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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-18858
KAISER VENTURES INC.
(Exact name of registrant as specified in its charter)
Delaware 94-0594733
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
3633 E. Inland Empire Blvd.
Suite 850
Ontario, CA 91764
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (909) 483-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.03 par value)
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. Yes X No
--- ---
At March 17, 1997, the aggregate market value of the registrant's Common Stock,
$.03 par value, held by non-affiliates of the registrant was $45,983,000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
At March 17, 1997, 10,542,548 shares of the registrant's Common Stock, $.03 par
value, were outstanding, including 136,919 shares deemed outstanding but
reserved for issuance to the general unsecured creditors of Kaiser Steel
Corporation.
Documents Incorporated by reference: The Company's Proxy Statement for the 1997
Annual Meeting of Stockholders is incorporated into Part III of this Form 10-K.
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TABLE OF CONTENTS TO FORM 10-K
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PART I
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Item 1. BUSINESS........................................... 1
Item 2. PROPERTIES......................................... 24
Item 3. LEGAL PROCEEDINGS.................................. 26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................... 29
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS....................... 30
Item 6. SELECTED FINANCIAL DATA............................ 31
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 32
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 41
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............ 41
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT........................................ 42
Item 11. EXECUTIVE COMPENSATION............................. 42
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................... 42
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 42
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K............................... 43
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PART I
FORWARD LOOKING INFORMATION
SOME OF THE STATEMENTS IN THIS FORM 10-K REPORT CONTAIN FORWARD-LOOKING
INFORMATION WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WHEN USED OR
INCORPORATED BY REFERENCE IN THIS REPORT, THE WORDS "ANTICIPATE," "ESTIMATE,"
"PROJECT," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
INFORMATION AND STATEMENTS. SUCH INFORMATION AND STATEMENTS ARE SUBJECT TO
CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS
OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS COULD MATERIALLY DIFFER FROM THOSE ANTICIPATED,
ESTIMATED OR PROJECTED. FOR EXAMPLE, ACTUAL RESULTS COULD MATERIALLY DIFFER AS
A RESULT OF FACTORS SUCH AS THE 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 DISCOVERY OF
UNANTICIPATED OR MORE EXTENSIVE ENVIRONMENTAL CONDITIONS ON ANY OF THE COMPANY'S
PROPERTIES; OR LITIGATION THAT MAY ARISE OUT OF THE COMPANY'S PERMITTING
ACTIVITIES.
ITEM 1. BUSINESS
GENERAL
Kaiser Ventures Inc. ("Kaiser" or the "Company", including its wholly owned
subsidiaries unless otherwise provided herein) is an emerging 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) a 12.29% ownership
interest in Penske Motorsports, Inc. ("PMI"), a publicly traded motorsports
company; (iii) approximately 668 acres (gross) of the former KSC steel mill site
(the "Mill Site Property") which is currently under redevelopment; (iv) 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 (v) the 11,350-acre idle iron ore mine in the
California desert (the "Eagle Mountain Site") which includes the associated 460
acre town of Eagle Mountain ("Eagle Mountain Townsite") and the property which
is leased to MRC for the Landfill Project.
In addition, the Company's financial position is enhanced by approximately
$107,000,000 of federal net operating loss tax carryforwards ("NOLs"), as of
December 31, 1996, 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 $11,000,000 of California net
operating loss carry-forwards as of December 31, 1996. The federal NOL's expire
between the year 2000 through 2010 while the California NOL's expire in years
1997 and 2000.
The Company's primary past and present business strategy is to capitalize on
its existing under-utilized assets by structuring 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 can be 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
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property to PMI for construction of the California Speedway 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
scrap, slag and revert 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. For example, revenues from short-term
property rentals at the Mill Site Property have substantially declined with the
development of approximately 534 acres of the Mill Site as the California
Speedway.
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 become 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 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 55.53%.
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
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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 1996 and 1995, the Cucamonga Lease generated $4.5 million
and $5.0 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, the agreed upon quantity of water from one source of water, the
Colton/Rialto wells, was temporarily reduced in 1996 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 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 $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 are again based upon an
annual production of 3,000 acre feet. However, it is currently unknown if the
drop in water level in the Colton/Rialto Wells during 1996 was a short-term
fluctuation, an indicator of a possible longer-term change in that basin, or
caused by possible over-pumping of the basin.
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 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.
However, 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. According to the Chino
Basin Watermaster, the agricultural transfers are anticipated to return to the
3,500 to 4,000 acre feet level for the 1996/1997 water year. See "Part 1, Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a complete discussion of the revenue impact of the reduction in
the agricultural pool transfers and the reduction in production from the
Rialto/Colton wells in 1996.
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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 9.0% per year over
the last 35 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, and
5.1% in 1995 (if the Cucamonga Lease is interpreted as the Company asserts).
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. The
Company is currently in litigation against Cucamonga over the interpretation of
the Cucamonga Lease with regard to the MWD rate structure and rate changes. As
a result of these changes, the Company asserts, 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 disputes 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 asserts is the
appropriate rate increase. Similarly, there is a dispute over the MWD rate and
thus the Cucamonga Lease rate for 1996. Cucamonga asserts there was no rate
increase in 1996, while the Company believes there was an increase in the
Cucamonga Lease rate if the Cucamonga Lease is interpreted in accordance with
the Company's understanding of the Cucamonga Lease. Because the Company was
unable to resolve this dispute, it instituted litigation with Cucamonga in San
Bernardino County Superior Court. The litigation is now in the discovery stage,
and is expected to go to trial by the end of 1997.
Cucamonga has, to date, paid its obligations under the Cucamonga Lease on a
timely basis, but at a level that reflects a 2.7% rate increase in July, 1995 as
opposed to the greater increase that the Company maintains it is entitled to
receive under the Cucamonga Lease. 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. In
addition, in the third quarter of 1996, Chino Basin Municipal Water District
increased its administrative charge to $2.00 per acre foot which Cucamonga
agrees is a component of the lease rate.
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 not aware of any significant contamination with
respect to any water source at the present time nor has it experienced any
significant contamination in the past.
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
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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 1,627,925 shares, or approximately 12.29% of the common stock
of PMI. As discussed in more detail below, the Company's ownership interest in
PMI was acquired as a result of: (i) its contribution in November, 1995, to PMI
of approximately 480 acres, as adjusted, of the Central Mill Site Property on
which the California Speedway ("TCS") has been built; and (ii) the subsequent
sale of the Speedway Business Park, totaling approximately 54 acres to PMI in
December, 1996. PMI is traded on the NASDAQ National Market under the symbol
"SPWY".
PMI is a leading promoter and marketer of professional motorsports in the
United States as well as an owner and operator of speedway facilities. PMI
currently owns: (i) Michigan International Speedway, Inc. which owns and
operates the Michigan Speedway ("MIS"), in Brooklyn, Michigan; (ii) The
California Speedway Corporation, the developer of TCS near Los Angeles,
California; (iii) Pennsylvania International Raceway, Inc. which owns and
operates the Nazareth Motor Speedway ("Nazareth") in Nazareth, Pennsylvania;
(iv) Motorsports International Corp. ("MIC"), a motorsports apparel and
memorabilia company; (v) Competition Tire West, Inc., and Competition Tire
South, Inc., distributors of Goodyear racing tires in the mid-west and southern
regions of the United States; and (vi) approximately four (4) percent of the
stock of North Carolina Motor Speedway, Inc. which owns the North Carolina Motor
Speedway, Inc., Rockingham, North Carolina.
PMI promoted a total of nine major racing events at MIS and Nazareth in 1996
and currently expects to promote a total of 15 racing events at MIS, Nazareth
and TCS in 1997. Of the anticipated 1997 races, 9 are to be sanctioned by the
National Association for Stock Car Auto Racing, Inc. ("NASCAR/(R)/") including 3
associated with the Winston Cup Series professional stock car racing circuit, 3
races with the NASCAR Busch Grand National Series, 1 race asociated with the
NASCAR Winston West Series, and 2 races associated with the Sears Craftsman
Truck Series; 3 races will be sanctioned by Championship Auto Racing Teams, Inc.
("CART/(R)/"); 2 races will be sanctioned by Automobil Racing Club of America
("ARCA") and 2 races will be with the International Race of Champions ("IROC").
A complete discussion of PMI, its business and financial results, may be found
in the Form 10-K Report for the year ended December 31, 1996 prepared and to be
filed by PMI.
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. 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 1996, was $889,000, net of residual
transaction expenses.
The following table sets forth the range of the low and high reported bid
price of PMI's common stock for the quarter indicated (since PMI's initial
public offering on March 26, 1996 at $24.00 a share), as reported on the NASDAQ
National Market System.
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1996: LOW HIGH
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Fourth Quarter $24.50 $34.88
Third Quarter $23.25 $34.13
Second Quarter $25.00 $36.25
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On March 17, 1997, the range of the low and high reported bid price of PMI's
common stock were $30.75 and $31.25, respectively.
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Kaiser Investment in PMI and Initial Public Offering by PMI. In April, 1994,
the Company entered into a Development Agreement with Penske Speedway, Inc.
("Penske") that called for the Company and Penske to jointly work together to
develop a motorsports complex on up to 500 acres of the Company's Central Mill
Site. The Company was responsible for undertaking the necessary environmental
remediation of limited areas of the Central Mill Site and for obtaining
appropriate environmental clearances. The Company also took the lead in
obtaining the necessary entitlements and permits for the motorsports complex
property.
Penske and the Company worked together for approximately a year and a half to
achieve these objectives which culminated in the Company entering into an
Organization Agreement as of November 22, 1995 with PSH Corp. and PMI (then
called Speedway Holding Corp.) as well as several other agreements which are
discussed below. Pursuant to the terms of the Organization Agreement, the
Company contributed all of the issued and outstanding stock in its wholly-owned
subsidiary, Speedway Development Corporation, to PMI in exchange for preferred
shares of stock convertible into a fifteen percent (15%) common stock ownership
interest in PMI. At the time of the contribution, Speedway Development
Corporation owned approximately 470 acres of the Company's Central Mill Site
together with entitlements and permits for the property and associated water
rights. Approximately ten (10) acres was later added to this amount through a
lot line adjustment which also adjusted the size of the Speedway Business Park.
Concurrent with the transactions discussed above, Speedway Development
Corporation, through a series of transactions, was then merged into one of PMI's
wholly-owned subsidiaries, The California Speedway Corporation, a Delaware
corporation.
In addition, on November 22, 1995, Facilities Investment Inc., a wholly-owned
subsidiary of International Speedway Corporation ("ISC"), then a public company
traded on the OTC Market and now traded on NASDAQ under the symbol ISCA,
acquired a 20% interest in the parent of PMI, PSH Corp., for an investment in
excess of $14 million. With the conversion of the Company's preferred stock
into common stock, but prior to the public offering and the sale of Speedway
Business Park to PMI, both discussed below, the effective ownership of PMI was
Penske Performance Inc. with 68%, Facilities Investment, Inc. with 17% and the
Company with 15%.
In January, 1996, PMI filed a form S-1 Registration Statement with the
Securities and Exchange Commission, which was declared effective as of March 26,
1996. PMI registered 3,737,500 shares of its common stock at $24.00 per share
with approximately $89,690,000 (gross) raised with the underwriters' over
allotment exercised in full.
Sale of Speedway Business Park to PMI. In 1995, the Company completed the
process of subdividing, into finished lots, approximately 54 acres (net)
adjacent to the motorsports complex. These lots were called the Speedway
Business Park. PMI expressed a desire to own the Speedway Business Park as it
consisted of attractive street frontage property adjoining the main entrance to
TCS. On October 8, 1996, the Company entered into an agreement for the sale of
the Speedway Business Park to PMI. The sale closed on December 12, 1996, with
the Company receiving approximately $5 million in cash and 254,298 shares of PMI
common stock, for a total contract price of $13,352,170 or approximately $5.67
per square foot.
The Company has no on-going obligations with respect to the Speedway Business
Park except for any undiscovered environmental contamination to the property
that may have occurred prior to sale. The Company has also agreed to provide
sewer service to the property when it is developed.
The California Speedway. As discussed above, PMI's subsidiary, The California
Speedway Corporation, now owns approximately 534 acres of the Central Mill Site
that were recently owned by the
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Company. This property includes the acreage originally acquired by PMI in
November, 1995, as later adjusted, as well as the Speedway Business Park
purchased in December, 1996 from the Company. See the map on page 9 of this Form
10-K Report illustrating the Company's ownership of property.
The construction of TCS by The California Speedway Corporation is nearing
completion with the first scheduled races to be held on June 21 and 22, 1997.
TCS consists of a two mile, tri-oval super speedway similar to the MIS facility.
It has 71,000 grandstand seats which PMI expects to increase to 92,000 seats by
the year 2002. PMI has received the necessary governmental approvals for these
additional seats as well as approval for a total capacity of 107,000 spectators.
In addition to its grandstand seats, TCS has 71 terrace suites, 55 chalets, and
12 grandstand pavilions and other amenities, as well as the necessary support
buildings and parking areas. Total estimated construction costs for TCS are
approximately $105 million, with PMI being fully responsible for such costs.
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. See "Item 1. Business - Investment in Penske Motorsports Inc. -
Kaiser Investment in PMI and Initial Public Offering by PMI" above. 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 ISC.
PSH Corp., PMI and the Company also entered into a Shareholders Agreement (as
latter amended, the "Shareholders Agreement") at the time of the November 22,
1995 transaction. 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. If
the non-transferring party is PSH Corp., then ISC has the right to purchase such
shares on the same terms and conditions as the proposed transferee. 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. Under certain circumstances, the Company may distribute a portion of the
shares of PMI's common stock that it owns to certain of its shareholders, free
from the right of first refusal.
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 serving as
the Compensation Committee. Finally, under the terms of the Shareholders
Agreement, PMI continued to pay the Company a fee of $162,125 per quarter during
1996 and will pay the same fee through the first quarter of 1997, the last
quarter before the opening of TCS.
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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, such agreement requires PMI, subject to certain
limitations and conditions, to register shares of PMI stock owned by lenders of
the Company in the event there should ever be an event of default on a loan
secured by PMI stock.
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 600 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 39
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 l. Business - Investment in PMI"). The map
on the following page illustrates the location of these four parcels and the
Company's and PMI's current ownership of such parcels.
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, were sold as a part of
a settlement of litigation and other claims with an adjoining landowner, and
another portion, 475 acre feet, were 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 moving forward with plans to
redevelop the balance of the Mill Site Property. After completion of the
transactions with PMI, and taking into account the land to be used for the Mill
Site materials recovery facility and transfer station ("Mill Site MRF"), the
Company now owns approximately 668 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 535 useable acres available for development.
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[Map illustrating property owned by the Company in
San Bernardino County, California]
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The Napa Lots, which constitute a 31 acre portion of the Central Mill Site
Property, and the MRF 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. This entitlement
and permitting process will soon formally commence with the Company filing an
application for a 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 the East Slag Pile property.
The Specific Plan application will identify 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.
Separately and in addition to the permitting and entitlement process with the
County the Company is currently working with the California Department of
Transportation and San Bernardino County to design and obtain approval for an
improved interchange at Etiwanda 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.
The entire entitlement and permitting process is anticipated to take ten to
fourteen months 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.
Significant capital funds will be required to implement the infrastructure and
access improvements discussed above. However, as discussed above, 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.
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 twenty-six 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. A number of potential
users of recyclables have contacted the Company about the possibility of
locating on the Napa Lots as a result of RMDZ incentives. In addition, the Mill
Site MRF may act as a magnet for these types of businesses by providing a
consistent stream of raw feed stock through its recycling activities.
Development of Central Mill Site. The portions of the Central Mill Site
Property still owned by the Company are the Napa Lots and the site of the Mill
Site MRF. These parcels are debt free. Specific projects relating to the
remaining portions of the Central Mill Site are discussed below.
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The Mill Site MRF
Background. 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 15 years of available landfill
capacity. Most Southern California urban communities met the 25% recycling
requirement, however, only one county has met the required 15 years of landfill
capacity. As a result, municipalities are continuing to explore and implement a
number of alternatives in order to comply with this legislation, including
source reduction, waste minimization, waste-to-energy projects, composting of
green waste and curbside recycling. Another alternative is the transportation
of solid waste to an independent or municipally-owned materials recovery
facility ("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 municipal landfills.
The commercial feasibility of MRFs has not yet been fully demonstrated due to
high operating costs compared to direct land filling and fluctuating recyclable
commodity prices. However, the Company believes that the requirements of AB
939, the continuing favorable public response to recycling and more favorable
pricing for recyclable products should continue to improve the economics of MRFs
in California. In addition, it is clear that the transfer station aspects of a
typical MRF are increasingly necessary with the closure and future closure of
urban landfills in Southern California.
Kaiser-Burrtec Joint Venture. 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 "Mill Site MRF").
In 1996, the Company and Burrtec reached agreement, in principle, on the terms
of restructuring the Joint Venture as a limited liability company (the West
Valley MRF, LLC, a California limited liability company). The agreement in
principle is subject to the completion and execution of final documentation.
Under the agreement, the Company is responsible for the environmental
remediation of the property for the Mill Site MRF and obtaining appropriate
environmental clearances. The actual remediation required for the Mill Site MRF
was more extensive than originally anticipated but it was substantially
completed during the first quarter of 1997.
All necessary state and local permits (other than construction permits) for
the Mill Site MRF have been granted. In addition to the environmental
remediation conducted by the Company, the Company and Burrtec are continuing to
undertake those preliminary steps necessary to construct Phase 1 of the Mill
Site MRF. Phase I of the Mill Site MRF is currently expected to include a
62,000 square foot building, sorting equipment, and related facilities for waste
transfer and recycling services. Off site improvements and the grading of the
site are nearing completion. The total estimated cost for Phase 1 of the Mill
Site MRF, including all equipment, is approximately $10,300,000. West Valley
MRF, LLC is in the process of securing financing to cover the full cost of the
facility. It is anticipated that the Company and Burrtec will be required to
guarantee any third party financing obtained by the West Valley MRF, LLC. See
also "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
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. Western
Waste Industries, an integrated waste management company, has indicated its
intention to construct a MRF on land it owns approximately three miles from the
Company's Mill Site Property. Western Waste entered into a contract with the
City of Ontario to construct and operate such
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facility, although Ontario has recently taken steps to terminate the contract
which has led to the commencement of litigation by Western Waste against the
City of Ontario. The Company believes that no draft EIR or other land use
application has been filed for that site. Other potential MRF facilities within
the broad geographic service area of the Mill Site MRF are proposed for the
cities of Pomona, San Bernardino, and Riverside. A number of transfer stations
with limited or full material recovery operations are already in operation in
Southern California.
NAPA Lots. Adjoining TCS and the Mill Site MRF are approximately 31 acres of
property, called the "Napa Lots", that have been developed into three industrial
zoned, rail served lots ranging in size from 5 to 15.5 acres. A new access road
(Napa Street) for these finished lots, TCS and the Mill Site MRF site has been
completed. In addition, the Napa Lots have received environmental clearance
except for approximately 8 acres, which should receive environmental clearance
by the end of 1997.
A number of potential users have expressed an interest in the Napa Lots and
the Company has reached a tentative agreement with Budway Enterprises Inc.
("Budway") to sell Budway approximately 15.5 acres at a price of approximately
$4.25 per square foot. The sale is contingent upon preparation of final
documentation and Budway obtaining acceptable financing for its construction of
a rail-served distribution facility. It is contemplated that the sale, if
consummated, will include an approximate $1,000,000 cash payment, with the
Company taking a note secured by the property for the remainder of the sales
price. The Company has agreed to subordinate this note to Budway's construction
and term financing, if the construction and term financing is acceptable to the
Company. If these contingencies are met, it is expected that the sale will be
completed by the end of the second quarter of 1997.
The Company continues to market other portions of the Napa Lots.
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. 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. On the
West End Property 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. 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 Company is also
exploring using the West End Property as an inter-modal rail facility. However,
development of the West End Property will involve substantial expenditures for
grading and infrastructure improvement.
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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.
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 treatments 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 and is 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, unless a substantive portion of the slag can be
used in the redevelopment of other portions of the Mill Site properties or in
connection with proposed freeway and street improvements. 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 end 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 has applied to the DTSC to use up to approximately 6.5 acres of the
South Mill Site as a corrective action management unit in which certain types of
impacted materials from other locations from the Mill Site Property would be
stored and capped. 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 land
owner, from its sewage treatment plant located on the northeastern end of the
South Mill site property for a total revenue in 1996 of $217,000. 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 has agreed to pay the Company an
annual fee of $88,800 in quarterly installments beginning 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
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provide this sewer service, the Company is expanding the capacity of and
refurbishing the treatment plant at an estimated cost of approximately $1.5
million. Approximately 65% of the costs to upgrade the sewer treatment plant are
being paid by The California Speedway Corporation.
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 current Consent Order, the phased
remediation is scheduled to be completed by July, 1998 unless an extension is
obtained from the DTSC. The Company is presently negotiating with the DTSC for
an extension to the Consent Order.
During 1995 and 1996, the Company undertook substantial activities with regard
to environmental matters. These activities included, but were not limited to,
remediation of limited "pockets" of affected soil detected as a result of the
construction of TCS; the remediation of an approximately ten acre site now owned
by The California Speedway Corporation due to the bankruptcy of the former
tenant at such site; the commencement of remediation of the Mill Site MRF site;
installation of two ground water monitoring wells on the Central Mill Site
property; final environmental clearance of the West End and Valley Boulevard
properties from material adverse environmental conditions except for two very
limited areas on the West End that require further investigation; and
remediation and general clearance of the former waste water treatment plant
(acid plant) and an area known as the Chemwest lower facility.
As a result of all of its remediation activities, which in part allowed for
the construction of TCS, the Company in October, 1996, received the 1996
Governor's Award for Environmental and Economic Leadership in a ceremony at the
California State Capital. California Secretary for Environmental Protection,
James M. Strock, presented the award to the Company and commended the Company
for demonstrating that environmental protection and conservation can be
accomplished in conjunction with economic growth.
In addition, the Company is now seeking approval for a Corrective Action
Management Unit ("CAMU") with the DTSC. The CAMU, which would 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, would 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 would 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 system. The Company has agreed with the DTSC on the scope and
duration of the supplemental groundwater investigation, and has drilled the
first two test wells on the Central Mill Site Property. Initial results from
these two test wells are positive for the Company in that they do 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 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
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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 1996 and 1995 totaled approximately $7.2
million and $7.6 million, respectively. 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 dealing with inactive PCB transformers and the removal or containment 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) further investigation and 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 $32 million,
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 is approved. In
order to provide better information 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
previously, an offset to land for the amount of future remediation and other
environmental costs reflected in its financial statements. The restatement
reflects the original $34.7 million remediation adjustment to land; the $6.6
million groundwater remediation reserve recorded in 1988 when the Company
emerged from bankruptcy; and the net $12.5 million in environmental insurance
litigation settlement proceeds received in 1995 being offset by approximately
$21.6 million in remediation and other environmental costs expended through
December 31, 1996. The Company's decision to restate its balance sheet
presentation is based upon, among other things, the more extensive investigation
and remediation activities that have been pursued over the past two years and
the Company's ability to better estimate the probable range of future
remediation and other environmental costs. As of December 31, 1996, the total
short-term and long-term environmental remediation liability reflected on the
Company's balance sheet was approximately $32.2 million, the high end of the
probable range of future remediation and other environmental costs. 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. 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.
Further, the Company has provided certain financial assurances to the DTSC in
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connection with anticipated remediation activities, the primary one being the
dedication of approximately $5.5 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 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 22 "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
LANDFILL PROJECT
Background. Many of Southern California's current landfills are located in
urban areas and often 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 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 in the future. However,
the anticipated shortage in landfill capacity that was predicted in the 1980's
and early 1990's has not developed as quickly as originally anticipated because
several regional landfills were expanded and a number of other landfills are
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 California
recession.
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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, the Company and 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 and Ownership 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 in the amount of approximately $10,400,000 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.
Acquisition by the Company of Majority Ownership Interest in MRC and Financial
Status. After a series of discussions, MRC and the Company entered into a Stock
Acquisition Agreement dated January 13, 1995 pursuant to which the Company,
through EMR, a wholly owned subsidiary separate from the subsidiary that owns
the land at Eagle Mountain, agreed to acquire common stock in MRC representing a
70% ownership interest. This transaction was consummated on February 2, 1995,
but 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. In addition, MRC forgave all current contingent non-recourse obligations,
including $1,500,000 in prepaid rent and approximately $1,500,000 in other
obligations the Company would have had to repay MRC out of future royalties.
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Operation 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 MRC's 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 made a commitment in June, 1995,
subject to certain conditions, to provide funding to MRC in an amount of up to
approximately $5.25 million over two years. Through its participation in a
series of private placements with existing MRC shareholders, which raised a
total of $6.0 million, Kaiser had provided $4.5 million in new equity to MRC as
of December 31, 1996. Other MRC shareholders provided an additional $1.5
million of new equity during the same period. In January, 1997, the Company,
subject to certain conditions, agreed to provide to MRC up to an additional $3.7
million in equity in 1997 with an understanding that additional equity
contributions of approximately $1.9 million by the Company may be necessary in
1998.
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
(prior to the July, 1994 amendment, once all the permits were received, MRC also
became obligated to pay minimum rent to the Company for the balance of the term
of the 100 year lease); 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 through its subsidiary, Kaiser Eagle Mountain,
Inc., the Landfill 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,
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
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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
<TABLE>
<CAPTION>
AVERAGE
DAILY TONNAGE/1/ TIPPING FEE PERCENTAGE PAYABLE TO KAISER
- ---------------- --------------------------------------------------
<C> <S>
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
- ----------------
</TABLE>
/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 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
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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 will be 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 statement ("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.
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.
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. During this time period, the BLM held three
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. While it is difficult to summarize the
extensive comments, they can be generally be categorized into four broad general
areas: (i) concerns and issues about environmental impacts such as ground
water, air, and other similar items; (ii) concerns and issues on the impact to
Joshua Tree National Park (the "Park"); (iii) landfill and landfill liner
safety; and (iv) the need for the Landfill Project. Responses were prepared by
the independent consultant retained by the County and the BLM and included in
the final EIR/EIS.
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The new final EIR/EIS was released to the public in January, 1997. The final
EIR/EIS and the Landfill Project are presently being reviewed by Riverside
County as discussed below.
Status of Review and Negotiations with Riverside County. The Landfill Project
is currently being reviewed by the Riverside County Planning Commission, which
has held five public meetings as of March 26, 1997 on the Landfill Project. The
Riverside County Planning Commission will forward the Landfill Project to the
Riverside County Board of Supervisors with a recommendation that it be approved
or not be approved. It is anticipated that a decision by the Riverside County
Planning Commission will be made in April, 1997. Once the EIR is approved by
the Board of Supervisors, assuming the EIS receives the necessary approvals, it
will probably take up to an additional year to secure the necessary technical
permits for the Landfill Project.
It had been anticipated that the Riverside County Board of Supervisors would
act on the Landfill Project during the first half of 1997. However, at an
October 29, 1996, meeting of the Board of Supervisors, the Board voted to delay
the consideration of proposals relating to any private or public/private
landfill project for at least six months. This action was as a result of an
investigation by the Federal Bureau of Investigation of Western Waste
Industries, Inc. which was proposing a major expansion of its El Sobrante
landfill in western Riverside County. Neither the Company nor MRC have any
connection with Western Waste Industries, Inc. Regardless of this fact, the
Board decided to delay its consideration of all private and public/private
landfill projects given the ongoing investigation, which includes the review of
the records of the Board of Supervisors and certain County staff members. As
the Company currently understands the October 29, 1996 decision, it may result
only in minimal delay if any, in the Board's consideration of the Eagle Mountain
Landfill Project. However, the full ramifications of the Board's vote are
unknown and further delays, are possible.
MRC has been engaged in extensive negotiations with the County of Riverside
staff over the terms of the land use approvals and an agreement with Riverside
County that addresses many of the obligations of MRC in connection with the
development the Landfill Project (the "Development Agreement"). Due to the
significant change in economic circumstances since the last Development
Agreement was negotiated, MRC has been able to negotiate a reduction in the
amounts payable to Riverside County over the previous Development Agreement.
In addition, there have been changes in the financial assurances package to be
provided to Riverside County which in some respects are stronger than previously
provided financial assurances but give MRC greater flexibility. For example,
MRC will be able to use third party pollution liability insurance, which it has
already obtained, as part of its financial assurance package. Another proposed
major change is that $.10 per ton of waste will be contributed into a trust
which will build a cash reserve to respond to any environmental or other
liability claims. As currently structured, the trust will be funded equally by
Riverside County and MRC, i.e. $.05 per ton each, with an ultimate cap of $50
million.
Because the Landfill Project is just commencing the Riverside County review
and political process, there may be a number of material changes to the final
economic terms of the Development Agreement with Riverside County including
those discussed above.
Finally, it must be recognized that there is no assurance that the new EIR/EIS
will receive the necessary approvals, including approval by the Riverside County
Board of Supervisors. In addition, there is no assurance that, even if the new
EIR/EIS is ultimately certified and all necessary permits are received, there
will not be new legal challenges that would further delay the construction and
operation of the Landfill Project. In addition, there can be no assurance that
all necessary permits or approvals will be
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<PAGE>
obtained or that they will be obtained within the time periods estimated by MRC
or the Company. Also, given the legal challenges that have occurred to date, and
the controversies that generally surround landfill projects, future legal
challenges are likely.
Agreement with the National Park Service. The Company, MRC and the National
Park Service ("NPS") signed an agreement on December 9, 1996, regarding the
Landfill Project to address the NPS concerns with respect to the Landfill
Project. While this agreement acknowledges the NPS's continued opposition to
the Landfill Project, the NPS recognizes that the EIR/EIS is adequate and, upon
compliance with the mitigation measures specified in the EIR/EIS, there will be
no known significant physical environmental impacts to the Park. The NPS
Agreement should assist the BLM in making a determination on proceeding with the
land exchange and the rights-or-way grant discussed in more detail below. The
NPS Agreement should also assist in addressing numerous adverse comments
submitted by Landfill Project opponents on the potential impacts to the Park.
As discussed above, one of the six concerns in the 1994 Court ruling was impacts
to the Park. This agreement should assist in addressing those concerns.
The NPS Agreement and its validity were appealed to the Federal Office of
Hearings and Appeals by opponents to the Landfill Project. However, this appeal
was dismissed by the Federal Office of Hearings and Appeals on March 13, 1997.
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 property 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
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<PAGE>
exchange. This additional review put the land exchange on hold pending
completion of the new environmental review process.
The BLM is the lead Federal agency for the EIS. The 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. The land
exchange may not occur until after the Riverside Board of Supervisors vote on
the EIR and necessary land use approvals.
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.
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 20
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. Like the Landfill Project, both projects face
opposition and the Rail Cycle project is 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.
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
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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 $32.00, $31.00, $30.00 and $29.00
per ton with five (5), ten (10) and fifteen (15) year commitments, respectively.
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. In addition, the success of the 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.
EMPLOYEES
As of March 17, 1997, Kaiser had 24 full-time and 3 part-time employees. In
addition, as of March 17, 1997, 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 August,
1997, 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 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
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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 Company now
owns approximately 668 acres 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 $5,300,000. 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. 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 water well is now currently
used only for irrigation purposes and a third party provides water to users of
the Mill Site Property. 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 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 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. See
"Item 3. Legal Proceedings." In addition, the Company currently has rights to
approximately 5,000 acre-feet of water in storage, effective as of December,
1996. 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 next 18 years. See "Item 3. Legal Proceedings."
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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 1996. As a result of the Company's experience in remediating the limited
portion of the motorsports complex 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 38,000 acre-feet (including currently
approximately 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 the 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." The
Company is currently in a rate dispute with Cucamonga. See "Item 3. Legal
Proceedings."
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
Superior Court. The Court's decisions required MRC to prepare a new EIR,
26
<PAGE>
which has been completed but has not yet been certified. The litigation is still
considered technically outstanding as the San Diego Superior Court retains
jurisdiction to determine if the new EIR complies with its rulings. MRC and the
Company initially appealed the Court's decisions, but withdrew such appeals to
focus its efforts on re-permitting the Landfill Project. One of the plaintiffs
appealed and later withdrew its appeal of the denial of its request for the
award of attorneys fees. Another one of the plaintiffs, National Parks and
Conservation Association, appealed the trial court's conclusion that the
discussion of MRF's in the EIR was adequate and that the Development Agreement
was valid. On February 16, 1996, the California Court of Appeals (Case No.
D022183 - Superior Court No. 662907) announced its decision upholding the trial
court's rulings on these matters, thus resolving these issues in MRC's favor.
Warburton Litigation. The Company and KSC were named as 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
tentative settlement was reached in the litigation with respect to the
environmental claims which is subject to appropriate documentation. If the
environmental portion of the litigation is settled in accordance with the
tentative terms of settlement, the Company's cash contribution to the settlement
will be immaterial. While there was a tentative settlement of the environmental
matters, 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 Company is
currently awaiting a decision of the Court. The Company through its bankruptcy
and reorganization has already settled any liability it may have had with IMACC
and state environmental regulators for the applicable sites. In addition, under
a previous agreement with IMACC, IMACC is to defend, indemnify and hold the
Company harmless from any such liability. IMACC has been defending this lawsuit
on behalf of the Company. The Company asserted various defenses in the
litigation. In addition, the Company believes it has full indemnification
coverage from IMACC, therefore, no provision for any potential loss has been
made in the accompanying financial statements.
Johnson Machinery Litigation. The Company and others were served with a
lawsuit in November, 1996 commenced by Johnson Machinery, Inc., in which it is
alleged that the Company is liable for the theft of equipment with a value in
excess of $1 million from a warehouse on the West End Property. (San Bernardino
County Superior Court: Case No. RCV 23757). The alleged basis of the lawsuit is
that the Company provides security at the Mill Site Property through one guard
gate and a roving patrol resulting in a breach of contract and negligence by the
Company by allowing the theft to occur. The original complaint was dismissed by
the Court, but a subsequent complaint was filed in February, 1997. The Company
believes it has numerous defenses to this litigation and it does not appear that
the Company has any significant exposure to liability that is not covered by
insurance.
Asbestos Suits. The Company along with KSC are currently named in
approximately a dozen 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 and involve multiple defendants claiming injury resulting from
exposure to asbestos. The Company anticipates that it will be named as a
defendant in
27
<PAGE>
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 currently believes it has numerous defenses in the litigation.
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
28
<PAGE>
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.
29
<PAGE>
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.
<TABLE>
<CAPTION>
LOW HIGH
------ ------
<S> <C> <C>
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
1995:
Fourth quarter..... $ 9.13 $13.00
Third quarter...... $ 6.38 $ 9.00
Second quarter..... $ 6.25 $ 8.00
First quarter...... $ 5.25 $ 7.75
</TABLE>
As of March 17, 1997, there were 2,381 holders of record of the Company's
Common Stock.
As of March 17, 1997, 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.
30
<PAGE>
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.
<TABLE>
<CAPTION>
SELECTED STATEMENT OF INCOME DATA
FOR THE YEARS ENDED DECEMBER 31: 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues........................... $ 15,414,000 $ 11,108,000 $ 12,471,000 $ 10,591,000 $ 9,944,000
Costs and expenses....................... 7,149,000 7,993,000 8,593,000 8,144,000 7,789,000
------------ ------------ ------------ ------------ ------------
Income from operations................... 8,265,000 3,115,000 3,878,000 2,447,000 2,155,000
Net interest expense (income)............ 819,000 665,000 (155,000) (466,000) (341,000)
------------ ------------ ------------ ------------ ------------
Income before income tax provision
and extraordinary loss.................. 7,446,000 2,450,000 4,033,000 2,913,000 2,496,000
Taxes currently payable.................. 92,000 --- 125,000 50,000 ---
Deferred tax expense..................... 840,000 721,000 --- --- ---
Deferred tax expense credited to equity.. 3,945,000 335,000 1,621,000 1,171,000 1,027,000
------------ ------------ ------------ ------------ ------------
Income before extraordinary loss......... 2,569,000 1,394,000 2,287,000 1,692,000 1,469,000
Extraordinary loss (net of taxes)........ --- --- 2,233,000 --- ---
------------ ------------ ------------ ------------ ------------
Net income............................... $ 2,569,000 $ 1,394,000 $ 54,000 $ 1,692,000 $ 1,469,000
============ ============ ============ ============ ============
Earnings per share
Before extraordinary loss............... $ .24 $ .13 $ .21 $ .16 $ .14
After extraordinary loss................ $ .24 $ .13 $ .01 $ $ .14
Weighted average number of
shares outstanding....................... 10,716,032 10,671,665 10,671,154 10,604,122 10,176,367
<CAPTION>
SELECTED BALANCE SHEET DATA
AS OF DECEMBER 31: 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments.................. $ 8,482,000 $ 10,937,000 $ 6,829,000 $ 15,922,000 $ 8,110,000
Working capital.......................... (1,240,000) 2,821,000 (3,567,000) 11,420,000 9,280,000
Total assets............................. 134,067,000 126,803,000 114,350,000 109,014,000 100,881,000
Long-term debt........................... 8,102,000 5,342,000 5,700,000 --- ---
Long-term environmental
remediation reserves.................... 26,466,000 32,176,000 28,439,000 34,537,000 40,325,000
Stockholders' equity..................... 81,448,000 68,697,000 66,802,000 66,664,000 57,751,000
</TABLE>
(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, 1996, were approximately
$107,000,000 and $11,000,000, for federal and California income tax
purposes, respectively.
31
<PAGE>
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 emerging asset
development company pursuing project opportunities and investments in activities
related to water resources, motorsports, property redevelopment and solid waste
management. The Company's long-term emphasis is on the further development of
its principal assets: (i) a 50.88% interest in Fontana Union Water Company
("Fontana Union"), a mutual water company; (ii) a 12.29% interest in Penske
Motorsports, Inc. ("PMI"), a publicly-traded professional motorsports company
that has developed the California Speedway ("TCS") on land acquired from the
Company; (iii) approximately a 73% interest in Mine Reclamation Corporation
("MRC"), the developer of the Eagle Mountain Landfill Project (the "Landfill
Project"); (iv) approximately 668 acres of the former Kaiser Steel Corporation
("KSC") steel mill site (the "Mill Site Property"); and (v) the 11,350 acre idle
iron ore mine in the California desert (the "Eagle Mountain Site"), which
includes the associated 460 acre town of Eagle Mountain ("Eagle Mountain
Townsite") and the land leased to MRC for the Landfill Project. The Company is
also pursuing other related longer-term growth opportunities on the balance of
its Mill Site Property, including the development of a transfer station and
materials recovery facility ("Mill Site MRF") and the redevelopment of
industrial and commercial parcels of land near TCS and the Mill Site MRF.
PRIMARY REVENUE SOURCES
ONGOING OPERATIONS
The Company's revenues from ongoing operations are generally derived from the
development of the Company's long-term projects. Revenues from water resources
represent payments under the lease of the Company's interest in Fontana Union to
Cucamonga County Water District ("Cucamonga"). Property redevelopment revenues
primarily reflect revenues from long-term redevelopment activities at the Mill
Site property; housing rental income, aggregate rock sales and lease payments
for the minimum security prison at the Eagle Mountain Townsite; and royalty
revenues from iron ore shipments from the Company's iron ore mine in California
(the "Silver Lake Mine"). Joint venture revenues reflect Kaiser's share of
income related to those equity investments (primarily PMI) and joint ventures
which the Company accounts for under the equity method. Prior to 1995, waste
management revenues reflected the minimum lease payments under MRC's 100-year
lease in connection with the Landfill Project.
INTERIM ACTIVITIES
Revenues from interim activities are generated from various sources primarily
related to the Mill Site Property. Significant components of interim activities
include rentals under short-term tenant lease arrangements, royalty revenues
from the sale of slag to outside contractors, water and wastewater treatment
service revenues, revenues from the sale of recyclable materials and other
miscellaneous short-term activities.
SUMMARY OF REVENUE SOURCES
Due to the development nature of certain Company projects and the Company's
recognition of revenues from bankruptcy-related and other non-recurring items,
historical period-to-period comparisons of total revenues may not be meaningful
for developing an overall understanding of the Company. Therefore, the Company
believes it is important to evaluate the trends in the components of its
revenues as well as the
32
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
recent developments regarding its long-term ongoing and interim revenue sources.
See "Part I, Item 1. Business" for a discussion of recent material events
affecting the Company's revenue sources.
In addition, due to the concentration of motorsport racing events between
April and September, PMI's operations have been, and will continue to be, highly
seasonal. Except for one event week-end in October, 1997 at TCS, PMI has no
current plans to host events in the first and fourth quarters at its existing
facilities. As a result, the Company's reported share of undistributed equity
in the earnings of PMI will likely be positive (income) in the second and third
quarters and negative (loss) in the first and fourth quarters.
RESULTS OF OPERATIONS
ANALYSIS OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
An analysis of the significant components of the Company's resource revenues
for the years ended December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 % INC. (DEC)
----------- ----------- -----------
<S> <C> <C> <C>
ONGOING OPERATIONS
Water resource....................... $ 4,505,000 $ 4,974,000 (9%)
Property redevelopment............... 1,120,000 998,000 12%
Joint venture........................ 1,539,000 162,000 850%
Mill Site land sale.................. 6,371,000 --- ---
----------- ----------- ----
TOTAL ONGOING OPERATIONS......... 13,535,000 6,134,000 121%
----------- ----------- ----
INTERIM ACTIVITIES
Lease, service and other............. 1,879,000 2,774,000 (32%)
Asset sales.......................... --- 2,200,000 (100%)
----------- ----------- ----
TOTAL INTERIM ACTIVITIES......... 1,879,000 4,974,000 (62%)
----------- ----------- ----
TOTAL RESOURCE REVENUES.......... $15,414,000 $11,108,000 39%
=========== =========== ====
REVENUES AS A PERCENTAGE OF TOTAL
RESOURCE REVENUES:
Ongoing operations................... 88% 55%
Interim activities................... 12% 45%
----------- -----------
TOTAL RESOURCE REVENUES.......... 100% 100%
=========== ===========
</TABLE>
Resource Revenues. Total resource revenues for 1996 were $15,414,000,
compared to $11,108,000 for 1995. Revenues from ongoing operations increased
121% during the year to $13,535,000 from $6,134,000 in 1995, while revenues from
interim activities declined 62% to $1,879,000 from $4,974,000 in 1995. Revenues
from ongoing operations as a percentage of total revenues increased to 88% in
1996 from 55% in 1995; however, excluding both the Mill Site land sale in 1996
and the gain on sale of water rights to CSI in 1995, ongoing operations
represented 79% and 69% of total revenues in 1996 and 1995, respectively.
Ongoing Operations. Water lease revenues under the Company's 102-year take-or-
pay lease with Cucamonga were $4,505,000 during 1996 compared to $4,974,000 for
1995. The 9% decrease in water revenues during the year reflects: (a) a
reduction affecting all parties under the Colton/Rialto Basin judgment, in the
amount of water that Cucamonga (through Fontana Union) can draw from the
33
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
Colton/Rialto Basin due to low water levels ($269,000); and (b) a likely non-
recurring reduction in the Chino Basin agricultural pool transfer relating to
increased agricultural usage and the overstatement of estimates in prior years
($201,000). As previously disclosed, Metropolitan Water District of Southern
California ("MWD"), effective July 1, 1995, implemented changed rates and a
changed rate structure which resulted in the continuing lease interpretation
dispute with Cucamonga regarding the extent of the MWD rate increases. Although
the Company is continuing to bill Cucamonga at what it believes is the correct
MWD rate under the lease with Cucamonga, the Company has elected to reserve the
full amount in dispute and report revenues on the basis of amounts actually
received from Cucamonga. The total amount of lease payments in dispute as of
December 31, 1996 is approximately $748,000. In addition, MWD has stated that
it may further refine its rate structure in the near future.
Property redevelopment revenues were $1,120,000 for 1996 compared to $998,000
for 1995. The 12% increase from 1995 is primarily as a result of higher iron
ore sales from one of the Company's California mines which more than offset
reductions in tenant rental income at Eagle Mountain.
Mill Site land sale revenues represents the sale of approximately 54.2 net
acres of the Mill Site Property, known as the Speedway Business Park, to PMI for
$5.0 million in cash and approximately $8.35 million, or 254,298 shares, of PMI
common stock. The transaction closed in December 1996. As a result of the
transaction, Kaiser increased its ownership of PMI to 1,627,900 shares or
approximately 12.29%.
Joint venture revenue increased to $1,539,000 for 1996 compared to $162,000
for 1995 as a result of an increase in the amount of project service fees paid
by PMI ($488,000) plus the Company's 12.29% (10.56% through November 30, 1996)
share of PMI's net income, net of expenses, from April 1, 1996 ($889,000). The
Company is recording its investment in PMI on the equity method and began
recording its share of PMI's net income concurrent with conversion of the
Company's preferred stock into common stock at the end of the first quarter of
1996.
Interim Activities. Revenues from interim activities for 1996 were $1,879,000
compared to $4,974,000 for 1995. As noted above, the 62% decrease in revenues
from interim activities in 1996 is primarily attributable to the non-recurring
$2.2 million gain on the sale of water rights to CSI recorded in 1995; lower
slag and scrap revenues ($156,000); service revenues under the amended Services
Agreement with CSI ($185,000) and lower miscellaneous revenues ($347,000). It
is anticipated that in 1997, these revenues will continue to decline due to the
continuing redevelopment of the Mill Site Property.
Resource Operating Costs. Resource operating costs are those costs directly
related to the resource revenue sources. Total resource operating costs for
1996 declined to $3,312,000 from $3,792,000 in 1995. Operations and maintenance
costs for 1996 were $1,092,000 compared to $1,496,000 for 1995. The 27%
decrease in 1996 operations and maintenance costs was primarily due to lower
expenses associated with the reduced levels of services being provided to CSI
and lower property taxes associated with the portion of the Mill Site Property
that was contributed to PMI for the development of the TCS. Administrative
support expenses for 1996 decreased 3% to $2,220,000 from $2,296,000 for 1995.
The decrease was primarily due to lower outside professional costs and lower
depreciation expense.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for 1996 decreased 9% to $3,837,000 from $4,201,000 for
1995. The decrease was due primarily due to savings realized as a result of the
departure of the Company's prior President & CEO at the end of 1995, and the
subsequent management realignment.
Net Interest Expense (Income). Net interest expense for 1996 was $819,000
compared to $665,000 in 1995. The increase was due primarily to the accelerated
amortization of deferred loan fees associated with
34
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
the Union Bank credit facility being offset by the capitalization of interest
expense associated with the development of certain parcels of the Mill Site
Property and higher interest income.
Income and Income Tax Provision. The Company recorded income before income
tax provision of $7,446,000 for 1996, a 204% increase from the $2,450,000
recorded in 1995. A provision for income taxes of $4,877,000 was recorded in
1996 as compared with $1,056,000 in 1995. Over 90% of the tax provisions for
1996 and 1995 are not currently payable due primarily to utilization of the
Company's net operating loss carryforwards ("NOL's"). Consequently, pretax
income is an important indicator of the Company's performance.
Net Income. For 1996, the Company reported net income after extraordinary
items of $2,569,000, or $.24 per share, a 84% increase from the $1,394,000, or
$.13 per share, reported for 1995.
ANALYSIS OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
An analysis of the significant components of the Company's resource revenues
for the years ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 % INC. (DEC)
----------- ----------- -----------
<S> <C> <C> <C>
ONGOING OPERATIONS
Water resource....................... $ 4,974,000 $ 4,820,000 3%
Property redevelopment............... 998,000 1,052,000 (5%)
Joint venture........................ 162,000 --- ---
Waste management..................... --- 2,400,000 (100%)
----------- ----------- ----
TOTAL ONGOING OPERATIONS......... 6,134,000 8,272,000 (26%)
----------- ----------- ----
INTERIM ACTIVITIES
Lease, service and other............. 2,774,000 4,199,000 (34%)
Asset sales.......................... 2,200,000 --- ---
----------- ----------- ----
TOTAL INTERIM ACTIVITIES......... 4,974,000 4,199,000 18%
----------- ----------- ----
TOTAL RESOURCE REVENUES.......... $11,108,000 $12,471,000 (11%)
=========== =========== ====
REVENUES AS A PERCENTAGE OF TOTAL
RESOURCE REVENUES:
Ongoing operations................... 55% 66%
Interim activities................... 45% 34%
----------- -----------
TOTAL RESOURCE REVENUES.......... 100% 100%
=========== ===========
</TABLE>
Resource Revenues. Total resource revenues for 1995 were $11,108,000,
compared to $12,471,000 for 1994. Revenues from ongoing operations declined 26%
during the year to $6,134,000 from $8,272,000 in 1994, while revenues from
interim activities increased 18% to $4,974,000 from $4,199,000 in 1994.
Revenues from ongoing operations as a percentage of total revenues decreased to
55% in 1995 from 66% in 1994; however, excluding the non-recurring gain on the
sale of water rights to CSI, ongoing operations represented 69% of total
revenues.
Ongoing Operations. Water lease revenues under the Company's lease with
Cucamonga were $4,974,000 during 1995 compared to $4,820,000 for 1994. The 3%
increase in water revenues during the year reflects the July, 1995, 5.1%
increase in water rates of The Metropolitan Water District of Southern
California ("MWD") offset by a small decline, from 56.11% in 1994 to 55.53% in
1995, in the Company's
35
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
effective interest in Fontana Union. The total amount of lease payments in
dispute as of December 31, 1995 was approximately $80,000.
Property redevelopment revenues were $998,000 for 1995 compared to $1,052,000
for 1994. The 5% reduction from 1994 primarily represents lower aggregate and
rocks sale revenues at Eagle Mountain.
Joint venture revenue increased to $162,000 as a result of the initial project
service fees paid by PMI.
There were no waste management revenues during 1995 compared to $2,400,000 in
1994 as a result of the Company's acquisition of a 70% equity interest in MRC
effective January 1, 1995, and the elimination of MRC's minimum monthly rent
payments to the Company. Elimination of the maximum monthly rent payments will
not, however, affect the payments due the Company upon the commencement of
landfill operations.
Interim Activities. Revenues from interim activities for 1995 were $4,974,000
compared to $4,199,000 for 1994. As noted above, the 18% increase in revenues
from interim activities in 1995 is primarily attributable to the $2.2 million
gain on the sale of water rights to CSI being partially offset by lower levels
of service revenues under the amended Services Agreement with CSI ($1,457,000)
and lower miscellaneous revenues ($276,000).
Resource Operating Costs. As is noted above, resource operating costs are
those costs directly related to the resource revenue sources. Total resource
operating costs for 1995 declined to $3,792,000 from $5,163,000 in 1994.
Operations and maintenance costs for 1995 were $1,496,000 compared to $1,970,000
for 1994. The 24% decrease in 1995 operations and maintenance costs was
primarily due to lower expenses associated with the reduced levels of services
being provided to CSI and lower property taxes at the Mill Site Property.
Administrative support expenses for 1995 decreased 28% to $2,296,000 from
$3,193,000 for 1994. The decrease was primarily due to non-recurring
environmental cleanup costs in 1994 relating to two Mill Site tenants that went
out of business and lower legal expenses.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for 1995 increased 22% to $4,201,000 from $3,430,000 for
1994. The increase was due primarily to expenses related to the departure of
the Company's President and CEO and the resulting management realignment.
Net Interest Expense (Income). Net interest expense for 1995 was $665,000,
compared with net interest income of $155,000 in 1994. The fluctuation was due
primarily to lower average cash balances on hand during 1995 and interest
expense on the $6.0 million note issued as part of the purchase of properties
from the Lusk Joint Ventures in July, 1994.
Income and Income Tax Provision. The Company recorded income before income
tax provision of $2,450,000 for 1995, a 39% decrease from the $4,033,000
recorded in 1994. A provision for income taxes of $1,056,000 was recorded in
1995 as compared with $1,746,000 in 1994. Over 90% of the tax provisions for
1995 and 1994 are not currently payable due primarily to utilization of the
Company's net operating loss carryforwards ("NOL's").
Income Before Extraordinary Loss. For 1995, the Company reported income
before extraordinary loss of $1,394,000, or $.13 per share, a decrease of 39%
from the $2,287,000, or $.21 per share, reported for 1994.
UMWA Extraordinary Loss (Net of Taxes). As previously disclosed, the Company,
together with Kaiser Coal and the KSC bankruptcy estate "(KSC Recovery"),
settled all outstanding claims with the
36
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
UMWA Combined Benefit Fund and 1992 Benefit Trust in 1994. The Company's share
of the settlement was $3,788,000. As a result, for 1994 the Company recorded an
extraordinary loss (net of taxes) of $2,233,000.
Net Income. For 1995, the Company reported net income after extraordinary
items of $1,394,000, or $.13 per share, a 25 fold increase from the $54,000, or
$.01 per share, reported for 1994.
COMPREHENSIVE INCOME
The Financial Accounting Standards Board ("FASB") proposed, in 1996, a new
accounting statement concerning the reporting of comprehensive income.
Comprehensive income is defined as the aggregate of all changes in shareholder's
equity that occurred during the reporting periods other than changes resulting
from equity investments by or dividends and distributions to shareholders. The
purpose of the FASB proposal, which has not been adopted by the FASB and is,
therefore, not considered a generally accepted accounting principle, is to
highlight and disclose all transactions that impact shareholders equity
regardless of whether or not they flow through the consolidated income
statement. Comprehensive income, which should not be used as a replacement for
net income, is a very meaningful performance measure for Kaiser because of the
amount of deferred tax expense credited directly to equity caused by the
Company's NOL carryforwards and because of the impact of other transactions such
as the increase in equity due to the 1996 PMI public offering. Comprehensive
income and comprehensive income per share for the years ended December 31, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- -------
<S> <C> <C> <C>
Net Income ............................... $ 2,569,000 $1,394,000 $54,000
Deferred tax expense credited to equity... 3,945,000 335,000 38,000
Increase in investment in Penske
Motorsports, Inc......................... 6,116,000 --- ---
----------- ---------- -------
Comprehensive income...................... 12,630,000 1,729,000 92,000
=========== ========== =======
Comprehensive income per share............ $ 1.18 $ .16 $ .01
=========== ========== =======
Net Earning per share..................... $ .24 $ .13 $ .01
=========== ========== =======
</TABLE>
SECTION 2: FINANCIAL POSITION
Cash, Cash Equivalents and Short-Term Investments. The Company defines cash
equivalents as highly liquid debt instruments with original maturities of 90
days or less. Cash and cash equivalents decreased $2,455,000 to $8,482,000 at
December 31, 1996 from $10,937,000 at December 31, 1995. Included in cash and
cash equivalents is $1,766,000 and $2,309,000 held solely for the benefit of MRC
at December 31, 1996 and 1995, respectively. The decrease in cash and cash
equivalents is due primarily to the $9,273,000 in capital expenditures and
$6,595,000 in environmental remediation, incurred in 1996 being offset by: (a)
$5.0 million in cash from the sale of the Speedway Business Park Property to
PMI; (b) net cash proceeds of approximately $3,400,000 from the 1995 CSI and
environmental insurance settlements; and (c) $3,000,000 of new borrowings under
the Union Bank credit facility.
Working Capital. During 1996, current assets decreased $8,811,000 to
$11,818,000 while current liabilities decreased $4,750,000 to $13,058,000. The
decrease in current assets resulted primarily from the $2,455,000 decrease in
cash and cash equivalents, discussed above, plus a $6,356,000 decline in
accounts receivable due primarily to the receipt of over $6,000,000 in gross
proceeds from the CSI and environmental insurance settlements. The decrease in
current liabilities resulted primarily from payments under terms of the CSI
Settlement Agreement, and attorney fees arising from the Company's environmental
insurance litigation settlement. Current liabilities at December 31, 1996, and
1995 include $1,616,000 and
37
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
$1,608,000, respectively, in accounts payable and accrued liabilities relating
to MRC. As a result, working capital decreased during 1996 by $4,0612,000 to a
negative $1,240,000 at December 31, 1996.
Real Estate. Real Estate decreased $3.2 million during 1996 primarily because
of the sale of Speedway Business Park to PMI in December being partially offset
by the development expenditures incurred during 1996.
Investments. The increase in investment in PMI is primarily related to the
increase in the equity investment in PMI as a result of PMI's initial public
offering in March 1996 ($6,513,000); the Company's recording of its share of
equity in PMI's undistributed earnings subsequent to the public offering in
March ($889,000), and the sale of Speedway Business Park to PMI for cash and
$8,352,000 in common stock in PMI in December, 1996. As a result of the initial
public offering, the Company increased its recorded investment in PMI, by
approximately $6.5 million, to reflect its diluted share of the increase in
shareholders equity of PMI that was generated by the public offering. The
Company also recorded corresponding increases in deferred income taxes and
stockholders equity of approximately $400,000 and $6.1 million, respectively.
Other Assets. The increase in other assets is primarily related to
approximately $4.0 million of capitalized landfill permitting and development
costs for MRC being partially offset by the amortization of deferred loan fees
relating to the Union Bank Credit Facility.
Environmental Remediation. As is discussed extensively in Part I, "Property
Redevelopment, Mill Site Environmental", the Company estimates, based upon
current information, that its future remediation and other environmental costs
for the balance of its land and related matters, including groundwater and other
possible third party claims, will be between approximately $20 million and $32
million, depending both upon the ultimate extent of the environmental
remediation and clean-up effort involved and which approved remediation
alternatives are eventually selected. In order to provide better information
regarding these future remediation and other environmental costs, the Company
has elected to restate its balance sheets to show as a separate liability rather
than, as previously, an offset to land, the amount of future environmental
related costs reflected in its financial statements. The restatement reflects
the original $34.7 million remediation adjustment to land; the $6.6 million
groundwater remediation reserve recorded in 1988 when the Company emerged from
bankruptcy as the reorganized successor of KSC; and the net $12.5 million in
environmental insurance litigation settlement proceeds received in 1995 being
offset by approximately $21.6 million in remediation and other environmental
costs expended through December 31, 1996. The Company's decision to restate its
balance sheet is based upon, among other things, the more extensive
investigation and remediation activities that have been pursued over the past
two years and the Company's ability to better estimate the probable range of
future remediation and other environmental costs.
As of December 31, 1996, the total short-term and long-term environmental
liabilities including remediation reflected on the Company's balance sheet was
approximately $32.2 million, the high end of the probable range of future
remediation and other environmental costs, which declined from the $39.4 million
as of December 31, 1995. The decrease is a result, primarily, of the $7.2
million in remediation and other environmental costs incurred in 1996 on the
Mill Site property.
Although ongoing environmental investigations are being conducted on the Mill
Site Property and management believes it is currently in a position to estimate
with some reasonable certainty future investigation and remediation costs, there
can be no assurance that the actual amount of environmental remediation
expenditures to be incurred will not substantially exceed those currently
anticipated or that additional areas of contamination may not be identified.
Accordingly, future facts and circumstances could cause these estimates to
change significantly.
38
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
Long-term Debt. As of December 31, 1996, the Company had $8,102,000 in long-
term debt comprised of $5,102,000 of debt issued as part of the purchase of
properties from the Lusk Joint Ventures in July 1994 and $3.0 million borrowed
under the $20,000,000 revolving-to-term credit facility with Union Bank.
Long-term Liabilities. The increase in other long-term liabilities is
primarily due to $1,237,000 in other additional deferred tax liabilities
recorded during 1996.
Minority Interest and Other Liabilities. As of December 31, 1996, the Company
has recorded $1,618,000 of minority interest relating to MRC in which the
Company had approximately a 73% equity interest.
Contingent Liabilities. The Company has contingent liabilities more fully
described in the notes to the financial statements.
SECTION 3: BUSINESS OUTLOOK
The statements contained in this Business Outlook are based upon current
expectations. In addition to the forward-looking statements and information
contained elsewhere in this 10-K Report, these statements are forward-looking
and, therefore, actual results may differ materially.
On-Going Operations. As noted above, the Company's revenues from ongoing
operations are generally derived from the development of the Company's major
long-term projects and investments. The development of a number of these
projects and investments, such as the 102-year take-or-pay lease with Cucamonga
and the 12.29% equity ownership in PMI, are essentially complete and the Company
is recognizing significant revenues and income from these investments. The
Company expects revenues from these projects and investments to increase
moderately over time as certain key economic factors impacting these projects
and investments increase.
In regard to the lease with Cucamonga, the most significant economic factor
affecting future water lease revenues is likely to be adjustments in the MWD
rate for untreated and non-interruptible water as available through the Chino
Basin Municipal Water District (the "Lease Rate") upon which the lease payments
are calculated. The MWD rate established for untreated, non-interruptible water
is based on a number of factors, including MWD's need for funds to finance
capital improvements and to cover large fixed overhead costs. After increasing
at an average of over 9.0% per year during the past 35 years, MWD is projecting
that the MWD rate for untreated, non-interruptible water, including all of the
changed rates and charges implemented by MWD since July 1, 1995, will likely
increase at less than 5.0% per year for the next 3-5 years. This reduction is
due to a reduced capital budget, lower overhead, lower borrowing costs and
reduced levels of inflation. Also affecting the Company's future water lease
revenues is the dispute with Cucamonga regarding the calculation of the Lease
Rate. A ruling in favor of the Company would result in the receipt of all or a
portion of the $748,000 of lease payments in dispute as of December 31, 1996,
which the Company has fully reserved.
In regard to the Company's 12.29% investment in PMI, the most significant
factors affecting the Company's future joint venture income from PMI will be the
increased revenues and net income generated by PMI from the expansion of its
professional motorsports operations. Critical to this expansion is the
successful startup of the TCS that is on land acquired from the Company.
Construction of TCS is virtually completed and it will hold its first major
races, the International Race of Champions and a NASCAR Winston West Series
race on June 21, 1997, followed by the "NAPA 500" NASCAR Winston Cup race, on
June 22, 1997. Three other major events,
39
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
the "Marlboro 500" CART PPG World Series Event on September 28, 1997 and a
NASCAR Busch Series race on October 17, 1997, and a Sears Craftsman Truck Series
on October 18, 1997, are also scheduled. The success of these events, coupled
with the results of the other ten major racing events schedule for PMI's MIS
and Nazareth speedways and PMI's other motorsports related operations, will
determine the amount of income from equity method investments the Company
reports in the future.
The Company is also spending a significant amount of capital in the continued
development of its two other major project and investment opportunities: the
redevelopment of the remaining approximately 668 acres (gross) of the Company's
Mill Site Property and the re-permitting of the Eagle Mountain Landfill by MRC,
the Company's 73% owned subsidiary. If it is successful in completing the
development of these two projects as planned, the Company expects to generate
significant future revenues and net income from them. However, as is noted
elsewhere in this Report, there are also numerous risks associated with
completing the re-permitting of the Eagle Mountain Landfill and the
redevelopment of the remaining Mill Site Property that could materially impact
the Company's future revenues and net income from these projects.
In regard to the redevelopment of the remaining approximately 668 acres
(gross) of the Mill Site Property, the Company is currently undertaking efforts
to obtain the entitlement and permits necessary to develop the remaining 668
acres for a variety of possible commercial, industrial and recreational uses.
These efforts, which will continue throughout 1997 and into 1998, include the
approval of possible changes that would alter and improve the existing access to
portions of the Mill Site Property. In support of these efforts, the Company
expects to spend, in 1997, up to approximately $7.0 million for required
environmental remediation and approximately $3.5 million for real estate
entitlement and improvement expenditures. The $7.0 million to be spent in 1997
for required environmental remediation is a component of the $20-32 million
estimate to complete all remaining required remediation for the Mill Site
Property. In addition, substantial capital expenditures beyond the $3.5 million
projected for 1997 will be required to complete the necessary on-site and off-
site improvements for the redevelopment of remaining Mill Site property.
In regard to the Eagle Mountain Landfill, MRC continues to pursue the
activities necessary to re-permit the Landfill Project. The final EIR/EIS has
been completed and released and is being reviewed by the Riverside County
Planning Commission. Once the Planning Commission completes its review, it will
forward the EIR/EIS with its recommendations to the Riverside County Board of
Supervisors. The Company expects that the Supervisors will act on the Landfill
Project during the middle of 1997; however, there are a number of issues and
actions that could delay such action. In addition, even if the Supervisors
approve the Landfill Project, the Company anticipates further litigation by the
opponents to the Landfill Project in state and federal court in an effort to
block the Landfill Project. The Company expects to spend approximately $3.7
million for support of MRC's landfill re-permitting efforts in 1997 and
approximately an additional $1.9 million in 1998.
Capital Resources. The Company expects that its current cash balances and
short-term investments together with: (a) cash provided from operating
activities; (b) amounts available under its revolving-to-term credit facility
which was increased from $20,000,000 to $30,000,000 subsequent to December 31,
1996 (less $2,832,000 in reductions in the borrowing base and $5,505,000
reserved for financial assurances required by the DTSC and relating to
environmental remediation on the Mill Site Property) will be sufficient to
satisfy both the Company's near-term operating cash requirements and to enable
the Company to continue to fund the development of its long-term projects and
investments. As was discussed in more detail above, the Company expects to
commit, in 1997, a total of approximately $14.2 million for capital projects and
investments. To the extent that additional capital resources are required, such
capital will be raised through bank borrowings, partnerships, joint venture
arrangements, additional equity or the sales or monetization of assets.
40
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
Improved Cash Flow from Use of Net Operating Loss Tax Carryforwards. Due to
the Company's status as successor to KSC and its use of KSC-related NOLs, income
taxes actually paid by the Company are substantially less than the income tax
provision reported in its financial statements. The tax benefit associated with
the utilization of these NOLs is reflected as an increase to stockholders'
equity rather than as an increase to net income. The Company expects that its
use of these NOLs will substantially reduce the cash paid for income taxes until
these NOLs are fully utilized. The total NOLs at December 31, 1996, are
estimated to be approximately $107,000,000 for federal purposes and $11,000,000
for California purposes. The federal NOLs expire in varying amounts over a
period from year 2000 to 2010 while the California NOLs expire in year 1997 and
2000.
If within a three-year period, 50% or more of the stock of the Company changes
ownership, the future annual use of NOLs may be limited. The annual limitation
would be calculated as the product of: (i) the highest long-term tax-exempt
rate for a designated period prior to the ownership change; and (ii) the market
value of the Company at such time.
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.
41
<PAGE>
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 1997
Annual Meeting of Stockholders (the "1997 Proxy Statement"), a definitive copy
of which will be filed within 120 days of December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
Executive Compensation Section of the 1997 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 1997
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the 1997
Proxy Statement.
42
<PAGE>
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:
<TABLE>
<CAPTION>
(1) Financial Statements Page
-------------------- ----
<S> <C>
Report of Independent Auditors............................... 54
Consolidated Balance Sheets.................................. 55
Consolidated Statements of Income............................ 57
Consolidated Statements of Cash Flows........................ 58
Consolidated Statements of Changes in Stockholders' Equity... 59
Notes to Consolidated Financial Statements................... 60
<CAPTION>
(2) Financial Statement Schedules
-----------------------------
<S> <C>
II Valuation and Qualifying Accounts and Reserves........ 76
</TABLE>
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:
43
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX
(* INDICATES COMPENSATION PLAN, CONTRACT OR ARRANGEMENT)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------------- ------------------------------------------------------------
<S> <C>
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.
</TABLE>
44
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------------- ------------------------------------------------------------
<S> <C>
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
icorporated 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.
10.2. 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 Option Agreement dated July 22, 1994, among Kaiser Resources
Inc., Kaiser Steel Land Development, Inc., The Lusk Company,
The Lusk Ontario Industrial Partners II, Ltd., Kaiser-Lusk
West Joint Venture, and Kaiser- Lusk Valley Boulevard Joint
Venture, incorporated by reference from Exhibit 3 of the
Company's Form 10-Q Report for the period ending June 30,
1994.
</TABLE>
45
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------------- ------------------------------------------------------------
<S> <C>
10.2.2 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).
10.4* Employment Agreement between Kaiser Ventures Inc. and
Richard E. Stoddard, dated effective January 1, 1996,
incorporated by reference from Exhibit 10.4 of the Company's
Form 10-K Report for the year ended December 31, 1995.
10.5* Employment Agreement between Kaiser Ventures Inc. and Gerald
A. Fawcett, dated effective January 1, 1996 incorporated by
reference from Exhibit 10.5 of the Company's Form 10-K
Report for the year ended December 31, 1995.
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.
</TABLE>
46
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------------- ------------------------------------------------------------
<S> <C>
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 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 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.
10.11 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 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.
10.12.1 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).
10.12.2 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.
10.13 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.
</TABLE>
47
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------------- ------------------------------------------------------------
<S> <C>
10.14 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.
10.15* 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.
10.16* 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).
10.17* 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.
10.17.1* 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).
10.18 Joint Venture Agreement for Inland Empire Resource Recovery,
incorporated by reference from Exhibit 10.17 of the
Company's Form 10-K Report for the year ended December 31,
1991.
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).
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.
</TABLE>
48
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------------- ------------------------------------------------------------
<S> <C>
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.
10.28 Conditional Demand Registration Report Agreement between
Penske Motorsports, Inc. and Kaiser Ventures Inc.
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.
</TABLE>
49
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------------- ------------------------------------------------------------
<S> <C>
10.29.1 First Amendment of Credit and Term Loan Agreement between
Fontana Water Resources, Inc. and Union Bank, dated January
30, 1997.
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 January 30, 1997.
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.
21 The Company has eight 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
</TABLE>
50
<PAGE>
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, 1997
KAISER VENTURES INC.
By: /s/ Richard E. Stoddard
---------------------------------------
Name: Richard E. Stoddard
---------------------------------------
Title: Chief Executive Officer and
---------------------------------------
Chairman of the Board
---------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
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)
51
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
Each person whose signature appears below constitutes and appoints RICHARD E.
STODDARD and GERALD A. FAWCETT 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
1. Principal Executive Officer
/s/ Richard E. Stoddard Chief Executive Officer and March 31, 1997
---------------------------- Chairman of the Board
Richard E. Stoddard
2. President
/s/ Gerald A. Fawcett President and Chief Operating March 31, 1997
---------------------------- Officer
Gerald A. Fawcett
3. Principal Financial and
Accounting Officer
/s/ James F. Verhey Sr. Vice President Finance and March 31, 1997
---------------------------- Chief Finance Officer
James F. Verhey
</TABLE>
52
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
4. Directors
/s/ Ronald E. Bitonti Director March 31, 1997
---------------------------
Ronald E. Bitonti
/s/ Todd G. Cole Director March 31, 1997
---------------------------
Todd G. Cole
/s/ Reynold C. MacDonald Director March 31, 1997
---------------------------
Reynold C. MacDonald
/s/ William J. Morgan Director March 31, 1997
---------------------------
William J. Morgan
/s/ Charles E. Packard Director March 31, 1997
---------------------------
Charles E. Packard
/s/ Thomas S. Rabone Director March 31, 1997
---------------------------
Thomas S. Rabone
/s/ Lyle B. Stevenson Director March 31, 1997
---------------------------
Lyle B. Stevenson
/s/ Marshall F. Wallach Director March 31, 1997
---------------------------
Marshall F. Wallach
</TABLE>
53
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
Kaiser Ventures Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Kaiser
Ventures Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of income, cash flows, and stockholders'
equity for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Kaiser Ventures Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Riverside, California
February 11, 1997
54
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(As Restated)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................... $ 8,482,000 $ 10,937,000
Accounts receivable and other, net of allowance
for doubtful accounts of $1,034,000 and
$494,000, respectively............................. 3,217,000 3,330,000
CSI Settlement receivable........................... --- 3,661,000
Insurance Settlement receivable..................... 119,000 2,701,000
------------ ------------
11,818,000 20,629,000
------------ ------------
Investment in common stock of Penske Motorsports, Inc.
(Fair market value of 1,627,923 shares equal to
$41,512,000 as of December 31, 1996).................. 38,863,000 22,991,000
------------ ------------
Investment in Fontana Union Water Company.............. 16,108,000 16,108,000
------------ ------------
Real Estate
Land and improvements............................... 51,122,000 49,908,000
Real estate under development....................... 7,545,000 11,920,000
------------ ------------
58,667,000 61,828,000
------------ ------------
Other Assets
Landfill permitting and development................. 5,645,000 1,660,000
Buildings and equipment (net)....................... 2,210,000 2,433,000
Other assets and investments........................ 756,000 1,154,000
------------ ------------
8,611,000 5,247,000
------------ ------------
Total Assets........................................... $134,067,000 $126,803,000
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
55
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
<TABLE>
<CAPTION>
1996 1995
------------ ------------
(As Restated)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable....................... $ 2,936,000 $ 4,065,000
Accrued liabilities.................... 4,125,000 6,268,000
Current portion of long-term debt...... 240,000 240,000
Environmental remediation.............. 5,757,000 7,235,000
------------ ------------
13,058,000 17,808,000
------------ ------------
Long-term Liabilities
Accrued liabilities.................... 1,417,000 1,111,000
Deferred tax liabilities............... 1,958,000 721,000
Long-term debt......................... 8,102,000 5,342,000
Environmental remediation.............. 26,466,000 32,176,000
------------ ------------
37,943,000 39,350,000
------------ ------------
Total Liabilities......................... 51,001,000 57,158,000
------------ ------------
Minority Interest......................... 1,618,000 948,000
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Common stock, par value $.03 per
share, authorized 13,333,333 shares;
issued and outstanding 10,488,114
and 10,470,614 respectively........... 315,000 314,000
Capital in excess of par value......... 70,437,000 60,256,000
Retained earnings since November 15,
1988.................................. 10,696,000 8,127,000
------------ ------------
Total Stockholders' Equity................ 81,448,000 68,697,000
------------ ------------
Total Liabilities and Stockholders'
Equity................................... $134,067,000 $126,803,000
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
56
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
RESOURCE REVENUES
Ongoing Operations
Water resource................... $ 4,505,000 $ 4,974,000 $ 4,820,000
Property redevelopment........... 1,120,000 998,000 1,052,000
Income From Equity Method
Investments..................... 1,539,000 162,000 ---
Mill Site land sale.............. 6,371,000 --- ---
Waste management................. --- --- 2,400,000
----------- ----------- -----------
Total ongoing operations....... 13,535,000 6,134,000 8,272,000
----------- ----------- -----------
Interim Activities
Lease, service and other......... 1,879,000 2,774,000 4,199,000
Asset sales...................... --- 2,200,000 ---
----------- ----------- -----------
Total interim activities....... 1,879,000 4,974,000 4,199,000
----------- ----------- -----------
Total resource revenues........ 15,414,000 11,108,000 12,471,000
----------- ----------- -----------
RESOURCE OPERATING COSTS
Operations and maintenance............. 1,092,000 1,496,000 1,970,000
Administrative support expenses........ 2,220,000 2,296,000 3,193,000
----------- ----------- -----------
Total resource operating costs. 3,312,000 3,792,000 5,163,000
----------- ----------- -----------
INCOME FROM RESOURCES................... 12,102,000 7,316,000 7,308,000
Corporate general and administrative
expenses.............................. 3,837,000 4,201,000 3,430,000
----------- ----------- -----------
INCOME FROM OPERATIONS.................. 8,265,000 3,115,000 3,878,000
Net interest expense (income).......... 819,000 665,000 (155,000)
----------- ----------- -----------
INCOME BEFORE INCOME TAX PROVISION AND
EXTRAORDINARY LOSS..................... 7,446,000 2,450,000 4,033,000
Income tax provision
Currently payable................ 92,000 --- 125,000
Deferred tax expense............. 840,000 721,000 ---
Deferred tax expense credited to
equity.......................... 3,945,000 335,000 1,621,000
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY LOSS........ 2,569,000 1,394,000 2,287,000
EXTRAORDINARY LOSS (NET OF INCOME TAXES
OF $1,705,000) --- --- 2,233,000
----------- ----------- -----------
NET INCOME.............................. $ 2,569,000 $ 1,394,000 $ 54,000
=========== =========== ===========
EARNINGS PER SHARE BEFORE EXTRAORDINARY
LOSS................................... $.24 $.13 $.21
=========== =========== ===========
NET EARNINGS PER SHARE.................. $.24 $.13 $.01
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING............................ 10,716,032 10,671,665 10,671,154
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
57
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 2,569,000 $ 1,394,000 $ 54,000
Provision for income tax which is
credited to equity.................. 3,945,000 335,000 38,000
Equity income in Penske Motorsports,
Inc................................. (889,000) --- ---
Deferred tax expense................. 840,000 721,000 ---
Depreciation and amortization........ 952,000 436,000 430,000
Extraordinary loss (paid) accrued.... --- (3,938,000) 3,938,000
Gain on sale of Speedway Business
Park................................ (6,371,000) --- ---
Gain from the CSI Settlement......... --- (2,200,000) ---
Allowance for doubtful accounts...... 36,000 258,000 (148,000)
Changes in assets:
Receivable and other............. 77,000 (755,000) 446,000
Changes in liabilities:
Current liabilities.............. (2,810,000) 798,000 (880,000)
Long-term accrued liabilities.... 306,000 --- ---
----------- ----------- -----------
Net cash flows from operating
activities.......................... (1,345,000) (2,951,000) 3,878,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Minority interest and other
liabilities......................... 670,000 1,538,000 ---
Proceeds from the sale of Speedway
Business Park....................... 5,000,000 --- ---
Proceeds from the CSI Settlement..... 3,661,000 --- ---
Capital expenditures................. (9,273,000) (1,605,000) (1,334,000)
Environmental remediation
expenditures........................ (6,595,000) (5,950,000) (1,698,000)
Environmental insurance proceeds
(net)............................... 2,582,000 13,823,000 ---
Investment in Penske Motorsports,
Inc................................. 232,000 (309,000) (250,000)
Other investments.................... (268,000) (184,000) (100,000)
Short-term investments and marketable
securities.......................... --- 3,624,000 6,418,000
Investment in Fontana Union Water Co. --- (62,000) ---
Purchase of Lusk Joint Venture
Properties.......................... --- --- (8,814,000)
----------- ----------- -----------
Net cash flows from investing
activities.......................... (3,991,000) 10,875,000 (5,778,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock............. 121,000 166,000 46,000
Borrowing under revolver-to-term
credit facility..................... 3,000,000 --- ---
Principal payments on note payable... (240,000) (358,000) (60,000)
Payment of loan fees................. --- --- (761,000)
----------- ----------- -----------
Net cash flows from financing
activities.......................... 2,881,000 (192,000) (775,000)
----------- ----------- -----------
NET CHANGES IN CASH AND CASH
EQUIVALENTS........................... (2,455,000) 7,732,000 (2,675,000)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR................................ 10,937,000 3,205,000 5,880,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 8,482,000 $10,937,000 $ 3,205,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
58
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
---------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993..... 10,427,962 $313,000 $59,672,000 $ 6,679,000 $66,664,000
Provision for income tax,
credited to equity........... --- --- 38,000 --- 38,000
Issuance of shares of
common stock................. 9,400 --- 46,000 --- 46,000
Net Income.................... --- --- --- 54,000 54,000
---------- -------- ----------- ----------- -----------
Balance at December 31, 1994..... 10,437,362 313,000 59,756,000 6,733,000 66,802,000
---------- -------- ----------- ----------- -----------
Provision for income tax,
credited to equity........... --- --- 335,000 --- 335,000
Issuance of shares of
common stock................. 33,252 1,000 165,000 --- 166,000
Net Income.................... --- --- --- 1,394,000 1,394,000
---------- -------- ----------- ----------- -----------
Balance at December 31, 1995..... 10,470,614 314,000 60,256,000 8,127,000 68,697,000
---------- -------- ----------- ----------- -----------
Increase in investment in
Penske Motorsports, Inc. due
to public offering........... --- --- 6,116,000 --- 6,116,000
Provision for income tax,
credited to equity........... --- --- 3,945,000 --- 3,945,000
Issuance of shares of
common stock................. 17,500 1,000 120,000 --- 121,000
Net Income.................... --- --- --- 2,569,000 2,569,000
---------- -------- ----------- ----------- -----------
Balance at December 31, 1996..... 10,488,114 $315,000 $70,437,000 $10,696,000 $81,448,000
========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
59
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
On November 16, 1988, the Company began operations as Kaiser Steel Resources,
Inc. upon the successful completion of the reorganization of Kaiser Steel
Corporation ("KSC") under Chapter 11 of the Bankruptcy Code. The Company has
changed its name twice since reorganization in June 1993 and 1995, to Kaiser
Resources Inc. and to Kaiser Ventures Inc. ("Kaiser" or the "Company"),
respectively.
The Company's business focuses on the long-term development of its principal
assets including water resources, land and waste management assets. The
development of these assets is financed primarily through joint venture and
long-term lease arrangements. Ongoing operations refer to those revenue
resources which the Company is developing over the long-term while interim
activities refer to those revenue resources which are temporary or short-term in
nature and which are earned while the Company is evaluating the appropriate
long-term use of the asset or property.
At December 31, 1996, the Company's long-term emphasis is on the further
development of its principal assets: (i) a 50.88% interest in Fontana Union
Water Company ("Fontana Union"), a mutual water company; (ii) a 12.29% interest
in Penske Motorsports, Inc. ("PMI"), a public professional motorsports company
that, among other projects, is developing the California Speedway on land
acquired from the Company; (iii) approximately a 73% interest in Mine
Reclamation Corporation ("MRC"), the developer of the Eagle Mountain Landfill
Project (the "Landfill Project"); (iv) approximately 668 acres of the former
Kaiser Steel Corporation ("KSC") steel mill site (the "Mill Site Property"); and
(v) the 11,350 acre idle iron ore mine in the California desert (the "Eagle
Mountain Site"), which includes the associated 460 acre town of Eagle Mountain
("Eagle Mountain Townsite") and the land leased to MRC for the Landfill Project.
The Company is also pursuing other related longer-term growth opportunities on
the balance of its Mill Site Property, including the development of a transfer
station and materials recovery facility on the ("Mill Site MRF") and the
redevelopment of industrial and commercial parcels of land adjoining the
California Speedway and the Mill Site MRF.
The Company's consolidated financial statements include the following
significant entities: Fontana Water Resources, Inc., Kaiser Steel Land
Development, Inc., Eagle Mountain Reclamation, Inc., Lake Tamarisk Development
Corporation, Kaiser Eagle Mountain, Inc. and Mine Reclamation Corporation. See
Note 2 below for additional information concerning the Company's subsidiaries.
ONGOING OPERATIONS
The Company's revenues from ongoing operations are generally derived from the
development of the Company's long-term projects. Revenues from water resources
represent payments under the lease of the Company's interest in Fontana Union to
Cucamonga County Water District ("Cucamonga"). Property redevelopment revenues
primarily reflect revenues from long-term development activities at the Mill
Site Property; land sales; housing rental income, aggregate rock sales and lease
payments for the minimum security prison at the Eagle Mountain Townsite; and
royalty revenues from iron ore shipments from the Company's iron ore mine in
California (the "Silver Lake Mine"). Income from equity method investments
reflect Kaiser's share of income related to those equity investments (primarily
PMI) and joint ventures which the Company accounts for under the equity method.
Prior to 1995, waste management revenues reflected the minimum lease payments
under MRC's 100-year lease in connection with the Landfill Project.
60
<PAGE>
INTERIM ACTIVITIES
Revenues from interim activities are generated from various sources primarily
related to the Mill Site Property. Significant components of interim activities
include rentals under short-term tenant lease arrangements, royalty revenues
from the sale of slag to outside contractors, water and wastewater treatment
service revenues, revenues from the sale of recyclable materials and other
miscellaneous short-term activities.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The stated value of the assets and liabilities of the Company were carried
forward from those of KSC except as adjusted in reorganization.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries and majority owned investments, except as
specified below. Intercompany accounts and transactions have been eliminated.
Fontana Union Water Company ("Fontana Union"). The Company, through its
wholly-owned subsidiary Fontana Water Resources, Inc. ("FWR"), owns 50.88% of
Fontana Union, a mutual water company, which entitles the Company to its
proportionate share of Fontana Union water. The Company has effectively
transferred its control in Fontana Union to Cucamonga pursuant to a 102-year
lease of its Fontana Union shares ("Cucamonga Lease") which the Company
entered into in March 1989 and which was amended in 1989, 1992 and 1993.
Therefore, Kaiser receives no direct benefit from nor has any direct exposure to
the operations or financial performance of Fontana Union. Consequently,
Kaiser's investment in Fontana Union is recorded on the cost method with
revenues from the Cucamonga Lease being recorded on a current basis pursuant
to the terms and conditions of the Lease. (See Note 9).
KSC Recovery, Inc. ("KSC Recovery"). The Company's wholly-owned subsidiary,
KSC Recovery, Inc., which is governed and controlled by a Bankruptcy Court
approved Plan of Reorganization, acts solely as an agent for KSC's former
creditors in pursuing bankruptcy related adversary litigation and administration
of the KSC bankruptcy estate. Kaiser exercises no significant control or
influence over nor does Kaiser have any interest in the operations, assets or
liabilities of KSC Recovery except as provided by the terms of the approved Plan
of Reorganization. In addition, all costs and expenses of KSC Recovery are
funded by KSC Recovery's cash on hand and potential future recoveries. It is
anticipated that the bankruptcy estate of KSC Recovery expects to make all final
distributions within the next 12 to 18 months. Consequently, activity of KSC
Recovery is not included in Kaiser's financial statements; however, KSC Recovery
is a member of the Kaiser consolidated group for tax purposes and is therefore,
included in the consolidated tax return.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of 90 days or less to be cash equivalents. The Company
maintains its cash balances with high quality financial institutions and are
insured by the Federal Deposit Insurance Corporation up to $100,000 at each
institution.
REAL ESTATE
61
<PAGE>
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of (FASB 121), the
Company records impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. There has been no requirement to record
impairment losses on the Company's assets under FASB 121.
Interest and property taxes related to real estate under development are
capitalized during periods of development.
INVESTMENT IN PENSKE MOTORSPORTS, INC.
The Company accounts for its investment in Penske Motorsports, Inc. ("PMI")
under the equity method of accounting because the Company exercises significant
influence over the operations of PMI through its representation on the Board of
Directors and Board Committees.
DEFERRED COSTS
Included in other assets are deferred loan fees of $761,000 incurred in 1994,
which are being amortized over the life of the related loan on a straight-line
basis. Amortization of these deferred loan fees, which is included in net
interest expense (income) was $666,000, $77,000, and $18,000 for 1996, 1995 and
1994, respectively. Acceleration of amortization of loan fees in 1996 is due to
the renegotiation of the revolving-to-term credit facility.
BUILDINGS AND EQUIPMENT
Buildings and equipment are stated on the cost basis. Depreciation is
provided on the straight line method over the estimated useful lives of the
respective assets.
REVENUE RECOGNITION
Revenues are recognized when the Company has completed the earnings process
and an exchange transaction has taken place.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary timing differences between the financial
statement and tax bases of assets and liabilities at the applicable enacted tax
rates.
PER SHARE AMOUNTS
Earnings per share is computed based on the weighted average number of common
stock and common stock equivalents (including stock options) outstanding during
each period.
STOCK OPTIONS
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees" and intends to
continue to do so. (See Note 10.)
62
<PAGE>
FINANCIAL STATEMENT RESTATEMENT AND RECLASSIFICATIONS
The 1995 Balance Sheet and certain footnote discolosure has been restated as
discussed in the footnote entitled Environmental Remediation Reserve. (See Note
8.)
The Company has reclassified certain amounts in its Consolidated Financial
Statements for the years ended in 1994 and 1995 in order to conform with the
1996 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents. The carrying amount approximates fair value because
- -------------------------
of the short-term maturity of these instruments.
Receivables. The carrying amount approximates fair value because of the
- -----------
short-term maturity of these instruments.
Long-Term Debt. The carrying amount approximates fair value based on the current
- --------------
rates offered to the Company for debt of the same remaining maturities.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Cucamonga County Water District... $ 2,099,000 $1,790,000
Penske Motorsports, Inc........... 843,000 54,000
Burrtec Waste Industries.......... 461,000 17,000
Other............................. 848,000 1,963,000
----------- ----------
4,251,000 3,824,000
Allowance for doubtful accounts... (1,034,000) (494,000)
----------- ----------
Total.......................... $ 3,217,000 $3,330,000
=========== ==========
</TABLE>
The Company is currently in litigation against Cucamonga over the
interpretation of the Cucamonga Lease with regard to the amount payable to the
Company pursuant to the terms of the lease. Although the Company is continuing
to invoice Cucamonga at what it believes is the correct Metropolitan Water
District of Southern California ("MWD") rate under the lease with Cucamonga, the
Company has elected to reserve the full amount in dispute and report revenues on
the basis of amounts received. The total amount of lease payments in dispute as
of December 31, 1996 is approximately $748,000 and is included in the allowance
for doubtful accounts.
NOTE 4. INVESTMENT IN PENSKE MOTORSPORTS, INC.
The Company, as of December 31, 1996, owns 1,627,925 shares, or approximately
12.29% of the common stock of PMI. As discussed in more detail below, the
Company's ownership interest in PMI was acquired as a result of: (i) its
contribution in November, 1995, to PMI of approximately 480 acres, as adjusted,
of the Central Mill Site Property on which the California Speedway ("TCS") has
been built; and (ii) the subsequent sale of the Speedway Business Park, totaling
approximately 54 acres to PMI in December, 1996. Kaiser recorded no gain or loss
as a result of the November 1995 transaction discussed above since the value of
the PMI stock that Kaiser received was equal to the book value of the land
Kaiser contributed to PMI. PMI is traded on the NASDAQ National Market under the
symbol "SPWY".
In March, 1996, Penske Motorsports, Inc. ("PMI") effected a recapitalization
resulting in PMI ownership of the outstanding shares of Michigan International
Speedway, Inc., Pennsylvania International Raceway, Inc., The California
Speedway Corporation, Motorsports International Corp., Competition Tire West,
Inc. and Competition Tire Sourth, Inc. Subsequent to the recapitalization, PMI
completed an initial public offering ("IPO") by issuing 3,737,500 shares of
common stock at a price to the public of $24 per share. The proceeds to PMI,
after underwriting discounts and commissions and other offering expenses, were
approximately $83.1 million. As a result of the IPO, which materially increased
the Company's share of PMI's stockholder's equity, the Company has recorded an
increase in its equity investment in PMI of $6,513,000 and corresponding
increases in deferred income taxes and capital in excess of par value of
$397,000 and $6,116,000, respectively. As an additional result of the IPO, when
the Company converted its PMI preferred stock into PMI common stock, the Company
changed its accounting for this investment from the cost to the equity method of
accounting and began recording its share of undistributed equity in the earnings
of PMI effective April 1, 1996.
In addition, due to the concentration of motor sport racing events between
April and September, PMI's operations have been, and will continue to be, highly
seasonal. Except for one event week-end in October, 1997 at TCS, PMI has no
current plans to host events in the first and fourth quarters at its existing
facilities. As a result, the Company's reported share of undistributed equity
in the earnings of PMI will likely be positive (income) in the second and
third quarters and negative (loss) in the first and fourth quarters.
PMI is a leading promoter and marketer of professional motorsports in the
United States as well as an owner and operator of speedway facilities. PMI
currently owns: (i) Michigan International Speedway, Inc. which owns and
operates the Michigan Speedway ("MIS"), in Brooklyn, Michigan; (ii) The
California Speedway Corporation, the developer of TCS near Los Angeles,
California; (iii) Pennsylvania International Raceway, Inc. which owns and
operates the Nazareth Motor Speedway ("Nazareth") in Nazareth, Pennsylvania;
(iv) Motorsports International Corp. ("MIC"), a motorsports apparel and
63
<PAGE>
memorabilia company; (v) Competition Tire West, Inc. and Competition Tire South,
Inc., distributors of Goodyear racing tires in the mid-west and southern regions
of the United States; and (vi) approximately four (4) percent of the stock of
North Carolina Motor Speedway, Inc. which owns the North Carolina Motor
Speedway, Inc., Rockingham, North Carolina.
PMI promoted a total of nine major racing events at MIS and Nazareth in 1996
and currently expects to promote a total of 15 racing events at MIS, Nazareth
and TCS in 1997. Of the anticipated 1997 races, 9 are to be sanctioned by the
National Association for Stock Car Auto Racing, Inc. ("NASCAR/(R)/") including 3
associated with the Winston Cup Series professional stock car racing circuit, 3
races with the NASCAR Busch Grand National Series, 1 race associated with the
NASCAR Winston West Series and 2 races associated with the Sears Craftsman
Truck Series; 3 races will be sanctioned by Championship Auto Racing Teams, Inc.
("CART/(R)/"); 2 races will be sanctioned by Automobile Racing Club of America
("ARCA"); and 2 races will be with the International Race of Champions ("IROC").
Total 1996 revenues for PMI, on a consolidated basis were $55.2 million with a
net income of $10.9 million, or $.90 per share. The Company's share of
undistributed equity in the earnings of PMI for 1996, was $889,000 net of
residual transaction expenses.
A condensed balance sheet of PMI as of December 31, follows:
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Current Assets.......................... $ 33,559,000 $ 8,458,000
Property and Equipment.................. 140,402,000 61,009,000
Other Assets............................ 10,036,000 3,788,000
------------ -----------
Total Assets......................... $183,997,000 $73,255,000
============ ===========
Current Liabilities..................... $ 25,801,000 $15,664,000
Other Liabilities....................... 3,825,000 1,454,000
Deferred taxes.......................... 8,969,000 9,115,000
Minority Interest....................... --- 1,210,000
Stockholders' Equity.................... 145,402,000 45,812,000
------------ -----------
Total Liabilities and Stockholders'
Equity.............................. $183,997,000 $73,255,000
============ ===========
</TABLE>
NOTE 5. MINE RECLAMATION CORPORATION
As previously disclosed, the Company, in January, 1995, acquired a 70%
interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle
Mountain Landfill Project. Concurrent with this acquisition, MRC and the
Company amended the MRC Lease to terminate the minimum monthly rent payments by
MRC to the Company. Consequently, the Company did not receive any rent payments
from MRC during 1995 or 1996 nor will it in the future until commencement of
operations at the Landfill Project. The transaction which was insignificant to
the operating results, financial position and total assets of the Company has
been treated as a purchase, and the assets acquired and liabilities assumed were
recorded at their fair market values.
As of December 31, 1996 the Company had provided approximately $4.5 million in
equity funding to MRC. In addition, the Company's Board of Directors has
committed, subject to their periodic review, an additional $3.7 million of
equity funding for MRC during 1997. As a result of these equity fundings, the
Company's ownership interest in MRC as of December 31, 1996 is approximately
73%.
While the Company has made the decision to invest up to an additional $3.7
million in equity in MRC, the Company is not obligated to provide additional
funding to MRC beyond its current commitments.
64
<PAGE>
MRC will need additional capital beyond that committed to successfully complete
the permitting and development process.
NOTE 6. BUILDINGS AND EQUIPMENT (NET)
Buildings and equipment (net) as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Buildings and structures... $ 2,074,000 $ 2,063,000
Machinery and equipment.... 1,621,000 1,557,000
----------- -----------
3,695,000 3,620,000
Accumulated depreciation... (1,485,000) (1,187,000)
----------- -----------
Total................... $ 2,210,000 $ 2,433,000
=========== ===========
</TABLE>
NOTE 7. ACCRUED LIABILITIES
Accrued liabilities as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Environmental insurance settlement costs..... $1,313,000 $3,938,000
Compensation and related employee costs...... 1,353,000 1,475,000
Other........................................ 1,459,000 855,000
---------- ----------
Total..................................... $4,125,000 $6,268,000
========== ==========
</TABLE>
NOTE 8. ENVIRONMENTAL REMEDIATION RESERVE
The Company estimates, based upon current information, that its future
remediation and other environmental costs, including groundwater and other
possible third party claims, will be between approximately $20 million and $32
million, depending both upon the ultimate extent of the environmental
remediation and clean-up involved and upon which approved remediation
alternatives are eventually selected. In order to improve the presentation
regarding these future remediation and other environmental costs, the Company
has elected to restate all balance sheet information presented to show, as a
separate liability rather than as an offset to land, the amount of future
remediation and other environmental costs reflected in its financial statements.
The restatement reflects the amounts originally recognized when the Company
emerged from bankruptcy comprised of a $34.7 million remediation adjustment to
land and a $6.6 million groundwater remediation reserve and $12.5 million in
environmental insurance litigation settlement proceeds received in 1995,
reduced by approximately $21.6 million in remediation and other environmental
costs expended through December 31, 1996. The Company's decision to restate its
balance sheet information is based upon the more extensive investigation and
remediation activities that have been pursued over the past two years and the
Company's ability to better estimate the probable range of future remediation
and other environmental costs.
As of December 31, 1996, the total short-term and long-term environmental
remediation liabilities reflected on the Company's balance sheet was
approximately $32.2 million, which is the high end of the probable range of
future remediation and other environmental costs. Below is a table showing the
activity in the remediation liability accounts for the years ended December 31:
65
<PAGE>
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Beginning Estimated Liability $39,411,000 $34,529,000
Environmental Insurance Proceeds --- 12,500,000
Remediation Cost Incurred (7,188,000) (7,618,000)
----------- -----------
Ending Estimated Liability 32,223,000 39,411,000
Less: Current Portion (5,757,000) (7,235,000)
----------- -----------
Long-term Portion $26,466,000 $32,176,000
=========== ===========
</TABLE>
In 1995, the additional remediation and other environmental costs identified
were offset by the receipt of approximately $12.5 million in net environmental
insurance litigation settlement proceeds; therefore, there was no income
statement impact from either the additional remediation and other environmental
costs identified or the receipt of the insurance litigation proceeds.
See Note 15, "Commitments and Contingencies" for further information.
NOTE 9. LONG-TERM DEBT
As of December 31, 1996, long-term debt consisted of a $5,342,000 note, which
includes the current portion of $240,000 secured by a first trust deed issued to
Bank of America as part of the Company's purchase of property from the Lusk
Joint Ventures and $3,000,000 in borrowings under the Union Bank credit
facility. The Bank of America note is payable in quarterly payments of $60,000
plus interest at the their prime rate plus 1.5% (9.75% at December 31, 1996)
with all remaining principal and accrued and unpaid interest due and payable on
July 28, 1998.
The Company, through FWR, had a 9-year, $20,000,000 revolving-to-term credit
facility with Union Bank at floating interest rates and collateralized by the
Company's shares of Fontana Union and the lease of those shares to Cucamonga.
At December 31, 1996, there was $3,000,000 in outstanding loans outstanding
under the credit facility. The borrowing base available under the credit
facility is limited to the discounted present value of a five year projection of
future payments under the Cucamonga Lease, as defined in the credit facility
agreement. Under the borrowing base calculations, the maximum amount available
was $19,525,000 as of December 31, 1996. The net available funds under the
$20,000,000 revolving-to-term credit facility less $5,505,000 reserved for
financial assurances required by the DTSC and relating to environmental
remediation on the Mill Site Property; and $3,000,000 in outstanding loans was
$11,020,000 as of December 31, 1996.
On January 30, 1997 the $20,000,000 revolving-to-term credit facility with
Union Bank, was increased to $30,000,000. In addition, the term of the facility
was extended 2 years to September 30, 2004, and the borrowing base calculation
was revised to include 8 years, rather than 5 years, of projections of future
payments under the Cucamonga Lease. (See Note 17.)
Total interest expense incurred in 1996, 1995, and 1994 was $743,000, $625,000
and $263,000, respectively.
66
<PAGE>
NOTE 10. STOCKHOLDERS' EQUITY
COMMON STOCK OUTSTANDING
At December 31, 1996 and 1995, Kaiser Ventures Inc. common stock has a par
value of $0.03 and 13,333,333 authorized shares, of which 10,488,114 and
10,470,614 were outstanding, respectively.
In November, 1988, 10,000,000 shares of common stock (after giving effect for
a 3 for 1 reverse stock split that took place in 1990) were issued pursuant to
the KSC Plan of Reorganization. As of December 31, 1996, 136,919 of these
shares are being held for the benefit of the former general unsecured creditors
of the predecessor company pending the resolution of disputed bankruptcy claims.
The final resolution of these claims will result in the final allocation of the
held shares among the unsecured creditor group, which presents no liability to
the Company. For financial reporting purposes these shares have been considered
issued and outstanding.
In February, 1993, the Company completed a stock offering of 2,000,000 shares
of its common stock, including 500,000 shares sold by the Company and 1,500,000
shares sold by its two principal stockholders. After the Company's
proportionate share of costs of approximately $100,000 incurred in connection
with the stock offering, the Company realized net proceeds from the stock
offering of approximately $6,000,000.
STOCK OPTION AND STOCK GRANT PROGRAMS
In October, 1990, the Company's stockholders approved the Amended, Restated
and Substituted Kaiser Steel Resources, Inc. 1989 Stock Plan (the "1989 Stock
Plan"). The 1989 Stock Plan provided for the grant of incentive stock options,
non-qualified stock options, stock appreciation rights, restricted stock or
deferred stock awards. Certain options granted under the 1989 Stock Plan are
still outstanding. No compensation expense was incurred by the Company during
1996, 1995 and 1994.
In June, 1995, the Company's stockholders approved the 1995 Stock Plan. The
1995 Stock Plan provides for the grant of incentive stock options, non-qualified
stock options, restricted stock and other stock related incentives. In June,
1996, the 1995 Stock Plan was amended to reserve up to 859,102 shares for
issuance upon exercise of stock options, grants of stock and other stock related
incentives. As a result of the increase in the 1995 Stock Plan reserve, the
Company had 419,691 reserved shares as of December 31, 1996. Grants are
generally established at fair market value of the Company's common stock on the
date of the grant and the exercise thereof may extend for up to 10 years with
various vesting schedules.
In addition, under the 1995 Stock Plan, each director when first elected to
the Board shall automatically be granted options for 5,000 common stock shares.
Each non-employee director who is re-elected or serving an unexpired term as a
member of the Board at an annual meeting of holders of stock of the Company will
be automatically granted an additional 1,500 stock options. These options have
an exercise price equal to the fair market value of the Company's Common Stock
on the date of the grant.
67
<PAGE>
A summary of the status of the stock option grants under the Company's Stock
Plans' as of December 31, 1996 and 1995 and activities during the years ending
on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- --------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year..... 809,661 $11.63 652,836 $13.00 493,903 $12.39
Granted.............................. 639,000 10.87 182,000 5.93 165,000 14.64
Exercised............................ (17,500) 6.89 (17,801 4.26 (6,067) 8.11
Forfeited............................ --- --- (7,374) 10.09 --- ---
---------- -------- --------
Outstanding at end of year........... 1,431,161 $11.35 809,661 $11.63 652,836 $13.00
========== ======== ========
Options exercisable at year end...... 497,791 $11.29 425,916 $10.97 309,937 $11.45
========== ========
Weighted-average fair value of
options granted during the year... $ 2.87 $ 1.22
</TABLE>
68
<PAGE>
The Company employed the Black-Scholes option-pricing model in order to
calculate the above reduction in net income and earnings per share. The effect
on net earnings for 1996 and 1995 is not necessarily representative of the
effect in future years. The following table describes the assumptions utilized
by the Black-Scholes option-pricing model and the resulting fair value of the
options granted:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Volatility .254 .346
Risk-free interest rate 5.74% 6.98%
Expected life in years 2.67 2.25
Forfeiture rate 0.00% 0.00%
Dividend yield 0.00% 0.00%
</TABLE>
In 1988, the Company granted stock options totaling 533,333 shares with a
nominal exercise price to certain of its officers as part of the emergence from
bankruptcy reorganization. These options became 50% vested at the date of grant
with the remaining options ratably vesting through June 1, 1991. As of December
31, 1996, 160,000 of these options remain vested and unexercised.
NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest during 1996, 1995, and 1994 of $674,000, $607,000
and $144,000, respectively.
As a result of the PMI initial public offering in March, 1996, the Company
increased its investment in PMI by approximately $6.5 million and recorded
corresponding increases in deferred income taxes and stockholders equity of
approximately $400,000 and $6.1 million, respectively.
During 1996, the Company sold Speedway Business Park to PMI for $13,352,000.
The Company received $5,000,000 of the proceeds in cash and $8,352,000 in common
stock of PMI.
During 1996, the Company capitalized interest and property taxes on
property real estate under development of $354,000 and $28,000, respectively.
There was no capitalization of interest expense on property taxes during 1995 or
1994.
During 1995, in connection with the contribution of land to PMI, the
Company reclassified $22.5 million of land to investment in PMI.
During 1994, non-cash investing activities included a $6,000,000 note payable
as part of the Company's purchase of properties owned by the Lusk Joint
Ventures.
69
<PAGE>
NOTE 12. INCOME TAXES
The income tax provisions for the years ended December 31, 1996, 1995 and 1994
are composed of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Current tax expense:
Federal................................ $ 56,000 $ --- $ 92,000
State.................................. 36,000 --- 33,000
---------- ---------- -----------
92,000 --- 125,000
---------- ---------- -----------
Deferred tax expense credited to equity:
Federal................................ 3,945,000 335,000 1,371,000
State.................................. --- --- 250,000
---------- ---------- -----------
3,945,000 335,000 1,621,000
---------- ---------- -----------
Deferred tax expense:
Federal................................ --- --- ---
State.................................. 840,000 721,000 ---
---------- ---------- -----------
840,000 721,000 ---
---------- ---------- -----------
Tax benefit of extraordinary item (Note
13):
Current tax benefit:
Federal................................ --- --- (92,000)
State.................................. --- --- (30,000)
---------- ---------- -----------
--- --- (122,000)
---------- ---------- -----------
Deferred tax benefit credited to equity:
Federal................................ --- --- (1,339,000)
State.................................. --- --- (244,000)
---------- ---------- -----------
--- --- (1,583,000)
---------- ---------- -----------
$4,877,000 $1,056,000 $ 41,000
========== ========== ===========
</TABLE>
In accordance with SFAS 109, the tax benefits of all deductible temporary
differences and loss carryforwards that existed at the date of a reorganization
must be credited directly to additional paid-in capital when the initial
recognition of these benefits occurs subsequent to the reorganization.
Income taxes paid in 1996 and 1994 were $20,000 and $272,000, respectively.
There were no income taxes paid in 1995.
Deferred tax liabilities (assets) are comprised of the following as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Land held for development............... $ 2,231,000 $ 4,744,000
Investment in Fontana Union............. 6,440,000 6,440,000
Investment in Penske Motorsports Inc.... 11,795,000 9,031,000
Depreciation............................ 36,000 103,000
------------ ------------
20,502,000 20,318,000
------------ ------------
Groundwater remediation................. (690,000) (695,000)
Insurance Proceeds...................... (2,165,000) (5,098,000)
Investment in MRC....................... (1,837,000) (1,837,000)
Accounts receivable reserve............. (181,000) (166,000)
Other................................... (1,262,000) (1,219,000)
Loss carryforwards...................... (39,898,000) (45,912,000)
------------ ------------
(46,033,000) (54,927,000)
------------ ------------
Deferred tax asset valuation allowance.. 27,489,000 35,330,000
------------ ------------
$ 1,958,000 $ 721,000
============ ============
</TABLE>
70
<PAGE>
As indicated above, the net change in the valuation allowance was a reduction
of $7,841,000 in 1996.
A reconciliation of the effective income tax rate to the federal statutory
rate, for financial reporting purposes, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate.................. 34.0% 34.0% 34.0%
Increase resulting from state tax, net
of federal benefit..................... 5.1 6.1 6.1
Other................................... 2.4 3.0 3.0
Additional recognition of
pre-reorganization benefits............. 17.5 --- ---
Increase in valuation allowance on 6.2 --- ---
state NOLs............................. ---- ---- ----
65.2% 43.1% 43.1%
==== ==== ====
</TABLE>
The consolidated Net Operating Loss ("NOL") carryforwards available
for federal income tax purposes as of December 31, 1996, are approximately
$107,000,000 and will expire over a period from year 2000 through 2010. The
amount of NOL carryforwards available for California state tax purposes is
approximately $11,000,000 as of December 31, 1996. During 1993, the California
Legislature amended the tax code relative to the generation and use of NOL
carryforwards available for California state tax purposes. This legislation,
among other changes, reduced the NOL carryforwards from 15 years to 5 years.
Therefore, the Company's NOL carryforwards available for California state tax
purposes now expire in year 1997 and 2000. In addition, there are certain
limitations as to the future annual use of NOLs if 50% or more of the stock of
the Company changes ownership. The Company also has approximately $2,817,000 of
investment tax credit carryforwards available. The credits will expire in the
years 1997 through 2000 and can be utilized only after the NOL is exhausted.
NOTE 13. EXTRAORDINARY LOSS
During the first quarter of 1994, the Company learned that it may have been
responsible for the payment of premiums levied pursuant to the Coal Industry
Retiree Health Benefit Act of 1992 (the "Coal Act"). This legislation not only
imposes liability for premiums on companies currently in the coal mining
industry, but also on companies and their successors that were in the coal
mining industry. Prior to 1985, coal mines were operated to support the
Company's steel making operations. In December 1994, the Company reached an
agreement settling all outstanding and future claims under which the Company
paid $3,778,000 plus expenses. The settlement was recorded as an extraordinary
loss of $2,233,000 (net of tax benefits of $1,705,000) in December 1994.
NOTE 14. LEASED ASSETS AND SIGNIFICANT CUSTOMERS
LONG-TERM LEASES
The Company has long-term lease agreements with Cucamonga pursuant to the
Fontana Union Lease (Note 1), Management Training Corporation ("MTC") and
California Steel Industries ("CSI"). Minimum lease payments expected to be
received by the Company through the next five years are as follows:
71
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDING CUCAMONGA CSI SERVICE
DECEMBER 31 LEASE MTC LEASE AGREEMENT TOTAL
- ----------- ------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
1997 $4,867,000 $625,000 $220,000 $5,712,000
1998 $4,867,000 $ --- $110,000 $4,977,000
1999 $4,867,000 $ --- $ --- $4,867,000
2000 $4,867,000 $ --- $ --- $4,867,000
2001 $4,867,000 $ --- $ --- $4,867,000
</TABLE>
The amounts for the Cucamonga Lease are based upon: (a) the quantities of
water as of December 31, 1996, and as provided for under the Lease; (b) the
current disputed lease rate paid by Cucamonga, (which is less than the lease
rate the Company bills Cucamonga by approximately $540,000 on an annual basis)
and; (c) projections by MWD which forecast no rate increases in the disputed
rate over the next 5 years.
The net book values of Fontana Union and Eagle Mountain at December 31, 1996
were $16,108,000 and $10,386,000, respectively. Only a portion of Eagle
Mountain is being utilized for the MTC Lease.
SIGNIFICANT CUSTOMERS
The Company received substantial portions of its revenue from the following
customers:
<TABLE>
<CAPTION>
YEAR ENDING CUCAMONGA CSI SERVICE
DECEMBER 31 LEASE MTC LEASE AGREEMENT MRC LEASE
- ----------- ------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
1996 $4,505,000 $709,000 $ 217,000 $ ---
1995 $4,974,000 $699,000 $ 416,000 $ ---
1994 $4,820,000 $694,000 $1,859,000 $2,400,000
</TABLE>
NOTE 15. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
As discussed in Note 8 above, the Company estimates, based upon current
information, that its future remediation and other environmental costs,
including groundwater and other possible third party claims, will be between
approximately $20 million and $32 million, depending upon which approved
remediation alternatives are eventually selected.
Although ongoing environmental investigations are being conducted on the
Company's property, management believes it is currently in a position to
estimate with some reasonable certainty future investigation and remediation
costs, there can be no assurance that the actual amount of environmental
remediation expenditures and incurred will not substantially exceed those
currently anticipated or that additional areas of contamination may not be
identified. Accordingly, future facts and circumstances could cause these
estimates to change significantly. The Company anticipates recovery of the
remediation costs incurred through redevelopment of the property, primarily in
connection with specific redevelopment projects or joint ventures. Further, the
Company has provided certain financial assurances to the DTSC in connection with
anticipated remediation activities, the primary one being the dedication of
approximately $5.5 million of Kaiser's Union Bank Credit facility.
72
<PAGE>
While the Company has monitored certain groundwater wells in the past, the
DTSC requested and the Company will implement a supplemental groundwater
monitoring system. The Company has settled obligations of groundwater
contamination with the California Regional Water Quality Control Board. The
settlement required a $1,500,000 cash payment by the Company which was made in
February, 1994, and the contribution of 1,000 acre feet of water annually for 25
years to a water quality project. These water rights are unrelated to those
leased to Cucamonga. In 1995, the Company contributed 18,000 acre feet of its
water in storage thus satisfying the first 18 years of its obligation. The
Company remains contingently liable for any impacts the groundwater plume may
have on water wells owned by third parties. Recently the City of Ontario,
California commenced litigation against the Company alleging that the Company
has contaminated one of its municipal wells. The Company believes sufficient
amounts have been accrued for this contingency.
PENSION PLANS
The Company currently sponsors a voluntary qualified 401(k) savings plan and a
nonqualified pension plan, available to all full-time employees. Participants
may make contributions of up to 15% of their compensation with the Company
matching one-half of each participant's contribution up to 6% of compensation.
The non-qualified plan mirrors the qualified 401(k) plan.
Total expense relative to these plans for the years ended December 31, 1996,
1995 and 1994, was $199,000, $170,000 and $139,000, respectively.
LETTERS OF CREDIT
At December 31, 1996, the Company had guaranteed letters of credit outstanding
on its behalf to third parties totaling $420,000. These letters of credit were
issued for reclamation activities performed at two idled coal properties, on
behalf of and at the expense of the KSC bankruptcy estate.
NOTE 16. LEGAL PROCEEDINGS
Significant legal proceedings are summarized as follows:
73
<PAGE>
BANKRUPTCY ADVERSARY LITIGATION
The Company's predecessor, KSC, was in reorganization under Chapter 11 of the
United States Bankruptcy Code from February, 1987 until November, 1988.
Pursuant to the KSC Plan of Reorganization, the Company has established a
subsidiary, KSC Recovery, Inc. ("KSC Recovery") see Note 1, which was engaged in
the process of pursuing certain legal actions on behalf of the former creditors
of KSC and handling the remaining administrative duties of the KSC bankruptcy
estate, including claims resolution.
From time-to-time, various environmental and similar types of claims such as
injury or death from asbestos exposure that relate to KSC pre-bankruptcy
activities are asserted against the Company and/or KSC Recovery. In connection
with the KSC Plan of Reorganization, the Company, as the reorganized successor
to KSC, was discharged from all liabilities that may have arisen prior to
confirmation of the KSC Plan of Reorganization, except as otherwise provided by
the plan or by law. Although the Company believes there is no ongoing
contamination from its activities and that all pre-petition environmental claims
were discharged under the KSC Plan of Reorganization, in the event any of these
claims are ultimately determined to survive the KSC bankruptcy, it could have a
material adverse effect on the Company.
OTHER LITIGATION
In addition, the Company, in the normal course of its business, is involved in
various claims and legal proceedings. Management believes these matters will
not have a material adverse effect on the Company's business or financial
condition.
NOTE 17. SUBSEQUENT EVENT
On January 30, 1997 the Company amended its revolving-to-term credit facility
with Union Bank. As a result of the amendment, the amount available under the
credit facility was increased from $20.0 million to $30.0 million. In addition,
the term of the facility was extended 2 years to September 30, 2004, and the
borrowing base calculation was revised to include 8 years, rather than 5 years,
of projections of future payments under the Fontana Union Lease. The other
existing terms and conditions of the credit facility remain in effect.
74
<PAGE>
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1996
Resource revenues......................... $2,034,000 $2,423,000 $2,345,000 $ 8,612,000
Income from operations.................... $ 335,000 $ 658,000 $ 677,000 $ 6,595,000
Income before income tax provision........ $ 224,000 $ 519,000 $ 521,000 $ 6,182,000
Net income................................ $ 127,000 $ 294,000 $ 296,000 $ 1,852,000
Earnings per share........................ $ .01 $ .03 $ .03 $ .17
1995
Resource revenues......................... $1,999,000 $2,150,000 $2,089,000 $ 4,870,000
Income from operations.................... $ 237,000 $ 243,000 $ 291,000 $ 2,266,000
Income before income tax provision........ $ 88,000 $ 86,000 $ 108,000 $ 2,168,000
Net income................................ $ 50,000 $ 49,000 $ 62,000 $ 1,233,000
Earnings per share........................ $ .00 $ .00 $ .01 $ .12
1994
Resource revenues......................... $2,944,000 $2,848,000 $3,302,000 $ 3,377,000
Income from operations.................... $ 781,000 $ 882,000 $1,105,000 $ 1,092,000
Income before income tax provision and
extraordinary loss..................... $ 889,000 $ 998,000 $1,146,000 $ 1,000,000
Income before extraordinary loss.......... $ 504,000 $ 566,000 $ 650,000 $ 567,000
Extraordinary loss (net of taxes)......... --- --- --- $ 2,233,000
Net income (loss)......................... $ 504,000 $ 566,000 $ 650,000 $(1,666,000)
Earnings (loss) per share
Before extraordinary loss.............. $ 0.05 $ 0.05 $ 0.06 $ 0.05
After extraordinary loss............... $ 0.05 $ 0.05 $ 0.06 $ (0.15)
</TABLE>
75
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING COSTS AND FROM BALANCE AT
CLASSIFICATION OF PERIOD EXPENSES (A) RESERVES (B) END OF PERIOD
- ---------------------------------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
- ----------------------------------
Allowance for losses in collection
of current accounts receivable.... $494,000 $668,000 $128,000 $1,034,000
======== ======== ======== ==========
YEAR ENDED DECEMBER 31, 1995
- ----------------------------------
Allowance for losses in collection
of current accounts receivable.... $156,000 $423,000 $ 85,000 $ 494,000
======== ======== ======== ==========
YEAR ENDED DECEMBER 31, 1994
- ----------------------------------
Allowance for losses in collection
of current accounts receivable.... $314,000 $149,000 $307,000 $ 156,000
======== ======== ======== ==========
</TABLE>
(A) Although the Company is continuing to bill Cucamonga at what it believes is
the correct Metropolitan Water District of Southern California ("MWD") rate
under the lease with Cucamonga, the Company has elected to reserve the full
amount in dispute and report revenues on the basis of amounts received. The
total amount of lease payments in dispute for the years ending December 31, 1996
and 1995 are approximately $668,000 and $80,000, respectively.
(B) Amount charged off during the year.
76
<PAGE>
EXHIBIT 10.28
-------------
CONDITIONAL DEMAND REGISTRATION RIGHTS AGREEMENT
This CONDITIONAL DEMAND REGISTRATION RIGHTS AGREEMENT (this "Agreement") is
made as of December 12, 1996 between Penske Motorsports, Inc., a Delaware
corporation (the "Company") and Kaiser Ventures Inc., a Delaware corporation
("Kaiser").
Recitals
A. Kaiser is currently the owner of 1,373,625 shares of the common stock
of the Company, $.0l par value share, and will acquire an additional 254,298
shares of the Company's common stock upon the consummation of a proposed real
estate transaction (collectively the "SHARES"), as set forth in a Purchase
Agreement and Escrow among the Company, Kaiser and The California Speedway
Corporation ("TCSC").
B. The Company, Kaiser and PSH Corp., a Delaware corporation ("Penske"),
are parties to a Shareholders Agreement, dated November 22, 1995, as amended
pursuant to a First Amendment to Shareholders Agreement, dated March 21, 1996
(the "Shareholders Agreement").
C. In order to accommodate those person or entities that may accept the
pledge of all or any portion of the Shares as collateral for a loan, bond,
financial assurance or other similar obligation, Kaiser desires to obtain, and
the Company is willing to grant, certain registration rights for the Shares in
the event a holder of a security interest in the Shares should foreclose on the
Shares and then be required to sell all or any portion of such Shares to satisfy
all or a portion of Kaiser's indebtedness to such lender.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Company and Kaiser agree as
follows:
1. Confirmation of Ability to Pledge the Shares. The Company hereby
agrees that Kaiser shall have the right to pledge all or any part of the shares
to a third party as collateral for a loan, bond, financial assurance or other
similar borrowing, potential borrowing, or obligation (hereafter a "Secured
Lender" and collectively "Secured Lenders")) subject to the terms and conditions
of this Agreement, the Shareholders Agreement, the Lock-up Agreement between
Kaiser and CS First Boston dated March 21, 1996, and any restrictions imposed by
applicable law.
2. Demand Registration Rights.
(a) Subject to the terms and conditions of this Agreement, upon
written demand to the Company by a Secured Lender who is the beneficial owner of
a majority of the Registrable Securities (as defined below) pledged to Secured
Lenders (a "Majority Holder"), the Company shall undertake all reasonable
efforts to effect the registration of all or any portion of the Registrable
Securities (as defined below) owned by the Secured Lenders under the Securities
Act of 1933, as amended (the "Securities Act") and pursuant to applicable state
"blue sky" laws ("Demand Registration"). The term "Registrable Securities"
means those shares beneficially owned by a Secured Lender and acquired from
Kaiser through foreclosure or through a transfer in lieu of foreclosure, and as
a result of a default by Kaiser under the terms
1
<PAGE>
CONDITIONAL DEMAND REGISTRATION RIGHTS AGREEMENT
of any security or pledge agreement which grants to such Secured Lender a
security interest in, or pledge of, all or any part of the Shares together with
all the Shares deemed Registrable Securities pursuant to Section 2(b) below. The
terms "beneficial owner" or "beneficial ownership" as used in this Agreement
shall mean ownership in accordance with Rule 13d-3 promulgated pursuant to the
Securities Exchange Act of 1934, as amended.
(b) Each request for a Demand Registration shall specify the approximate
number of Registrable Securities requested to be registered. Within ten (10)
days after receipt of any such request, the Company will give written notice of
such requested registration to all Secured Lenders known to the Company and will
include in such registration all Shares with respect to which the Company has
received written requests for inclusion therein within fifteen (15) days after
the receipt of Company's notice. All of such Shares shall thereafter be deemed
Registrable Securities for purposes of this Agreement.
(c) The holders of Registrable Securities are entitled to request two
Demand Registrations, an initial Demand Registration and a second Demand
Registration pursuant to Paragraph 3(c) below. The Secured Lenders will pay all
Registration Expenses (as defined in Paragraph 6 below) pro-rata on the basis of
the amount of securities being sold by each such holder participating in the
Demand Registration. No party has any rights under this Agreement to request
Demand Registrations except as provided in this Agreement. A registration will
not count as a permitted Demand Registration until it has become effective,
(unless such Demand Registration has not become effective due solely to the
fault of the holders requesting such registration). The Demand Registrations
shall be underwritten registrations.
(d) Subject to the restrictions below, the Company may include in the
Demand Registration any securities which are not Registrable Securities. If a
Demand Registration is an underwritten offering and the managing underwriters
advise the Company in writing that in their opinion the number of Registrable
Securities and the additional securities requested to be included in such
offering, if any, exceeds the number of securities that can be reasonably sold
in such offering without adversely affecting the marketability of the offering,
the Company will include in such registration, prior to the inclusion of any
additional securities which are not Registrable Securities, the number of
Registrable Securities requested to be included that in the opinion of such
underwriters can be sold without adversely affecting the marketability of the
offering. In such event, the amount of Registrable Securities to be registered
shall be first allocated to all those Shares requested by a Majority Holder with
the balance of the Registrable Securities to be included in the Demand
Registration allocated pro-rata among the other respective holders of such
Registrable Securities on the basis of the amount of Registrable Securities,
excluding the Majority Holder, owned by each other holder; but in no event shall
the number of shares registered in the initial Demand Registration be less than
850,000 Shares of Registrable Securities unless agreed upon in writing by the
Company and the Secured Lenders.
(e) The Company will not be obligated to effect any Demand Registration
within nine (9) months after the effective date of a previous registration
statement filed by the Company under the Securities Act of 1933. The Company
may postpone for up to three (3) months the filing or the effectiveness of a
registration statement for the Demand Registration if the Company in its
reasonable good faith judgment, determines that such Demand
2
<PAGE>
CONDITIONAL DEMAND REGISTRATION RIGHTS AGREEMENT
Registration would reasonably be expected to have an adverse effect on any then
existing proposal or plan by the Company or of its Subsidiaries to engage in any
acquisition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer, issuance and selling of additional stock
whether through a public offering or otherwise, or any similar transaction;
provided that in such event, the holders of Registrable Securities initially
requesting such Demand Registration will be entitled to withdraw such request
and, if such request is withdrawn, such Demand Registration will not count as a
Demand Registration under this Agreement. Notwithstanding the foregoing, in the
event the Company has filed or intends to file a registration statement within
three (3) months and such filing or intent to file precludes the Secured Lenders
from registering their Registrable Securities such Secured Lenders shall have
"piggyback" registration rights in accordance with, and subject to the terms and
conditions of the Registration Rights Agreement, dated as of March 21, 1996, by
and between the Company and Kaiser (the "Registration Rights Agreement"), as if
such Registrable Securities are "Shares" thereunder.
3. Conditions of Obligation to Register Shares. The obligation of the
Company under this Agreement to register any of the Shares owned by a Secured
Lender are subject to each of the following conditions:
(a) The amount of Registrable Securities being registered on behalf of
the Majority Holder must be beneficially owned by the Majority Holder. Any
Secured Lender other than the Majority Holder need not be the owner of Shares to
participate in a Demand Registration, but in no event shall Kaiser or an
affiliate of Kaiser be deemed a Secured Lender hereunder.
(b) Prior to the commencement of the registration of the Registrable
Securities, the Secured Lender shall have first offered the Registrable
Securities to the Company, in accordance with the procedures and on the terms
and conditions set forth in Section 1.3 of the Shareholders Agreement. If the
Company elects not to purchase the Registrable Securities, then the Secured
Lenders shall offer the Registrable Securities to PSH Corp., in accordance with
the procedures and on the terms and conditions set forth in Section 1.3 of the
Shareholders Agreement except that PSH Corp. shall have ten (10) days in which
to exercise its option purchase shares. If PSH Corp., elects not to purchase
the Registrable Securities, then the Secured Lenders shall offer the Registrable
Securities to Penske Performance, Inc. in accordance with the procedures and on
the terms and conditions set forth in Section 1.3 of the Shareholders Agreement,
except that Penske Performance, Inc. shall have ten (10) days in which to
exercise its option to purchase such shares. If Penske Performance, Inc.,
elects not to purchase the Registrable Securities, then the Secured Lenders
shall offer the Registrable Securities to International Speedway Corporation in
accordance with the procedures and on the terms and conditions set forth in
Section 1.3 of the Shareholders Agreement, except that International Speedway
shall have ten (10) days in which to exercise its option to purchase such
Registrable Securities. If International Speedway Corporation elects not to
purchase the Registrable Securities then the Secured Lenders may exercise the
Demand Registration rights hereunder.
(c) The Company shall not be required to include in any Registration
statement more than 850,000 Shares of the Registrable Securities on behalf of
the Secured Lenders. However, after a twelve (12) month period after the
effective date of the initial
3
<PAGE>
CONDITIONAL DEMAND REGISTRATION RIGHTS AGREEMENT
registration statement, the Secured Lenders may by written demand to the Company
require the registration of the balance of the Registrable Securities not
previously registered.
(d) During such time as Secured Lender may be engaged in a
distribution of the Shares that are registered, such holder will comply with
Rules 10b-7 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and pursuant thereto, Secured Lender will, among other
things, cause to be furnished to each broker through whom Registration
Securities may be offered, or to the offeree if an offer is not made through a
broker, such copies of the prospectus covering the Shares that are registered
and any amendment or supplement thereto and documents incorporated by reference
therein as may be required by law and the Secured Party shall not bid for or
purchase any shares of the Company or attempt to induce any other person to
purchase any securities of the Company other than as permitted under Exchange
Act.
(e) To the extent not inconsistent with applicable law, each Secured
Lender will agree not to effect any public sale or distribution (including sales
pursuant to Rule 144) of equity securities of the Company, or any securities
convertible into or exchangeable or exercisable for such securities during the
seven (7) days prior to, and the 180-day period beginning on the effective date
of the underwritten Demand Registration, unless the underwriter managing the
registered public offering otherwise agrees.
(f) Each Secured Lender participating in a Demand Registration shall
furnish to the Company a written undertaking that such Secured Lender is bound
by and will abide by the terms of this Agreement.
4. Secured Lender's Cooperation. The Secured Lender will cooperate with
the Company in connection with the preparation of the registration statement,
and for so long as the Company is obligated to file and keep effective the
registration statement, will provide to the Company, in writing, for use in the
registration statement, all information regarding Secured Party as may be
necessary to enable the Company to prepare the registration statement and
prospectus covering the Registrable Securities, to maintain the currency and the
currency and effectiveness thereof and otherwise to comply with all applicable
requirements of law in connection therewith.
5. Exercise of Piggyback Registration Rights. In the event a Secured
Lender makes a written demand for registration pursuant to the terms of this
Agreement, Kaiser shall not have any "piggyback" registration rights pursuant to
the Registration Rights Agreement for such registration statement. However,
Kaiser's inability to participate in a registration shall not otherwise affect
its "piggyback" registration rights under the Registration Rights Agreement nor
shall it count as an offering in which Kaiser declined to participate.
6. Registration Expenses.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel for the Company and all independent certified public
accountants, underwriters and other Persons retained by the
4
<PAGE>
CONDITIONAL DEMAND REGISTRATION RIGHTS ACGREEMENT
Company (all such expenses being herein called "Registration Expenses"), will be
borne by Secured Lenders unless such registration shall be deemed an exercise of
Kaiser's "piggyback" pro-rata on the basis of the amount of the securities being
sold by each such holder, registration rights under the Registration Rights
Agreement in which case the allocation of Registration Expenses provided in the
Registration Rights Agreement shall be applicable.
(b) Notwithstanding Paragraph 6(a) above, if the Company should also
register securities pursuant to the same registration statement as for all or
any portion of the Shares being registered on behalf of a Secured Lender, the
Registration Expenses shall be allocated and paid pro rata among all such
persons, including the Company, on the amount of securities being sold by each
such person.
7. Indemnification.
(a) The Company agrees to indemnify, to the extent permitted by law,
the Secured Lenders, their respective officers, directors, counsel and each
Person who controls Secured Lenders (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses caused by any
untrue or alleged untrue statement of material fact contained in any
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by Kaiser or the Secured Lenders
for use therein or by Kaiser's or the Secured Lenders failure to deliver a copy
of the registration statement or prospectus or any amendments or supplements
thereto after the Company has furnished the Secured Lenders with a sufficient
number of copies of the same.
(b) In connection with any registration statement in which Secured
Lenders are participating, the Secured Lenders and Kaiser will furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law each of the Secured Lenders and
Kaiser, will indemnify the Company, its directors, officers, counsel,
accountants and each Person who controls the Company (within the meaning of the
Securities Act) against all losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement of material fact contained
in the registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
omission is contained in any information or affidavit so furnished in writing by
any of the Secured Lenders or Kaiser. No Secured Party or Kaiser shall be
responsible for the information furnished by the other.
(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying
5
<PAGE>
CONDITIONAL DEMAND REGISTRATION RIGHTS AGREEMENT
party will not be subject to any liability for any settlement made by the
indemnified party without its consent (but such consent will not be unreasonably
withheld). An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and expenses
of more than one counsel for all parties indemnified by such indemnifying party
with respect to such claim, unless in the reasonable judgment of any indemnified
party a conflict of interest may exist between such indemnified party and any
other of such indemnified parties with respect to such claim.
(d) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive the transfer of securities.
8. Termination. This Agreement shall automatically terminate and be of
no further force or effect upon the twentieth (20th) anniversary date of this
Agreement.
9. Third Party Beneficiary. Kaiser and the Company agree that any
Secured Lender (as defined herein) shall have the right to enforce the terms and
conditions of this Agreement as if they were originally a party to this
Agreement. This Agreement is for the benefit of each Secured Lender.
10. Miscellaneous.
(a) Definition of Person. "Person" means any individual, corporation,
--------------------
partnership, limited liability company, limited liability partnership, firm,
joint venture, association, joint-stock company, trust or un-incorporated
organization.
(b) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and Kaiser and any Secured Lender.
(c) Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement.
(d) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
(e) Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.
(f) Governing Law. The corporate law of Delaware will govern all
-------------
issues concerning the relative rights of the Company and its stockholders. All
other questions concerning the construction, validity and interpretation of this
Agreement and the exhibits and schedules hereto will be governed by the internal
law, and not the law of conflicts, of Michigan.
6
<PAGE>
CONDITIONAL DEMAND REGISTRATION RIGHTS AGREEMENT
(g) Notices. All notices, demands or other communications to be given
-------
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable express courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demand and other
communications will be sent to the addresses indicated below:
To: Penske Motorsports, Inc.
13400 Outer Drive West
Detroit, Michigan 48239
Attention: President
With a copy to: Robert H. Kurnick, Jr.
c/o Penske Auto Centers, Inc.
3270 W. Big Beaver Road, Suite 130
Troy, Michigan 48084
To: Kaiser Ventures Inc.
3633 E. Inland Empire Boulevard, Suite 850
Ontario, California 91764
Attention: President
With a copy to: Terry Cook
c/o Kaiser Ventures Inc.
3633 E. Inland Empire Boulevard, Suite 850
Ontario, California 91764
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
"Company"
PENSKE MOTORSPORTS, INC.
By: /s/ Richard J. Peters
-----------------------
Richard J. Peters, President &
Chief Executive Officer
"Kaiser"
KAISER VENTURES INC.
By: /s/ Gerald A. Fawcett
-----------------------
Gerald A. Fawcett, President &
Chief Operating Officer
7
<PAGE>
EXHIBIT 10.29.1
---------------
FIRST AMENDMENT
---------------
TO
--
REVOLVING CREDIT AND TERM LOAN AGREEMENT
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This Amendment, dated as of January 30, 1997, is entered into by FONTANA
WATER RESOURCES, INC., a Delaware corporation (the "Borrower"), and UNION BANK
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OF CALIFORNIA, N.A., a national banking association (successor in interest to
Union Bank, a California banking corporation) (the "Bank").
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Recitals
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A. The Borrower and the Bank have entered into a Revolving Credit and
Term Loan Agreement dated as of September 30, 1994 (the "Credit Agreement").
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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, among
other things, increase the Maximum Commit ment. Accordingly, the Borrower and
the Bank agree as set forth below.
1. Amendments to Credit Agreement. Effective as of the date hereof and
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subject to satisfaction of the conditions precedent set forth in Section 2, the
Credit Agreement is hereby amended as set forth below.
(a) The definitions of "Borrowing Base," "Loans," "Maturity Date" and
"Revolving Commitment Termination Date" in Section 1.1 of the Credit Agreement
are amended in full to read respectively as follows:
"'Borrowing Base' means, at any time of determina tion as provided in
--------------
Section 4.2(b)(iii) or 6.1(b), the net present value determined by
discounting at the rate of 9% per annum for a period of 32 quarters the sum
--- -----
of (a) one quarter of the sum of the 4 most recent 'Quar terly Lease
Payments' both scheduled and made by CCWD to the Borrower during the
immediately preceding 14 months pursuant to Section
<PAGE>
4.2(c) of the CCWD Lease, plus (b) one quarter of the amount of the most
----
recent 'Agricultural Pool Transfer Payment' both scheduled and made by CCWD
to the Borrower during the immediately preceding 18 months pursuant to
Section 4.2(d) of the CCWD Lease. As an example of the calculation
described above, if the sum of (a) and (b) above were $1,223,077, then
discounting that amount at 9% per annum for 32 quarters would yield a net
--- -----
present value, i.e., a Borrowing Base, of $27,687,619."
---
"'Loans' has the meaning set forth in Section 2.1(a)."
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"'Maturity Date' means September 30, 2006; provided, however, that,
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if the Bank notifies the Borrower as contemplated by the second proviso of
Section 2.4, then 'Maturity Date' shall mean September 30, 2004."
"'Revolving Commitment Termination Date' means October 1, 2001."
-------------------------------------
(b) The following new definitions are added to Section 1.1 of the
Credit Agreement in appropriate alphabetical order:
"'DTSC' means the Department of Toxic Substances Control of the State
----
of California."
"'DTSC Reserve Agreement' means the Agreement Regarding Reservation of
----------------------
a Portion of Line of Credit as a Financial Assurance for the California
Department of Toxic Substances Control dated effective December 15, 1995
between the Borrower and the Bank."
"'DTSC Sub-Commitment' has the meaning set forth in Section 2.1(a)."
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(c) Section 2.1 of the Credit Agreement is amended in full to read as
follows:
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<PAGE>
"Section 2.1 Commitment.
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"(a) The Bank agrees, on the terms and conditions hereinafter
set forth, to make loans to the Borrower (the 'Loans') from time to time
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during the period from the Closing Date to the Revolving Commit ment
Termination Date in an aggregate amount not to exceed at any time
outstanding the lesser from time to time (the 'Commitment') of (i)
----------
$30,000,000, as such amount may be reduced pursuant to Section 2.1(b) (such
amount, as it may be so reduced, herein called the 'Maximum Commitment'),
------------------
and (ii) the Borrowing Base. The Borrower and the Bank agree that,
pursuant to the DTSC Reserve Agreement and subject to the limits of the
Commitment, the Borrower has agreed to set aside within the Commitment
borrowing availability in the amount of $5,505,000, as such amount may be
increased or de creased pursuant to Section 2.1(b) (such amount, as it may
be so increased or decreased, herein called the 'DTSC Sub-Commitment'), to
-------------------
provide financial assurance as required by the DTSC. The amount that would
other wise be available to the Borrower from time to time for borrowing
under the Commitment shall be reduced by the amount available to the
Borrower from time to time for borrowing under the DTSC Sub-Commitment.
Within the limits of the Commitment, the Borrower may borrow under this
Section 2.1(a), prepay pursuant to Section 2.6(a) and reborrow under this
Section 2.1(a).
"(b) The Borrower shall have the right, upon at least 10
Business Days' notice to the Bank, to terminate in whole or reduce in part
the unused portion of the Maximum Commitment from time to time; provided,
--------
however, that each partial reduction of the Maximum Commitment shall be in
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the amount of $1,000,000 or an integral multiple of $500,000 in excess
thereof. The Borrower shall also have the right, upon at least 10 Business
Days' notice to the Bank and subject to availability under the Commitment,
to increase the DTSC Sub-Commitment from time to time. In addition, the
DTSC Sub-Commitment shall be increased automatically (subject to
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<PAGE>
availability under the Commitment) or decreased automatically (to the
extent not then in use) from time to time to the amount as to which the
Borrower and the DTSC jointly notify the Bank in writing from time to time
pursuant to the last sentence of Paragraph 1 of the DTSC Reserve Agreement.
"(c) If at any time on or before the Revolving Commitment
Termination Date the aggregate principal amount of the Loans outstanding
exceeds the Borrowing Base (any such excess herein called an
"Overadvance"), then the Borrower will repay such Overadvance in 4
-----------
substantially equal quarterly install ments, 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, in addition to the interest payable on
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each Overadvance pursuant to Section 2.5, the unpaid principal amount of
such Overadvance shall bear an interest premium of 1% per annum (payable at
--- -----
the same time as regular inter est) until such principal amount has been
repaid 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 outstand ing shall be applied first, to the payment
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of interest then due on the Loans (including pursuant to the first proviso
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 the princi
------
pal-repayment installments then due on such Overad vances pursuant to this
Section 2.1(c), third, to the payment of any regular principal-repayment
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installments then due on the Loans pursuant to Section 2.4, fourth, to the
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payment of any mandatory prepayments of princi pal then due on the Loans
pursuant to Section 2.7, fifth, to the prepayment of any remaining
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principal-repayment installments scheduled on such Overadvances pursuant to
this Section 2.1(c), in inverse order of maturity, and sixth, if any amount
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is remaining, to the Borrower; further provided, however, that the last
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scheduled principal-repayment installment on each Overadvance
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<PAGE>
shall be in the amount necessary to repay in full the unpaid principal
amount of such Overadvance; and further provided, however, that the
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repayment and prepayment of, and the payment of additional interest 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."
(d) The second sentence of Section 2.2(a) of the Credit Agreement is
amended in full to read as follows:
"Each such notice of a Loan (a 'Notice of Borrowing') shall be by an
-------------------
Authorized Officer in writing, specify ing (i) the requested date of such
Loan (which shall be a Business Day), (ii) the requested Type of Loan,
(iii) the requested amount of such Loan (which shall be $500,000 or an
integral multiple of $250,000 in excess thereof), (iv) in the case of a
Eurodollar Loan, the requested initial Interest Period for such Loan, (v)
whether such Loan is requested under the DTSC Sub-Commitment or not and
(vi) the fact that the statements set forth in Sections 4.2(b)(i) and (ii)
are true as of the date of such Loan."
(e) Section 2.4 of the Credit Agreement is amended in full to read as
follows:
"Section 2.4 Repayment. The Borrower will repay the principal amount
----------- ---------
of the Loans outstanding on the Revolving Commitment Termination Date in 20
quarterly installments, each such installment to be determined by
multiplying such principal amount by the percentage set forth opposite the
applicable repayment date on Schedule 2. Such installments shall be due on
the 10th day of each February, May, August and November, commencing on
February 10, 2002, and on the Maturity Date; provided, however, that the
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last such installment shall be in the amount necessary to repay in full the
unpaid principal amount of the Loans; and further provided, however, that,
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if the Bank notifies the Borrower on or before September 30, 2003 that the
Loans will be due and
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<PAGE>
payable in full on September 30, 2004, in the Bank's sole and absolute
discretion, then the Borrower will repay the Loans in full on September 30,
2004."
(f) Section 2.7 of the Credit Agreement is amended by deleting the
date "June 30, 2000" and substituting the date "June 30, 2002."
(g) Article 2 of the Credit Agreement is amended by adding a new
Section 2.14, to read as follows:
"Section 2.14 Commitment Fee. The Borrower will pay the Bank a
------------ --------------
commitment fee of $250,000, of which (a) $100,000 shall be payable on
January 30, 1997 and (b) $150,000 shall be payable in 6 installments of
$25,000 each, payable quarterly on the 10th day of each February, May,
August and November, commencing on February 10, 1997 and ending on May 10,
1998; provided, however, that, if the Commitment is terminated in full
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before May 10, 1998, then the Borrower will pay to the Bank on the date of
such termination all installments of such commitment fee then remaining
unpaid. The Borrower acknowledges and agrees that such commitment fee was
fully earned as of January 30, 1997 and that the foregoing sentence is
concerned only with the timing of payment of such fee."
(h) The first sentence of Article 6 of the Credit Agreement, and
Section 8.8 of the Credit Agreement, are amended by deleting the word "Maximum"
wherever it appears therein.
(i) Section 6.10 of the Credit Agreement is amended in full to read as
follows:
"Section 6.10 Use of Proceeds. 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
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<PAGE>
Guarantor's mill site, including the provision of financial assurances to
the DTSC concern ing the same."
(j) Schedule 2 to the Credit Agreement is deleted and replaced by
Schedule 2 attached to this Amendment.
2. Conditions to Effectiveness. This Amendment shall become effective when the
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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, duly executed by the Borrower;
(b) an amended and restated promissory note to the order of the Bank
in the maximum principal amount of $30,000,000 (the "New Note"), duly executed
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by the Borrower;
(c) a modification to the Deed of Trust for the purpose, among others,
of making reference in the Deed of Trust to the New Note (the "Deed of Trust
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Modification"), duly executed by the Borrower, together with evidence of the
- ------------
completion of recording of the Deed of Trust Modification in the Official
Records of San Bernardino, Riverside and Los Angeles Counties;
(d) an amendment to the Guaranty for the purpose of amending Section 4
thereof, together with a consent to this Amendment (collectively the "Guaranty
--------
Amendment"), duly executed by the Guarantor;
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(e) an amendment to the Escrow Agreement for the purpose of extending
the maximum term thereof to October 31, 2006 (the "Escrow Amendment"), duly
----------------
executed by the Borrower and the Escrow Agent;
(f) copies of previously adopted resolutions of the Board of Directors
of each Loan Party approving those of this Amendment, the New Note, the Deed of
Trust Modification, the Guaranty Amendment and the Escrow 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
-7-
<PAGE>
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, listing the
charter documents and all amendments thereto of each Loan Party on file in the
applicable Governmental Person's office and certifying that (i) such amendments
are the only amendments to such Loan Party's charter documents on file in the
applicable Governmental Person's office, (ii) such Loan Party has paid all
franchise taxes in Delaware and California to the date of such certificate and
(iii) 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) as to the absence of any 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 representations
and warranties 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 (iii) 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
-8-
<PAGE>
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 Agree ment, 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.
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
imposi tion 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
-9-
<PAGE>
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 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 September 30,
1996 and the related statements of income, retained earnings and cash flows of
the Borrower for the 9-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 9-month period ended on such date, all in
accordance with generally accepted accounting principles applied on a consistent
basis. Since September 30, 1996 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.
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<PAGE>
4. Reference to and Effect on Credit Documents.
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(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," "there
under," "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.
5. Costs and Expenses. The Borrower agrees to pay on demand all 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 responsi bilities hereunder and thereunder.
6. Headings. The section headings used herein have been inserted for
- - --------
convenience of reference only and do not con stitute matters to be considered in
interpreting this Amendment.
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<PAGE>
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.
8. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
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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/ James F. Verhey
____________________
James F. Verhey
Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Bret A. Martin
____________________
Name:Bret A. Martin
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Title:Vice President
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<PAGE>
SCHEDULE 2
REPAYMENT SCHEDULE
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Repayment Date Repayment Percentage
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February 10, 2002 4.00%
May 10, 2002 4.00%
August 10, 2002 4.00%
November 10, 2002 4.00%
February 10, 2003 4.50%
May 10, 2003 4.50%
August 10, 2003 4.50%
November 10, 2003 4.50%
February 10, 2004 5.00%
May 10, 2004 5.00%
August 10, 2004 5.00%
November 10, 2004 5.00%
February 10, 2005 5.50%
May 10, 2005 5.50%
August 10, 2005 5.50%
November 10, 2005 5.50%
February 10, 2006 6.00%
May 10, 2006 6.00%
August 10, 2006 6.00%
September 30, 2006 6.00%
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100.00%
<PAGE>
The Repayment Percentages set forth above apply to the principal amount of the
Loans outstanding on the Revolving Commitment Termination Date.
<PAGE>
FIRST AMENDMENT TO GUARANTY EXHIBIT 10.29.3
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This Amendment, dated as of January 30, 1997, is entered into by KAISER
VENTURES INC., a Delaware corporation (formerly known as "Kaiser Resources
Inc.") (the "Guarantor"), and UNION BANK OF CALIFORNIA, N.A., a national banking
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association (successor in interest to Union Bank, a California banking
corporation) (the "Bank").
----
Recitals
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A. The Guarantor has executed a Guaranty dated as of September 30, 1994
(the "Guaranty") in favor of the Bank, pursuant to which the Guarantor has
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guaranteed all of the obligations of Fontana Water Resources, Inc., a Delaware
corporation (the "Borrower"), to the Bank under the Revolving Credit and Term
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Loan Agreement dated as of September 30, 1994 (the "Credit Agreement") between
----------------
the Borrower and the Bank. 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 Guarantor and the Bank wish to amend the Guaranty to revise
certain of the waivers contained therein. Accordingly, the Guarantor and the
Bank agree as set forth below.
1. Amendments to Guaranty. The Guaranty is hereby amended as set forth below.
- - ----------------------
(a) Section 4(b) of the Guaranty is amended in full to read as
follows:
"(b) Without limiting the generality of any other provision of this
Guaranty, the Guarantor waives all rights and defenses that it may have
because the Borrower's debt is secured by real property. This means, among
other things, that:
<PAGE>
"(i) the Bank may collect from the Guarantor without first
foreclosing on any real- or personal-property collateral pledged by the
Borrower; and
"(ii) if the Bank forecloses on any real property collateral
pledged by the Borrower:
"(A) the amount of the debt may be reduced only by the
price for which that collateral is sold at the foreclosure sale, even if
the collateral is worth more than the sale price; and
"(B) the Bank may collect from the Guarantor even if the
Bank, by foreclosing on the real-property collateral, has destroyed any
right that the Guarantor may have to collect from the Borrower.
"This is an unconditional and irrevocable waiver of any rights and defenses
that the Guarantor may have because the Borrower's debt is secured by real
property. These rights and defenses include, but are not limited to, any
rights or defenses based upon Section 580a, 580b, 580d or 726 of the
California Code of Civil Procedure."
(b) Section 4 of the Guaranty is amended by adding a new Section 4(c),
to read as follows:
"(c) Without limiting the generality of any other provision of this
Guaranty, the Guarantor waives all rights and defenses arising out of an
election of remedies by the Bank, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed the Guarantor's rights of subrogation and
reimbursement against the Borrower by the operation of Section 580d of the
California Code of Civil Procedure or otherwise."
2. Representations and Warranties of Guarantor. The Guarantor represents and
- - -------------------------------------------
warrants to the Bank as set forth below.
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<PAGE>
(a) The execution, delivery and performance by the Guarantor of this
Amendment, and of the Guaranty as amended hereby, and the consummation of the
transactions contemplated by this Amendment and the Guaranty as amended hereby,
are within the Guarantor's corporate powers, have been duly authorized by all
necessary corporate action and do not (i) contravene the Guarantor'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 Guarantor 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
other wise), operations, performance, properties or prospects of the Guarantor
or the ability of the Guarantor to perform its obligations under any of the
Credit Documents, as amended by this Amendment, or (iv) result in or require the
creation or imposition of any Lien upon or with respect to any of the properties
of the Guarantor, other than in favor of the Bank.
(b) No Governmental Action is required for the due execution, delivery
or performance by the Guarantor of this Amendment, or of the Guaranty as amended
hereby.
(c) This Amendment, and the Guaranty as amended hereby, constitute
legal, valid and binding obligations of the Guarantor, enforceable against the
Guarantor 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) The Stock Pledge Agreement constitutes a valid and perfected
first-priority Lien on the Collateral purported to be covered thereby,
enforceable against all third parties in all jurisdictions, and secures the
payment of all obligations of the Guarantor under the Guaranty, as amended by
this Amendment, and the other Credit Documents; and the execution, delivery and
performance of this Amendment do not adversely affect the Lien of the Stock
Pledge Agreement.
(e) The audited consolidated balance sheet of the Guarantor and its
Subsidiaries as of December 31, 1995, and the
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<PAGE>
related audited consolidated statements of income, retained earnings and cash
flows of the Guarantor and its Subsidiaries for the fiscal year then ended,
fairly present the consolidated financial condition of the Guarantor and its
Subsidiaries as of such date and the consolidated results of the operations of
the Guarantor and its Subsidiaries for the fiscal year ended on such date, all
in accordance with generally accepted accounting principles applied on a
consistent basis. The unaudited consolidated balance sheet of the Guarantor and
its Subsidiaries as of [September] 30, 1996, and the related unaudited
consolidated statements of income, retained earnings and cash flows of the
Guarantor and its Subsidiaries for the [9]-month period then ended, certified
(subject to normal year-end audit adjustments) by the chief financial officer or
chief accounting officer of the Guarantor as having been prepared in accordance
with generally accepted accounting principles applied on a consistent basis,
fairly present the consolidated financial condition of the Guarantor and its
Subsidiaries as of such date and the consolidated results of the operations of
the Guarantor and its Subsidiaries for the [9]-month period ended on such date.
Since [September] 30, 1996 there has been no materially adverse change in the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Guarantor or any of its Subsidiaries. The
Guarantor and its Subsidiaries have no material contingent liabilities, except
as disclosed in such consolidated financial statements 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 Guarantor or any of its Subsidiaries.
(f) There is no pending or, to the knowledge of the Guarantor,
threatened action, suit, investigation, litigation or proceeding affecting the
Guarantor before any Governmental Person or arbitrator that purports to affect
the legality, validity or enforceability of this Amendment or of the Guaranty as
amended hereby.
-4-
<PAGE>
3. Reference to and Effect on Guaranty.
- - -----------------------------------
(a) On and after the effective date of this Amendment, each reference
in the Guaranty to "this Guaranty," "hereunder," "hereof," "herein" or any other
expression of like import referring to the Guaranty, and each reference in the
other Credit Documents to "the Guaranty," "thereunder," "thereof," "therein" or
any other expression of like import referring to the Guaranty, shall mean and be
a reference to the Guaranty as amended by this Amendment.
(b) Except as specifically amended by this Amendment, the Guaranty
shall remain in full force and effect and is hereby ratified and confirmed.
Without limiting the generality of the foregoing, the Stock Pledge Agreement and
all of the Collateral described therein do and shall continue to secure the
payment of all obligations of the Guarantor under the Guaranty, as amended by
this Amendment, and the other Credit Documents.
(c) The execution, delivery and effectiveness of this Amendment 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.
4. Consent. The Guarantor hereby consents to the First Amendment to Revolving
- - -------
Credit and Term Loan Agreement dated as of January 30, 1997 (the "Credit
------
Agreement Amendment") between the Borrower and the Bank 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 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 Credit Agreement Amendment.
5. Costs and Expenses. The Guarantor agrees to pay on demand all costs and
- - ------------------
expenses of the Bank in connection with the preparation, execution and delivery
of this Amendment and the other instruments and documents to be delivered
hereunder,
-5-
<PAGE>
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.
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.
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.
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.
KAISER VENTURES INC.
By: /s/ James F. Verhey
_________________________
James F. Verhey
Vice President &
Chief Financial Officer
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Bret A. Martin
_________________________
Name: Bret A. Martin
_______________________
Title: Vice President
______________________
-6-
<PAGE>
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 February 11,
1997, 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, 1996.
/s/ Ernst & Young LLP
------------------------
Ernst & Young LLP
Riverside, California
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FROM THE
DECEMBER 31, 1996 FORM 10-K REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 8,482,000 10,937,000
<SECURITIES> 0 0
<RECEIVABLES> 3,217,000 3,330,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,818,000 20,629,000
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 134,067,000 126,803,000
<CURRENT-LIABILITIES> 13,058,000 17,808,000
<BONDS> 8,102,000 5,342,000
0 0
0 0
<COMMON> 315,000 314,000
<OTHER-SE> 81,133,000 68,383,000
<TOTAL-LIABILITY-AND-EQUITY> 134,067,000 126,803,000
<SALES> 0 0
<TOTAL-REVENUES> 15,414,000 11,108,000
<CGS> 0 0
<TOTAL-COSTS> 3,312,000 3,792,000
<OTHER-EXPENSES> 3,837,000 4,201,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 819,000 665,000
<INCOME-PRETAX> 7,446,000 2,450,000
<INCOME-TAX> 4,877,000 1,056,000
<INCOME-CONTINUING> 2,569,000 1,394,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,569,000 1,394,000
<EPS-PRIMARY> 0.24 0.13
<EPS-DILUTED> 0.24 0.13
</TABLE>
