.0% on first 3,500 tons; 15.0% on balance during applicable month 5,000 - 8,999 15.0% on all tonnage during applicable month 9,000 - 20,000 18.5% on all tonnage during applicable month
- ---------------------------------- /1/ Determined over the number of operating days in a calendar month. The Company's revenues under the MRC Lease will be directly affected by the amount of tonnage accepted at the Landfill Project and the applicable tipping fees charged for such tonnage. The amount of tonnage depends upon MRC's ability to obtain contracts with municipalities and waste haulers for the receipt, transfer and disposal of solid waste. MRC has not, to date, obtained any contract for the transfer or disposal of solid waste, although MRC is undertaking limited marketing efforts to seek such contracts. However, there are no assurances that MRC will be able to secure contracts for sufficient waste tonnage to make the Landfill Project successful. Disposal costs consist principally of tipping fees and transportation costs associated with the hauling of waste to the landfill. Tipping fees currently vary widely among landfills, partly as a result of real and 22 perceived landfill capacity shortages in areas, pending closure deadlines and partly as a result of increased costs of construction, operation and/or closure. Tipping fees do not include transportation costs, which may vary significantly depending upon such factors as distance to the landfill and method of handling the waste. It is unknown at this time if disposal costs in Southern California will sufficiently increase as to make the Eagle Mountain landfill attractive to those controlling the disposal of waste. See the discussion on disposal fees below. Government Regulation/Permitting. Solid waste landfills are subject to stringent federal, state and local environmental regulations. These regulations, among other things, require upgraded or new composite landfill liners, leachate collection and treatment, groundwater and methane gas monitoring, stricter siting and location criteria, closure requirements and financial assurances (such as a surety bond) from the owner or operator. The Eagle Mountain landfill is designed to meet or exceed these requirements. In order to construct and operate the Landfill Project, MRC is required to obtain numerous government permits and approvals relating to such matters as land use compatibility, groundwater protection, air quality emissions, habitat protection, and rodent, pest and litter controls. The process for obtaining these permits and approvals is often difficult, expensive and time-consuming, particularly because the siting of landfills is a highly political issue and often draws opposition from environmental groups and local residents. Through the first half of 1994, MRC was making substantial progress in obtaining the necessary permits to commence construction of the Landfill Project. As of June 1, 1994, MRC had received 17 of the required 20 permits and two more of the permits were in draft form and were anticipated to be issued soon. However, as discussed in detail below, many of the permits were suspended or voided due to the adverse outcome of litigation involving the environmental impact report ("EIR")/environmental impact study ("EIS") for the Landfill Project approved by Riverside County in 1992. By way of background, before any significant regulatory permit may be granted relating to the construction and operation of the Landfill Project, an EIR/EIS must be certified and approved by the appropriate regulatory agencies. In October 1992, the Riverside County Board of Supervisors approved the EIR for the Landfill Project and MRC's local land use applications. Legal challenges to the certification of the EIR were mounted in late 1992 by a number of individuals, a conservation group and Eagle Crest Energy Company ("ECEC"), formerly known as Eagle Mountain Energy Company, which is a potential competitor for the use of a portion of the Landfill Project site. In July 1994, the San Diego County Superior Court issued its decisions on the challenges to the EIR for the Landfill Project. Of the more than seventy (70) areas of concern initially raised by the plaintiffs in the cases, the Court announced that it had eight (8) areas of concern in which the EIR was deficient, thus requiring corrective action. (This same court has subsequently ruled on a new EIR for the Landfill Project as discussed below). As a result of the Court's determinations, the Court set aside and declared void the Riverside County Board of Supervisors' EIR certification and all Riverside County approvals rendered in connection with the EIR certification. The Court ordered activities related to the development of the landfill suspended and directed the preparation of a new final environmental impact report in compliance with applicable law and the Court's conclusions. MRC and the Company disagreed with many of the Court's conclusions and initially took steps to appeal the decisions, but later withdrew their appeal to focus their efforts on re-permitting the Landfill Project. 23 In March 1995, MRC initiated the necessary re-permitting process by filing its land use applications with Riverside County and has worked with the County and BLM in the preparation of a new EIR/EIS. The draft EIR/EIS was made available to the public in July 1996, with the comment period on the draft EIR/EIS closing in September 1996. The BLM held public hearings on the draft EIR/EIS and received extensive public comment. In addition, by the close of the public comment period in September 1996, numerous written comments were received. The new final EIR/EIS was released to the public in January 1997 and, as discussed in more detail below, received final approval on September 9, 1997. Approval by Riverside County of the Landfill Project. After approval of the Landfill Project by the Riverside Planning Commission and after a number of public hearings held by the Riverside County Board of Supervisors, on August 26, 1997, the Board of Supervisors, by a four to one vote, approved the Landfill Project. Final approval of the Development Agreement, EIR for the Landfill Project and related land use matters was made by the Board of Supervisors on September 9, 1997. The Landfill Project was approved to receive up to 20,000 tons per day (6 days a week) of non-hazardous municipal solid waste. However, MRC is limited during the first ten years of operations to 10,000 tons per day of non-County waste plus the waste generated from within the County. After ten years, MRC may request an increase in daily tonnage up to the maximum of 20,000 tons, but such increase must be reviewed by and receive the approval of an independent scientific panel as discussed in more detail below. State Litigation-Return to Writ. After the September, 1997 approval of the EIR, the litigation with respect to the EIR resumed. The state litigation surrounding the Landfill Project has two subparts: the "return to the writ" previously issued by the San Diego Superior Court and a newly filed lawsuit which is discussed in more detail below. As noted above, in 1994, the San Diego Superior Court ruled that the EIR for the Landfill Project approved by Riverside County in November 1992 was defective in eight areas. This resulted in the issuance of a writ (a form of legal document) ordering Riverside County to comply with the court's decisions and the California Environmental Quality Act ("CEQA"), which is the statutory basis for the preparation and evaluation of an EIR. The County and MRC have sought to comply with the court's decisions and the writ by preparing a new EIR and completing the entire evaluation and political process again. This culminated in the final approval of the EIR and related land use approvals by Riverside County on September 9, 1997. On September 19, 1997, Riverside County filed with Judge Judith McConnell of the San Diego Superior Court a return to the writ which detailed the reasons as to how the eight defects in the former EIR were remedied by the new EIR. Judge McConnell presided over the 1994 hearing on the adequacy of the 1992 EIR. Objections to the return to the writ were filed by all the previous parties to the litigation except for Eagle Crest Energy Company ("ECEC"). On October 20, 1997, the San Diego Superior Court entered an order discharging the original objections of ECEC. The remaining original project opponents maintain that MRC and the Company failed to correct in the new EIR any of the deficiencies found to exist in the 1992 approved EIR. After receipt of briefs, on December 31, 1997, Judge McConnell held a hearing on the objections filed by opponents to the Landfill Project. On the day of and just prior to the holding of such hearing, Judge McConnell issued a tentative ruling that preliminarily concluded that the EIR was still inadequate with respect to most of the issues raised in her 1994 decisions. 24 On February 17, 1998, Judge McConnell issued her final ruling with respect to the new EIR. Judge McConnell reversed herself with respect to several of the items she initially had determined to be defective, but found that the new EIR was still inadequate in two general areas: (i) the threatened desert tortoise; and (ii) impacts to Joshua Tree National Park. Specifically, according to Judge McConnell, there was no substantial evidence in the record to support the new EIR's conclusion that the impact to the desert tortoise would be mitigated to a level below significance. In particular the Court concluded that there was a lack of required tortoise-proof fencing and cited the Desert Tortoise Recovery Plan that recommends no new landfills be constructed in desert tortoise habitat. With respect to Joshua Tree National Park, the Court found that the EIR improperly split its analyses of the total "wilderness experience" into two parts: wilderness resources and the wilderness experience. The Court also found that there was no support for the conclusion that "non-wilderness" areas within the Park should be treated any differently from other areas within the Park. The Court also expressed concerns about the effect of the night time lighting on the Park resulting from the possible expansion of the Eagle Mountain Townsite and also concluded that the EIR failed to analyze the impact to biological resources of the Park as a complete and interrelated system. State Litigation-New Lawsuit. Under CEQA, participants in the administrative and political process have the ability to commence litigation with regard to an EIR within thirty days after the approval of the EIR. Several project opponents did file a new lawsuit in Riverside County on October 10, 1997. The plaintiffs in this new litigation are generally the same plaintiffs as in the lawsuit commenced in 1992 with a few exceptions. Notably, ECEC and the City of Coachella were not plaintiffs in the new lawsuit. There was only one new plaintiff, the Center for Community Action and Environmental Justice, a local environmental group originally organized to address environmental issues associated with the String Fellows acid pits located in Riverside County. The claims made in the petition were fairly typical of a CEQA lawsuit. The only non-CEQA claim is a claim that the Development Agreement with Riverside County violates California Proposition 218, an amendment to California's Constitution. Proposition 218 generally requires a vote of taxpayers if a new tax is levied by a governmental or quasi-governmental entity. On December 19, 1997, the environmental claims in the new Riverside County lawsuit were dismissed because the plaintiffs failed to timely commence the litigation. Evaluation of Alternatives. As a result of Judge McConnell's final ruling, the Company and MRC are evaluating their available alternatives with respect to the Landfill Project. These alternatives include, but are not limited, to: (i) appealing the Court's decision in whole or in part; (ii) taking the actions believed necessary to correct the deficiencies the Court found to exist in the EIR; (iii) postpone or terminate the Landfill Project; or (iv) a combination of these or other alternatives. The Company's and MRC's ultimate course of action will depend upon a number of factors such as the length of time to accomplish any alternative, the likelihood of success, the amount of and availability of funds necessary to accomplish a particular alternative, and the anticipated marketability of the Landfill once permitted. Depending upon the course of action ultimately selected by the Company and MRC, there could be a material adverse impact to the financial statements of the Company, including a write down of the Company's investment in MRC to the lower of cost or fair market value. A final decision on what course of action will be taken by MRC and the Company should be made by mid-1998. The Development Agreement. As a part of the process of considering the Landfill Project, the Company and MRC negotiated a Development Agreement with Riverside County. The Development Agreement, while in final form, is not effective until consummation of the federal land exchange 25 discussed below. In summary, the Development Agreement among Riverside County, MRC, the Company, and two of the Company's subsidiaries, Kaiser Eagle Mountain, Inc. and Eagle Mountain Reclamation, Inc., provides the mechanism by which MRC acquires long-term vested land use rights for a landfill and generally governs the relationship among the parties to the Agreement. The Development Agreement also addresses such items as the duties and indemnification obligations to Riverside County; the extensive financial assurances to be provided to Riverside County; the reservation and availability of landfill space for waste generated within Riverside County; and events of default and remedies as well as a number of other items. In addition, the financial payments to, or for the benefit of Riverside County and others, are detailed in the Development Agreement and in the Purchase and Sale Agreement, which is a part of the Development Agreement. The Purchase and Sale Agreement requires a per ton payment on non-County waste determined from a base rate which is the greater of $2.70 per ton or ten percent (10%) of the landfill tip fee up to 12,000 tons of non-County waste. The 10% number increases to 12 1/2% for all non-County waste once non-County waste exceeds 12,000 tons per day. The per ton payment to the County also increases as volume increases. The per ton payments on non-County Waste to Riverside County are summarized as follows:
------------------------------------------------------------------------------------ Average Tons Per Day of Non-County Waste Payment to Riverside County ------------------------------------------------------------------------------------ 0 - 7,000 Greater of 10% (12.5% once volume exceeds 12,000 tpd) or $2.70 ("Base") 7,000 - 10,000 Base plus $.80 10,000 - 12,000 Base + $1.30 12,000 - 16,000 Base + $2.30 16,000 - 20,000 Base + $3.30 ----------------------------------------------------------------------------------------
Other major payments include: (i) partial funding for up to four rail crossings with $1 million due at the commencement of construction of the landfill and an additional $1 million over the course of landfill operations; (ii) financial assistance for the host community, Lake Tamarisk, comprised of $500,000 due at the commencement of construction of the landfill plus an additional approximately $1.5 million due over the course of landfill operations; and (iii) funding for non-California Environmental Quality Act reduction air emission programs of $600,000 over the course of operations. The initial term of the Development Agreement is fifty years. However, the term can be extended to November 30, 2088. In order to obtain an increase in the initial 50-year term of the Development Agreement and/or an increase in the initial 10,000 tons per day limit on out-of-County waste, an independent scientific panel will be convened to review such a request. The scientific panel will be made up of five independent scientists and engineers selected by the University of Riverside, California (the "University") with the approval of the Company and MRC. If the University and the Company/MRC are unable to agree on the panel members, two members are to be selected by the University, two by the Company/MRC and the fifth member is to be selected by the other four members. Alternative procedures are in place in the event the University does not participate in the selection of the panel members for any reason. The panel will conduct its review within eight months of any request for capacity expansion. The panel, in effect, is to limit its review to confirming that MRC has substantially complied with all development approvals, the environmental mitigation measures and all regulatory 26 permits and that the potential environmental impacts of the landfill are the same as identified in the EIR. Various appeal procedures are available depending upon the initial and final findings of the panel. Environmental Trust Fund. Pursuant to the terms of the Development Agreement and other related documents, $.90 of the per ton payment made to Riverside County by MRC on out-of-County municipal solid waste will be deposited into an environmental trust. In addition, MRC directly pays $.90 per ton into the environmental trust for in-County waste deposited into the landfill. Funds in the environmental trust are to be used within Riverside County for: (a) the protection, acquisition, preservation, and restoration of parks, open space, biological habitat, scenic, cultural, and scientific resources; (b) the support of environmental education and research; (c) the mitigation of the Project's environmental impacts; and (d) the long term monitoring of the above mentioned items. Finally, MRC has agreed to pay $.10 per ton of municipal solid waste deposited into the landfill to the National Parks Foundation for the benefit of the National Park Service. Proposed BLM Land Exchange. Of the approximately 11,350 acres located at the Eagle Mountain site, the Company currently owns 1,800 acres in fee and has various possessory mining claims with respect to the remaining 9,550 acres. In addition, the Company owns in fee approximately 3,200 acres along the 52-mile railroad right-of-way. The major remaining portion of the Company's railroad right-of-way consists of various private leases and an operating grant from the BLM. In conjunction with the landfill permitting process, the Company plans to transfer to the BLM approximately 2,800 acres of Kaiser-owned property along the railroad right-of-way, which has been identified as prime desert tortoise habitat, in exchange for fee ownership of approximately 3,500 acres of land within the Landfill Project area. Specifically, the Company will receive fee ownership of various non-fee mining interests currently held by the Company near the large open pits. After extensive review and analysis, in October 1993, the BLM issued its Record of Decision approving the land exchange with the Company. The decision of the BLM approving the land exchange was challenged by the filing of appeals with the Interior Board of Land Appeals ("IBLA"), the agency having immediate appellate jurisdiction over the BLM's decision. However, as discussed in more detail below, in March, 1995, the BLM announced that it would join in Riverside County's additional environmental review, and requested that the IBLA remand the decision on appeal for further agency action. In a separate but related action to the land exchange, the Company and the BLM also entered into discussions with respect to the extension of the Company's right-of-way to use the railroad, a right-of-way for an existing road and the transfer to the Company of property rights with respect to land at the Eagle Mountain Townsite. All issues with respect to the right-of-way were also resolved as a part of the BLM's Record of Decision. The BLM issued a new right- of-way for the Kaiser railroad and a new joint right-of-way for the Eagle Mountain road and its extension to Kaiser and the Metropolitan Water District of Southern California. These right-of-way grants were also appealed to the IBLA. The Record of Decision also approved the termination of the reversionary interest with respect to approximately 460 acres within the Eagle Mountain Townsite. This portion of the Record of Decision was also appealed to the IBLA. On March 10, 1995, the BLM announced that it would join with Riverside County's new environmental review by preparing a new or supplemental EIS for the proposed land exchange. This additional review put the land exchange on hold pending completion of the new environmental review process. 27 The BLM is the lead Federal agency for the EIS. The National Parks Service ("NPS") has been a cooperating agency for the EIS. As noted above, the final EIR/EIS was distributed in January 1997 after a series of public hearings held by the BLM and after the conclusion of an over 60 day public comment period. In September, 1997, the BLM announced that it had approved the proposed land exchange. Approval commenced a forty-five (45) day protest period during which opponents to the proposed land exchange may raise objections. Objections were received and we understand that responses are currently being prepared by the BLM. The Company currently anticipates a final decision by the BLM on the land exchange and the rights-of-way during the second quarter of 1998. Competition. The solid waste disposal industry is highly competitive with a few large, integrated waste management firms and a significant number of smaller, independent operators. Assuming the Landfill Project is ultimately permitted, the success of the Landfill Project depends largely upon MRC's ability to secure solid waste disposal contracts from municipalities and waste haulers in this highly competitive environment. The ability of MRC to secure such waste disposal contracts is predicated upon a number of factors including, but not limited to, MRC's ability to (i) charge disposal fees comparable to those of its competitors; (ii) provide financial and environmental safeguards against potential liability; (iii) provide sufficient long-term capacity; and (iv) commence operations prior to the expansion of existing landfills or the opening of other large capacity, rail-haul landfills. Currently, there are over 18 major existing municipal solid waste landfills in Southern California serving the same geographic area as that proposed by the Landfill Project (primarily Los Angeles, Orange, Riverside and San Bernardino Counties). While a number of Southern California landfills are scheduled to close in the next several years as they reach capacity, several of them, including El Sobrante Landfill in Riverside County and Puente Hills in Los Angeles County, are in the process of expanding the permitted capacities of their existing facilities. The Company is also currently aware of at least two other enterprises seeking to develop rail-haul, solid waste disposal facilities which would be located in Southern California and would compete directly with the Landfill Project. These proposed cut-and-fill landfills include: (i) a landfill to be developed in a desert site in San Bernardino County by Rail Cycle of Los Angeles, a joint venture between Waste Management, Inc. and the Santa Fe Railway Company, Inc.; and (ii) Mesquite Regional Landfill to be developed in Imperial County by a partnership including Western Waste Industries and SP Environmental Systems, Inc., an affiliate of the Southern Pacific Transportation Company. Both projects are being developed by well established waste management companies, which control significant waste streams in Southern California as a result of their waste hauling businesses. Both of these rail haul projects received certification of their respective EIRs in late 1995. The Mesquite Regional Landfill is considered much further along in the permitting process than the Eagle Mountain Landfill Project because it is ready for construction subject to the receipt of several technical permits. The EIR for the Mesquite Regional landfill and the EIR for Rail Cycle were subject to separate legal challenges which are now concluded without further action on such EIR's required. The Rail Cycle project is also contingent upon the approval of a business tax by the voters, which has failed once. Competition also extends to rail-haul landfills in the states of Arizona, Utah and Washington. In Utah, East Carbon Development Corp. operates a rail-haul landfill capable of receiving waste from Southern California and it is actively marketing its services to waste generators in Southern California. In addition, BFI, the former majority shareholder of MRC, operates a landfill in La Paz County, Arizona, with planned rail access, which will compete for Southern California waste. To a lesser extent, the Landfill Project will also compete with alternatives to landfills, such as recycling and "waste-to-energy" projects. 28 Disposal Fees. While the Company believes that it will take several years for MRC's projected disposal fees to be aligned at competitive levels with other urban landfills, it also currently believes that the advantages afforded by the Eagle Mountain site should enable it, in the long-term, to compete effectively with both existing and other proposed landfills. Within the last year, there has been a general reduction in disposal or "tipping fees" in several areas of Southern California. The reduction in tipping fees was accelerated with the bankruptcy of Orange County, California. As a means of generating revenue, Orange County reduced its tipping fee to out-of-county trash from $38.50 to as low as $18.00 per ton depending upon the length of the time commitment. Trash generated within Orange County still pays approximately $38.50 per ton tipping fee. Riverside County also adopted a two-tier tipping fee structure. The tipping fee would generally be $30.00 for direct haul to a landfill and $25.00 if the waste is processed through a transfer station or materials recycling facility. Facing the loss of waste from its system, San Bernardino County dropped its tipping fee from $35.50 per ton to $28.50 per ton for fifteen (15) year commitments. Risk Factors. Management believes that the advantages afforded by the Eagle Mountain site should enable it, in the long-term, to compete effectively with both existing and other proposed landfills provided the Landfill Project can be permitted. In addition, the success of the Landfill Project depends upon the development of the anticipated shortage in landfill capacity in Southern California over the next several years. However, there is no assurance that the Company is currently able or will be able to compete effectively with anticipated landfill space and pricing competition or that other forms of competition will not result. Furthermore, there is no assurance that the Landfill Project can obtain all the necessary permits or that it can be successful in defending against legal challenges to the Landfill Project. To date, MRC has not been successful in litigation challenging the adequacy of the EIR. Finally, there is a risk that sufficient and suitable financing may not be made available to MRC in order to allow it to continue to pursue the Landfill Project. EMPLOYEES As of March 20, 1998, Kaiser had 25 full-time and 2 part-time employees. In addition, as of March 20, 1998, MRC, the Company's subsidiary, had 6 full-time employees. Item 2. PROPERTIES OFFICE FACILITIES The Company's principal offices are located at 3633 East Inland Empire Boulevard, Suite 850, Ontario, California 91764. The Company leases approximately 7,500 square feet in Ontario, California, pursuant to a lease agreement expiring in August 1999. The Company also maintains offices on the Mill Site Property, at the Eagle Mountain site and in Denver, Colorado. MRC leases an office in Palm Desert, California for a term that expires in 1998, and maintains an office at the Eagle Mountain Site. EAGLE MOUNTAIN, CALIFORNIA The Kaiser Eagle Mountain idle iron ore mine and the adjoining Eagle Mountain Townsite are located in Riverside County, approximately ten miles northwest of Desert Center, California. Desert Center is located on Interstate 10 between Indio and Blythe. The heavy duty maintenance shops and electrical power distribution system have been kept substantially intact since the 1982 shutdown. The 29 Company also owns several buildings, a water distribution system, a sewage treatment facility, and related infrastructure. The Eagle Mountain Townsite includes more than 300 single family homes, approximately 100 of which have been renovated and are currently in use. Most of the houses in use are leased to Management and Training Corporation ("MTC") for use in conjunction with a permitted 500-bed community-custody facility operated under a contract with the California Department of Corrections. Utilization of the remaining houses and related facilities will require additional renovation activities plus approval by Riverside County of a Townsite Specific Plan. In and around the Eagle Mountain area the Company has various possessory mining claims on 9,550 acres and holds 1,800 acres in fee simple. In addition, the Company and BLM are working toward a land exchange. See "Part I, Item 1. Business" with respect to the proposed land transfer between the Company and the BLM. The Company owns six deep water wells, of which two are currently being used, and two booster pump stations that serve the Eagle Mountain mine and townsite. RAILROAD To transport ore from the Eagle Mountain mine to the mill site (see below), KSC constructed a 52-mile heavy duty rail line connecting the mine to the main Southern Pacific rail line at Ferrum, California. The Company owns in fee approximately 10% of the 52-mile railroad right-of-way. The major remaining portion of the railroad right-of-way consists of various private leases and an operating right-of-way from the BLM. As a part of its Record of Decision the BLM issued a new railroad right-of-way to the Company. However, with the decision of the BLM to reconsider its Record of Decision, the new railroad right-of-way is currently considered still pending. The railroad is included in the lease to MRC for the Landfill Project. See "Part I, Item 1. Business." FONTANA, CALIFORNIA With the acquisition of approximately 534 acres by The California Speedway Corporation for the construction of TCS and related facilities, the contribution and reservation of property for the West Valley MRF and the sale of a NAPA Lot, the Company now owns approximately 629 acres (gross) near Fontana, California. All of the Company's property is debt free with the exception of the West End and Valley Boulevard parcels, which total approximately 282 acres (gross). The West End and Valley Boulevard parcels are subject to an outstanding loan with an approximate principal balance of $5,102,000. Located on the Mill Site Property is extensive infrastructure, including, water and sewage treatment facilities, and several old single-story office, storage and industrial buildings. However, all the buildings previously on the Central Mill Site Property have been demolished as part of the development of TCS. Various buildings and other improvements are also being demolished on the West End. The Company has historically had a number of short-term lease arrangements with unaffiliated entities for portions of this property. There is one active deep water well on the property, with capacity significantly in excess of the current water needs for the property. Another deep water well formerly owned by the Company is located on the property acquired by The California Speedway Corporation, although it was taken out of service due to the development of TCS. The Company's remaining water well is now currently used only for irrigation purposes by TCS. See "Part I, Item 1. Business." The Company originally had adjudicated water rights to extract 2,930 acre-feet of water per year for use on the property. However, the Company as part of the transaction with PMI and the Company's agreement to sell a portion of these water rights to 30 CSI, an adjoining landowner, in connection with the settlement of certain disputes and litigations with such company, the Company owns the following water rights associated with the Mill Site Property: (i) 525 annual acre feet; (ii) 475 annual acre feet as tenants in common with The California Speedway Corporation which has the right of first use; and (iii) 630 acre feet as tenants in common with CSI, with CSI having the first right of use, with payment to the Company, through June 30, 2004 and the Company having the first right of use thereafter. In addition, the Company currently has rights to approximately 5,500 acre-feet of water in storage, effective as of December 1997. Pursuant to a settlement agreement reached with the California Regional Water Quality Control Board in 1993, the Company is obligated to contribute 1,000 acre feet of water per year for 25 years for the purposes of a regional de-salter project. In 1995, the Company contributed 18,000 acre feet of water in storage, which satisfies the Company's obligation under the settlement agreement for the first 18 years. Further, the DTSC has determined that limited portions of the property require environmental remediation. The Company is working with the DTSC to remediate the impacted areas. As discussed in "Item 1. Business - Mill Site Environmental Matters," the Company undertook significant remediation activities in 1997. As a result of the Company's experience in remediating the limited portion of the motorsports complex and other areas requiring remediation, the Company is evaluating other alternatives for the remediation of the remaining impacted areas of its property. See "Item 1. Business." LAKE TAMARISK, CALIFORNIA Lake Tamarisk is an unincorporated community located two miles northwest of Desert Center, California and approximately 8 miles from the Eagle Mountain mine. This community has 150 improved lots situated around two recreational lakes and a nine-hole golf course. With 70 homes and a 150-space mobile home park, the community has an average year-round population in excess of 150. Lake Tamarisk Development Corporation ("LTDC"), a wholly-owned subsidiary of the Company, owns 77 improved lots including one residential structure. LTDC also owns a 240 acre parcel of unimproved land across the highway from the main entrance to Lake Tamarisk. OTHER REAL ESTATE PROPERTIES The Company owns numerous small land parcels and iron ore deposits in the high desert area of Southern California and in Huerfano and Archuleta Counties in Colorado, including the Silver Lake Mine west of Baker, California and 190 acres near Afton Canyon, California. FONTANA UNION WATER COMPANY The Company, through a wholly owned subsidiary, owns 7,632.63 shares or approximately 51% of the outstanding stock of Fontana Union, a California mutual water company. These shares entitle the Company (or its lessee) to receive, at cost, its proportionate share of Fontana Union's water. Fontana Union owns surface and groundwater rights in the Fontana, California area with annual average production of approximately 34,000 acre-feet (plus approximately 3,500- 4,000 acre feet relating to the annual Chino Basin agricultural pool transfer). The Company's shares of Fontana Union stock are currently leased to Cucamonga. The Fontana Union shares and the lease of such shares to Cucamonga are currently pledged as collateral for the Company's $30,000,000 revolving-to-term credit facility. See "Item 1. Business - Water Resources." See "Item 3 - Legal Proceedings." 31 ITEM 3. LEGAL PROCEEDINGS The Company, in the normal course of its business, is involved in various claims and legal proceedings. Except for those matters described below, management believes these matters will not have a material adverse effect on Kaiser's business or financial condition. Significant legal proceedings, including those, which may have a material adverse effect on the Company's business or financial condition, are summarized as follows: LITIGATION Eagle Mountain EIR Litigation. This litigation involved three separate legal challenges to the EIR for the Landfill Project certified by the Riverside County Board of Supervisors in October 1992. These cases were heard in the San Diego County Superior Court. The Court's decisions required MRC to prepare a new EIR, which was completed and certified in September 1997. The original litigation against the EIR was resumed before Judge Judith McConnell of the San Diego County Superior Court. In February 1998, the San Diego County Superior Court announced its final decision and concluded that the new EIR was still deficient in two principal respects. The Court's two remaining areas of concern involve the threatened desert tortoise and Joshua Tree National Park. The Company and MRC are now evaluating their alternatives with respect to the Landfill Project. For a more extensive discussion of this litigation, please see "Municipal Solid Waste Management - Landfill Project - State Litigation-Return to Writ." In addition to the "return to writ" litigation before Judge McConnell, a separate lawsuit challenging the validity of the new EIR was filed in Riverside County. The environmental challenges in this lawsuit were dismissed in December 1997. Warburton Litigation. The Company, KSC and KSC Recovery were named or became cross-defendants in certain litigation in the U.S. Federal District Court for the District of Northern California (Case No. C-93-1114 CW) commenced by IMACC Corporation ("IMACC") against Dorothy Warburton ("Warburton") and others seeking a determination of liability, contribution and indemnification for the costs of environmental remediation for two sites that had been used at one time by IMACC in conjunction with its barrel reconditioning business. Warburton is the owner of the sites in question. At one time, KSC, through a wholly owned subsidiary, owned the business now operated by IMACC. Certain other Warburton family defendants are claiming that they should be indemnified by KSC's subsidiary or by the Company for actions they took while officers of the KSC subsidiary. A settlement was reached in the litigation with respect to the environmental claims, which required payment of less than $100,000 by the Company and by KSC Recovery. The Company's cash contribution to the settlement will be immaterial. While there was a tentative settlement of the environmental matters (which has now been finalized), a trial was held in November 1996, relating to the indemnity claims and related matters. The Court had previously ruled that either the Company or KSC was the alter ego of KSC's subsidiary, Myers Drum Company. The Court also subsequently ruled that in these particular circumstances, the request for indemnification did not rise to the level of being a claim in bankruptcy at the time of the bankruptcy and thus could not be discharged. With the announcement of the Court's decision, there remains a dispute among the parties over the award of attorneys' fees. Two of the estates claim that the Company and IMACC jointly owe them approximately $1.7 million in attorneys fees and IMACC believes it is in turn entitled to attorneys' fees. Even if the Company should be found liable for the attorneys' fees, which it vigorously contests, IMACC is obligated to indemnify the Company for all such amounts. Since the Company believes it has full indemnification coverage from IMACC, no provision for any potential loss has been made in the accompanying financial statements. 32 Theft Related Litigation. The Company and certain of its subsidiaries are defendants in three separate lawsuits related to alleged thefts of items from tenants or users of sites formerly leased on the West End Property. The alleged basis of each lawsuit is that the Company failed to provide proper security resulting in a breach of contract and negligence by the Company by allowing theft to occur. The Company believes it has numerous defenses to each of these litigation matters. Defense of each matter has been tendered and accepted by the Company's insurance carrier although the Company is paying defense costs in excess of those paid by the carrier. If the Company should be found negligent in any of these cases, insurance coverage may be available for any damages awarded. If the Company is found to have breached a contract, insurance coverage may not be available. The Company is vigorously defending each lawsuit. Johnson Machinery, Inc. is the plaintiff in one of the three lawsuits in which it is alleged that the Company is liable for the theft of equipment or other items from land leased by the Company. Johnson Machinery claims that there was a theft of equipment with a value of approximately $1.2 million from a warehouse on the West End Property. (Johnson Machinery, Inc. v. Lusk/Kaiser West End Joint Venture et al. - San Bernardino County Superior Court: Case No. RCV 23757). In November 1997, Centennial Insurance Company commenced litigation in San Bernardino County Superior Court seeking approximately $115,000 in damages from the Company and other defendants related to the alleged theft of property from the Company's West End Property that was stored in a semi-truck of a common carrier leasing a site from the Company (Centennial Insurance Company, v. Kaiser Resources Inc., et al., San Bernardino County Superior Court - Rancho Cucamonga Division, Case No. RCV 30545). In February 1998, the Company was served with a complaint alleging that the Company, certain subsidiaries of the Company and others are liable for approximately $1.8 million paid by Nippon Fire & Marine Insurance Co., Ltd. to Toshiba America Information System, Inc. as a result of the theft of a load of lap top computers from a semi-truck owned by PST Vans a former tenant on the West End Property. (Nippon Fire & Marine Insurance Co., Ltd., a corporation, and Toshiba America Information System, Inc. v. PST Vans, Inc., a corporation; PST Van Line, Inc. a corporation; Burns International, Inc., a corporation; Burns International Security Services, Inc., a corporation; Borg-Warner Security Corporation, a corporation; Kaiser Steel and Land Development, Inc., a corporation; Kaiser Ventures Inc., a corporation; Kaiser Resources Inc., a corporation; Lusk-Kaiser West End Joint Venture, a business entity (Case No. CV97-9558 CBM (VAPx)). Apollo Wood Litigation: On November 11, 1997, the Company and two individual officers of the Company were served with a complaint brought by Apollo Wood Recovery, Inc. in San Bernardino Superior Court seeking unspecified damages, but which are estimated to exceed $100,000. The plaintiff is a tenant on the Company's Mill Site Property. In summary, the complaint alleges that the Company and two officers of the Company falsely represented the status of the permitting of the property on which Plaintiff operates its business, committed fraud, interfered with the plaintiff's business, engaged in unfair trade practices and other similar causes of action. The Company believes the lawsuit is without merit and is vigorously defending such lawsuit. (Apollo Wood Recovery, Inc. v. Kaiser Ventures Inc., Terry L. Cook, Lee Redmond, Apollo Wood & Metal Recycling Ltd., Shirley Isom Construction Company, Troy Isom and Does 1 through 40, San Bernardino Superior Court, Case No. SCN 42863.) Cucamonga Litigation: In 1996, the Company initiated legal action against Cucamonga. The dispute involved amounts owed to the Company under the terms of its lease of 33 Fontana Union Water stock to Cucamonga. The dispute arose out of a change made by the Metropolitan Water District in its water rates and rate structure effective July 1, 1995. After a five-day trial on the matter in March 1998, the San Bernardino County Superior Court ruled that the lease rate had been discontinued effective July 1, 1995. Thus, the parties are required to negotiate in good faith a substitute lease rate as provided under the terms of the lease with Cucamonga. For more detailed information, please see "Water Resources - Lease to Cucamonga County Water District." Asbestos Suits. The Company along with KSC are currently named in approximately ten active asbestos lawsuits. The Company and KSC have been previously named in other asbestos suits but for various reasons those suits are not currently being pursued. Most of the plaintiffs alleged that they worked in ship yards in the Oakland/San Francisco, California area in the 1940's and that KSC was in some manner associated with one or more shipyards or has successor liability from another "Kaiser" entity. Most of these lawsuits are third party premises claims claiming injury resulting from exposure to asbestos and involve multiple defendants. The Company anticipates that it will be named as a defendant in additional asbestos lawsuits. All of the complaints are non- specific. As such it is not practical at this time to determine the true nature and extent of the claims against the Company and KSC. To date, several, but not all, of the plaintiffs have agreed that they will not personally pursue the Company, but they have been granted the right to pursue the Company's insurance coverage, to the extent there is coverage. The Company currently believes that it does have insurance coverage for at least a portion of the claims and has tendered these suits for defense. The Company also currently believes that it has various defenses to these claims, including the discharge granted to it in connection with KSC's bankruptcy reorganization. The KSC bankruptcy estate, through KSC Recovery has been incurring defense costs, which should in large part be reimbursed by insurance. However, this is an evolving area of the law and the factual discovery with respect to many of these lawsuits has not been completed. City of Ontario Litigation. On February 27, 1996, the City of Ontario, California served on the Company a complaint filed in San Bernardino County Superior Court (City of Ontario v. Kaiser Ventures Inc., et al.; Case No. RCV 17334). In sum, the complaint alleges that a plume or plumes containing organic carbon, dissolved solids and mercury originating from the Company's Mill Site Property due to activities of KSC and/or a former tenant of the Mill Site Property have impacted one of the City of Ontario's water wells. Ontario seeks reimbursement for remedial costs, replacement of the allegedly impacted well and replacement or improvement or refurbishment of related facilities. The Company challenged Ontario's ability to bring this litigation given the KSC bankruptcy and the discharge granted to the Company. In April, 1996, Ontario brought a declaratory judgment action in the U.S. District Court for the District of Colorado in Bankruptcy ("the U.S. Bankruptcy Court") against the Company, (City of Ontario v. Kaiser Ventures Inc., Adversary Proceeding No. 96- 1215 MSK). In the U.S. Bankruptcy Court action, Ontario in effect sought a determination that the matters and damages alleged in its California lawsuit were not discharged as a part of the KSC bankruptcy proceedings. The Company and the City reached a settlement concerning the matter before the U.S. Bankruptcy Court which was approved by the U.S. Bankruptcy Court in October. Under the terms of the settlement, the Company has agreed to waive its bankruptcy-related defenses to the City's prosecution of claims for groundwater contamination caused by mercury or other priority pollutants. In return, the City agreed to dismiss the California litigation as to all claims related to total dissolved solids, total dissolved carbons and sulfates, and to be bound by the 1993 Settlement Agreement between Kaiser and the California Regional Water Quality Control Board. The City has not yet filed an amended complaint. The Company and the City of Ontario are engaging in informal discovery and discussions. The Company currently believes it has numerous defenses in the litigation. 34 BANKRUPTCY 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 "KSC Plan"), the Company established a subsidiary, KSC Recovery, 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. All litigation and bankruptcy administration costs are borne by KSC Recovery, which maintains a cash reserve from previous litigation and other recoveries to fund anticipated ongoing litigation and administration costs. All major remaining claims in the bankruptcy estate were settled in 1995, with completion of one major settlement occurring in 1996. Resolution of these claims allowed for a distribution of cash and stock to most of the unsecured creditors of the KSC bankruptcy estate in the second quarter of 1996. Consistent with KSC Recovery's role solely as an agent of the former KSC creditors, the Company's consolidated statements of operations and cash flows do not reflect any of KSC Recovery's activities. Because of the minimum activities of the KSC bankruptcy estate, the Bankruptcy Court terminated its supervision over the estate in October 1996. From time-to-time, various other environmental and similar types of claims, such as the asbestos litigation mentioned above, that relate to KSC pre- bankruptcy activities are asserted against KSC Recovery and the Company. In connection with the KSC Plan, the Company, as the reorganized successor to KSC, was discharged from all liabilities that may have arisen prior to confirmation of the KSC Plan, except as otherwise provided by the KSC Plan and by law. Although the Company believes that in general all pre-petition claims were discharged under the KSC Plan, in the event any of these claims or other similar claims are ultimately determined to survive the KSC bankruptcy, it could have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not applicable. 35 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock commenced trading on the NASDAQ National Market System in the fourth quarter of 1990 under the symbol "KSRI." In June 1993, Kaiser changed its name to Kaiser Resources Inc. and symbol to "KRSC." Most recently, the Company changed its name, in June 1995, to Kaiser Ventures Inc., but its trading symbol remained the same. The following table sets forth the range of the high and low reported bid price of the Company's Common Stock for the periods indicated, as reported on the NASDAQ National Market System.
Low High --- ---- 1997: Fourth quarter.............................. $ 10.00 $ 15.06 Third quarter............................... $ 10.75 $ 14.88 Second quarter.............................. $ 7.50 $ 10.50 First quarter............................... $ 8.50 $ 10.75 1996: Fourth quarter.............................. $ 8.25 $ 10.00 Third quarter............................... $ 8.75 $ 9.50 Second quarter.............................. $ 9.38 $ 12.75 First quarter............................... $ 11.00 $ 13.13
As of March 20, 1998, there were 2,310 holders of record of the Company's Common Stock. As of March 20, 1998, the Company held 136,919 shares that are deemed outstanding but reserved for issuance to the former general unsecured creditors of KSC pursuant to the KSC Plan. The Company has neither declared nor paid any cash dividends on its Common Stock since emerging from the KSC bankruptcy in November 1988 and does not intend to declare dividends on its Common Stock in the foreseeable future. Any future decisions by the Company to pay cash dividends will depend upon its growth, profitability, financial condition and other factors the Board of Directors may deem relevant. The Company presently intends to retain its earnings to finance the development and expansion of its business and for use in connection with future acquisitions. 36 ITEM 6. SELECTED FINANCIAL DATA The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, related notes and other financial information included herein.
SELECTED STATEMENT OF INCOME DATA FOR THE YEARS ENDED DECEMBER 31: 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Total revenues............................... $10,006,000 $15,331,000 $11,053,000 $12,471,000 $10,591,000 Costs and expenses........................... 7,815,000 7,066,000 7,938,000 8,593,000 8,144,000 ----------- ----------- ----------- ----------- ----------- Income from operations....................... 2,191,000 8,265,000 3,115,000 3,878,000 2,447,000 Net interest expense (income)................ 672,000 819,000 665,000 (155,000) (466,000) ----------- ----------- ----------- ----------- ----------- Income before income tax provision and extraordinary loss...................... 1,519,000 7,446,000 2,450,000 4,033,000 2,913,000 Taxes currently payable...................... 43,000 92,000 --- 125,000 50,000 Deferred tax expense......................... 74,000 840,000 721,000 --- --- Deferred tax expense credited to equity...... 554,000 3,945,000 335,000 1,621,000 1,171,000 ----------- ----------- ----------- ----------- ----------- Income before extraordinary loss............. 848,000 2,569,000 1,394,000 2,287,000 1,692,000 Extraordinary loss (net of taxes)............ --- --- --- 2,233,000 --- ----------- ----------- ----------- ----------- ----------- Net income................................... $ 848,000 $ 2,569,000 $ 1,394,000 $ 54,000 $ 1,692,000 =========== =========== =========== =========== =========== Earnings per share Before extraordinary loss Basic...................................... $ .08 $ .24 $ .13 $ .21 $ .16 Diluted.................................... $ .08 $ .24 $ .13 $ .21 $ .16 Net Income Basic...................................... $ .08 $ .24 $ .13 $ .01 $ .16 Diluted.................................... $ .08 $ .24 $ .13 $ .01 $ .16 Basic Weighted average number of shares outstanding................. 10,536,457 10,485,943 10,456,353 10,435,878 10,365,163 Diluted Weighted average number of shares outstanding................. 10,740,357 10,729,645 10,653,950 10,671,154 10,604,122
SELECTED BALANCE SHEET DATA AS OF DECEMBER 31: 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Cash, cash equivalents and short-term investments...................... $ 4,330,000 $ 8,482,000 $ 10,937,000 $ 6,829,000 $ 15,922,000 Working capital.............................. (4,685,000) (1,240,000) 2,821,000 (3,567,000) 11,420,000 Total assets................................. 139,265,000 134,067,000 126,803,000 114,350,000 109,014,000 Long-term debt............................... 8,982,000 8,102,000 5,342,000 5,700,000 --- Long-term environmental...................... 24,673,000 remediation reserves........................ 26,466,000 32,176,000 28,439,000 34,537,000 Stockholders' equity......................... 86,204,000 81,448,000 68,697,000 66,802,000 66,664,000
(1) The deferred tax expense credited to equity represents taxes that are recorded by the Company for financial reporting purposes, but are not payable due to the Company's utilization of Net Operating Loss ("NOL") benefits from losses arising prior to and through the KSC bankruptcy. Although the amount of this benefit is not included in net income, stockholders' equity is increased in an amount equal to the NOL tax benefit reported. NOL carryforwards at December 31, 1997, were approximately $113 million and $2.4 million, for federal and California income tax purposes, respectively. (2) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements beginning on page 70. 37 KAISER VENTURES INC. AND SUBSIDIARIES 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 asset development company pursuing project opportunities and investments in 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 11.51% 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) a 50% joint venture interest in the West Valley MRF ("WVMRF"), a transfer station and recycling facility located on land acquired from the Company; (v) approximately 629 acres of the former Kaiser Steel Corporation ("KSC") steel mill site (the "Mill Site Property") which is currently undergoing redevelopment; and (vi) 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 redevelopment of industrial and commercial parcels of land near TCS and the WVMRF. SUMMARY OF SIGNIFICANT DEVELOPMENTS IN 1997 During 1997, a number of material events occurred which affected the Company. Therefore, readers are encouraged to read this Report it in its entirety in order to adequately understand the impact of these events on the Company. In Management's opinion, three of the material events were particularly significant: (a) the San Diego Court's ruling relative to the Landfill Project's environmental impact report ("EIR"); (b) the filing of revised Form 13D's related to the Company's two largest shareholders: the New Kaiser Voluntary Employee Benefit Association ("VEBA") and the Pension Benefit Guarantee Corporation ("PBGC"); and (c) the creation of a special committee by the Board of Directors to evaluate strategic alternatives and transactions with respect to the Company and its assets. In regard to the Landfill Project, MRC received the necessary land use and environmental approvals from the Riverside County Board of Supervisors on September 9, 1997. Subsequently, two separate legal actions were pursued by opponents to the Eagle Mountain Landfill Project which argued that the environmental impact report ("EIR") approved by Riverside County was defective. The first action challenged the County's and MRC's assertion that the new EIR satisfied the requirements of the July, 1994 decisions of San Diego Superior Court Judge Judith McConnell. The second action was the commencement of a new lawsuit in Riverside County. The environmental challenges in the new lawsuit were dismissed with prejudice on December 16, 1997. However, with respect to the first action, Judge McConnell of the San Diego Superior Court issued, on December 31, 1997, a tentative ruling that preliminarily concluded that the new EIR was still deficient in several areas. On February 17, 1998, the Court issued its final ruling. In its final ruling the Court reversed itself with regard to several items in its tentative ruling that were initially determined adverse to the Landfill Project, but the Court still concluded that the new EIR was deficient in two areas. The Court's two remaining areas of concern involve the project's impacts on the threatened desert tortoise and Joshua Tree National Park. For more detailed information on this matter, please see "Municipal Solid Waste Management Landfill Project." As a result of the Court's final ruling, the Company and MRC are currently evaluating their available options with respect to the Landfill Project. These options include, but are not limited to: (i) appealing the Court's decision; (ii) taking the actions believed necessary to correct the deficiencies in the EIR in 38 KAISER VENTURES INC. AND SUBSIDIARIES compliance with the Court's decision; (iii) indefinitely postponing the Landfill Project in some manner; or (iv) a combination of these or other alternatives. Depending upon the course of action ultimately selected by MRC and the Company, there could be a material adverse impact to the financial statements of the Company, including a possible write down of the Company's investment in MRC to the lower of cost or fair market value. A final decision on what course of action will be taken by MRC and the Company should be made by mid-1998. In regard to the revised Form 13D's filed by VEBA and the investment advisor of the PBGC, they disclosed that a Cooperation Agreement was entered into between the PBGC's and VEBA's respective investment advisors. A copy of the Cooperation Agreement was filed with the Form 13D's. The Cooperation Agreement provides, among other things, that the parties are considering pursuing one or more strategies involving the Company and its assets. Such alternatives include distributing the PMI stock, securitizing and/or distributing the payments from the Cucamonga Lease, pursuing the full development and operation of the Eagle Mountain Landfill Project, selling or merging the Company, or jointly selling the Company stock owned by PBGC and VEBA. In addition, the Company's Board of Directors appointed a special committee (the "Special Committee") to evaluate and consider pursuing, among other things, various strategic alternatives and transactions with respect to the Company and its assets. The Special Committee has retained outside legal counsel and the investment banking firm of Merrill Lynch to assist it in its work. These events, as well as other event, are discussed in more detail in Part I of this Report. 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, including water and waste water treatment revenues; housing rental income, aggregate and 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 (i.e., PMI) and, starting in 1998, joint ventures (i.e., West Valley MRF) which the Company accounts for under the equity method. 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, royalty revenues from the sale of recyclable revert materials and other miscellaneous short-term activities. SUMMARY OF REVENUE SOURCES Due to the developmental 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 39 KAISER VENTURES INC. AND SUBSIDIARIES 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. 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, 1997 AND 1996 An analysis of the significant components of the Company's resource revenues for the years ended December 31, 1997 and 1996 follows:
1997 1996 % INC. (DEC) ---- ---- ------------ ONGOING OPERATIONS Water resource................................. $ 5,143,000 $ 4,505,000 14% Property redevelopment......................... 1,213,000 1,120,000 8% Income from equity method investments.......... 2,003,000 1,539,000 30% Mill Site land sale............................ --- 6,371,000 (100%) ----------- ----------- ----- TOTAL ONGOING OPERATIONS...................... 8,359,000 13,535,000 (38%) ----------- ----------- ----- INTERIM ACTIVITIES Lease, service and other....................... 1,647,000 1,796,000 (8%) ----------- ----------- ----- TOTAL INTERIM ACTIVITIES...................... 1,647,000 1,796,000 (8%) ----------- ----------- ----- TOTAL RESOURCE REVENUES....................... $10,006,000 $15,331,000 (35%) =========== =========== ===== REVENUES AS A PERCENTAGE OF TOTAL RESOURCE REVENUES: Ongoing operations............................. 84% 88% Interim activities............................. 16% 12% ----------- ----------- TOTAL RESOURCE REVENUES....................... 100% 100% =========== ===========
Resource Revenues. Total resource revenues for 1997 were $10,006,000, compared to $15,331,000 for 1996. Revenues from ongoing operations decreased 38% during the year to $8,359,000 from $13,535,000 in 1996, while revenues from interim activities declined 8% to $1,647,000 from $1,796,000 in 1996. Comparing 1997 revenues from ongoing operations to 1996 without the Mill Site land sale shows an increase of 17 %, or $1,195,000, to $8,359,000 from $7,164,000. Revenues from ongoing operations as a percentage of total revenues decreased to 84% in 1997 from 88% in 1996; however, excluding the Mill Site land sale in 1996, ongoing operations represented 80%. Ongoing Operations. Water lease revenues under the Company's 102-year take-or- pay lease with Cucamonga were $5,143,000 during 1997 compared to $4,505,000 for 1996. The 14% increase in water revenues during the year reflects: (a) two rate increases, as of February 1, 1997, and July 1, 1997 in the effective non- interruptible untreated water rate being paid by Cucamonga from $346.00 to $351.00 per 40 KAISER VENTURES INC. AND SUBSIDIARIES acre foot and then to $351.75 per acre foot, respectively; (b) a return to the maximum amount of water that Cucamonga (through Fontana Union) can draw from the Colton/Rialto Basin wells; and (c) an increase in the Chino Basin agricultural pool transfer relating to increased agricultural usage and the overstatement of estimates in prior years. 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, 1997 is approximately $1,236,000. In addition, MWD has stated that it may further refine its rate structure in the near future. Property redevelopment revenues were $1,213,000 for 1997 compared to $1,120,000 for 1996. The 8% increase from 1996 is primarily a result of: (a) the reclassification of the Mill Site sewer treatment plant service fees as property redevelopment revenues as a result of the Company's renovation of the plant and its renewed commitment to provide sewer services to PMI and future Mill Site tenants ($292,000) higher iron ore and aggregate sales ($78,000), partially offset by; and (b) residual expenses associated with offsite improvements for the Speedway Business Park property that the Company sold to PMI in December 1996 ($242,000). Income from equity method investments increased to $2,003,000 for 1997 compared to $1,539,000 for 1996. The $951,000 increase in Company's share of the reported net income of PMI for the year, of which the Company recorded its 11.51% weighted average share, was partially offset by the $487,000 reduction in the management fee which the Company received from PMI through March 31, 1997. The Company's equity interest in PMI declined, as of June 1, 1997, from 12.29% to 11.51% as a result of the approximate 907,000 shares that PMI issued in connection with the acquisition of a majority interest in North Carolina Motor Speedway, Inc. 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. Mill Site land sale revenues in 1996 represent 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 1,627,923 shares. Interim Activities. Revenues from interim activities for 1997 were $1,647,000 compared to $1,796,000 for 1996. The 8% decrease in revenues from interim activities in 1997 is primarily attributable to: (a) lower revenues from tenant services and from sales of metallics and scrap ($230,000); and (b) revenues from the reclassification of the sewer treatment plant service fees as property redevelopment revenues ($217,000), being partially offset by increases in tenant rental revenue ($87,000), railroad switching revenue ($91,000), and slag revenue ($121,000). It is anticipated that in 1998, 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 1997 increased to $3,654,000 from $3,229,000 in 1996. Operations and maintenance costs for 1997 were $1,311,000 compared to $1,092,000 for 1996. The 20% increase in 1997 operations and maintenance costs was primarily due to higher property tax expense associated with the completed offsite improvements for portions of the Mill Site property ($104,000) and increased maintenance and supplies costs for buildings and equipment ($112,000). 41 KAISER VENTURES INC. AND SUBSIDIARIES Administrative support expenses for 1997 increased 10% to $2,343,000 from $2,137,000 for 1996. This increase was primarily due to increases in insurance expense relating to the addition of environmental pollution insurance coverage for the Mill Site ($73,000), depreciation expense relating to the newly completed railroad and sewer plant improvements at the Mill Site ($59,000), and legal costs associated with both the CCWD water lease rate dispute and Mill Site tenants claims ($132,000) being partially offset by lower salaries and outside professional costs ($56,000). Corporate General and Administrative Expenses. Corporate general and administrative expenses for 1997 increased 8% to $4,161,000 from $3,837,000 for 1996. The increase is due to higher compensation and related expenses ($75,000) and higher professional and outside consulting expenses ($253,000). Net Interest Expense. Net interest expense for 1997 was $672,000 compared to $819,000 in 1996. The decrease was due primarily to a decrease in amortization of loan fees ($633,000), being partially offset by lower interest income from lower cash/investment balances ($76,000) and higher interest expense ($410,000) due to higher average borrowings under the Union Bank credit facility. Income and Income Tax Provision. The Company recorded income before income tax provision of $1,519,000 for 1997, an 80% decrease from the $7,446,000 recorded in 1996. Comparing 1997 to 1996 without the sale of the Speedway Business Park sale, pre-tax income increased 41% or $444,000 to $1,519,000 from $1,075,000. A provision for income taxes of $671,000 was recorded in 1997 as compared with $4,877,000 in 1996. Over 90% of the tax provisions for 1997 and 1996 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 1997, the Company reported net income of $848,000, or $.08 per share, a 67% decrease from the $2,569,000, or $.24 per share, reported for 1996. Mill Site Land Sale. During 1997, the Company sold approximately 15.7 acres of the Mill Site Property to McLeod Properties, Fontana LLC for $2,943,000, or $4.30 per square foot, for use as a rail-truck intermodal distribution facility for Budway Trucking, Inc. The transaction closed on September 30, 1997 at which time the Company received $1,500,000 in cash and a note receivable for $1,443,000. The Company agreed to subordinate its note receivable to a construction/permanent loan in order to facilitate the construction of a building on the property. Although the Company considers the sale to have been fully consummated during 1997 generally accepted accounting principles require the gain of $656,000 to be deferred and recognized as cash collections are received on its subordinated note receivable. 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: 42 KAISER VENTURES INC. AND SUBSIDIARIES
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........................... 1,796,000 2,719,000 (34%) Asset sales........................................ --- 2,200,000 (100%) ----------- ----------- ----- TOTAL INTERIM ACTIVITIES........................... 1,796,000 4,919,000 (63%) ----------- ----------- ----- TOTAL RESOURCE REVENUES............................ $15,331,000 $11,053,000 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 $15,331,000, compared to $11,053,000 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 63% to $1,796,000 from $4,919,000 in 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 80% 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 was 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. 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, 43 KAISER VENTURES INC. AND SUBSIDIARIES 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. Mill Site land sale revenues represent 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 1,627,923 shares or approximately 12.29%. Interim Activities. Revenues from interim activities for 1996 were $1,796,000 compared to $4,919,000 for 1995. As noted above, the 63% 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); sewer service revenues under the amended Services Agreement with CSI ($185,000) and lower miscellaneous revenues ($347,000). Resource Operating Costs. Resource operating costs are those costs directly related to the resource revenue sources. Total resource operating costs for 1996 declined to $3,229,000 from $3,737,000 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 expenses for 1996 decreased 3% to $2,137,000 from $2,241,000 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 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. 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 of $2,569,000, or $.24 per share, an 84% increase from the $1,394,000, or $.13 per share, reported for 1995. 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 $4,152,000 to $4,330,000 at December 31, 1997 from $8,482,000 at December 31, 1996. 44 KAISER VENTURES INC. AND SUBSIDIARIES Included in cash and cash equivalents is $1,984,000 and $1,766,000 held solely for the benefit of MRC at December 31, 1997 and 1996, respectively. The decrease in cash and cash equivalents is due primarily to the $7,174,000 in capital expenditures and $1,496,000 in environmental remediation, incurred in 1997 being offset by: (a) $1,500,000 in cash from the sale of the 15.7 acres of the Mill Site Property to McLeod Properties Fontana LLC (Budway Enterprises); (b) $1,000,000 of net new borrowings under the Union Bank credit facility; (c) $1,260,000 of equity funds contributed by the minority owners of MRC; and (d) the collection of $865,000 of outstanding accounts receivable. Working Capital. During 1997, current assets decreased $4,539,000 to $7,279,000 while current liabilities decreased $1,094,000 to $11,964,000. The decrease in current assets resulted primarily from the $4,152,000 decrease in cash and cash equivalents, plus a $797,000 decline in accounts receivable due primarily to the receipt of reimbursable expenses from PMI, partially offset by an increase in the current portion of the note receivable ($410,000) from the Mill Site land sale to McLeod properties. The decrease in current liabilities resulted primarily from a decrease in capital spending at the Mill Site during the 4/th/ quarter of 1997. Included in current liabilities for 1997 is $885,000 in accounts payable and accrued liabilities relating to MRC. As a result, working capital decreased during 1997 by $3,445,000 to a negative $4,685,000 at December 31, 1997. Real Estate. Real Estate decreased $2,952,000 during 1997 due to: (a) the closing of the Company's restructured joint venture with Burrtec Waste Industries for the West Valley MRF and the resulting contribution of 23 acres of land for WVMRF ($2,199,000); and (b) the sale of 15.7 acres of land to McLeod Properties, Fontana, LLC ($2,225,000). These reductions were partially offset by capital expenditures ($1,472,000) related to continue redevelopment of the Mill Site properties. Investments. There was a $6,503,000 increase in the Company's investments in PMI and WVMRF during 1997. The Company's increased investment in PMI ($5,018,000) is a result of PMI's stock issuance related to its acquisition of a majority of the common stock of North Carolina Motor Speedway Inc. ("NCMS") in May 1997 ($3,128,000) and the Company's recording of its equity share of PMI's 1997 earnings ($1,840,000). In regard to the $3,128,000 increase in Kaiser's investment in PMI relating to its stock issuance for NCMS, the Company also recorded corresponding increases in deferred income taxes and stockholders equity of approximately $191,000 and $2,937,000, respectively. The increase in the investment in WVMRF ($1,485,000) is due to Kaiser's contribution of the land for the joint venture ($2,199,000) being partially offset by expense reimbursements from the joint venture ($714,000). Other Assets. The increase in other assets ($5,918,000) is primarily related to: a) capitalized landfill permitting and development costs incurred by MRC ($3,962,000); b) recording of the long term portion of the note receivable associated with the Mill Site (Napa Lot) land sale ($860,000); c) railroad and sewer plant improvements at the Mill Site ($1,213,000); and an increase in deferred loan fees ($242,000). These increases were partially offset by an increase in accumulated depreciation as of December 31, 1997 ($359,000). 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 $31 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 elected, in 1996, 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 45 KAISER VENTURES INC. AND SUBSIDIARIES 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 $23.1 million in remediation and other environmental costs expended through December 31, 1997. 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 three years and the Company's ability to better estimate the probable range of future remediation and other environmental costs. As of December 31, 1997, the total short-term and long-term environmental liabilities including remediation reflected on the Company's balance sheet were approximately $30.7 million, the high end of the probable range of future remediation and other environmental costs, which declined from the $32.2 million as of December 31, 1996. The decrease is a result of the $1.5 million in remediation and other environmental costs incurred in 1997 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. Of December 31, 1997, the Company had $8,982,000 in long-term debt comprised of $4,982,000 of debt issued as part of the purchase of properties from the Lusk Joint Ventures in July 1994 and $4,000,000 borrowed under the $30,000,000 revolving-to-term credit facility with Union Bank. The Lusk debt has been classified as long-term debt due to the Company's intent and ability to refinance the obligation on a long-term basis utilizing the Union Bank revolving-to-term credit facility. Long-term Liabilities. The $872,000 decrease in other long-term liabilities is primarily due to the reduction of the environmental remediation liability as a result of: a) $1,496,000 in environmental remediation undertaken during 1997 and b) a reclassification of $297,000 from long term into current environmental remediation. These reductions were partially offset by the recording of the deferred gain on the sale of real estate ($656,000) and the increases in deferred tax liability discussed above ($265,000). Minority Interest and Other Liabilities. As of December 31, 1997, the Company has recorded $2,878,000 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. Impact of the Year 2000 Issue. The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. 46 KAISER VENTURES INC. AND SUBSIDIARIES Based on a recent assessment, the Company determined that all of the software currently in use on its computer system will properly utilize dates beyond December 31, 1999. The Company has determined that it has no exposure to contingencies related to the Year 2000 Issue for the services it has sold. The Company has initiated informal communications with all of its significant business associates to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. The Company believes that the failure of its customers to convert their computer systems to be compliant with the Year 2000 Issue will not have a material effect on the Company. SECTION 3: BUSINESS OUTLOOK The statements contained in this Business Outlook are based upon current operations and 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 11.51% 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 addition, the Company continues to evaluate these completed projects and investments in light of how to best provide maximum value to its shareholders. 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 nearly 8.6% per year during the past 25 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 for the next 2-4 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. In March 1998, the San Bernardino Superior Court ruled that the Lease Rate had been discontinued as of July 1, 1995. Thus, the parties are required to negotiate in good faith a substitute Lease Rate. If parties are unable to negotiate a substitute Lease Rate, the matter is referred to arbitration for resolution. In regard to the Company's 11.51% 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 will be the continued success of TCS that is on land acquired from the Company. The continued success of TCS, coupled with the results of the other major racing events schedule for PMI's MIS, Nazareth, North Caroline and Homestead 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 approximately 496 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 47 KAISER VENTURES INC. AND SUBSIDIARIES 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 the redevelopment of the remaining Mill Site Property and completing the re-permitting of the Eagle Mountain Landfill that could materially impact the Company's future revenues and net income from these projects. In regard to the redevelopment of approximately 445 acres (gross) of the Mill Site Property, the Company is currently undertaking efforts to obtain the entitlement and permits necessary for a variety of possible commercial, industrial and recreational uses. These efforts, which will continue throughout 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 1998, up to approximately $6.1 million for required environmental remediation and approximately $1.5 million for real estate entitlement and improvement expenditures. The $6.1 million to be spent in 1998 for required environmental remediation is a component of the $20-31 million estimate to complete all remaining required remediation for the Mill Site Property. In addition, substantial capital expenditures beyond the $1.5 million projected for 1998 will be required to complete the necessary on-site and off-site improvements for the redevelopment of remaining Mill Site property. Although neither the Company nor any subsidiary of the Company has any obligation to invest funds in MRC, the Company has, to date, continued to make investments in MRC. Through a series of private placements with existing MRC shareholders, from July 1995 through December 31, 1997, a total of $10.8 million has been raised by MRC, with Kaiser contributing approximately $8.1 million of that amount. Due to the uncertainty associated with the Landfill Project, the Company is evaluating its continuing investment in MRC. In this regard, the Company has agreed to advance funds to MRC for a limited period in 1998 pending the Company's determination, in light of the San Diego County Superior Court's recent ruling, of what course of action to pursue with regard to the Landfill Project. It is anticipated that the initial 1998 advance will total up to approximately $900,000 and that the Company may invest additional funds in MRC during 1998 depending upon what course of action the Company may ultimately decide to pursue. 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 $30,000,000 revolving-to-term credit facility (less $4,850,000 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 1998, a total of approximately $8 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, 1997, are estimated to be approximately $113 million for federal purposes and $2.4 million for California purposes. The federal NOLs expire in varying amounts over a period from year 2000 to 2010 while the California NOLs expire from 2000 through 2002. 48 KAISER VENTURES INC. AND SUBSIDIARIES 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Please see Item 14 of this Form 10-K Report for financial statements and supplementary data. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 49 KAISER VENTURES INC. AND SUBSIDIARIES PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this item is incorporated by reference from the Executive Compensation Section of the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement"), a definitive copy of which will be filed within 120 days of December 31, 1997. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference from the Executive Compensation Section of the 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference from the Security Ownership of Principal Shareholders and Management Section of the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference from the 1998 Proxy Statement. 50 KAISER VENTURES INC. AND SUBSIDIARIES PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following financial statements and financial schedules are filed as a part of this report:
(1) Financial Statements Page -------------------- ---- Report of Independent Auditors ............................... 64 Consolidated Balance Sheets .................................. 65 Consolidated Statements of Income ............................ 67 Consolidated Statements of Cash Flows ........................ 68 Consolidated Statements of Changes in Stockholders' Equity ... 69 Notes to Consolidated Financial Statements ................... 70 (2) Financial Statement Schedules ----------------------------- II Valuation and Qualifying Accounts and Reserves ..... 92
All other schedules are omitted because they are not required, are inapplicable, or the information is included in the Consolidated Financial Statements or Notes thereto. (b) Reports on Form 8-K. The following reports on Form 8-K have been filed during the last quarter of the period covered by this Form 10-K Report to the date of this report. None. (c) Exhibits. The following exhibits are filed as part of this Form 10-K: 51 KAISER VENTURES INC. AND SUBSIDIARIES EXHIBIT INDEX (* INDICATES COMPENSATION PLAN, CONTRACT OR ARRANGEMENT)
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ---------- ---------------------------------------------------------------------------- 2.1 Second Amended Joint Plan of Reorganization as Modified, as filed with the United States Bankruptcy Court for the District of Colorado on September 9, 1988, incorporated by reference from Exhibit 2.1 of the Company's Form 10-K Report for the year ended December 31, 1988. 2.2 Second Amended Joint Plan of Reorganization Modification, as filed with the United States Bankruptcy Court on September 26, 1988, incorporated by reference from Exhibit 2.2 of the Company's Form 10-K Report for the year ended December 31, 1988. 2.3 United States Bankruptcy Court Order dated October 4, 1988, confirming the Second Amended Joint Plan of Reorganization as Modified, incorporated by reference from Exhibit 2.3 of the Company's Form 10-K Report for the year ended December 31, 1988. 4.1 Restated Certificate of Incorporation of Kaiser Steel Corporation filed with the Secretary of State of Delaware on November 17, 1988, incorporated by reference from Exhibit D(i) to the Company's Form 8-A dated November 21, 1988. 4.1.1 Certificate of Amendment to Restated Certificate of Incorporation of Kaiser Steel Resources, Inc. filed with the Delaware Secretary of State on October 2, 1990, incorporated by reference from the Company's Form 8-K Report dated September 18, 1990. 4.1.2 Certificate of Amendment to Restated Certificate of Incorporation of Kaiser Steel Resources, Inc. changing the Corporation's name to Kaiser Resources Inc., filed with the Delaware Secretary of State on June 14, 1993, incorporated by reference from Exhibit 4.1.2 of the Company's Form 10-K Report for the year ended December 31, 1993. 4.1.3 Certificate of Amendment to Restated Certificate of Incorporation of Kaiser Resources Inc. changing the Corporation's name to Kaiser Ventures Inc., filed with the Delaware Secretary of State on June 19, 1995. 4.2 Amended and Restated Bylaws of Kaiser Steel Resources, Inc., effective March 22, 1989, incorporated by reference from Exhibit 3.2 of the Company's Form 10-K Report for the year ended December 31, 1989. 4.2.1 Amendment to Amended and Restated Bylaws of Kaiser Steel Resources, Inc., effective November 18, 1991, incorporated by reference from Exhibit 3.2.1 of the Company's Form 10-K Report for the year ended December 31, 1991.
52 KAISER VENTURES INC. AND SUBSIDIARIES EXHIBIT INDEX - (CONTINUED)
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.1 Lease Entered Into Between Kaiser Eagle Mountain, Inc., and Mine Reclamation Corporation, dated November 30, 1988, incorporated by reference from Exhibit 10.1 of the Company's Form 10-K Report for the year ended December 31, 1988. 10.1.1 First Amendment dated December 18, 1990, to Lease dated November 30, 1990 between Kaiser Eagle Mountain, Inc. and Mine Reclamation Corporation, incorporated by reference from the Company's Form 8-K Report dated December 18, 1990. 10.1.2 Second Amendment dated July 29, 1994, to Lease dated November 30, 1990, between Kaiser Eagle Mountain, Inc. and Mine Reclamation Corporation, incorporated by reference from Exhibit 4 of the Company's Form 10-Q Report for the period ending June 30, 1994. 10.1.3 Third Amendment dated January 29, 1995, but effective as of January 1, 1995, to Lease dated November 30, 1990, between Kaiser Eagle Mountain, Inc. and Mine Reclamation Corporation, incorporated by reference from Exhibit 10.1.3 of the Company's Form 10-K Report for the year ended December 31, 1994. 10.1.4 Fourth Amendment dated effective January 1, 1996, between Kaiser Eagle Mountain, Inc. and Mine Reclamation Corporation incorporated by reference from Exhibit 10.1.4 of the Company's Form 10-K Report for the year ended December 31, 1995. 10.1.5 Settlement Agreement dated June 30, 1994, by and among Mine Reclamation Corporation, Browning-Ferris Industries, Inc., BFI Riverside, Inc., BFI California, Inc., Kaiser Eagle Mountain, Inc., and Kaiser Resources Inc., incorporated by reference by the Company's Form 10-Q Report for the period ending June 30, 1994. 10.1.6 Stock Acquisition Agreement between Eagle Mountain Reclamation, Inc. and Mine Reclamation Corporation dated January 13, 1995, incorporated by reference from Exhibit 10.1.5 of the Company's Form 10-K Report for the year ended December 31, 1994. 10.1.7 Indemnification Agreement dated September 9, 1997 among Riverside County, Mine Reclamation Corporation, Kaiser Eagle Mountain, Inc. Eagle Mountain Reclamation, Inc. and Kaiser Ventures Inc, incorporated by reference from Exhibit 10.1 of the Company's Form 10-Q Report for the period ended September 30, 1997. 10.1.8 Development Agreement to be executed upon consummation of federal land exchange among Riverside County, Mine Reclamation Corporation, Kaiser Eagle Mountain, Inc. Eagle Mountain Reclamation, Inc. and Kaiser Ventures Inc., incorporated by reference from Exhibit 10.2 of the Company's Form 10-Q Report for the period ended September 30, 1997.
53 KAISER VENTURES INC. AND SUBSIDIARIES EXHIBIT INDEX - (CONTINUED)
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.2 Dissolution Agreement among Lusk-Kaiser Fontana Joint Venture, Kaiser Steel Resources, Inc., The Lusk Company, Service Mortgage Company and Lusk Ontario Industrial Partners II, effective September 30, 1992, incorporated by reference from Exhibit 10.2.4 of the Company's Form S-2 (Registration No. 33-56234). 10.2.1 Dissolution Agreement among Lusk-Kaiser West End Joint Venture, Kaiser Resources Inc., The Lusk Company, Service Mortgage Company and Lusk-Ontario Industrial Partners II, dated July 31, 1994, incorporated by reference from Exhibit 10.2.7 of the Company's Form 10-K Report for the year ended December 31, 1994. 10.2.3 Dissolution Agreement among Lusk-Kaiser Valley Boulevard Joint Venture, Kaiser Resources Inc., The Lusk Company, Service Mortgage Company and Lusk-Ontario Industrial Partners II, dated July 31, 1994, incorporated by reference from Exhibit 10.2.7 of the Company's Form 10-K Report for the year ended December 31, 1994. 10.3 Eagle Mountain Lease Between Management and Training Corporation and Kaiser Steel Corporation, dated November 16, 1987, incorporated by reference from Exhibit 10.4 of the Company's Form 10-K Report for the year ended December 31, 1988. 10.3.1 First Amendment dated July 1, 1990, to Lease between Management and Training Corporation and Kaiser Steel Resources, Inc., incorporated by reference from Exhibit 10.3.1 of the Company's Form 10-K Report for the year ended December 31, 1990. 10.3.2 Second Amendment dated November 16, 1992, to Lease dated November 16, 1987 between Management and Training Corporation and Kaiser Steel Resources, Inc., incorporated by reference from Exhibit 10.3.2 of the Company's Form S-2 Registration No. 33-56234). 10.3.3 Third Amendment to Eagle Mountain Lease between Management and Training Corporation and Kaiser Steel Resources, Inc. dated November 16, 1997. 10.4* Amended and Restated Employment Agreement between Kaiser Ventures Inc. and Richard E. Stoddard, dated effective January 15, 1998. 10.5* Employment Agreement between Kaiser Ventures Inc. and Gerald A. Fawcett, dated effective January 15, 1998.
54 KAISER VENTURES INC. AND SUBSIDIARIES EXHIBIT INDEX - (CONTINUED)
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.6* Employment Agreement between Kaiser Ventures Inc. and Pamela M. Catlett, dated effective June 17, 1996, incorporated by reference from Exhibit 10.1 of the Company's Form 10-Q Report for quarter ended June 30, 1996. 10.7* Employment Agreement between Kaiser Ventures Inc. and Terry L. Cook dated effective June 17, 1996, incorporated be reference from Exhibit 10.2 of the company's Form 10-Q Report for quarter ended June 30, 1996. 10.8* Employment Agreement between Kaiser Ventures Inc. and Lee R. Redmond III, dated effective June 17, 1996 incorporated by reference from Exhibit 10.3 of the Company's Form 10-Q Report for the quarter ended June 30, 1996. 10.9* Employment Agreement between Kaiser Ventures Inc. and Anthony Silva dated effective January 15, 1998. 10.10* Employment Agreement between Kaiser Ventures Inc. and James F. Verhey, dated effective June 17, 1996 incorporated by reference from the Company's Form 10-Q Report for the quarter ended June 30, 1996. 10.10* First Amendment to Employment Agreement dated effective January 15, 1998 between Kaiser Ventures Inc and James F. Verhey. 10.11 Lease Agreement between American Trading Estate Properties, Landlord and Kaiser Resources Inc., Tenant, dated June 6, 1994, incorporated by reference from Exhibit 10.8 of the Company's Form 10-K Report for the year ended 1994. 10.12 Environmental Agreement, State of California, Health and Welfare Agency, Department of Health Services, Consent Order Health and Safety Code Sections 205, 25355.1(a)(B), 25355.5(a)(C), dated August 22, 1988, incorporated by reference from Exhibit 10.14 of the Company's Form 10-K Report for the year ended December 31, 1988. 10.12.1 Amendment to Consent Order dated August 22, 1998 issued by the State Department of Health Services to Kaiser Steel Corporation is issued as of November 13, 1997 by the California Environmental Protection Agency. 10.13 Environmental Agreement, California Regional Water Quality Control Board, Santa Ana Region, Cleanup and Abatement Order No. 87-121, dated August 26, 1987, incorporated by reference from Exhibit 10.15 of the Company's Form 10-K Report for the year ended December 31, 1988. 10.13.1 Environmental Agreement, California Regional Water Quality Control Board, Santa Ana Region, Cleanup and Abatement Order No. 91-40, dated March 11, 1991, incorporated by reference from Exhibit 10.11.1 of the Company's Form S-2 (Registration No. 33-56234).
55 KAISER VENTURES INC. AND SUBSIDIARIES EXHIBIT INDEX - (CONTINUED)
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ----------- -------------------------------------------------------------------------------- 10.13.2 Settlement Agreement between Kaiser Resources Inc. and California Regional Water Quality Control Board, Santa Ana Region, dated October 21, 1993, incorporated by reference from Exhibit 10.11.2 of the Company's Form 10-K Report for the year ended December 31, 1993. 10.14 Lease of Corporate shares of Fontana Union Water Company coupled with Irrevocable Proxy between Kaiser Resources Inc. and Cucamonga County Water District dated July 1, 1993, incorporated by reference from Exhibit 1 to Form 10-Q dated June 30, 1993. 10.15 Assignment from Kaiser Steel Resources, Inc. to KSC Recovery, Inc., dated December 29, 1989, incorporated by reference from Exhibit 10.20 of the Company's Form 10-K Report for the year ended December 31, 1989. 10.16* Amended, Restated and Substituted Kaiser Steel Resources, Inc. 1989 Stock Plan, incorporated by reference from the Company's Proxy Statement for the Special Meeting of Stockholders held on October 2, 1990. 10.17* Kaiser Steel Resources, Inc. 1992 Stock Option Plan, as amended, incorporated by reference from Exhibit 10.16 of the Company's Form S-2 (Registration No. 33-56234). 10.18* Kaiser Ventures Inc. 1995 Stock Plan incorporated by reference from Exhibit 10.15 of the Company's 10-K Report for the year ended December 31, 1995. 10.18.1* First Amendment to Kaiser Ventures Inc. 1995 Stock Option Plan incorporated by reference from Exhibit 4.1.1 of the Company's Form S-8 Registration Statement (Registration No. 333-17843). 10.19 Third Amended Plan of Reorganization of Fontana Union Water Company dated September 26, 1990, incorporated by reference from Exhibit 10.18 of the Company's Form S-2 (Registration No. 33-56234). 10.20 Settlement Agreement among Fontana Union Water Company, Kaiser Steel Resources, Inc., San Gabriel Valley Water Company and Cucamonga County Water District dated February 7, 1992, incorporated by reference from Exhibit 10.19 of the Company's Form S-2 (Registration No. 33-56234). 10.21 Mining Lease between Kaiser Steel Resources, Inc. and Levand Steel and Supply Corporation/K.D. Mining and Consulting Co. effective January 2, 1993, incorporated by reference from Exhibit 10.20 of the Company's Form S-2 (Registration No. 33-56234).
56 KAISER VENTURES INC. AND SUBSIDIARIES EXHIBIT INDEX - (CONTINUED)
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.22 Organization Agreement, dated November 22, 1995 by and among PSH Corp., Kaiser Ventures Inc. and Penske Motorsports, Inc. (f/k/a Penske Speedway Holdings Corp.), incorporated by reference from Exhibit 10.23 of the Company's 8-K Report dated November 22, 1995. 10.22.1 First Amendment to Organization Agreement dated March 21, 1996, by and among PSH Corp., Kaiser Venture Inc., and Penske Motorsports, Inc. incorporated by reference from Exhibit 10.20.1 of the Company's Form 10-K Report for the year ended December 31, 1995. 10.23 Shareholders Agreement, dated November 22, 1995 by and among PSH Corp., Kaiser Ventures Inc. and Penske Motorsports, Inc. (f/k/a Penske Speedway Holdings Corp.) incorporated by reference from Exhibit 10.24 of the Company's 8-K Report dated November 22, 1995. 10.23.1 First Amendment to Shareholders Agreement, dated March 21, 1996, between Penske Motorsports, Inc. and Kaiser Ventures Inc., incorporated by reference from Exhibit 10.21.1 of the Company's Form 10-K Report for the year ended December 31, 1995. 10.24 Water Rights Agreement, dated November 21, 1995 by and among Kaiser Ventures Inc., Kaiser Inc. and The California Speedway Corporation (successor by merger to Speedway Development Corporation) incorporated by reference from Exhibit 10.22 of the Company's Form 10-K Report for the year ended December 31, 1995. 10.25 Access Agreement, dated as of November 22, 1995 by and among Kaiser Ventures Inc., Kaiser Land Development, Inc. and The California Corporation incorporated by reference from Exhibit 10.23 of the Company's Form 10-K Report for the year ended December 31, 1995. 10.26 Sewer Services Agreement, dated as of November 21, 1995 between Kaiser Ventures Inc. and The California Speedway Corporation (successor by merger to Speedway Development Corporation) incorporated by reference from Exhibit 10.24 of the Company's Form 10-K Report for the year ended December 31, 1995. 10.27 Purchase Agreement and Escrow Instructions (without exhibits) dated October 8, 1996, among Kaiser Ventures Inc., The California Speedway Corporation and Penske Motorsports, Inc. incorporated by reference from Exhibit 10.1 of the Company's Form 10-Q Report for the quarter ended September 30, 1995.
57 KAISER VENTURES INC. AND SUBSIDIARIES EXHIBIT INDEX - (CONTINUED)
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.28 Conditional Demand Registration Report Agreement between Penske Motorsports, Inc. and Kaiser Ventures Inc., incorporated by reference from Exhibit 10.28 of the Company's Form 10-K Report for the year ended December 31, 1996. 10.29 Revolving Credit and Term Loan Agreement between Fontana Water Resources, Inc. and Union Bank, dated September 30, 1994, (Excluding the exhibits), incorporated by reference from Exhibit 10.21 of the Company's Form 10-K Report for the year ended December 31, 1994. 10.29.1 First Amendment of Credit and Term Loan Agreement between Fontana Water Resources, Inc. and Union Bank, dated January 30, 1997, incorporated by reference from Exhibit 10.29.1 of the Company's Form 10-K Report for the year ended December 31, 1996. 10.29.2 Guaranty executed by Kaiser Resources Inc. in favor of Union Bank, dated September 30, 1994, incorporated by reference from Exhibit 10.21.1 of the Company's Form 10-K Report for the year ended December 31, 1994. 10.29.3 First Amendment to Guaranty by Kaiser Ventures Inc. in favor of Union Bank dated June 30, 1997 incorporated by reference from Exhibit 10.29.3 of the Company's 10-K Report for the year ended December 31, 1996. 10.29.4 First Amendment to Pledge and Security Agreement; Second Amendment to Guaranty; First Amendment to Stock Pledge Agreement; and Guarantor Consent by Kaiser Ventures Inc. in favor of Union Bank dated August 14, 1997. 10.29.5 Second Modification of Deed of Trust and Assignment of Leases and Rents dated as of August 14, 1997 by Fontana Water Resources, Inc. and Union Bank of California. 10.29.6 Second Amendment to Revolving Credit and Term Loan Agreement dated August 14, 1997 by Fontana Water Resources, Inc. and Union Bank of California. 10.31 Settlement Agreement among Kaiser Resources Inc., KSC Recovery, Inc., Kaiser Coal Corporation, the UMWA Combined Benefit Fund and the UMWA 1992 Benefit Plan dated December 1, 1994, incorporated by reference from Exhibit 10.22 of the Company's 10-K Report for the year ended December 31, 1994. 10.32 Promissory Note of McLeod Properties, Fontana LLC, dated September 30, 1997 payable to the order of Kaiser Ventures Inc., incorporated by reference from Exhibit 10.3 of the Company's 10-Q Report for the period ended September 30, 1997.
58 KAISER VENTURES INC. AND SUBSIDIARIES EXHIBIT INDEX - (CONTINUED)
EXHIBIT NUMBER DOCUMENT DESCRIPTION - ---------- --------------------------------------------------------------------------------- 10.32.1 Guaranty Agreement of Budway Enterprises, Inc. and V.M. McLeod dated September 30, 1997, incorporated by reference from Exhibit 10.3.1 of the Company's 10-Q Report for the period ended September 30, 1997. 10.32.2 Subordinated Deed of Trust, Assignment of Leases and Rents and Security Agreement dated September 30, 1997 given by McLeod Properties, Fontana LLC for the benefit of the Kaiser Ventures Inc., incorporated by reference from Exhibit 10.3.2 of the Company's 10-Q Report for the period ended September 30, 1997. 10.33 Members Operating Agreement dated June 19, 1997 between Kaiser Recycling Corporation and West Valley Recycling & Transfer, Inc., incorporated by reference from Exhibit 10.1 of the Company's 10-Q Report for the period ended June 30, 1997. 10.33.1 Performance Guaranty and Indemnification Agreement (KRC Obligations) dated June 19, 1997 given by Kaiser Ventures Inc. for the benefit of West Valley MRF, LLC and West Valley Recycling & Transfer, Inc., incorporated by reference from Exhibit 10.1.1 of the Company's 10-Q Report for the period ended June 30, 1997. 10.34 Loan Agreement dated as of June 1, 1997 between West Valley MRF, LLC and California Pollution Control Financing Authority, incorporated by reference from Exhibit 10.2 of the Company's 10-Q Report for the period ended June 30, 1997. 10.34.1 Indenture Agreement dated as of June 1, 1997 between California Pollution Control Financing Authority and BNY Western Trust Company for the benefit of $9,500,000 California Pollution Control Financing Authority Variable Rate Demand Solid Waste Disposal Revenue Bonds (West Valley MRF, LLC Project) Series 1997A, incorporated by reference from Exhibit 10.2.1 of the Company's 10-Q Report for the period ended June 30, 1997. 10.35 Remarketing Agreement dated as of June 1, 1997, and among West Valley MRF, LLC and Westhoff, Cone & Holmstedt and Smith Barney, Inc. with regard to $9,500,000 California Pollution Control Financing Authority Variable Rate Demand Stock Waste Disposal Revenue Bonds (West Valley MRF, LLC Project) Series 1997A, incorporated by reference from Exhibit 10.3 of the Company's 10-Q Report for the period ended June 30, 1997. 10.36 Reimbursement Agreement dated as of June 1, 1997 between West Valley MRF, LLC and Union Bank of California, N.A., incorporated by reference from Exhibit 10.4 of the Company's 10-Q Report for the period ended June 30, 1997.
59 KAISER VENTURES INC. AND SUBSIDIARIES EXHIBIT INDEX - (CONTINUED)
EXHIBIT NUMBER DOCUMENT DESCRIPTION - -------- ----------------------------------------------------------------------------------- 10.36.1 Guaranty and Mandatory DSR Agreement dated as of June 1, 1997 given by Kaiser Ventures Inc. and Kaiser Recycling Corporation for the benefit of Union Bank of California, N.A., incorporated by reference from Exhibit 10.4.1 of the Company's 10-Q Report for the period ended June 30, 1997. 10.37 Environmental Compliance Agreement dated as of June 19, 1997 between West Valley MRF, LLC and Union Bank of California, N.A., incorporated by reference from Exhibit 10.5 of the Company's 10-Q Report for the period ended June 30, 1997. 10.37.1 Environmental Guaranty Agreement dated as of June 19, 1997 given by Kaiser Ventures Inc. and Kaiser Recycling Corporation for the benefit of Union Bank of California, N.A., incorporated by reference from Exhibit 10.5.1 of the Company's 10-Q Report for the period ended June 30, 1997. 21 The Company has nine active subsidiaries. Fontana Water Resources, Inc., Kaiser Eagle Mountain, Inc., Kaiser Steel Corporation, Kaiser Steel Land Development, Inc., Kaiser Waste Treatment, Inc., Kaiser Recycling Corporation, Kaiser Reclamation, Inc., and KSC Recovery, Inc. are incorporated under the laws of the State of Delaware. Lake Tamarisk Development Corporation is incorporated under the laws of the State of California. KSC Recovery, Inc.'s activities are limited to those permitted by the Second Amended Joint Plan of Reorganization as modified (Exhibit 2.1 of this Report). 23 Consent of Ernst & Young LLP. 24 Power of Attorney (included in the signature page). 27 Financial Data Schedule
60 KAISER VENTURES INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 31, 1998 KAISER VENTURES INC. By: /s/ Richard E. Stoddard ----------------------------------------- Name: Richard E. Stoddard ----------------------------------------- Title: President, Chief Executive Officer ------------------------------------------- and Chairman of the Board ------------------------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. (Power of Attorney) 61 KAISER VENTURES INC. AND SUBSIDIARIES Each person whose signature appears below constitutes and appoints RICHARD E. STODDARD and JAMES F. VERHEY as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURE TITLE DATE --------- ----- ---- 1. Principal Executive Officer /s/ Richard E. Stoddard President, Chief Executive March 31, 1998 ------------------------- Richard E. Stoddard Officer and Chairman of the Board 2. Principal Financial and Accounting Officer /s/ James F. Verhey Executive Vice President March 31, 1998 -------------------------- James F. Verhey Finance and Chief Finance Officer
62
SIGNATURE TITLE DATE --------- ----- ---- 4. Directors /s/ Ronald E. Bitonti Director March 31, 1998 -------------------------------------------- Ronald E. Bitonti /s/ Todd G. Cole Director March 31, 1998 -------------------------------------------- Todd G. Cole /s/ Gerald A. Fawcett Vice Chairman March 31, 1998 -------------------------------------------- Gerald A. Fawcett /s/ Reynold C. MacDonald Director March 31, 1998 -------------------------------------------- Reynold C. MacDonald /s/ William J. Morgan Director March 31, 1998 -------------------------------------------- William J. Morgan /s/ Charles E. Packard Director March 31, 1998 -------------------------------------------- Charles E. Packard /s/ Thomas S. Rabone Director March 31, 1998 -------------------------------------------- Thomas S. Rabone /s/ Lyle B. Stevenson Director March 31, 1998 -------------------------------------------- Lyle B. Stevenson /s/ Marshall F. Wallach Director March 31, 1998 -------------------------------------------- Marshall F. Wallach
63 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, 1997 and 1996, and the related consolidated statements of income, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 January 20, 1998 64 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
1997 1996 ------------- ------------ ASSETS Current Assets Cash and cash equivalents............................... $ 4,330,000 $ 8,482,000 Accounts receivable and other, net of allowance for doubtful accounts of $1,535,000 and $1,034,000, respectively........................................ 2,539,000 3,336,000 Note receivable......................................... 410,000 --- ------------ ------------ 7,279,000 11,818,000 ------------ ------------ Investment in common stock of Penske Motorsports, Inc...... 43,881,000 38,863,000 ------------ ------------ Investment in Fontana Union Water Company.................. 16,108,000 16,108,000 ------------ ------------ Investment in West Valley MRF.............................. 2,509,000 1,024,000 ------------ ------------ Real Estate Land and improvements................................... 15,621,000 15,554,000 Real estate in development.............................. 40,094,000 43,113,000 ------------ ------------ 55,715,000 58,667,000 ------------ ------------ Other Assets Note Receivable......................................... 860,000 --- Landfill permitting and development..................... 9,607,000 5,645,000 Buildings and equipment (net)........................... 3,064,000 2,210,000 Other assets............................................ 242,000 --- ------------ ------------ 13,773,000 7,855,000 ------------ ------------ Total Assets............................................... $139,265,000 $134,335,000 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 65 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
1997 1996 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable....................................... $ 1,479,000 $ 2,936,000 Accrued liabilities.................................... 4,311,000 4,125,000 Current portion of long-term debt...................... 120,000 240,000 Environmental remediation.............................. 6,054,000 5,757,000 ------------ ------------ 11,964,000 13,058,000 ------------ ------------ Long-term Liabilities Deferred gain on sale of real estate................... 656,000 --- Accrued liabilities.................................... 1,685,000 1,685,000 Deferred tax liabilities............................... 2,223,000 1,958,000 Long-term debt......................................... 8,982,000 8,102,000 Environmental remediation.............................. 24,673,000 26,466,000 ------------ ------------ 38,219,000 38,211,000 ------------ ------------ Total Liabilities......................................... 50,183,000 51,269,000 ------------ ------------ Minority Interest......................................... 2,878,000 1,618,000 ------------ ------------ Commitments and Contingencies Stockholders' Equity Common stock, par value $.03 per share, authorized 13,333,333 shares; issued and outstanding 10,591,240 and 10,488,114 respectively............. 318,000 315,000 Capital in excess of par value......................... 74,342,000 70,437,000 Retained earnings since November 15, 1988.............. 11,544,000 10,696,000 ------------ ------------ Total Stockholders' Equity................................ 86,204,000 81,448,000 ------------ ------------ Total Liabilities and Stockholders' Equity................ $139,265,000 $134,335,000 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 66 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31
1997 1996 1995 ----------- ----------- ----------- RESOURCE REVENUES Ongoing Operations Water resource............................................... $ 5,143,000 $ 4,505,000 $ 4,974,000 Property redevelopment....................................... 1,213,000 1,120,000 998,000 Income from equity method investments........................ 2,003,000 1,539,000 162,000 Mill Site land sale.......................................... --- 6,371,000 --- ----------- ----------- ----------- Total ongoing operations.................................. 8,359,000 13,535,000 6,134,000 ----------- ----------- ----------- Interim Activities Lease, service and other..................................... 1,647,000 1,796,000 2,719,000 Asset sales.................................................. --- --- 2,200,000 ----------- ----------- ----------- Total interim activities.................................. 1,647,000 1,796,000 4,919,000 ----------- ----------- ----------- Total resource revenues................................... 10,006,000 15,331,000 11,053,000 ----------- ----------- ----------- RESOURCE OPERATING COSTS Operations and maintenance........................................ 1,311,000 1,092,000 1,496,000 Administrative support expenses................................... 2,343,000 2,137,000 2,241,000 ----------- ----------- ----------- Total resource operating costs............................... 3,654,000 3,229,000 3,737,000 ----------- ----------- ----------- INCOME FROM RESOURCES............................................... 6,352,000 12,102,000 7,316,000 Corporate general and administrative expenses..................... 4,161,000 3,837,000 4,201,000 ----------- ----------- ----------- Income from Operations.............................................. 2,191,000 8,265,000 3,115,000 Net interest expense.............................................. 672,000 819,000 665,000 ----------- ----------- ----------- INCOME BEFORE INCOME TAX PROVISION.................................. 1,519,000 7,446,000 2,450,000 Income tax provision Currently payable............................................ 43,000 92,000 --- Deferred tax expense......................................... 74,000 840,000 721,000 Deferred tax expense credited to equity...................... 554,000 3,945,000 335,000 ----------- ----------- ----------- NET INCOME.......................................................... $ 848,000 $ 2,569,000 $ 1,394,000 =========== =========== =========== BASIC EARNINGS PER SHARE............................................ $.08 $.24 $.13 =========== =========== =========== DILUTED EARNINGS PER SHARE.......................................... $.08 $.24 $.13 =========== =========== =========== BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................. 10,536,457 10,485,943 10,456,353 DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 10,740,357 10,729,645 10,653,950
The accompanying notes are an integral part of the consolidated financial statements. 67 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
1997 1996 1995 ------------------ ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................... $ 848,000 $ 2,569,000 $ 1,394,000 Provision for income tax which is credited to equity..... 554,000 3,945,000 335,000 Equity income in Penske Motorsports, Inc................. (1,840,000) (889,000) --- Deferred tax expense..................................... 74,000 840,000 721,000 Depreciation and amortization............................ 389,000 952,000 436,000 Extraordinary loss....................................... --- --- (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.......................... 13,000 36,000 258,000 Changes in assets: Receivable and other................................. 865,000 77,000 (755,000) Changes in liabilities: Current liabilities.................................. 684,000 (2,810,000) 798,000 Long-term accrued liabilities........................ --- 306,000 --- ----------- ----------- ----------- Net cash flows from operating activities................. 1,587,000 (1,345,000) (2,951,000) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Minority interest and other liabilities.................. 1,260,000 670,000 1,538,000 Proceeds from the sale of Mill Site Real Estate.......... 1,500,000 5,000,000 --- Collection of note receivable............................ 174,000 --- --- Proceeds from the CSI Settlement......................... --- 3,661,000 --- Capital expenditures..................................... (7,174,000) (9,273,000) (1,605,000) Environmental remediation expenditures..................... (1,496,000) (6,595,000) (5,950,000) Environmental insurance proceeds (net)................... --- 2,582,000 13,823,000 Investment in Penske Motorsports, Inc...................... --- 232,000 (309,000) Other investments.......................................... (759,000) (268,000) (184,000) Short-term investments and marketable securities......... --- --- 3,624,000 Investment in Fontana Union Water Co..................... --- --- (62,000) ----------- ----------- ----------- Net cash flows from investing activities................... (6,495,000) (3,991,000) 10,875,000 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock................................. 196,000 121,000 166,000 Borrowings under revolver-to-term credit facility........ 2,000,000 3,000,000 --- Principal payments on revolver-to-term credit facility and note payable........................................ (1,240,000) (240,000) (358,000) Payment of loan fees (200,000) --- --- ----------- ----------- ----------- Net cash flows from financing activities 756,000 2,881,000 (192,000) ----------- ----------- ----------- NET CHANGES IN CASH AND CASH EQUIVALENTS (4,152,000) (2,455,000) 7,732,000 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,482,000 10,937,000 3,205,000 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,330,000 $ 8,482,000 $10,937,000 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 68 KAISER VENTURES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CAPITAL IN COMMON STOCK EXCESS OF RETAINED ------------------------------------ SHARES AMOUNT PAR VALUE EARNINGS TOTAL ---------------------------------------------------------------------------------------- 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 ---------- -------- ----------- ----------- ----------- Increase in investment in Penske Motorsports, Inc. due to issuance of stock......... --- --- 2,937,000 --- 2,937,000 Provision for income tax, credited to equity.............. --- --- 554,000 --- 554,000 Issuance of shares of common stock.................... 103,126 3,000 414,000 --- 417,000 Net Income --- --- --- 848,000 848,000 ---------- -------- ----------- ----------- ----------- Balance at December 31, 1997 10,591,240 $318,000 $74,342,000 $11,544,000 $86,204,000 ========== ======== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 69 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, 1997, 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 11.51% interest in Penske Motorsports, Inc. ("PMI"), a public 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) a 50% joint venture interest in the West Valley MRF ("WVMRF"), a transfer station and recycling facility located on land acquired from the Company; (v) approximately 650 acres of the former Kaiser Steel Corporation ("KSC") steel mill site (the "Mill Site Property") which is currently undergoing redevelopment; and (vi) 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 redevelopment of industrial and commercial parcels of land adjoining the California Speedway and the WVMRF. 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., Kaiser Recycling Corporation, 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, including water and waste water treatment revenues; housing rental income, aggregate and 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 (i.e., PMI) and, starting in 1998, joint ventures (i.e., West Valley MRF) which the Company accounts for under the equity method. 70 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, royalty revenues from the sale of recyclable revert 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 4.) 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, KSC Recovery's cash on hand and potential future recoveries funds all costs and expenses of KSC Recovery. 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. 71 REAL ESTATE In accordance with Financial Accounting Standards Board ("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. INVESTMENT IN WEST VALLEY MRF, LCC The Company accounts for its investment in West Valley MRF, LCC under the equity method of accounting because of the Company's 50% ownership interest. DEFERRED COSTS Included in other assets are deferred loan fees of $1,036,000 (net of $794,000 of amortization) which were incurred in 1994 and 1997 and which are being amortized over the life of the related loan on a straight-line basis. Amortization of these deferred loan fees is included in net interest expense (income), and was $ 34,000, $666,000, and $77,000 for 1997, 1996 and 1995, respectively. Acceleration of amortization of loan fees in 1996 was 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. 72 EARNINGS PER SHARE In 1997, the FASB issued Statement No. 128, Earnings per Share (FASB 128). FASB 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the FASB 128 requirements. STOCK OPTIONS The Company accounts for its stock compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and intends to continue to do so. (See Note 13.) FINANCIAL STATEMENT RESTATEMENT AND RECLASSIFICATIONS The Company has reclassified certain amounts in its Consolidated Financial Statements for the years ended in 1995 and 1996 in order to conform with the 1997 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. 73 Note 3. ACCOUNTS RECEIVABLE & OTHER Accounts receivable as of December 31 consisted of the following:
1997 1996 ----------- ----------- Cucamonga County Water District.......................... $ 2,877,000 $ 2,099,000 Penske Motorsports, Inc.................................. 157,000 843,000 Burrtec Waste Industries................................. --- 461,000 Other.................................................... 1,040,000 967,000 ----------- ----------- 4,074,000 4,370,000 Allowance for doubtful accounts CCWD rate dispute (See Note 4)........................ (1,236,000) (748,000) Other................................................. (299,000) (286,000) ----------- ----------- Total............................................ $ 2,539,000 $ 3,336,000 =========== ===========
Note 4. CUCAMONGA LEASE The Company, through a wholly-owned subsidiary, Fontana Water Resources, Inc., leases its 50.88% ownership of the capital stock of Fontana Union, a mutual water company, to Cucamonga County Water District ("Cucamonga") pursuant to a take-or-pay lease (the "Cucamonga Lease") that terminates in the year 2092. In 1996, the Company instituted litigation against Cucamonga due to a dispute concerning the amount payable to the Company pursuant to the terms of the Cucamonga Lease. The dispute centered upon whether or not the lease rate in the Cucamonga Lease should be interpreted as the Company asserts to include all the changed rates and items implemented by Metropolitan Water District of Southern California ("MWD") since July 1, 1995. Alternatively, the Company asserted that the lease rate was discontinued as of July 1, 1995 requiring the parties to negotiate in good faith a substitute lease rate. Cucamonga continues to pay under the terms of the Cucamonga Lease, but at a rate substantially less than the Lease Rate that the Company maintains it is entitled to receive pursuant to the Cucamonga Lease. Although the Company is continuing to bill Cucamonga at what it believes is the correct lease rate, 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 as of December 31, 1997, is approximately $1,236,000 and is included in the allowance for doubtful accounts. See Note 21. "Subsequent Events" with regard to the court ruling on the lease rate dispute with Cucamonga. Note 5. INVESTMENT IN PENSKE MOTORSPORTS, INC. The Company, as of December 31, 1997, owns 1,627,923 shares, or approximately 11.51% 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 74 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 May 1997, the Company increased its equity investment in PMI by $3,128,000, as a result of PMI's issuance of stock related to its acquisition of a majority of the common stock of North Carolina Motor Speedway Inc. The Company also recorded corresponding increases in deferred income taxes and capital in excess of par value of approximately $191,000 and $2,937,000, respectively. 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. 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, in Brooklyn, Michigan; (ii) The California Speedway Corporation, which owns and operates California Speedway near Los Angeles, California; (iii) Pennsylvania International Raceway, Inc. which owns and operates the Nazareth Motor Speedway in Nazareth, Pennsylvania; (iv) North Carolina Motor Speedway, Inc. which owns and operates the North Carolina Motor Speedway in Rockingham, North Carolina; (v) a forty-five percent (45%) interest in Homestead-Miami, LLC, the operator of the Metro-Dade Homestead Motorsports Complex: in Dade County, Florida; (vi) Motorsports International Corp., a motorsports apparel and memorabilia company; and (vii) 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. Total 1997 revenues for PMI, on a consolidated basis were $110 million with a net income of $16 million, or $1.19 per share. The Company's share of undistributed equity in the earnings of PMI for 1997, was $1,840,000 net of residual transaction expenses. 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. The fair market value of the Company's 1,627,923 shares of PMI stock as of December 3, 1997 is approximately $41 million. The unaudited condensed balance sheets of PMI as of December 31, follow: 75
1997 1996 ------------ ------------ Current Assets............................................ $ 9,238,000 $ 33,559,000 Property and Equipment.................................... 224,666,000 140,402,000 Other Assets.............................................. 57,510,000 10,036,000 ------------ ------------ Total Assets........................................... $291,414,000 $183,997,000 ============ ============ Current Liabilities....................................... $ 39,713,000 $ 25,801,000 Long-Term Debt............................................ 47,278,000 3,825,000 Other Liabilities......................................... 738,000 --- Deferred taxes............................................ 13,036,000 8,969,000 Stockholders' Equity...................................... 190,649,000 145,402,000 ------------ ------------ Total Liabilities and Stockholders' Equity............. $291,414,000 $183,997,000 ============ ============
Note 6. INVESTMENT IN WEST VALLEY MRF, LLC The Company and Burrtec Waste Industries, Inc. ("Burrtec"), a privately-held company, completed their revised agreement for the development, construction and operation of the WVMRF, a municipal solid waste transfer and recovery facility. Effective June 19, 1997, Kaiser Recycling Corporation ("KRC") and West Valley Recycling & Transfer, Inc. ("WVRT"), Burrtec's wholly owned subsidiary, which are equal members of the newly created limited liability company, West Valley MRF, LLC, entered into a Members Operating Agreement which is substantially the equivalent of a joint venture agreement but for a limited liability company. The construction and start up of the WVMRF was completed during December 1997. Pursuant to the terms of the Members Operating Agreement, KRC contributed approximately 23 acres of Mill Site property on which the WVMRF was constructed while WVRT contributed all of Burrtec's recycling business that was operated within Riverside County, thereby entitling WVMRF to receive all revenues generated from this business after the closing date. Most of the financing for the projected cost of the WVMRF of approximately $10,300,000, including reimbursement of most of the previously incurred development costs of Burrtec and the Company, was obtained through the issuance and sale of $9,500,000 in California Pollution Control Financing Authority (the "Authority") Variable Rate Demand Solid Waste Disposal Revenue Bonds (West Valley MRF, LLC Project) Series 1997A (the "Bonds"). The Bonds are secured by an irrevocable letter of credit issued by Union Bank of California, N.A. ("Union Bank"). The Bonds have a stated maturity date of June 1, 2012, although West Valley MRF, LLC is required, pursuant to its agreement with Union Bank, to annually redeem a portion of the Bonds on a stated schedule. Pursuant to a Guaranty Agreement with Union Bank, the Company and Burrtec are each liable for fifty percent (50%) of the principal and interest on the Bonds in the event of a default by the West Valley MRF, LLC. The Company is accounting for its investment in West Valley MRF, LLC under the equity method. Gross revenues for the WVMRF from inception through December 31, 1997 amounted to $2.4 million. The Company's share of undistributed equity in the earnings of WVMRF was, however, immaterial. A condensed unaudited balance sheet of West Valley MRF, LLC as of December 31, 1997 follows: 76
1997 ---- Current Assets........................................ $ 1,153,000 Property and Equipment................................ 11,015,000 Other Assets.......................................... 900,000 ----------- Total Assets....................................... $13,068,000 =========== Current Liabilities................................... $ 1,547,000 Other Liabilities..................................... 199,000 CPCFA Bonds Payable................................... 8,562,000 Stockholders' Equity.................................. 2,760,000 ----------- Total Liabilities and Stockholders' Equity......... $13,068,000 ===========
Note 7. 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 has not received any rent payments from MRC since 1994 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. Through a series of private placements with existing MRC shareholders, from July 1995 through December 31, 1997, a total of $10.8 million has been raised by MRC, with Kaiser contributing approximately $8.1 million of that amount. As a result of these equity fundings, the Company's ownership interest in MRC as of December 31, 1997 is approximately 73%. The environmental impact report ("EIR") received approvals from the Riverside County Planning Commission and Board of Supervisors in 1997. However, on February 17, 1998, Judge McConnell issued her final ruling with respect to the EIR, in which she found the EIR inadequate in two general areas: 1) the threatened desert tortoise; and 2) impacts to Joshua Tree National Park. The Company has agreed to advance funds to MRC for a limited period in 1998 pending the Company's determination, in light of Judge McConnell's recent ruling, of what course of action to pursue with regard to the Landfill Project. It is anticipated that the initial 1998 advance will total up to approximately $900,000 and that the Company may invest additional funds in MRC during 1998 depending upon what course of action the Company may ultimately decide to pursue. Depending upon the course of action ultimately selected by MRC and the Company, there could be a material adverse impact to the financial statements of the Company, including a possible write down of the Company's investment in MRC to the lower of cost or fair market value. A final decision on what course of action will be taken by MRC and the Company should be made by mid-1998. Note 8. NOTE RECEIVABLE As of December 1997, the Company has a note receivable from McLeod Properties, Fontana LLC in the amount of $1,270,000, of which $410,000 has been included in current assets and the balance, of $860,000, classified as long term. The note bears interest at 10% per annum with monthly payments of 77 approximately $59,000 plus accrued interest through June 1998; thereafter quarterly payments of $25,000 plus accrued interest with the remaining balance due October 2004. The Company has agreed to subordinate its note receivable to a construction/permanent loan in order to facilitate the construction of a building on the property. (See Note 15, Sale of Mill Site Real Estate.) Note 9. BUILDINGS AND EQUIPMENT (Net) Buildings and equipment (net) as of December 31 consisted of the following:
1997 1996 ---- ---- Buildings and structures..................................... $ 2,076,000 $ 2,074,000 Machinery and equipment...................................... 2,834,000 1,621,000 ----------- ----------- 4,910,000 3,695,000 Accumulated depreciation..................................... (1,846,000) (1,485,000) ----------- ----------- Total..................................................... $ 3,064,000 $ 2,210,000 =========== ===========
Note 10. ACCRUED LIABILITIES - CURRENT The current portion of accrued liabilities as of December 31 consisted of the following:
1997 1996 ---- ---- Environmental insurance settlement costs..................... $1,313,000 $1,313,000 Compensation and related employee costs...................... 1,008,000 956,000 Other........................................................ 1,990,000 1,856,000 ---------- ---------- Total..................................................... $4,311,000 $4,125,000 ========== ==========
Note 11. 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 $31 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 $23.1 million in remediation and other environmental costs expended through December 31, 1997. 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. 78 As of December 31, 1997, the total short-term and long-term environmental remediation liabilities reflected on the Company's balance sheet was approximately $30.7 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:
1997 1996 ---- ---- Beginning Estimated Liability $32,223,000 $39,411,000 Remediation Costs Incurred (1,496,000) (7,188,000) ----------- ----------- Ending Estimated Liability 30,727,000 32,223,000 Less: Current Portion (6,054,000) (5,757,000) ----------- ----------- Long-term Portion $24,673,000 $26,466,000 =========== ===========
See Note 19, "Commitments and Contingencies" for further information. Note 12. LONG-TERM DEBT As of December 31, 1997, long-term debt consisted of a $5,102,000 note (which includes the current portion of $120,000) 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 $4,000,000 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% (10% at December 31, 1997) with all remaining principal and accrued and unpaid interest due and payable on July 28, 1998. The Lusk debt has been classified as long-term debt due to the Company's intent and ability to refinance the obligation on a long-term basis utilizing the Union Bank revolving-to-term facility. The Company, through FWR, had a 7-year, $30,000,000 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, 1997, there was $4,000,000 outstanding under the credit facility. The borrowing base available under the credit facility is limited to the discounted present value of an eight-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 $25,150,000 as of December 31, 1997. The net available funds under the $30,000,000 revolving- to-term credit facility less $4,850,000 reserved for financial assurances required by the DTSC and relating to environmental remediation on the Mill Site Property; $765,000 in two unused outstanding standby letters of credit; and $4,000,000 in outstanding loans was $20,385,000 as of December 31, 1997. Total interest expense incurred in 1997, 1996, and 1995 was $980,000, $743,000 and $728,000, respectively. Note 13. STOCKHOLDERS' EQUITY EQUITY TRANSACTIONS During 1997, 1996 and 1995 the Company recorded transactions directly to stockholders' equity other than changes resulting from net income or equity transactions with shareholders. These transactions include deferred tax expense credited to equity due to the utilization of the Company's 79 reorganization NOL carryforwards, and the increase in equity due to the Penske Motorsports, Inc. ("PMI"), Initial Public Offering in March 1996 and PMI's purchase of North Carolina Motor Speedway ("NCMS") in May 1997. These amounts for the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995 --------------- --------------- -------------- Deferred tax expense credited to equity $ 554,000 $ 3,945,000 $335,000 Investment increase in Penske Motorsports, Inc.......................... 2,937,000 6,116,000 --- ---------- ----------- -------- $3,491,000 $10,061,000 $335,000 ========== =========== ========
COMMON STOCK OUTSTANDING At December 31, 1997 and 1996, Kaiser Ventures Inc. common stock has a par value of $0.03 and 13,333,333 authorized shares, of which 10,591,240 and 10,488,114 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. 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. The Company incurred no compensation expense during 1997, 1996 and 1995. 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 859,102 reserved shares as of December 31, 1997. 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, 1997, 1996 and 1995 and activities during the years ending on those dates is presented below: 80
1997 1996 1995 --------------------------------- -------------------------------- ------------------------------ WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------------- ---------------- --------------- ---------------- ------------- ---------------- Outstanding at beginning of Year....................... 1,431,161 $11.35 809,661 $11.63 652,836 $13.00 Granted 44,000 8.05 639,000 10.87 182,000 5.93 Exercised (4,000) 5.83 (17,500) 6.89 (17,801) 4.26 Forfeited --- --- --- --- (7,374) 10.09 ---------- ---------- -------- Outstanding at end of year 1,471,161 $11.28 1,431,161 $11.35 809,661 $11.63 ========== ========== ======== Options exercisable at year ========== $11.08 497,791 $11.29 425,916 $10.97 end........................ 676,987 ========== ======== ========== Weighted-average fair value of options granted during the year................... $1.55 $ 2.87 $1.22
The following table summarizes information about fixed stock options outstanding as of December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------- ---------------------------------------- WEIGHTED-AVERAGE RANGE OF EXERCISE REMAINING LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE PRICES (YEARS) OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE - ----------------- ---------------- ----------------- ---------------- ----------------- -------------------- $3.00 to 7.50 6.7 198,511 $ 5.71 183,261 $ 5.71 $7.51 to 17.58 6.9 1,272,650 $12.15 493,726 $13.07
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:
1997 1996 1995 ---- ---- ---- Net Earnings As reported $848,000 $2,569,000 $1,394,000 Pro forma $263,000 $2,160,000 $1,249,000 Earnings per share (Basic and Diluted) As reported $ 0.08 $ 0.24 $ 0.13 Pro forma $ 0.02 $ 0.20 $ 0.12
81 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 1997, 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:
1997 1996 1995 ---- ---- ---- Volatility .255 .254 .346 Risk-free interest rate 6.38% 5.74% 6.98% Expected life in years 2.10 2.67 2.25 Forfeiture rate 0.00% 0.00% 0.00% Dividend yield 0.00% 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, 1997, 90,833 of these options remain vested and unexercised. NOTE 14. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 ---- ---- ---- Numerator: Net Income............................................... $ 848,000 $ 2,569,000 $ 1,394,000 Numerator for basic earnings per share -income available to common stockholders.............. $ 848,000 $ 2,569,000 $ 1,394,000 Numerator for diluted earnings per share -income available to common stockholders.............. $ 848,000 $ 2,569,000 $ 1,394,000 Denominator: Denominator for basic earnings per share -weighted-average shares.............................. 10,536,457 10,485,943 10,456,353 Effect of dilutive options............................... 203,900 243,702 197,597 ----------- ----------- ----------- Denominator for diluted earnings per share -adjusted weighted-average shares and assumed conversions...................................... 10,740,357 10,729,645 10,653,950 =========== =========== =========== Basic earnings per share................................... $ .08 $ .24 $ .13 =========== =========== =========== Diluted earnings per share................................. $ .08 $ .24 $ .13 =========== =========== ===========
For additional disclosures regarding the outstanding employee stock options see Note 13. 82 The following table discloses the number of vested and outstanding options during 1997, 1996 and 1995 that were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.
1997 1996 1995 -------------------- ------------------- ------------------ Number of antidilutive options..................... 364,000 272,000 291,000 Range of option prices for the antidilutive options................... $11.25 - 17.85 $10.50 - 17.85 $8.78 - 17.85
NOTE 15. SALE OF MILL SITE REAL ESTATE During 1997, the Company sold approximately 15.7 acres of its Mill Site Property to McLeod Properties, Fontana LLC for $2,943,000, or $4.30 per square foot, for use as a rail-truck intermodal distribution facility for Budway Trucking, Inc. The transaction closed on September 30, 1997 at which time the Company received $1,500,000 in cash and a note receivable for $1,443,000. The Company has agreed to subordinate its note receivable to a construction/permanent loan in order to facilitate the construction of a building on the property. Although the Company considers the sale to have been fully consummated during 1997, generally accepted accounting principles require the gain of $656,000 to be deferred and recognized under the cost recovery method, once proceeds received from the buyer exceed the Company's basis in the property sold. During 1996 the Company sold 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. NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid interest during 1997, 1996, and 1995 of $968,000, $674,000 and $607,000, respectively. Income taxes paid in 1997 and 1996 were $92,000 and $20,000, respectively. There were no income taxes paid in 1995. During 1997, the Company issued $360,000 of common stock for payment of 1996 bonuses and 1997 compensation. During 1997 the Company carried back a note receivable for $1,443,000 from McLeod Properties, Fontana LLC from the sale of 15.7 acres of Mill Site real estate. During 1997, in connection with the contribution of the land to the West Valley MRF, LLC, the Company reclassified $1,485,000 of land to the investment in West Valley MRF, LLC. As a result of the acquisition by PMI of 70% of the common stock of NCMS, the Company increased its investment in PMI by $3,128,000 and recorded corresponding increases in deferred income taxes and stockholders equity of $191,000 and $2,937,000, respectively. 83 During 1997 and 1996, the Company capitalized interest and property taxes on property real estate under development of $187,000 and $382,000, respectively. There was no capitalization of interest expense or property taxes during 1995. 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 1995, in connection with the contribution of the land to PMI, the Company reclassified $22.5 million of land to investment in PMI. NOTE 17. INCOME TAXES The income tax provisions for the years ended December 31, 1997, 1996 and 1995 are composed of the following:
1997 1996 1995 -------------- -------------- -------------- Current tax expense: .............................................. Federal....................................... $ 5,000 $ 56,000 $ --- State......................................... 38,000 36,000 --- -------- ---------- ---------- 43,000 92,000 --- -------- ---------- ---------- Deferred tax expense credited to equity: Federal....................................... 554,000 3,945,000 335,000 State......................................... --- --- --- -------- ---------- ---------- 554,000 3,945,000 335,000 -------- ---------- ---------- Deferred tax expense: Federal....................................... --- --- --- State......................................... 74,000 840,000 721,000 -------- ---------- ---------- 74,000 840,000 721,000 -------- ---------- ---------- $671,000 $4,877,000 $1,056,000 ======== ========== ==========
In accordance with FASB 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. Deferred tax liabilities (assets) are comprised of the following as of December 31, 1997 and 1996: 84
1997 1996 ---- ---- Land held for development.................................... $ 1,711,000 $ 2,231,000 Investment in Fontana Union.................................. 6,440,000 6,440,000 Investment in Penske Motorsports Inc......................... 13,332,000 11,795,000 Depreciation................................................. 56,000 36,000 ------------ ------------ 21,539,000 20,502,000 ------------ ------------ Groundwater remediation...................................... (690,000) (690,000) Insurance Proceeds........................................... (1,659,000) (2,165,000) Investment in MRC............................................ (1,837,000) (1,837,000) Accounts receivable reserve.................................. (193,000) (181,000) Other........................................................ (1,825,000) (1,262,000) Loss carryforwards........................................... (38,870,000) (39,898,000) ------------ ------------ (45,074,000) (46,033,000) ------------ ------------ Deferred tax asset valuation allowance....................... 25,758,000 27,489,000 ------------ ------------ $ 2,223,000 $ 1,958,000 ============ ============
As indicated above, the net change in the valuation allowance was a reduction of $1,731,000 in 1997. A reconciliation of the effective income tax rate to the federal statutory rate, for financial reporting purposes, is as follows:
1997 1996 1995 ---- ---- ---- Federal statutory rate...................................... 34.0% 34.0% 34.0% Increase resulting from state tax, net of federal benefit... 6.1 5.1 6.1 Other 3.6 2.4 3.0 Additional recognition of pre-reorganization benefits....... 30.2 21.5 --- Increase in valuation allowance on state NOLs............... --- 6.2 --- Non taxable equity earnings................................. (29.8) (4.0%) --- ----- ---- ---- 44.1% 65.2% 43.1% ===== ==== ====
The consolidated Net Operating Loss ("NOL") carryforwards available for federal income tax purposes as of December 31, 1997, are approximately $113,000,000 and will expire over a period from year 2000 through 2010. The amount of NOL carryforwards available for California state tax purposes as of December 31, 1997, are approximately $2,394,000 and will expire over a period from year 2000 through 2002. There may be 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 $379,000 of investment tax credit carryforwards available. The credits will expire in the years 1998 through 2000 and can be utilized only after the NOL is exhausted. NOTE 18. LEASED ASSETS AND SIGNIFICANT CUSTOMERS LONG-TERM LEASES The Company has long-term lease agreements with Cucamonga pursuant to the Cucamonga Lease (Note 4), and Management Training Corporation ("MTC"). Minimum lease payments expected to be received by the Company through the next five years are as follows: 85
YEAR ENDING CUCAMONGA DECEMBER 31 LEASE MTC LEASE TOTAL ----------- ----- --------- ----- 1998 $ 5,047,000 $ 714,000 $ 5,761,000 1999 $ 5,047,000 $ 60,000 $ 5,107,000 2000 $ 5,047,000 $ --- $ 5,047,000 2001 $ 5,047,000 $ --- $ 4,047,000 2002 $ 5,047,000 $ --- $ 4,047,000
The amounts for the Cucamonga Lease are based upon: (a) the quantities of water as of December 31, 1997, 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, 1997 were $16,108,000 and $10,555,000, 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 DECEMBER 31 LEASE MTC LEASE ----------- ----- --------- 1997 $5,143,000 $714,000 1996 $4,505,000 $709,000 1995 $4,974,000 $699,000
NOTE 19. COMMITMENTS AND CONTINGENCIES ENVIRONMENTAL CONTINGENCIES As discussed in Note 11 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 $31 million, depending upon which approved remediation alternatives are eventually selected. Although ongoing environmental investigations are being conducted on the Company's 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 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 $4.8 million of Kaiser's Union Bank Credit facility. 86 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. The City of Ontario, California has 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 if should arise. 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, 1997, 1996 and 1995, was $223,000, $199,000 and $170,000, respectively. LETTERS OF CREDIT At December 31, 1997, the Company had guaranteed letters of credit outstanding on its behalf to third parties totaling $158,000. 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 20. LEGAL PROCEEDINGS Significant legal proceedings are summarized as follows: Eagle Mountain EIR Litigation. This litigation involved three separate legal challenges to the environmental impact report for the Eagle Mountain landfill project certified by the Riverside County Board of Supervisors in October 1992. These cases were heard in the San Diego Superior Court. The Court's decisions required MRC to prepare a new EIR, which was completed and certified in September 1997. The original litigation against the EIR was resumed before Judge Judith McConnell of the San Diego County Superior Court. In February 1998, the San Diego County Superior Court announced its final decision and concluded that the new EIR was still deficient in two principal respects. The Court's two remaining areas of concern involve the threatened desert tortoise and Joshua Tree National Park. The Company and MRC are now evaluating their alternatives with respect to the landfill project. Depending upon the course of action ultimately selected with respect to the landfill project, there could be a material adverse impact to the financial statements of the Company, including a possible writedown of the Company's investment in MRC to the lower of cost or fair market value. Warburton Litigation. The Company, KSC and KSC Recovery were named or became cross-defendants in certain litigation in the U.S. Federal District Court for the District of Northern California (Case No. C-93-1114 CW) commenced by IMACC Corporation ("IMACC") against Dorothy Warburton ("Warburton") and others seeking a determination of liability, contribution and indemnification for the costs of environmental remediation for two sites that had been used at one time by IMACC in conjunction with its barrel reconditioning business. Warburton is the owner of the sites in question. At one time, KSC, through a wholly owned subsidiary, owned the business now operated by IMACC. 87 Certain other Warburton family defendants are claiming that they should be indemnified by KSC's subsidiary or by the Company for actions they took while officers of the KSC subsidiary. A settlement was reached in the litigation with respect to the environmental claims, which required payment of less than $100,000 by the Company and by KSC Recovery. The Company's cash contribution to the settlement was immaterial. While there was a tentative settlement of the environmental matters (which has now been finalized), a trial was held in November 1996, relating to the indemnity claims and related matters. The Court had previously ruled that either the Company or KSC was the alter ego of KSC's subsidiary, Myers Drum Company. The Court also subsequently ruled that in these particular circumstances, the request for indemnification did not rise to the level of being a claim in bankruptcy at the time of the bankruptcy and thus could not be discharged. With the announcement of the Court's decision, there is now a dispute over the award of attorney's fees. Two of the estates claim that the Company and IMACC jointly owe them approximately $1.7 million in attorneys fees and IMACC believes it is in turn entitled to attorneys' fees. Even if the Company should be found liable for the attorneys' fees, which it vigorously contests, IMACC is obligated to indemnify the Company for all such amounts. Since the Company believes it has full indemnification coverage from IMACC, no provision for any potential loss has been made in the accompanying financial statements. Johnson Machinery, Inc. It is alleged that the Company is liable for the theft of equipment or other items from land leased by the Company. Johnson Machinery, the Plaintiff, claims that there was a theft of equipment with a value of approximately $1.2 million from a warehouse on the West End Property owned by the Company. (Johnson Machinery, Inc. v. Lusk/Kaiser West End Joint Venture et al. - San Bernardino County Superior Court: Case No. RCV 23757). The Company believes the lawsuit is without merit and is vigorously defending such lawsuit. Apollo Wood Litigation: On November 11, 1997, the Company and two individual officers of the Company were served with a complaint brought by Apollo Wood Recovery, Inc. in San Bernardino Superior Court seeking unspecified damages, but which are estimated to exceed $100,000. The plaintiff is a tenant on the Company's Mill Site Property. In summary, the complaint alleges that the Company and two officers of the Company falsely represented the status of the permitting of the property on which Plaintiff operates its business, committed fraud, interfered with the plaintiff's business, engaged in unfair trade practices and other similar causes of action. The Company believes the lawsuit is without merit and is vigorously defending such lawsuit. (Apollo Wood Recovery, Inc. v. Kaiser Ventures Inc., Terry L. Cook, Lee Redmond, Apollo Wood & Metal Recycling Ltd., Shirley Isom Construction Company, Troy Isom and Does 1 through 40, San Bernardino Superior Court, Case No. SCN 42863.) City of Ontario Litigation. On February 27, 1996, the City of Ontario, California served on the Company a complaint filed in San Bernardino County Superior Court (City of Ontario v. Kaiser Ventures Inc., et al.; Case No. RCV 17334). In sum, the complaint alleges that a plume or plumes containing organic carbon, dissolved solids and mercury originating from the Company's Mill Site Property due to 88 activities of KSC and/or a former tenant of the Mill Site Property have impacted one of the City of Ontario's water wells. Ontario seeks reimbursement for remedial costs, replacement of the allegedly impacted well and replacement or improvement or refurbishment of related facilities. The Company challenged Ontario's ability to bring this litigation given the KSC bankruptcy and the discharge granted to the Company. In April, 1996, Ontario brought a declaratory judgment action in the U.S. District Court for the District of Colorado in Bankruptcy ("the U.S. Bankruptcy Court") against the Company, (City of Ontario v. Kaiser Ventures Inc., Adversary Proceeding No. 96- 1215 MSK). In the U.S. Bankruptcy Court action, Ontario in effect sought a determination that the matters and damages alleged in its California lawsuit were not discharged as a part of the KSC bankruptcy proceedings. The Company and the City reached a settlement concerning the matter before the U.S. Bankruptcy Court which was approved by the U.S. Bankruptcy Court in October. Under the terms of the settlement, the Company has agreed to waive its bankruptcy-related defenses to the City's prosecution of claims for groundwater contamination caused by mercury or other priority pollutants. In return, the City agreed to dismiss the California litigation as to all claims related to total dissolved solids, total dissolved carbons and sulfates, and to be bound by the 1993 Settlement Agreement between Kaiser and the California Regional Water Quality Control Board. The City has not yet filed an amended complaint. The Company will vigorously defend any continuation of this litigation. 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 2, 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 relates 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. 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. See also Note 21. Subsequent Events. NOTE 21. SUBSEQUENT EVENTS Nippon Fire & Marine Insurance Co. In February 1998, the Company was served with a complaint alleging that the Company, certain subsidiaries of the Company and others are liable for approximately $1.8 million paid by Nippon Fire & Marine Insurance Co., Ltd. to Toshiba America Information System, 89 Inc. as a result of the theft of a load of lap top computers from a semi-truck owned by PST Vans a former tenant on the West End Property. (Nippon Fire & Marine Insurance Co., Ltd., a corporation, and Toshiba America Information System, Inc. v. PST Vans, Inc., a corporation; PST Van Line, Inc. a corporation; Burns International, Inc., a corporation; Burns International Security Services, Inc., a corporation; Borg-Warner Security Corporation, a corporation; Kaiser Steel and Land Development, Inc., a corporation; Kaiser Ventures Inc., a corporation; Kaiser Resources Inc., a corporation; Lusk-Kaiser West End Joint Venture, a business entity). The Company currently believes it has numerous defenses to this litigation and is vigorously defending the case. Cucamonga County Water District. The Company is involved in a rate dispute with Cucamonga. Such dispute involves amounts owed to the Company under the terms of its lease of Fontana Union Water stock to Cucamonga. This dispute arises out of a change made by the Metropolitan Water District in its water rates and rate structure effective July 1, 1995. In April 1996 litigation was commenced by the Company against Cucamonga to resolve the dispute. After a five-day trial in March 1998, the Court concluded that the rate on which the Cucamonga Lease had been based was discontinued effective July 1, 1995. Therefore, the terms of the Cucamonga Lease require the parties to negotiate in good faith a new substitute lease rate. If the parties are unable to agree on a substitute lease rate, the matter is referred to arbitration for resolution. There is no specified time period in which the new lease rate must be established. 90 NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- 1997 Resource revenues $1,837,000 $3,221,000 $2,977,000 $1,971,000 Income (loss) from operations $ (112,000) $1,288,000 $1,149,000 $ (134,000) Income (loss) before income tax provision $ (295,000) $1,051,000 $ 873,000 $ (110,000) Net (loss) income $ (174,000) $ 604,000 $ 493,000 $ (75,000) Earnings per share Basic $ (.02) $ .06 $ .05 $ (.01) Diluted $ (.02) $ .06 $ .05 $ (.01) 1996 Resource revenues $2,017,000 $2,408,000 $2,323,000 $8,583,000 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 Basic $ .01 $ .03 $ .03 $ .17 Diluted $ .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 Basic $ .00 $ .00 $ .01 $ .12 Diluted $ .00 $ .00 $ .01 $ .12
91 KAISER VENTURES INC. AND SUBSIDIARIES 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, 1997 - --------------------------------------- Allowance for losses in collection of current accounts receivable......... $1,034,000 $542,000 $ 41,000 $1,535,000 =============== ================= ================ ============== 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 =============== ================= ================ ==============
(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, 1997, 1996 and 1995 are approximately $488,000, $668,000 and $80,000, respectively. (B) Amount charged off during the year. 92
EX-10.3.3 2 THIRD AMENDMENT TO EAGLE MOUNTAIN LEASE EXHIBIT 10.3.3 THIRD AMENDMENT TO EAGLE MOUNTAIN LEASE BETWEEN MANAGEMENT & TRAINING CORPORATION AND KAISER VENTURES INC. EFFECTIVE: NOVEMBER 16, 1997 THIRD AMENDMENT TO LEASE ------------------------ THIS AMENDMENT is made on November 16, 1997, by and between KAISER VENTURES INC. (formerly KAISER STEEL RESOURCES, INC. and MANAGEMENT AND TRAINING CORPORATION (Tenant) It is expressly covenanted and agreed by and between Landlord and Tenant as follows: ARTICLE III - TERM - ------------------ 3.1 - This section is amended to extend the term of the agreement for fourteen (14) months. This Lease will, therefore, continue through January 31, 1999. ARTICLE XXIV - NOTICES - ---------------------- 24.1 - This section is amended to correct the name and address of the Landlord as follows: Kaiser Ventures Inc. 3633 East Inland Empire Boulevard Ontario, CA 91764 Attention: President All other provisions of the Lease dated November 16, 1987, and the First and Second Amendments thereto, remain in full force and effect and are unchanged by this Amendment. IN WITNESS WHEREOF, the parties have executed this THIRD AMENDMENT to the Lease as of the day and year first above written. Management & Training Corporation By: /s/ R. Russell --------------------------------------- R. Russell Title: V.P. Corrections ------------------------------------ Kaiser Ventures Inc. By: /s/ Gerald A. Fawcett ------------------------------------- Gerald A. Fawcett Title: President and Chief Operating Officer ------------------------------------- EX-10.4 3 AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT OF RICHARD E. STODDARD This AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("AGREEMENT") is made and entered into effective January 15, 1998 by and between Richard E. Stoddard ("Employee") and Kaiser Ventures Inc. ("KAISER"). Recitals A. Effective as of January 15, 1996, Employee and Kaiser entered into an employment agreement (the "Initial Employment Agreement"). Under the terms of the January 15, 1996 Employment Agreement, Kaiser expanded Employee's duties and responsibilities beyond serving as Chairman of the Board by appointing him Chief Executive Officer of the Corporation as of November 28, 1995, all officers of the Corporation began to report directly to Employee. B. In connection with the June 17, 1996 approval by Kaiser's Board of Directors of employment agreements for other officers of Kaiser, the Board of Directors authorized and directed the amendment of the Initial Employment Agreement of Employee as set forth herein. C. The intent of this Agreement is to amend and restate the Initial Employment Agreement and thus to set forth the current agreement and understanding of Employee and Kaiser with regard to Employee's continued employment by Kaiser. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment, Positions and Duties. Kaiser hereby continues the employment of Employee upon the terms and conditions set forth in this Agreement. Employee's positions with Kaiser shall be President, Chief Executive Officer and Chairman of the Board. Employee shall have the responsibilities and duties normally incident to such positions, including, but not limited to, those duties and responsibilities set forth in Exhibit "A" attached hereto and incorporated herein by this reference and such other duties and responsibilities as may be reasonably assigned to him from time-to-time by Kaiser's Board of Directors. Employee agrees to devote his full business time and attention to the discharge of his duties and responsibilities under this Agreement. 2. Term. Employee's employment under the terms of this Agreement, as amended herein, shall commence as of January 15, 1998 and shall continue until terminated as provided herein; provided, however, upon Employee's termination, Employee shall receive the severance compensation provided herein. 3. Base Salary. Retroactive to February 1, 1995, Employee's annual base salary shall be Two-Hundred Eighty Thousand Dollars ($280,000) per year. Notwithstanding the 1 foregoing, the Board of Directors may in good faith and in its reasonable discretion may elect to cause the Corporation to issue to Employee restricted stock with a value of up to Forty Thousand Dollars ($40,000) per year in lieu of cash compensation provided that subsequent to the date of this Agreement there are no material adverse changes in the tax and securities laws during the year preceding any proposed grant of restricted stock pertaining to or affecting Employee's receipt, taxation, sale or transfer of restricted stock. In the event of any material adverse change in the tax or securities laws pertaining to Employee's receipt, taxation, sale or transfer of restricted stock as reasonably determined in good faith by Employee or Kaiser, Employee and Kaiser shall in good faith discuss any changes that may be appropriate or necessary in connection with any grant of restricted stock to Employee. For 1996, as a part of Employee's annual base salary the Board has elected to issue to Employee Forty Thousand Dollars ($40,000) of restricted stock in lieu of Forty Thousand Dollars ($40,000) cash compensation. In the event that any restricted stock is issued to Employee as a part of his annual base salary, the value of such restricted stock at the time of its grant shall be counted as base salary in the calculation of any bonus that may be awarded to Employee. For all other purposes, any such stock shall be treated as salary for the calculation of any benefits based upon an employee's salary as may be required by law or any benefit plan. Prior to the first meeting of the Board of Directors in any calendar year, the Compensation and Benefits Committee of the Board will review Employee's salary and report its recommendations for any revision to the full Board at such meeting. Employee's annual base salary shall be adjusted effective as of January 1 of each year, commencing January 1, 1997, by the increase in the consumer price index over the prior applicable year utilizing the Consumer Price Index for Urban Wage Earners and Clerical Workers, U.S. City Average, All Items, published by the Bureau of Labor Statistics of the United Stated Department of Labor. The entire Board of Directors has final responsibility for the review, approval or disapproval of any revisions to Employee's annual base salary. 4. Annual Bonus. In addition to his base salary, Employee shall be entitled to participate in the bonus program of Kaiser applicable to senior executives as it may be amended from time to time. The timing, size and/or amount of any bonus awarded to Employee during the term of this Agreement will be determined annually in accordance with the process set forth in paragraph 3 above for the annual base salary review and based upon the bonus program developed from time to time by the Human Relations Committee and approved by the Board of Directors. The bonus for any year, if any, will be determined based upon such review. The Board of Directors may award in good faith and in its reasonable discretion up to fifty percent (50%) of any bonus in restricted stock provided that subsequent to the date of this Agreement there are no material adverse changes in the tax and securities laws pertaining to or affecting Employee's receipt, taxation, sale or transfer of restricted stock. In the event of any material adverse change in the tax or securities laws during the year preceding any proposed grant of restricted stock pertaining to Employee's receipt, taxation, sale or transfer of restricted stock as reasonably determined in good faith by Employee of Kaiser, Employee and Kaiser shall in good faith discuss any changes that may be appropriate or necessary in connection with any grant of restricted stock to Employee. 5. Stock Options and Other Stock Related Incentives. Employee shall be eligible for the grant of incentive stock options, non-qualified stock options and other forms of stock related incentives from time-to-time in the discretion of the Stock Option Committee of 2 the Board of Directors. The timing, size and amount of any future stock options or other stock related incentives will be determined generally in accordance with the process used to determine the award of any bonus to Employee. The grant and exercise of the stock options and other stock related incentives shall generally be subject to and governed by the terms of Kaiser's 1995 Stock Plan or any similar or successor plan. However, the Stock Option Committee may award stock options, restricted or other stock related incentives outside the 1995 Stock Plan in its discretion. As of January 15, 1996, the Stock Option Committee awarded to Employee stock options for 50,000 shares pursuant to the 1995 Stock Plan. In addition, as of June 17, 1996, the Stock Option Committee awarded to Employee stock options for 150,000 shares pursuant to the 1995 Stock Plan which represents a greater number of options than are usually granted in one year with the number of options that may be granted to Employee in future years reduced accordingly. 6. Other Benefits. Employee will be entitled to participate in all benefits provided by Kaiser to its employees and to senior executives in accordance with and subject to Kaiser's polices and procedures as they may exist from time-to-time, including, but not limited to, medical and dental insurance, life insurance, disability insurance, 401(k) savings plan, any pension plan, deferred compensation plan, education and seminar reimbursement, car allowance, and reimbursement of reasonable expenses for company business. These benefits shall include life insurance for the benefit of Employee with a face amount of not less than Employee's annual base salary, except that Kaiser may self-insure if insurance is not available. Employee shall be entitled to four (4) weeks of paid vacation per year. 7. Restricted Stock. Any restricted stock issued by Kaiser in lieu of cash payments in connection with Employee's base salary or any bonus, shall be subject to the terms and conditions of a mutually agreed upon stock restriction agreement which may provide, among other things, for the forfeiture of such stock in phases if Employee should voluntarily terminate his employment with Kaiser within a certain period of time or upon Employee's termination for "cause" as defined herein. In addition to any other rights to vest in such stock, the restricted stock granted as part of Employee's 1996 Salary shall vest on January 15, 1997. The restricted stock granted as a part of Employee's 1995 bonus shall vest 50% on January 15, 1997 and 50% on January 15, 1998, and as otherwise provided in the stock restriction agreement for each grant. 8. Death Benefits. In the event of Employee's death, Kaiser shall pay to Employee's personal representative or his estate, Employee's salary and benefits through the end of the month in which the death occurred plus a ratable portion of Employee's anticipated bonus for the year through the date of Employee's death. Employee's anticipated bonus shall be measured by the bonus awarded for the most recent fiscal year. If a bonus has been earned by Employee for the preceding fiscal year but has not yet been paid prior to the death of Employee, Employee's estate or personal representative shall be paid the full amount of the earned but unpaid bonus. The proceeds from such life insurance shall be for the sole benefit of Employee's designated beneficiaries or if there are no designated beneficiaries, Employee's estate. Upon Employee's death, all restricted stock issued to Employee for past services (e.g. bonus stock), shall immediately vest and all restricted stock initially issued for anticipated future services (e.g. salary stock) will vest ratably through the date of death. Employee's estate 3 or personal representative shall have at least one (1) year after the date of Employee's death while in the employment of the Company in which to exercise all vested Stock Options. 9. Disability Benefits. In the event of the disability of Employee for any reason, Kaiser shall continue to pay to Employee his salary and benefits less short-term disability payments until long-term disability payments are made to Employee but in no event shall such salary and benefit payments continue for longer than six (6) months from the date of disability. In addition, upon permanent disability, the vesting of all retirement and deferral compensation plans and all outstanding options, restricted stock or other stock related incentives shall continue to occur for a period of two (2) years after the date of disability in the same manner as if Employee were still employed by Kaiser during that period. 10. Deductions. Applicable federal and state income taxes, social security contributions (FICA), Medicare contributions, medical insurance premiums and any other appropriate or customary deductions shall be withheld from any compensation paid to Employee by Kaiser. 11. Material Change. Upon the occurrence of a Material Change as hereafter defined and subject to Paragraph 14 below, all options to acquire shares of Kaiser stock, restricted stock or any other stock related incentive previously granted to Employee shall immediately and fully vest one (1) day prior to the Material Change, notwithstanding any other applicable vesting schedule. Upon the occurrence of a Material Change, Employee shall be entitled, for a period of two years, to exercise his stock options as to any of such shares. This provision shall take precedence over any contrary provision in any standard stock option agreement. For purposes of this Agreement, the term "Material Change" shall refer to and mean the occurrence of any one of the following events after the date of this Agreement: a. any sale, merger or other acquisition of all or substantially all of Kaiser with or by another entity where the shareholders of Kaiser at the time of the sale, merger or other acquisition do not own or control at least 51% of the voting power of such entity immediately after the time of the sale, merger or other acquisition. b. any acquisition of common stock by a person or "group" (as defined in section 13(d) of the Securities Exchange Act of 1934), resulting in the "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by that person or group of more than (i) 25% of the capital stock of Kaiser accompanied by a change of more than 50% of the directors of Kaiser within one year after such event or (ii) 35% of the capital stock of Kaiser with or without such change. c. following the date of this Agreement, there has been an aggregate of net assets with a cumulative value that exceeds the greater of (i) $20,000,000 or (ii) 20% of the net equity of Kaiser at the time of the distribution (whether by dividend or repurchase of stock) distributed to any one or more Kaiser shareholders. 12. Constructive Termination After A Material Change. Upon the occurrence of a Material Change, Employee shall be deemed to have been constructively discharged upon the occurrence of any of the following events within six months (6) before or eighteen (18) months after the Material Change: 4 a. The assignment to Employee of duties materially and adversely inconsistent with Employee's positions immediately prior to a Material Change. This includes a change in reporting responsibilities, authority including title, or responsibilities; provided, however, a lateral transfer within Kaiser or to an Affiliate shall not be deemed a constructive termination; b. Any requirement that Employee permanently relocate to an office more than 50 miles from the then location to which he is assigned; and c. Any failure to provide Employee with compensation and benefits in the aggregate on terms not materially less favorable than those enjoyed by Employee under this Agreement immediately prior to a Material Change, or the subsequent taking of any action that would materially reduce any of Employee's compensation and benefits in effect at the time of the Material Change unless such compensation and benefits are substantially equally reduced for executive officers of Kaiser as a group (as measured by a percentage) or there is less than a ten percent (10%) reduction in compensation or benefits. then, at Employee's option, exercisable within ninety (90) days of the date Employee knew, or should have known exercising reasonable care, of the occurrence of any of the foregoing events and the expiration of any applicable cure period, Employee shall have the right to terminate his employment by written notice to Kaiser, and on the date of such termination Kaiser will pay Employee the compensation and benefits described in Paragraph 13 below. 13. Compensation Payable Upon Actual or Constructive Termination Related To a Material Change. In the event Employee is terminated for any reason except for death, permanent disability or for cause, as defined below, within six (6) months before or eighteen (18) months after a Material Change or upon the constructive termination of Employee before or after a Material Change as defined and provided in Paragraph 12 above, Kaiser shall pay to Employee the following compensation as severance benefits in addition to the severance compensation and notice that Employee shall receive pursuant to Paragraph 15 regardless of any Material Change: a. if the termination is effective after March 31 of any year, an amount equal to the pro rata portion of the bonus that Employee would have been eligible to earn for the year of termination as measured by the preceding year's bonus; b. an amount equal to one year's average annual bonus (cash and stock, but not including stock options or stock grants outside of the annual bonus) averaged over the two (2) immediately preceding years; and c. Employee shall have the right to participate proportionately in stock buyback or dividend distribution in proportion to shares owned together will all other shareholders. All amounts due Employee shall be payable in one lump sum or, at Employee's option, over such period of time not to exceed twelve (12) months. Employee shall have no duty to 5 seek other employment during this period of time and there shall be no offset for any compensation paid to Employee from any other source; provided, however, if Employee is paid a consulting fee or receives compensation from Kaiser or an Affiliate of Kaiser for services actually rendered during a one (1) year period from the date of termination, unless otherwise agreed in writing, such amount shall be offset against the payments made or due Employee. 14. Possible Reduction in Certain Benefits. (a) Except as provided in Paragraph 14(b) below, Employee shall in no circumstances receive "payments in the nature of compensation" from Kaiser which would result in "excess parachute payments" (as that term is defined in Sections 280G and 4999 of the Internal Revenue Code of 1954, as amended, or any equivalent or analogous term as shall in the future be defined in any law or regulation governing the amount of severance compensation that may be paid without penalty to an officer of a company upon a change in control of Kaiser). In the event either Employee or Kaiser shall be advised in writing by his or its counsel that Employee would receive excess parachute payments if all payments under all contacts between Employee and Kaiser were made, such opinion shall be confidentially disclosed to the other party. If it is mutually determined that such payments would trigger the excess parachute payments provisions, Employee shall receive only such compensation and benefits under his contracts with Kaiser (not to exceed those permitted without constituting excess parachute payments) which he, in his sole discretion, has designated in written notice to Kaiser. Employee shall have a minimum of thirty (30) days in which to make such written designation. In the event of a disagreement between the counsel of the respective parties as to whether a payment would result in excess parachute payments, such counsel shall jointly designate an independent tax counsel (whose fees shall be paid by Kaiser) within 10 days who shall promptly make a conclusive determination of the matter. (b) Notwithstanding anything else to the contrary, in the event Employee is terminated pursuant to Paragraph 13 above, Employee shall have the right, in his sole discretion, to elect to receive all or any part of the compensation payable to him upon termination (or which would have been due under Paragraph 11 but for a previous election under Paragraph 14(a)) without regard to whether any such amounts may constitute "excess parachute payments." If Employee fails to provide the Company a written designation within thirty (30) days, he shall be presumed to have elected to receive all compensation and benefits due him without regard to whether any such compensation or benefits shall constitute "excess parachute payments." (c) Nothing in this Paragraph 14 shall be construed or deemed to be a forfeiture of any compensation or benefits that Employee may elect not to accelerate due to any concern about the receipt of "excess parachute payments." 15. Termination Without Cause. Kaiser may terminate Employee without cause (as defined below) at any time but only upon twelve (12) months advance written notice to Employee. During the twelve (12) month period following receipt of such notice (the "Termination Year"), Employee shall continue to work for Kaiser as provided in this Agreement and during the Termination Year Kaiser shall continue to pay Employee all compensation (including a bonus calculated in the same manner as provided under Paragraph 13 (b)), and Employee shall continue to receive and accrue all benefits; provided, however, at 6 Kaiser's option, Kaiser may, at any point during the Termination Year, waive the requirement that Employee continue to render services during the Termination Year (and constructive termination as provided in Paragraph 12 shall be deemed notice of termination if notice has not been previously given, and shall be deemed a waiver of Kaiser's right to request Employee to perform services for the balance of the Termination Year) but any such waiver shall not reduce the compensation and benefits that would otherwise be payable to him as if he continued to provide services during the Termination Year. In addition, provided Employee has rendered any services required of him during the Termination Year (except any dispute over Employee's performance of services during the Termination Year following the actual or constructive termination of Employee in connection with a Material Change shall not affect the timely payment of the severance compensation and other benefits provided to Employee as provided in this sentence), Employee shall be paid, at the conclusion of the Termination Year (i) an additional amount as severance compensation, equal to one year's annual base salary (based on Employees then current annual base salary); and (ii) continue to provide and pay its portion of all of Employee's health, welfare, insurance and other benefits for a period of twelve (12) months after the Termination Year; plus (iii) in the case of any actual or constructive termination six (6) months prior to or eighteen (18) months after a Material Change, the additional severance provided in Paragraph 13. Such amount shall be payable in one lump sum or, at Employees option, over such period of time not to exceed twelve (12) months. After the Termination Year, Employee shall be entitled, for a period of two years (i.e., a total of thirty six (36) months following actual notice of termination or Employee gives notice of constructive termination pursuant to Paragraph 12) to exercise his stock options as to any then vested, including any options vesting within one year after the Termination Year as provided in the next sentence, notwithstanding any other applicable provision contained in any option agreement. In addition to the foregoing related to stock options, with respect to any restricted stock or other stock related incentives, Employee shall continue to vest in such securities for a period of one year following the Termination Year. 16. Termination for Cause. If Kaiser elects to terminate Employee's employment for cause (as defined Paragraph 17 below), Employee's employment will terminate on the date fixed for termination by Kaiser and thereafter Kaiser will not be obligated to pay Employee any additional compensation, other than the compensation due and owing up to the date of termination. After such termination, Employee shall be entitled, for a period of ninety (90) days, to exercise any stock options or other stock related incentives that are vested as of the date of termination. 17. Definition of Cause. "Cause" for the purposes of this Agreement shall mean any of the following: a. Willful breach by Employee of any provision of this Agreement, provided, however, if the breach is not a material breach, Kaiser shall give Employee written notice of such breach and Employee shall have thirty (30) days in which to cure such breach. No written notice or cure period shall be required in the event of a willful and material breach of this Agreement by Employee; b. Gross negligence or dishonesty in the performance of Employee's duties or responsibilities hereunder; 7 c. Engaging in conduct or activities or holding any position that materially conflicts with the interest of, or materially interferes with Employee's duties and responsibilities to Kaiser or its Affiliates; or d. Engaging in conduct which is materially detrimental to the business of Kaiser or its affiliates. 18. Voluntary Termination. Employee's employment by Kaiser may be terminated at any time upon the parties' mutual written agreement. In the event of a mutual written agreement, Employee's severance benefits shall be as set forth in such agreement. In the event of Employee's voluntary termination of employment, Kaiser shall not be obligated to pay Employee any additional compensation, other than the compensation due and owing as through the date of termination and as may be required by law. After such termination, Employee shall be entitled for a period of ninety (90) days to exercise any stock options or other stock related incentives that are vested as of the date of termination. 19. Confidentiality a. Employee's Obligations. Employee agrees that (a) except as ---------------------- provided in this Agreement Employee shall maintain the confidential nature of any Proprietary Information received or acquired by him, and (b) Employee shall use such Proprietary Information solely for the purpose of meeting his obligations under this Agreement and not in connection with any other business or activity. "Proprietary Information" means all oral, written or recorded information about or related to the Kaiser or any of its Affiliates or its or their technology, assets, liabilities, or business, whether acquired before or after the date hereof, and regardless of the manner in which it is acquired, together with any documents or other materials prepared by Employee which contain or reflect such information. After termination of employment upon demand of Kaiser, Employee agrees to return or destroy any and all materials containing any Proprietary Information. b. Kaiser's Obligations. Kaiser agrees that it shall maintain -------------------- and provide information regarding Employee in accordance with generally accepted industrial and business practices. c. Limitations on Confidential Obligations and Use Restrictions. ------------------------------------------------------------ The restrictions in Paragraphs 19(a) and (b) above do not apply to information which the disclosing party can demonstrate (i) is then in the public domain by acts not attributable to such disclosing party or (ii) is hereafter received on an unrestricted basis by such disclosing party from a third party source who, to such disclosing party's knowledge after due inquiry, is not and was not bound by confidentiality obligations to Kaiser or any Affiliate thereof (in the case of Paragraph 19(a)) or to Employee (in the case of Paragraph 19(b)). In addition, Employee and Kaiser are permitted to disclose any Proprietary Information as necessary in the defense or prosecution of any legal action. d. Actions if Disclosure Required. If Employee is required by ------------------------------- law to make any disclosure otherwise prohibited hereunder, such party shall use its best efforts to provide the other with prompt prior notice where possible so that (a) the other party (with the 8 reasonable cooperation of the party required to make such disclosure) may seek an appropriate protection order or other remedy and/or (b) the parties can seek in good faith to agree on the appropriate scope and approach to disclosure. If a protective order or other remedy is not obtained, the party required to make such disclosure may furnish only that portion of information protection hereby which it is legally compelled to disclose and shall use its reasonable efforts to obtain confidential treatment for all information so disclosed. e. Injunction. Each party agrees that remedies at law may be ----------- inadequate to protect against breach of this Paragraph 19, and hereby agrees to the granting of injunctive relief without proof of actual damage. 20. Arbitration of Disputes. If Employee and Kaiser cannot resolve a dispute (whether arising in contract or tort or any other legal theory, whether based on federal, state or local statute or common law and regardless of the identities of any other defendants) that in any way relates to or arises out of this Agreement, the termination of Employee's employment relationship with Kaiser or any Affiliate thereof, (without limiting the generality of any other Paragraph herein), then such dispute shall be settled as follows: a. Kaiser and Employee agree to jointly select a judicial officer who is affiliated with the Judicial Arbitration and Mediation Service, or such other equivalent organization as Kaiser and Employee may mutually select, to act as the trier of fact and judicial officer in such dispute resolution; b. If Kaiser and Employee are unable to agree upon a particular judicial officer, then the decision shall be made by the chief executive officer of the Judicial Arbitration and Mediation Service, after consulting with Kaiser and Employee; c. Kaiser and Employee shall have the same rights of discovery as if the dispute were being resolved in the Superior Court of the State of California. However, the judicial officer shall, on his own motion, or the request of either Kaiser or Employee, have the authority to extend or reduce the time periods therefor; and, d. The judicial officer serving hereunder shall be designated as a referee under the provisions of Title VIII, Chapter 6 of the California Code of Civil Procedure (Sections 638 through 645. 1, inclusive). Payment for the services of the judicial officer and the rights and procedure of appeal, and/or other review of the decision, shall be made as provided in such sections. The judicial officer shall have the right to grant injunctive relief, specific performance and other equitable remedies. 21. Miscellaneous. a. Entire Agreement; Amendments. This Agreement states the ----------------------------- entire understanding and agreement between the parties with respect to its subject matter and may only be amended by a written instrument duly executed by Employee and Kaiser. 9 b. Assignment. This Agreement and the rights and obligations ----------- of Employee may not be sold, transferred, assigned, pledged or hypothecated by Employee. c. Non-Waiver. Failure to insist upon strict compliance with ----------- any provision of this Agreement or the waiver of any specific event of non- compliance shall not be deemed to be or operate as a waiver of such provision or any other provision hereof or any other event of non-compliance. d. Binding Effect. This Agreement shall be binding upon and --------------- inure to the benefit of Kaiser, its successors and assigns and, Employee's heirs, successors, and legal or personal representatives. e. Headings. The headings throughout this Agreement are for --------- convenience only and shall in no way be deemed to define, limit, or add to the meaning of any provision of this Agreement. f. Context. Whenever required by the context, the singular -------- shall include the plural, the plural the singular, and one gender such other gender as is appropriate. g. Notices. All notices, request, demands, consents and other -------- communications hereunder shall be transmitted in writing and shall be deemed to have been duly given when hand delivered or sent by certified United States mail, postage prepaid, with return by certified requested, addressed to the parties as follows: Kaiser Ventures Inc. 3633 E. Inland Empire Blvd., Suite 850 Ontario, CA 91764 Richard E. Stoddard 6500 Mansfield Ave. Villa #40 Denver, CO 80235 h. Costs. In any action taken to enforce the provisions of ------ this Agreement, the prevailing party shall be reimbursed all costs incurred in such legal action including reasonable attorney's fees in such action. i. Severability. If any provision or clause of this Agreement, ------------- as applied to any party or circumstances shall be adjudged by a court to be invalid or unenforceable, said adjudication shall in no manner effect any other provision of this Agreement, the application of such provision to any other circumstances or the validity or enforceability of this Agreement. j. Definition of Affiliate. The term "Affiliate" for purposes ------------------------ of this Agreement shall mean any person or entity now or hereafter in control, controlled by or in common control with Kaiser. It shall also include any direct or indirect subsidiary of such Corporation and any company in which Kaiser has more than a ten percent (10%) ownership interest. 10 k. Acknowledgment Regarding ISO's. Employee acknowledges that ------------------------------ he is responsible for the tax consequences of all severance compensation he may receive and that certain actions may need to be taken by Employee within limited periods of time to preserve the tax status of any incentive stock options. Kaiser makes no representation or warranty that any past or future grant of a stock option to Employee qualifies as an incentive stock option. l. Governing Law. This Agreement shall be governed by and -------------- construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement and January 15, 1998, to be effective as of the day and year first written above not withstanding the actual date of signature. "Employee" Richard E. Stoddard /s/ Richard E. Stoddard ---------------------------------- Richard E. Stoddard "Kaiser" Kaiser Ventures Inc. By: /s/ James F. Verhey ----------------------------- James F. Verhey, Senior Vice President-Finance By: /s/ Lyle B. Stevenson ------------------------------ Lyle B. Stevenson, Chairman of the Human Relations Committee 11 SCHEDULE "A" RICHARD E. STODDARD Chairman of the Board of Directors, Chief Executive Officer & President This position shall report directly to the Board of Directors. Responsibilities: This position has total responsibility for every facet of the strategy, planning, operation, project implementation, performance and direction of Kaiser Ventures Inc. and all its subsidiaries. Within this framework of ultimate responsibility, Mr. Stoddard has delegated certain operational and implementation duties to the Executive Vice President. Shown below are strategic functions which will remain under the direct control of Mr. Stoddard as Chairman, CEO, and President: . Corporate planning and strategy. . Determination of the direction and goals of the Company. . Future growth opportunity decisions. . Development of all projects exit strategies. . Major corporate financial or other resource commitments. . All phases of investor relations. . Relationships with major shareholders. . All phases of the corporation's legal strategy, including compliance with laws and regulations. . Outside auditor performance and relationship. . Corporate accounting policies and financial reporting responsibilities. . Corporate financing strategy and fiscal accountability. . Major joint venture partner relations. . Major negotiations on behalf of the corporation. . Financial analysis and modeling of corporate opportunities. . Political lobbying at the federal, State and local levels. . Public relations and corporate participation policy. . Agency relations and communications. . Mine Reclamation Corporation Management. . Establishment of policies for the conduct of the company's business. . Oversee the implementation of corporate policy. . As chairman, conduct the meetings and business of the Board of Directors. . Implement the decisions of the Board of Directors. 12 EX-10.5 4 EMPLOYMENT AGREEMENT EXHIBIT 10.5 January 13, 1998 Mr. Gerald Fawcett Sun Lakes Country Club 1046 Laguna Seca Court Banning, CA 92220 Re: Continuation of Employment Dear Gerry: This letter will set forth the terms of your continued employment by Kaiser Ventures Inc. ("Kaiser") effective as of January 16, 1998. We understand your desire to substantially reduce your duties and responsibilities at Kaiser and accordingly we reluctantly acknowledge that you will be resigning from your duties as President and Chief Operating Officer of Kaiser effective as of the close of business on January 15, 1998. New Position and Duties - ----------------------- Effective as of January 16, 1998, you will be the Vice Chairman. You may attend meetings of the Board of Directors of Kaiser regardless of whether you are appointed or elected as a member of the Board. You will continue to serve on the Board of Directors of Mine Reclamation Corporation and on the Executive Committee of West Valley MRF, LLC. In addition to the duties associated with such positions, you will be on call and available for other Kaiser and Kaiser related work and special projects as may be mutually agreed upon from time to time. You will report directly to Kaiser's Chief Executive Officer. Base Salary and Bonus - --------------------- For all your services you will be paid an annual base salary of Sixty Thousand Dollars ($60,000) payable in accordance with Kaiser's normal pay roll procedures. All payments will be subject to usual and customary deductions, tax and other withholdings. Any increase in annual base salary will be determined in the sole discretion of the Board of Directors. You will not participate in the executive officer bonus pool. Any bonus or adjustment to your compensation shall be determined and awarded in the sole and absolute discretion of Kaiser's Board of Directors. There is no guaranteed minimum bonus. Benefits - -------- Except as noted herein, you shall continue to receive and be eligible to participate in all benefits generally available to an executive officer of Kaiser such as participation in Gerry A. Fawcett January 13, 1998 Page 2 - -------------------------------------------------------------------------------- Kaiser's medical plans, life insurance program, disability insurance program, 401(k) and other retirement plans. However, instead of receiving a monthly auto allowance you will be reimbursed at the per mile rate that Kaiser establishes from time to time for the reimbursement of its employees for the use of his or her vehicle on company business. In addition, due to the flexible nature of your schedule, you will not accrue any vacation time. Stock Options - ------------- As long as you continue to be employed by Kaiser, you shall continue to vest in your stock options in accordance with their terms. In addition, during your employment, upon the occurrence of a "Material Change" as defined in Exhibit "A" attached hereto and incorporate herein by this reference, provided such Material Change occurs, you shall immediately and fully vest in all options to acquire shares of Kaiser stock, restricted stock any other stock related incentive previously granted to you fourteen (14) days prior to the Material Change, notwithstanding any other applicable vesting schedule. Upon the occurrence of a Material Change, you shall be entitled for a period of two years, to exercise the your stock options as to any such shares unless a longer period is otherwise provided pursuant to your stock option agreement or applicable stock option plan. In the event of your normal retirement from Kaiser, all outstanding stock options, shares of restricted stock and other stock related incentives you own that have not already vested as of your retirement date shall vest as of the effective date of your retirement unless you should otherwise agree in writing; provided, however, all such stock options and restricted stock (or the monetary equivalent thereof) whose vesting was accelerated due to your retirement are subject to forfeiture back to Kaiser if you should: (i) breach the confidentiality of any material nonpublic information about Kaiser, its subsidiaries or any of their projects or plans; (ii) publicly disparage Kaiser; or (iii) work on behalf of any individual or entity within five (5) years of your retirement that is in direct competition with any project or activity of Kaiser or a subsidiary of Kaiser at the time of your retirement. You agree and understand that the acceleration of options, restricted stock and other stock related incentives may subject you to the "golden parachute" provisions attached hereto as Exhibit "A". Kaiser's Stock Option Committee shall have the authority, but no obligation, to consider the issuance of restricted stock, the grant of stock options and other stock related incentives to you. Term - ---- This letter agreement can be terminated by you or by Kaiser upon ninety (90) days prior written notice. Notice of termination by either party will be treated as your full normal retirement from Kaiser. This letter agreement shall also terminate upon your death or permanent disability, but you shall be deemed to have retired the day prior to the occurrence of such event. For purposes of this letter agreement, the term "permanent disability" shall mean your inability to perform the material functions of your duties for a Gerry A. Fawcett January 13, 1998 Page 3 - -------------------------------------------------------------------------------- period in excess of ninety (90) days. Upon termination of employment for any reason, all property and files of, or related to Kaiser or a subsidiary of Kaiser shall be immediately returned as directed by Kaiser. Dispute Resolution - ------------------ You agree that any claim, action, dispute or disagreement with regard to or in connection with this letter agreement, your employment by Kaiser or work performed on behalf of Kaiser or a Kaiser subsidiary shall be governed by the dispute resolution procedure's set forth in Exhibit "B" attached hereto and incorporated herein by this reference. Entire Agreement - ---------------- This letter agreement and the exhibits attached hereto will replace and supercede your current employment agreement with Kaiser effective as of January 16, 1998. This letter agreement constitutes the entire agreement and understanding regarding your continued employment, Gerry, if this letter and the attached exhibits accurately reflect the terms and conditions of your continued employment with Kaiser, please sign and return the enclosed copy of this letter to me. Sincerely, /s/ Richard E. Stoddard ----------------------- Richard E. Stoddard Chairman of the Board & Chief Executive Officer RES:TLC:jpk ACCEPTANCE ========== I, Gerald A. Fawcett, hereby agree to and accept the terms of the above letter agreement concerning my continued employment by Kaiser Ventures Inc., dated January 13, 1998, including the exhibits attached thereto. Date: January 15, 1998 /s/ Gerald A. Fawcett ---------------- --------------------- Gerald A. Fawcett Exhibit "A" A. Material Change. For purposes of this letter agreement, the term Material Change shall refer to and mean the occurrence of any one of the following events after the effective date of this letter agreement: (1) any sale, merger or other acquisition of all or substantially all of Kaiser with or by another entity where the shareholders of Kaiser at the time of the sale, merger or other acquisition do not own or control at least 51% of the voting power of such entity immediately after the time of the sale, merger or other acquisition. (2) any acquisition of common stock by a person or "group" (as defined in section 13(d) of the Securities Exchange Act of 1934), resulting in the "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by that person or group of more than (i) 25% of the capital stock of Kaiser accompanied by a change of more than 50% of the directors of Kaiser within one year after such event or (ii) 35% of the capital stock of Kaiser with or without such change. (3) following the effective date of this letter agreement, there has been an aggregate of net assets with a cumulative value that exceeds the greater of (i) $20,000,000 or (ii) 20% of the net equity of Kaiser at the time of the distribution (whether by dividend or repurchase of stock) distributed to any one or more Kaiser shareholders. B. Possible Reduction in Certain Benefits. (1) Except as provided in Paragraph B(2) below, you shall in no circumstances receive "payments in the nature of compensation" from Kaiser which would result in "excess parachute payments" (as that term is defined in Sections 280G and 4999 of the Internal Revenue Code of 1954, as amended, or any equivalent or analogous term as shall in the future be defined in any law or regulation governing the amount of severance compensation that may be paid without penalty to an officer of a company upon a change in control of Kaiser). In the event either you or Kaiser shall be advised in writing by his or its counsel that you will receive excess parachute payments if all payments under all contacts between you and Kaiser were made, such opinion shall be confidentially disclosed to the other party. If it is mutually determined that such payments would trigger the excess parachute payments provisions, you shall receive only such compensation and benefits under your contracts with Kaiser (not to exceed those permitted without constituting excess parachute payments) which in your sole discretion, has designated in written notice to Kaiser. You shall have a minimum of thirty (30) days in which to make such written designation. In the event of a disagreement between the counsel of the respective parties as to whether a payment would result in excess parachute payments, such counsel shall jointly designate an independent tax counsel (whose fees shall be paid by Kaiser) within 10 days who shall promptly make a conclusive determination of the matter. (2) Notwithstanding anything else to the contrary, in the event you are terminated within six (6) months after the occurrence of a Material Change by Kaiser or its successor you shall have the right, in your sole discretion, to elect to receive all or any part of the compensation payable to you upon termination (or which would have been due you, but for a previous election under Paragraph B(1)) without regard to whether any such amounts may constitute "excess parachute payments." If you fail to provide Kaiser a written designation within thirty (30) days, you shall be presumed to have elected to receive all compensation and benefits due you without regard to whether any such compensation or benefits shall constitute "excess parachute payments." (3) Nothing in this Paragraph B shall be construed or deemed to be a forfeiture of any compensation or benefits that Employee may elect not to accelerate due to any concern about the receipt of "excess parachute payments." Exhibit "B" Arbitration of Disputes. If we cannot resolve a dispute (whether arising in contract or tort or any other legal theory, whether based on federal, state or local statute or common law and regardless of the identities of any other defendants) that in any way relates to or arises out of this letter agreement, the termination of your employment relationship with Kaiser, then such dispute shall be settled as follows: a. Kaiser and you agree to jointly select a judicial officer who is affiliated with the Judicial Arbitration and Mediation Service, or such other equivalent organization as Kaiser and Employee may mutually select, to act as the trier of fact and judicial officer in such dispute resolution; b. If you and Kaiser are unable to agree upon a particular judicial officer, then the decision shall be made by the chief executive officer of the Judicial Arbitration and Mediation Service, after consulting with you and Kaiser; c. You and Kaiser shall have the same rights of discovery as if the dispute were being resolved in the Superior Court of the State of California. However, the judicial officer shall, on his own motion, or the request of either you or Kaiser, have the authority to extend or reduce the time periods therefor; and, d. The judicial officer serving hereunder shall be designated as a referee under the provisions of Title VIII, Chapter 6 of the California Code of Civil Procedure (Sections 638 through 645.1, inclusive). Payment for the services of the judicial officer and the rights and procedure of appeal, and/or other review of the decision shall be made as provided in such sections. The judicial officer shall have the right to grant injunctive relief, specific performance and other equitable remedies. EX-10.9 5 EMPLOYMENT AGREEMENT EXHIBIT 10.9 EMPLOYMENT AGREEMENT OF ANTHONY SILVA This EMPLOYMENT AGREEMENT is made and entered into effective January 15, 1998 by and between Anthony Silva ("Employee") and Kaiser Ventures Inc. ("Kaiser"). Recitals A. Employee is currently employed by Kaiser as Director, Corporate Engineering and Environmental. B. Effective as of January 15, 1998, Kaiser expanded Employee's duties and responsibilities and has appointed him as Vice President, Resource Development and Environmental Services. C. The intent of this Agreement is to set forth the current agreement and understanding of Employee and Kaiser with regard to Employee's continued employment by Kaiser. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment, Positions and Duties. Kaiser hereby continues the employment of Employee upon the terms and conditions set forth in this Agreement. Employee's position with Kaiser shall be Vice President, Resource Development and Environmental Services. Employee shall have the responsibilities and duties normally incident to such position, including, but not limited to, those duties and responsibilities set forth in Exhibit "A" attached hereto and incorporated herein by this reference and such other duties and responsibilities as may be reasonably assigned to him from time-to-time by Kaiser's Executive Vice President or Chief Executive Officer. Employee agrees to devote his full business time and attention to the discharge of his duties and responsibilities under this Agreement. 2. Term. Employee's employment under the terms of this Agreement shall commence as of January 15, 1998, and shall continue until terminated as provided herein; provided, however, upon Employee's termination, Employee shall receive the severance compensation provided herein. 3. Base Salary. Employee's initial annual base salary shall be One Hundred Ten Thousand Dollars ($110,000) per year. Prior to the first meeting of the Board of Directors in any calendar year, the Human Relations Committee of the Board will review Employee's salary and report its recommendations for any revision to the full Board at such meeting. 4. Annual Bonus. In addition to his base salary, Employee shall be entitled to participate in the bonus program of Kaiser applicable to senior executives as it may be amended from time to time. The timing, size and/or amount of any bonus awarded to Employee during the term of 1 this Agreement will be determined annually in accordance with the process set forth in Paragraph 3 above for the annual base salary review and based upon the bonus program developed from time to time by the Compensation and Benefits Committee and approved by the Board of Directors. 5. Stock Options and Other Stock Related Incentives. Employee shall be eligible for the grant of incentive stock options, non-qualified stock options and other forms of stock related incentives from time-to-time in the discretion of the Stock Option Committee of the Board of Directors. The timing, size and amount of any future stock options or other stock related incentives will be determined generally in accordance with the process used to determine the award of any bonus to Employee. The grant and exercise of the stock options and other stock related incentives shall generally be subject to and governed by the terms of Kaiser's 1995 Stock Plan as it may be amended or any similar or successor option plan. However, the Stock Option Committee may award stock options, restricted stock or other stock related incentives outside the 1995 Stock Plan in its discretion. 6. Other Benefits. Employee will be entitled to participate in all benefits provided by Kaiser to its employees and to senior executives in accordance with and subject to Kaiser's polices and procedures as they may exist from time-to-time, including, but not limited to, medical and dental insurance, life insurance, disability insurance, 401(k) savings plan, any pension plan, deferred compensation plan, education and seminar reimbursement, car allowance, and reimbursement of reasonable expenses for company business. These benefits shall include life insurance for the benefit of Employee with a face amount of not less than Employee's annual base salary, except that Kaiser may self-insure if insurance is not available on a commercially reasonable basis. Employee shall be entitled to three (3) weeks of paid vacation per year until Employee has been employed at Kaiser for five (5) years at which time Employee shall be entitled to four (4) weeks of paid vacation per year. 7. Restricted Stock. Any restricted stock issued by Kaiser in lieu of cash payments in connection with Employee's base salary or any bonus, shall be subject to the terms and conditions of a stock restriction agreement which may provide, among other things, for the forfeiture of such stock in phases if Employee should voluntarily terminate his employment with Kaiser within a certain period of time or upon Employee's termination for "cause", as defined herein. 8. Death Benefits. In the event of Employee's death, Kaiser shall pay to Employee's personal representative or his estate, Employee's salary and benefits through the end of the month in which the death occurred plus a ratable portion of Employee's anticipated bonus for the year through the date of Employee's death. Employee's anticipated bonus shall be measured by the bonus awarded for the most recent fiscal year. If a bonus has been earned by Employee for the preceding fiscal year but has not yet been paid prior to the death of Employee, Employee's estate or personal representative shall be paid the full amount of the earned but unpaid bonus. The proceeds from any such life insurance shall be for the sole benefit of Employee's designated beneficiaries or if there are no designated beneficiaries, Employee's estate. Upon an Employee's death, all restricted stock issued to Employee for past services (e.g. bonus stock), shall immediately vest and all restricted stock initially issued for anticipated future services (e.g. salary stock) will vest ratably through the date of death. Employee's estate or personal representative shall have at least one (1) year after the date of Employee's death while in the employment of the Company in which to exercise all vested Stock Options. 9. Disability Benefits. In the event of the disability of Employee for any reason, Kaiser shall continue to pay to Employee his salary and benefits less short-term disability payments until long- 2 term disability payments are made to Employee but in no event shall such salary and benefit payments continue for longer than six (6) months from the date of disability. In addition, upon permanent disability, the vesting of all retirement and deferral compensation plans and all outstanding options, restricted stock or other stock related incentives shall continue to occur for a period of two (2) years after the date of disability in the same manner as if Employee were still employed by Kaiser during that period. 10. Deductions. Applicable federal and state income taxes, social security contributions (FICA), Medicare contributions, medical insurance premiums and any other appropriate or customary deductions shall be withheld from any compensation paid to Employee by Kaiser. 11. Material Change. Upon the occurrence of a Material Change as hereafter defined and subject to Paragraph 14 below, all options to acquire shares of Kaiser stock, restricted stock or any other stock related incentive previously granted to Employee shall immediately and fully vest one (1) day prior to the Material Change, notwithstanding any other applicable vesting schedule. Upon the occurrence of a Material Change, Employee shall be entitled, for a period of two years, to exercise his stock options as to any of such shares. This provision shall take precedence over any contrary provision in any standard stock option agreement. For purposes of this Agreement, the term Material Change shall refer to and mean the occurrence of any one of the following events after the date of this Agreement: a. any sale, merger or other acquisition of all or substantially all of Kaiser with or by another entity where the shareholders of Kaiser at the time of the sale, merger or other acquisition do not own or control at least 51% of the voting power of such entity immediately after the time of the sale, merger or other acquisition. b. any acquisition of common stock by a person or "group" (as defined in section 13(d) of the Securities Exchange Act of 1934), resulting in the "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by that person or group of more than (i) 25% of the capital stock of Kaiser accompanied by a change of more than 50% of the directors of Kaiser within one year after such event or (ii) 35% of the capital stock of Kaiser with or without such change. c. following the date of this Agreement, there has been an aggregate of net assets with a cumulative value that exceeds the greater of (i) $20,000,000 or (ii) 20% of the net equity of Kaiser at the time of the distribution (whether by dividend or repurchase of stock) distributed to any one or more Kaiser shareholders. 12. Constructive Termination After A Material Change. Upon the occurrence of a Material Change, Employee shall be deemed to have been constructively discharged upon the occurrence of any of the following events within six months (6) before or eighteen (18) months after the Material Change: a. The assignment to Employee of duties materially and adversely inconsistent with Employee's positions immediately prior to a Material Change. This includes a change in reporting responsibilities, authority including title, or responsibilities; provided, however, a lateral transfer within Kaiser or to an Affiliate shall not be deemed a constructive termination; 3 b. Any requirement that Employee permanently relocate to an office more than 50 miles from the then location to which he is assigned; and c. Any failure to provide Employee with compensation and benefits in the aggregate on terms not materially less favorable than those enjoyed by Employee under this Agreement immediately prior to a Material Change, or the subsequent taking of any action that would materially reduce any of Employee's compensation and benefits in effect at the time of the Material Change unless such compensation and benefits are substantially equally reduced for executive officers of Kaiser as a group (as measured by a percentage) or there is less than a ten percent (10%) reduction in compensation or benefits. then, at Employee's option, exercisable within ninety (90) days of the date Employee knew, or should have known exercising reasonable care, of the occurrence of any of the foregoing events and the expiration of any applicable cure period, Employee shall have the right to terminate his employment by written notice to Kaiser, and on the date of such termination Kaiser will pay Employee the compensation and benefits described in Paragraph 13 below. 13. Compensation Payable Upon Actual or Constructive Termination Related to a Material Change. In the event Employee is terminated for any reason except for death, permanent disability or for cause, as defined below, within six (6) months before or eighteen (18) months after a Material Change or upon the Constructive Termination of Employee before or after a Material Change as defined and provided in Paragraph 12 above, Kaiser shall pay to Employee the following compensation as severance benefits in addition to the severance compensation that Employee shall receive pursuant to Paragraph 15 regardless of any Material Change: a. if the termination is effective after March 31 of any year, an amount equal to the pro rata portion of the bonus that Employee would have been eligible to earn for the year of termination as measured by the preceding year's bonus; b. an amount equal to one year's average annual bonus (cash and stock, but not including stock options or stock grants outside of the annual bonus) averaged over the two (2) immediately preceding years; and c. Employee shall have the right to participate proportionately in stock buyback or dividend distribution in proportion to shares owned together will all other shareholders. All amounts due Employee shall be payable in one lump sum or, at Employee's option, over such period of time not to exceed twelve (12) months. Employee shall have no duty to seek other employment during this period of time and there shall be no offset for any compensation paid to Employee from any other source; provided, however, if Employee is paid a consulting fee or receives compensation from Kaiser or an Affiliate of Kaiser for services actually rendered during a one (1) year period from the date of termination, unless otherwise agreed in writing, such amount shall be offset against the payments made or due Employee. 14. Possible Reduction in Certain Benefits. (a) Except as provided in Paragraph 14(b) below, Employee shall in no circumstances receive "payments in the nature of compensation" from Kaiser which would result in 4 "excess parachute payments" (as that term is defined in Sections 280G and 4999 of the Internal Revenue Code of 1954, as amended, or any equivalent or analogous term as shall in the future be defined in any law or regulation governing the amount of severance compensation that may be paid without penalty to an officer of a company upon a change in control of Kaiser). In the event either Employee or Kaiser shall be advised in writing by his or its counsel that Employee would receive excess parachute payments if all payments under all contacts between Employee and Kaiser were made, such opinion shall be confidentially disclosed to the other party. If it is mutually determined that such payments would trigger the excess parachute payments provisions, Employee shall receive only such compensation and benefits under his contracts with Kaiser (not to exceed those permitted without constituting excess parachute payments) which he, in his sole discretion, has designated in written notice to Kaiser. Employee shall have a minimum of thirty (30) days in which to make such written designation. In the event of a disagreement between the counsel of the respective parties as to whether a payment would result in excess parachute payments, such counsel shall jointly designate an independent tax counsel (whose fees shall be paid by Kaiser) within 10 days who shall promptly make a conclusive determination of the matter. (b) Notwithstanding anything else to the contrary, in the event Employee is terminated pursuant to Paragraph 13 above, Employee shall have the right, in his sole discretion, to elect to receive all or any part of the compensation payable to him upon termination (or which would have been due under Section 11 but for a previous election under Section 14(a)) without regard to whether any such amounts may constitute "excess parachute payments." If Employee fails to provide the Company a written designation within thirty (30) days, he shall be presumed to have elected to receive all compensation and benefits due him without regard to whether any such compensation or benefits shall constitute "excess parachute payments." (c) Nothing in this Paragraph 14 shall be construed or deemed to be a forfeiture of any compensation or benefits that Employee may elect not to accelerate due to any concern about the receipt of "excess parachute payments." 15. Termination Without Cause. In the event Kaiser elects to terminate Employee's employment without cause (as defined below) during the term of this Agreement, then Kaiser agrees to pay Employee an amount equal to one year's annual base salary (based on Employees then current annual base salary) and continue to provide and pay its portion of all of Employee's health, welfare, insurance and other benefits for a period of twelve (12) months following the date of termination, including Kaiser's portion of any retirement and deferred compensation plan such as Kaiser's 401(k) plan. After such termination, Employee shall be entitled, for a period of two years to exercise his stock options as to any then vested, including any options vesting within one year of termination as provided in the next sentence, notwithstanding any other applicable provision contained in any option agreement. In addition to the foregoing related to stock options, with respect to any restricted stock or other stock related incentives, Employee shall continue to vest in such securities for a period of one-year following termination. If Employee is terminated before or after a Material Change as provided in Paragraph 12, Employee shall receive the additional severance compensation provided in Paragraph 13. 16. Termination for Cause. If Kaiser elects to terminate Employee's employment for cause (as defined below), Employee's employment will terminate on the date fixed for termination by Kaiser and thereafter Kaiser will not be obligated to pay Employee any additional compensation, other than the compensation due and owing up to the date of termination and as may be required by law. 5 After such termination, Employee shall be entitled, for a period of ninety (90) days, to exercise any stock options or other stock related incentives that are vested as of the date of termination. 17. Definition of "Cause." "Cause" for the purposes of this Agreement shall mean any of the following: a. Willful breach by Employee of any provision of this Agreement, provided, however, if the breach is not a material breach, Kaiser shall give Employee written notice of such breach and Employee shall have thirty (30) days in which to cure such breach. No written notice or cure period shall be required in the event of a willful and material breach of this Agreement by Employee; b. Gross negligence or dishonesty in the performance of Employee's duties or responsibilities hereunder; c. Engaging in conduct or activities or holding any position that materially conflicts with the interest of, or materially interferes with Employee's duties and responsibilities to Kaiser or its Affiliates; or d. Engaging in conduct which is materially detrimental to the business of Kaiser or its Affiliates. 18. Voluntary Termination. Employee's employment by Kaiser may be terminated at any time upon the parties' mutual written agreement or voluntarily by either party upon prior written notice to the other. In the event of a mutual written agreement, Employee's severance benefits shall be as set forth in such agreement. In the event of Employee's voluntary termination of employment, Kaiser shall not be obligated to pay Employee any additional compensation, other than the compensation due and owing as through the date of termination and as may be required by law. After such termination, Employee shall be entitled for a period of ninety (90) days to exercise any stock options or other stock related incentives that are vested as of the date of termination. 19. Confidentiality. a. Employee's Obligations. Employee agrees that (a) except as ---------------------- provided in this Agreement Employee shall maintain the confidential nature of any Proprietary Information received or acquired by him, and (b) Employee shall use such Proprietary Information solely for the purpose of meeting his obligations under this Agreement and not in connection with any other business or activity. "Proprietary Information" means all oral, written or recorded information about or related to Kaiser or any of its Affiliates or its or their technology, assets, liabilities, or business, whether acquired before or after the date hereof, and regardless of the manner in which it is acquired, together with any documents or other materials prepared by Employee which contain or reflect such information. After termination of employment upon demand of Kaiser, Employee agrees to return or destroy any and all materials containing any Proprietary Information. b. Kaiser's Obligations. Kaiser agrees that it shall maintain and -------------------- provide information regarding Employee in accordance with generally accepted industry and business practices. 6 c. Limitations on Confidential Obligations and Use Restrictions. The ------------------------------------------------------------ restrictions in Paragraph 19(a) above do not apply to information which the Employee can demonstrate (i) is then in the public domain by acts not attributable to such disclosing party or (ii) is hereafter received on an unrestricted basis by such Employee from a third party source who, to Employee's knowledge after due inquiry, is not and was not bound by confidentiality obligations to Kaiser or any Affiliate thereof. In addition, Employee and Kaiser are permitted to disclose any Proprietary Information as necessary in the defense or prosecution of any legal action. d. Actions if Disclosure Required. If Employee is required by law to ------------------------------ make any disclosure otherwise prohibited hereunder, such party shall use its best efforts to provide the other with prompt prior notice where possible so that (a) the other party (with the reasonable cooperation of the party required to make such disclosure) may seek an appropriate protection order or other remedy and/or (b) the parties can seek in good faith to agree on the appropriate scope and approach to disclosure. If a protective order or other remedy is not obtained, the party required to make such disclosure may furnish only that portion of information protected hereby which it is legally compelled to disclose and shall use its reasonable efforts to obtain confidential treatment for all information so disclosed. e. Injunction. Each party agrees that remedies at law may be ---------- inadequate to protect against breach of this Paragraph 19, and hereby agrees to the granting of injunctive relief without proof of actual damage. 20. Indemnification. Kaiser agrees to continue to indemnify employee in accordance with the Indemnification Agreement between Employee and Kaiser dated October 10, 1996, a copy of which is attached hereto as Exhibit "B" and incorporated herein by this reference. 21. Arbitration of Disputes. If Employee and Kaiser cannot resolve a dispute (whether arising in contract or tort or any other legal theory, whether based on federal, state or local statute or common law and regardless of the identities of any other defendants) that in any way relates to or arises out of this Agreement, the termination of Employee's employment relationship with Kaiser or any Affiliate thereof, (without limiting the generality of any other Paragraph herein), then such dispute shall be settled as follows: a. Kaiser and Employee agree to jointly select a judicial officer who is affiliated with the Judicial Arbitration and Mediation Service, or such other equivalent organization as Kaiser and Employee may mutually select, to act as the trier of fact and judicial officer in such dispute resolution; b. If Kaiser and Employee are unable to agree upon a particular judicial officer, then the decision shall be made by the chief executive officer of the Judicial Arbitration and Mediation Service, after consulting with Kaiser and Employee; c. Kaiser and Employee shall have the same rights of discovery as if the dispute were being resolved in the Superior Court of the State of California. However, the judicial officer shall, on his own motion, or the request of either Kaiser or Employee, have the authority to extend or reduce the time periods therefor; and, 7 d. The judicial officer serving hereunder shall be designated as a referee under the provisions of Title VIII, Chapter 6 of the California Code of Civil Procedure (Sections 638 through 645. 1, inclusive). Payment for the services of the judicial officer and the rights and procedure of appeal, and/or other review of the decision, shall be made as provided in such sections. The judicial officer shall have the right to grant injunctive relief, specific performance and other equitable remedies. 22. Miscellaneous. a. Entire Agreement; Amendments. This Agreement and the exhibits ---------------------------- attached hereto state the entire understanding and agreement between the parties with respect to its subject matter supercedes the Employment Agreement between Employee and Kaiser dated October 10, 1996 and may only be amended by a written instrument duly executed by Employee and Kaiser. b. Assignment. This Agreement and the rights and obligations of ---------- Employee may not be sold, transferred, assigned, pledged or hypothecated by Employee. c. Non-Waiver. Failure to insist upon strict compliance with any ---------- provision of this Agreement or the waiver of any specific event of non- compliance shall not be deemed to be or operate as a waiver of such provision or any other provision hereof or any other event of non-compliance. d. Binding Effect. This Agreement shall be binding upon and inure to -------------- the benefit of Kaiser, its successors and assigns and, Employee's heirs, successors, and legal or personal representatives. e. Headings. The headings throughout this Agreement are for -------- convenience only and shall in no way be deemed to define, limit, or add to the meaning of any provision of this Agreement. f. Context. Whenever required by the context, the singular shall ------- include the plural, the plural the singular, and one gender such other gender as is appropriate. g. Notices. All notices, request, demands, consents and other ------- communications hereunder shall be transmitted in writing and shall be deemed to have been duly given when hand delivered or sent by certified United States mail, postage prepaid, with return by certified requested, addressed to the parties as follows: Kaiser Ventures Inc. 3633 E. Inland Empire Blvd., Suite 850 Ontario, CA 91764 Anthony Silva 7 Capri Foothill Ranch, CA 92610 8 h. Costs. In any action taken to enforce the provisions of this ----- Agreement, the prevailing party shall be reimbursed all reasonable costs incurred in such legal action including reasonable attorney's fees in such action. i. Severability. If any provision or clause of this Agreement, as ------------ applied to any party or circumstances shall be adjudged by a court to be invalid or unenforceable, said adjudication shall in no manner effect any other provision of this Agreement, the application of such provision to any other circumstances or the validity or enforceability of this Agreement. j. Definition of Affiliate. The term "Affiliate" for purposes of ----------------------- this Agreement shall mean any person or entity now or hereafter in control, controlled by or in common control with Kaiser. It shall also include any direct or indirect subsidiary of such Corporation and any company in which Kaiser has more than a ten percent (10%) ownership interest. k. Acknowledgment Regarding ISO's. Employee acknowledges that he is ------------------------------ responsible for the tax consequences of all severance compensation he may receive and that certain actions may need to be taken by Employee within limited periods of time to preserve the tax status of any incentive stock options. Kaiser makes no representation or warranty that any past or future grant of a stock option to Employee qualifies as an incentive stock option. l. Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement to be effective as of the day and year first written above not withstanding the actual date of signature. "Employee" Anthony Silva /s/ Anthony Silva ------------------------------ Anthony Silva "Kaiser" Kaiser Ventures Inc. By: /s/ James F. Verhey ----------------------------------------- James F. Verhey, Executive Vice President By: /s/ Lyle B. Stevenson ----------------------------------------- Lyle B. Stevenson, Chairman of the Compensation and Benefits Committee 9 SCHEDULE "A" ANTHONY SILVA Vice President Environmental and Engineering This position reports to the Executive Vice President and the Chief Executive Officer of the Corporation. Responsibilities The position has the primary responsibility for developing strategies and options for addressing and resolving all of Kaiser's outstanding environmental remediation liabilities and for managing cost-effective implementation of those environmental remediation strategies and options approved by Kaiser's management and the Board of Directors. Employee's Particular Responsibilities Include: . Assisting the Chief Executive Officer and others with developing environmental remediation strategy(ies) and managing the implementation of the approved strategy to comply with consent order and additional Department of Toxic Substances Control requirements. . Managing the development of all long-term strategic environmental remediation planning and monitoring for the Company. . Selecting, managing and supervising, as appropriate, all environmental and related other consultants and contractors. . Providing Senior Management review on various redevelopment/planning projects and environmental/engineering projects. . Ensuring correct environmental and engineering information is disseminated to Senior Management, Board of Directors and Regulatory Agency Representatives. . Implementing operational systems (e.g. computer information systems and project management systems) to assist in the management of assigned projects and associated budgets. . Providing professional expertise to in-house counsel and retained counsel for claims, litigation and judicial arbitration. . Participating as an Integral Member of Corporate Strategic Planning Team. . Developing and managing corporate engineering and environmental annual budgets. . Develop and implementing audit and monitoring programs to insure Kaiser's compliance in complying with statutory and corporate requirements. . Providing regular briefings/reports on key issues to Senior Management, Board and Directors and regulatory agency report representatives. . Conduct in-house training as necessary to ensure all employees are aware of their responsibilities with regard to corporation environmental policies and practice. 10 EX-10.10 6 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.10 FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT OF JAMES F. VERHEY This FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT OF JAMES F. VERHEY ("First Amendment") is made and entered into effective January 15, 1998 by and between James F. Verhey ("Employee") and Kaiser Ventures Inc. ("Kaiser"). Recitals A. Employee is currently employed by Kaiser as Senior Vice President- Finance and Chief Financial Officer and has an existing Employment Agreement with Kaiser dated effective June 17, 1996 (the "Employment Agreement"). B. Effective as of January 15, 1998, Kaiser has expanded Employee's duties and responsibilities by appointing him Executive Vice President in addition to his duties as Chief Financial Officer of Kaiser. C. Employee and Kaiser desire to amend the Employment Agreement as provided herein to reflect the change in Employee's duties and an increase in his annual base salary. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment of Section 1 of Employment Agreement. Section 1 of the Employment Agreement is hereby amended in its entirety to read as follows: Employment, Positions and Duties. Kaiser hereby continues the --------------------------------- employment of Employee upon the terms and conditions set forth in the Employment Agreement as amended herein. Employee's positions with Kaiser shall be Executive Vice President and Chief Financial Officer. Employee shall have the responsibilities and duties normally incident to such positions, including, but not limited to, those duties and responsibilities set forth in Exhibit "A" attached hereto and incorporated herein by this reference and such other duties and responsibilities as may be reasonably assigned to him from time-to- time by Kaiser's President or Chief Executive Officer. Employee agrees to devote his full business time and attention to the discharge of his duties and responsibilities under this Agreement. 2. Amendment of Section 3 of Employment Agreement. Section 3 of the Employment Agreement is hereby amended in its entirety to read as follows: Base Salary. Employee's initial annual base salary shall be One ------------ Hundred Ninety Five Thousand Dollars ($195,000) per year. In the event that any restricted stock is issued to Employee as a part of his annual base salary, the value of such restricted stock at the time of its grant shall be counted as base salary in the calculation of any bonus that may be awarded to Employee. For all other purposes, any such stock shall be treated as 1 salary for the calculation of any benefits based upon an employee's salary as may be required by law or any benefit plan. Prior to the first meeting of the Board of Directors in any calendar year, the Human Relations Committee of the Board will review Employee's salary and report its recommendations for any revision to the full Board at such meeting. 3. Amendment of Schedule "A" to Employment Agreement. Schedule "A" to the Employment Agreement is hereby amended in its entirety to read as set forth in the Revised Schedule "A" attached hereto and incorporated herein by this reference. 4. Ratification of Employment Agreement as Amended. The Employment Agreement is not amended in any respect except as expressly provided herein, and the Employment Agreement as amended by this First Amendment is hereby ratified and approved in all respects. 5. Governing Law. This First Amendment shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment to the Employment Agreement to be effective as of the day and year first written above not withstanding the actual date of signature. "Employee" James F. Verhey /s/ James F. Verhey ------------------------------------------- James F. Verhey "Kaiser" Kaiser Ventures Inc. By: /s/ Richard E. Stoddard -------------------------------------- Richard E. Stoddard, President & Chief Executive Officer By: /s/ Lyle B. Stevenson -------------------------------------- Lyle B. Stevenson, Chairman of the Human Relations Committee 2 REVISED SCHEDULE "A" JAMES F. VERHEY Executive Vice President & CFO This position will report to the President and Chief Executive Officer. Responsibilities: This position has the responsibility to manage all accounting, finance, tax, and treasury functions for the Company and its subsidiaries; to represent the Company with all outside entities coming under the purview of corporate finance; to ensure all reporting requirements are met in a satisfactory and timely manner; to assist senior management in analyzing, evaluating and pursuing new business and growth opportunities; to manage the Company's annual budget and capital plan processes; to manage the Company's financial analysis and modeling function; to manage the Company's insurance program; to direct the human resource and employee benefits functions; to manage the corporate office; to ensure the smooth functioning of all administrative departments, and to monitor all project development activities from the financial perspective. These duties include the following: . Assist CEO in analyzing, evaluating and pursuing business and growth opportunities. . Seek out, secure and manage all financing for future growth opportunities and acquisitions. . Oversee environmental compliance and environmental remediation implementation and compliance. . Oversee investor relations program implementation, shareholder/ investor communications, media relations and charitable and political donations. . Oversee implementation of real estate development and financing strategy. . Oversee SEC reporting and disclosure issues. . Manage and oversee financial aspects of SEC compliance. . Oversee the treasury and controller functions. Oversee all audit procedures, outside auditors, and report to the Chairman of the Audit Committee. . Manage all aspects of the accounting function of the Company, employing Generally Accepted Accounting Procedures. . Manage the Company's annual budget and capital plan processes. . Manage the Company's financial analysis and modeling function. . Manage all tax planning and reporting. . Manage all debt and equity structuring. . Manage all insurance programs. . Manage and oversee all human resource functions to include employee benefits and personal legal issues. . Manage and oversee the corporate office, Kaiser Eagle Mountain and MRC, operations, insuring both smooth functioning of all administrative departments and operations of both facilities. . Monitor all project development activities from the financial perspective. . Participate in major negotiations with third parties. . To direct and manage the operations of the Company in the absence of the Chief Executive Officer. 3 EX-10.12.1 7 AMENDMENT TO CONSENT ORDER EXHIBIT 10.12.1 Amendment to Consent Order This amendment to that certain Consent Order dated August 22, 1988 issued by the State Department of Health Services ("DHS") to Kaiser Steel Corporation (the "Consent Order"), is issued as of November 13, 1997 by the California Environmental Protection Agency, Department of Toxic Substances Control ("DTSC"), successor to the DHS, to Kaiser Ventures Inc., a Delaware Corporation, ("KVI") the reorganized successor to Kaiser Steel Corporation. Recitals A. The Consent Order was issued to address possible air, soil, surface water and groundwater contamination at the former Kaiser Steel Facility near Fontana, California, as described in the Consent Order (the "Kaiser Steel Facility"). The objective of the parties in entering into the Consent Order was to ensure that any release or threatened release of a hazardous substance or a hazardous waste to the air, soil, surface water and groundwater at or from the former Kaiser Steel Facility is thoroughly investigated and that appropriate remedial action is taken. B. Since the Consent Order was issued, KVI, under the direction of the DTSC, has investigated the principal areas of the Kaiser Steel Facility to assess the level of contamination. Based upon the investigations conducted to date, it has been determined that limited portions of the Kaiser Steel Facility require remediation. However, additional investigation, characterization, and remediation may be necessary from time to time with respect to other portions of the Kaiser Steel Facility. C. Since the Consent Order was issued, KVI has undertaken, and continues to undertake, appropriate remedial activities with regard to the Kaiser Steel Facility. D. KVI has spent more than $20 million dollars to date on the investigation and remediation activities on the Kaiser Steel Facility which does not include the estimated value of die water contributed by KVI as part of the settlement with the Regional Water Quality Control Board. E. Pursuant to Health and Safety Code, Division 20, Chapter 6.65, Section 25260 et seq. (AB 2061, Chapter 1184, Statutes of 1993 Umberg]), the Site Designation Committee designated DTSC as the administering agency for the Kaiser Steel Facility. DTSC is responsible for issuing all permits, and applying all applicable environmental laws and regulations with respect to the Kaiser Steel Facility. F. Based on currently known information, major remediation areas remaining to be addressed at the Kaiser Steel Facility are the Tar Pits and the East Slag Pile Waste Management Unit. In addition, additional groundwater investigation is required for the former Kaiser Steel Mill. Based on its experience with the investigation and prior remediation of the Kaiser Steel Facility and its projections as to the development and market absorption of the remaining portions of the Kaiser Steel Facility, KVI estimates that it will require up to an additional seven years to complete the remediation of the Kaiser Steel Facility. G. Under Paragraph 8.9 and 8.10 of the Consent Order, the DTSC may grant an extension of the current completion date of August 22, 1998, if a good cause exists for such an extension. By its actions in investigating the Kaiser Steel Facility and remediating a major portion of it, the funds expended to date as well as anticipated expenditures, KVI has demonstrated both its willingness to fully remediate the Kaiser Steel Facility and its need for an extension of the Consent Order. Given the amount of work completed and to be completed, the financial resources of KVI, and for other reasons, the DTSC has determined that it is appropriate to grant an extension to KVI. In accordance with the revised Master Workplan Schedule, the DTSC agrees to a seven year extension of the completion date, to August 22, 2005, to complete the activities required by the Consent Order. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and obligations contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree to amend the Consent Order in the following particulars only: Paragraph 4,1 is hereby deleted, to be replaced as follows: "4.1 Master Workplan. Attached hereto as exhibit "I" is a revised Master Workplan, which describes how KVI currently proposes to schedule the remaining activities required under Paragraphs 5.1 through 6.1 of this Consent Order. Though this Master Workplan proposes to address different portions of the facility at different times (concurrently and/or sequentially) and provide for more than one remedial investigation and report and Remedial Action Plan for the Facility, KVI may change the order of the completion of various portions of the Kaiser Steel Facility with the prior approval of the DTSC. The schedule in the Master Workplan provides that all investigation and characterization, and remedial actions excluding operation and maintenance, shall be complete at the entire Kaiser Steel Facility by August 22, 2005 unless that date is extended by the DTSC pursuant to paragraphs 8.9 and 8.10 of this Consent Order. Paragraph 7.1 and 7.2 is hereby deleted, to be replaced as follows: 7.1 - 7.2 Without waiving any rights of recovery from others, KVI agrees to pay all costs of response related to the Site. These costs include, but are not limited to, costs associated with compliance with the California Environmental Quality Act, costs associated with conducting site investigation, implementing the selected remedy, and ongoing operation and maintenance, and costs incurred by DTSC in implementing and administering Health and Safety Code, Division 20, Chapters 6.5, 6.65 and 6.8, related to the Site. DTSC shall bill KVI quarterly for costs incurred by DTSC. Upon request by KVI, DTSC agrees to provide back-up information (e.g., time sheets and vendor bills) with such invoices. KVI shall pay DTSC s costs, as indicated on the invoice within 60 days of receipt of DTSC s invoice. Paragraph 8.16 is hereby deleted, to be replaced as follows: 8.16 In addition to payments due under paragraphs 7.1 -7.3, failure or refusal of KVI to comply with this Consent Order may make KVI liable for any government costs incurred, including those set forth in Paragraph 7.1, as provided in Health and Safety Code section 25360 and other applicable provisions of law. Paragraph 8.3 is hereby deleted, to be replaced as follows: 8.3 Each year, beginning May 1998, Kaiser and DTSC will meet on or before May 15 of that year to discuss the Master Schedule, in the interest of accelerating remaining remedial work where feasible and appropriate. Paragraph 8.5 is hereby deleted, to be replaced as follows: 8.5 Submittals and Approvals. All submittals and notifications from Kaiser ------------------------ Ventures Inc. (KVI) required by this Consent Order shall be sent simultaneously to: Chief Site Mitigation Cleanup Operations Southern California Branch A Department of Toxic Substances Control 245 West Broadway, Suite 350 Long Beach, California 90802 Attn: Project Manager All approvals and decisions of DTSC made regarding such submittals and notifications shall be communicated to KVI in writing by the Chief or his designee. no informal advice, guidance, suggestions or comments by DTSC regarding reports, plans, specifications, schedules or any other writing prepared or submitted by or for KVI shall be construed to relieve KVI of its obligations to obtain such formal approvals as may be required herein. All other terms and conditions of the Consent Order as it may be amended to date shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this First Amendment to Consent Order as of the day first above written. "DTSC" "KVI" CALIFORNIA ENVIRONMENTAL KAISER VENTURES INC. PROTECTION AGENCY a Delaware Corporation DEPARTMENT OF TOXIC SUBSTANCES CONTROL By: Hamid Saebfar By: Gerald A. Fawcett Its: Chief Its: President and Chief Operating Site Mitigation Cleanup Operations Officer Southern California Branch A /s/ Hamid Saebfar /s/ /Gerald A. Fawcett - --------------------------------------- ----------------------------------- EX-10.29.4 8 FIRST AMENDMENT TO PLEDGE EXHIBIT 10.29.4 August 14, 1997 Union Bank of California, N.A. 70 South Lake Avenue, Suite 900 Pasadena, California 91101 Attention: Commercial Finance Division RE: FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT; SECOND AMENDMENT TO GUARANTY; FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT; AND GUARANTOR CONSENT Gentlemen: We refer to the following documents: (i) the Revolving Credit and Term Loan Agreement dated as of September 30, 1994, as amended by the First Amendment to Revolving Credit and Term Loan Agreement dated as of January 30, 1997 and the Second Amendment to Revolving Credit and Term Loan Agreement dated as of August 14, 1997 (the "Second Credit Agreement Amendment") (said Agreement, as so --------------------------------- amended, herein called the "Credit Agreement"), between Fontana Water Resources, ---------------- Inc., a Delaware corporation (the "Borrower"), and Union Bank of California, -------- N.A., a national banking association (successor in interest to Union Bank, a California banking corporation) (the "Bank"); (ii) the Pledge and Security ---- Agreement dated as of September 30, 1994 (the "Pledge and Security Agreement") ----------------------------- made by the Borrower in favor of the Bank; (iii) the Guaranty dated as of September 30, 1994 made by Kaiser Ventures Inc., a Delaware corporation formerly known as "Kaiser Resources Inc." (the "Guarantor"), in favor of the Bank, as --------- amended by the First Amendment to Guaranty dated as of January 30, 1997 between the Guarantor and the Bank (said Guaranty, as so amended, herein called the "Guaranty"); and (iv) the Stock Pledge Agreement dated as of September 30, 1994 - --------- (the "Stock Pledge Agreement") made by the Guarantor in favor of the Bank. ---------------------- Terms defined in the Credit Agreement and not otherwise defined herein have the same respective meanings when used herein. 1. Subject to the terms and conditions of this letter amendment, (a) Section 18(a) of the Pledge and Security Agreement and Section 16(a) of the Stock Pledge Agreement are amended by adding the words and punctuation "all Letters of Credit have expired," after the word "until" in each case, and (b) Section 12(a) of the Guaranty is amended by adding the words and punctuation "expiration of all Letters of Credit," after the word "until." August 14, 1997 Page 2 2. If you agree to the terms hereof, please evidence your agreement by executing this letter amendment in the space provided below. This letter amendment shall become effective as of the date first set forth above when and if counterparts of this letter amendment have been executed and delivered by the Borrower, the Guarantor and the Bank. 3. On and after the effective date of this letter amendment, each reference in the Pledge and Security Agreement, the Guaranty and the Stock Pledge Agreement to "this Agreement," "this Guaranty," "hereunder," "hereof," "herein" or any other expression of like import referring to the Pledge and Security Agreement, the Guaranty or the Stock Pledge Agreement, as the case may be, and each reference in the other Credit Documents to "the Pledge and Security Agreement," "the Guaranty," "the Stock Pledge Agreement," "thereunder," "thereof," "therein" or any other expression of like import referring to the Pledge and Security Agreement, the Guaranty or the Stock Pledge Agreement, as the case may be, shall mean and be a reference to the Pledge and Security Agreement, the Guaranty or the Stock Pledge Agreement, as applicable, as amended by this letter amendment. Except as specifically amended above, the Pledge and Security Agreement, the Guaranty and the Stock Pledge Agreement shall remain in full force and effect and are hereby ratified and confirmed. 4. This letter amendment may be executed in any number of counterparts and by any of the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same letter amendment. 5. The Guarantor hereby consents to the Second Credit Agreement Amendment and hereby confirms and agrees that the Guaranty is and shall continue to be in full force and effect and is ratified and confirmed in all respects, except that, on and after the effective date of the Second Credit Agreement Amendment, each reference in the Guaranty to "the Credit Agreement," "thereunder," "thereof," "therein" or any other expression of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by the Second Credit Agreement Amendment. August 14, 1997 Page 3 6. This letter amendment shall be governed by, and construed in accordance with, the laws of the State of California applicable to contracts made and performed in the State of California. Very truly yours, FONTANA WATER RESOURCES, INC. By: /s/ Gerald A. Fawcett --------------------- Gerald A. Fawcett President KAISER VENTURES INC. By: /s/ Gerald A. Fawcett --------------------- Gerald A. Fawcett President & Chief Operating Officer Agreed to as of August 14, 1997: UNION BANK OF CALIFORNIA, N.A. By: /s/ Richard P. DeGrey, Jr. -------------------------- Richard P. DeGrey, Jr. Vice President EX-10.29.5 9 SECOND MODIFICATION OF DEED OF TRUST EXHIBIT 10.29.5 RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: Pillsbury Madison & Sutro LLP 725 South Figueroa Street, Suite 1200 Los Angeles, California 90017-5443 Attention: Robert V. Slattery Jr. SECOND MODIFICATION ------------------- OF -- DEED OF TRUST AND ASSIGNMENT OF LEASES AND RENTS ------------------------------------------------ This Modification is made as of August 14, 1997 by FONTANA WATER RESOURCES, INC., a Delaware corporation ("Trustor"), and UNION BANK OF CALIFORNIA, N.A., a ------- national banking association (successor in interest to Union Bank, a California banking corporation) ("Beneficiary"). ----------- Recitals -------- A. Trustor executed a Deed of Trust and Assignment of Leases and Rents dated as of September 30, 1994 to First American Title Insurance Company, as trustee ("Trustee"), for the benefit of Beneficiary, as amended by a First ------- Modification of Deed of Trust and Assignment of Leases and Rents dated as of January 30, 1997 between Trustee and Beneficiary (said Deed of Trust, as so amended, herein called the "Deed of Trust"), covering interests in real property ------------- located in San Bernardino, Riverside and Los Angeles Counties, California, as more particularly described in Exhibit A to the Deed of Trust. The Deed of Trust was recorded (1) in the Official Records of San Bernardino County on October 7, 1994 as instrument number 94412304, (2) in the Official Records of Riverside County on October 6, 1994 as instrument number 388292 and (3) in the Official Records of Los Angeles County on October 13, 1994 as instrument number 94-1872435. Terms defined in the Deed of Trust and not otherwise defined herein have the respective meanings given to such terms in the Deed of Trust. The Deed of Trust secures, among other obligations, all of the obligations of Trustor to Beneficiary under (1) the Amended and Restated Promissory Note dated January 30, 1997 in the maximum principal amount of $30,000,000 made by Trustor in favor of Beneficiary and (2) the Revolving Credit and Term Loan Agreement dated as of September 30, 1994, as amended by the First Amendment to Revolving Credit and Term Loan Agreement dated as of January 30, 1997 (said Agreement, as so amended, herein called the "Credit Agreement"), between Trustor and Beneficiary. ---------------- B. Concurrently herewith, Trustor and Beneficiary have executed a Second Amendment to Revolving Credit and Term Loan Agreement dated as of August 14, 1997 for the purpose of providing for the issuance of letters of credit by Beneficiary for the account of Trustor. -1- C. Trustor and Beneficiary now wish to amend the Deed of Trust to modify certain references therein, and they accordingly agree as set forth below. Modification ------------ 1. Amendments. The Deed of Trust is hereby amended as set forth below. ---------- (a) Section 1.2(c) of the Deed of Trust is amended in full to read as follows: "(c) Payment of all other moneys agreed or provided to be paid by Trustor herein and/or in the Revolving Credit and Term Loan Agreement dated as of September 30, 1994, as amended by the First Amendment to Revolving Credit and Term Loan Agreement dated as of January 30, 1997 and the Second Amendment to Revolving Credit and Term Loan Agreement dated as of August 14, 1997, between Trustor and Beneficiary, including any further renewals, extensions, modifications, changes and/or amendments thereof (the "Credit ------ Agreement"), and performance of all other obligations of Trustor contained ---------- herein and/or in the Credit Agreement, including any modifications, changes and/or amendments hereto or thereto; and." (b) Section 2.18(a)(i) of the Deed of Trust is amended by adding the punctuation and words ", all Letters of Credit (as defined in the Credit Agreement) have expired" after the word "full." 2. Effect of Modification. On and after the effective date of this ---------------------- Modification, each reference in the Deed of Trust to "this Deed of Trust," "hereunder," "hereof," "herein" or any other expression of like import referring to the Deed of Trust, and each reference in the Credit Agreement and the other Credit Documents (as defined in the Credit Agreement) to "the Deed of Trust," "thereunder," "thereof," "therein" or any other expression of like import referring to the Deed of Trust, shall mean and be a reference to the Deed of Trust as amended by this Modification. 3. Other Terms Unchanged. Except as specifically amended above, the Deed --------------------- of Trust shall remain in full force and effect and is hereby ratified and confirmed. 4. Headings. The section headings used herein have been inserted for -------- convenience of reference only and do not constitute matters to be considered in interpreting this Modification. 5. Execution in Counterparts. This Modification may be executed in any ------------------------- number of counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. -2- 6. Governing Law. THIS MODIFICATION SHALL BE GOVERNED BY, AND CONSTRUED ------------- IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THE STATE OF CALIFORNIA. IN WITNESS WHEREOF, Trustor and Beneficiary have executed this Modification as of the date first written above. FONTANA WATER RESOURCES, INC. By: /s/ Gerald A. Fawcett --------------------- Gerald A. Fawcett President UNION BANK OF CALIFORNIA, N.A. By: /s/ Richard P. DeGrey, Jr. -------------------------- Richard P. DeGrey, Jr. Vice President -3- State of California ) ) ss. County of _______________ ) On _____________, 1997 before me, ________________________, Notary Public, personally appeared JAMES F. VERHEY, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Signature ______________________ (Seal) -4- State of California ) ) ss. County of ______________ ) On _____________, 1997 before me, _______________________, Notary Public, personally appeared ___________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Signature ____________________ (Seal) -5- EX-10.29.6 10 SECOND AMENDMENT TO REVOLVING CREDIT EXHIBIT 10.29.6 SECOND AMENDMENT ---------------- TO -- REVOLVING CREDIT AND TERM LOAN AGREEMENT ---------------------------------------- This Amendment, dated as of August 14, 1997, is entered into by FONTANA WATER RESOURCES, INC., a Delaware corporation (the "Borrower"), and UNION BANK -------- OF CALIFORNIA, N.A., a national banking association (the "Bank"). ---- Recitals -------- A. The Borrower and the Bank have entered into a Revolving Credit and Term Loan Agreement dated as of September 30, 1994, as amended by a First Amendment to Revolving Credit and Term Loan Agreement dated as of January 30, 1997 (said Agreement, as so amended, herein called the "Credit Agreement"). ---------------- Terms defined in the Credit Agreement and not otherwise defined herein have the same respective meanings when used herein, and the rules of interpretation set forth in Sections 1.2 and 1.3 of the Credit Agreement are incorporated herein by reference. B. The Borrower and the Bank wish to amend the Credit Agreement to provide for the issuance of letters of credit by the Bank for the account of the Borrower. Accordingly, the Borrower and the Bank agree as set forth below. Section 1. Amendments to Credit Agreement. Effective as of the date ---------- ------------------------------ hereof and subject to satisfaction of the conditions precedent set forth in Section 2, the Credit Agreement is hereby amended as set forth below. (a) The definition of "Credit Documents" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'Credit Documents" means this Agreement, the Note, the Deed of Trust, ---------------- the Pledge and Security Agreement, the Guaranty, the Stock Pledge Agreement, the Escrow Agreement, the Estoppel Certificate, the Teletransmission Agreement, all Letter of Credit Requests executed by the Borrower from time to time and all Letters of Credit issued from time to time." (b) The following new definitions are added to Section 1.1 of the Credit Agreement in appropriate alphabetical order: "'Letter of Credit" has the meaning set forth in 2.15(a)." ---------------- "'Letter of Credit Facility' has the meaning set forth in 2.15(a)." ------------------------- "'Letter of Credit Request" means a request by the Borrower for the ------------------------- 1 issuance of a Letter of Credit, on the Bank's standard form of Application for Irrevocable Standby Letter of Credit, the current form of which is attached hereto as Exhibit F, and containing such other terms and conditions as may be satisfactory to the Bank in its sole discretion." "'Teletransmission Agreement" means the Teletransmission Agreement --------------------------- between the Borrower and the Bank substantially in the form of Exhibit G." (c) Section 2.1(c) of the Credit Agreement is amended in full to read as follows: "(c) If at any time on or before the Revolving Commitment Termination Date (i) the sum of the aggregate principal amount of all Loans outstanding and the aggregate undrawn amount of all Letters of Credit outstanding exceeds (ii) the Borrowing Base (any such excess herein called an "Overadvance"), then the Borrower will pay the amount of such Overadvance ------------- to the Bank in 4 substantially equal quarterly installments, payable on the same dates on which interest is payable pursuant to Section 2.5(a), commencing on the second such interest-payment date occurring after such Overadvance is determined; provided, however, that any payment of an -------- ------- installment of an Overadvance pursuant to this Section 2.1(c) shall be applied first to prepay outstanding principal of the Loans and then, after all outstanding Loans have been paid in full, held by the Bank as cash collateral for the undrawn amount of any outstanding Letters of Credit; further provided, however, that, in addition to the interest payable ------- -------- ------- pursuant to Section 2.5 and the fees payable pursuant to Section 2.15(e), the unpaid amount of each Overadvance shall bear a premium of 1% per annum --- ----- (payable at the same time as interest under Section 2.5(a)) until such amount has been paid in full; further provided, however, that amounts paid ------- -------- ------- out of the escrow account maintained pursuant to the Escrow Agreement while one or more Overadvances are outstanding shall be applied first, to the ----- payment of interest or premium then due under this Agreement (including pursuant to the first provision of this Section 2.1(c)), any fees due under this Agreement and any costs and expenses due under this Agreement, second, ------ to the payment of any installments of such Overadvances then due pursuant to this Section 2.1(c), third, to the payment of any regular principal- ----- repayment installments then due on the Loans pursuant to Section 2.4, fourth, to the payment of any mandatory prepayments of principal then due ------ on the Loans pursuant to Section 2.7, fifth, to the prepayment of any ----- remaining installments scheduled on such Overadvances pursuant to this Section 2.1(c), in inverse order of maturity, and sixth, if any amount is ----- remaining, to the Borrower; further provided, however, that the last ------- -------- ------- scheduled installment of each Overadvance shall be in the amount necessary to pay in full the unpaid amount of such Overadvance; and further provided, ------- -------- however, that the payment and prepayment of, and the payment of premium on, ------- Overadvances as described above shall not be required if the Borrower or the Guarantor provides the Bank additional collateral sufficient, in the sole judgment of the Bank, when added to the Collateral, to adequately secure the Obligations." 2 (d) Article 2 of the Credit Agreement is amended by adding a new Section 2.15, to read as follows: "Section 2.15 Letters of Credit. ------------ ----------------- "(a) Letter of Credit Facility. On the terms and conditions ------------------------- hereinafter set forth, the Borrower may request the Bank to issue, and the Bank will if so requested issue, standby letters of credit (each a "Letter ------ of Credit") for the account of the Borrower from time to time on any ---------- Business Day from August 14, 1997 until 30 days before the Revolving Commitment Termination Date, in an aggregate face amount not to exceed at any time outstanding the lesser of $5,000,000 and the unused portion of the Commitment (the "Letter of Credit Facility"). No Letter of Credit shall -------------------------- have an expiration date (including all rights of renewal) later than 15 days before the Revolving Commitment Termination Date. Within the limits of the Letter of Credit Facility, the Borrower may request the issuance of Letters of Credit under this Section 2.15(a), repay any Loans resulting from drawings thereunder pursuant to Section 2.15(c) and request the issuance of additional Letters of Credit under this Section 2.15(a). "(b) Request for Issuance. The Borrower may request the issuance -------------------- of a Letter of Credit by giving the Bank a Letter of Credit Request that must be received by the Bank at least 1 Business Day before the requested date of issuance of such Letter of Credit (which shall be a Business Day). Any Letter of Credit Request received by the Bank later than 3:00 p.m., Los Angeles time, shall be deemed to have been received on the next Business Day. Each Letter of Credit Request shall be sent by courier, United States mail or telecopier (provided that any Letter of Credit Request sent by telecopier shall be subject to the terms and conditions of the Teletransmission Agreement and shall be confirmed by sending the original to the Bank promptly by courier or United States mail), shall be signed by an Authorized Officer, shall be irrevocable and shall be effective upon receipt by the Bank. Provided that a valid Letter of Credit Request has been received by the Bank and upon fulfillment of the other applicable conditions set forth in Article 4, the Bank will issue the requested Letter of Credit from its office specified in Section 8.2. "(c) Drawing and Reimbursement. The payment by the Bank of a ------------------------- draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement the making by the Bank of a Reference Rate Loan in the amount of such draft (but without any requirement for compliance with the conditions set forth in Article 4). The Borrower hereby agrees to the provisions of the Letter of Credit Request form; provided, however, that -------- ------- the terms of this Agreement shall take precedence if there is any inconsistency between the terms of this Agreement and the terms of said form. "(d) Obligations Absolute. The obligations of the Borrower -------------------- 3 under this Agreement and any other agreement or instrument relating to any Letter of Credit shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement and such other agreement or instrument under all circumstances, including the following: (i) any lack of validity or enforceability of this Agreement, any Letter of Credit or any other agreement or instrument relating thereto (collectively the "LOC Documents"); (ii) any change in the time, manner or place of ------------- payment of, or in any other term of, any or all of the Obligations of the Borrower in respect of the Letters of Credit, or any other amendment or waiver of, or consent to departure from, any or all of the LOC Documents; (iii) the existence of any claim, setoff, defense or other right that the Borrower may have at any time against any beneficiary or transferee of any Letter of Credit (or any Person for which any such beneficiary or transferee may be acting), the Bank or any other Person, whether in connection with any LOC Document, any transaction contemplated thereby or any unrelated transaction; (iv) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect, or any statement therein being untrue or inaccurate in any respect; (v) payment by the Bank under any Letter of Credit against presentation of a draft or certificate that does not comply with the terms of such Letter of Credit; (vi) any exchange, release or nonperfection of any Collateral or other collateral, or any release, amendment or waiver of, or consent to departure from, the Guaranty or any other guaranty, for any or all of the Obligations of the Borrower in respect of the Letters of Credit; or (vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. "(e) Compensation. The Borrower will pay the following to the ------------ Bank: (i) on the date of issuance of each Letter of Credit, a nonrefundable issuance fee equal to the sum of $100 plus the greater of (A) the product of (1) 1.5% per annum, (2) the maximum amount available to be --- ----- drawn under such Letter of Credit (assuming compliance with all conditions of drawing) and (3) the term of such Letter of Credit, in days, divided by 360 days and (B) $250; (ii) on the date of any amendment of any Letter of Credit, an additional nonrefundable issuance fee, on the terms described in clause (i) above, for the amended amount and extended term of such Letter of Credit; and (iii) such additional fees and charges (including cable charges) as are generally associated with letters of credit, in accordance with the Bank's standard internal charge guidelines. "(f) No Liability of Bank. The Borrower assumes all risks of the -------------------- acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Bank nor any of its officers or directors shall be liable or responsible for any of the following: (i) the use that may be made of any Letter of Credit or any act or omission of any beneficiary or transferee in connection therewith; (ii) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by the Bank against presentation of documents that do not comply with the terms 4 of a Letter of Credit, including failure of any document to bear any reference or adequate reference to a Letter of Credit; or (iv) any other circumstance whatsoever in making or failing to make payment under any Letter of Credit; provided, however, that the Borrower shall have a claim -------- ------- against the Bank, and the Bank shall be liable to the Borrower, to the extent of any direct, but not consequential, damages suffered by the Borrower that the Borrower proves were caused by (A) the Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit comply with the terms of such Letter of Credit or (B) the Bank's willful failure to make lawful payment under a Letter of Credit after the presentation to it of a draft and certificates strictly complying with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing, the Bank may accept any document that appears on its face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary." (e) Section 3.4 of the Credit Agreement is amended in full to read as follows: Section 3.4 Capital Adequacy. If the Bank determines that compliance ----------- ---------------- with any Governmental Rule of general application to similar banks or to corporations similar to that controlling the Bank (whether or not having the force of law), to the extent such compliance is based upon a change in any Governmental Rule, or the introduction of a new Governmental Rule, after the date of this Agreement, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and that the amount of such capital is increased by or based upon the existence of the Bank's commitment to lend hereunder and other commitments of this type or the commitment to issue, or the issuance of, Letters of Credit (or similar contingent obligations), then, upon demand by the Bank, the Borrower will pay to the Bank, from time to time as specified thereby, additional amounts sufficient to compensate the Bank for its increased costs in the light of such circumstances, to the extent that the Bank reasonably determines such increase in capital to be allocable to the existence of the Bank's commitment to lend hereunder or commitment to issue, or the issuance of, Letters of Credit. A certificate as to such amounts submitted to the Borrower by the Bank shall be conclusive and binding for all purposes, absent manifest error." (f) Article 3 of the Credit Agreement is amended by adding a new Section 3.6 to read as follows: "Section 3.6 Increased Letter of Credit Costs. If, after the date ----------- -------------------------------- hereof, any change in any Governmental Rule or in the interpretation thereof by any Governmental Person charged with the administration thereof either (a) imposes, modifies or deems applicable any reserve, special- deposit or similar requirement against letters of credit or guaranties issued by, or assets held by, or deposits in or for the account of, the Bank or (b) imposes on the Bank any other condition regarding this Agreement, the Bank or any Letter of Credit, and the result of any 5 event referred to in the preceding clause (a) or (b) is to increase the cost to the Bank of issuing or maintaining any Letter of Credit, then, upon demand by the Bank, the Borrower will pay to the Bank, from time to time as specified thereby, additional amounts sufficient to compensate the Bank for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower by the Bank, shall be conclusive and binding for all purposes, absent manifest error." (g) Article 4 of the Credit Agreement is amended by adding a new Section 4.3 to read as follows: "Section 4.3 Each Letter of Credit. The obligation of the Bank to ----------- --------------------- issue each Letter of Credit is subject to the limitations of the Commitment, to the performance by the Borrower of all of its obligations under this Agreement and to the satisfaction of the following further conditions: "(a) the Bank shall have received a Letter of Credit Request with respect to such Letter of Credit; and "(b) the following statements shall be true, and the Bank shall have received (by personal delivery (including courier) or by telecopier) a certificate signed by an Authorized Officer of the Borrower, dated the date of issuance of such Letter of Credit, stating that: "(i) the representations and warranties of each Loan Party contained in each Credit Document are correct in all material respects on and as of the date of issuance of such Letter of Credit, before and after giving effect to the issuance of such Letter of Credit, as though made on and as of such date; "(ii) no event has occurred and is continuing, or would result from the issuance of such Letter of Credit, that constitutes a Default or Event of Default; and "(iii) the calculation of the Borrowing Base on and as of the date of issuance of such Letter of Credit, as set forth in such certificate (showing each step of such calculation), is correct and complete; provided, however, that the Borrower shall not be required to -------- ------- provide such calculation if the maximum amount of such Letter of Credit does not exceed $500,000." (h) The first sentence of Article 6 of the Credit Agreement is amended in full to read as follows: "So long as any of the Commitment is in effect, any Letter of Credit is outstanding or any Obligation is unpaid, unless compliance has been waived in writing by the Bank, the Borrower will observe the covenants set forth below." 6 (i) Section 6.10 of the Credit Agreement is amended in full to read as follows: "Section 6.10 Use of Loan Proceeds and Letters of Credit. The ------------ ------------------------------------------ Borrower will use the proceeds of the Loans only for its general corporate purposes and to make loans or pay dividends to the Guarantor to be used for the Guarantor's general corporate purposes, including the funding of expenditures by the Guarantor or its Subsidiaries for (a) the continued redevelopment of the Guarantor's mill site and Eagle Mountain properties and (b) environmental remediation at the Guarantor's mill site, including the provision of financial assurances to the DTSC concerning the same. The Borrower will request Letters of Credit only for the general corporate purposes of the Borrower, the Guarantor or any other Subsidiary of the Guarantor." (j) The portion of Section 7.1 after Section 7.1(m) is amended in full to read as follows: "then, and in any such event, the Bank may, by notice to the Borrower, (i) declare the obligation of the Bank to make Loans and issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and/or (ii) declare the Obligations, all interest thereon and all other amounts payable under this Agreement and the other Credit Documents to be forthwith due and payable, whereupon (A) the Obligations, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower, and (B) to the extent any Letters of Credit are then outstanding, the Borrower will deposit with and pledge to the Bank cash collateral in the aggregate face amount of such Letters of Credit, and/or (iii) exercise any or all of its other rights and remedies under the Credit Documents; provided, however, that, in the event -------- ------- of an actual or deemed entry of an order for relief with respect to either Loan Party under the Federal Bankruptcy Code, (x) the obligation of the Bank to make Loans and issue Letters of Credit shall be terminated automatically, and (y) the Loans, all such interest and all such amounts (including such cash collateral) shall automatically become and be due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower." (k) The Credit Agreement is amended by adding Exhibits F and G attached hereto as Exhibits F and G to the Credit Agreement. Section 2. Conditions to Effectiveness. This Amendment shall become ---------- --------------------------- effective when the Bank has received all of the following documents, each dated the date of receipt thereof by the Bank (which date shall be the same for all such documents), in form and substance satisfactory to the Bank and in the number of originals requested by the Bank: (a) this Amendment and the Teletransmission Agreement, duly executed by the Borrower; 7 (b) an amendment to the Pledge and Security Agreement for the purpose of amending Section 18 thereof (the "Pledge and Security Agreement Amendment"), --------------------------------------- duly executed by the Borrower; (c) a modification to the Deed of Trust for the purpose, among others, of making reference therein to the Letters of Credit and this Amendment (the "Deed of Trust Modification"), duly executed by the Borrower, for recording in - --------------------------- the Official Records of San Bernardino, Riverside and Los Angeles Counties; (d) an amendment to the Guaranty for the purpose of amending Section 12 thereof, together with a consent to this Amendment (collectively the "Guaranty Amendment"), duly executed by the Guarantor; - ------------------- (e) an amendment to the Stock Pledge Agreement for the purpose of amending Section 16 thereof (the "Stock Pledge Agreement Amendment"), duly -------------------------------- executed by the Borrower; (f) copies of previously adopted resolutions of the Board of Directors of each Loan Party approving those of this Amendment, the Teletransmission Agreement, the Pledge and Security Agreement Amendment, the Deed of Trust Modification, the Guaranty Amendment and the Stock Pledge Agreement Amendment (the "Amendment Documents") to which such Loan Party is or is to be a party, and ------------------- copies of all other documents evidencing necessary corporate action or Governmental Action, if any, with respect to such Amendment Documents, certified by the Secretary or an Assistant Secretary of such Loan Party to be correct and complete and in full force and effect as of the date of execution of each such document; (g) a certificate of the Secretary or an Assistant Secretary of each Loan Party as to the incumbency, and setting forth a specimen signature, of each of the persons who has signed or will sign any Amendment Document, or any other document delivered hereunder, on behalf of such Loan Party; (h) one or more certificates of the appropriate Governmental Persons of the States of Delaware and California, dated a recent date, certifying that (i) such Loan Party has paid all franchise taxes in Delaware and California to the date of such certificate and (ii) such Loan Party is duly incorporated and in good standing under the laws of Delaware and is in good standing under the laws of California; (i) a certificate of each Loan Party, signed on behalf of such Loan Party by its President or a Vice President and its Secretary or an Assistant Secretary, certifying (i) that there has been no amendment on or after the Closing Date to the bylaws of such Loan Party or to any of the Material Contracts and the Commission Agreement to which such Loan Party is a party, except as attached to such certificate and certified by such Loan Party to be correct and complete and in full force and effect, (ii) that the charter documents (including any amendments and other modifications) of such Loan Party delivered to the Bank on or about January 30, 1997 have not been further amended or otherwise further modified, (iii) that the representations and warranties 8 of such Loan Party contained in each Credit Document are correct in all material respects on and as of the date of such certificate, before and after giving effect to the Amendment Documents, as though made on and as of the date of such certificate, and (iv) that no event has occurred and is continuing, or would result from the effectiveness of the Amendment Documents, that constitutes a Default or an Event of Default; (j) one or more favorable opinions of legal counsel to the Loan Parties, to the effect that the Amendment Documents have been duly authorized, executed and delivered by the Loan Parties, as applicable, and confirming the opinion furnished on September 30, 1994 pursuant to Section 4.1(a)(viii) of the Credit Agreement, with references therein to the Credit Documents to mean the Credit Documents as amended by the Amendment Documents; and (k) such other approvals, opinions and documents as the Bank may reasonably request. Section 3. Representations and Warranties of Borrower. The Borrower ---------- ------------------------------------------ represents and warrants to the Bank as set forth below. (a) The execution, delivery and performance by the Borrower of the Amendment Documents, and of the Credit Documents as amended thereby, to which the Borrower is or is to be a party, and the consummation of the transactions contemplated by such Amendment Documents and Credit Documents, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action and do not (i) contravene the Borrower's charter documents or bylaws, (ii) violate any Governmental Rule, (iii) conflict with or result in the breach of, or constitute a default under, any Material Contract, loan agreement, indenture, mortgage, deed of trust or lease, or any other contract or instrument binding on or affecting the Borrower or any of its properties, the conflict, breach or default of which would be reasonably likely to have a materially adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower or the ability of the Borrower to perform its obligations under any of the Credit Documents, as amended by the Amendment Documents, or (iv) result in or require the creation or imposition of any Lien upon or with respect to any of the properties of the Borrower, other than in favor of the Bank. (b) Except for the recording of the Deed of Trust Modification in the Official Records of San Bernardino, Riverside and Los Angeles Counties, no Governmental Action is required for the due execution, delivery or performance by the Borrower of any Amendment Document, or of any Credit Document as amended thereby, to which the Borrower is a party. (c) Each of the Amendment Documents, and each of the Credit Documents as amended thereby, to which the Borrower is a party constitute legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally. (d) Each of the Collateral Documents, as amended by the Amendment Documents, constitutes a valid and perfected first-priority Lien on the Collateral purported to be 9 covered thereby, enforceable against all third parties in all jurisdictions, and secures the payment of all obligations of the Borrower under the Credit Documents, as amended by the Amendment Documents; and the execution, delivery and performance of the Amendment Documents do not adversely affect the Liens of the Collateral Documents. (e) The unaudited balance sheet of the Borrower as of June 30, 1997 and the related statements of income, retained earnings and cash flows of the Borrower for the 6-month period then ended, certified by the chief financial officer or chief accounting officer of the Borrower, fairly present the financial condition of the Borrower as of such date and the results of the operations of the Borrower for the 6-month period ended on such date, all in accordance with generally accepted accounting principles applied on a consistent basis. Since June 30, 1997 there has been no materially adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower. The Borrower has no contingent liabilities, except as disclosed in such balance sheet or the notes thereto, that would be reasonably likely to have a materially adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Borrower. (f) There is no pending or, to the knowledge of the Borrower, threatened action, suit, investigation, litigation or proceeding affecting the Borrower before any Governmental Person or arbitrator that purports to affect the legality, validity or enforceability of any Amendment Document or of any of the Credit Documents as amended thereby. Section 4. Reference to and Effect on Credit Documents. ---------- ------------------------------------------- (a) On and after the effective date of this Amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or any other expression of like import referring to the Credit Agreement, and each reference in the other Credit Documents to "the Credit Agreement," "thereunder," "thereof," "therein" or any other expression of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this Amendment. (b) Except as specifically amended by the Amendment Documents, the Credit Agreement and the other Credit Documents shall remain in full force and effect and are hereby ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Documents, as amended by the Amendment Documents, and all of the Collateral described therein do and shall continue to secure the payment of all obligations of the Borrower under the Credit Documents, as amended by the Amendment Documents. (c) The execution, delivery and effectiveness of the Amendment Documents shall not operate as a waiver of any right, power or remedy of the Bank under any of the Credit Documents or constitute a waiver of any provision of any of the Credit Documents. The Borrower acknowledges and agrees that, as of the date of this Amendment, it has no defenses, offsets or claims against the Bank with respect to the Borrower's obligations to the Bank under the Credit Documents. Section 5. Costs and Expenses. The Borrower agrees to pay on demand all ---------- ------------------ reasonable 10 costs and expenses of the Bank in connection with the preparation, execution and delivery of the Amendment Documents and the other instruments and documents to be delivered hereunder, including the reasonable fees and out-of-pocket expenses of legal counsel for the Bank with respect thereto and with respect to advising the Bank as to its rights and responsibilities hereunder and thereunder. Section 6. Headings. The section headings used herein have been inserted ---------- -------- for convenience of reference only and do not constitute matters to be considered in interpreting this Amendment. Section 7. Execution in Counterparts. This Amendment may be executed in ---------- ------------------------- any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. Section 8. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND ---------- ------------- CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THE STATE OF CALIFORNIA. FONTANA WATER RESOURCES, INC. By: /s/ Gerald A. Fawcett --------------------- Gerald A. Fawcett President UNION BANK OF CALIFORNIA, N.A. By: /s/ Richard P. DeGrey, Jr ------------------------- Richard P. DeGrey, Jr. Vice President 11 EX-23 11 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 ---------- CONSENT OF INDEPENDENT AUDITORS ------------------------------- We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-51116, 33-39557, 33-39556 and 333-17843) pertaining to the Kaiser Steel Resources, Inc. 1992 Stock Option Plan, the Kaiser Steel Resources, Inc. 1989 Officer Bonus Program, the Amended, Restated and Substituted Kaiser Steel Resources, Inc. 1989 Stock Plan, and the Kaiser Ventures Inc. 1995 Stock Plan, respectively, of Kaiser Ventures Inc. of our report dated January 20, 1998, with respect to the consolidated financial statements and schedules of Kaiser Ventures Inc. and Subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP --------------------- Ernst & Young LLP Riverside, California March 26, 1998 93 EX-27 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FROM THE DECEMBER 31, 1997 FORM 10-K REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 DEC-31-1997 4,330,000 0 2,949,000 0 0 7,279,000 0 0 139,265,000 11,964,000 8,982,000 0 0 318,000 85,886,000 139,265,000 0 10,006,000 0 3,654,000 4,161,000 0 672,000 1,519,000 671,000 848,000 0 0 0 848,000 $.08 $.08
-----END PRIVACY-ENHANCED MESSAGE-----