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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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-18858
KAISER VENTURES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-0594733
- --------------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
3633 E. Inland Empire Blvd.
Suite 850
Ontario, CA 91764
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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:
Name of Each Exchange
Title of Each Class on which Registered
----------------------------- -----------------------
COMMON STOCK ($.03 PAR VALUE) Nasdaq Stock Market(SM)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. Yes X No ___
---
The aggregate market value of the registrant's Common Stock, $.03 par value,
held by non-affiliates of the registrant was approximately $51,203,719 based
upon the average of the bid and ask prices of registrant's Common Stock on the
Nasdaq Stock Market(SM) at March 20, 1998, or $10.875 per share.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No ___
---
At March 20, 1998, 10,612,815 shares of the registrant's Common Stock, $.03 par
value, were outstanding, including 136,919 shares deemed outstanding but
reserved for issuance to the general unsecured creditors of Kaiser Steel
Corporation.
DOCUMENTS INCORPORATED BY REFERENCE: The Company's Proxy Statement for the 1998
Annual Meeting of Stockholders is incorporated into Part III of this Form 10-K.
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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........................................................ 29
Item 3. LEGAL PROCEEDINGS................................................. 32
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.......................................................... 35
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS...................................... 36
Item 6. SELECTED FINANCIAL DATA........................................... 37
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 49
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 49
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT....................................................... 50
Item 11. EXECUTIVE COMPENSATION............................................ 50
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................... 50
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 50
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.............................................. 51
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PART I
FORWARD LOOKING INFORMATION
EXCEPT FOR THE HISTORICAL STATEMENTS AND DISCUSSIONS CONTAINED HEREIN,
STATEMENTS CONTAINED IN THIS 10-K REPORT CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ANY 10-K, ANNUAL
REPORT TO STOCKHOLDERS, 10-Q OR 8-K REPORT OF THE COMPANY MAY INCLUDE FORWARD-
LOOKING STATEMENTS. IN ADDITION, OTHER WRITTEN OR ORAL STATEMENTS, WHICH
CONSTITUTE FORWARD-LOOKING STATEMENTS, HAVE BEEN MADE AND MAY BE MADE IN THE
FUTURE BY THE COMPANY. WHEN USED OR INCORPORATED BY REFERENCE IN THIS 10-K
REPORT OR IN OTHER WRITTEN OR ORAL STATEMENTS, THE WORDS "ANTICIPATE,"
"ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-
LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE,
OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED, EXPECTED OR PROJECTED. FOR
EXAMPLE, ACTUAL RESULTS COULD MATERIALLY DIFFER FROM THOSE PROJECTED AS A RESULT
OF FACTORS SUCH AS, BUT NOT LIMITED TO: GENERAL ECONOMIC CONDITIONS IN THE
UNITED STATES AND SOUTHERN CALIFORNIA; THE IMPACT OF FEDERAL, STATE, AND LOCAL
LAWS AND REGULATIONS ON THE COMPANY'S DEVELOPMENT ACTIVITIES; THE IMPACT OF
WEATHER ON THE COMPANY'S CONSTRUCTION RELATED ACTIVITIES; THE DISCOVERY OF
UNANTICIPATED ENVIRONMENTAL CONDITIONS ON ANY OF THE COMPANY'S PROPERTIES; THE
FAILURE OF THE BANKRUPTCY DISCHARGE GRANTED TO THE COMPANY TO ADDRESS CLAIMS AND
LITIGATION THAT RELATE TO THE PRE-BANKRUPTCY ACTIVITIES OF KAISER STEEL
CORPORATION; OR THE FAILURE TO OBTAIN ANY REQUIRED APPROVAL OR PERMIT FOR THE
PROPOSED EAGLE MOUNTAIN LANDFILL PROJECT OR DEVELOPMENT OF THE COMPANY'S REAL
ESTATE. READERS ARE CAUTIONED NOT TO PUT UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS. THE COMPANY DISCLAIMS ANY INTENTION TO UPDATE OR REVISE ANY FORWARD-
LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR
OTHERWISE.
ITEM 1. BUSINESS
GENERAL
Kaiser Ventures Inc. ("Kaiser" or the "Company", including its wholly-owned
subsidiaries unless otherwise provided herein) is an asset development company
based in Southern California. The Company is the reorganized successor to Kaiser
Steel Corporation ("KSC") which was an integrated steel manufacturer that filed
for bankruptcy protection in 1987. Today, the Company's principal assets
include: (i) a 50.88% ownership interest in Fontana Union Water Company
("Fontana Union") which is leased to Cucamonga County Water District
("Cucamonga") pursuant to a 102-year take-or-pay lease; (ii) an 11.51% ownership
interest in Penske Motorsports, Inc. ("PMI"), a publicly traded motorsports
company; (iii) approximately 629 acres (gross) of the former KSC steel mill site
(the "Mill Site Property") which is currently undergoing redevelopment; (iv) a
50% joint venture interest in the West Valley Material Recovery Facility and
Transfer Station ("WVMRF"), a transfer station and recycling facility located on
land acquired from the Company; (v) an approximate 73% ownership interest in
Mine Reclamation Corporation ("MRC"), the company seeking to permit a rail-haul
municipal solid waste landfill (the "Landfill Project"); and (vi) the 11,350
acre idle iron ore mine in the California desert (the "Eagle Mountain Site")
which includes the associated 460 acre town of Eagle Mountain ("Eagle Mountain
Townsite") and the property which is leased to MRC for the Landfill Project.
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In addition, the Company's financial position is enhanced by approximately
$113 million of federal net operating loss tax carryforwards ("NOLs"), as of
December 31, 1997, which arose through the KSC bankruptcy reorganization and
which are expected to reduce most of the Company's federal tax liability in the
near future. The Company also has approximately $2.4 million of California net
operating loss carryforwards as of December 31, 1997. The federal NOL's expire
between the year 2000 through 2010 while the California NOL's expire between
year 2000 through 2002.
The Company's primary business strategy is to convert its existing
under-utilized assets into equity in new businesses joint ventures, long-term
leases, or by contributing assets in exchange for an ownership interest in
operating companies. This strategy enables the Company to minimize its capital
investment, reduce its risk, and benefit from the operational expertise of its
strategic partners or lessees. This strategy is illustrated by the successful
development of the Company's Fontana Union water rights into a long-term, take-
or-pay lease with Cucamonga, and by the Company's contribution of Mill Site
property to PMI for construction of the California Speedway ("TCS") in exchange
for an ownership interest in PMI. The Company will continue to focus on its
existing projects and asset base while seeking additional growth opportunities,
primarily through strategic joint ventures or acquisitions. While this is the
Company's general philosophy, the Company may choose to become more directly
involved in a particular project, such as the Landfill Project, when
appropriate, or if the Company believes its active participation will enhance
long-term shareholder value.
To support the development of its current long-term projects and assets, the
Company is also engaged in a number of short-term interim activities on the Mill
Site Property including month-to-month property rentals and the sale of existing
slag and other materials at the site. These interim activities have historically
generated a material portion of the Company's revenues and enabled the Company
to remain profitable in each full fiscal year since emerging from the KSC
bankruptcy. The Company anticipates that short-term property rentals and other
interim revenues will continue to decline as development of the remaining Mill
Site Property proceeds.
SUMMARY OF SIGNIFICANT DEVELOPMENTS IN 1997
During 1997, a number of material events occurred which affected the Company,
therefore, readers are encouraged to read this Report it in its entirety in
order to adequately understand the impact of these events on the Company. In
Management's opinion, three material events were particularly significant: (a)
the San Diego Court's ruling relative to the Landfill Project's environmental
impact report ("EIR"); (b) the filing of revised Form 13D's related to the
Company's two largest shareholders: the New Kaiser Voluntary Employee Benefit
Association ("VEBA") and the Pension Benefit Guarantee Corporation ("PBGC"); and
(c) the creation of a special committee by the Board of Directors to evaluate
strategic alternatives and transactions with respect to the Company and its
assets.
In regard to the Landfill Project, MRC received the necessary land use and
environmental approvals from the Riverside County Board of Supervisors on
September 9, 1997. Subsequently, two separate legal actions were pursued by
opponents to the Eagle Mountain Landfill Project which argued that the
environmental impact report ("EIR") approved by Riverside County was defective.
The first action challenged the County's and MRC's assertion that the new EIR
satisfied the requirements of the July, 1994 decisions of San Diego County
Superior Court Judge Judith McConnell. The second action was the commencement of
a new lawsuit in Riverside County. The environmental challenges in the new
lawsuit were dismissed on December 16, 1997. However, with respect to the first
action, the San Diego County Superior Court issued, on December 31, 1997, a
tentative ruling that preliminarily concluded that the new EIR was deficient in
several areas. On February 17, 1998, the Court issued its final ruling. In its
final ruling, the Court reversed itself with regard to several items in its
tentative ruling which were initially
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determined adverse to the Landfill Project. However, the Court still concluded
that the new EIR was deficient in two areas: the Landfill Project's impacts on
the threatened desert tortoise and Joshua Tree National Park. For more detailed
information on this matter, please see "Municipal Solid Waste Management
Landfill Project."
As a result of the Court's final ruling, the Company and MRC are currently
evaluating their available options with respect to the Landfill Project. These
options include, but are not limited to: (i) appealing the Court's decision;
(ii) taking the actions believed necessary to correct the deficiencies in the
EIR in compliance with the Court's decision; (iii) indefinitely postponing the
Landfill Project in some manner; or (iv) a combination of these or other
alternatives. Depending upon the course of action ultimately selected by MRC and
the Company, there could be a material adverse impact to the financial
statements of the Company, including a possible write down of the Company's
investment in MRC to the lower of cost or fair market value. The Company
anticipates a final decision on what course of action will be taken by MRC and
the Company by mid-1998.
In regard to the revised Form 13D's filed by VEBA and the investment advisor
of the PBGC, they disclosed that a Cooperation Agreement was entered into
between the PBGC's and VEBA's respective investment advisors. A copy of the
Cooperation Agreement was filed with the Form 13D's. The VEBA and PBGC own 33%
and 20% of the Company's stock respectively. The Cooperation Agreement provides,
among other things, that the parties are considering pursuing one or more
strategies involving the Company and its assets. Such alternatives include
distributing the PMI stock, securitizing and/or distributing the payments from
the Cucamonga Lease, pursuing the full development and operation of the Eagle
Mountain Landfill Project, selling or merging the Company, or jointly selling
the Company stock owned by PBGC and VEBA.
In addition, the Company's Board of Directors appointed a special committee
(the "Special Committee") to evaluate and consider pursuing, among other things,
various strategic alternatives and transactions with respect to the Company and
its assets. The Special Committee has retained outside legal counsel and the
investment banking firm of Merrill Lynch to assist it in its work.
These events, as well as other events, such as the successful opening of TCS
on property formerly owned by the Company, are discussed in more detail in this
Report.
WATER RESOURCES
Background. Municipalities in Southern California traditionally have long
depended on the availability of water from Northern California and the Colorado
River for significant portions of their water supply. Heavy usage of and
competing demands for these traditional sources, however, have decreased the
reliability of these imported sources and forced municipalities to seek
alternative water supplies. In addition, it is increasingly expensive to obtain
and deliver these imported water supplies. As a result, locally available
Southern California water resources continue to be increasingly important and
valuable.
The Company, through a wholly-owned subsidiary, Fontana Water Resources, Inc.
("FWR"), owns 50.88% of Fontana Union, a mutual water company, which was a
primary local source of water for KSC's former steel making operations. Fontana
Union owns water rights to produce water from four distinct surface and
subsurface sources of water near Fontana, California, including: (i) adjudicated
surface and streambed flow rights from the Lytle Creek area of the San Gabriel
Mountains; (ii) adjudicated rights to the Chino Basin subsurface aquifer; (iii)
adjudicated rights to the Colton/Rialto
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Basin subsurface aquifer; and (iv) unadjudicated rights to a subsurface aquifer
accessed by a well at the base of Lytle Creek (Well No. 22).
Kaiser's ownership of Fontana Union entitles the Company to receive, annually,
its proportionate share of Fontana Union's water which historically totals
approximately 34,000 acre feet per year (an acre foot equals approximately
325,000 gallons). In addition, when other shareholders of Fontana Union do not
take their annual proportionate shares of water, the unclaimed water for each
year from those shareholders is divided pro rata among those shareholders that
do take such water. Currently, the Company's pro rata interest in unclaimed
water raises its effective overall share from 50.88% to approximately 55.66%.
Over time, the Company expects this supplemental source of water to be reduced
or eliminated as minority shareholders who do not currently utilize all their
water begin to use, sell, or lease their water interests.
Lease to Cucamonga County Water District. In 1989, the Company leased its
shares of Fontana Union stock to Cucamonga, a local water district with an "A-"
credit rating from Moody's Investor Services. Under the terms of the 102-year
take-or-pay lease (the "Cucamonga Lease"), Cucamonga is entitled to receive all
of the Company's proportionate share of water from the foregoing sources.
Cucamonga pays the Company for all of the Company's share of water based upon
fixed quantities of water at a rate of 68.13% of the Metropolitan Water District
of Southern California's (the "MWD") charge for untreated, non-interruptible
water as available through Chino Basin Municipal Water District. Thus, on a
quarterly basis, Cucamonga pays for its proportionate share of the agreed upon
annual quantities regardless of fluctuations in actual water flows and actual
receipt and use of water, except in certain limited situations as discussed in
more detail below. During 1997 and 1996, the Cucamonga Lease generated $5.1
million and $4.5 million, respectively, in revenues to the Company.
Because of the 102-year lease agreement, which gives Cucamonga all of the
Company's ownership rights in Fontana Union, the Company does not consolidate
the accounts of Fontana Union for financial reporting purposes. Substantially
all risks and costs of producing the water are borne by Cucamonga.
Under the Cucamonga Lease, the Company and Cucamonga agreed that the gross
annual quantity of Fontana Union water from all sources (except the annual Chino
Basin agricultural pool transfer for which the Company accrues revenues for its
share in the 4th quarter), is approximately 34,000 acre feet or approximately
8,500 acre feet per quarter. Fixing the average quantities of water stabilized
the Company's revenues and Cucamonga's payments. The water quantities under the
Cucamonga Lease were fixed based on the historical average of water available
from the applicable water sources according to over 80 years of records. The
agreed upon quantities of water paid for under the Cucamonga Lease cannot be
adjusted or modified except in certain limited circumstances.
However, there are limited circumstances in which the amount of water can be
adjusted. As an example, in 1996, the agreed upon quantity of water from one
source of water, the Colton/Rialto wells, was temporarily reduced in accordance
with the terms of the Cucamonga Lease. Under the terms of the Cucamonga Lease,
Cucamonga pays the Company based upon a presumed annual production of 3,000 acre
feet from the Colton/Rialto wells through 1997 and beginning in 1998 and
thereafter 3,100 acre feet, provided that the water level in certain index wells
is above a certain level. This amount is a component of the 34,000 acre feet of
annual water described above. In the second quarter of 1996, the Company was
informed that the average water level in the index wells dropped below the
specified level thereby resulting in a reduction in production and the agreed
upon quantity under the Cucamonga Lease to a maximum of 920 acre feet. With this
reduction in production from the Colton/Rialto wells, the gross revenues to the
Company pursuant to the Cucamonga Lease declined in 1996 by approximately
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$269,000. However, in the fourth quarter of 1996, the wells again began pumping
at their historical levels. Thus, revenues generated from the Rialto/Colton
wells during 1997 were again based upon an annual production of 3,000 acre feet.
Another source of water leased by the Company to Cucamonga pursuant to the
Cucamonga Lease is the Company's proportionate share of water from what is known
as the Chino Basin agriculture pool transfers. These transfers represent that
portion of water allocated to agricultural users in the Chino Basin, which is
not used by such agricultural users in a particular water year. As a result, the
Company through Fontana Union is entitled to a share of this surplus water,
which Cucamonga pays for under the Cucamonga Lease. The historical average of
annual agricultural pool transfers to Fontana Union has been approximately 4,000
acre feet but the amount has fluctuated in recent years. Agricultural pool
transfers were only 2,557 acre feet for the 1995/96 water year apparently due to
increased and more accurate reporting of water usage by the agricultural
interests during the year. For the most recent water year, the 1996/97 water
year, the agricultural transfer was 3,832 acre feet. For the 1997/98 water year,
it is anticipated that the agricultural pool transfer will be in the range of
3,500 to 4,000 acre feet. See "Part 1, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a complete
discussion of the revenues derived pursuant to the Cucamonga Lease.
The Company's future lease revenue increases are primarily dependent upon any
adjustments in the MWD water rates and other fees upon which the lease rate is
calculated. The MWD rate established for untreated, non-interruptible water is
based on a number of factors, including the MWD need for funds to finance
capital improvements and to cover its fixed operational and overhead costs. The
MWD water rate has increased at an average rate in excess of 8.6% per year over
the last 25 years. The MWD rate increases are often cyclical in nature depending
upon such factors as water availability, consumption, capital projects and
available reserves. Recent effective rate increases, as of July 1 of each year,
have been 12.7% in 1991, 21.2% in 1992, 18.2% in 1993, 5.3% in 1994. As
discussed in more detail below, in 1995 a dispute arose as to MWD's rate
increase and the amount payable to the Company under the terms of the Cucamonga
Lease. Cucamonga asserted that the rate increases for the years 1995, 1996 and
1997 were substantially less than those asserted by the Company. Past rate
increases are not necessarily indicative of future rate increases by MWD.
On July 1, 1995, MWD implemented changed rates and a new rate structure. As a
result of these changes, the Company asserted that all the changed rates and
items implemented by MWD, which must be paid in order to receive untreated, non-
interruptible water from MWD, are to be included in the calculation of the MWD
rate payable under the terms of the Cucamonga Lease. Cucamonga disputed the
Company's interpretation of the Cucamonga Lease which would result in a rate
increase greater than 2.7%, the 1995 rate of increase Cucamonga asserted was the
appropriate rate increase. Similarly, there is a dispute over the MWD rate and
thus the Cucamonga Lease rate for 1996 and 1997. Cucamonga asserted there was no
rate increase in 1996 and only a 1.5% increase in 1997, while the Company
believes that there would have been greater increases in the Cucamonga Lease
rate in 1996 and 1997 if the Cucamonga Lease is interpreted in accordance with
Company's understanding of the Cucamonga Lease. Alternatively, the Company
asserted that the MWD rate as defined in the Cucamonga Lease had been
discontinued, requiring the parties to negotiate a new lease rate in accordance
with the terms of the Cucamonga Lease. Because the Company and Cucamonga were
unable to resolve this dispute, in 1996 the Company instituted litigation
against Cucamonga in San Bernardino County Superior Court.
A trial on the matter was held in March, 1998. After a five-day trial, the
Court concluded that the rate on which the Cucamonga Lease had been based was
discontinued effective July 1, 1995.
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Therefore, the terms of the Cucamonga Lease require the parties to negotiate in
good faith a new substitute rate. If the parties are unable to agree on a
substitute rate, the matter is referred to arbitration. There is no specified
time period in which the new substitute rate must be established.
Cucamonga has, to date, paid its obligations under the Cucamonga Lease on a
timely basis, but at a level that reflects the lower rates that the Company has
been disputing. The Company bills Cucamonga for the full amount it asserts it is
entitled to receive under the Cucamonga Lease, but has elected to create a
reserve for the amount in dispute. Therefore, water revenues are reported in the
amounts actually received from Cucamonga. Consequently, the recently announced
court decision does not affect the Company's financial statements but it may
have a positive impact on the future revenues the Company receives from
Cucamonga.
Pursuant to the Cucamonga Lease, if any of the Fontana Union water sources
become sufficiently contaminated as to be unusable after treatment and/or
blending, Cucamonga is not obligated to pay for the quantities of available but
unusable water. The Company is aware of only one limited source of water that
has been affected by contamination. Two water wells owned by Fontana Union have
been closed because of contamination apparently originating from the Mid-Valley
Landfill owned by San Bernardino County. The closure of these two wells has, to
date, not impacted and is not currently anticipated to impact the payments
received by the Company pursuant to the Cucamonga Lease. However, the Company
will closely monitor the situation to make sure that it is prepared to undertake
the activities necessary to protect itself from any revenue loss due to the
contamination of these two wells.
In addition, if any of Fontana Union's water rights are challenged by a third
party, the Company and Cucamonga are obligated to share the costs of defending
such challenge. Cucamonga also has an option to purchase the Company's Fontana
Union shares in the second half of year 2042, at a price generally based upon a
multiple of 15 times the then current annual lease payment, as well as the right
to purchase all of the Company's Fontana Union shares for $1.00 in the year
2092.
The Company employed a consulting organization in its search for a lessee of
its Fontana Union shares. The consulting agreement calls for a commission
payment of 5.42% of each payment received by the Company.
The Company views the Cucamonga Lease as a mature, stable asset with its
primary variable being future MWD water rate changes. Accordingly, the Company,
in a continuing effort to maximize shareholder value, regularly evaluates
various alternatives with respect to the Cucamonga Lease. These alternatives
include, but are not limited to, retention, sale, securitization and
monetization of the Cucamonga Lease. The Fontana Union shares and the Cucamonga
Lease are currently pledged as collateral for the Company's revolving-to-term
credit facility with Union Bank.
INVESTMENT IN PENSKE MOTORSPORTS, INC.
The Company owns 1,627,923 shares, or approximately 11.51% of the common stock
of PMI. As discussed in more detail below, the Company's ownership interest in
PMI was acquired as a result of: (i) its contribution in November, 1995, to PMI
of approximately 480 acres, as adjusted, of the Central Mill Site Property on
which TCS was built and successfully commenced operations in June 1997; and (ii)
the subsequent sale of the Speedway Business Park, totaling approximately 54
acres to PMI in December 1996. In March 1996, PMI became a publicly traded
company. PMI is traded on the Nasdaq National Market under the symbol "SPWY".
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PMI is a leading promoter and marketer of professional motorsports in the
United States as well as an owner and operator of speedway facilities. PMI
currently owns: (i) Michigan International Speedway, Inc. which owns and
operates the Michigan Speedway ("MIS"), in Brooklyn, Michigan; (ii) The
California Speedway Corporation, which owns and operates TCS near Los Angeles,
California; (iii) Pennsylvania International Raceway, Inc. which owns and
operates the Nazareth Motor Speedway ("Nazareth") in Nazareth, Pennsylvania;
(iv) North Carolina Motor Speedway, Inc. which owns and operates the North
Carolina Motor Speedway ("NCMS") in Rockingham, North Carolina; (v) a forty-five
percent (45%) interest in Homestead-Miami, LLC, the operator of the Metro-Dade
Homestead Motorsports Complex: in Dade County, Florida; (vi) Motorsports
International Corp. ("MIC"), a motorsports apparel and memorabilia company; and
(vii) Competition Tire West, Inc. and Competition Tire South, Inc., distributors
of Goodyear racing tires in the mid-west and southern regions of the United
States.
On March 27, 1998, PMI announced the sale of its seven percent (7%) interest
in Grand Prix of Long Beach, Inc. (Nasdaq:GPLB), the organizer and operator of
the annual CART PPG Cup Race run on the streets of Long Beach, California and
the owner and operator of Gateway International Raceway in Madison, Illinois and
Memphis Motorsports Park in Millington, Tennessee to Dover Downs Entertainment,
Inc. for a reported $5,270,000.
PMI, excluding Homestead-Miami Speedway, promoted a total of 17 major racing
events at MIS, Nazareth, TCS and NCMS in 1997 and expects to promote a total of
19 major racing events at these speedways in 1998. Of the seventeen 1997 events,
11 were stock car races, 9 of which were sanctioned by National Association of
Stock Car Racing ("NASCAR"), 4 (including an Indy Lights Series event) were Indy
car races sanctioned by Championship Auto Racing Teams, Inc. ("CART"), and 2
were Craftsman Truck Series races sanctioned by NASCAR. NASCAR events promoted
by PMI in 1997 included 4 NASCAR races associated with the Winston Cup Series, 4
races associated with the NASCAR Busch Grand National Series, and 2 races
associated with the NASCAR Craftsman Truck Series.
PMI's 1998 scheduled racing events at all of its facilities, excluding GPLB,
are as follows:
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DATE RACE CIRCUIT FACILITY
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February 21 GM Goodwrench Service Plus 200 NASCAR Busch Grand National North Carolina Speedway
February 22 GM Goodwrench Service Plus 400 NASCAR Winston Cup North Carolina Speedway
March 15 PPG-Dayton Indy Lights Homestead-Miami Speedway
March 15 Marlboro Grand Prix of Miami CART/Fed EX Championship Homestead-Miami Speedway
Presented by Toyota
April 4 NASCAR Slim Jim All-Pro Homestead-Miami Speedway
April 4 Florida Dodge Dealers 400 NASCAR Craftsman Truck Homestead-Miami Speedway
April 25 Kool, Toyota Atlantic Championship Nazareth Speedway
April 26 PPG-Dayton Indy Lights Nazareth Speedway
April 26 Bosch Spark Plug Grand Pix Presented CART/FedEx Championship Nazareth Speedway
By Toyota
May 2 Auto Club 200 NASCAR Winston West California Speedway
May 2 IROC Round II IROC California Speedway
May 3 California 500 Presented by NAPA NASCAR Winston Cup California Speedway
May 16 USRRC/F2000 Homestead-Miami Speedway
May 17 USRRC NTB Trans Am Homestead-Miami Speedway
May 17 USRRC Can-Am GT Homestead-Miami Speedway
May 17 First Union 200 NASCAR Busch Grand National Nazareth Speedway
May 17 NASCAR Featherlite Modified Tour Nazareth Speedway
June 13 ARCA 200 ARCA Michigan Speedway
June 13 IROC Round II IROC Michigan Speedway
June 14 Miller Lite 400 NASCAR Winston Cup Michigan Speedway
July 12 NASCAR Slim Jim All-Pro Nazareth Speedway
July 12 NAPA AutoCare 200 NASCAR Craftsman Truck Nazareth Speedway
July 18 No Fear Challenge NASCAR Craftsman Truck California Speedway
</TABLE>
7
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<TABLE>
<S> <C> <C> <C>
July 18 NASCAR Winston West California Speedway
July 19 Kenwood Home & Car Audio 300 NASCAR Busch Grand National California Speedway
July 25 Detroit News 100 PPG-Dayton Indy Lights Michigan Speedway
July 26 US 500 Presented by Toyota CART/FedEx Championship Michigan Speedway
August 15 Pepsi 200 Presented by DeVilbiss NASCAR Busch Grand National Michigan Speedway
August 16 Pepsi 400 Presented by DeVilbiss NASCAR Winston Cup Michigan Speedway
October 31 PPG-Dayton Indy Lights California Speedway
October 31 ACDelco 200 NASCAR Busch Grand National North Carolina Speedway
November 1 Marboro 500 Presented by Toyota CART/FedEx Championship California Speedway
November 1 ACDelco 400 NASCAR Winston Cup North Carolina Speedway
November 14 NASCAR Goody's Dash Homestead-Miami Speedway
November 15 NASCAR Slim Jim All-Pro Homestead-Miami Speedway
November 15 Jiffy Lube Miami 300 NASCAR Busch Grand National Homestead-Miami Speedway
</TABLE>
A complete discussion of PMI, its business and financial results, is found in
the Form 10-K Report for the year ended December 31, 1997 prepared and filed by
PMI.
Total 1997 revenues for PMI, on a consolidated basis, were $109.8 million with
a net income of $16.4 million. After a fourteen percent (14%) increase in
average shares outstanding, 1997 earnings per share increased thirty two percent
(32%) from $.90 per share in 1996 to $1.19 per share in 1997. As discussed
below, the Company began accounting for its share of PMI's net income as of
April 1, 1996. The Company's share of PMI's net income for 1997 was $1,840,000
plus a management fee of $162,000, which ended in the first quarter of 1997.
The following table sets forth the range of the low and high reported bid
price of PMI's common stock for the quarter indicated, as reported on the NASDAQ
National Market System.
<TABLE>
<CAPTION>
1997 LOW HIGH
------------- -------------
<S> <C> <C>
Fourth Quarter $24.38 $33.88
Third Quarter $32.50 $34.58
Second Quarter $27.25 $32.38
First Quarter $25.00 $30.75
</TABLE>
On March 20, 1998, the range of the low and high reported bid price of PMI's
common stock were $31.38 and $33.00, respectively.
Agreements Affecting the Company's Ownership Interest in PMI. In connection
with the November 22, 1995 transaction whereby the Company acquired its initial
ownership interest in PMI, and in connection with the sale of Speedway Business
Park in December 1996, the Company entered into several agreements that affect
the Company's ownership interest in PMI. The November 22, 1995 Organization
Agreement contains, among other things, the terms and conditions pursuant to
which the Company acquired its initial ownership interest in PMI. The
Organization Agreement was later amended at the time of PMI's initial public
offering in March 1996. Pursuant to the Organization Agreement, the Company has
certain continuing indemnification obligations including one with respect to
various environmental matters. The Organization Agreement also grants to PMI a
right of first refusal to participate in any transaction or opportunity that
directly relates to the conduct or ownership of a motorsports complex that comes
to the Company, PSH Corp. or an affiliate of either, excluding International
Speedway Corporation ("ISC"), an owner of twenty percent (20%) of the stock of
PSH Corp., the majority owner of PMI.
PSH Corp., PMI and the Company also entered into a Shareholders Agreement (the
"Shareholders Agreement") at the time of the November 22, 1995 transaction. It
was subsequently amended in March
8
<PAGE>
1996. The Shareholders Agreement provides that if PSH Corp. desires to transfer
any shares of capital stock of PMI for consideration to an unrelated third
party, PSH Corp. must first offer such shares to the Company on the same terms
and conditions as the proposed transfer. The Shareholders Agreement also
provides that if the Company desires to transfer any shares of capital stock of
PMI for consideration to an unrelated third party, the Company must first offer
such shares to PSH Corp. at a price equal to the average of the Nasdaq National
Market closing price of PMI's shares for the previous thirty calendar days.
However, with the Company's consent, PSH Corp. has effectively transferred its
right of first refusal to ISC. Thus, ISC has the right to purchase such
shares on the same terms and conditions as PSH Corp.. If ISC elects not to
purchase such shares, then PSH Corp. has the right to purchase such shares on
the same terms and conditions as the proposed transfer. In either case, if the
non-transferring party elects not to purchase such shares, then the transferring
party may transfer its shares to the unrelated third party.
The Shareholders Agreement also provides that PSH Corp. will vote its PMI
shares in the election of directors for one nominee of the Company to the Board
of Directors of PMI. Richard E. Stoddard, the Company's Chairman of the Board
and Chief Executive Officer, is on the Board of Directors of PMI and is one of
the three board members constituting PMI's Executive Committee and also serves
on the Compensation Committee. Finally, under the terms of the Shareholders
Agreement, PMI continued to pay the Company a fee of $162,000 through the first
quarter of 1997, the last quarter before the opening of TCS.
The Company also entered into a Registration Rights Agreement with PMI
pursuant to which PMI granted incidental registration rights to the Company,
subject to certain limitations, each time PMI files a registration statement
with the Securities and Exchange Commission in connection with the sale of its
common stock. In December 1996, as a part of the sale of Speedway Business Park
to PMI, the Company and PMI entered into a Conditional Demand Registration
Rights Agreement. In summary, this agreement requires PMI, in the event there
should ever be an event of default on a loan secured by the PMI stock and the
lender forecloses on the PMI stock, subject to certain limitations and
conditions, to register the shares of PMI stock owned by such lenders.
PROPERTY REDEVELOPMENT
MILL SITE PROPERTY
Background. From 1942 through 1983, KSC operated a steel mill in Southern
California near the junction of the Interstate 10 and Interstate 15 freeways and
approximately three miles to the northeast of Ontario International Airport.
The Mill Site Property is located approximately 45 miles east of Los Angeles in
one of California's fastest growing regions, and is served by two major
railroads, the Burlington Northern Santa Fe and the Union Pacific (formerly
Southern Pacific). The Mill Site Property consists of four distinct parcels of
land: the Central Mill Site (originally approximately 595 acres (gross)), the
South Mill Site (approximately 290 acres (gross)), the West End Property
(approximately 240 acres (gross)) and the Valley Boulevard Property
(approximately 42 acres (gross)). The property also includes approximately 35
acres used for the San Sevine flood control channel. As discussed in more
detail above, approximately 534 acres of the Central Mill Site Property are now
owned by PMI. (See "Part I, Item 1. Business - Investment in PMI"). In
addition, as discussed in more detail below, approximately 16 acres were sold
during 1997 to a third party and approximately 23 acres were contributed for the
benefit of the WVMRF. The map on the following page illustrates the location of
these four parcels and the Company's current ownership of such parcels.
9
<PAGE>
[Map illustrating property owned by the Company in
San Bernardino County, California and Map Illustrating Proposed Major
Improvements to the Property]
10
<PAGE>
The Mill Site Property has its own water rights, originally 2,930 acre feet
per year that are entirely distinct from the Company's interest in Fontana
Union. A portion of these water rights, 1,300 acre feet, was sold as a part of
a settlement of litigation and other claims with an adjoining landowner, and
another portion, 475 acre feet, was contributed with the property now owned by
The California Speedway Corporation. Thus, the Company now owns 1,155 acre feet
of annual water rights associated with the Mill Site Property of which 630 acre
feet are jointly owned with California Steel Industries ("CSI"). CSI has the
right of first use of the 630 acre feet, with payment to the Company, through
June 30, 2004, with the Company having the right of first use thereafter.
Mill Site Redevelopment Plan. The Company is continuing with its plans to
redevelop the balance of the Mill Site Property. After: (i) completion of the
transactions with PMI; (ii) taking into account the land to be used for the
WVMRF; and (iii) the sale of one of the NAPA lots to an affiliate of Budway
Enterprises, Inc., the Company now owns approximately 629 acres (gross).
However, depending upon the final redevelopment plan and after taking into
account slope loss, rail road easements, the San Sevaine flood control channel,
proposed streets and highway improvements, the sewer treatment facility, and
other similar items, the Company anticipates having approximately 500 useable
acres available for development.
The remaining Napa Lot, which constitutes approximately a 15 acre portion of
the Central Mill Site Property, and the WVMRF site, as discussed below, have
already received the entitlements and permits necessary for their development.
However, the balance of the Mill Site Property owned by the Company, requires
various entitlements and permits from San Bernardino County prior to
redevelopment. The entitlement and permitting process formally commenced in the
second quarter of 1997 with the Company filing an application for the "Kaiser
Commerce Center" Specific Plan with San Bernardino County for all of its
property except for approximately 26 acres within the City of Rancho Cucamonga
and the approximately 135 acres of property commonly referred to as the "East
Slag Pile" property.
The Specific Plan application identified a wide variety of potential uses for
the property. Possible uses include a rail-served distribution and commercial
park, an inter-modal rail truck distribution center, warehousing, a commercial
truck stop, as well as commercial and recreational uses. Of course, the final
use for any specific parcel of the Mill Site Property will be dependent upon the
real estate market and the needs of potential tenants, buyers and users of a
particular parcel, subject to the general limitations imposed by the final
Specific Plan.
If development of the Kaiser Commerce Center occurs as provided in the
proposed Specific Plan, it will have a major impact on the local economy. In an
economic study prepared by The Natelson Company, Inc. and released in the first
quarter of 1998, it is projected that over 9,500 permanent new jobs and
approximately $575 million per year in additional economic activity in San
Bernardino County will be generated by the project's full development, with
5,200 of those jobs created on site. There are no assurances, however, that the
Kaiser Commerce Center will ultimately be approved for development as currently
proposed or as to the timing and scope of ultimate development.
Separately and in addition to the permitting and entitlement process with the
County, the Company is working with the California Department of Transportation
and San Bernardino County to design and obtain approval for an improved
interchange at Etiwanda Avenue and the I-10 Freeway. Such freeway improvements
near the Mill Site Property would also involve the realignment of at least one
existing street and the construction of other street improvements.
11
<PAGE>
As a result of additional technical studies and review, the entire entitlement
and permitting process is currently anticipated to be completed by the third
quarter of this year and involve an expenditure of approximately $1.5 million.
In addition, as discussed in more detail below, the Company will continue to
evaluate and undertake the required environmental remediation of portions of the
Mill Site Property. The approximately 405 (net) aces that comprise the Kaiser
Commerce Center contained limited areas with affected soils that require
remediation.
Significant capital funds will be required to implement the infrastructure and
access improvements discussed above. However, the Company will seek to minimize
its capital investments for these improvements by structuring joint ventures and
leases or by contributing portions of the land for an ownership interest in
operating companies seeking to develop the land. In addition, the Company will
seek other sources of funds, if available, such as local tax increment financing
as well as Federal highway improvement funds. See "Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional information.
To further encourage development of the Mill Site Property, the Company and
the San Bernardino County Economic Development Department jointly sought and
obtained the designation of the Mill Site Property, with the exception of the
approximately 26 acre Rancho Cucamonga parcel, as a Recycling Market Development
Zone ("RMDZ"). RMDZ's are intended to create incentives to attract businesses
that recycle or utilize recycled products.
Development of Central Mill Site-Napa Lots and WVMRF site. The portions of
the Central Mill Site Property still owned by the Company are one of the Napa
Lots (approximately 15 acres) and portions of the property on which the WVMRF is
to be expanded. These parcels are debt free and are described in greater detail
below.
NAPA Lots. Adjoining TCS are approximately 31 acres of property, called the
"Napa Lots", that were ultimately developed into two industrial zoned, rail-
served lots. On September 30, 1997, one of the Napa Lots, of approximately 15.7
acres, was sold to an affiliate of Budway Enterprises Inc. ("Budway"), a
distributor of steel and other products, for approximately $2,943,000, or
approximately $4.30 per square foot resulting in a gain of $656,000 which has
been deferred. At closing, the Company received $1,500,000 in cash, less closing
adjustments. The balance of the purchase price of approximately $1,443,000 is
represented by a promissory note from the buyer. The note requires a payment of
approximately $554,000 in principal in nine equal monthly installments plus
interest at ten percent (10%) per annum with the remaining principal balance of
approximately $909,000 payable $25,000 per quarter plus interest at the same ten
percent (10%) rate. The note is secured by a lien on the property sold and by
the guarantee of Budway and one of its individual owners. The Company has
subordinated its note receivable to approximately $6.0 million in construction
and permanent financing for a warehouse and distribution center being built on
the property. Although the Company considers the sale to have been fully
consummated during 1997, generally accepted accounting principles require the
gain to be deferred and recognized under the cost recovery method, i.e., once
proceeds received from the buyer exceed the Company's basis in the property
sold.
The remaining NAPA Lot of approximately 15 acres does have some impacted
soil stock piled on a portion of the lot. Once this soil is removed and
environmental clearance is received, the lot will be available for sale.
12
<PAGE>
The WVMRF. In June, 1997, the Company through its wholly-owned subsidiary,
Kaiser Recycling Corporation ("KRC"), contributed approximately 23 acres to West
Valley MRF, LLC, the limited liability company owned fifty percent (50%) by the
Company and fifty percent (50%) by Burrtec Waste Industries, Inc. As discussed
in greater detail below under "Waste Management-West Valley MRF", West Valley
MRF, LLC constructed and began operation of a materials recycling and waste
transfer facility in the second half of 1997. Approximately 7 acres of the
Central Mill Site are still currently reserved for possible contribution to West
Valley MRF, LLC if expansion of the MRF requires such property. However, a
portion of the reserved property includes the Mill Site tar pits which must be
remediated and, therefore, may not ultimately be available for development. (See
"Mill Site Environmental Matters" below).
West End and Valley Boulevard Properties. The West End Properties
(approximately 240 acres (gross)) is located to the West of the Central Mill
Site Property across the San Sevaine Channel. The Valley Boulevard Property
(approximately 42 acres (gross)) is located South of the Central Mill Site and
adjoins the I-10 Freeway. In 1989 and 1990, the Company entered into joint
venture agreements with Lusk Ontario Industrial Partners II, a California
limited partnership, whose general partner was The Lusk Company (collectively
"Lusk"), with respect to the West End Property and the Valley Boulevard
Property. In July 1994, the Company, through a wholly owned subsidiary, Kaiser
Steel Land Development, Inc., purchased the properties out of the Lusk Joint
Ventures for a total consideration of $15,000,000. The Company paid
approximately $9,000,000 in cash at closing and Lusk carried back $6,000,000
pursuant to a promissory note secured, solely, by a first deed of trust on the
properties. The principal amount of the note accrues interest at 1.5% over the
prime rate. Principal payments of $60,000 plus accrued interest are to be made
quarterly with a balloon payment due on the fourth anniversary of the note, July
28, 1998. The Company currently anticipates drawing on its existing credit
facility to repay the obligation on its due date. See also "Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this Form 10-K Report.
The West End Property has no known material environmental remediation
requirements although two limited areas require further investigation and may
require limited remediation. On the West End Property there are several older
metal warehouse buildings which are rented out to a variety of short term
tenants and which will need to be demolished as the redevelopment of the West
End Property proceeds. In the second half of 1997, the Company began the
activities necessary to demolish one of the major remaining buildings,
Fabrication No. 3 Building, and related structures. Such activities included
terminating leases with certain tenants in and surrounding the Fabrication No. 3
Building and conducting various environmental surveys. The actual demolition of
Fabrication No. 3 Building and related structures commenced in the first quarter
of 1998.
The Company also provides railroad switching services for many of the tenants
on this property. The Company believes that the West End Property could be
redeveloped in a variety of ways, including a modern industrial, rail-served
distribution and commercial park, once the appropriate permitting and
entitlements are obtained and assuming that economic conditions justify the
redevelopment. The development of the West End Property will involve
substantial expenditures for grading and infrastructure improvement.
The Valley Boulevard Property has no known environmental remediation
requirements and can be easily redeveloped. If the proposed freeway and street
improvements are made, the Valley Boulevard Property will have increased freeway
access and visibility. This property could serve as a location for a hotel,
fast food restaurants and other similar types of businesses where freeway
visibility and access are important.
13
<PAGE>
South Mill Site. The South Mill Site consists of approximately 290 acres and
is debt free. This property was used by KSC primarily as a storage area for
slag, a non-hazardous rock-like byproduct of iron and steel production, as well
as for the Company's sewage and wastewater treatment plants. The sewer
treatment plant is discussed in more detail below. The Company's hazardous
treatment plant was closed in mid-1994 in connection with the expiration of the
Company's contract to treat the waste of an adjacent property owner. These uses
have historically provided the Company with interim revenues and positive cash
flow while waiting to begin redevelopment of the property.
The west portion of the South Mill Site, known as the West Slag Pile, was used
only for the storage of slag. There is no known environmental remediation
required with respect to this property although additional investigation will be
required. Although the slag is being removed and sold by a third party
contractor, thereby, producing a current revenue stream for the Company, the
amount of slag is such that it is unlikely to be cleared in less than 5-10 years
without cost to the Company. However, if the West Slag Pile, West End Property
and the street and freeway improvements are constructed as currently
contemplated, it is anticipated that most of the remaining slag will be utilized
in the grading and construction process. As noted above, the Company is
currently pursuing the possible use of this portion of the property as a
commercial truck stop and other related uses.
The eastern portion of the South Mill Site known as the East Slag Pile, is
also mostly covered by slag. However, up to approximately 40 acres in the
southeast corner of this property will require some form of remediation as
discussed in "Mill Site Environmental Matters" below. Although the Company is
exploring uses of the property that may not require the complete removal of the
hazardous materials and slag, the definitive redevelopment of this entire
property is likely to be delayed until any required remediation is completed.
Depending upon the type of environmental remediation required, this property
could have potential commercial and recreational uses.
In addition to the area of the East Slag Pile requiring remediation, the
Company applied to the California Environmental Protection Agency Department of
Toxic Substance Control ("DTSC") to use up to approximately 6.5 acres of the
South Mill Site as a corrective action management unit ("CAMU") in which certain
types of impacted materials from other locations from the Mill Site Property
would be stored and capped. Approval of the CAMU was received in February 1998.
See "Mill Site Environmental Matters" below.
Sewer Services. The Company operates a sewage treatment facility on the South
Mill Site that serves property historically owned by the Company or KSC. The
Company currently provides sanitary sewer services to CSI, an adjoining
landowner, from its sewage treatment plant located on the northeastern end of
the South Mill site property for a total revenue in 1997 of $223,000. CSI is
also obligated to pay a substantial portion of the operating costs of the sewer
treatment plant.
In addition, pursuant to a Sewer Services Agreement, the Company has agreed to
provide sanitary sewer treatment services for the wastewater generated by the
property owned by The California Speedway Corporation. In consideration for such
services, The California Speedway Corporation pays to the Company an annual fee
of $88,800 in quarterly installments, which commenced in April 1997, adjusted
annually by increases in the consumer price index. The agreement also grants an
option to The California Speedway Corporation to purchase the Company's
wastewater treatment facility in certain circumstances such as if the Company
terminates the Sewer Services Agreement or the Company discontinues providing
sewer treatment services. In order to provide this sewer service, the Company
14
<PAGE>
has expanded the capacity of and refurbished the treatment plant at a cost of
approximately $2.3 million. Approximately $988,000 of the $2.3 million of the
costs to upgrade the sewer treatment plant were paid by The California Speedway
Corporation.
The sewer treatment facility also currently serves the West Valley MRF and is
anticipated to serve the former Mill Site as it is developed if alternatives are
not otherwise available on a cost effective basis.
Completion of the improvements to the sewer treatment facility, totaling
approximately $213,000 will be undertaken in 1998.
MILL SITE ENVIRONMENTAL MATTERS
The operation of a steel mill by the Company's predecessor, KSC, resulted in
known contamination of limited portions of the Company's Mill Site Property.
The Company is subject to a 1988 consent order (the "Consent Order") with the
DTSC, which requires the Company to investigate and remediate hazardous
materials on the Mill Site Property. Under the Consent Order, the phased
remediation was originally scheduled to be completed by July 1998. However, in
late 1997, the Company was granted a seven (7) year extension to complete its
required obligations under the Consent Order. The Consent Order, as amended,
provides for a general outline of the known tasks and the timing of performing
such tasks. Any particular item of investigation and/or remediation can be
modified with the consent of the DTSC.
During 1997, the Company undertook a number of activities with regard to
environmental matters. These activities included, but were not limited to,
remediation of impacted soil on the site of the WVMRF, investigation of the
sewer treatment facility and adjacent areas, investigation of buildings planned
for demolition for such items as asbestos containing materials and lead based
paint, and preparation of a draft supplemental groundwater study. The Company
also undertook preliminary investigations of available and alternative
technologies for remediation of the tar pits located on the Central Mill Site
and the landfill in the East Slag Pile.
In addition, the Company expended considerable effort in seeking approval for
a CAMU with the DTSC. The CAMU was approved by the DTSC in February 1998. The
CAMU will be in the northeast portion of the East Slag Pile on land that was
previously used by a bankrupt former tenant of KSC for a waste pickling facility
and will be used for the on-site disposal of affected soils and materials from
the balance of the Mill Site Property. Upon termination of the use of the CAMU,
the CAMU will be capped and closed in compliance with the DTSC's policies. The
CAMU is a less expensive alternative than transporting the affected soils and
materials to an off-site disposal facility.
While the Company has monitored certain groundwater wells in the past, the
DTSC requested and the Company intends to implement a supplemental groundwater
investigation study. In 1997, a draft supplemental ground water study was
furnished to the DTSC for its review and comment. It is currently anticipated
that the DTSC and the Company will agree in 1998 on the methodology and scope of
the supplemental groundwater investigation. As a part of the supplemental study
of groundwater, in late 1996, the Company drilled the first two test wells on
the on property owned by TCS, i.e., the Central Mill Site. Initial results from
these two test wells were positive for the Company in that they did not indicate
any groundwater contamination that would require remediation.
In addition, the Company previously settled certain obligations of groundwater
contamination with the California Regional Water Quality Control Board. The
settlement required a $1.5 million cash
15
<PAGE>
payment by the Company, which was made in February 1994, and the contribution of
1,000 acre feet of water annually for 25 years to a water quality project. These
water rights are unrelated to those leased to Cucamonga. In 1995, the Company
contributed 18,000 acre feet of its water in storage thus, satisfying the first
18 years of its obligation.
The Company's cost for investigation, remediation, site cleanup, and all other
environmental related activities for 1997 totaled approximately $1.5 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of this Form 10-K Report for additional
information.
While there are a number of smaller environmentally-related Mill Site projects
such as disposing inactive PCB transformers and removing or containing of some
asbestos containing materials, based on currently know information, the major
outstanding environmental issues to be addressed that will likely involve
material expenditures are: (i) the approximately 7 acre parcel containing the
tar pits which parcel is located adjacent to the Mill Site MRF property; (ii)
the East Slag Pile waste management unit (sometimes referred to as the East Slag
Pile landfill); (iii) remediation of the sewer treatment plant, as appropriate;
(iv) additional groundwater monitoring including groundwater related items; (v)
completion of the above described CAMU; and (vi) investigation and possible
remediation of two limited areas on the West End Property.
The Company estimates, based upon current information, that its future
remediation and other environmental costs for the balance of its land and
related matters will be between approximately $20 million and $31 million (i.e.,
the original high range of the estimate of approximately $32 million less 1997
expenditures), depending both upon the ultimate extent of the environmental
remediation and clean-up involved and upon which approved remediation
alternatives are eventually selected. The Company anticipates recovery of the
future remediation costs incurred through redevelopment of the property,
primarily in connection with specific redevelopment projects or joint ventures.
This range assumes a capping alternative can be used for the East Slag Pile
waste management unit on the East Slag Pile and the tar pits parcel and that the
CAMU can accept all the impacted soil currently scheduled for deposit into the
CAMU. As of December 31, 1997, the total short-term and long-term environmental
remediation liability reflected on the Company's balance sheet was approximately
$30.7 million, the high end of the probable range of future remediation and
other environmental costs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7 of the Form
10-K Report.
Although ongoing environmental investigations are being conducted on the
Company's property and management believes it is currently in a position to
estimate with some reasonable certainty future investigation and remediation
costs, there can be no assurance that the actual amount of environmental
remediation expenditures to be incurred will not substantially exceed those
currently anticipated or that additional areas of contamination may not be
identified. Accordingly, future facts and circumstances could cause these
estimates to change significantly. Further, the Company has provided certain
financial assurances to the DTSC in connection with anticipated remediation
activities, the primary one being the dedication of approximately $4.8 million
of Kaiser's Union Bank Credit facility. See Part II, "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
The Company is also involved, from time-to-time, in legal proceedings
concerning environmental matters. In February 1996, the City of Ontario,
California served a complaint on the Company alleging
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<PAGE>
that the Company is liable for environmental contamination of one of its
municipal wells. See "Part I, Item 3. Legal Proceedings."
EAGLE MOUNTAIN TOWNSITE
The Eagle Mountain Townsite, which is owned debt free by Kaiser and covers
approximately 460 acres, consists of more than 300 houses (of which
approximately 100 have been renovated for current occupancy), a water supply and
sewage treatment system, an office building, machine shops, school facilities
and other structures. When the Eagle Mountain iron ore mine was operational,
the Eagle Mountain Townsite provided housing for mine employees and their
families. Except for many buildings and relating piping having asbestos
containing materials, there is no known material environmental remediation
required at Eagle Mountain.
The Company's wholly-owned subsidiary, Kaiser Eagle Mountain, Inc., owns and
operates the Eagle Mountain Townsite. The Company currently leases a portion of
the Eagle Mountain Townsite to a private company, which operates a minimum
security prison for the State of California. In order to redevelop the Eagle
Mountain Townsite, the Company has filed a Specific Plan with the County of
Riverside. The Townsite Specific Plan is included in the processing of the
Landfill Project.
If the land exchange with the United States Bureau of Land Management (the
"BLM") is completed (see page 27 "Proposed BLM Land Exchange" in this Form 10-K
Report), the Eagle Mountain Townsite will expand to approximately 1,100 acres.
OTHER REDEVELOPMENT OPPORTUNITIES
Other Property Ownership and Development. The Company owns a number of real
estate parcels and mineral deposits in the California desert, including the
Morris Lode Properties, an active iron ore mine leased to a third party (the
"Silver Lake Mine"), and improved and unimproved property at Lake Tamarisk, an
unincorporated community located approximately eight miles from the Eagle
Mountain site.
MUNICIPAL SOLID WASTE MANAGEMENT
THE WEST VALLEY MRF
West Valley MRF, LLC. In 1989, the California legislature enacted
legislation, AB 939, which currently requires all municipalities to recycle or
divert 25% of their solid waste streams from landfills by the year 1995 and 50%
by the year 2000. In addition, counties are required to demonstrate to the
State of California that they have at least 15 years of available landfill
capacity. An alternative to these requirements is the transportation of solid
waste to an independent or municipally-owned materials recovery facility,
commonly referred to as "MRF", which will separate recyclable materials for
either storage or sale to a variety of users. The residue waste from the
recycling process is disposed of at landfills. In response to this potential
market opportunity, the Company and Burrtec Waste Industries, Inc. ("Burrtec"),
a local waste hauler, entered into a joint venture agreement (the "MRF Joint
Venture") in 1989 to construct and operate a rail-served regional solid waste
transfer station and MRF to be located on approximately 30 acres of the Central
Mill Site (the "WVMRF"). From 1989 through 1996 Burrtec and the Company secured
the necessary permits and entitlements to build and operate a MRF and
unsuccessfully sought to be integrated into San Bernardino County's Municipal
waste system.
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In 1997, the Company and Burrtec restructured their MRF joint venture whereby
a limited liability company, West Valley MRF, LLC was formed to construct and
operate the WVMRF. Effective June 19, 1997, a wholly-owned subsidiary of the
Company, Kaiser Recycling Corporation ("KRC") and West Valley Recycling &
Transfer, Inc. ("WVRT"), Burrtec's wholly owned subsidiary, entered into a
Members Operating Agreement ("MOA") which is substantially the equivalent of a
joint venture agreement but for a limited liability company. Other ancillary
and related agreements to the MOA were also entered into as of June 19, 1997.
Pursuant to the terms of the MOA, KRC contributed an approximately 23 acre
parcel of the Mill Site on which Phase 1 of the WVMRF was constructed and WVRT
contributed all of the goodwill of Burrtec's recycling business that was
operated out of Riverside County entitling West Valley MRF, LLC to all revenues
generated from such business after the closing date. Under the terms of the
MOA, KRC and the Company remain responsible for any pre-existing environmental
conditions and WVRT is responsible for environmental issues that may arise
related to the future deposit or release, if any, of hazardous substances.
The MOA also addresses such items as the terms and conditions for the
contribution of up to approximately 7 acres of additional property by KRC to
West Valley MRF, LLC; future capital and financing transactions; the governance
of West Valley MRF, LLC through the creation and operation of an Executive
Committee; voting rights; indemnification obligations between the members of
West Valley MRF, LLC; the daily operation of the WVMRF by WVRT pursuant to a
separate Operation and Maintenance Agreement; distribution of cash flow in
various circumstances; rights of first refusal and various rights related to a
sale or deemed sale of a member's ownership interest in West Valley MRF, LLC and
the terms of any such sale, including a non-completion provision in certain
circumstances; events of default; remedies upon the occurrence of an event of
default by KRC or WVRT including the possible purchase of a member's interest in
West Valley MRF, LLC at a discount from appraised value; and termination and
dissolution of West Valley MRF, LLC. The Company and Burrtec have each given
their separate Performance Guaranty Agreement pursuant to which they
respectively guaranty the prompt performance of their respective subsidiary's
obligations under the MOA and in the case of Burrtec, also under the Operations
and Maintenance Agreement which deals with the daily operation of the WVMRF by
WVRT.
Financing, Construction and Operation of the WVMRF. Phase 1 of the WVMRF,
which includes a 62,000 square foot building, sorting equipment, and related
facilities for waste transfer and recycling services, was constructed and
equipped, at a total cost of approximately $10.3 million, in the last half of
1997. It became operational on a limited basis in late October 1997 and became
fully operational as of January 1998. The WVMRF currently receives and
processes approximately 800 to 1,000 tons per day of non-hazardous commercial
and municipal solid waste. Phase 1 of the WVMRF is permitted to receive and
process up to 2,000 tons per day (six days a week) of solid waste. Upon the
construction of future phases, the WVMRF could receive and process up to 5,000
tons per day of commercial and municipal solid waste.
Most of the financing for Phase I was obtained through the issuance and sale
of $9,500,000 in California Pollution Control Financing Authority (the
"Authority") Variable Rate Demand Solid Waste Disposal Revenue Bonds Series
1997A (the "Bonds"). This tax-exempt financing transaction represented by the
Bonds, which effectively closed on June 25, 1997, are limited obligations of the
Authority payable solely from and secured by a pledge and lien on, the loan
payments made by West Valley MRF, LLC and funds that may be drawn on an
irrevocable direct pay letter of credit issued by Union Bank of California, N.A.
("Union Bank"). Neither the faith and credit nor the taxing power of the State
of California or any political subdivision thereof is pledged to the payment of
the principal or interest on the Bonds. The Bonds are backed by a letter of
credit issued by Union Bank. Pursuant to a Guaranty Agreement with
18
<PAGE>
Union Bank, the Company and KRC are liable for fifty percent (50%) of the
principal and interest on the Bonds in the event of a default by West Valley
MRF, LLC. Burrtec and its affiliates in effect are also liable under a separate
Guaranty Agreement with Union Bank for the other fifty percent (50%) of the
principal and interest on the Bonds in the event of a default by Borrower. Fitch
Investors Service rated the Bonds upon issuance as "AA-/F-1+."
The interest rate for the Bonds varies weekly and has averaged approximately
3.5% per annum since inception. The Bonds have a stated maturity date of June
1, 2012, although the West Valley MRF, LLC is required pursuant to an agreement
with Union Bank to annually redeem a portion of the Bonds on a stated schedule.
Beginning in 1998, the West Valley MRF, LLC is required to redeem $100,000 in
principal amount of the Bonds with the annual redemption increasing to a maximum
of $940,000 in the year 2011.
West Valley MRF, LLC and Union Bank have executed a Reimbursement Agreement,
which among other things, sets the terms and conditions whereby the West Valley
MRF, LLC is: (i) required to repay Union Bank in the event of a draw under the
letter of credit; (ii) grants the Bank certain security interests in the
property of West Valley MRF, LLC; (iii) establishes the redemption schedule for
the Bonds; and (iv) sets forth certain financial and other covenants West Valley
MRF, LLC must comply with during the term of the Bonds. The Company and KRC
have also provided to Union Bank an Environmental Guaranty Agreement pursuant to
which they are jointly and severally liable for any liability that may be
imposed on Union Bank for pre-existing environmental conditions on the
Borrower's property acquired from KRC that the Borrower fails to timely address.
See also "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
Potential Dispute with San Bernardino County. San Bernardino County recently
asserted that the WVMRF's current operations are in violation of the MRF's
conditional use permit because much of the waste processed at the WVMRF is
deposited into Orange County, California landfills. One of the purported
conditions in the WVMRF's conditional use permit states that the residue from
the MRF is to be deposited into San Bernardino County landfills until November
23, 1998. West Valley MRF, LLC believes that this purported condition is invalid
and not enforceable for a variety of reasons. However, if upheld, the violation
of such condition could lead to the revocation of the conditional use permit
under which the WVMRF operates. San Bernardino County has initiated discussions
with the West Valley MRF, LLC to determine if there can be a mutually acceptable
arrangement pursuant to which the WVMRF can be integrated into the County's
landfill system without adversely impacting the economics of the WVMRF.
Litigation could result if these negotiations do not reach a mutually acceptable
conclusion.
Competition. Although other entities have proposed to develop MRFs that would
serve the same broad geographic area as that of the Mill Site MRF, the Company
believes that none of them has yet completed the permitting process. However,
Burrtec does own and operate a MRF in Agua Mansa, California located
approximately 15 miles from the WVMRF that could compete in very limited areas
for waste that might otherwise go to the WVMRF. Agua Mansa is currently
anticipated to have little if any impact in the WVMRF.
LANDFILL PROJECT
Background. Many of Southern California's current landfills are located in
urban areas and are old, unlined, and lack current environmental safeguards.
Furthermore, it is becoming increasingly expensive and difficult to permit and
open new landfills or to expand existing landfills in urban areas due to
19
<PAGE>
political opposition and stringent government regulations, including recent
federal regulations. The Company believes that Southern California will begin to
face a shortage of safe, permitted landfill capacity beginning in the next
decade. However, the anticipated shortage in landfill capacity that was
originally predicted to occur in the 1980's and early 1990's did not develop as
anticipated because several regional landfills were expanded and a number of
other landfills were seeking to expand their permitted capacity. In addition,
the anticipated life of many existing landfills also increased because of better
landfill management techniques and reduced waste tonnage due to recycling and
the recent California recession.
The Eagle Mountain Site. The Company's 11,350 acre Eagle Mountain site,
located in the remote California desert approximately 200 miles east of Los
Angeles, consists of three large open pit mines, the Eagle Mountain Townsite and
a 52-mile private rail line that accesses the site. The Company has leased
approximately 4,654 acres of the idled mine site and the rail line to MRC for
development of a rail-haul solid-waste landfill (the "Landfill Project"). As
discussed in more detail below, effective as of January 1, 1995, the Company,
through a wholly-owned subsidiary, Eagle Mountain Reclamation, Inc. ("EMR"),
became a 70% shareholder in MRC and, through subsequent investments in MRC, is
currently an approximately 73% shareholder in MRC.
In anticipation of Southern California's ultimate need for new environmentally
safe landfill capacity, MRC in 1988 began the planning and permitting for a
20,000 ton per day rail-haul, non-hazardous solid waste landfill at Kaiser's
Eagle Mountain Site. The Company believes that the Eagle Mountain Site has many
unique attributes which make it particularly well-suited for a rail-haul, solid
waste landfill including, but not limited to, its remote location, arid climate,
available and suitable materials for the proposed liner system and daily cover,
and rail access.
Current plans for operation of the landfill anticipate that non-hazardous
household solid waste will initially be delivered to MRFs and transfer
facilities throughout Southern California by municipalities and independent
waste haulers. Recyclable and hazardous materials will be separated at these
facilities, and the remaining non-hazardous solid waste will be transported,
primarily by rail, in closed and locked containers to the Eagle Mountain
landfill. MRC currently anticipates that the landfill's initial operations,
depending upon the level of disposal fees, could commence with a minimum of
approximately 4,000 tons of solid waste per day.
Founding, Ownership and Restructuring of MRC. MRC was formed in 1982 by waste
industry professionals to address the anticipated solid waste disposal problem
in Southern California. In order to utilize Kaiser's Eagle Mountain Site, the
Company, through its subsidiary Kaiser Eagle Mountain, Inc., entered into a
lease with MRC in 1988 for the development of the Landfill Project (the "MRC
Lease"). In 1990, a subsidiary of Browning Ferris Industries ("BFI"), purchased
a 50% interest in MRC. BFI provided a majority of MRC's funding subsequent to
its initial investment, which resulted in BFI becoming the majority owner of
MRC.
As of August 1, 1994, the ownership of MRC was restructured as part of BFI's
withdrawal from MRC. As part of the restructuring, BFI returned to MRC all of
its common and preferred stock in MRC and paid off all of MRC's outstanding bank
indebtedness leaving MRC substantially debt free. In addition, BFI provided MRC
with funds in excess of $5,000,000 to be used to fund ongoing development
activities. BFI also agreed to leave in place certain financial assurances
associated with the permits that had been granted to MRC through August 1, 1996.
Those financial assurances were never used.
20
<PAGE>
MRC was further restructured effective January 1, 1995, when the Company
through Eagle Mountain Reclamation ("EMR"), a wholly-owned subsidiary separate
from the subsidiary that owns the land at Eagle Mountain, acquired common stock
in MRC representing a 70% ownership interest. This transaction was effective as
of January 1, 1995. In exchange for the ownership interest, the MRC Lease was
amended to eliminate MRC's obligation to pay minimum rent. MRC forgave all
current contingent non-recourse obligations the Company would have had to repay
MRC out of future royalties.
Operation and Financing of MRC. With the acquisition of the equity interest
in MRC, the Company, through MRC, has taken a more active role in the permitting
of the Landfill Project and in assisting MRC, as appropriate, in raising the
funds necessary to complete the permitting process. The completion of the
Landfill Project is dependent upon, among other things, MRC's continuing ability
to raise additional equity capital.
Although neither the Company nor any subsidiary of the Company has any
obligation to invest funds in MRC, the Company has continued, to date, to make
investments in MRC. Through a series of private placements with existing MRC
shareholders, from July 1995 through December 31, 1997, a total of $10.8 million
has been raised by MRC, with Kaiser contributing approximately $8.1 million of
that amount. Due to the uncertainty associated with the Landfill Project, the
Company is evaluating its continuing investment in MRC. In this regard, the
Company has agreed to advance funds to MRC for a limited period in 1998 pending
the Company's determination, in light of the San Diego County Superior Court's
recent ruling, of what course of action to pursue with regard to the Landfill
Project. It is anticipated that the initial 1998 advance will total up to
approximately $900,000 and that the Company may invest additional funds in MRC
during 1998 depending upon what course of action the Company may ultimately
decide to pursue.
MRC continues to pursue other financing from prospective investors as well as
other means of raising funds or commitments such as the sale of capacity rights,
air space or disposal agreements.
MRC Lease. In connection with the reorganization of MRC, the MRC Lease was
amended effective July 29, 1994, and again amended effective January 1, 1995,
with the Company's acquisition of a 70% interest in MRC. Under the terms of the
MRC Lease, as amended to date, MRC is responsible for substantially all project
costs and activities, including landfill design, permitting, construction and
operation. MRC has also agreed to indemnify the Company against claims arising
from MRC's activities, including any environmental damage that may be caused to
the leased property by MRC's operations. The MRC Lease also provides, among
other things that: (i) the Company must give MRC notice of any proposed sale of
its interest in the Eagle Mountain property, and MRC has a right of first
refusal to purchase such interest under certain circumstances; (ii) the Company
and MRC may not participate in another project that employs a railroad in
connection with the storage or disposal of solid waste in counties surrounding
the landfill; and (iii) MRC has certain rights to terminate the MRC Lease
including: (a) upon the Company's default under the terms of the MRC Lease; (b)
upon 180 days notice at any time during the six month period immediately
following the receipt of all the necessary permits for the Landfill Project; and
(c) at any time upon two year's notice.
The MRC Lease was again amended as of January 1, 1996. The amendment reduced
the amount of land that MRC leases from the Company by approximately 50%. MRC
continues to lease from the Company all the real property necessary for the
Project.
The Company maintains and may exercise all rights it has under the MRC Lease,
including the right to re-acquire the land leased to MRC through its subsidiary,
Kaiser Eagle Mountain, Inc., for the Landfill
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<PAGE>
Project. In the event the Company re-acquires the Landfill Project, depending
upon the circumstances, such as upon MRC's default due to lack of funds, the
non-BFI shareholders, at the time of the July 1994 amendment to the MRC Lease,
shall have the right to continue in the project in some manner.
Lease Economics. Until January 1, 1995, MRC paid to the Company a minimum
monthly rent. This rent was $200,000 per month during 1994 and was originally
scheduled to increase to $300,000 a month in December 1995. However, in
conjunction with the Company's acquisition of its equity interest in MRC, the
MRC Lease was amended effective January 1, 1995, to eliminate the minimum
monthly rent. The elimination of the minimum monthly rent did not change the
future royalty payments due the Company upon the commencement of landfill
operations.
Once the landfill is operational, under the current terms of the MRC Lease,
the Company will receive, as landlord of the Eagle Mountain Site, the greater of
(i) a royalty of $2.00 per ton of waste received; or (ii) a royalty payment
calculated as a designated percentage of the landfill tipping fees charged by
MRC. The future royalty payment paid to the Company by MRC is based on MRC's
gross collections, which are basically equivalent to the tipping fees to be
charged by MRC at the landfill. In calculating gross collections, MRC may deduct
certain items, including any federal or state fees, the host fees paid to
Riverside County and other charges imposed or required to be collected at the
landfill. Certain other revenues are also excluded from the definition of gross
collections, including any MRC revenue from salvage, recycling or reclamation
operations or from the disposal of waste from certain areas near the Landfill
Project. In addition to the royalty payment, the Company will receive an
additional $0.15 royalty for every ton of waste transported to the landfill on
the Company's 52-mile rail line.
The following table illustrates the royalty payment formula set forth in the
MRC Lease.
Monthly Average % Fee Net # Days
Royalty = Daily X Payable to X Tipping X in
Payment Tonnage Kaiser Fee Per Ton Operation
<TABLE>
<CAPTION>
Average
Daily Tonnage/1/ Tipping Fee Percentage Payable to Kaiser
- ---------------------------------- --------------------------------------------------------
<S> <C>
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
22
<PAGE>
perceived landfill capacity shortages in areas, pending closure deadlines and
partly as a result of increased costs of construction, operation and/or closure.
Tipping fees do not include transportation costs, which may vary significantly
depending upon such factors as distance to the landfill and method of handling
the waste. It is unknown at this time if disposal costs in Southern California
will sufficiently increase as to make the Eagle Mountain landfill attractive to
those controlling the disposal of waste. See the discussion on disposal fees
below.
Government Regulation/Permitting. Solid waste landfills are subject to
stringent federal, state and local environmental regulations. These
regulations, among other things, require upgraded or new composite landfill
liners, leachate collection and treatment, groundwater and methane gas
monitoring, stricter siting and location criteria, closure requirements and
financial assurances (such as a surety bond) from the owner or operator. The
Eagle Mountain landfill is designed to meet or exceed these requirements.
In order to construct and operate the Landfill Project, MRC is required to
obtain numerous government permits and approvals relating to such matters as
land use compatibility, groundwater protection, air quality emissions, habitat
protection, and rodent, pest and litter controls. The process for obtaining
these permits and approvals is often difficult, expensive and time-consuming,
particularly because the siting of landfills is a highly political issue and
often draws opposition from environmental groups and local residents.
Through the first half of 1994, MRC was making substantial progress in
obtaining the necessary permits to commence construction of the Landfill
Project. As of June 1, 1994, MRC had received 17 of the required 20 permits and
two more of the permits were in draft form and were anticipated to be issued
soon. However, as discussed in detail below, many of the permits were suspended
or voided due to the adverse outcome of litigation involving the environmental
impact report ("EIR")/environmental impact study ("EIS") for the Landfill
Project approved by Riverside County in 1992.
By way of background, before any significant regulatory permit may be granted
relating to the construction and operation of the Landfill Project, an EIR/EIS
must be certified and approved by the appropriate regulatory agencies. In
October 1992, the Riverside County Board of Supervisors approved the EIR for the
Landfill Project and MRC's local land use applications. Legal challenges to the
certification of the EIR were mounted in late 1992 by a number of individuals, a
conservation group and Eagle Crest Energy Company ("ECEC"), formerly known as
Eagle Mountain Energy Company, which is a potential competitor for the use of a
portion of the Landfill Project site.
In July 1994, the San Diego County Superior Court issued its decisions on the
challenges to the EIR for the Landfill Project. Of the more than seventy (70)
areas of concern initially raised by the plaintiffs in the cases, the Court
announced that it had eight (8) areas of concern in which the EIR was deficient,
thus requiring corrective action. (This same court has subsequently ruled on a
new EIR for the Landfill Project as discussed below).
As a result of the Court's determinations, the Court set aside and declared
void the Riverside County Board of Supervisors' EIR certification and all
Riverside County approvals rendered in connection with the EIR certification.
The Court ordered activities related to the development of the landfill
suspended and directed the preparation of a new final environmental impact
report in compliance with applicable law and the Court's conclusions. MRC and
the Company disagreed with many of the Court's conclusions and initially took
steps to appeal the decisions, but later withdrew their appeal to focus their
efforts on re-permitting the Landfill Project.
23
<PAGE>
In March 1995, MRC initiated the necessary re-permitting process by filing its
land use applications with Riverside County and has worked with the County and
BLM in the preparation of a new EIR/EIS. The draft EIR/EIS was made available
to the public in July 1996, with the comment period on the draft EIR/EIS closing
in September 1996. The BLM held public hearings on the draft EIR/EIS and
received extensive public comment. In addition, by the close of the public
comment period in September 1996, numerous written comments were received.
The new final EIR/EIS was released to the public in January 1997 and, as
discussed in more detail below, received final approval on September 9, 1997.
Approval by Riverside County of the Landfill Project. After approval of the
Landfill Project by the Riverside Planning Commission and after a number of
public hearings held by the Riverside County Board of Supervisors, on August 26,
1997, the Board of Supervisors, by a four to one vote, approved the Landfill
Project. Final approval of the Development Agreement, EIR for the Landfill
Project and related land use matters was made by the Board of Supervisors on
September 9, 1997.
The Landfill Project was approved to receive up to 20,000 tons per day (6 days
a week) of non-hazardous municipal solid waste. However, MRC is limited during
the first ten years of operations to 10,000 tons per day of non-County waste
plus the waste generated from within the County. After ten years, MRC may
request an increase in daily tonnage up to the maximum of 20,000 tons, but such
increase must be reviewed by and receive the approval of an independent
scientific panel as discussed in more detail below.
State Litigation-Return to Writ. After the September, 1997 approval of the
EIR, the litigation with respect to the EIR resumed. The state litigation
surrounding the Landfill Project has two subparts: the "return to the writ"
previously issued by the San Diego Superior Court and a newly filed lawsuit
which is discussed in more detail below. As noted above, in 1994, the San Diego
Superior Court ruled that the EIR for the Landfill Project approved by Riverside
County in November 1992 was defective in eight areas. This resulted in the
issuance of a writ (a form of legal document) ordering Riverside County to
comply with the court's decisions and the California Environmental Quality Act
("CEQA"), which is the statutory basis for the preparation and evaluation of an
EIR. The County and MRC have sought to comply with the court's decisions and
the writ by preparing a new EIR and completing the entire evaluation and
political process again. This culminated in the final approval of the EIR and
related land use approvals by Riverside County on September 9, 1997. On
September 19, 1997, Riverside County filed with Judge Judith McConnell of the
San Diego Superior Court a return to the writ which detailed the reasons as to
how the eight defects in the former EIR were remedied by the new EIR. Judge
McConnell presided over the 1994 hearing on the adequacy of the 1992 EIR.
Objections to the return to the writ were filed by all the previous parties to
the litigation except for Eagle Crest Energy Company ("ECEC"). On October 20,
1997, the San Diego Superior Court entered an order discharging the original
objections of ECEC. The remaining original project opponents maintain that MRC
and the Company failed to correct in the new EIR any of the deficiencies found
to exist in the 1992 approved EIR. After receipt of briefs, on December 31,
1997, Judge McConnell held a hearing on the objections filed by opponents to the
Landfill Project. On the day of and just prior to the holding of such hearing,
Judge McConnell issued a tentative ruling that preliminarily concluded that the
EIR was still inadequate with respect to most of the issues raised in her 1994
decisions.
24
<PAGE>
On February 17, 1998, Judge McConnell issued her final ruling with respect to
the new EIR. Judge McConnell reversed herself with respect to several of the
items she initially had determined to be defective, but found that the new EIR
was still inadequate in two general areas: (i) the threatened desert tortoise;
and (ii) impacts to Joshua Tree National Park. Specifically, according to Judge
McConnell, there was no substantial evidence in the record to support the new
EIR's conclusion that the impact to the desert tortoise would be mitigated to a
level below significance. In particular the Court concluded that there was a
lack of required tortoise-proof fencing and cited the Desert Tortoise Recovery
Plan that recommends no new landfills be constructed in desert tortoise habitat.
With respect to Joshua Tree National Park, the Court found that the EIR
improperly split its analyses of the total "wilderness experience" into two
parts: wilderness resources and the wilderness experience. The Court also
found that there was no support for the conclusion that "non-wilderness" areas
within the Park should be treated any differently from other areas within the
Park. The Court also expressed concerns about the effect of the night time
lighting on the Park resulting from the possible expansion of the Eagle Mountain
Townsite and also concluded that the EIR failed to analyze the impact to
biological resources of the Park as a complete and interrelated system.
State Litigation-New Lawsuit. Under CEQA, participants in the administrative
and political process have the ability to commence litigation with regard to an
EIR within thirty days after the approval of the EIR. Several project opponents
did file a new lawsuit in Riverside County on October 10, 1997. The plaintiffs
in this new litigation are generally the same plaintiffs as in the lawsuit
commenced in 1992 with a few exceptions. Notably, ECEC and the City of
Coachella were not plaintiffs in the new lawsuit. There was only one new
plaintiff, the Center for Community Action and Environmental Justice, a local
environmental group originally organized to address environmental issues
associated with the String Fellows acid pits located in Riverside County.
The claims made in the petition were fairly typical of a CEQA lawsuit. The
only non-CEQA claim is a claim that the Development Agreement with Riverside
County violates California Proposition 218, an amendment to California's
Constitution. Proposition 218 generally requires a vote of taxpayers if a new
tax is levied by a governmental or quasi-governmental entity.
On December 19, 1997, the environmental claims in the new Riverside County
lawsuit were dismissed because the plaintiffs failed to timely commence the
litigation.
Evaluation of Alternatives. As a result of Judge McConnell's final ruling,
the Company and MRC are evaluating their available alternatives with respect to
the Landfill Project. These alternatives include, but are not limited, to: (i)
appealing the Court's decision in whole or in part; (ii) taking the actions
believed necessary to correct the deficiencies the Court found to exist in the
EIR; (iii) postpone or terminate the Landfill Project; or (iv) a combination of
these or other alternatives. The Company's and MRC's ultimate course of action
will depend upon a number of factors such as the length of time to accomplish
any alternative, the likelihood of success, the amount of and availability of
funds necessary to accomplish a particular alternative, and the anticipated
marketability of the Landfill once permitted. Depending upon the course of
action ultimately selected by the Company and MRC, there could be a material
adverse impact to the financial statements of the Company, including a write
down of the Company's investment in MRC to the lower of cost or fair market
value. A final decision on what course of action will be taken by MRC and the
Company should be made by mid-1998.
The Development Agreement. As a part of the process of considering the
Landfill Project, the Company and MRC negotiated a Development Agreement with
Riverside County. The Development Agreement, while in final form, is not
effective until consummation of the federal land exchange
25
<PAGE>
discussed below. In summary, the Development Agreement among Riverside County,
MRC, the Company, and two of the Company's subsidiaries, Kaiser Eagle Mountain,
Inc. and Eagle Mountain Reclamation, Inc., provides the mechanism by which MRC
acquires long-term vested land use rights for a landfill and generally governs
the relationship among the parties to the Agreement. The Development Agreement
also addresses such items as the duties and indemnification obligations to
Riverside County; the extensive financial assurances to be provided to Riverside
County; the reservation and availability of landfill space for waste generated
within Riverside County; and events of default and remedies as well as a number
of other items.
In addition, the financial payments to, or for the benefit of Riverside County
and others, are detailed in the Development Agreement and in the Purchase and
Sale Agreement, which is a part of the Development Agreement. The Purchase and
Sale Agreement requires a per ton payment on non-County waste determined from a
base rate which is the greater of $2.70 per ton or ten percent (10%) of the
landfill tip fee up to 12,000 tons of non-County waste. The 10% number
increases to 12 1/2% for all non-County waste once non-County waste exceeds
12,000 tons per day. The per ton payment to the County also increases as volume
increases. The per ton payments on non-County Waste to Riverside County are
summarized as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Average Tons Per Day
of Non-County Waste Payment to Riverside County
------------------------------------------------------------------------------------
<S> <C>
0 - 7,000 Greater of 10% (12.5% once volume exceeds
12,000 tpd) or $2.70 ("Base")
7,000 - 10,000 Base plus $.80
10,000 - 12,000 Base + $1.30
12,000 - 16,000 Base + $2.30
16,000 - 20,000 Base + $3.30
----------------------------------------------------------------------------------------
</TABLE>
Other major payments include: (i) partial funding for up to four rail
crossings with $1 million due at the commencement of construction of the
landfill and an additional $1 million over the course of landfill operations;
(ii) financial assistance for the host community, Lake Tamarisk, comprised of
$500,000 due at the commencement of construction of the landfill plus an
additional approximately $1.5 million due over the course of landfill
operations; and (iii) funding for non-California Environmental Quality Act
reduction air emission programs of $600,000 over the course of operations.
The initial term of the Development Agreement is fifty years. However, the
term can be extended to November 30, 2088. In order to obtain an increase in
the initial 50-year term of the Development Agreement and/or an increase in the
initial 10,000 tons per day limit on out-of-County waste, an independent
scientific panel will be convened to review such a request. The scientific
panel will be made up of five independent scientists and engineers selected by
the University of Riverside, California (the "University") with the approval of
the Company and MRC. If the University and the Company/MRC are unable to agree
on the panel members, two members are to be selected by the University, two by
the Company/MRC and the fifth member is to be selected by the other four
members. Alternative procedures are in place in the event the University does
not participate in the selection of the panel members for any reason. The panel
will conduct its review within eight months of any request for capacity
expansion. The panel, in effect, is to limit its review to confirming that MRC
has substantially complied with all development approvals, the environmental
mitigation measures and all regulatory
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permits and that the potential environmental impacts of the landfill are the
same as identified in the EIR. Various appeal procedures are available depending
upon the initial and final findings of the panel.
Environmental Trust Fund. Pursuant to the terms of the Development Agreement
and other related documents, $.90 of the per ton payment made to Riverside
County by MRC on out-of-County municipal solid waste will be deposited into an
environmental trust. In addition, MRC directly pays $.90 per ton into the
environmental trust for in-County waste deposited into the landfill. Funds in
the environmental trust are to be used within Riverside County for: (a) the
protection, acquisition, preservation, and restoration of parks, open space,
biological habitat, scenic, cultural, and scientific resources; (b) the support
of environmental education and research; (c) the mitigation of the Project's
environmental impacts; and (d) the long term monitoring of the above mentioned
items.
Finally, MRC has agreed to pay $.10 per ton of municipal solid waste deposited
into the landfill to the National Parks Foundation for the benefit of the
National Park Service.
Proposed BLM Land Exchange. Of the approximately 11,350 acres located at the
Eagle Mountain site, the Company currently owns 1,800 acres in fee and has
various possessory mining claims with respect to the remaining 9,550 acres. In
addition, the Company owns in fee approximately 3,200 acres along the 52-mile
railroad right-of-way. The major remaining portion of the Company's railroad
right-of-way consists of various private leases and an operating grant from the
BLM.
In conjunction with the landfill permitting process, the Company plans to
transfer to the BLM approximately 2,800 acres of Kaiser-owned property along the
railroad right-of-way, which has been identified as prime desert tortoise
habitat, in exchange for fee ownership of approximately 3,500 acres of land
within the Landfill Project area. Specifically, the Company will receive fee
ownership of various non-fee mining interests currently held by the Company near
the large open pits. After extensive review and analysis, in October 1993, the
BLM issued its Record of Decision approving the land exchange with the Company.
The decision of the BLM approving the land exchange was challenged by the filing
of appeals with the Interior Board of Land Appeals ("IBLA"), the agency having
immediate appellate jurisdiction over the BLM's decision. However, as discussed
in more detail below, in March, 1995, the BLM announced that it would join in
Riverside County's additional environmental review, and requested that the IBLA
remand the decision on appeal for further agency action.
In a separate but related action to the land exchange, the Company and the BLM
also entered into discussions with respect to the extension of the Company's
right-of-way to use the railroad, a right-of-way for an existing road and the
transfer to the Company of property rights with respect to land at the Eagle
Mountain Townsite. All issues with respect to the right-of-way were also
resolved as a part of the BLM's Record of Decision. The BLM issued a new right-
of-way for the Kaiser railroad and a new joint right-of-way for the Eagle
Mountain road and its extension to Kaiser and the Metropolitan Water District of
Southern California. These right-of-way grants were also appealed to the IBLA.
The Record of Decision also approved the termination of the reversionary
interest with respect to approximately 460 acres within the Eagle Mountain
Townsite. This portion of the Record of Decision was also appealed to the IBLA.
On March 10, 1995, the BLM announced that it would join with Riverside County's
new environmental review by preparing a new or supplemental EIS for the proposed
land exchange. This additional review put the land exchange on hold pending
completion of the new environmental review process.
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The BLM is the lead Federal agency for the EIS. The National Parks Service
("NPS") has been a cooperating agency for the EIS. As noted above, the final
EIR/EIS was distributed in January 1997 after a series of public hearings held
by the BLM and after the conclusion of an over 60 day public comment period. In
September, 1997, the BLM announced that it had approved the proposed land
exchange. Approval commenced a forty-five (45) day protest period during which
opponents to the proposed land exchange may raise objections. Objections were
received and we understand that responses are currently being prepared by the
BLM. The Company currently anticipates a final decision by the BLM on the land
exchange and the rights-of-way during the second quarter of 1998.
Competition. The solid waste disposal industry is highly competitive with a
few large, integrated waste management firms and a significant number of
smaller, independent operators.
Assuming the Landfill Project is ultimately permitted, the success of the
Landfill Project depends largely upon MRC's ability to secure solid waste
disposal contracts from municipalities and waste haulers in this highly
competitive environment. The ability of MRC to secure such waste disposal
contracts is predicated upon a number of factors including, but not limited to,
MRC's ability to (i) charge disposal fees comparable to those of its
competitors; (ii) provide financial and environmental safeguards against
potential liability; (iii) provide sufficient long-term capacity; and (iv)
commence operations prior to the expansion of existing landfills or the opening
of other large capacity, rail-haul landfills. Currently, there are over 18 major
existing municipal solid waste landfills in Southern California serving the same
geographic area as that proposed by the Landfill Project (primarily Los Angeles,
Orange, Riverside and San Bernardino Counties). While a number of Southern
California landfills are scheduled to close in the next several years as they
reach capacity, several of them, including El Sobrante Landfill in Riverside
County and Puente Hills in Los Angeles County, are in the process of expanding
the permitted capacities of their existing facilities.
The Company is also currently aware of at least two other enterprises seeking
to develop rail-haul, solid waste disposal facilities which would be located in
Southern California and would compete directly with the Landfill Project. These
proposed cut-and-fill landfills include: (i) a landfill to be developed in a
desert site in San Bernardino County by Rail Cycle of Los Angeles, a joint
venture between Waste Management, Inc. and the Santa Fe Railway Company, Inc.;
and (ii) Mesquite Regional Landfill to be developed in Imperial County by a
partnership including Western Waste Industries and SP Environmental Systems,
Inc., an affiliate of the Southern Pacific Transportation Company. Both
projects are being developed by well established waste management companies,
which control significant waste streams in Southern California as a result of
their waste hauling businesses. Both of these rail haul projects received
certification of their respective EIRs in late 1995. The Mesquite Regional
Landfill is considered much further along in the permitting process than the
Eagle Mountain Landfill Project because it is ready for construction subject to
the receipt of several technical permits. The EIR for the Mesquite Regional
landfill and the EIR for Rail Cycle were subject to separate legal challenges
which are now concluded without further action on such EIR's required. The Rail
Cycle project is also contingent upon the approval of a business tax by the
voters, which has failed once.
Competition also extends to rail-haul landfills in the states of Arizona, Utah
and Washington. In Utah, East Carbon Development Corp. operates a rail-haul
landfill capable of receiving waste from Southern California and it is actively
marketing its services to waste generators in Southern California. In addition,
BFI, the former majority shareholder of MRC, operates a landfill in La Paz
County, Arizona, with planned rail access, which will compete for Southern
California waste.
To a lesser extent, the Landfill Project will also compete with alternatives
to landfills, such as recycling and "waste-to-energy" projects.
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Disposal Fees. While the Company believes that it will take several years for
MRC's projected disposal fees to be aligned at competitive levels with other
urban landfills, it also currently believes that the advantages afforded by the
Eagle Mountain site should enable it, in the long-term, to compete effectively
with both existing and other proposed landfills. Within the last year, there
has been a general reduction in disposal or "tipping fees" in several areas of
Southern California. The reduction in tipping fees was accelerated with the
bankruptcy of Orange County, California. As a means of generating revenue,
Orange County reduced its tipping fee to out-of-county trash from $38.50 to as
low as $18.00 per ton depending upon the length of the time commitment. Trash
generated within Orange County still pays approximately $38.50 per ton tipping
fee. Riverside County also adopted a two-tier tipping fee structure. The
tipping fee would generally be $30.00 for direct haul to a landfill and $25.00
if the waste is processed through a transfer station or materials recycling
facility. Facing the loss of waste from its system, San Bernardino County
dropped its tipping fee from $35.50 per ton to $28.50 per ton for fifteen (15)
year commitments.
Risk Factors. Management believes that the advantages afforded by the Eagle
Mountain site should enable it, in the long-term, to compete effectively with
both existing and other proposed landfills provided the Landfill Project can be
permitted. In addition, the success of the Landfill Project depends upon the
development of the anticipated shortage in landfill capacity in Southern
California over the next several years. However, there is no assurance that the
Company is currently able or will be able to compete effectively with
anticipated landfill space and pricing competition or that other forms of
competition will not result. Furthermore, there is no assurance that the
Landfill Project can obtain all the necessary permits or that it can be
successful in defending against legal challenges to the Landfill Project. To
date, MRC has not been successful in litigation challenging the adequacy of the
EIR. Finally, there is a risk that sufficient and suitable financing may not be
made available to MRC in order to allow it to continue to pursue the Landfill
Project.
EMPLOYEES
As of March 20, 1998, Kaiser had 25 full-time and 2 part-time employees. In
addition, as of March 20, 1998, MRC, the Company's subsidiary, had 6 full-time
employees.
Item 2. PROPERTIES
OFFICE FACILITIES
The Company's principal offices are located at 3633 East Inland Empire
Boulevard, Suite 850, Ontario, California 91764. The Company leases
approximately 7,500 square feet in Ontario, California, pursuant to a lease
agreement expiring in August 1999. The Company also maintains offices on the
Mill Site Property, at the Eagle Mountain site and in Denver, Colorado. MRC
leases an office in Palm Desert, California for a term that expires in 1998, and
maintains an office at the Eagle Mountain Site.
EAGLE MOUNTAIN, CALIFORNIA
The Kaiser Eagle Mountain idle iron ore mine and the adjoining Eagle Mountain
Townsite are located in Riverside County, approximately ten miles northwest of
Desert Center, California. Desert Center is located on Interstate 10 between
Indio and Blythe. The heavy duty maintenance shops and electrical power
distribution system have been kept substantially intact since the 1982 shutdown.
The
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Company also owns several buildings, a water distribution system, a sewage
treatment facility, and related infrastructure. The Eagle Mountain Townsite
includes more than 300 single family homes, approximately 100 of which have been
renovated and are currently in use. Most of the houses in use are leased to
Management and Training Corporation ("MTC") for use in conjunction with a
permitted 500-bed community-custody facility operated under a contract with the
California Department of Corrections. Utilization of the remaining houses and
related facilities will require additional renovation activities plus approval
by Riverside County of a Townsite Specific Plan.
In and around the Eagle Mountain area the Company has various possessory
mining claims on 9,550 acres and holds 1,800 acres in fee simple. In addition,
the Company and BLM are working toward a land exchange. See "Part I, Item 1.
Business" with respect to the proposed land transfer between the Company and the
BLM.
The Company owns six deep water wells, of which two are currently being used,
and two booster pump stations that serve the Eagle Mountain mine and townsite.
RAILROAD
To transport ore from the Eagle Mountain mine to the mill site (see below),
KSC constructed a 52-mile heavy duty rail line connecting the mine to the main
Southern Pacific rail line at Ferrum, California. The Company owns in fee
approximately 10% of the 52-mile railroad right-of-way. The major remaining
portion of the railroad right-of-way consists of various private leases and an
operating right-of-way from the BLM. As a part of its Record of Decision the
BLM issued a new railroad right-of-way to the Company. However, with the
decision of the BLM to reconsider its Record of Decision, the new railroad
right-of-way is currently considered still pending. The railroad is included in
the lease to MRC for the Landfill Project. See "Part I, Item 1. Business."
FONTANA, CALIFORNIA
With the acquisition of approximately 534 acres by The California Speedway
Corporation for the construction of TCS and related facilities, the contribution
and reservation of property for the West Valley MRF and the sale of a NAPA Lot,
the Company now owns approximately 629 acres (gross) near Fontana, California.
All of the Company's property is debt free with the exception of the West End
and Valley Boulevard parcels, which total approximately 282 acres (gross). The
West End and Valley Boulevard parcels are subject to an outstanding loan with an
approximate principal balance of $5,102,000. Located on the Mill Site Property
is extensive infrastructure, including, water and sewage treatment facilities,
and several old single-story office, storage and industrial buildings. However,
all the buildings previously on the Central Mill Site Property have been
demolished as part of the development of TCS. Various buildings and other
improvements are also being demolished on the West End. The Company has
historically had a number of short-term lease arrangements with unaffiliated
entities for portions of this property.
There is one active deep water well on the property, with capacity
significantly in excess of the current water needs for the property. Another
deep water well formerly owned by the Company is located on the property
acquired by The California Speedway Corporation, although it was taken out of
service due to the development of TCS. The Company's remaining water well is
now currently used only for irrigation purposes by TCS. See "Part I, Item 1.
Business." The Company originally had adjudicated water rights to extract 2,930
acre-feet of water per year for use on the property. However, the Company as
part of the transaction with PMI and the Company's agreement to sell a portion
of these water rights to
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CSI, an adjoining landowner, in connection with the settlement of certain
disputes and litigations with such company, the Company owns the following water
rights associated with the Mill Site Property: (i) 525 annual acre feet; (ii)
475 annual acre feet as tenants in common with The California Speedway
Corporation which has the right of first use; and (iii) 630 acre feet as tenants
in common with CSI, with CSI having the first right of use, with payment to the
Company, through June 30, 2004 and the Company having the first right of use
thereafter. In addition, the Company currently has rights to approximately 5,500
acre-feet of water in storage, effective as of December 1997. Pursuant to a
settlement agreement reached with the California Regional Water Quality Control
Board in 1993, the Company is obligated to contribute 1,000 acre feet of water
per year for 25 years for the purposes of a regional de-salter project. In 1995,
the Company contributed 18,000 acre feet of water in storage, which satisfies
the Company's obligation under the settlement agreement for the first 18 years.
Further, the DTSC has determined that limited portions of the property require
environmental remediation. The Company is working with the DTSC to remediate
the impacted areas. As discussed in "Item 1. Business - Mill Site
Environmental Matters," the Company undertook significant remediation activities
in 1997. As a result of the Company's experience in remediating the limited
portion of the motorsports complex and other areas requiring remediation, the
Company is evaluating other alternatives for the remediation of the remaining
impacted areas of its property. See "Item 1. Business."
LAKE TAMARISK, CALIFORNIA
Lake Tamarisk is an unincorporated community located two miles northwest of
Desert Center, California and approximately 8 miles from the Eagle Mountain
mine. This community has 150 improved lots situated around two recreational
lakes and a nine-hole golf course. With 70 homes and a 150-space mobile home
park, the community has an average year-round population in excess of 150. Lake
Tamarisk Development Corporation ("LTDC"), a wholly-owned subsidiary of the
Company, owns 77 improved lots including one residential structure. LTDC also
owns a 240 acre parcel of unimproved land across the highway from the main
entrance to Lake Tamarisk.
OTHER REAL ESTATE PROPERTIES
The Company owns numerous small land parcels and iron ore deposits in the high
desert area of Southern California and in Huerfano and Archuleta Counties in
Colorado, including the Silver Lake Mine west of Baker, California and 190 acres
near Afton Canyon, California.
FONTANA UNION WATER COMPANY
The Company, through a wholly owned subsidiary, owns 7,632.63 shares or
approximately 51% of the outstanding stock of Fontana Union, a California mutual
water company. These shares entitle the Company (or its lessee) to receive, at
cost, its proportionate share of Fontana Union's water. Fontana Union owns
surface and groundwater rights in the Fontana, California area with annual
average production of approximately 34,000 acre-feet (plus approximately 3,500-
4,000 acre feet relating to the annual Chino Basin agricultural pool transfer).
The Company's shares of Fontana Union stock are currently leased to Cucamonga.
The Fontana Union shares and the lease of such shares to Cucamonga are currently
pledged as collateral for the Company's $30,000,000 revolving-to-term credit
facility. See "Item 1. Business - Water Resources." See "Item 3 - Legal
Proceedings."
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ITEM 3. LEGAL PROCEEDINGS
The Company, in the normal course of its business, is involved in various
claims and legal proceedings. Except for those matters described below,
management believes these matters will not have a material adverse effect on
Kaiser's business or financial condition. Significant legal proceedings,
including those, which may have a material adverse effect on the Company's
business or financial condition, are summarized as follows:
LITIGATION
Eagle Mountain EIR Litigation. This litigation involved three separate legal
challenges to the EIR for the Landfill Project certified by the Riverside County
Board of Supervisors in October 1992. These cases were heard in the San Diego
County Superior Court. The Court's decisions required MRC to prepare a new EIR,
which was completed and certified in September 1997. The original litigation
against the EIR was resumed before Judge Judith McConnell of the San Diego
County Superior Court. In February 1998, the San Diego County Superior Court
announced its final decision and concluded that the new EIR was still deficient
in two principal respects. The Court's two remaining areas of concern involve
the threatened desert tortoise and Joshua Tree National Park. The Company and
MRC are now evaluating their alternatives with respect to the Landfill Project.
For a more extensive discussion of this litigation, please see "Municipal Solid
Waste Management - Landfill Project - State Litigation-Return to Writ."
In addition to the "return to writ" litigation before Judge McConnell, a
separate lawsuit challenging the validity of the new EIR was filed in Riverside
County. The environmental challenges in this lawsuit were dismissed in December
1997.
Warburton Litigation. The Company, KSC and KSC Recovery were named or became
cross-defendants in certain litigation in the U.S. Federal District Court for
the District of Northern California (Case No. C-93-1114 CW) commenced by IMACC
Corporation ("IMACC") against Dorothy Warburton ("Warburton") and others seeking
a determination of liability, contribution and indemnification for the costs of
environmental remediation for two sites that had been used at one time by IMACC
in conjunction with its barrel reconditioning business. Warburton is the owner
of the sites in question. At one time, KSC, through a wholly owned subsidiary,
owned the business now operated by IMACC. Certain other Warburton family
defendants are claiming that they should be indemnified by KSC's subsidiary or
by the Company for actions they took while officers of the KSC subsidiary. A
settlement was reached in the litigation with respect to the environmental
claims, which required payment of less than $100,000 by the Company and by KSC
Recovery. The Company's cash contribution to the settlement will be immaterial.
While there was a tentative settlement of the environmental matters (which has
now been finalized), a trial was held in November 1996, relating to the
indemnity claims and related matters. The Court had previously ruled that
either the Company or KSC was the alter ego of KSC's subsidiary, Myers Drum
Company. The Court also subsequently ruled that in these particular
circumstances, the request for indemnification did not rise to the level of
being a claim in bankruptcy at the time of the bankruptcy and thus could not be
discharged. With the announcement of the Court's decision, there remains a
dispute among the parties over the award of attorneys' fees. Two of the estates
claim that the Company and IMACC jointly owe them approximately $1.7 million in
attorneys fees and IMACC believes it is in turn entitled to attorneys' fees.
Even if the Company should be found liable for the attorneys' fees, which it
vigorously contests, IMACC is obligated to indemnify the Company for all such
amounts. Since the Company believes it has full indemnification coverage from
IMACC, no provision for any potential loss has been made in the accompanying
financial statements.
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Theft Related Litigation. The Company and certain of its subsidiaries are
defendants in three separate lawsuits related to alleged thefts of items from
tenants or users of sites formerly leased on the West End Property. The alleged
basis of each lawsuit is that the Company failed to provide proper security
resulting in a breach of contract and negligence by the Company by allowing
theft to occur. The Company believes it has numerous defenses to each of these
litigation matters. Defense of each matter has been tendered and accepted by
the Company's insurance carrier although the Company is paying defense costs in
excess of those paid by the carrier. If the Company should be found negligent
in any of these cases, insurance coverage may be available for any damages
awarded. If the Company is found to have breached a contract, insurance
coverage may not be available. The Company is vigorously defending each
lawsuit.
Johnson Machinery, Inc. is the plaintiff in one of the three lawsuits in which
it is alleged that the Company is liable for the theft of equipment or other
items from land leased by the Company. Johnson Machinery claims that there was
a theft of equipment with a value of approximately $1.2 million from a warehouse
on the West End Property. (Johnson Machinery, Inc. v. Lusk/Kaiser West End Joint
Venture et al. - San Bernardino County Superior Court: Case No. RCV 23757).
In November 1997, Centennial Insurance Company commenced litigation in San
Bernardino County Superior Court seeking approximately $115,000 in damages from
the Company and other defendants related to the alleged theft of property from
the Company's West End Property that was stored in a semi-truck of a common
carrier leasing a site from the Company (Centennial Insurance Company, v. Kaiser
Resources Inc., et al., San Bernardino County Superior Court - Rancho Cucamonga
Division, Case No. RCV 30545).
In February 1998, the Company was served with a complaint alleging that the
Company, certain subsidiaries of the Company and others are liable for
approximately $1.8 million paid by Nippon Fire & Marine Insurance Co., Ltd. to
Toshiba America Information System, Inc. as a result of the theft of a load of
lap top computers from a semi-truck owned by PST Vans a former tenant on the
West End Property. (Nippon Fire & Marine Insurance Co., Ltd., a corporation,
and Toshiba America Information System, Inc. v. PST Vans, Inc., a corporation;
PST Van Line, Inc. a corporation; Burns International, Inc., a corporation;
Burns International Security Services, Inc., a corporation; Borg-Warner Security
Corporation, a corporation; Kaiser Steel and Land Development, Inc., a
corporation; Kaiser Ventures Inc., a corporation; Kaiser Resources Inc., a
corporation; Lusk-Kaiser West End Joint Venture, a business entity (Case No.
CV97-9558 CBM (VAPx)).
Apollo Wood Litigation: On November 11, 1997, the Company and two individual
officers of the Company were served with a complaint brought by Apollo Wood
Recovery, Inc. in San Bernardino Superior Court seeking unspecified damages, but
which are estimated to exceed $100,000. The plaintiff is a tenant on the
Company's Mill Site Property. In summary, the complaint alleges that the
Company and two officers of the Company falsely represented the status of the
permitting of the property on which Plaintiff operates its business, committed
fraud, interfered with the plaintiff's business, engaged in unfair trade
practices and other similar causes of action. The Company believes the lawsuit
is without merit and is vigorously defending such lawsuit. (Apollo Wood
Recovery, Inc. v. Kaiser Ventures Inc., Terry L. Cook, Lee Redmond, Apollo Wood
& Metal Recycling Ltd., Shirley Isom Construction Company, Troy Isom and Does 1
through 40, San Bernardino Superior Court, Case No. SCN 42863.)
Cucamonga Litigation: In 1996, the Company initiated legal action against
Cucamonga. The dispute involved amounts owed to the Company under the terms of
its lease of
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Fontana Union Water stock to Cucamonga. The dispute arose out of a change made
by the Metropolitan Water District in its water rates and rate structure
effective July 1, 1995. After a five-day trial on the matter in March 1998, the
San Bernardino County Superior Court ruled that the lease rate had been
discontinued effective July 1, 1995. Thus, the parties are required to negotiate
in good faith a substitute lease rate as provided under the terms of the lease
with Cucamonga. For more detailed information, please see "Water Resources -
Lease to Cucamonga County Water District."
Asbestos Suits. The Company along with KSC are currently named in
approximately ten active asbestos lawsuits. The Company and KSC have been
previously named in other asbestos suits but for various reasons those suits are
not currently being pursued. Most of the plaintiffs alleged that they worked in
ship yards in the Oakland/San Francisco, California area in the 1940's and that
KSC was in some manner associated with one or more shipyards or has successor
liability from another "Kaiser" entity. Most of these lawsuits are third party
premises claims claiming injury resulting from exposure to asbestos and involve
multiple defendants. The Company anticipates that it will be named as a
defendant in additional asbestos lawsuits. All of the complaints are non-
specific. As such it is not practical at this time to determine the true nature
and extent of the claims against the Company and KSC. To date, several, but not
all, of the plaintiffs have agreed that they will not personally pursue the
Company, but they have been granted the right to pursue the Company's insurance
coverage, to the extent there is coverage. The Company currently believes that
it does have insurance coverage for at least a portion of the claims and has
tendered these suits for defense. The Company also currently believes that it
has various defenses to these claims, including the discharge granted to it in
connection with KSC's bankruptcy reorganization. The KSC bankruptcy estate,
through KSC Recovery has been incurring defense costs, which should in large
part be reimbursed by insurance. However, this is an evolving area of the law
and the factual discovery with respect to many of these lawsuits has not been
completed.
City of Ontario Litigation. On February 27, 1996, the City of Ontario,
California served on the Company a complaint filed in San Bernardino County
Superior Court (City of Ontario v. Kaiser Ventures Inc., et al.; Case No. RCV
17334). In sum, the complaint alleges that a plume or plumes containing organic
carbon, dissolved solids and mercury originating from the Company's Mill Site
Property due to activities of KSC and/or a former tenant of the Mill Site
Property have impacted one of the City of Ontario's water wells. Ontario seeks
reimbursement for remedial costs, replacement of the allegedly impacted well and
replacement or improvement or refurbishment of related facilities.
The Company challenged Ontario's ability to bring this litigation given the
KSC bankruptcy and the discharge granted to the Company. In April, 1996,
Ontario brought a declaratory judgment action in the U.S. District Court for the
District of Colorado in Bankruptcy ("the U.S. Bankruptcy Court") against the
Company, (City of Ontario v. Kaiser Ventures Inc., Adversary Proceeding No. 96-
1215 MSK). In the U.S. Bankruptcy Court action, Ontario in effect sought a
determination that the matters and damages alleged in its California lawsuit
were not discharged as a part of the KSC bankruptcy proceedings.
The Company and the City reached a settlement concerning the matter before
the U.S. Bankruptcy Court which was approved by the U.S. Bankruptcy Court in
October. Under the terms of the settlement, the Company has agreed to waive its
bankruptcy-related defenses to the City's prosecution of claims for groundwater
contamination caused by mercury or other priority pollutants. In return, the
City agreed to dismiss the California litigation as to all claims related to
total dissolved solids, total dissolved carbons and sulfates, and to be bound by
the 1993 Settlement Agreement between Kaiser and the California Regional Water
Quality Control Board. The City has not yet filed an amended complaint. The
Company and the City of Ontario are engaging in informal discovery and
discussions. The Company currently believes it has numerous defenses in the
litigation.
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BANKRUPTCY CLAIMS
The Company's predecessor, KSC, was in reorganization under Chapter 11 of the
United States Bankruptcy Code from February 1987 until November 1988. Pursuant
to the KSC Plan of Reorganization (the "KSC Plan"), the Company established a
subsidiary, KSC Recovery, which was engaged in the process of pursuing certain
legal actions on behalf of the former creditors of KSC and handling the
remaining administrative duties of the KSC bankruptcy estate, including claims
resolution. All litigation and bankruptcy administration costs are borne by KSC
Recovery, which maintains a cash reserve from previous litigation and other
recoveries to fund anticipated ongoing litigation and administration costs. All
major remaining claims in the bankruptcy estate were settled in 1995, with
completion of one major settlement occurring in 1996. Resolution of these
claims allowed for a distribution of cash and stock to most of the unsecured
creditors of the KSC bankruptcy estate in the second quarter of 1996.
Consistent with KSC Recovery's role solely as an agent of the former KSC
creditors, the Company's consolidated statements of operations and cash flows do
not reflect any of KSC Recovery's activities. Because of the minimum activities
of the KSC bankruptcy estate, the Bankruptcy Court terminated its supervision
over the estate in October 1996.
From time-to-time, various other environmental and similar types of claims,
such as the asbestos litigation mentioned above, that relate to KSC pre-
bankruptcy activities are asserted against KSC Recovery and the Company. In
connection with the KSC Plan, the Company, as the reorganized successor to KSC,
was discharged from all liabilities that may have arisen prior to confirmation
of the KSC Plan, except as otherwise provided by the KSC Plan and by law.
Although the Company believes that in general all pre-petition claims were
discharged under the KSC Plan, in the event any of these claims or other similar
claims are ultimately determined to survive the KSC bankruptcy, it could have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
35
<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>
1997:
Fourth quarter.............................. $ 10.00 $ 15.06
Third quarter............................... $ 10.75 $ 14.88
Second quarter.............................. $ 7.50 $ 10.50
First quarter............................... $ 8.50 $ 10.75
1996:
Fourth quarter.............................. $ 8.25 $ 10.00
Third quarter............................... $ 8.75 $ 9.50
Second quarter.............................. $ 9.38 $ 12.75
First quarter............................... $ 11.00 $ 13.13
</TABLE>
As of March 20, 1998, there were 2,310 holders of record of the Company's
Common Stock.
As of March 20, 1998, the Company held 136,919 shares that are deemed
outstanding but reserved for issuance to the former general unsecured creditors
of KSC pursuant to the KSC Plan.
The Company has neither declared nor paid any cash dividends on its Common
Stock since emerging from the KSC bankruptcy in November 1988 and does not
intend to declare dividends on its Common Stock in the foreseeable future. Any
future decisions by the Company to pay cash dividends will depend upon its
growth, profitability, financial condition and other factors the Board of
Directors may deem relevant. The Company presently intends to retain its
earnings to finance the development and expansion of its business and for use in
connection with future acquisitions.
36
<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: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues............................... $10,006,000 $15,331,000 $11,053,000 $12,471,000 $10,591,000
Costs and expenses........................... 7,815,000 7,066,000 7,938,000 8,593,000 8,144,000
----------- ----------- ----------- ----------- -----------
Income from operations....................... 2,191,000 8,265,000 3,115,000 3,878,000 2,447,000
Net interest expense (income)................ 672,000 819,000 665,000 (155,000) (466,000)
----------- ----------- ----------- ----------- -----------
Income before income tax provision
and extraordinary loss...................... 1,519,000 7,446,000 2,450,000 4,033,000 2,913,000
Taxes currently payable...................... 43,000 92,000 --- 125,000 50,000
Deferred tax expense......................... 74,000 840,000 721,000 --- ---
Deferred tax expense credited to equity...... 554,000 3,945,000 335,000 1,621,000 1,171,000
----------- ----------- ----------- ----------- -----------
Income before extraordinary loss............. 848,000 2,569,000 1,394,000 2,287,000 1,692,000
Extraordinary loss (net of taxes)............ --- --- --- 2,233,000 ---
----------- ----------- ----------- ----------- -----------
Net income................................... $ 848,000 $ 2,569,000 $ 1,394,000 $ 54,000 $ 1,692,000
=========== =========== =========== =========== ===========
Earnings per share
Before extraordinary loss
Basic...................................... $ .08 $ .24 $ .13 $ .21 $ .16
Diluted.................................... $ .08 $ .24 $ .13 $ .21 $ .16
Net Income
Basic...................................... $ .08 $ .24 $ .13 $ .01 $ .16
Diluted.................................... $ .08 $ .24 $ .13 $ .01 $ .16
Basic Weighted average
number of shares outstanding................. 10,536,457 10,485,943 10,456,353 10,435,878 10,365,163
Diluted Weighted average
number of shares outstanding................. 10,740,357 10,729,645 10,653,950 10,671,154 10,604,122
</TABLE>
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET DATA
AS OF DECEMBER 31: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments...................... $ 4,330,000 $ 8,482,000 $ 10,937,000 $ 6,829,000 $ 15,922,000
Working capital.............................. (4,685,000) (1,240,000) 2,821,000 (3,567,000) 11,420,000
Total assets................................. 139,265,000 134,067,000 126,803,000 114,350,000 109,014,000
Long-term debt............................... 8,982,000 8,102,000 5,342,000 5,700,000 ---
Long-term environmental...................... 24,673,000
remediation reserves........................ 26,466,000 32,176,000 28,439,000 34,537,000
Stockholders' equity......................... 86,204,000 81,448,000 68,697,000 66,802,000 66,664,000
</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, 1997, were approximately $113
million and $2.4 million, for federal and California income tax purposes,
respectively.
(2) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings
Per Share. For further discussion of earnings per share and the impact of
Statement No. 128, see the notes to the consolidated financial statements
beginning on page 70.
37
<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 asset development
company pursuing project opportunities and investments in water resources,
motorsports, property redevelopment and solid waste management. The Company's
long-term emphasis is on the further development of its principal assets: (i) a
50.88% interest in Fontana Union Water Company ("Fontana Union"), a mutual water
company; (ii) a 11.51% interest in Penske Motorsports, Inc. ("PMI"), a publicly-
traded professional motorsports company that has developed the California
Speedway ("TCS") on land acquired from the Company; (iii) approximately a 73%
interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle
Mountain Landfill Project (the "Landfill Project"); (iv) a 50% joint venture
interest in the West Valley MRF ("WVMRF"), a transfer station and recycling
facility located on land acquired from the Company; (v) approximately 629 acres
of the former Kaiser Steel Corporation ("KSC") steel mill site (the "Mill Site
Property") which is currently undergoing redevelopment; and (vi) the 11,350
acre idle iron ore mine in the California desert (the "Eagle Mountain Site"),
which includes the associated 460 acre town of Eagle Mountain ("Eagle Mountain
Townsite") and the land leased to MRC for the Landfill Project. The Company is
also pursuing other related longer-term growth opportunities on the balance of
its Mill Site Property, including the redevelopment of industrial and commercial
parcels of land near TCS and the WVMRF.
SUMMARY OF SIGNIFICANT DEVELOPMENTS IN 1997
During 1997, a number of material events occurred which affected the Company.
Therefore, readers are encouraged to read this Report it in its entirety in
order to adequately understand the impact of these events on the Company. In
Management's opinion, three of the material events were particularly
significant: (a) the San Diego Court's ruling relative to the Landfill Project's
environmental impact report ("EIR"); (b) the filing of revised Form 13D's
related to the Company's two largest shareholders: the New Kaiser Voluntary
Employee Benefit Association ("VEBA") and the Pension Benefit Guarantee
Corporation ("PBGC"); and (c) the creation of a special committee by the Board
of Directors to evaluate strategic alternatives and transactions with respect to
the Company and its assets.
In regard to the Landfill Project, MRC received the necessary land use and
environmental approvals from the Riverside County Board of Supervisors on
September 9, 1997. Subsequently, two separate legal actions were pursued by
opponents to the Eagle Mountain Landfill Project which argued that the
environmental impact report ("EIR") approved by Riverside County was defective.
The first action challenged the County's and MRC's assertion that the new EIR
satisfied the requirements of the July, 1994 decisions of San Diego Superior
Court Judge Judith McConnell. The second action was the commencement of a new
lawsuit in Riverside County. The environmental challenges in the new lawsuit
were dismissed with prejudice on December 16, 1997. However, with respect to
the first action, Judge McConnell of the San Diego Superior Court issued, on
December 31, 1997, a tentative ruling that preliminarily concluded that the new
EIR was still deficient in several areas. On February 17, 1998, the Court
issued its final ruling. In its final ruling the Court reversed itself with
regard to several items in its tentative ruling that were initially determined
adverse to the Landfill Project, but the Court still concluded that the new EIR
was deficient in two areas. The Court's two remaining areas of concern involve
the project's impacts on the threatened desert tortoise and Joshua Tree National
Park. For more detailed information on this matter, please see "Municipal Solid
Waste Management Landfill Project."
As a result of the Court's final ruling, the Company and MRC are currently
evaluating their available options with respect to the Landfill Project. These
options include, but are not limited to: (i) appealing the Court's decision;
(ii) taking the actions believed necessary to correct the deficiencies in the
EIR in
38
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
compliance with the Court's decision; (iii) indefinitely postponing the Landfill
Project in some manner; or (iv) a combination of these or other alternatives.
Depending upon the course of action ultimately selected by MRC and the Company,
there could be a material adverse impact to the financial statements of the
Company, including a possible write down of the Company's investment in MRC to
the lower of cost or fair market value. A final decision on what course of
action will be taken by MRC and the Company should be made by mid-1998.
In regard to the revised Form 13D's filed by VEBA and the investment advisor
of the PBGC, they disclosed that a Cooperation Agreement was entered into
between the PBGC's and VEBA's respective investment advisors. A copy of the
Cooperation Agreement was filed with the Form 13D's. The Cooperation Agreement
provides, among other things, that the parties are considering pursuing one or
more strategies involving the Company and its assets. Such alternatives include
distributing the PMI stock, securitizing and/or distributing the payments from
the Cucamonga Lease, pursuing the full development and operation of the Eagle
Mountain Landfill Project, selling or merging the Company, or jointly selling
the Company stock owned by PBGC and VEBA.
In addition, the Company's Board of Directors appointed a special committee
(the "Special Committee") to evaluate and consider pursuing, among other things,
various strategic alternatives and transactions with respect to the Company and
its assets. The Special Committee has retained outside legal counsel and the
investment banking firm of Merrill Lynch to assist it in its work.
These events, as well as other event, are discussed in more detail in Part I
of this Report.
PRIMARY REVENUE SOURCES
ONGOING OPERATIONS
The Company's revenues from ongoing operations are generally derived from the
development of the Company's long-term projects. Revenues from water resources
represent payments under the lease of the Company's interest in Fontana Union to
Cucamonga County Water District ("Cucamonga"). Property redevelopment revenues
primarily reflect revenues from long-term redevelopment activities at the Mill
Site property, including water and waste water treatment revenues; housing
rental income, aggregate and rock sales and lease payments for the minimum
security prison at the Eagle Mountain Townsite; and royalty revenues from iron
ore shipments from the Company's iron ore mine in California (the "Silver Lake
Mine"). Income from equity method investments reflect Kaiser's share of income
related to those equity investments (i.e., PMI) and, starting in 1998, joint
ventures (i.e., West Valley MRF) which the Company accounts for under the equity
method.
INTERIM ACTIVITIES
Revenues from interim activities are generated from various sources primarily
related to the Mill Site Property. Significant components of interim activities
include rentals under short-term tenant lease arrangements, royalty revenues
from the sale of slag to outside contractors, royalty revenues from the sale of
recyclable revert materials and other miscellaneous short-term activities.
SUMMARY OF REVENUE SOURCES
Due to the developmental nature of certain Company projects and the Company's
recognition of revenues from bankruptcy-related and other non-recurring items,
historical period-to-period comparisons
39
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
of total revenues may not be meaningful for developing an overall understanding
of the Company. Therefore, the Company believes it is important to evaluate the
trends in the components of its revenues as well as the recent developments
regarding its long-term ongoing and interim revenue sources. See "Part I, Item
1. Business" for a discussion of recent material events affecting the Company's
revenue sources.
In addition, due to the concentration of motorsport racing events between
April and September, PMI's operations have been, and will continue to be, highly
seasonal. As a result, the Company's reported share of undistributed equity in
the earnings of PMI will likely be positive (income) in the second and third
quarters and negative (loss) in the first and fourth quarters.
RESULTS OF OPERATIONS
ANALYSIS OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
An analysis of the significant components of the Company's resource revenues
for the years ended December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996 % INC. (DEC)
---- ---- ------------
<S> <C> <C> <C>
ONGOING OPERATIONS
Water resource................................. $ 5,143,000 $ 4,505,000 14%
Property redevelopment......................... 1,213,000 1,120,000 8%
Income from equity method investments.......... 2,003,000 1,539,000 30%
Mill Site land sale............................ --- 6,371,000 (100%)
----------- ----------- -----
TOTAL ONGOING OPERATIONS...................... 8,359,000 13,535,000 (38%)
----------- ----------- -----
INTERIM ACTIVITIES
Lease, service and other....................... 1,647,000 1,796,000 (8%)
----------- ----------- -----
TOTAL INTERIM ACTIVITIES...................... 1,647,000 1,796,000 (8%)
----------- ----------- -----
TOTAL RESOURCE REVENUES....................... $10,006,000 $15,331,000 (35%)
=========== =========== =====
REVENUES AS A PERCENTAGE OF TOTAL
RESOURCE REVENUES:
Ongoing operations............................. 84% 88%
Interim activities............................. 16% 12%
----------- -----------
TOTAL RESOURCE REVENUES....................... 100% 100%
=========== ===========
</TABLE>
Resource Revenues. Total resource revenues for 1997 were $10,006,000,
compared to $15,331,000 for 1996. Revenues from ongoing operations decreased
38% during the year to $8,359,000 from $13,535,000 in 1996, while revenues from
interim activities declined 8% to $1,647,000 from $1,796,000 in 1996. Comparing
1997 revenues from ongoing operations to 1996 without the Mill Site land sale
shows an increase of 17 %, or $1,195,000, to $8,359,000 from $7,164,000.
Revenues from ongoing operations as a percentage of total revenues decreased to
84% in 1997 from 88% in 1996; however, excluding the Mill Site land sale in
1996, ongoing operations represented 80%.
Ongoing Operations. Water lease revenues under the Company's 102-year take-or-
pay lease with Cucamonga were $5,143,000 during 1997 compared to $4,505,000 for
1996. The 14% increase in water revenues during the year reflects: (a) two rate
increases, as of February 1, 1997, and July 1, 1997 in the effective non-
interruptible untreated water rate being paid by Cucamonga from $346.00 to
$351.00 per
40
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
acre foot and then to $351.75 per acre foot, respectively; (b) a return to the
maximum amount of water that Cucamonga (through Fontana Union) can draw from the
Colton/Rialto Basin wells; and (c) an increase in the Chino Basin agricultural
pool transfer relating to increased agricultural usage and the overstatement of
estimates in prior years. As previously disclosed, Metropolitan Water District
of Southern California ("MWD"), effective July 1, 1995, implemented changed
rates and a changed rate structure which resulted in the continuing lease
interpretation dispute with Cucamonga regarding the extent of the MWD rate
increases. Although the Company is continuing to bill Cucamonga at what it
believes is the correct MWD rate under the lease with Cucamonga, the Company has
elected to reserve the full amount in dispute and report revenues on the basis
of amounts actually received from Cucamonga. The total amount of lease payments
in dispute as of December 31, 1997 is approximately $1,236,000. In addition, MWD
has stated that it may further refine its rate structure in the near future.
Property redevelopment revenues were $1,213,000 for 1997 compared to
$1,120,000 for 1996. The 8% increase from 1996 is primarily a result of: (a) the
reclassification of the Mill Site sewer treatment plant service fees as property
redevelopment revenues as a result of the Company's renovation of the plant and
its renewed commitment to provide sewer services to PMI and future Mill Site
tenants ($292,000) higher iron ore and aggregate sales ($78,000), partially
offset by; and (b) residual expenses associated with offsite improvements for
the Speedway Business Park property that the Company sold to PMI in December
1996 ($242,000).
Income from equity method investments increased to $2,003,000 for 1997
compared to $1,539,000 for 1996. The $951,000 increase in Company's share of
the reported net income of PMI for the year, of which the Company recorded its
11.51% weighted average share, was partially offset by the $487,000 reduction in
the management fee which the Company received from PMI through March 31, 1997.
The Company's equity interest in PMI declined, as of June 1, 1997, from 12.29%
to 11.51% as a result of the approximate 907,000 shares that PMI issued in
connection with the acquisition of a majority interest in North Carolina Motor
Speedway, Inc. The Company is recording its investment in PMI on the equity
method and began recording its share of PMI's net income concurrent with
conversion of the Company's preferred stock into common stock at the end of the
first quarter of 1996.
Mill Site land sale revenues in 1996 represent the sale of approximately 54.2
net acres of the Mill Site Property, known as the Speedway Business Park, to PMI
for $5.0 million in cash and approximately $8.35 million, or 254,298 shares, of
PMI common stock. The transaction closed in December 1996. As a result of the
transaction, Kaiser increased its ownership of PMI to 1,627,923 shares.
Interim Activities. Revenues from interim activities for 1997 were $1,647,000
compared to $1,796,000 for 1996. The 8% decrease in revenues from interim
activities in 1997 is primarily attributable to: (a) lower revenues from tenant
services and from sales of metallics and scrap ($230,000); and (b) revenues from
the reclassification of the sewer treatment plant service fees as property
redevelopment revenues ($217,000), being partially offset by increases in tenant
rental revenue ($87,000), railroad switching revenue ($91,000), and slag revenue
($121,000). It is anticipated that in 1998, these revenues will continue to
decline due to the continuing redevelopment of the Mill Site Property.
Resource Operating Costs. Resource operating costs are those costs directly
related to the resource revenue sources. Total resource operating costs for
1997 increased to $3,654,000 from $3,229,000 in 1996. Operations and
maintenance costs for 1997 were $1,311,000 compared to $1,092,000 for 1996. The
20% increase in 1997 operations and maintenance costs was primarily due to
higher property tax expense associated with the completed offsite improvements
for portions of the Mill Site property ($104,000) and increased maintenance and
supplies costs for buildings and equipment ($112,000).
41
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
Administrative support expenses for 1997 increased 10% to $2,343,000 from
$2,137,000 for 1996. This increase was primarily due to increases in insurance
expense relating to the addition of environmental pollution insurance coverage
for the Mill Site ($73,000), depreciation expense relating to the newly
completed railroad and sewer plant improvements at the Mill Site ($59,000), and
legal costs associated with both the CCWD water lease rate dispute and Mill Site
tenants claims ($132,000) being partially offset by lower salaries and outside
professional costs ($56,000).
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for 1997 increased 8% to $4,161,000 from $3,837,000 for
1996. The increase is due to higher compensation and related expenses ($75,000)
and higher professional and outside consulting expenses ($253,000).
Net Interest Expense. Net interest expense for 1997 was $672,000 compared to
$819,000 in 1996. The decrease was due primarily to a decrease in amortization
of loan fees ($633,000), being partially offset by lower interest income from
lower cash/investment balances ($76,000) and higher interest expense ($410,000)
due to higher average borrowings under the Union Bank credit facility.
Income and Income Tax Provision. The Company recorded income before income
tax provision of $1,519,000 for 1997, an 80% decrease from the $7,446,000
recorded in 1996. Comparing 1997 to 1996 without the sale of the Speedway
Business Park sale, pre-tax income increased 41% or $444,000 to $1,519,000 from
$1,075,000. A provision for income taxes of $671,000 was recorded in 1997 as
compared with $4,877,000 in 1996. Over 90% of the tax provisions for 1997 and
1996 are not currently payable due primarily to utilization of the Company's net
operating loss carryforwards ("NOL's"). Consequently, pretax income is an
important indicator of the Company's performance.
Net Income. For 1997, the Company reported net income of $848,000, or $.08
per share, a 67% decrease from the $2,569,000, or $.24 per share, reported for
1996.
Mill Site Land Sale. During 1997, the Company sold approximately 15.7 acres
of the Mill Site Property to McLeod Properties, Fontana LLC for $2,943,000, or
$4.30 per square foot, for use as a rail-truck intermodal distribution facility
for Budway Trucking, Inc. The transaction closed on September 30, 1997 at which
time the Company received $1,500,000 in cash and a note receivable for
$1,443,000. The Company agreed to subordinate its note receivable to a
construction/permanent loan in order to facilitate the construction of a
building on the property. Although the Company considers the sale to have been
fully consummated during 1997 generally accepted accounting principles require
the gain of $656,000 to be deferred and recognized as cash collections are
received on its subordinated note receivable.
ANALYSIS OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
An analysis of the significant components of the Company's resource
revenues for the years ended December 31, 1996 and 1995 follows:
42
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1995 % Inc. (Dec)
---- ---- ------------
ONGOING OPERATIONS
<S> <C> <C> <C>
Water resource $ 4,505,000 $ 4,974,000 (9%)
Property redevelopment 1,120,000 998,000 12%
Income from equity method investments 1,539,000 162,000 850%
Mill Site land sale 6,371,000 --- ---
----------- ----------- -----
TOTAL ONGOING OPERATIONS........................... 13,535,000 6,134,000 121%
----------- ----------- -----
INTERIM ACTIVITIES
Lease, service and other........................... 1,796,000 2,719,000 (34%)
Asset sales........................................ --- 2,200,000 (100%)
----------- ----------- -----
TOTAL INTERIM ACTIVITIES........................... 1,796,000 4,919,000 (63%)
----------- ----------- -----
TOTAL RESOURCE REVENUES............................ $15,331,000 $11,053,000 39%
=========== =========== =====
REVENUES AS A PERCENTAGE OF TOTAL RESOURCE REVENUES:
Ongoing operations................................. 88% 55%
Interim activities................................. 12% 45%
----------- -----------
Total resource revenues............................ 100% 100%
=========== ===========
</TABLE>
Resource Revenues. Total resource revenues for 1996 were $15,331,000,
compared to $11,053,000 for 1995. Revenues from ongoing operations increased
121% during the year to $13,535,000 from $6,134,000 in 1995, while revenues from
interim activities declined 63% to $1,796,000 from $4,919,000 in 1995. Revenues
from ongoing operations as a percentage of total revenues increased to 88% in
1996 from 55% in 1995; however, excluding both the Mill Site land sale in 1996
and the gain on sale of water rights to CSI in 1995, ongoing operations
represented 80% and 69% of total revenues in 1996 and 1995, respectively.
Ongoing Operations. Water lease revenues under the Company's 102-year take-
or-pay lease with Cucamonga were $4,505,000 during 1996 compared to $4,974,000
for 1995. The 9% decrease in water revenues during the year reflects: (a) a
reduction affecting all parties under the Colton/Rialto Basin judgment, in the
amount of water that Cucamonga (through Fontana Union) can draw from the
Colton/Rialto Basin due to low water levels ($269,000); and (b) a likely non-
recurring reduction in the Chino Basin agricultural pool transfer relating to
increased agricultural usage and the overstatement of estimates in prior years
($201,000). As previously disclosed, Metropolitan Water District of Southern
California ("MWD"), effective July 1, 1995, implemented changed rates and a
changed rate structure which resulted in the continuing lease interpretation
dispute with Cucamonga regarding the extent of the MWD rate increases. Although
the Company is continuing to bill Cucamonga at what it believes is the correct
MWD rate under the lease with Cucamonga, the Company has elected to reserve the
full amount in dispute and report revenues on the basis of amounts actually
received from Cucamonga. The total amount of lease payments in dispute as of
December 31, 1996 was approximately $748,000. In addition, MWD has stated that
it may further refine its rate structure in the near future.
Property redevelopment revenues were $1,120,000 for 1996 compared to $998,000
for 1995. The 12% increase from 1995 is primarily as a result of higher iron
ore sales from one of the Company's California mines which more than offset
reductions in tenant rental income at Eagle Mountain.
Income from equity method investments increased to $1,539,000 for 1996
compared to $162,000 for 1995 as a result of an increase in the amount of
project service fees paid by PMI ($488,000) plus the Company's 12.29% (10.56%
through November 30, 1996) share of PMI's net income, net of expenses,
43
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
from April 1, 1996 ($889,000). The Company is recording its investment in PMI on
the equity method and began recording its share of PMI's net income concurrent
with conversion of the Company's preferred stock into common stock at the end of
the first quarter of 1996.
Mill Site land sale revenues represent the sale of approximately 54.2 net
acres of the Mill Site Property, known as the Speedway Business Park, to PMI for
$5.0 million in cash and approximately $8.35 million, or 254,298 shares, of PMI
common stock. The transaction closed in December 1996. As a result of the
transaction, Kaiser increased its ownership of PMI to 1,627,923 shares or
approximately 12.29%.
Interim Activities. Revenues from interim activities for 1996 were $1,796,000
compared to $4,919,000 for 1995. As noted above, the 63% decrease in revenues
from interim activities in 1996 is primarily attributable to the non-recurring
$2.2 million gain on the sale of water rights to CSI recorded in 1995; lower
slag and scrap revenues ($156,000); sewer service revenues under the amended
Services Agreement with CSI ($185,000) and lower miscellaneous revenues
($347,000).
Resource Operating Costs. Resource operating costs are those costs directly
related to the resource revenue sources. Total resource operating costs for
1996 declined to $3,229,000 from $3,737,000 in 1995. Operations and maintenance
costs for 1996 were $1,092,000 compared to $1,496,000 for 1995. The 27%
decrease in 1996 operations and maintenance costs was primarily due to lower
expenses associated with the reduced levels of services being provided to CSI
and lower property taxes associated with the portion of the Mill Site Property
that was contributed to PMI for the development of the TCS. Administrative
support expenses for 1996 decreased 3% to $2,137,000 from $2,241,000 for 1995.
The decrease was primarily due to lower outside professional costs and lower
depreciation expense.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses for 1996 decreased 9% to $3,837,000 from $4,201,000 for
1995. The decrease was due primarily to savings realized as a result of the
departure of the Company's prior President & CEO at the end of 1995, and the
subsequent management realignment.
Net Interest Expense. Net interest expense for 1996 was $819,000 compared to
$665,000 in 1995. The increase was due primarily to the accelerated
amortization of deferred loan fees associated with the Union Bank credit
facility being offset by the capitalization of interest expense associated with
the development of certain parcels of the Mill Site Property and higher interest
income.
Income and Income Tax Provision. The Company recorded income before income
tax provision of $7,446,000 for 1996, a 204% increase from the $2,450,000
recorded in 1995. A provision for income taxes of $4,877,000 was recorded in
1996 as compared with $1,056,000 in 1995. Over 90% of the tax provisions for
1996 and 1995 are not currently payable due primarily to utilization of the
Company's net operating loss carryforwards ("NOL's"). Consequently, pretax
income is an important indicator of the Company's performance.
Net Income. For 1996, the Company reported net income of $2,569,000, or $.24
per share, an 84% increase from the $1,394,000, or $.13 per share, reported for
1995.
SECTION 2: FINANCIAL POSITION
Cash, Cash Equivalents and Short-Term Investments. The Company defines cash
equivalents as highly liquid debt instruments with original maturities of 90
days or less. Cash and cash equivalents decreased $4,152,000 to $4,330,000 at
December 31, 1997 from $8,482,000 at December 31, 1996.
44
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
Included in cash and cash equivalents is $1,984,000 and $1,766,000 held solely
for the benefit of MRC at December 31, 1997 and 1996, respectively. The decrease
in cash and cash equivalents is due primarily to the $7,174,000 in capital
expenditures and $1,496,000 in environmental remediation, incurred in 1997 being
offset by: (a) $1,500,000 in cash from the sale of the 15.7 acres of the Mill
Site Property to McLeod Properties Fontana LLC (Budway Enterprises); (b)
$1,000,000 of net new borrowings under the Union Bank credit facility; (c)
$1,260,000 of equity funds contributed by the minority owners of MRC; and (d)
the collection of $865,000 of outstanding accounts receivable.
Working Capital. During 1997, current assets decreased $4,539,000 to
$7,279,000 while current liabilities decreased $1,094,000 to $11,964,000. The
decrease in current assets resulted primarily from the $4,152,000 decrease in
cash and cash equivalents, plus a $797,000 decline in accounts receivable due
primarily to the receipt of reimbursable expenses from PMI, partially offset by
an increase in the current portion of the note receivable ($410,000) from the
Mill Site land sale to McLeod properties. The decrease in current liabilities
resulted primarily from a decrease in capital spending at the Mill Site during
the 4/th/ quarter of 1997. Included in current liabilities for 1997 is $885,000
in accounts payable and accrued liabilities relating to MRC. As a result,
working capital decreased during 1997 by $3,445,000 to a negative $4,685,000 at
December 31, 1997.
Real Estate. Real Estate decreased $2,952,000 during 1997 due to: (a) the
closing of the Company's restructured joint venture with Burrtec Waste
Industries for the West Valley MRF and the resulting contribution of 23 acres of
land for WVMRF ($2,199,000); and (b) the sale of 15.7 acres of land to McLeod
Properties, Fontana, LLC ($2,225,000). These reductions were partially offset
by capital expenditures ($1,472,000) related to continue redevelopment of the
Mill Site properties.
Investments. There was a $6,503,000 increase in the Company's investments in
PMI and WVMRF during 1997. The Company's increased investment in PMI
($5,018,000) is a result of PMI's stock issuance related to its acquisition of a
majority of the common stock of North Carolina Motor Speedway Inc. ("NCMS") in
May 1997 ($3,128,000) and the Company's recording of its equity share of PMI's
1997 earnings ($1,840,000). In regard to the $3,128,000 increase in Kaiser's
investment in PMI relating to its stock issuance for NCMS, the Company also
recorded corresponding increases in deferred income taxes and stockholders
equity of approximately $191,000 and $2,937,000, respectively. The increase in
the investment in WVMRF ($1,485,000) is due to Kaiser's contribution of the land
for the joint venture ($2,199,000) being partially offset by expense
reimbursements from the joint venture ($714,000).
Other Assets. The increase in other assets ($5,918,000) is primarily related
to: a) capitalized landfill permitting and development costs incurred by MRC
($3,962,000); b) recording of the long term portion of the note receivable
associated with the Mill Site (Napa Lot) land sale ($860,000); c) railroad and
sewer plant improvements at the Mill Site ($1,213,000); and an increase in
deferred loan fees ($242,000). These increases were partially offset by an
increase in accumulated depreciation as of December 31, 1997 ($359,000).
Environmental Remediation. As is discussed extensively in Part I, "Property
Redevelopment, Mill Site Environmental", the Company estimates, based upon
current information, that its future remediation and other environmental costs
for the balance of its land and related matters, including groundwater and other
possible third party claims, will be between approximately $20 million and $31
million, depending both upon the ultimate extent of the environmental
remediation and clean-up effort involved and which approved remediation
alternatives are eventually selected. In order to provide better information
regarding these future remediation and other environmental costs, the Company
elected, in 1996, to restate its balance sheets to show as a separate liability
rather than, as previously, an offset to land, the amount of future
environmental related costs reflected in its financial statements. The
restatement reflects the
45
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
original $34.7 million remediation adjustment to land; the $6.6 million
groundwater remediation reserve recorded in 1988 when the Company emerged from
bankruptcy as the reorganized successor of KSC; and the net $12.5 million in
environmental insurance litigation settlement proceeds received in 1995 being
offset by approximately $23.1 million in remediation and other environmental
costs expended through December 31, 1997. The Company's decision to restate its
balance sheet is based upon, among other things, the more extensive
investigation and remediation activities that have been pursued over the past
three years and the Company's ability to better estimate the probable range of
future remediation and other environmental costs.
As of December 31, 1997, the total short-term and long-term environmental
liabilities including remediation reflected on the Company's balance sheet were
approximately $30.7 million, the high end of the probable range of future
remediation and other environmental costs, which declined from the $32.2 million
as of December 31, 1996. The decrease is a result of the $1.5 million in
remediation and other environmental costs incurred in 1997 on the Mill Site
property.
Although ongoing environmental investigations are being conducted on the Mill
Site Property and management believes it is currently in a position to estimate
with some reasonable certainty future investigation and remediation costs, there
can be no assurance that the actual amount of environmental remediation
expenditures to be incurred will not substantially exceed those currently
anticipated or that additional areas of contamination may not be identified.
Accordingly, future facts and circumstances could cause these estimates to
change significantly.
Long-term Debt. Of December 31, 1997, the Company had $8,982,000 in long-term
debt comprised of $4,982,000 of debt issued as part of the purchase of
properties from the Lusk Joint Ventures in July 1994 and $4,000,000 borrowed
under the $30,000,000 revolving-to-term credit facility with Union Bank. The
Lusk debt has been classified as long-term debt due to the Company's intent and
ability to refinance the obligation on a long-term basis utilizing the Union
Bank revolving-to-term credit facility.
Long-term Liabilities. The $872,000 decrease in other long-term liabilities
is primarily due to the reduction of the environmental remediation liability as
a result of: a) $1,496,000 in environmental remediation undertaken during 1997
and b) a reclassification of $297,000 from long term into current environmental
remediation. These reductions were partially offset by the recording of the
deferred gain on the sale of real estate ($656,000) and the increases in
deferred tax liability discussed above ($265,000).
Minority Interest and Other Liabilities. As of December 31, 1997, the Company
has recorded $2,878,000 of minority interest relating to MRC in which the
Company had approximately a 73% equity interest.
Contingent Liabilities. The Company has contingent liabilities more fully
described in the notes to the financial statements.
Impact of the Year 2000 Issue. The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
46
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
Based on a recent assessment, the Company determined that all of the software
currently in use on its computer system will properly utilize dates beyond
December 31, 1999. The Company has determined that it has no exposure to
contingencies related to the Year 2000 Issue for the services it has sold.
The Company has initiated informal communications with all of its significant
business associates to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 Issue. The
Company believes that the failure of its customers to convert their computer
systems to be compliant with the Year 2000 Issue will not have a material effect
on the Company.
SECTION 3: BUSINESS OUTLOOK
The statements contained in this Business Outlook are based upon current
operations and expectations. In addition to the forward-looking statements and
information contained elsewhere in this 10-K Report, these statements are
forward-looking and, therefore, actual results may differ materially.
On-Going Operations. As noted above, the Company's revenues from ongoing
operations are generally derived from the development of the Company's major
long-term projects and investments. The development of a number of these
projects and investments, such as the 102-year take-or-pay lease with Cucamonga
and the 11.51% equity ownership in PMI, are essentially complete and the Company
is recognizing significant revenues and income from these investments. The
Company expects revenues from these projects and investments to increase
moderately over time as certain key economic factors impacting these projects
and investments increase. In addition, the Company continues to evaluate these
completed projects and investments in light of how to best provide maximum value
to its shareholders.
In regard to the lease with Cucamonga, the most significant economic factor
affecting future water lease revenues is likely to be adjustments in the MWD
rate for untreated and non-interruptible water as available through the Chino
Basin Municipal Water District (the "Lease Rate") upon which the lease payments
are calculated. The MWD rate established for untreated, non-interruptible water
is based on a number of factors, including MWD's need for funds to finance
capital improvements and to cover large fixed overhead costs. After increasing
at an average of nearly 8.6% per year during the past 25 years, MWD is
projecting that the MWD rate for untreated, non-interruptible water, including
all of the changed rates and charges implemented by MWD since July 1, 1995, will
likely increase at less than 5.0% per year for the next 2-4 years. This
reduction is due to a reduced capital budget, lower overhead, lower borrowing
costs and reduced levels of inflation. Also affecting the Company's future
water lease revenues is the dispute with Cucamonga regarding the calculation of
the Lease Rate. In March 1998, the San Bernardino Superior Court ruled that
the Lease Rate had been discontinued as of July 1, 1995. Thus, the parties are
required to negotiate in good faith a substitute Lease Rate. If parties are
unable to negotiate a substitute Lease Rate, the matter is referred to
arbitration for resolution.
In regard to the Company's 11.51% investment in PMI, the most significant
factors affecting the Company's future equity income from PMI will be the
increased revenues and net income generated by PMI from the expansion of its
professional motorsports operations. Critical to this expansion will be the
continued success of TCS that is on land acquired from the Company. The
continued success of TCS, coupled with the results of the other major racing
events schedule for PMI's MIS, Nazareth, North Caroline and Homestead speedways
and PMI's other motorsports related operations, will determine the amount of
income from equity method investments the Company reports in the future.
The Company is also spending a significant amount of capital in the continued
development of its two other major project and investment opportunities: the
redevelopment of approximately 496 acres (gross) of the Company's Mill Site
Property and the re-permitting of the Eagle Mountain Landfill by MRC, the
Company's 73% owned subsidiary. If it is successful in completing the
development of these
47
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
two projects as planned, the Company expects to generate significant future
revenues and net income from them. However, as is noted elsewhere in this
Report, there are also numerous risks associated with the redevelopment of the
remaining Mill Site Property and completing the re-permitting of the Eagle
Mountain Landfill that could materially impact the Company's future revenues and
net income from these projects.
In regard to the redevelopment of approximately 445 acres (gross) of the Mill
Site Property, the Company is currently undertaking efforts to obtain the
entitlement and permits necessary for a variety of possible commercial,
industrial and recreational uses. These efforts, which will continue throughout
1998, include the approval of possible changes that would alter and improve the
existing access to portions of the Mill Site Property. In support of these
efforts, the Company expects to spend, in 1998, up to approximately $6.1 million
for required environmental remediation and approximately $1.5 million for real
estate entitlement and improvement expenditures. The $6.1 million to be spent
in 1998 for required environmental remediation is a component of the $20-31
million estimate to complete all remaining required remediation for the Mill
Site Property. In addition, substantial capital expenditures beyond the $1.5
million projected for 1998 will be required to complete the necessary on-site
and off-site improvements for the redevelopment of remaining Mill Site property.
Although neither the Company nor any subsidiary of the Company has any
obligation to invest funds in MRC, the Company has, to date, continued to make
investments in MRC. Through a series of private placements with existing MRC
shareholders, from July 1995 through December 31, 1997, a total of $10.8 million
has been raised by MRC, with Kaiser contributing approximately $8.1 million of
that amount. Due to the uncertainty associated with the Landfill Project, the
Company is evaluating its continuing investment in MRC. In this regard, the
Company has agreed to advance funds to MRC for a limited period in 1998 pending
the Company's determination, in light of the San Diego County Superior Court's
recent ruling, of what course of action to pursue with regard to the Landfill
Project. It is anticipated that the initial 1998 advance will total up to
approximately $900,000 and that the Company may invest additional funds in MRC
during 1998 depending upon what course of action the Company may ultimately
decide to pursue.
Capital Resources. The Company expects that its current cash balances and
short-term investments together with: (a) cash provided from operating
activities; (b) amounts available under its $30,000,000 revolving-to-term credit
facility (less $4,850,000 reserved for financial assurances required by the DTSC
and relating to environmental remediation on the Mill Site Property) will be
sufficient to satisfy both the Company's near-term operating cash requirements
and to enable the Company to continue to fund the development of its long-term
projects and investments. As was discussed in more detail above, the Company
expects to commit, in 1998, a total of approximately $8 million for capital
projects and investments. To the extent that additional capital resources are
required, such capital will be raised through bank borrowings, partnerships,
joint venture arrangements, additional equity or the sales or monetization of
assets.
Improved Cash Flow from Use of Net Operating Loss Tax Carryforwards. Due to
the Company's status as successor to KSC and its use of KSC-related NOLs, income
taxes actually paid by the Company are substantially less than the income tax
provision reported in its financial statements. The tax benefit associated with
the utilization of these NOLs is reflected as an increase to stockholders'
equity rather than as an increase to net income. The Company expects that its
use of these NOLs will substantially reduce the cash paid for income taxes until
these NOLs are fully utilized. The total NOLs at December 31, 1997, are
estimated to be approximately $113 million for federal purposes and $2.4 million
for California purposes. The federal NOLs expire in varying amounts over a
period from year 2000 to 2010 while the California NOLs expire from 2000 through
2002.
48
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
If within a three-year period, 50% or more of the stock of the Company changes
ownership, the future annual use of NOLs may be limited. The annual limitation
would be calculated as the product of: (i) the highest long-term tax-exempt
rate for a designated period prior to the ownership change; and (ii) the market
value of the Company at such time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Please see Item 14 of this Form 10-K Report for financial statements and
supplementary data.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
49
<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 1998
Annual Meeting of Stockholders (the "1998 Proxy Statement"), a definitive copy
of which will be filed within 120 days of December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
Executive Compensation Section of the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by this item is incorporated by reference from the
Security Ownership of Principal Shareholders and Management Section of the 1998
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the 1998
Proxy Statement.
50
<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> <C>
Report of Independent Auditors ............................... 64
Consolidated Balance Sheets .................................. 65
Consolidated Statements of Income ............................ 67
Consolidated Statements of Cash Flows ........................ 68
Consolidated Statements of Changes in Stockholders' Equity ... 69
Notes to Consolidated Financial Statements ................... 70
(2) Financial Statement Schedules
-----------------------------
II Valuation and Qualifying Accounts and Reserves ..... 92
</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:
51
<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>
52
<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 incorporated by reference from Exhibit
10.1.4 of the Company's Form 10-K Report for the year ended December 31, 1995.
10.1.5 Settlement Agreement dated June 30, 1994, by and among Mine Reclamation
Corporation, Browning-Ferris Industries, Inc., BFI Riverside, Inc., BFI
California, Inc., Kaiser Eagle Mountain, Inc., and Kaiser Resources Inc.,
incorporated by reference by the Company's Form 10-Q Report for the period
ending June 30, 1994.
10.1.6 Stock Acquisition Agreement between Eagle Mountain Reclamation, Inc. and Mine
Reclamation Corporation dated January 13, 1995, incorporated by reference from
Exhibit 10.1.5 of the Company's Form 10-K Report for the year ended December 31,
1994.
10.1.7 Indemnification Agreement dated September 9, 1997 among Riverside County, Mine
Reclamation Corporation, Kaiser Eagle Mountain, Inc. Eagle Mountain Reclamation,
Inc. and Kaiser Ventures Inc, incorporated by reference from Exhibit 10.1 of the
Company's Form 10-Q Report for the period ended September 30, 1997.
10.1.8 Development Agreement to be executed upon consummation of federal land exchange
among Riverside County, Mine Reclamation Corporation, Kaiser Eagle Mountain,
Inc. Eagle Mountain Reclamation, Inc. and Kaiser Ventures Inc., incorporated by
reference from Exhibit 10.2 of the Company's Form 10-Q Report for the period
ended September 30, 1997.
</TABLE>
53
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
10.2 Dissolution Agreement among Lusk-Kaiser Fontana Joint Venture, Kaiser Steel
Resources, Inc., The Lusk Company, Service Mortgage Company and Lusk Ontario
Industrial Partners II, effective September 30, 1992, incorporated by reference
from Exhibit 10.2.4 of the Company's Form S-2 (Registration No. 33-56234).
10.2.1 Dissolution Agreement among Lusk-Kaiser West End Joint Venture, Kaiser Resources
Inc., The Lusk Company, Service Mortgage Company and Lusk-Ontario Industrial
Partners II, dated July 31, 1994, incorporated by reference from Exhibit 10.2.7
of the Company's Form 10-K Report for the year ended December 31, 1994.
10.2.3 Dissolution Agreement among Lusk-Kaiser Valley Boulevard Joint Venture, Kaiser
Resources Inc., The Lusk Company, Service Mortgage Company and Lusk-Ontario
Industrial Partners II, dated July 31, 1994, incorporated by reference from
Exhibit 10.2.7 of the Company's Form 10-K Report for the year ended December 31,
1994.
10.3 Eagle Mountain Lease Between Management and Training Corporation and Kaiser
Steel Corporation, dated November 16, 1987, incorporated by reference from
Exhibit 10.4 of the Company's Form 10-K Report for the year ended December 31,
1988.
10.3.1 First Amendment dated July 1, 1990, to Lease between Management and Training
Corporation and Kaiser Steel Resources, Inc., incorporated by reference from
Exhibit 10.3.1 of the Company's Form 10-K Report for the year ended December 31,
1990.
10.3.2 Second Amendment dated November 16, 1992, to Lease dated November 16, 1987
between Management and Training Corporation and Kaiser Steel Resources, Inc.,
incorporated by reference from Exhibit 10.3.2 of the Company's Form S-2
Registration No. 33-56234).
10.3.3 Third Amendment to Eagle Mountain Lease between Management and Training
Corporation and Kaiser Steel Resources, Inc. dated November 16, 1997.
10.4* Amended and Restated Employment Agreement between Kaiser Ventures Inc. and
Richard E. Stoddard, dated effective January 15, 1998.
10.5* Employment Agreement between Kaiser Ventures Inc. and Gerald A. Fawcett, dated
effective January 15, 1998.
</TABLE>
54
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
10.6* Employment Agreement between Kaiser Ventures Inc. and Pamela M. Catlett, dated
effective June 17, 1996, incorporated by reference from Exhibit 10.1 of the
Company's Form 10-Q Report for quarter ended June 30, 1996.
10.7* Employment Agreement between Kaiser Ventures Inc. and Terry L. Cook dated
effective June 17, 1996, incorporated be reference from Exhibit 10.2 of the
company's Form 10-Q Report for quarter ended June 30, 1996.
10.8* Employment Agreement between Kaiser Ventures Inc. and Lee R. Redmond III, dated
effective June 17, 1996 incorporated by reference from Exhibit 10.3 of the
Company's Form 10-Q Report for the quarter ended June 30, 1996.
10.9* Employment Agreement between Kaiser Ventures Inc. and Anthony Silva dated
effective January 15, 1998.
10.10* Employment Agreement between Kaiser Ventures Inc. and James F. Verhey, dated
effective June 17, 1996 incorporated by reference from the Company's Form 10-Q
Report for the quarter ended June 30, 1996.
10.10* First Amendment to Employment Agreement dated effective January 15, 1998 between
Kaiser Ventures Inc and James F. Verhey.
10.11 Lease Agreement between American Trading Estate Properties, Landlord and Kaiser
Resources Inc., Tenant, dated June 6, 1994, incorporated by reference from
Exhibit 10.8 of the Company's Form 10-K Report for the year ended 1994.
10.12 Environmental Agreement, State of California, Health and Welfare Agency,
Department of Health Services, Consent Order Health and Safety Code Sections
205, 25355.1(a)(B), 25355.5(a)(C), dated August 22, 1988, incorporated by
reference from Exhibit 10.14 of the Company's Form 10-K Report for the year
ended December 31, 1988.
10.12.1 Amendment to Consent Order dated August 22, 1998 issued by the State Department
of Health Services to Kaiser Steel Corporation is issued as of November 13, 1997
by the California Environmental Protection Agency.
10.13 Environmental Agreement, California Regional Water Quality Control Board, Santa
Ana Region, Cleanup and Abatement Order No. 87-121, dated August 26, 1987,
incorporated by reference from Exhibit 10.15 of the Company's Form 10-K Report
for the year ended December 31, 1988.
10.13.1 Environmental Agreement, California Regional Water Quality Control Board, Santa
Ana Region, Cleanup and Abatement Order No. 91-40, dated March 11, 1991,
incorporated by reference from Exhibit 10.11.1 of the Company's Form S-2
(Registration No. 33-56234).
</TABLE>
55
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ----------- --------------------------------------------------------------------------------
<S> <C>
10.13.2 Settlement Agreement between Kaiser Resources Inc. and California Regional
Water Quality Control Board, Santa Ana Region, dated October 21, 1993,
incorporated by reference from Exhibit 10.11.2 of the Company's Form 10-K
Report for the year ended December 31, 1993.
10.14 Lease of Corporate shares of Fontana Union Water Company coupled with
Irrevocable Proxy between Kaiser Resources Inc. and Cucamonga County Water
District dated July 1, 1993, incorporated by reference from Exhibit 1 to Form
10-Q dated June 30, 1993.
10.15 Assignment from Kaiser Steel Resources, Inc. to KSC Recovery, Inc., dated
December 29, 1989, incorporated by reference from Exhibit 10.20 of the
Company's Form 10-K Report for the year ended December 31, 1989.
10.16* Amended, Restated and Substituted Kaiser Steel Resources, Inc. 1989 Stock Plan,
incorporated by reference from the Company's Proxy Statement for the Special
Meeting of Stockholders held on October 2, 1990.
10.17* Kaiser Steel Resources, Inc. 1992 Stock Option Plan, as amended, incorporated
by reference from Exhibit 10.16 of the Company's Form S-2 (Registration No.
33-56234).
10.18* Kaiser Ventures Inc. 1995 Stock Plan incorporated by reference from Exhibit
10.15 of the Company's 10-K Report for the year ended December 31, 1995.
10.18.1* First Amendment to Kaiser Ventures Inc. 1995 Stock Option Plan incorporated by
reference from Exhibit 4.1.1 of the Company's Form S-8 Registration Statement
(Registration No. 333-17843).
10.19 Third Amended Plan of Reorganization of Fontana Union Water Company dated
September 26, 1990, incorporated by reference from Exhibit 10.18 of the
Company's Form S-2 (Registration No. 33-56234).
10.20 Settlement Agreement among Fontana Union Water Company, Kaiser Steel Resources,
Inc., San Gabriel Valley Water Company and Cucamonga County Water District
dated February 7, 1992, incorporated by reference from Exhibit 10.19 of the
Company's Form S-2 (Registration No. 33-56234).
10.21 Mining Lease between Kaiser Steel Resources, Inc. and Levand Steel and Supply
Corporation/K.D. Mining and Consulting Co. effective January 2, 1993,
incorporated by reference from Exhibit 10.20 of the Company's Form S-2
(Registration No. 33-56234).
</TABLE>
56
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
10.22 Organization Agreement, dated November 22, 1995 by and among PSH Corp., Kaiser
Ventures Inc. and Penske Motorsports, Inc. (f/k/a Penske Speedway Holdings
Corp.), incorporated by reference from Exhibit 10.23 of the Company's 8-K Report
dated November 22, 1995.
10.22.1 First Amendment to Organization Agreement dated March 21, 1996, by and among PSH
Corp., Kaiser Venture Inc., and Penske Motorsports, Inc. incorporated by
reference from Exhibit 10.20.1 of the Company's Form 10-K Report for the year
ended December 31, 1995.
10.23 Shareholders Agreement, dated November 22, 1995 by and among PSH Corp., Kaiser
Ventures Inc. and Penske Motorsports, Inc. (f/k/a Penske Speedway Holdings
Corp.) incorporated by reference from Exhibit 10.24 of the Company's 8-K Report
dated November 22, 1995.
10.23.1 First Amendment to Shareholders Agreement, dated March 21, 1996, between Penske
Motorsports, Inc. and Kaiser Ventures Inc., incorporated by reference from
Exhibit 10.21.1 of the Company's Form 10-K Report for the year ended December
31, 1995.
10.24 Water Rights Agreement, dated November 21, 1995 by and among Kaiser Ventures
Inc., Kaiser Inc. and The California Speedway Corporation (successor by merger
to Speedway Development Corporation) incorporated by reference from Exhibit
10.22 of the Company's Form 10-K Report for the year ended December 31, 1995.
10.25 Access Agreement, dated as of November 22, 1995 by and among Kaiser Ventures
Inc., Kaiser Land Development, Inc. and The California Corporation incorporated
by reference from Exhibit 10.23 of the Company's Form 10-K Report for the year
ended December 31, 1995.
10.26 Sewer Services Agreement, dated as of November 21, 1995 between Kaiser Ventures
Inc. and The California Speedway Corporation (successor by merger to Speedway
Development Corporation) incorporated by reference from Exhibit 10.24 of the
Company's Form 10-K Report for the year ended December 31, 1995.
10.27 Purchase Agreement and Escrow Instructions (without exhibits) dated October 8,
1996, among Kaiser Ventures Inc., The California Speedway Corporation and Penske
Motorsports, Inc. incorporated by reference from Exhibit 10.1 of the Company's
Form 10-Q Report for the quarter ended September 30, 1995.
</TABLE>
57
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
10.28 Conditional Demand Registration Report Agreement between Penske Motorsports,
Inc. and Kaiser Ventures Inc., incorporated by reference from Exhibit 10.28 of
the Company's Form 10-K Report for the year ended December 31, 1996.
10.29 Revolving Credit and Term Loan Agreement between Fontana Water Resources, Inc.
and Union Bank, dated September 30, 1994, (Excluding the exhibits), incorporated
by reference from Exhibit 10.21 of the Company's Form 10-K Report for the year
ended December 31, 1994.
10.29.1 First Amendment of Credit and Term Loan Agreement between Fontana Water
Resources, Inc. and Union Bank, dated January 30, 1997, incorporated by
reference from Exhibit 10.29.1 of the Company's Form 10-K Report for the year
ended December 31, 1996.
10.29.2 Guaranty executed by Kaiser Resources Inc. in favor of Union Bank, dated
September 30, 1994, incorporated by reference from Exhibit 10.21.1 of the
Company's Form 10-K Report for the year ended December 31, 1994.
10.29.3 First Amendment to Guaranty by Kaiser Ventures Inc. in favor of Union Bank dated
June 30, 1997 incorporated by reference from Exhibit 10.29.3 of the Company's
10-K Report for the year ended December 31, 1996.
10.29.4 First Amendment to Pledge and Security Agreement; Second Amendment to Guaranty;
First Amendment to Stock Pledge Agreement; and Guarantor Consent by Kaiser
Ventures Inc. in favor of Union Bank dated August 14, 1997.
10.29.5 Second Modification of Deed of Trust and Assignment of Leases and Rents dated as
of August 14, 1997 by Fontana Water Resources, Inc. and Union Bank of California.
10.29.6 Second Amendment to Revolving Credit and Term Loan Agreement dated August 14,
1997 by Fontana Water Resources, Inc. and Union Bank of California.
10.31 Settlement Agreement among Kaiser Resources Inc., KSC Recovery, Inc., Kaiser
Coal Corporation, the UMWA Combined Benefit Fund and the UMWA 1992 Benefit Plan
dated December 1, 1994, incorporated by reference from Exhibit 10.22 of the
Company's 10-K Report for the year ended December 31, 1994.
10.32 Promissory Note of McLeod Properties, Fontana LLC, dated September 30, 1997
payable to the order of Kaiser Ventures Inc., incorporated by reference from
Exhibit 10.3 of the Company's 10-Q Report for the period ended September 30,
1997.
</TABLE>
58
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
10.32.1 Guaranty Agreement of Budway Enterprises, Inc. and V.M. McLeod dated September
30, 1997, incorporated by reference from Exhibit 10.3.1 of the Company's 10-Q
Report for the period ended September 30, 1997.
10.32.2 Subordinated Deed of Trust, Assignment of Leases and Rents and Security
Agreement dated September 30, 1997 given by McLeod Properties, Fontana LLC for
the benefit of the Kaiser Ventures Inc., incorporated by reference from Exhibit
10.3.2 of the Company's 10-Q Report for the period ended September 30, 1997.
10.33 Members Operating Agreement dated June 19, 1997 between Kaiser Recycling
Corporation and West Valley Recycling & Transfer, Inc., incorporated by
reference from Exhibit 10.1 of the Company's 10-Q Report for the period ended
June 30, 1997.
10.33.1 Performance Guaranty and Indemnification Agreement (KRC Obligations) dated June
19, 1997 given by Kaiser Ventures Inc. for the benefit of West Valley MRF, LLC
and West Valley Recycling & Transfer, Inc., incorporated by reference from
Exhibit 10.1.1 of the Company's 10-Q Report for the period ended June 30, 1997.
10.34 Loan Agreement dated as of June 1, 1997 between West Valley MRF, LLC and
California Pollution Control Financing Authority, incorporated by reference from
Exhibit 10.2 of the Company's 10-Q Report for the period ended June 30, 1997.
10.34.1 Indenture Agreement dated as of June 1, 1997 between California Pollution
Control Financing Authority and BNY Western Trust Company for the benefit of
$9,500,000 California Pollution Control Financing Authority Variable Rate Demand
Solid Waste Disposal Revenue Bonds (West Valley MRF, LLC Project) Series 1997A,
incorporated by reference from Exhibit 10.2.1 of the Company's 10-Q Report for
the period ended June 30, 1997.
10.35 Remarketing Agreement dated as of June 1, 1997, and among West Valley MRF, LLC
and Westhoff, Cone & Holmstedt and Smith Barney, Inc. with regard to $9,500,000
California Pollution Control Financing Authority Variable Rate Demand Stock
Waste Disposal Revenue Bonds (West Valley MRF, LLC Project) Series 1997A,
incorporated by reference from Exhibit 10.3 of the Company's 10-Q Report for the
period ended June 30, 1997.
10.36 Reimbursement Agreement dated as of June 1, 1997 between West Valley MRF, LLC
and Union Bank of California, N.A., incorporated by reference from Exhibit 10.4
of the Company's 10-Q Report for the period ended June 30, 1997.
</TABLE>
59
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
EXHIBIT INDEX - (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- -------- -----------------------------------------------------------------------------------
<S> <C>
10.36.1 Guaranty and Mandatory DSR Agreement dated as of June 1, 1997 given by Kaiser
Ventures Inc. and Kaiser Recycling Corporation for the benefit of Union Bank of
California, N.A., incorporated by reference from Exhibit 10.4.1 of the Company's
10-Q Report for the period ended June 30, 1997.
10.37 Environmental Compliance Agreement dated as of June 19, 1997 between West Valley
MRF, LLC and Union Bank of California, N.A., incorporated by reference from
Exhibit 10.5 of the Company's 10-Q Report for the period ended June 30, 1997.
10.37.1 Environmental Guaranty Agreement dated as of June 19, 1997 given by Kaiser
Ventures Inc. and Kaiser Recycling Corporation for the benefit of Union Bank of
California, N.A., incorporated by reference from Exhibit 10.5.1 of the Company's
10-Q Report for the period ended June 30, 1997.
21 The Company has nine active subsidiaries. Fontana Water Resources, Inc.,
Kaiser Eagle Mountain, Inc., Kaiser Steel Corporation, Kaiser Steel Land
Development, Inc., Kaiser Waste Treatment, Inc., Kaiser Recycling Corporation,
Kaiser Reclamation, Inc., and KSC Recovery, Inc. are incorporated under the
laws of the State of Delaware. Lake Tamarisk Development Corporation is
incorporated under the laws of the State of California. KSC Recovery, Inc.'s
activities are limited to those permitted by the Second Amended Joint Plan of
Reorganization as modified (Exhibit 2.1 of this Report).
23 Consent of Ernst & Young LLP.
24 Power of Attorney (included in the signature page).
27 Financial Data Schedule
</TABLE>
60
<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, 1998
KAISER VENTURES INC.
By: /s/ Richard E. Stoddard
-----------------------------------------
Name: Richard E. Stoddard
-----------------------------------------
Title: President, Chief Executive Officer
-------------------------------------------
and Chairman of the Board
------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
(Power of Attorney)
61
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
Each person whose signature appears below constitutes and appoints RICHARD E.
STODDARD and JAMES F. VERHEY as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Form 10-K and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
1. Principal Executive Officer
/s/ Richard E. Stoddard President, Chief Executive March 31, 1998
-------------------------
Richard E. Stoddard Officer and Chairman of the
Board
2. Principal Financial and
Accounting Officer
/s/ James F. Verhey Executive Vice President March 31, 1998
--------------------------
James F. Verhey Finance and Chief Finance
Officer
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
4. Directors
/s/ Ronald E. Bitonti Director March 31, 1998
--------------------------------------------
Ronald E. Bitonti
/s/ Todd G. Cole Director March 31, 1998
--------------------------------------------
Todd G. Cole
/s/ Gerald A. Fawcett Vice Chairman March 31, 1998
--------------------------------------------
Gerald A. Fawcett
/s/ Reynold C. MacDonald Director March 31, 1998
--------------------------------------------
Reynold C. MacDonald
/s/ William J. Morgan Director March 31, 1998
--------------------------------------------
William J. Morgan
/s/ Charles E. Packard Director March 31, 1998
--------------------------------------------
Charles E. Packard
/s/ Thomas S. Rabone Director March 31, 1998
--------------------------------------------
Thomas S. Rabone
/s/ Lyle B. Stevenson Director March 31, 1998
--------------------------------------------
Lyle B. Stevenson
/s/ Marshall F. Wallach Director March 31, 1998
--------------------------------------------
Marshall F. Wallach
</TABLE>
63
<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, 1997 and 1996,
and the related consolidated statements of income, cash flows, and stockholders'
equity for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Kaiser Ventures Inc. and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Riverside, California
January 20, 1998
64
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................... $ 4,330,000 $ 8,482,000
Accounts receivable and other, net of allowance for
doubtful accounts of $1,535,000 and $1,034,000,
respectively........................................ 2,539,000 3,336,000
Note receivable......................................... 410,000 ---
------------ ------------
7,279,000 11,818,000
------------ ------------
Investment in common stock of Penske Motorsports, Inc...... 43,881,000 38,863,000
------------ ------------
Investment in Fontana Union Water Company.................. 16,108,000 16,108,000
------------ ------------
Investment in West Valley MRF.............................. 2,509,000 1,024,000
------------ ------------
Real Estate
Land and improvements................................... 15,621,000 15,554,000
Real estate in development.............................. 40,094,000 43,113,000
------------ ------------
55,715,000 58,667,000
------------ ------------
Other Assets
Note Receivable......................................... 860,000 ---
Landfill permitting and development..................... 9,607,000 5,645,000
Buildings and equipment (net)........................... 3,064,000 2,210,000
Other assets............................................ 242,000 ---
------------ ------------
13,773,000 7,855,000
------------ ------------
Total Assets............................................... $139,265,000 $134,335,000
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
65
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable....................................... $ 1,479,000 $ 2,936,000
Accrued liabilities.................................... 4,311,000 4,125,000
Current portion of long-term debt...................... 120,000 240,000
Environmental remediation.............................. 6,054,000 5,757,000
------------ ------------
11,964,000 13,058,000
------------ ------------
Long-term Liabilities
Deferred gain on sale of real estate................... 656,000 ---
Accrued liabilities.................................... 1,685,000 1,685,000
Deferred tax liabilities............................... 2,223,000 1,958,000
Long-term debt......................................... 8,982,000 8,102,000
Environmental remediation.............................. 24,673,000 26,466,000
------------ ------------
38,219,000 38,211,000
------------ ------------
Total Liabilities......................................... 50,183,000 51,269,000
------------ ------------
Minority Interest......................................... 2,878,000 1,618,000
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Common stock, par value $.03 per share, authorized
13,333,333 shares; issued and outstanding
10,591,240 and 10,488,114 respectively............. 318,000 315,000
Capital in excess of par value......................... 74,342,000 70,437,000
Retained earnings since November 15, 1988.............. 11,544,000 10,696,000
------------ ------------
Total Stockholders' Equity................................ 86,204,000 81,448,000
------------ ------------
Total Liabilities and Stockholders' Equity................ $139,265,000 $134,335,000
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
66
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
RESOURCE REVENUES
Ongoing Operations
Water resource............................................... $ 5,143,000 $ 4,505,000 $ 4,974,000
Property redevelopment....................................... 1,213,000 1,120,000 998,000
Income from equity method investments........................ 2,003,000 1,539,000 162,000
Mill Site land sale.......................................... --- 6,371,000 ---
----------- ----------- -----------
Total ongoing operations.................................. 8,359,000 13,535,000 6,134,000
----------- ----------- -----------
Interim Activities
Lease, service and other..................................... 1,647,000 1,796,000 2,719,000
Asset sales.................................................. --- --- 2,200,000
----------- ----------- -----------
Total interim activities.................................. 1,647,000 1,796,000 4,919,000
----------- ----------- -----------
Total resource revenues................................... 10,006,000 15,331,000 11,053,000
----------- ----------- -----------
RESOURCE OPERATING COSTS
Operations and maintenance........................................ 1,311,000 1,092,000 1,496,000
Administrative support expenses................................... 2,343,000 2,137,000 2,241,000
----------- ----------- -----------
Total resource operating costs............................... 3,654,000 3,229,000 3,737,000
----------- ----------- -----------
INCOME FROM RESOURCES............................................... 6,352,000 12,102,000 7,316,000
Corporate general and administrative expenses..................... 4,161,000 3,837,000 4,201,000
----------- ----------- -----------
Income from Operations.............................................. 2,191,000 8,265,000 3,115,000
Net interest expense.............................................. 672,000 819,000 665,000
----------- ----------- -----------
INCOME BEFORE INCOME TAX PROVISION.................................. 1,519,000 7,446,000 2,450,000
Income tax provision
Currently payable............................................ 43,000 92,000 ---
Deferred tax expense......................................... 74,000 840,000 721,000
Deferred tax expense credited to equity...................... 554,000 3,945,000 335,000
----------- ----------- -----------
NET INCOME.......................................................... $ 848,000 $ 2,569,000 $ 1,394,000
=========== =========== ===========
BASIC EARNINGS PER SHARE............................................ $.08 $.24 $.13
=========== =========== ===========
DILUTED EARNINGS PER SHARE.......................................... $.08 $.24 $.13
=========== =========== ===========
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................. 10,536,457 10,485,943 10,456,353
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 10,740,357 10,729,645 10,653,950
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
67
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................... $ 848,000 $ 2,569,000 $ 1,394,000
Provision for income tax which is credited to equity..... 554,000 3,945,000 335,000
Equity income in Penske Motorsports, Inc................. (1,840,000) (889,000) ---
Deferred tax expense..................................... 74,000 840,000 721,000
Depreciation and amortization............................ 389,000 952,000 436,000
Extraordinary loss....................................... --- --- (3,938,000)
Gain on sale of Speedway Business Park................... --- (6,371,000) ---
Gain from the CSI Settlement............................. --- --- (2,200,000)
Allowance for doubtful accounts.......................... 13,000 36,000 258,000
Changes in assets:
Receivable and other................................. 865,000 77,000 (755,000)
Changes in liabilities:
Current liabilities.................................. 684,000 (2,810,000) 798,000
Long-term accrued liabilities........................ --- 306,000 ---
----------- ----------- -----------
Net cash flows from operating activities................. 1,587,000 (1,345,000) (2,951,000)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Minority interest and other liabilities.................. 1,260,000 670,000 1,538,000
Proceeds from the sale of Mill Site Real Estate.......... 1,500,000 5,000,000 ---
Collection of note receivable............................ 174,000 --- ---
Proceeds from the CSI Settlement......................... --- 3,661,000 ---
Capital expenditures..................................... (7,174,000) (9,273,000) (1,605,000)
Environmental remediation expenditures..................... (1,496,000) (6,595,000) (5,950,000)
Environmental insurance proceeds (net)................... --- 2,582,000 13,823,000
Investment in Penske Motorsports, Inc...................... --- 232,000 (309,000)
Other investments.......................................... (759,000) (268,000) (184,000)
Short-term investments and marketable securities......... --- --- 3,624,000
Investment in Fontana Union Water Co..................... --- --- (62,000)
----------- ----------- -----------
Net cash flows from investing activities................... (6,495,000) (3,991,000) 10,875,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock................................. 196,000 121,000 166,000
Borrowings under revolver-to-term credit facility........ 2,000,000 3,000,000 ---
Principal payments on revolver-to-term credit facility
and note payable........................................ (1,240,000) (240,000) (358,000)
Payment of loan fees (200,000) --- ---
----------- ----------- -----------
Net cash flows from financing activities 756,000 2,881,000 (192,000)
----------- ----------- -----------
NET CHANGES IN CASH AND CASH EQUIVALENTS (4,152,000) (2,455,000) 7,732,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,482,000 10,937,000 3,205,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,330,000 $ 8,482,000 $10,937,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
68
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED
------------------------------------
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994...... 10,437,362 $313,000 $59,756,000 $ 6,733,000 $66,802,000
Provision for income tax,
credited to equity.............. --- --- 335,000 --- 335,000
Issuance of shares of
common stock.................... 33,252 1,000 165,000 --- 166,000
Net Income --- --- --- 1,394,000 1,394,000
---------- -------- ----------- ----------- -----------
Balance at December 31, 1995 10,470,614 314,000 60,256,000 8,127,000 68,697,000
---------- -------- ----------- ----------- -----------
Increase in investment in
Penske Motorsports, Inc.
due to public offering......... --- --- 6,116,000 --- 6,116,000
Provision for income tax,
credited to equity.............. --- --- 3,945,000 --- 3,945,000
Issuance of shares of
common stock.................... 17,500 1,000 120,000 --- 121,000
Net Income --- --- --- 2,569,000 2,569,000
---------- -------- ----------- ----------- -----------
Balance at December 31, 1996 10,488,114 315,000 70,437,000 10,696,000 81,448,000
---------- -------- ----------- ----------- -----------
Increase in investment in
Penske Motorsports, Inc.
due to issuance of stock......... --- --- 2,937,000 --- 2,937,000
Provision for income tax,
credited to equity.............. --- --- 554,000 --- 554,000
Issuance of shares of
common stock.................... 103,126 3,000 414,000 --- 417,000
Net Income --- --- --- 848,000 848,000
---------- -------- ----------- ----------- -----------
Balance at December 31, 1997 10,591,240 $318,000 $74,342,000 $11,544,000 $86,204,000
========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
69
<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, 1997, the Company's long-term emphasis is on the further
development of its principal assets: (i) a 50.88% interest in Fontana Union
Water Company ("Fontana Union"), a mutual water company; (ii) a 11.51% interest
in Penske Motorsports, Inc. ("PMI"), a public professional motorsports company
that has developed the California Speedway ("TCS") on land acquired from the
Company; (iii) approximately a 73% interest in Mine Reclamation Corporation
("MRC"), the developer of the Eagle Mountain Landfill Project (the "Landfill
Project"); (iv) a 50% joint venture interest in the West Valley MRF ("WVMRF"), a
transfer station and recycling facility located on land acquired from the
Company; (v) approximately 650 acres of the former Kaiser Steel Corporation
("KSC") steel mill site (the "Mill Site Property") which is currently undergoing
redevelopment; and (vi) the 11,350 acre idle iron ore mine in the California
desert (the "Eagle Mountain Site"), which includes the associated 460 acre town
of Eagle Mountain ("Eagle Mountain Townsite") and the land leased to MRC for the
Landfill Project. The Company is also pursuing other related longer-term growth
opportunities on the balance of its Mill Site Property, including the
redevelopment of industrial and commercial parcels of land adjoining the
California Speedway and the WVMRF.
The Company's consolidated financial statements include the following
significant entities: Fontana Water Resources, Inc., Kaiser Steel Land
Development, Inc., Eagle Mountain Reclamation, Inc., Lake Tamarisk Development
Corporation, Kaiser Eagle Mountain, Inc., Kaiser Recycling Corporation, and Mine
Reclamation Corporation. See Note 2 below for additional information concerning
the Company's subsidiaries.
ONGOING OPERATIONS
The Company's revenues from ongoing operations are generally derived from the
development of the Company's long-term projects. Revenues from water resources
represent payments under the lease of the Company's interest in Fontana Union to
Cucamonga County Water District ("Cucamonga"). Property redevelopment revenues
primarily reflect revenues from long-term development activities at the Mill
Site property, including water and waste water treatment revenues; housing
rental income, aggregate and rock sales, and lease payments for the minimum
security prison at the Eagle Mountain Townsite; and royalty revenues from iron
ore shipments from the Company's iron ore mine in California (the "Silver Lake
Mine"). Income from equity method investments reflect Kaiser's share of income
related to those equity investments (i.e., PMI) and, starting in 1998, joint
ventures (i.e., West Valley MRF) which the Company accounts for under the equity
method.
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<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, royalty revenues from the sale of
recyclable revert materials and other miscellaneous short-term activities.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The stated value of the assets and liabilities of the Company were carried
forward from those of KSC except as adjusted in reorganization.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all wholly-owned subsidiaries and majority owned investments, except as
specified below. Intercompany accounts and transactions have been eliminated.
Fontana Union Water Company ("Fontana Union"). The Company, through its
wholly-owned subsidiary Fontana Water Resources, Inc. ("FWR"), owns 50.88% of
Fontana Union, a mutual water company, which entitles the Company to its
proportionate share of Fontana Union water. The Company has effectively
transferred its control in Fontana Union to Cucamonga pursuant to a 102-year
lease of its Fontana Union shares ("Cucamonga Lease") which the Company entered
into in March 1989 and which was amended in 1989, 1992 and 1993. Therefore,
Kaiser receives no direct benefit from nor has any direct exposure to the
operations or financial performance of Fontana Union. Consequently, Kaiser's
investment in Fontana Union is recorded on the cost method with revenues from
the Cucamonga Lease being recorded on a current basis pursuant to the terms and
conditions of the Lease. (See Note 4.)
KSC Recovery, Inc. ("KSC Recovery"). The Company's wholly-owned subsidiary,
KSC Recovery, Inc., which is governed and controlled by a Bankruptcy Court
approved Plan of Reorganization, acts solely as an agent for KSC's former
creditors in pursuing bankruptcy related adversary litigation and administration
of the KSC bankruptcy estate. Kaiser exercises no significant control or
influence over nor does Kaiser have any interest in the operations, assets or
liabilities of KSC Recovery except as provided by the terms of the approved Plan
of Reorganization. In addition, KSC Recovery's cash on hand and potential
future recoveries funds all costs and expenses of KSC Recovery. It is
anticipated that the bankruptcy estate of KSC Recovery expects to make all final
distributions within the next 12 to 18 months. Consequently, activity of KSC
Recovery is not included in Kaiser's financial statements; however, KSC Recovery
is a member of the Kaiser consolidated group for tax purposes and is therefore,
included in the consolidated tax return.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of 90 days or less to be cash equivalents. The Company
maintains its cash balances with high quality financial institutions and are
insured by the Federal Deposit Insurance Corporation up to $100,000 at each
institution.
71
<PAGE>
REAL ESTATE
In accordance with Financial Accounting Standards Board ("FASB") Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (FASB 121), the Company records impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
There has been no requirement to record impairment losses on the Company's
assets under FASB 121.
Interest and property taxes related to real estate under development are
capitalized during periods of development.
INVESTMENT IN PENSKE MOTORSPORTS, INC.
The Company accounts for its investment in Penske Motorsports, Inc. ("PMI")
under the equity method of accounting because the Company exercises significant
influence over the operations of PMI through its representation on the Board of
Directors and PMI Board Committees.
INVESTMENT IN WEST VALLEY MRF, LCC
The Company accounts for its investment in West Valley MRF, LCC under the
equity method of accounting because of the Company's 50% ownership interest.
DEFERRED COSTS
Included in other assets are deferred loan fees of $1,036,000 (net of $794,000
of amortization) which were incurred in 1994 and 1997 and which are being
amortized over the life of the related loan on a straight-line basis.
Amortization of these deferred loan fees is included in net interest expense
(income), and was $ 34,000, $666,000, and $77,000 for 1997, 1996 and 1995,
respectively. Acceleration of amortization of loan fees in 1996 was due to the
renegotiation of the revolving-to-term credit facility.
BUILDINGS AND EQUIPMENT
Buildings and equipment are stated on the cost basis. Depreciation is
provided on the straight-line method over the estimated useful lives of the
respective assets.
REVENUE RECOGNITION
Revenues are recognized when the Company has completed the earnings process
and an exchange transaction has taken place.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary timing differences between the financial
statement and tax bases of assets and liabilities at the applicable enacted tax
rates.
72
<PAGE>
EARNINGS PER SHARE
In 1997, the FASB issued Statement No. 128, Earnings per Share (FASB 128).
FASB 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the FASB 128 requirements.
STOCK OPTIONS
The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and intends to continue to do so. (See Note 13.)
FINANCIAL STATEMENT RESTATEMENT AND RECLASSIFICATIONS
The Company has reclassified certain amounts in its Consolidated Financial
Statements for the years ended in 1995 and 1996 in order to conform with the
1997 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents. The carrying amount approximates fair value
because of the short-term maturity of these instruments.
Receivables. The carrying amount approximates fair value because of the
short-term maturity of these instruments.
Long-Term Debt. The carrying approximates fair value based on the current
rates offered to the Company for debt of the same remaining maturities.
73
<PAGE>
Note 3. ACCOUNTS RECEIVABLE & OTHER
Accounts receivable as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cucamonga County Water District.......................... $ 2,877,000 $ 2,099,000
Penske Motorsports, Inc.................................. 157,000 843,000
Burrtec Waste Industries................................. --- 461,000
Other.................................................... 1,040,000 967,000
----------- -----------
4,074,000 4,370,000
Allowance for doubtful accounts
CCWD rate dispute (See Note 4)........................ (1,236,000) (748,000)
Other................................................. (299,000) (286,000)
----------- -----------
Total............................................ $ 2,539,000 $ 3,336,000
=========== ===========
</TABLE>
Note 4. CUCAMONGA LEASE
The Company, through a wholly-owned subsidiary, Fontana Water Resources, Inc.,
leases its 50.88% ownership of the capital stock of Fontana Union, a mutual
water company, to Cucamonga County Water District ("Cucamonga") pursuant to a
take-or-pay lease (the "Cucamonga Lease") that terminates in the year 2092. In
1996, the Company instituted litigation against Cucamonga due to a dispute
concerning the amount payable to the Company pursuant to the terms of the
Cucamonga Lease. The dispute centered upon whether or not the lease rate in the
Cucamonga Lease should be interpreted as the Company asserts to include all the
changed rates and items implemented by Metropolitan Water District of Southern
California ("MWD") since July 1, 1995. Alternatively, the Company asserted that
the lease rate was discontinued as of July 1, 1995 requiring the parties to
negotiate in good faith a substitute lease rate. Cucamonga continues to pay
under the terms of the Cucamonga Lease, but at a rate substantially less than
the Lease Rate that the Company maintains it is entitled to receive pursuant to
the Cucamonga Lease. Although the Company is continuing to bill Cucamonga at
what it believes is the correct lease rate, the Company has elected to reserve
the full amount in dispute and report revenues on the basis of amounts received.
The total amount of lease payments in dispute as of December 31, 1997, is
approximately $1,236,000 and is included in the allowance for doubtful accounts.
See Note 21. "Subsequent Events" with regard to the court ruling on the lease
rate dispute with Cucamonga.
Note 5. INVESTMENT IN PENSKE MOTORSPORTS, INC.
The Company, as of December 31, 1997, owns 1,627,923 shares, or approximately
11.51% of the common stock of PMI. As discussed in more detail below, the
Company's ownership interest in PMI was acquired as a result of: (i) its
contribution in November, 1995, to PMI of approximately 480 acres, as adjusted,
of the Central Mill Site Property on which the California Speedway ("TCS") has
been built; and (ii) the subsequent sale of the Speedway Business Park, totaling
approximately 54 acres to PMI in December, 1996. Kaiser recorded no gain or
loss as a result of the November 1995 transaction discussed above since the
value of the PMI stock that Kaiser received was equal to the book value of the
land Kaiser contributed to PMI. PMI is traded on the NASDAQ National Market
under the symbol "SPWY".
In March, 1996, Penske Motorsports, Inc. ("PMI") effected a recapitalization
resulting in PMI ownership of the outstanding shares of Michigan International
Speedway, Inc., Pennsylvania International Raceway, Inc., The California
Speedway Corporation, Motorsports International Corp., Competition Tire West,
Inc. and Competition Tire South, Inc. Subsequent to the recapitalization, PMI
completed an initial public offering ("IPO") by issuing 3,737,500 shares of
common stock at a price to the public of $24 per share. The proceeds to PMI,
after underwriting discounts and commissions and
74
<PAGE>
other offering expenses, were approximately $83.1 million. As a result of the
IPO, which materially increased the Company's share of PMI's stockholder's
equity, the Company has recorded an increase in its equity investment in PMI of
$6,513,000 and corresponding increases in deferred income taxes and capital in
excess of par value of $397,000 and $6,116,000, respectively. As an additional
result of the IPO, when the Company converted its PMI preferred stock into PMI
common stock, the Company changed its accounting for this investment from the
cost to the equity method of accounting and began recording it's share of
undistributed equity in the earnings of PMI effective April 1, 1996.
In May 1997, the Company increased its equity investment in PMI by $3,128,000,
as a result of PMI's issuance of stock related to its acquisition of a majority
of the common stock of North Carolina Motor Speedway Inc. The Company also
recorded corresponding increases in deferred income taxes and capital in excess
of par value of approximately $191,000 and $2,937,000, respectively.
In addition, due to the concentration of motorsport racing events between
April and September, PMI's operations have been, and will continue to be, highly
seasonal. As a result, the Company's reported share of undistributed equity in
the earnings of PMI will likely be positive (income) in the second and third
quarters and negative (loss) in the first and fourth quarters.
PMI is a leading promoter and marketer of professional motorsports in the
United States as well as an owner and operator of speedway facilities. PMI
currently owns: (i) Michigan International Speedway, Inc. which owns and
operates the Michigan Speedway, in Brooklyn, Michigan; (ii) The California
Speedway Corporation, which owns and operates California Speedway near Los
Angeles, California; (iii) Pennsylvania International Raceway, Inc. which owns
and operates the Nazareth Motor Speedway in Nazareth, Pennsylvania; (iv) North
Carolina Motor Speedway, Inc. which owns and operates the North Carolina Motor
Speedway in Rockingham, North Carolina; (v) a forty-five percent (45%) interest
in Homestead-Miami, LLC, the operator of the Metro-Dade Homestead Motorsports
Complex: in Dade County, Florida; (vi) Motorsports International Corp., a
motorsports apparel and memorabilia company; and (vii) Competition Tire West,
Inc. and Competition Tire South, Inc., distributors of Goodyear racing tires in
the mid-west and southern regions of the United States.
Total 1997 revenues for PMI, on a consolidated basis were $110 million with a
net income of $16 million, or $1.19 per share. The Company's share of
undistributed equity in the earnings of PMI for 1997, was $1,840,000 net of
residual transaction expenses. Total 1996 revenues for PMI, on a consolidated
basis were $55.2 million with a net income of $10.9 million, or $.90 per share.
The Company's share of undistributed equity in the earnings of PMI for 1996, was
$889,000 net of residual transaction expenses.
The fair market value of the Company's 1,627,923 shares of PMI stock as of
December 3, 1997 is approximately $41 million. The unaudited condensed balance
sheets of PMI as of December 31, follow:
75
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Current Assets............................................ $ 9,238,000 $ 33,559,000
Property and Equipment.................................... 224,666,000 140,402,000
Other Assets.............................................. 57,510,000 10,036,000
------------ ------------
Total Assets........................................... $291,414,000 $183,997,000
============ ============
Current Liabilities....................................... $ 39,713,000 $ 25,801,000
Long-Term Debt............................................ 47,278,000 3,825,000
Other Liabilities......................................... 738,000 ---
Deferred taxes............................................ 13,036,000 8,969,000
Stockholders' Equity...................................... 190,649,000 145,402,000
------------ ------------
Total Liabilities and Stockholders' Equity............. $291,414,000 $183,997,000
============ ============
</TABLE>
Note 6. INVESTMENT IN WEST VALLEY MRF, LLC
The Company and Burrtec Waste Industries, Inc. ("Burrtec"), a privately-held
company, completed their revised agreement for the development, construction and
operation of the WVMRF, a municipal solid waste transfer and recovery facility.
Effective June 19, 1997, Kaiser Recycling Corporation ("KRC") and West Valley
Recycling & Transfer, Inc. ("WVRT"), Burrtec's wholly owned subsidiary, which
are equal members of the newly created limited liability company, West Valley
MRF, LLC, entered into a Members Operating Agreement which is substantially the
equivalent of a joint venture agreement but for a limited liability company.
The construction and start up of the WVMRF was completed during December 1997.
Pursuant to the terms of the Members Operating Agreement, KRC contributed
approximately 23 acres of Mill Site property on which the WVMRF was constructed
while WVRT contributed all of Burrtec's recycling business that was operated
within Riverside County, thereby entitling WVMRF to receive all revenues
generated from this business after the closing date.
Most of the financing for the projected cost of the WVMRF of approximately
$10,300,000, including reimbursement of most of the previously incurred
development costs of Burrtec and the Company, was obtained through the issuance
and sale of $9,500,000 in California Pollution Control Financing Authority (the
"Authority") Variable Rate Demand Solid Waste Disposal Revenue Bonds (West
Valley MRF, LLC Project) Series 1997A (the "Bonds"). The Bonds are secured by
an irrevocable letter of credit issued by Union Bank of California, N.A. ("Union
Bank"). The Bonds have a stated maturity date of June 1, 2012, although West
Valley MRF, LLC is required, pursuant to its agreement with Union Bank, to
annually redeem a portion of the Bonds on a stated schedule. Pursuant to a
Guaranty Agreement with Union Bank, the Company and Burrtec are each liable for
fifty percent (50%) of the principal and interest on the Bonds in the event of a
default by the West Valley MRF, LLC.
The Company is accounting for its investment in West Valley MRF, LLC under the
equity method.
Gross revenues for the WVMRF from inception through December 31, 1997 amounted
to $2.4 million. The Company's share of undistributed equity in the earnings of
WVMRF was, however, immaterial. A condensed unaudited balance sheet of West
Valley MRF, LLC as of December 31, 1997 follows:
76
<PAGE>
<TABLE>
<CAPTION>
1997
----
<S> <C>
Current Assets........................................ $ 1,153,000
Property and Equipment................................ 11,015,000
Other Assets.......................................... 900,000
-----------
Total Assets....................................... $13,068,000
===========
Current Liabilities................................... $ 1,547,000
Other Liabilities..................................... 199,000
CPCFA Bonds Payable................................... 8,562,000
Stockholders' Equity.................................. 2,760,000
-----------
Total Liabilities and Stockholders' Equity......... $13,068,000
===========
</TABLE>
Note 7. MINE RECLAMATION CORPORATION
As previously disclosed, the Company, in January, 1995, acquired a 70%
interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle
Mountain Landfill Project. Concurrent with this acquisition, MRC and the
Company amended the MRC Lease to terminate the minimum monthly rent payments by
MRC to the Company. Consequently, the Company has not received any rent
payments from MRC since 1994 nor will it in the future until commencement of
operations at the Landfill Project. The transaction which was insignificant to
the operating results, financial position and total assets of the Company has
been treated as a purchase, and the assets acquired and liabilities assumed were
recorded at their fair market values.
Through a series of private placements with existing MRC shareholders, from
July 1995 through December 31, 1997, a total of $10.8 million has been raised by
MRC, with Kaiser contributing approximately $8.1 million of that amount. As a
result of these equity fundings, the Company's ownership interest in MRC as of
December 31, 1997 is approximately 73%.
The environmental impact report ("EIR") received approvals from the Riverside
County Planning Commission and Board of Supervisors in 1997. However, on
February 17, 1998, Judge McConnell issued her final ruling with respect to the
EIR, in which she found the EIR inadequate in two general areas: 1) the
threatened desert tortoise; and 2) impacts to Joshua Tree National Park. The
Company has agreed to advance funds to MRC for a limited period in 1998 pending
the Company's determination, in light of Judge McConnell's recent ruling, of
what course of action to pursue with regard to the Landfill Project. It is
anticipated that the initial 1998 advance will total up to approximately
$900,000 and that the Company may invest additional funds in MRC during 1998
depending upon what course of action the Company may ultimately decide to
pursue.
Depending upon the course of action ultimately selected by MRC and the
Company, there could be a material adverse impact to the financial statements of
the Company, including a possible write down of the Company's investment in MRC
to the lower of cost or fair market value. A final decision on what course of
action will be taken by MRC and the Company should be made by mid-1998.
Note 8. NOTE RECEIVABLE
As of December 1997, the Company has a note receivable from McLeod Properties,
Fontana LLC in the amount of $1,270,000, of which $410,000 has been included in
current assets and the balance, of $860,000, classified as long term. The note
bears interest at 10% per annum with monthly payments of
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<PAGE>
approximately $59,000 plus accrued interest through June 1998; thereafter
quarterly payments of $25,000 plus accrued interest with the remaining balance
due October 2004. The Company has agreed to subordinate its note receivable to a
construction/permanent loan in order to facilitate the construction of a
building on the property. (See Note 15, Sale of Mill Site Real Estate.)
Note 9. BUILDINGS AND EQUIPMENT (Net)
Buildings and equipment (net) as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Buildings and structures..................................... $ 2,076,000 $ 2,074,000
Machinery and equipment...................................... 2,834,000 1,621,000
----------- -----------
4,910,000 3,695,000
Accumulated depreciation..................................... (1,846,000) (1,485,000)
----------- -----------
Total..................................................... $ 3,064,000 $ 2,210,000
=========== ===========
</TABLE>
Note 10. ACCRUED LIABILITIES - CURRENT
The current portion of accrued liabilities as of December 31 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Environmental insurance settlement costs..................... $1,313,000 $1,313,000
Compensation and related employee costs...................... 1,008,000 956,000
Other........................................................ 1,990,000 1,856,000
---------- ----------
Total..................................................... $4,311,000 $4,125,000
========== ==========
</TABLE>
Note 11. ENVIRONMENTAL REMEDIATION RESERVE
The Company estimates, based upon current information, that its future
remediation and other environmental costs, including groundwater and other
possible third party claims, will be between approximately $20 million and $31
million, as determined on an undiscounted basis, depending both upon the
ultimate extent of the environmental remediation and clean-up involved and upon
which approved remediation alternatives are eventually selected. In order to
improve the presentation regarding these future remediation and other
environmental costs, the Company has elected to restate all balance sheet
information presented to show, as a separate liability rather than as an offset
to land, the amount of future remediation and other environmental costs
reflected in its financial statements. The restatement reflects the amounts
originally recognized when the Company emerged from bankruptcy comprised of a
$34.7 million remediation adjustment to land and a $6.6 million groundwater
remediation reserve and $12.5 million in environmental insurance litigation
settlement proceeds received in 1995, reduced by approximately $23.1 million in
remediation and other environmental costs expended through December 31, 1997.
The Company's decision to restate its balance sheet information is based upon
the more extensive investigation and remediation activities that have been
pursued over the past two years and the Company's ability to better estimate the
probable range of future remediation and other environmental costs.
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<PAGE>
As of December 31, 1997, the total short-term and long-term environmental
remediation liabilities reflected on the Company's balance sheet was
approximately $30.7 million, which is the high end of the probable range of
future remediation and other environmental costs. Below is a table showing the
activity in the remediation liability accounts for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Beginning Estimated Liability $32,223,000 $39,411,000
Remediation Costs Incurred (1,496,000) (7,188,000)
----------- -----------
Ending Estimated Liability 30,727,000 32,223,000
Less: Current Portion (6,054,000) (5,757,000)
----------- -----------
Long-term Portion $24,673,000 $26,466,000
=========== ===========
</TABLE>
See Note 19, "Commitments and Contingencies" for further information.
Note 12. LONG-TERM DEBT
As of December 31, 1997, long-term debt consisted of a $5,102,000 note (which
includes the current portion of $120,000) secured by a first trust deed issued
to Bank of America as part of the Company's purchase of property from the Lusk
Joint Ventures and $4,000,000 in borrowings under the Union Bank credit
facility. The Bank of America note is payable in quarterly payments of $60,000
plus interest at the their prime rate plus 1.5% (10% at December 31, 1997) with
all remaining principal and accrued and unpaid interest due and payable on July
28, 1998. The Lusk debt has been classified as long-term debt due to the
Company's intent and ability to refinance the obligation on a long-term basis
utilizing the Union Bank revolving-to-term facility.
The Company, through FWR, had a 7-year, $30,000,000 revolving-to-term credit
facility with Union Bank at floating interest rates and collateralized by the
Company's shares of Fontana Union and the lease of those shares to Cucamonga.
At December 31, 1997, there was $4,000,000 outstanding under the credit
facility. The borrowing base available under the credit facility is limited to
the discounted present value of an eight-year projection of future payments
under the Cucamonga Lease, as defined in the credit facility agreement. Under
the borrowing base calculations, the maximum amount available was $25,150,000 as
of December 31, 1997. The net available funds under the $30,000,000 revolving-
to-term credit facility less $4,850,000 reserved for financial assurances
required by the DTSC and relating to environmental remediation on the Mill Site
Property; $765,000 in two unused outstanding standby letters of credit; and
$4,000,000 in outstanding loans was $20,385,000 as of December 31, 1997.
Total interest expense incurred in 1997, 1996, and 1995 was $980,000, $743,000
and $728,000, respectively.
Note 13. STOCKHOLDERS' EQUITY
EQUITY TRANSACTIONS
During 1997, 1996 and 1995 the Company recorded transactions directly to
stockholders' equity other than changes resulting from net income or equity
transactions with shareholders. These transactions include deferred tax expense
credited to equity due to the utilization of the Company's
79
<PAGE>
reorganization NOL carryforwards, and the increase in equity due to the Penske
Motorsports, Inc. ("PMI"), Initial Public Offering in March 1996 and PMI's
purchase of North Carolina Motor Speedway ("NCMS") in May 1997. These amounts
for the years ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Deferred tax expense credited to equity $ 554,000 $ 3,945,000 $335,000
Investment increase in Penske
Motorsports, Inc.......................... 2,937,000 6,116,000 ---
---------- ----------- --------
$3,491,000 $10,061,000 $335,000
========== =========== ========
</TABLE>
COMMON STOCK OUTSTANDING
At December 31, 1997 and 1996, Kaiser Ventures Inc. common stock has a par
value of $0.03 and 13,333,333 authorized shares, of which 10,591,240 and
10,488,114 were outstanding, respectively.
In November 1988, 10,000,000 shares of common stock (after giving effect for a
3 for 1 reverse stock split that took place in 1990) were issued pursuant to the
KSC Plan of Reorganization. As of December 31, 1996, 136,919 of these shares
are being held for the benefit of the former general unsecured creditors of the
predecessor company pending the resolution of disputed bankruptcy claims. The
final resolution of these claims will result in the final allocation of the held
shares among the unsecured creditor group, which presents no liability to the
Company. For financial reporting purposes these shares have been considered
issued and outstanding.
STOCK OPTION AND STOCK GRANT PROGRAMS
In October 1990, the Company's stockholders approved the Amended, Restated and
Substituted Kaiser Steel Resources, Inc. 1989 Stock Plan (the "1989 Stock
Plan"). The 1989 Stock Plan provided for the grant of incentive stock options,
non-qualified stock options, stock appreciation rights, restricted stock or
deferred stock awards. Certain options granted under the 1989 Stock Plan are
still outstanding. The Company incurred no compensation expense during 1997,
1996 and 1995.
In June 1995, the Company's stockholders approved the 1995 Stock Plan. The
1995 Stock Plan provides for the grant of incentive stock options, non-qualified
stock options, restricted stock and other stock related incentives. In June
1996, the 1995 Stock Plan was amended to reserve up to 859,102 shares for
issuance upon exercise of stock options, grants of stock and other stock related
incentives. As a result of the increase in the 1995 Stock Plan reserve, the
Company had 859,102 reserved shares as of December 31, 1997. Grants are
generally established at fair market value of the Company's common stock on the
date of the grant and the exercise thereof may extend for up to 10 years with
various vesting schedules.
In addition, under the 1995 Stock Plan, each director when first elected to
the Board shall automatically be granted options for 5,000 common stock shares.
Each non-employee director who is re-elected or serving an unexpired term as a
member of the Board at an annual meeting of holders of stock of the Company will
be automatically granted an additional 1,500 stock options. These options have
an exercise price equal to the fair market value of the Company's Common Stock
on the date of the grant.
A summary of the status of the stock option grants under the Company's Stock
Plans' as of December 31, 1997, 1996 and 1995 and activities during the years
ending on those dates is presented below:
80
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- -------------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------------- ---------------- --------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
Year....................... 1,431,161 $11.35 809,661 $11.63 652,836 $13.00
Granted 44,000 8.05 639,000 10.87 182,000 5.93
Exercised (4,000) 5.83 (17,500) 6.89 (17,801) 4.26
Forfeited --- --- --- --- (7,374) 10.09
---------- ---------- --------
Outstanding at end of year 1,471,161 $11.28 1,431,161 $11.35 809,661 $11.63
========== ========== ========
Options exercisable at year
========== $11.08 497,791 $11.29 425,916 $10.97
end........................ 676,987 ========== ========
==========
Weighted-average fair value
of options granted during
the year................... $1.55 $ 2.87 $1.22
</TABLE>
The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ----------------------------------------
WEIGHTED-AVERAGE
RANGE OF EXERCISE REMAINING LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
PRICES (YEARS) OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
- ----------------- ---------------- ----------------- ---------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
$3.00 to 7.50 6.7 198,511 $ 5.71 183,261 $ 5.71
$7.51 to 17.58 6.9 1,272,650 $12.15 493,726 $13.07
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for the
Company's stock-based compensation plans other than for compensation and
performance-based stock awards. Had compensation cost for the Company's stock
option plan been determined based upon the fair value at the grant date for the
awards under the plan consistent with the methodology prescribed under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("FAS 123") the effect on the Company's net income and earnings
per share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Earnings
As reported $848,000 $2,569,000 $1,394,000
Pro forma $263,000 $2,160,000 $1,249,000
Earnings per share (Basic
and Diluted)
As reported $ 0.08 $ 0.24 $ 0.13
Pro forma $ 0.02 $ 0.20 $ 0.12
</TABLE>
81
<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 1997, 1996 and 1995 is not necessarily representative of the
effect in future years. The following table describes the assumptions utilized
by the Black-Scholes option-pricing model and the resulting fair value of the
options granted:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Volatility .255 .254 .346
Risk-free interest rate 6.38% 5.74% 6.98%
Expected life in years 2.10 2.67 2.25
Forfeiture rate 0.00% 0.00% 0.00%
Dividend yield 0.00% 0.00% 0.00%
</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, 1997, 90,833 of these options remain vested and unexercised.
NOTE 14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net Income............................................... $ 848,000 $ 2,569,000 $ 1,394,000
Numerator for basic earnings per share
-income available to common stockholders.............. $ 848,000 $ 2,569,000 $ 1,394,000
Numerator for diluted earnings per share
-income available to common stockholders.............. $ 848,000 $ 2,569,000 $ 1,394,000
Denominator:
Denominator for basic earnings per share
-weighted-average shares.............................. 10,536,457 10,485,943 10,456,353
Effect of dilutive options............................... 203,900 243,702 197,597
----------- ----------- -----------
Denominator for diluted earnings per share
-adjusted weighted-average shares and
assumed conversions...................................... 10,740,357 10,729,645 10,653,950
=========== =========== ===========
Basic earnings per share................................... $ .08 $ .24 $ .13
=========== =========== ===========
Diluted earnings per share................................. $ .08 $ .24 $ .13
=========== =========== ===========
</TABLE>
For additional disclosures regarding the outstanding employee stock options
see Note 13.
82
<PAGE>
The following table discloses the number of vested and outstanding options
during 1997, 1996 and 1995 that were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- ------------------
<S> <C> <C> <C>
Number of antidilutive options..................... 364,000 272,000 291,000
Range of option prices
for the antidilutive options................... $11.25 - 17.85 $10.50 - 17.85 $8.78 - 17.85
</TABLE>
NOTE 15. SALE OF MILL SITE REAL ESTATE
During 1997, the Company sold approximately 15.7 acres of its Mill Site
Property to McLeod Properties, Fontana LLC for $2,943,000, or $4.30 per square
foot, for use as a rail-truck intermodal distribution facility for Budway
Trucking, Inc. The transaction closed on September 30, 1997 at which time the
Company received $1,500,000 in cash and a note receivable for $1,443,000. The
Company has agreed to subordinate its note receivable to a
construction/permanent loan in order to facilitate the construction of a
building on the property. Although the Company considers the sale to have been
fully consummated during 1997, generally accepted accounting principles require
the gain of $656,000 to be deferred and recognized under the cost recovery
method, once proceeds received from the buyer exceed the Company's basis in the
property sold.
During 1996 the Company sold approximately 54.2 net acres of the Mill Site
Property, known as the Speedway Business Park, to PMI for $5.0 million in cash
and approximately $8.35 million, or 254,298 shares, of PMI common stock.
NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest during 1997, 1996, and 1995 of $968,000, $674,000
and $607,000, respectively.
Income taxes paid in 1997 and 1996 were $92,000 and $20,000, respectively.
There were no income taxes paid in 1995.
During 1997, the Company issued $360,000 of common stock for payment of 1996
bonuses and 1997 compensation.
During 1997 the Company carried back a note receivable for $1,443,000 from
McLeod Properties, Fontana LLC from the sale of 15.7 acres of Mill Site real
estate.
During 1997, in connection with the contribution of the land to the West
Valley MRF, LLC, the Company reclassified $1,485,000 of land to the investment
in West Valley MRF, LLC.
As a result of the acquisition by PMI of 70% of the common stock of NCMS, the
Company increased its investment in PMI by $3,128,000 and recorded corresponding
increases in deferred income taxes and stockholders equity of $191,000 and
$2,937,000, respectively.
83
<PAGE>
During 1997 and 1996, the Company capitalized interest and property taxes on
property real estate under development of $187,000 and $382,000, respectively.
There was no capitalization of interest expense or property taxes during 1995.
As a result of the PMI initial public offering in March 1996, the Company
increased its investment in PMI by approximately $6.5 million and recorded
corresponding increases in deferred income taxes and stockholders equity of
approximately $400,000 and $6.1 million, respectively.
During 1996, the Company sold Speedway Business Park to PMI for $13,352,000.
The Company received $5,000,000 of the proceeds in cash and $8,352,000 in common
stock of PMI.
During 1995, in connection with the contribution of the land to PMI, the
Company reclassified $22.5 million of land to investment in PMI.
NOTE 17. INCOME TAXES
The income tax provisions for the years ended December 31, 1997, 1996 and 1995
are composed of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
Current tax expense:
<S>.............................................. <C> <C> <C>
Federal....................................... $ 5,000 $ 56,000 $ ---
State......................................... 38,000 36,000 ---
-------- ---------- ----------
43,000 92,000 ---
-------- ---------- ----------
Deferred tax expense credited to equity:
Federal....................................... 554,000 3,945,000 335,000
State......................................... --- --- ---
-------- ---------- ----------
554,000 3,945,000 335,000
-------- ---------- ----------
Deferred tax expense:
Federal....................................... --- --- ---
State......................................... 74,000 840,000 721,000
-------- ---------- ----------
74,000 840,000 721,000
-------- ---------- ----------
$671,000 $4,877,000 $1,056,000
======== ========== ==========
</TABLE>
In accordance with FASB 109, the tax benefits of all deductible temporary
differences and loss carryforwards that existed at the date of a reorganization
must be credited directly to additional paid-in capital when the initial
recognition of these benefits occurs subsequent to the reorganization.
Deferred tax liabilities (assets) are comprised of the following as of
December 31, 1997 and 1996:
84
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land held for development.................................... $ 1,711,000 $ 2,231,000
Investment in Fontana Union.................................. 6,440,000 6,440,000
Investment in Penske Motorsports Inc......................... 13,332,000 11,795,000
Depreciation................................................. 56,000 36,000
------------ ------------
21,539,000 20,502,000
------------ ------------
Groundwater remediation...................................... (690,000) (690,000)
Insurance Proceeds........................................... (1,659,000) (2,165,000)
Investment in MRC............................................ (1,837,000) (1,837,000)
Accounts receivable reserve.................................. (193,000) (181,000)
Other........................................................ (1,825,000) (1,262,000)
Loss carryforwards........................................... (38,870,000) (39,898,000)
------------ ------------
(45,074,000) (46,033,000)
------------ ------------
Deferred tax asset valuation allowance....................... 25,758,000 27,489,000
------------ ------------
$ 2,223,000 $ 1,958,000
============ ============
</TABLE>
As indicated above, the net change in the valuation allowance was a reduction
of $1,731,000 in 1997.
A reconciliation of the effective income tax rate to the federal statutory
rate, for financial reporting purposes, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 34.0% 34.0% 34.0%
Increase resulting from state tax, net of federal benefit... 6.1 5.1 6.1
Other 3.6 2.4 3.0
Additional recognition of pre-reorganization benefits....... 30.2 21.5 ---
Increase in valuation allowance on state NOLs............... --- 6.2 ---
Non taxable equity earnings................................. (29.8) (4.0%) ---
----- ---- ----
44.1% 65.2% 43.1%
===== ==== ====
</TABLE>
The consolidated Net Operating Loss ("NOL") carryforwards available for
federal income tax purposes as of December 31, 1997, are approximately
$113,000,000 and will expire over a period from year 2000 through 2010. The
amount of NOL carryforwards available for California state tax purposes as of
December 31, 1997, are approximately $2,394,000 and will expire over a period
from year 2000 through 2002. There may be certain limitations as to the future
annual use of NOLs if 50% or more of the stock of the Company changes ownership.
The Company also has approximately $379,000 of investment tax credit
carryforwards available. The credits will expire in the years 1998 through 2000
and can be utilized only after the NOL is exhausted.
NOTE 18. LEASED ASSETS AND SIGNIFICANT CUSTOMERS
LONG-TERM LEASES
The Company has long-term lease agreements with Cucamonga pursuant to the
Cucamonga Lease (Note 4), and Management Training Corporation ("MTC"). Minimum
lease payments expected to be received by the Company through the next five
years are as follows:
85
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDING CUCAMONGA
DECEMBER 31 LEASE MTC LEASE TOTAL
----------- ----- --------- -----
<S> <C> <C> <C>
1998 $ 5,047,000 $ 714,000 $ 5,761,000
1999 $ 5,047,000 $ 60,000 $ 5,107,000
2000 $ 5,047,000 $ --- $ 5,047,000
2001 $ 5,047,000 $ --- $ 4,047,000
2002 $ 5,047,000 $ --- $ 4,047,000
</TABLE>
The amounts for the Cucamonga Lease are based upon: (a) the quantities of
water as of December 31, 1997, and as provided for under the Lease; (b) the
current disputed lease rate paid by Cucamonga, (which is less than the lease
rate the Company bills Cucamonga by approximately $540,000 on an annual basis)
and; (c) projections by MWD which forecast no rate increases in the disputed
rate over the next 5 years.
The net book values of Fontana Union and Eagle Mountain at December 31, 1997
were $16,108,000 and $10,555,000, respectively. Only a portion of Eagle
Mountain is being utilized for the MTC Lease.
SIGNIFICANT CUSTOMERS
The Company received substantial portions of its revenue from the following
customers:
<TABLE>
<CAPTION>
YEAR ENDED CUCAMONGA
DECEMBER 31 LEASE MTC LEASE
----------- ----- ---------
<S> <C> <C>
1997 $5,143,000 $714,000
1996 $4,505,000 $709,000
1995 $4,974,000 $699,000
</TABLE>
NOTE 19. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES
As discussed in Note 11 above, the Company estimates, based upon current
information, that its future remediation and other environmental costs,
including groundwater and other possible third party claims, will be between
approximately $20 million and $31 million, depending upon which approved
remediation alternatives are eventually selected.
Although ongoing environmental investigations are being conducted on the
Company's property, and management believes it is currently in a position to
estimate with some reasonable certainty future investigation and remediation
costs, there can be no assurance that the actual amount of environmental
remediation expenditures and incurred will not substantially exceed those
currently anticipated or that additional areas of contamination may not be
identified. Accordingly, future facts and circumstances could cause these
estimates to change significantly. The Company anticipates recovery of the
remediation costs incurred through redevelopment of the property, primarily in
connection with specific redevelopment projects or joint ventures. Further, the
Company has provided certain financial assurances to the DTSC in connection with
anticipated remediation activities, the primary one being the dedication of
approximately $4.8 million of Kaiser's Union Bank Credit facility.
86
<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. The City of Ontario, California has
commenced litigation against the Company alleging that the Company has
contaminated one of its municipal wells. The Company believes sufficient
amounts have been accrued for this contingency if should arise.
PENSION PLANS
The Company currently sponsors a voluntary qualified 401(k) savings plan and a
nonqualified pension plan, available to all full-time employees. Participants
may make contributions of up to 15% of their compensation with the Company
matching one-half of each participant's contribution up to 6% of compensation.
The non-qualified plan mirrors the qualified 401(k) plan.
Total expense relative to these plans for the years ended December 31, 1997,
1996 and 1995, was $223,000, $199,000 and $170,000, respectively.
LETTERS OF CREDIT
At December 31, 1997, the Company had guaranteed letters of credit outstanding
on its behalf to third parties totaling $158,000. These letters of credit were
issued for reclamation activities performed at two idled coal properties, on
behalf of and at the expense of the KSC bankruptcy estate.
NOTE 20. LEGAL PROCEEDINGS
Significant legal proceedings are summarized as follows:
Eagle Mountain EIR Litigation. This litigation involved three separate legal
challenges to the environmental impact report for the Eagle Mountain landfill
project certified by the Riverside County Board of Supervisors in October 1992.
These cases were heard in the San Diego Superior Court. The Court's decisions
required MRC to prepare a new EIR, which was completed and certified in
September 1997. The original litigation against the EIR was resumed before
Judge Judith McConnell of the San Diego County Superior Court. In February 1998,
the San Diego County Superior Court announced its final decision and concluded
that the new EIR was still deficient in two principal respects. The Court's two
remaining areas of concern involve the threatened desert tortoise and Joshua
Tree National Park. The Company and MRC are now evaluating their alternatives
with respect to the landfill project. Depending upon the course of action
ultimately selected with respect to the landfill project, there could be a
material adverse impact to the financial statements of the Company, including a
possible writedown of the Company's investment in MRC to the lower of cost or
fair market value.
Warburton Litigation. The Company, KSC and KSC Recovery were named or became
cross-defendants in certain litigation in the U.S. Federal District Court for
the District of Northern California (Case No. C-93-1114 CW) commenced by IMACC
Corporation ("IMACC") against Dorothy Warburton ("Warburton") and others seeking
a determination of liability, contribution and indemnification for the costs of
environmental remediation for two sites that had been used at one time by IMACC
in conjunction with its barrel reconditioning business. Warburton is the owner
of the sites in question. At one time, KSC, through a wholly owned subsidiary,
owned the business now operated by IMACC.
87
<PAGE>
Certain other Warburton family defendants are claiming that they should be
indemnified by KSC's subsidiary or by the Company for actions they took while
officers of the KSC subsidiary. A settlement was reached in the litigation with
respect to the environmental claims, which required payment of less than
$100,000 by the Company and by KSC Recovery. The Company's cash contribution to
the settlement was immaterial. While there was a tentative settlement of the
environmental matters (which has now been finalized), a trial was held in
November 1996, relating to the indemnity claims and related matters. The Court
had previously ruled that either the Company or KSC was the alter ego of KSC's
subsidiary, Myers Drum Company. The Court also subsequently ruled that in these
particular circumstances, the request for indemnification did not rise to the
level of being a claim in bankruptcy at the time of the bankruptcy and thus
could not be discharged. With the announcement of the Court's decision,
there is now a dispute over the award of attorney's fees. Two of the estates
claim that the Company and IMACC jointly owe them approximately $1.7 million in
attorneys fees and IMACC believes it is in turn entitled to attorneys' fees.
Even if the Company should be found liable for the attorneys' fees, which it
vigorously contests, IMACC is obligated to indemnify the Company for all such
amounts. Since the Company believes it has full indemnification coverage from
IMACC, no provision for any potential loss has been made in the accompanying
financial statements.
Johnson Machinery, Inc. It is alleged that the Company is liable for the
theft of equipment or other items from land leased by the Company. Johnson
Machinery, the Plaintiff, claims that there was a theft of equipment with a
value of approximately $1.2 million from a warehouse on the West End Property
owned by the Company. (Johnson Machinery, Inc. v. Lusk/Kaiser West End Joint
Venture et al. - San Bernardino County Superior Court: Case No. RCV 23757). The
Company believes the lawsuit is without merit and is vigorously defending such
lawsuit.
Apollo Wood Litigation: On November 11, 1997, the Company and two individual
officers of the Company were served with a complaint brought by Apollo Wood
Recovery, Inc. in San Bernardino Superior Court seeking unspecified damages, but
which are estimated to exceed $100,000. The plaintiff is a tenant on the
Company's Mill Site Property. In summary, the complaint alleges that the
Company and two officers of the Company falsely represented the status of the
permitting of the property on which Plaintiff operates its business, committed
fraud, interfered with the plaintiff's business, engaged in unfair trade
practices and other similar causes of action. The Company believes the lawsuit
is without merit and is vigorously defending such lawsuit. (Apollo Wood
Recovery, Inc. v. Kaiser Ventures Inc., Terry L. Cook, Lee Redmond, Apollo Wood
& Metal Recycling Ltd., Shirley Isom Construction Company, Troy Isom and Does 1
through 40, San Bernardino Superior Court, Case No. SCN 42863.)
City of Ontario Litigation. On February 27, 1996, the City of Ontario,
California served on the Company a complaint filed in San Bernardino County
Superior Court (City of Ontario v. Kaiser Ventures Inc., et al.; Case No. RCV
17334). In sum, the complaint alleges that a plume or plumes containing organic
carbon, dissolved solids and mercury originating from the Company's Mill Site
Property due to
88
<PAGE>
activities of KSC and/or a former tenant of the Mill Site Property have impacted
one of the City of Ontario's water wells. Ontario seeks reimbursement for
remedial costs, replacement of the allegedly impacted well and replacement or
improvement or refurbishment of related facilities.
The Company challenged Ontario's ability to bring this litigation given the
KSC bankruptcy and the discharge granted to the Company. In April, 1996,
Ontario brought a declaratory judgment action in the U.S. District Court for the
District of Colorado in Bankruptcy ("the U.S. Bankruptcy Court") against the
Company, (City of Ontario v. Kaiser Ventures Inc., Adversary Proceeding No. 96-
1215 MSK). In the U.S. Bankruptcy Court action, Ontario in effect sought a
determination that the matters and damages alleged in its California lawsuit
were not discharged as a part of the KSC bankruptcy proceedings.
The Company and the City reached a settlement concerning the matter before the
U.S. Bankruptcy Court which was approved by the U.S. Bankruptcy Court in
October. Under the terms of the settlement, the Company has agreed to waive its
bankruptcy-related defenses to the City's prosecution of claims for groundwater
contamination caused by mercury or other priority pollutants. In return, the
City agreed to dismiss the California litigation as to all claims related to
total dissolved solids, total dissolved carbons and sulfates, and to be bound by
the 1993 Settlement Agreement between Kaiser and the California Regional Water
Quality Control Board. The City has not yet filed an amended complaint. The
Company will vigorously defend any continuation of this litigation.
BANKRUPTCY ADVERSARY LITIGATION/CLAIMS
The Company's predecessor, KSC, was in reorganization under Chapter 11 of the
United States Bankruptcy Code from February 1987 until November 1988. Pursuant
to the KSC Plan of Reorganization, the Company has established a subsidiary, KSC
Recovery, Inc. ("KSC Recovery") see Note 2, which was engaged in the process of
pursuing certain legal actions on behalf of the former creditors of KSC and
handling the remaining administrative duties of the KSC bankruptcy estate,
including claims resolution.
From time-to-time, various environmental and similar types of claims such as
injury or death from asbestos exposure that relates to KSC pre-bankruptcy
activities are asserted against the Company and/or KSC Recovery. In connection
with the KSC Plan of Reorganization, the Company, as the reorganized successor
to KSC, was discharged from all liabilities that may have arisen prior to
confirmation of the KSC Plan of Reorganization, except as otherwise provided by
the plan or by law. Although the Company believes there is no ongoing
contamination from its activities and that all pre-petition environmental claims
were discharged under the KSC Plan of Reorganization, in the event any of these
claims are ultimately determined to survive the KSC bankruptcy, it could have a
material adverse effect on the Company.
OTHER LITIGATION
In addition, the Company, in the normal course of its business, is involved in
various claims and legal proceedings. Management believes these matters will
not have a material adverse effect on the Company's business or financial
condition.
See also Note 21. Subsequent Events.
NOTE 21. SUBSEQUENT EVENTS
Nippon Fire & Marine Insurance Co. In February 1998, the Company was served
with a complaint alleging that the Company, certain subsidiaries of the Company
and others are liable for approximately $1.8 million paid by Nippon Fire &
Marine Insurance Co., Ltd. to Toshiba America Information System,
89
<PAGE>
Inc. as a result of the theft of a load of lap top computers from a semi-truck
owned by PST Vans a former tenant on the West End Property. (Nippon Fire &
Marine Insurance Co., Ltd., a corporation, and Toshiba America Information
System, Inc. v. PST Vans, Inc., a corporation; PST Van Line, Inc. a corporation;
Burns International, Inc., a corporation; Burns International Security Services,
Inc., a corporation; Borg-Warner Security Corporation, a corporation; Kaiser
Steel and Land Development, Inc., a corporation; Kaiser Ventures Inc., a
corporation; Kaiser Resources Inc., a corporation; Lusk-Kaiser West End Joint
Venture, a business entity). The Company currently believes it has numerous
defenses to this litigation and is vigorously defending the case.
Cucamonga County Water District. The Company is involved in a rate dispute
with Cucamonga. Such dispute involves amounts owed to the Company under the
terms of its lease of Fontana Union Water stock to Cucamonga. This dispute
arises out of a change made by the Metropolitan Water District in its water
rates and rate structure effective July 1, 1995. In April 1996 litigation was
commenced by the Company against Cucamonga to resolve the dispute.
After a five-day trial in March 1998, the Court concluded that the rate on
which the Cucamonga Lease had been based was discontinued effective July 1,
1995. Therefore, the terms of the Cucamonga Lease require the parties to
negotiate in good faith a new substitute lease rate. If the parties are unable
to agree on a substitute lease rate, the matter is referred to arbitration for
resolution. There is no specified time period in which the new lease rate must
be established.
90
<PAGE>
NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1997
Resource revenues $1,837,000 $3,221,000 $2,977,000 $1,971,000
Income (loss) from operations $ (112,000) $1,288,000 $1,149,000 $ (134,000)
Income (loss) before income tax provision $ (295,000) $1,051,000 $ 873,000 $ (110,000)
Net (loss) income $ (174,000) $ 604,000 $ 493,000 $ (75,000)
Earnings per share
Basic $ (.02) $ .06 $ .05 $ (.01)
Diluted $ (.02) $ .06 $ .05 $ (.01)
1996
Resource revenues $2,017,000 $2,408,000 $2,323,000 $8,583,000
Income from operations $ 335,000 $ 658,000 $ 677,000 $6,595,000
Income before income tax provision $ 224,000 $ 519,000 $ 521,000 $6,182,000
Net income $ 127,000 $ 294,000 $ 296,000 $1,852,000
Earnings per share
Basic $ .01 $ .03 $ .03 $ .17
Diluted $ .01 $ .03 $ .03 $ .17
1995
Resource revenues $1,999,000 $2,150,000 $2,089,000 $4,870,000
Income from operations $ 237,000 $ 243,000 $ 291,000 $2,266,000
Income before income tax provision $ 88,000 $ 86,000 $ 108,000 $2,168,000
Net income $ 50,000 $ 49,000 $ 62,000 $1,233,000
Earnings per share
Basic $ .00 $ .00 $ .01 $ .12
Diluted $ .00 $ .00 $ .01 $ .12
</TABLE>
91
<PAGE>
KAISER VENTURES INC. AND SUBSIDIARIES
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, 1997
- ---------------------------------------
Allowance for losses in collection
of current accounts receivable......... $1,034,000 $542,000 $ 41,000 $1,535,000
=============== ================= ================ ==============
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------
Allowance for losses in collection
of current accounts receivable......... $ 494,000 $668,000 $128,000 $1,034,000
=============== ================= ================ ==============
YEAR ENDED DECEMBER 31, 1995
- ---------------------------------------
Allowance for losses in collection
of current accounts receivable......... $ 156,000 $423,000 $ 85,000 $ 494,000
=============== ================= ================ ==============
</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,
1997, 1996 and 1995 are approximately $488,000, $668,000 and $80,000,
respectively.
(B) Amount charged off during the year.
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<PAGE>
EXHIBIT 10.3.3
THIRD AMENDMENT
TO
EAGLE MOUNTAIN LEASE BETWEEN
MANAGEMENT & TRAINING CORPORATION AND
KAISER VENTURES INC.
EFFECTIVE: NOVEMBER 16, 1997
<PAGE>
THIRD AMENDMENT TO LEASE
------------------------
THIS AMENDMENT is made on November 16, 1997, by and between KAISER VENTURES
INC. (formerly KAISER STEEL RESOURCES, INC. and MANAGEMENT AND TRAINING
CORPORATION (Tenant)
It is expressly covenanted and agreed by and between Landlord and Tenant as
follows:
ARTICLE III - TERM
- ------------------
3.1 - This section is amended to extend the term of the agreement for
fourteen (14) months. This Lease will, therefore, continue through
January 31, 1999.
ARTICLE XXIV - NOTICES
- ----------------------
24.1 - This section is amended to correct the name and address of the
Landlord as follows:
Kaiser Ventures Inc.
3633 East Inland Empire Boulevard
Ontario, CA 91764
Attention: President
All other provisions of the Lease dated November 16, 1987, and the First
and Second Amendments thereto, remain in full force and effect and are unchanged
by this Amendment.
IN WITNESS WHEREOF, the parties have executed this THIRD AMENDMENT to the
Lease as of the day and year first above written.
Management & Training Corporation
By: /s/ R. Russell
---------------------------------------
R. Russell
Title: V.P. Corrections
------------------------------------
Kaiser Ventures Inc.
By: /s/ Gerald A. Fawcett
-------------------------------------
Gerald A. Fawcett
Title: President and Chief Operating Officer
-------------------------------------
<PAGE>
EXHIBIT 10.4
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
OF
RICHARD E. STODDARD
This AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("AGREEMENT") is made and
entered into effective January 15, 1998 by and between Richard E. Stoddard
("Employee") and Kaiser Ventures Inc. ("KAISER").
Recitals
A. Effective as of January 15, 1996, Employee and Kaiser entered into
an employment agreement (the "Initial Employment Agreement"). Under the terms of
the January 15, 1996 Employment Agreement, Kaiser expanded Employee's duties and
responsibilities beyond serving as Chairman of the Board by appointing him Chief
Executive Officer of the Corporation as of November 28, 1995, all officers of
the Corporation began to report directly to Employee.
B. In connection with the June 17, 1996 approval by Kaiser's Board of
Directors of employment agreements for other officers of Kaiser, the Board of
Directors authorized and directed the amendment of the Initial Employment
Agreement of Employee as set forth herein.
C. The intent of this Agreement is to amend and restate the Initial
Employment Agreement and thus to set forth the current agreement and
understanding of Employee and Kaiser with regard to Employee's continued
employment by Kaiser.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Employment, Positions and Duties. Kaiser hereby continues the
employment of Employee upon the terms and conditions set forth in this
Agreement. Employee's positions with Kaiser shall be President, Chief Executive
Officer and Chairman of the Board. Employee shall have the responsibilities and
duties normally incident to such positions, including, but not limited to, those
duties and responsibilities set forth in Exhibit "A" attached hereto and
incorporated herein by this reference and such other duties and responsibilities
as may be reasonably assigned to him from time-to-time by Kaiser's Board of
Directors. Employee agrees to devote his full business time and attention to
the discharge of his duties and responsibilities under this Agreement.
2. Term. Employee's employment under the terms of this Agreement, as
amended herein, shall commence as of January 15, 1998 and shall continue until
terminated as provided herein; provided, however, upon Employee's termination,
Employee shall receive the severance compensation provided herein.
3. Base Salary. Retroactive to February 1, 1995, Employee's annual
base salary shall be Two-Hundred Eighty Thousand Dollars ($280,000) per year.
Notwithstanding the
1
<PAGE>
foregoing, the Board of Directors may in good faith and in
its reasonable discretion may elect to cause the Corporation to issue to
Employee restricted stock with a value of up to Forty Thousand Dollars ($40,000)
per year in lieu of cash compensation provided that subsequent to the date of
this Agreement there are no material adverse changes in the tax and securities
laws during the year preceding any proposed grant of restricted stock pertaining
to or affecting Employee's receipt, taxation, sale or transfer of restricted
stock. In the event of any material adverse change in the tax or securities
laws pertaining to Employee's receipt, taxation, sale or transfer of restricted
stock as reasonably determined in good faith by Employee or Kaiser, Employee and
Kaiser shall in good faith discuss any changes that may be appropriate or
necessary in connection with any grant of restricted stock to Employee. For
1996, as a part of Employee's annual base salary the Board has elected to issue
to Employee Forty Thousand Dollars ($40,000) of restricted stock in lieu of
Forty Thousand Dollars ($40,000) cash compensation. In the event that any
restricted stock is issued to Employee as a part of his annual base salary, the
value of such restricted stock at the time of its grant shall be counted as base
salary in the calculation of any bonus that may be awarded to Employee. For all
other purposes, any such stock shall be treated as salary for the calculation of
any benefits based upon an employee's salary as may be required by law or any
benefit plan.
Prior to the first meeting of the Board of Directors in any calendar year,
the Compensation and Benefits Committee of the Board will review Employee's
salary and report its recommendations for any revision to the full Board at such
meeting. Employee's annual base salary shall be adjusted effective as of
January 1 of each year, commencing January 1, 1997, by the increase in the
consumer price index over the prior applicable year utilizing the Consumer Price
Index for Urban Wage Earners and Clerical Workers, U.S. City Average, All Items,
published by the Bureau of Labor Statistics of the United Stated Department of
Labor. The entire Board of Directors has final responsibility for the review,
approval or disapproval of any revisions to Employee's annual base salary.
4. Annual Bonus. In addition to his base salary, Employee shall be
entitled to participate in the bonus program of Kaiser applicable to senior
executives as it may be amended from time to time. The timing, size and/or
amount of any bonus awarded to Employee during the term of this Agreement will
be determined annually in accordance with the process set forth in paragraph 3
above for the annual base salary review and based upon the bonus program
developed from time to time by the Human Relations Committee and approved by the
Board of Directors. The bonus for any year, if any, will be determined based
upon such review. The Board of Directors may award in good faith and in its
reasonable discretion up to fifty percent (50%) of any bonus in restricted stock
provided that subsequent to the date of this Agreement there are no material
adverse changes in the tax and securities laws pertaining to or affecting
Employee's receipt, taxation, sale or transfer of restricted stock. In the
event of any material adverse change in the tax or securities laws during the
year preceding any proposed grant of restricted stock pertaining to Employee's
receipt, taxation, sale or transfer of restricted stock as reasonably determined
in good faith by Employee of Kaiser, Employee and Kaiser shall in good faith
discuss any changes that may be appropriate or necessary in connection with any
grant of restricted stock to Employee.
5. Stock Options and Other Stock Related Incentives. Employee shall be
eligible for the grant of incentive stock options, non-qualified stock options
and other forms of stock related incentives from time-to-time in the discretion
of the Stock Option Committee of
2
<PAGE>
the Board of Directors. The timing, size and amount of any future stock options
or other stock related incentives will be determined generally in accordance
with the process used to determine the award of any bonus to Employee. The grant
and exercise of the stock options and other stock related incentives shall
generally be subject to and governed by the terms of Kaiser's 1995 Stock Plan or
any similar or successor plan. However, the Stock Option Committee may award
stock options, restricted or other stock related incentives outside the 1995
Stock Plan in its discretion.
As of January 15, 1996, the Stock Option Committee awarded to Employee
stock options for 50,000 shares pursuant to the 1995 Stock Plan. In addition,
as of June 17, 1996, the Stock Option Committee awarded to Employee stock
options for 150,000 shares pursuant to the 1995 Stock Plan which represents a
greater number of options than are usually granted in one year with the number
of options that may be granted to Employee in future years reduced accordingly.
6. Other Benefits. Employee will be entitled to participate in all
benefits provided by Kaiser to its employees and to senior executives in
accordance with and subject to Kaiser's polices and procedures as they may exist
from time-to-time, including, but not limited to, medical and dental insurance,
life insurance, disability insurance, 401(k) savings plan, any pension plan,
deferred compensation plan, education and seminar reimbursement, car allowance,
and reimbursement of reasonable expenses for company business. These benefits
shall include life insurance for the benefit of Employee with a face amount of
not less than Employee's annual base salary, except that Kaiser may self-insure
if insurance is not available. Employee shall be entitled to four (4) weeks of
paid vacation per year.
7. Restricted Stock. Any restricted stock issued by Kaiser in lieu of
cash payments in connection with Employee's base salary or any bonus, shall be
subject to the terms and conditions of a mutually agreed upon stock restriction
agreement which may provide, among other things, for the forfeiture of such
stock in phases if Employee should voluntarily terminate his employment with
Kaiser within a certain period of time or upon Employee's termination for
"cause" as defined herein. In addition to any other rights to vest in such
stock, the restricted stock granted as part of Employee's 1996 Salary shall vest
on January 15, 1997. The restricted stock granted as a part of Employee's 1995
bonus shall vest 50% on January 15, 1997 and 50% on January 15, 1998, and as
otherwise provided in the stock restriction agreement for each grant.
8. Death Benefits. In the event of Employee's death, Kaiser shall
pay to Employee's personal representative or his estate, Employee's salary and
benefits through the end of the month in which the death occurred plus a ratable
portion of Employee's anticipated bonus for the year through the date of
Employee's death. Employee's anticipated bonus shall be measured by the bonus
awarded for the most recent fiscal year. If a bonus has been earned by Employee
for the preceding fiscal year but has not yet been paid prior to the death of
Employee, Employee's estate or personal representative shall be paid the full
amount of the earned but unpaid bonus. The proceeds from such life insurance
shall be for the sole benefit of Employee's designated beneficiaries or if there
are no designated beneficiaries, Employee's estate. Upon Employee's death, all
restricted stock issued to Employee for past services (e.g. bonus stock), shall
immediately vest and all restricted stock initially issued for anticipated
future services (e.g. salary stock) will vest ratably through the date of death.
Employee's estate
3
<PAGE>
or personal representative shall have at least one (1) year after the date of
Employee's death while in the employment of the Company in which to exercise all
vested Stock Options.
9. Disability Benefits. In the event of the disability of Employee for
any reason, Kaiser shall continue to pay to Employee his salary and benefits
less short-term disability payments until long-term disability payments are made
to Employee but in no event shall such salary and benefit payments continue for
longer than six (6) months from the date of disability. In addition, upon
permanent disability, the vesting of all retirement and deferral compensation
plans and all outstanding options, restricted stock or other stock related
incentives shall continue to occur for a period of two (2) years after the date
of disability in the same manner as if Employee were still employed by Kaiser
during that period.
10. Deductions. Applicable federal and state income taxes, social
security contributions (FICA), Medicare contributions, medical insurance
premiums and any other appropriate or customary deductions shall be withheld
from any compensation paid to Employee by Kaiser.
11. Material Change. Upon the occurrence of a Material Change as
hereafter defined and subject to Paragraph 14 below, all options to acquire
shares of Kaiser stock, restricted stock or any other stock related incentive
previously granted to Employee shall immediately and fully vest one (1) day
prior to the Material Change, notwithstanding any other applicable vesting
schedule. Upon the occurrence of a Material Change, Employee shall be entitled,
for a period of two years, to exercise his stock options as to any of such
shares. This provision shall take precedence over any contrary provision in any
standard stock option agreement. For purposes of this Agreement, the term
"Material Change" shall refer to and mean the occurrence of any one of the
following events after the date of this Agreement:
a. any sale, merger or other acquisition of all or
substantially all of Kaiser with or by another entity where the shareholders
of Kaiser at the time of the sale, merger or other acquisition do not own or
control at least 51% of the voting power of such entity immediately after the
time of the sale, merger or other acquisition.
b. any acquisition of common stock by a person or "group" (as
defined in section 13(d) of the Securities Exchange Act of 1934), resulting in
the "beneficial ownership" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) by that person or group of more than (i) 25% of the
capital stock of Kaiser accompanied by a change of more than 50% of the
directors of Kaiser within one year after such event or (ii) 35% of the capital
stock of Kaiser with or without such change.
c. following the date of this Agreement, there has been an
aggregate of net assets with a cumulative value that exceeds the greater of (i)
$20,000,000 or (ii) 20% of the net equity of Kaiser at the time of the
distribution (whether by dividend or repurchase of stock) distributed to any one
or more Kaiser shareholders.
12. Constructive Termination After A Material Change. Upon the
occurrence of a Material Change, Employee shall be deemed to have been
constructively discharged upon the occurrence of any of the following events
within six months (6) before or eighteen (18) months after the Material Change:
4
<PAGE>
a. The assignment to Employee of duties materially and adversely
inconsistent with Employee's positions immediately prior to a Material Change.
This includes a change in reporting responsibilities, authority including title,
or responsibilities; provided, however, a lateral transfer within Kaiser or to
an Affiliate shall not be deemed a constructive termination;
b. Any requirement that Employee permanently relocate to an
office more than 50 miles from the then location to which he is assigned; and
c. Any failure to provide Employee with compensation and
benefits in the aggregate on terms not materially less favorable than those
enjoyed by Employee under this Agreement immediately prior to a Material Change,
or the subsequent taking of any action that would materially reduce any of
Employee's compensation and benefits in effect at the time of the Material
Change unless such compensation and benefits are substantially equally reduced
for executive officers of Kaiser as a group (as measured by a percentage) or
there is less than a ten percent (10%) reduction in compensation or benefits.
then, at Employee's option, exercisable within ninety (90) days of the date
Employee knew, or should have known exercising reasonable care, of the
occurrence of any of the foregoing events and the expiration of any applicable
cure period, Employee shall have the right to terminate his employment by
written notice to Kaiser, and on the date of such termination Kaiser will pay
Employee the compensation and benefits described in Paragraph 13 below.
13. Compensation Payable Upon Actual or Constructive Termination Related
To a Material Change. In the event Employee is terminated for any reason except
for death, permanent disability or for cause, as defined below, within six (6)
months before or eighteen (18) months after a Material Change or upon the
constructive termination of Employee before or after a Material Change as
defined and provided in Paragraph 12 above, Kaiser shall pay to Employee the
following compensation as severance benefits in addition to the severance
compensation and notice that Employee shall receive pursuant to Paragraph 15
regardless of any Material Change:
a. if the termination is effective after March 31 of any year,
an amount equal to the pro rata portion of the bonus that Employee would have
been eligible to earn for the year of termination as measured by the preceding
year's bonus;
b. an amount equal to one year's average annual bonus (cash and
stock, but not including stock options or stock grants outside of the annual
bonus) averaged over the two (2) immediately preceding years; and
c. Employee shall have the right to participate proportionately
in stock buyback or dividend distribution in proportion to shares owned together
will all other shareholders.
All amounts due Employee shall be payable in one lump sum or, at Employee's
option, over such period of time not to exceed twelve (12) months. Employee
shall have no duty to
5
<PAGE>
seek other employment during this period of time and there shall be no offset
for any compensation paid to Employee from any other source; provided, however,
if Employee is paid a consulting fee or receives compensation from Kaiser or an
Affiliate of Kaiser for services actually rendered during a one (1) year period
from the date of termination, unless otherwise agreed in writing, such amount
shall be offset against the payments made or due Employee.
14. Possible Reduction in Certain Benefits.
(a) Except as provided in Paragraph 14(b) below, Employee shall
in no circumstances receive "payments in the nature of compensation" from Kaiser
which would result in "excess parachute payments" (as that term is defined in
Sections 280G and 4999 of the Internal Revenue Code of 1954, as amended, or any
equivalent or analogous term as shall in the future be defined in any law or
regulation governing the amount of severance compensation that may be paid
without penalty to an officer of a company upon a change in control of Kaiser).
In the event either Employee or Kaiser shall be advised in writing by his or its
counsel that Employee would receive excess parachute payments if all payments
under all contacts between Employee and Kaiser were made, such opinion shall be
confidentially disclosed to the other party. If it is mutually determined that
such payments would trigger the excess parachute payments provisions, Employee
shall receive only such compensation and benefits under his contracts with
Kaiser (not to exceed those permitted without constituting excess parachute
payments) which he, in his sole discretion, has designated in written notice to
Kaiser. Employee shall have a minimum of thirty (30) days in which to make such
written designation. In the event of a disagreement between the counsel of the
respective parties as to whether a payment would result in excess parachute
payments, such counsel shall jointly designate an independent tax counsel (whose
fees shall be paid by Kaiser) within 10 days who shall promptly make a
conclusive determination of the matter.
(b) Notwithstanding anything else to the contrary, in the event
Employee is terminated pursuant to Paragraph 13 above, Employee shall have the
right, in his sole discretion, to elect to receive all or any part of the
compensation payable to him upon termination (or which would have been due under
Paragraph 11 but for a previous election under Paragraph 14(a)) without regard
to whether any such amounts may constitute "excess parachute payments." If
Employee fails to provide the Company a written designation within thirty (30)
days, he shall be presumed to have elected to receive all compensation and
benefits due him without regard to whether any such compensation or benefits
shall constitute "excess parachute payments."
(c) Nothing in this Paragraph 14 shall be construed or deemed
to be a forfeiture of any compensation or benefits that Employee may elect not
to accelerate due to any concern about the receipt of "excess parachute
payments."
15. Termination Without Cause. Kaiser may terminate Employee without
cause (as defined below) at any time but only upon twelve (12) months advance
written notice to Employee. During the twelve (12) month period following
receipt of such notice (the "Termination Year"), Employee shall continue to work
for Kaiser as provided in this Agreement and during the Termination Year Kaiser
shall continue to pay Employee all compensation (including a bonus calculated in
the same manner as provided under Paragraph 13 (b)), and Employee shall continue
to receive and accrue all benefits; provided, however, at
6
<PAGE>
Kaiser's option, Kaiser may, at any point during the Termination Year, waive the
requirement that Employee continue to render services during the Termination
Year (and constructive termination as provided in Paragraph 12 shall be deemed
notice of termination if notice has not been previously given, and shall be
deemed a waiver of Kaiser's right to request Employee to perform services for
the balance of the Termination Year) but any such waiver shall not reduce the
compensation and benefits that would otherwise be payable to him as if he
continued to provide services during the Termination Year. In addition, provided
Employee has rendered any services required of him during the Termination Year
(except any dispute over Employee's performance of services during the
Termination Year following the actual or constructive termination of Employee in
connection with a Material Change shall not affect the timely payment of the
severance compensation and other benefits provided to Employee as provided in
this sentence), Employee shall be paid, at the conclusion of the Termination
Year (i) an additional amount as severance compensation, equal to one year's
annual base salary (based on Employees then current annual base salary); and
(ii) continue to provide and pay its portion of all of Employee's health,
welfare, insurance and other benefits for a period of twelve (12) months after
the Termination Year; plus (iii) in the case of any actual or constructive
termination six (6) months prior to or eighteen (18) months after a Material
Change, the additional severance provided in Paragraph 13. Such amount shall be
payable in one lump sum or, at Employees option, over such period of time not to
exceed twelve (12) months. After the Termination Year, Employee shall be
entitled, for a period of two years (i.e., a total of thirty six (36) months
following actual notice of termination or Employee gives notice of constructive
termination pursuant to Paragraph 12) to exercise his stock options as to any
then vested, including any options vesting within one year after the Termination
Year as provided in the next sentence, notwithstanding any other applicable
provision contained in any option agreement. In addition to the foregoing
related to stock options, with respect to any restricted stock or other stock
related incentives, Employee shall continue to vest in such securities for a
period of one year following the Termination Year.
16. Termination for Cause. If Kaiser elects to terminate Employee's
employment for cause (as defined Paragraph 17 below), Employee's employment will
terminate on the date fixed for termination by Kaiser and thereafter Kaiser will
not be obligated to pay Employee any additional compensation, other than the
compensation due and owing up to the date of termination. After such
termination, Employee shall be entitled, for a period of ninety (90) days, to
exercise any stock options or other stock related incentives that are vested as
of the date of termination.
17. Definition of Cause. "Cause" for the purposes of this Agreement
shall mean any of the following:
a. Willful breach by Employee of any provision of this
Agreement, provided, however, if the breach is not a material breach, Kaiser
shall give Employee written notice of such breach and Employee shall have thirty
(30) days in which to cure such breach. No written notice or cure period shall
be required in the event of a willful and material breach of this Agreement by
Employee;
b. Gross negligence or dishonesty in the performance of
Employee's duties or responsibilities hereunder;
7
<PAGE>
c. Engaging in conduct or activities or holding any position
that materially conflicts with the interest of, or materially interferes with
Employee's duties and responsibilities to Kaiser or its Affiliates; or
d. Engaging in conduct which is materially detrimental to the
business of Kaiser or its affiliates.
18. Voluntary Termination. Employee's employment by Kaiser may be
terminated at any time upon the parties' mutual written agreement. In the event
of a mutual written agreement, Employee's severance benefits shall be as set
forth in such agreement. In the event of Employee's voluntary termination of
employment, Kaiser shall not be obligated to pay Employee any additional
compensation, other than the compensation due and owing as through the date of
termination and as may be required by law. After such termination, Employee
shall be entitled for a period of ninety (90) days to exercise any stock options
or other stock related incentives that are vested as of the date of termination.
19. Confidentiality
a. Employee's Obligations. Employee agrees that (a) except as
----------------------
provided in this Agreement Employee shall maintain the confidential nature of
any Proprietary Information received or acquired by him, and (b) Employee shall
use such Proprietary Information solely for the purpose of meeting his
obligations under this Agreement and not in connection with any other business
or activity. "Proprietary Information" means all oral, written or recorded
information about or related to the Kaiser or any of its Affiliates or its or
their technology, assets, liabilities, or business, whether acquired before or
after the date hereof, and regardless of the manner in which it is acquired,
together with any documents or other materials prepared by Employee which
contain or reflect such information. After termination of employment upon
demand of Kaiser, Employee agrees to return or destroy any and all materials
containing any Proprietary Information.
b. Kaiser's Obligations. Kaiser agrees that it shall maintain
--------------------
and provide information regarding Employee in accordance with generally accepted
industrial and business practices.
c. Limitations on Confidential Obligations and Use Restrictions.
------------------------------------------------------------
The restrictions in Paragraphs 19(a) and (b) above do not apply to information
which the disclosing party can demonstrate (i) is then in the public domain by
acts not attributable to such disclosing party or (ii) is hereafter received on
an unrestricted basis by such disclosing party from a third party source who, to
such disclosing party's knowledge after due inquiry, is not and was not bound by
confidentiality obligations to Kaiser or any Affiliate thereof (in the case of
Paragraph 19(a)) or to Employee (in the case of Paragraph 19(b)). In addition,
Employee and Kaiser are permitted to disclose any Proprietary Information as
necessary in the defense or prosecution of any legal action.
d. Actions if Disclosure Required. If Employee is required by
-------------------------------
law to make any disclosure otherwise prohibited hereunder, such party shall use
its best efforts to provide the other with prompt prior notice where possible so
that (a) the other party (with the
8
<PAGE>
reasonable cooperation of the party required to make such disclosure) may seek
an appropriate protection order or other remedy and/or (b) the parties can seek
in good faith to agree on the appropriate scope and approach to disclosure. If a
protective order or other remedy is not obtained, the party required to make
such disclosure may furnish only that portion of information protection hereby
which it is legally compelled to disclose and shall use its reasonable efforts
to obtain confidential treatment for all information so disclosed.
e. Injunction. Each party agrees that remedies at law may be
-----------
inadequate to protect against breach of this Paragraph 19, and hereby agrees to
the granting of injunctive relief without proof of actual damage.
20. Arbitration of Disputes. If Employee and Kaiser cannot resolve a
dispute (whether arising in contract or tort or any other legal theory, whether
based on federal, state or local statute or common law and regardless of the
identities of any other defendants) that in any way relates to or arises out of
this Agreement, the termination of Employee's employment relationship with
Kaiser or any Affiliate thereof, (without limiting the generality of any other
Paragraph herein), then such dispute shall be settled as follows:
a. Kaiser and Employee agree to jointly select a judicial
officer who is affiliated with the Judicial Arbitration and Mediation Service,
or such other equivalent organization as Kaiser and Employee may mutually
select, to act as the trier of fact and judicial officer in such dispute
resolution;
b. If Kaiser and Employee are unable to agree upon a particular
judicial officer, then the decision shall be made by the chief executive officer
of the Judicial Arbitration and Mediation Service, after consulting with Kaiser
and Employee;
c. Kaiser and Employee shall have the same rights of discovery
as if the dispute were being resolved in the Superior Court of the State of
California. However, the judicial officer shall, on his own motion, or the
request of either Kaiser or Employee, have the authority to extend or reduce the
time periods therefor; and,
d. The judicial officer serving hereunder shall be designated
as a referee under the provisions of Title VIII, Chapter 6 of the California
Code of Civil Procedure (Sections 638 through 645. 1, inclusive). Payment for
the services of the judicial officer and the rights and procedure of appeal,
and/or other review of the decision, shall be made as provided in such sections.
The judicial officer shall have the right to grant injunctive relief,
specific performance and other equitable remedies.
21. Miscellaneous.
a. Entire Agreement; Amendments. This Agreement states the
-----------------------------
entire understanding and agreement between the parties with respect to its
subject matter and may only be amended by a written instrument duly executed by
Employee and Kaiser.
9
<PAGE>
b. Assignment. This Agreement and the rights and obligations
-----------
of Employee may not be sold, transferred, assigned, pledged or hypothecated by
Employee.
c. Non-Waiver. Failure to insist upon strict compliance with
-----------
any provision of this Agreement or the waiver of any specific event of non-
compliance shall not be deemed to be or operate as a waiver of such provision
or any other provision hereof or any other event of non-compliance.
d. Binding Effect. This Agreement shall be binding upon and
---------------
inure to the benefit of Kaiser, its successors and assigns and, Employee's
heirs, successors, and legal or personal representatives.
e. Headings. The headings throughout this Agreement are for
---------
convenience only and shall in no way be deemed to define, limit, or add to the
meaning of any provision of this Agreement.
f. Context. Whenever required by the context, the singular
--------
shall include the plural, the plural the singular, and one gender such other
gender as is appropriate.
g. Notices. All notices, request, demands, consents and other
--------
communications hereunder shall be transmitted in writing and shall be deemed to
have been duly given when hand delivered or sent by certified United States
mail, postage prepaid, with return by certified requested, addressed to the
parties as follows:
Kaiser Ventures Inc.
3633 E. Inland Empire Blvd., Suite 850
Ontario, CA 91764
Richard E. Stoddard
6500 Mansfield Ave. Villa #40
Denver, CO 80235
h. Costs. In any action taken to enforce the provisions of
------
this Agreement, the prevailing party shall be reimbursed all costs incurred in
such legal action including reasonable attorney's fees in such action.
i. Severability. If any provision or clause of this Agreement,
-------------
as applied to any party or circumstances shall be adjudged by a court to be
invalid or unenforceable, said adjudication shall in no manner effect any other
provision of this Agreement, the application of such provision to any other
circumstances or the validity or enforceability of this Agreement.
j. Definition of Affiliate. The term "Affiliate" for purposes
------------------------
of this Agreement shall mean any person or entity now or hereafter in control,
controlled by or in common control with Kaiser. It shall also include any
direct or indirect subsidiary of such Corporation and any company in which
Kaiser has more than a ten percent (10%) ownership interest.
10
<PAGE>
k. Acknowledgment Regarding ISO's. Employee acknowledges that
------------------------------
he is responsible for the tax consequences of all severance compensation he may
receive and that certain actions may need to be taken by Employee within limited
periods of time to preserve the tax status of any incentive stock options.
Kaiser makes no representation or warranty that any past or future grant of a
stock option to Employee qualifies as an incentive stock option.
l. Governing Law. This Agreement shall be governed by and
--------------
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement and January 15, 1998, to be effective as of the day and year first
written above not withstanding the actual date of signature.
"Employee"
Richard E. Stoddard
/s/ Richard E. Stoddard
----------------------------------
Richard E. Stoddard
"Kaiser"
Kaiser Ventures Inc.
By: /s/ James F. Verhey
-----------------------------
James F. Verhey,
Senior Vice President-Finance
By: /s/ Lyle B. Stevenson
------------------------------
Lyle B. Stevenson, Chairman of
the Human Relations Committee
11
<PAGE>
SCHEDULE "A"
RICHARD E. STODDARD
Chairman of the Board of Directors, Chief Executive Officer & President
This position shall report directly to the Board of Directors.
Responsibilities:
This position has total responsibility for every facet of the strategy,
planning, operation, project implementation, performance and direction of Kaiser
Ventures Inc. and all its subsidiaries.
Within this framework of ultimate responsibility, Mr. Stoddard has
delegated certain operational and implementation duties to the Executive Vice
President. Shown below are strategic functions which will remain under the
direct control of Mr. Stoddard as Chairman, CEO, and President:
. Corporate planning and strategy.
. Determination of the direction and goals of the Company.
. Future growth opportunity decisions.
. Development of all projects exit strategies.
. Major corporate financial or other resource commitments.
. All phases of investor relations.
. Relationships with major shareholders.
. All phases of the corporation's legal strategy, including
compliance with laws and regulations.
. Outside auditor performance and relationship.
. Corporate accounting policies and financial reporting
responsibilities.
. Corporate financing strategy and fiscal accountability.
. Major joint venture partner relations.
. Major negotiations on behalf of the corporation.
. Financial analysis and modeling of corporate opportunities.
. Political lobbying at the federal, State and local levels.
. Public relations and corporate participation policy.
. Agency relations and communications.
. Mine Reclamation Corporation Management.
. Establishment of policies for the conduct of the company's business.
. Oversee the implementation of corporate policy.
. As chairman, conduct the meetings and business of the Board of
Directors.
. Implement the decisions of the Board of Directors.
12
<PAGE>
EXHIBIT 10.5
January 13, 1998
Mr. Gerald Fawcett
Sun Lakes Country Club
1046 Laguna Seca Court
Banning, CA 92220
Re: Continuation of Employment
Dear Gerry:
This letter will set forth the terms of your continued employment by Kaiser
Ventures Inc. ("Kaiser") effective as of January 16, 1998. We understand your
desire to substantially reduce your duties and responsibilities at Kaiser and
accordingly we reluctantly acknowledge that you will be resigning from your
duties as President and Chief Operating Officer of Kaiser effective as of the
close of business on January 15, 1998.
New Position and Duties
- -----------------------
Effective as of January 16, 1998, you will be the Vice Chairman. You may
attend meetings of the Board of Directors of Kaiser regardless of whether you
are appointed or elected as a member of the Board. You will continue to serve
on the Board of Directors of Mine Reclamation Corporation and on the Executive
Committee of West Valley MRF, LLC. In addition to the duties associated with
such positions, you will be on call and available for other Kaiser and Kaiser
related work and special projects as may be mutually agreed upon from time to
time. You will report directly to Kaiser's Chief Executive Officer.
Base Salary and Bonus
- ---------------------
For all your services you will be paid an annual base salary of Sixty
Thousand Dollars ($60,000) payable in accordance with Kaiser's normal pay roll
procedures. All payments will be subject to usual and customary deductions, tax
and other withholdings. Any increase in annual base salary will be determined
in the sole discretion of the Board of Directors. You will not participate in
the executive officer bonus pool. Any bonus or adjustment to your compensation
shall be determined and awarded in the sole and absolute discretion of Kaiser's
Board of Directors. There is no guaranteed minimum bonus.
Benefits
- --------
Except as noted herein, you shall continue to receive and be eligible to
participate in all benefits generally available to an executive officer of
Kaiser such as participation in
<PAGE>
Gerry A. Fawcett
January 13, 1998
Page 2
- --------------------------------------------------------------------------------
Kaiser's medical plans, life insurance program, disability insurance program,
401(k) and other retirement plans. However, instead of receiving a monthly auto
allowance you will be reimbursed at the per mile rate that Kaiser establishes
from time to time for the reimbursement of its employees for the use of his or
her vehicle on company business. In addition, due to the flexible nature of your
schedule, you will not accrue any vacation time.
Stock Options
- -------------
As long as you continue to be employed by Kaiser, you shall continue to
vest in your stock options in accordance with their terms. In addition, during
your employment, upon the occurrence of a "Material Change" as defined in
Exhibit "A" attached hereto and incorporate herein by this reference, provided
such Material Change occurs, you shall immediately and fully vest in all options
to acquire shares of Kaiser stock, restricted stock any other stock related
incentive previously granted to you fourteen (14) days prior to the Material
Change, notwithstanding any other applicable vesting schedule. Upon the
occurrence of a Material Change, you shall be entitled for a period of two
years, to exercise the your stock options as to any such shares unless a longer
period is otherwise provided pursuant to your stock option agreement or
applicable stock option plan. In the event of your normal retirement from
Kaiser, all outstanding stock options, shares of restricted stock and other
stock related incentives you own that have not already vested as of your
retirement date shall vest as of the effective date of your retirement unless
you should otherwise agree in writing; provided, however, all such stock options
and restricted stock (or the monetary equivalent thereof) whose vesting was
accelerated due to your retirement are subject to forfeiture back to Kaiser if
you should: (i) breach the confidentiality of any material nonpublic information
about Kaiser, its subsidiaries or any of their projects or plans; (ii) publicly
disparage Kaiser; or (iii) work on behalf of any individual or entity within
five (5) years of your retirement that is in direct competition with any project
or activity of Kaiser or a subsidiary of Kaiser at the time of your retirement.
You agree and understand that the acceleration of options, restricted stock
and other stock related incentives may subject you to the "golden parachute"
provisions attached hereto as Exhibit "A".
Kaiser's Stock Option Committee shall have the authority, but no
obligation, to consider the issuance of restricted stock, the grant of stock
options and other stock related incentives to you.
Term
- ----
This letter agreement can be terminated by you or by Kaiser upon ninety
(90) days prior written notice. Notice of termination by either party will be
treated as your full normal retirement from Kaiser. This letter agreement shall
also terminate upon your death or permanent disability, but you shall be deemed
to have retired the day prior to the occurrence of such event. For purposes of
this letter agreement, the term "permanent disability" shall mean your inability
to perform the material functions of your duties for a
<PAGE>
Gerry A. Fawcett
January 13, 1998
Page 3
- --------------------------------------------------------------------------------
period in excess of ninety (90) days. Upon termination of employment for any
reason, all property and files of, or related to Kaiser or a subsidiary of
Kaiser shall be immediately returned as directed by Kaiser.
Dispute Resolution
- ------------------
You agree that any claim, action, dispute or disagreement with regard to or
in connection with this letter agreement, your employment by Kaiser or work
performed on behalf of Kaiser or a Kaiser subsidiary shall be governed by the
dispute resolution procedure's set forth in Exhibit "B" attached hereto and
incorporated herein by this reference.
Entire Agreement
- ----------------
This letter agreement and the exhibits attached hereto will replace and
supercede your current employment agreement with Kaiser effective as of January
16, 1998. This letter agreement constitutes the entire agreement and
understanding regarding your continued employment,
Gerry, if this letter and the attached exhibits accurately reflect the
terms and conditions of your continued employment with Kaiser, please sign and
return the enclosed copy of this letter to me.
Sincerely,
/s/ Richard E. Stoddard
-----------------------
Richard E. Stoddard
Chairman of the Board
& Chief Executive Officer
RES:TLC:jpk
ACCEPTANCE
==========
I, Gerald A. Fawcett, hereby agree to and accept the terms of the above
letter agreement concerning my continued employment by Kaiser Ventures Inc.,
dated January 13, 1998, including the exhibits attached thereto.
Date: January 15, 1998 /s/ Gerald A. Fawcett
---------------- ---------------------
Gerald A. Fawcett
<PAGE>
Exhibit "A"
A. Material Change. For purposes of this letter agreement, the term
Material Change shall refer to and mean the occurrence of any one of the
following events after the effective date of this letter agreement:
(1) any sale, merger or other acquisition of all or substantially all
of Kaiser with or by another entity where the shareholders of Kaiser at the time
of the sale, merger or other acquisition do not own or control at least 51% of
the voting power of such entity immediately after the time of the sale, merger
or other acquisition.
(2) any acquisition of common stock by a person or "group" (as defined
in section 13(d) of the Securities Exchange Act of 1934), resulting in the
"beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934) by that person or group of more than (i) 25% of the capital stock
of Kaiser accompanied by a change of more than 50% of the directors of Kaiser
within one year after such event or (ii) 35% of the capital stock of Kaiser with
or without such change.
(3) following the effective date of this letter agreement, there has
been an aggregate of net assets with a cumulative value that exceeds the greater
of (i) $20,000,000 or (ii) 20% of the net equity of Kaiser at the time of the
distribution (whether by dividend or repurchase of stock) distributed to any one
or more Kaiser shareholders.
B. Possible Reduction in Certain Benefits.
(1) Except as provided in Paragraph B(2) below, you shall in no
circumstances receive "payments in the nature of compensation" from Kaiser which
would result in "excess parachute payments" (as that term is defined in Sections
280G and 4999 of the Internal Revenue Code of 1954, as amended, or any
equivalent or analogous term as shall in the future be defined in any law or
regulation governing the amount of severance compensation that may be paid
without penalty to an officer of a company upon a change in control of Kaiser).
In the event either you or Kaiser shall be advised in writing by his or its
counsel that you will receive excess parachute payments if all payments under
all contacts between you and Kaiser were made, such opinion shall be
confidentially disclosed to the other party. If it is mutually determined that
such payments would trigger the excess parachute payments provisions, you shall
receive only such compensation and benefits under your contracts with Kaiser
(not to exceed those permitted without constituting excess parachute payments)
which in your sole discretion, has designated in written notice to Kaiser. You
shall have a minimum of thirty (30) days in which to make such written
designation. In the event of a disagreement between the counsel of the
respective parties as to whether a payment would result in excess parachute
payments, such counsel shall jointly designate an independent tax counsel (whose
fees shall be paid by Kaiser) within 10 days who shall promptly make a
conclusive determination of the matter.
(2) Notwithstanding anything else to the contrary, in the event you are
terminated within six (6) months after the occurrence of a Material Change by
Kaiser or its successor you shall have the right, in your sole discretion, to
elect to receive all or any part of the compensation payable to you upon
termination (or which would have been due you, but for a previous election under
Paragraph B(1)) without regard to whether any such amounts may constitute
"excess parachute payments." If you fail to provide Kaiser a written designation
within thirty (30) days, you shall be presumed to have
<PAGE>
elected to receive all compensation and benefits due you without regard to
whether any such compensation or benefits shall constitute "excess parachute
payments."
(3) Nothing in this Paragraph B shall be construed or deemed to be a
forfeiture of any compensation or benefits that Employee may elect not to
accelerate due to any concern about the receipt of "excess parachute payments."
<PAGE>
Exhibit "B"
Arbitration of Disputes. If we cannot resolve a dispute (whether arising
in contract or tort or any other legal theory, whether based on federal, state
or local statute or common law and regardless of the identities of any other
defendants) that in any way relates to or arises out of this letter agreement,
the termination of your employment relationship with Kaiser, then such dispute
shall be settled as follows:
a. Kaiser and you agree to jointly select a judicial officer who is
affiliated with the Judicial Arbitration and Mediation Service, or such other
equivalent organization as Kaiser and Employee may mutually select, to act as
the trier of fact and judicial officer in such dispute resolution;
b. If you and Kaiser are unable to agree upon a particular judicial
officer, then the decision shall be made by the chief executive officer of the
Judicial Arbitration and Mediation Service, after consulting with you and
Kaiser;
c. You and Kaiser shall have the same rights of discovery as if the
dispute were being resolved in the Superior Court of the State of California.
However, the judicial officer shall, on his own motion, or the request of either
you or Kaiser, have the authority to extend or reduce the time periods therefor;
and,
d. The judicial officer serving hereunder shall be designated as a
referee under the provisions of Title VIII, Chapter 6 of the California Code of
Civil Procedure (Sections 638 through 645.1, inclusive). Payment for the
services of the judicial officer and the rights and procedure of appeal, and/or
other review of the decision shall be made as provided in such sections.
The judicial officer shall have the right to grant injunctive relief,
specific performance and other equitable remedies.
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
OF
ANTHONY SILVA
This EMPLOYMENT AGREEMENT is made and entered into effective January 15,
1998 by and between Anthony Silva ("Employee") and Kaiser Ventures Inc.
("Kaiser").
Recitals
A. Employee is currently employed by Kaiser as Director, Corporate
Engineering and Environmental.
B. Effective as of January 15, 1998, Kaiser expanded Employee's duties and
responsibilities and has appointed him as Vice President, Resource Development
and Environmental Services.
C. The intent of this Agreement is to set forth the current agreement and
understanding of Employee and Kaiser with regard to Employee's continued
employment by Kaiser.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Employment, Positions and Duties. Kaiser hereby continues the
employment of Employee upon the terms and conditions set forth in this
Agreement. Employee's position with Kaiser shall be Vice President, Resource
Development and Environmental Services. Employee shall have the responsibilities
and duties normally incident to such position, including, but not limited to,
those duties and responsibilities set forth in Exhibit "A" attached hereto and
incorporated herein by this reference and such other duties and responsibilities
as may be reasonably assigned to him from time-to-time by Kaiser's Executive
Vice President or Chief Executive Officer. Employee agrees to devote his full
business time and attention to the discharge of his duties and responsibilities
under this Agreement.
2. Term. Employee's employment under the terms of this Agreement shall
commence as of January 15, 1998, and shall continue until terminated as provided
herein; provided, however, upon Employee's termination, Employee shall receive
the severance compensation provided herein.
3. Base Salary. Employee's initial annual base salary shall be One Hundred
Ten Thousand Dollars ($110,000) per year.
Prior to the first meeting of the Board of Directors in any calendar year,
the Human Relations Committee of the Board will review Employee's salary and
report its recommendations for any revision to the full Board at such meeting.
4. Annual Bonus. In addition to his base salary, Employee shall be
entitled to participate in the bonus program of Kaiser applicable to senior
executives as it may be amended from time to time. The timing, size and/or
amount of any bonus awarded to Employee during the term of
1
<PAGE>
this Agreement will be determined annually in accordance with the process set
forth in Paragraph 3 above for the annual base salary review and based upon the
bonus program developed from time to time by the Compensation and Benefits
Committee and approved by the Board of Directors.
5. Stock Options and Other Stock Related Incentives. Employee shall be
eligible for the grant of incentive stock options, non-qualified stock options
and other forms of stock related incentives from time-to-time in the discretion
of the Stock Option Committee of the Board of Directors. The timing, size and
amount of any future stock options or other stock related incentives will be
determined generally in accordance with the process used to determine the award
of any bonus to Employee. The grant and exercise of the stock options and other
stock related incentives shall generally be subject to and governed by the terms
of Kaiser's 1995 Stock Plan as it may be amended or any similar or successor
option plan. However, the Stock Option Committee may award stock options,
restricted stock or other stock related incentives outside the 1995 Stock Plan
in its discretion.
6. Other Benefits. Employee will be entitled to participate in all
benefits provided by Kaiser to its employees and to senior executives in
accordance with and subject to Kaiser's polices and procedures as they may exist
from time-to-time, including, but not limited to, medical and dental insurance,
life insurance, disability insurance, 401(k) savings plan, any pension plan,
deferred compensation plan, education and seminar reimbursement, car allowance,
and reimbursement of reasonable expenses for company business. These benefits
shall include life insurance for the benefit of Employee with a face amount of
not less than Employee's annual base salary, except that Kaiser may self-insure
if insurance is not available on a commercially reasonable basis. Employee shall
be entitled to three (3) weeks of paid vacation per year until Employee has been
employed at Kaiser for five (5) years at which time Employee shall be entitled
to four (4) weeks of paid vacation per year.
7. Restricted Stock. Any restricted stock issued by Kaiser in lieu of cash
payments in connection with Employee's base salary or any bonus, shall be
subject to the terms and conditions of a stock restriction agreement which may
provide, among other things, for the forfeiture of such stock in phases if
Employee should voluntarily terminate his employment with Kaiser within a
certain period of time or upon Employee's termination for "cause", as defined
herein.
8. Death Benefits. In the event of Employee's death, Kaiser shall pay to
Employee's personal representative or his estate, Employee's salary and benefits
through the end of the month in which the death occurred plus a ratable portion
of Employee's anticipated bonus for the year through the date of Employee's
death. Employee's anticipated bonus shall be measured by the bonus awarded for
the most recent fiscal year. If a bonus has been earned by Employee for the
preceding fiscal year but has not yet been paid prior to the death of Employee,
Employee's estate or personal representative shall be paid the full amount of
the earned but unpaid bonus. The proceeds from any such life insurance shall be
for the sole benefit of Employee's designated beneficiaries or if there are no
designated beneficiaries, Employee's estate. Upon an Employee's death, all
restricted stock issued to Employee for past services (e.g. bonus stock), shall
immediately vest and all restricted stock initially issued for anticipated
future services (e.g. salary stock) will vest ratably through the date of death.
Employee's estate or personal representative shall have at least one (1) year
after the date of Employee's death while in the employment of the Company in
which to exercise all vested Stock Options.
9. Disability Benefits. In the event of the disability of Employee for any
reason, Kaiser shall continue to pay to Employee his salary and benefits less
short-term disability payments until long-
2
<PAGE>
term disability payments are made to Employee but in no event shall such salary
and benefit payments continue for longer than six (6) months from the date of
disability. In addition, upon permanent disability, the vesting of all
retirement and deferral compensation plans and all outstanding options,
restricted stock or other stock related incentives shall continue to occur for a
period of two (2) years after the date of disability in the same manner as if
Employee were still employed by Kaiser during that period.
10. Deductions. Applicable federal and state income taxes, social security
contributions (FICA), Medicare contributions, medical insurance premiums and any
other appropriate or customary deductions shall be withheld from any
compensation paid to Employee by Kaiser.
11. Material Change. Upon the occurrence of a Material Change as hereafter
defined and subject to Paragraph 14 below, all options to acquire shares of
Kaiser stock, restricted stock or any other stock related incentive previously
granted to Employee shall immediately and fully vest one (1) day prior to the
Material Change, notwithstanding any other applicable vesting schedule. Upon the
occurrence of a Material Change, Employee shall be entitled, for a period of two
years, to exercise his stock options as to any of such shares. This provision
shall take precedence over any contrary provision in any standard stock option
agreement. For purposes of this Agreement, the term Material Change shall refer
to and mean the occurrence of any one of the following events after the date of
this Agreement:
a. any sale, merger or other acquisition of all or substantially all
of Kaiser with or by another entity where the shareholders of Kaiser at the time
of the sale, merger or other acquisition do not own or control at least 51% of
the voting power of such entity immediately after the time of the sale, merger
or other acquisition.
b. any acquisition of common stock by a person or "group" (as
defined in section 13(d) of the Securities Exchange Act of 1934), resulting in
the "beneficial ownership" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) by that person or group of more than (i) 25% of the
capital stock of Kaiser accompanied by a change of more than 50% of the
directors of Kaiser within one year after such event or (ii) 35% of the capital
stock of Kaiser with or without such change.
c. following the date of this Agreement, there has been an aggregate
of net assets with a cumulative value that exceeds the greater of (i)
$20,000,000 or (ii) 20% of the net equity of Kaiser at the time of the
distribution (whether by dividend or repurchase of stock) distributed to any one
or more Kaiser shareholders.
12. Constructive Termination After A Material Change. Upon the occurrence
of a Material Change, Employee shall be deemed to have been constructively
discharged upon the occurrence of any of the following events within six months
(6) before or eighteen (18) months after the Material Change:
a. The assignment to Employee of duties materially and adversely
inconsistent with Employee's positions immediately prior to a Material Change.
This includes a change in reporting responsibilities, authority including title,
or responsibilities; provided, however, a lateral transfer within Kaiser or to
an Affiliate shall not be deemed a constructive termination;
3
<PAGE>
b. Any requirement that Employee permanently relocate to an office
more than 50 miles from the then location to which he is assigned; and
c. Any failure to provide Employee with compensation and benefits in
the aggregate on terms not materially less favorable than those enjoyed by
Employee under this Agreement immediately prior to a Material Change, or the
subsequent taking of any action that would materially reduce any of Employee's
compensation and benefits in effect at the time of the Material Change unless
such compensation and benefits are substantially equally reduced for executive
officers of Kaiser as a group (as measured by a percentage) or there is less
than a ten percent (10%) reduction in compensation or benefits.
then, at Employee's option, exercisable within ninety (90) days of the
date Employee knew, or should have known exercising reasonable care, of the
occurrence of any of the foregoing events and the expiration of any applicable
cure period, Employee shall have the right to terminate his employment by
written notice to Kaiser, and on the date of such termination Kaiser will pay
Employee the compensation and benefits described in Paragraph 13 below.
13. Compensation Payable Upon Actual or Constructive Termination Related to
a Material Change. In the event Employee is terminated for any reason except for
death, permanent disability or for cause, as defined below, within six (6)
months before or eighteen (18) months after a Material Change or upon the
Constructive Termination of Employee before or after a Material Change as
defined and provided in Paragraph 12 above, Kaiser shall pay to Employee the
following compensation as severance benefits in addition to the severance
compensation that Employee shall receive pursuant to Paragraph 15 regardless of
any Material Change:
a. if the termination is effective after March 31 of any year, an
amount equal to the pro rata portion of the bonus that Employee would have been
eligible to earn for the year of termination as measured by the preceding year's
bonus;
b. an amount equal to one year's average annual bonus (cash and
stock, but not including stock options or stock grants outside of the annual
bonus) averaged over the two (2) immediately preceding years; and
c. Employee shall have the right to participate proportionately in
stock buyback or dividend distribution in proportion to shares owned together
will all other shareholders.
All amounts due Employee shall be payable in one lump sum or, at Employee's
option, over such period of time not to exceed twelve (12) months. Employee
shall have no duty to seek other employment during this period of time and there
shall be no offset for any compensation paid to Employee from any other source;
provided, however, if Employee is paid a consulting fee or receives compensation
from Kaiser or an Affiliate of Kaiser for services actually rendered during a
one (1) year period from the date of termination, unless otherwise agreed in
writing, such amount shall be offset against the payments made or due Employee.
14. Possible Reduction in Certain Benefits.
(a) Except as provided in Paragraph 14(b) below, Employee shall in no
circumstances receive "payments in the nature of compensation" from Kaiser which
would result in
4
<PAGE>
"excess parachute payments" (as that term is defined in Sections 280G and 4999
of the Internal Revenue Code of 1954, as amended, or any equivalent or analogous
term as shall in the future be defined in any law or regulation governing the
amount of severance compensation that may be paid without penalty to an officer
of a company upon a change in control of Kaiser). In the event either Employee
or Kaiser shall be advised in writing by his or its counsel that Employee would
receive excess parachute payments if all payments under all contacts between
Employee and Kaiser were made, such opinion shall be confidentially disclosed to
the other party. If it is mutually determined that such payments would trigger
the excess parachute payments provisions, Employee shall receive only such
compensation and benefits under his contracts with Kaiser (not to exceed those
permitted without constituting excess parachute payments) which he, in his sole
discretion, has designated in written notice to Kaiser. Employee shall have a
minimum of thirty (30) days in which to make such written designation. In the
event of a disagreement between the counsel of the respective parties as to
whether a payment would result in excess parachute payments, such counsel shall
jointly designate an independent tax counsel (whose fees shall be paid by
Kaiser) within 10 days who shall promptly make a conclusive determination of the
matter.
(b) Notwithstanding anything else to the contrary, in the event
Employee is terminated pursuant to Paragraph 13 above, Employee shall have the
right, in his sole discretion, to elect to receive all or any part of the
compensation payable to him upon termination (or which would have been due under
Section 11 but for a previous election under Section 14(a)) without regard to
whether any such amounts may constitute "excess parachute payments." If Employee
fails to provide the Company a written designation within thirty (30) days, he
shall be presumed to have elected to receive all compensation and benefits due
him without regard to whether any such compensation or benefits shall constitute
"excess parachute payments."
(c) Nothing in this Paragraph 14 shall be construed or deemed to be a
forfeiture of any compensation or benefits that Employee may elect not to
accelerate due to any concern about the receipt of "excess parachute payments."
15. Termination Without Cause. In the event Kaiser elects to terminate
Employee's employment without cause (as defined below) during the term of this
Agreement, then Kaiser agrees to pay Employee an amount equal to one year's
annual base salary (based on Employees then current annual base salary) and
continue to provide and pay its portion of all of Employee's health, welfare,
insurance and other benefits for a period of twelve (12) months following the
date of termination, including Kaiser's portion of any retirement and deferred
compensation plan such as Kaiser's 401(k) plan. After such termination, Employee
shall be entitled, for a period of two years to exercise his stock options as to
any then vested, including any options vesting within one year of termination as
provided in the next sentence, notwithstanding any other applicable provision
contained in any option agreement. In addition to the foregoing related to stock
options, with respect to any restricted stock or other stock related incentives,
Employee shall continue to vest in such securities for a period of one-year
following termination. If Employee is terminated before or after a Material
Change as provided in Paragraph 12, Employee shall receive the additional
severance compensation provided in Paragraph 13.
16. Termination for Cause. If Kaiser elects to terminate Employee's
employment for cause (as defined below), Employee's employment will terminate on
the date fixed for termination by Kaiser and thereafter Kaiser will not be
obligated to pay Employee any additional compensation, other than the
compensation due and owing up to the date of termination and as may be required
by law.
5
<PAGE>
After such termination, Employee shall be entitled, for a period of ninety (90)
days, to exercise any stock options or other stock related incentives that are
vested as of the date of termination.
17. Definition of "Cause." "Cause" for the purposes of this Agreement shall
mean any of the following:
a. Willful breach by Employee of any provision of this Agreement,
provided, however, if the breach is not a material breach, Kaiser shall give
Employee written notice of such breach and Employee shall have thirty (30) days
in which to cure such breach. No written notice or cure period shall be required
in the event of a willful and material breach of this Agreement by Employee;
b. Gross negligence or dishonesty in the performance of Employee's
duties or responsibilities hereunder;
c. Engaging in conduct or activities or holding any position that
materially conflicts with the interest of, or materially interferes with
Employee's duties and responsibilities to Kaiser or its Affiliates; or
d. Engaging in conduct which is materially detrimental to the
business of Kaiser or its Affiliates.
18. Voluntary Termination. Employee's employment by Kaiser may be
terminated at any time upon the parties' mutual written agreement or voluntarily
by either party upon prior written notice to the other. In the event of a mutual
written agreement, Employee's severance benefits shall be as set forth in such
agreement. In the event of Employee's voluntary termination of employment,
Kaiser shall not be obligated to pay Employee any additional compensation, other
than the compensation due and owing as through the date of termination and as
may be required by law. After such termination, Employee shall be entitled for a
period of ninety (90) days to exercise any stock options or other stock related
incentives that are vested as of the date of termination.
19. Confidentiality.
a. Employee's Obligations. Employee agrees that (a) except as
----------------------
provided in this Agreement Employee shall maintain the confidential nature of
any Proprietary Information received or acquired by him, and (b) Employee shall
use such Proprietary Information solely for the purpose of meeting his
obligations under this Agreement and not in connection with any other business
or activity. "Proprietary Information" means all oral, written or recorded
information about or related to Kaiser or any of its Affiliates or its or their
technology, assets, liabilities, or business, whether acquired before or after
the date hereof, and regardless of the manner in which it is acquired, together
with any documents or other materials prepared by Employee which contain or
reflect such information. After termination of employment upon demand of Kaiser,
Employee agrees to return or destroy any and all materials containing any
Proprietary Information.
b. Kaiser's Obligations. Kaiser agrees that it shall maintain and
--------------------
provide information regarding Employee in accordance with generally accepted
industry and business practices.
6
<PAGE>
c. Limitations on Confidential Obligations and Use Restrictions. The
------------------------------------------------------------
restrictions in Paragraph 19(a) above do not apply to information which the
Employee can demonstrate (i) is then in the public domain by acts not
attributable to such disclosing party or (ii) is hereafter received on an
unrestricted basis by such Employee from a third party source who, to Employee's
knowledge after due inquiry, is not and was not bound by confidentiality
obligations to Kaiser or any Affiliate thereof. In addition, Employee and Kaiser
are permitted to disclose any Proprietary Information as necessary in the
defense or prosecution of any legal action.
d. Actions if Disclosure Required. If Employee is required by law to
------------------------------
make any disclosure otherwise prohibited hereunder, such party shall use its
best efforts to provide the other with prompt prior notice where possible so
that (a) the other party (with the reasonable cooperation of the party required
to make such disclosure) may seek an appropriate protection order or other
remedy and/or (b) the parties can seek in good faith to agree on the appropriate
scope and approach to disclosure. If a protective order or other remedy is not
obtained, the party required to make such disclosure may furnish only that
portion of information protected hereby which it is legally compelled to
disclose and shall use its reasonable efforts to obtain confidential treatment
for all information so disclosed.
e. Injunction. Each party agrees that remedies at law may be
----------
inadequate to protect against breach of this Paragraph 19, and hereby agrees to
the granting of injunctive relief without proof of actual damage.
20. Indemnification. Kaiser agrees to continue to indemnify employee in
accordance with the Indemnification Agreement between Employee and Kaiser dated
October 10, 1996, a copy of which is attached hereto as Exhibit "B" and
incorporated herein by this reference.
21. Arbitration of Disputes. If Employee and Kaiser cannot resolve a
dispute (whether arising in contract or tort or any other legal theory, whether
based on federal, state or local statute or common law and regardless of the
identities of any other defendants) that in any way relates to or arises out of
this Agreement, the termination of Employee's employment relationship with
Kaiser or any Affiliate thereof, (without limiting the generality of any other
Paragraph herein), then such dispute shall be settled as follows:
a. Kaiser and Employee agree to jointly select a judicial officer
who is affiliated with the Judicial Arbitration and Mediation Service, or such
other equivalent organization as Kaiser and Employee may mutually select, to act
as the trier of fact and judicial officer in such dispute resolution;
b. If Kaiser and Employee are unable to agree upon a particular
judicial officer, then the decision shall be made by the chief executive officer
of the Judicial Arbitration and Mediation Service, after consulting with Kaiser
and Employee;
c. Kaiser and Employee shall have the same rights of discovery as if
the dispute were being resolved in the Superior Court of the State of
California. However, the judicial officer shall, on his own motion, or the
request of either Kaiser or Employee, have the authority to extend or reduce the
time periods therefor; and,
7
<PAGE>
d. The judicial officer serving hereunder shall be designated as a
referee under the provisions of Title VIII, Chapter 6 of the California Code of
Civil Procedure (Sections 638 through 645. 1, inclusive). Payment for the
services of the judicial officer and the rights and procedure of appeal, and/or
other review of the decision, shall be made as provided in such sections.
The judicial officer shall have the right to grant injunctive relief,
specific performance and other equitable remedies.
22. Miscellaneous.
a. Entire Agreement; Amendments. This Agreement and the exhibits
----------------------------
attached hereto state the entire understanding and agreement between the parties
with respect to its subject matter supercedes the Employment Agreement between
Employee and Kaiser dated October 10, 1996 and may only be amended by a written
instrument duly executed by Employee and Kaiser.
b. Assignment. This Agreement and the rights and obligations of
----------
Employee may not be sold, transferred, assigned, pledged or hypothecated by
Employee.
c. Non-Waiver. Failure to insist upon strict compliance with any
----------
provision of this Agreement or the waiver of any specific event of non-
compliance shall not be deemed to be or operate as a waiver of such provision or
any other provision hereof or any other event of non-compliance.
d. Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of Kaiser, its successors and assigns and, Employee's heirs,
successors, and legal or personal representatives.
e. Headings. The headings throughout this Agreement are for
--------
convenience only and shall in no way be deemed to define, limit, or add to the
meaning of any provision of this Agreement.
f. Context. Whenever required by the context, the singular shall
-------
include the plural, the plural the singular, and one gender such other gender as
is appropriate.
g. Notices. All notices, request, demands, consents and other
-------
communications hereunder shall be transmitted in writing and shall be deemed to
have been duly given when hand delivered or sent by certified United States
mail, postage prepaid, with return by certified requested, addressed to the
parties as follows:
Kaiser Ventures Inc.
3633 E. Inland Empire Blvd., Suite 850
Ontario, CA 91764
Anthony Silva
7 Capri
Foothill Ranch, CA 92610
8
<PAGE>
h. Costs. In any action taken to enforce the provisions of this
-----
Agreement, the prevailing party shall be reimbursed all reasonable costs
incurred in such legal action including reasonable attorney's fees in such
action.
i. Severability. If any provision or clause of this Agreement, as
------------
applied to any party or circumstances shall be adjudged by a court to be invalid
or unenforceable, said adjudication shall in no manner effect any other
provision of this Agreement, the application of such provision to any other
circumstances or the validity or enforceability of this Agreement.
j. Definition of Affiliate. The term "Affiliate" for purposes of
-----------------------
this Agreement shall mean any person or entity now or hereafter in control,
controlled by or in common control with Kaiser. It shall also include any direct
or indirect subsidiary of such Corporation and any company in which Kaiser has
more than a ten percent (10%) ownership interest.
k. Acknowledgment Regarding ISO's. Employee acknowledges that he is
------------------------------
responsible for the tax consequences of all severance compensation he may
receive and that certain actions may need to be taken by Employee within limited
periods of time to preserve the tax status of any incentive stock options.
Kaiser makes no representation or warranty that any past or future grant of a
stock option to Employee qualifies as an incentive stock option.
l. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement to be effective as of the day and year first written above not
withstanding the actual date of signature.
"Employee"
Anthony Silva
/s/ Anthony Silva
------------------------------
Anthony Silva
"Kaiser"
Kaiser Ventures Inc.
By: /s/ James F. Verhey
-----------------------------------------
James F. Verhey, Executive Vice President
By: /s/ Lyle B. Stevenson
-----------------------------------------
Lyle B. Stevenson, Chairman of the
Compensation and Benefits Committee
9
<PAGE>
SCHEDULE "A"
ANTHONY SILVA
Vice President Environmental and Engineering
This position reports to the Executive Vice President and the Chief
Executive Officer of the Corporation.
Responsibilities
The position has the primary responsibility for developing strategies and
options for addressing and resolving all of Kaiser's outstanding environmental
remediation liabilities and for managing cost-effective implementation of those
environmental remediation strategies and options approved by Kaiser's management
and the Board of Directors.
Employee's Particular Responsibilities Include:
. Assisting the Chief Executive Officer and others with developing
environmental remediation strategy(ies) and managing the
implementation of the approved strategy to comply with consent order
and additional Department of Toxic Substances Control requirements.
. Managing the development of all long-term strategic environmental
remediation planning and monitoring for the Company.
. Selecting, managing and supervising, as appropriate, all environmental
and related other consultants and contractors.
. Providing Senior Management review on various redevelopment/planning
projects and environmental/engineering projects.
. Ensuring correct environmental and engineering information is
disseminated to Senior Management, Board of Directors and Regulatory
Agency Representatives.
. Implementing operational systems (e.g. computer information systems
and project management systems) to assist in the management of
assigned projects and associated budgets.
. Providing professional expertise to in-house counsel and retained
counsel for claims, litigation and judicial arbitration.
. Participating as an Integral Member of Corporate Strategic Planning
Team.
. Developing and managing corporate engineering and environmental annual
budgets.
. Develop and implementing audit and monitoring programs to insure
Kaiser's compliance in complying with statutory and corporate
requirements.
. Providing regular briefings/reports on key issues to Senior
Management, Board and Directors and regulatory agency report
representatives.
. Conduct in-house training as necessary to ensure all employees are
aware of their responsibilities with regard to corporation
environmental policies and practice.
10
<PAGE>
EXHIBIT 10.10
FIRST AMENDMENT
TO THE
EMPLOYMENT AGREEMENT
OF
JAMES F. VERHEY
This FIRST AMENDMENT TO THE EMPLOYMENT AGREEMENT OF JAMES F. VERHEY ("First
Amendment") is made and entered into effective January 15, 1998 by and between
James F. Verhey ("Employee") and Kaiser Ventures Inc. ("Kaiser").
Recitals
A. Employee is currently employed by Kaiser as Senior Vice President-
Finance and Chief Financial Officer and has an existing Employment Agreement
with Kaiser dated effective June 17, 1996 (the "Employment Agreement").
B. Effective as of January 15, 1998, Kaiser has expanded Employee's
duties and responsibilities by appointing him Executive Vice President in
addition to his duties as Chief Financial Officer of Kaiser.
C. Employee and Kaiser desire to amend the Employment Agreement as
provided herein to reflect the change in Employee's duties and an increase in
his annual base salary.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Amendment of Section 1 of Employment Agreement. Section 1 of the
Employment Agreement is hereby amended in its entirety to read as follows:
Employment, Positions and Duties. Kaiser hereby continues the
---------------------------------
employment of Employee upon the terms and conditions set forth in the
Employment Agreement as amended herein. Employee's positions with
Kaiser shall be Executive Vice President and Chief Financial Officer.
Employee shall have the responsibilities and duties normally incident
to such positions, including, but not limited to, those duties and
responsibilities set forth in Exhibit "A" attached hereto and
incorporated herein by this reference and such other duties and
responsibilities as may be reasonably assigned to him from time-to-
time by Kaiser's President or Chief Executive Officer. Employee
agrees to devote his full business time and attention to the
discharge of his duties and responsibilities under this Agreement.
2. Amendment of Section 3 of Employment Agreement. Section 3 of the
Employment Agreement is hereby amended in its entirety to read as follows:
Base Salary. Employee's initial annual base salary shall be One
------------
Hundred Ninety Five Thousand Dollars ($195,000) per year. In the
event that any restricted stock is issued to Employee as a part of
his annual base salary, the value of such restricted stock at the
time of its grant shall be counted as base salary in the calculation
of any bonus that may be awarded to Employee. For all other purposes,
any such stock shall be treated as
1
<PAGE>
salary for the calculation of any benefits based upon an employee's
salary as may be required by law or any benefit plan.
Prior to the first meeting of the Board of Directors in any calendar
year, the Human Relations Committee of the Board will review
Employee's salary and report its recommendations for any revision to
the full Board at such meeting.
3. Amendment of Schedule "A" to Employment Agreement. Schedule "A" to
the Employment Agreement is hereby amended in its entirety to read as set forth
in the Revised Schedule "A" attached hereto and incorporated herein by this
reference.
4. Ratification of Employment Agreement as Amended. The Employment
Agreement is not amended in any respect except as expressly provided herein, and
the Employment Agreement as amended by this First Amendment is hereby ratified
and approved in all respects.
5. Governing Law. This First Amendment shall be governed by and
construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
to the Employment Agreement to be effective as of the day and year first written
above not withstanding the actual date of signature.
"Employee"
James F. Verhey
/s/ James F. Verhey
-------------------------------------------
James F. Verhey
"Kaiser"
Kaiser Ventures Inc.
By: /s/ Richard E. Stoddard
--------------------------------------
Richard E. Stoddard, President & Chief
Executive Officer
By: /s/ Lyle B. Stevenson
--------------------------------------
Lyle B. Stevenson, Chairman of the
Human Relations Committee
2
<PAGE>
REVISED
SCHEDULE "A"
JAMES F. VERHEY
Executive Vice President & CFO
This position will report to the President and Chief Executive Officer.
Responsibilities:
This position has the responsibility to manage all accounting, finance,
tax, and treasury functions for the Company and its subsidiaries; to represent
the Company with all outside entities coming under the purview of corporate
finance; to ensure all reporting requirements are met in a satisfactory and
timely manner; to assist senior management in analyzing, evaluating and pursuing
new business and growth opportunities; to manage the Company's annual budget and
capital plan processes; to manage the Company's financial analysis and modeling
function; to manage the Company's insurance program; to direct the human
resource and employee benefits functions; to manage the corporate office; to
ensure the smooth functioning of all administrative departments, and to monitor
all project development activities from the financial perspective. These duties
include the following:
. Assist CEO in analyzing, evaluating and pursuing business and growth
opportunities.
. Seek out, secure and manage all financing for future growth
opportunities and acquisitions.
. Oversee environmental compliance and environmental remediation
implementation and compliance.
. Oversee investor relations program implementation, shareholder/
investor communications, media relations and charitable and
political donations.
. Oversee implementation of real estate development and financing
strategy.
. Oversee SEC reporting and disclosure issues.
. Manage and oversee financial aspects of SEC compliance.
. Oversee the treasury and controller functions. Oversee all audit
procedures, outside auditors, and report to the Chairman of the
Audit Committee.
. Manage all aspects of the accounting function of the Company,
employing Generally Accepted Accounting Procedures.
. Manage the Company's annual budget and capital plan processes.
. Manage the Company's financial analysis and modeling function.
. Manage all tax planning and reporting.
. Manage all debt and equity structuring.
. Manage all insurance programs.
. Manage and oversee all human resource functions to include employee
benefits and personal legal issues.
. Manage and oversee the corporate office, Kaiser Eagle Mountain and
MRC, operations, insuring both smooth functioning of all
administrative departments and operations of both facilities.
. Monitor all project development activities from the financial
perspective.
. Participate in major negotiations with third parties.
. To direct and manage the operations of the Company in the absence
of the Chief Executive Officer.
3
<PAGE>
EXHIBIT 10.12.1
Amendment to Consent Order
This amendment to that certain Consent Order dated August 22, 1988 issued by the
State Department of Health Services ("DHS") to Kaiser Steel Corporation (the
"Consent Order"), is issued as of November 13, 1997 by the California
Environmental Protection Agency, Department of Toxic Substances Control
("DTSC"), successor to the DHS, to Kaiser Ventures Inc., a Delaware Corporation,
("KVI") the reorganized successor to Kaiser Steel Corporation.
Recitals
A. The Consent Order was issued to address possible air, soil, surface
water and groundwater contamination at the former Kaiser Steel Facility near
Fontana, California, as described in the Consent Order (the "Kaiser Steel
Facility"). The objective of the parties in entering into the Consent Order was
to ensure that any release or threatened release of a hazardous substance or a
hazardous waste to the air, soil, surface water and groundwater at or from the
former Kaiser Steel Facility is thoroughly investigated and that appropriate
remedial action is taken.
B. Since the Consent Order was issued, KVI, under the direction of the
DTSC, has investigated the principal areas of the Kaiser Steel Facility to
assess the level of contamination. Based upon the investigations conducted to
date, it has been determined that limited portions of the Kaiser Steel Facility
require remediation. However, additional investigation, characterization, and
remediation may be necessary from time to time with respect to other portions of
the Kaiser Steel Facility.
C. Since the Consent Order was issued, KVI has undertaken, and continues
to undertake, appropriate remedial activities with regard to the Kaiser Steel
Facility.
D. KVI has spent more than $20 million dollars to date on the
investigation and remediation activities on the Kaiser Steel Facility which does
not include the estimated value of die water contributed by KVI as part of the
settlement with the Regional Water Quality Control Board.
E. Pursuant to Health and Safety Code, Division 20, Chapter 6.65, Section
25260 et seq. (AB 2061, Chapter 1184, Statutes of 1993 Umberg]), the Site
Designation Committee designated DTSC as the administering agency for the Kaiser
Steel Facility. DTSC is responsible for issuing all permits, and applying all
applicable environmental laws and regulations with respect to the Kaiser Steel
Facility.
F. Based on currently known information, major remediation areas remaining
to be addressed at the Kaiser Steel Facility are the Tar Pits and the East Slag
Pile Waste Management Unit. In addition, additional groundwater investigation
is required for the
<PAGE>
former Kaiser Steel Mill. Based on its experience with the investigation and
prior remediation of the Kaiser Steel Facility and its projections as to the
development and market absorption of the remaining portions of the Kaiser Steel
Facility, KVI estimates that it will require up to an additional seven years to
complete the remediation of the Kaiser Steel Facility.
G. Under Paragraph 8.9 and 8.10 of the Consent Order, the DTSC may grant
an extension of the current completion date of August 22, 1998, if a good cause
exists for such an extension. By its actions in investigating the Kaiser Steel
Facility and remediating a major portion of it, the funds expended to date as
well as anticipated expenditures, KVI has demonstrated both its willingness to
fully remediate the Kaiser Steel Facility and its need for an extension of the
Consent Order. Given the amount of work completed and to be completed, the
financial resources of KVI, and for other reasons, the DTSC has determined that
it is appropriate to grant an extension to KVI. In accordance with the revised
Master Workplan Schedule, the DTSC agrees to a seven year extension of the
completion date, to August 22, 2005, to complete the activities required by the
Consent Order.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants and obligations contained herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Parties agree to amend the Consent Order in the following particulars only:
Paragraph 4,1 is hereby deleted, to be replaced as follows:
"4.1 Master Workplan. Attached hereto as exhibit "I" is a revised Master
Workplan, which describes how KVI currently proposes to schedule the remaining
activities required under Paragraphs 5.1 through 6.1 of this Consent Order.
Though this Master Workplan proposes to address different portions of the
facility at different times (concurrently and/or sequentially) and provide for
more than one remedial investigation and report and Remedial Action Plan for the
Facility, KVI may change the order of the completion of various portions of the
Kaiser Steel Facility with the prior approval of the DTSC. The schedule in the
Master Workplan provides that all investigation and characterization, and
remedial actions excluding operation and maintenance, shall be complete at the
entire Kaiser Steel Facility by August 22, 2005 unless that date is extended by
the DTSC pursuant to paragraphs 8.9 and 8.10 of this Consent Order.
Paragraph 7.1 and 7.2 is hereby deleted, to be replaced as follows:
7.1 - 7.2 Without waiving any rights of recovery from others, KVI agrees to pay
all costs of response related to the Site. These costs include, but are not
limited to, costs associated with compliance with the California Environmental
Quality Act, costs associated with conducting site investigation, implementing
the selected remedy, and ongoing operation and maintenance,
<PAGE>
and costs incurred by DTSC in implementing and administering Health and Safety
Code, Division 20, Chapters 6.5, 6.65 and 6.8, related to the Site. DTSC shall
bill KVI quarterly for costs incurred by DTSC. Upon request by KVI, DTSC agrees
to provide back-up information (e.g., time sheets and vendor bills) with such
invoices. KVI shall pay DTSC s costs, as indicated on the invoice within 60 days
of receipt of DTSC s invoice.
Paragraph 8.16 is hereby deleted, to be replaced as follows:
8.16 In addition to payments due under paragraphs 7.1 -7.3, failure or refusal
of KVI to comply with this Consent Order may make KVI liable for any government
costs incurred, including those set forth in Paragraph 7.1, as provided in
Health and Safety Code section 25360 and other applicable provisions of law.
Paragraph 8.3 is hereby deleted, to be replaced as follows:
8.3 Each year, beginning May 1998, Kaiser and DTSC will meet on or before May
15 of that year to discuss the Master Schedule, in the interest of accelerating
remaining remedial work where feasible and appropriate.
Paragraph 8.5 is hereby deleted, to be replaced as follows:
8.5 Submittals and Approvals. All submittals and notifications from Kaiser
------------------------
Ventures Inc. (KVI) required by this Consent Order shall be sent simultaneously
to:
Chief
Site Mitigation Cleanup Operations
Southern California Branch A
Department of Toxic Substances Control
245 West Broadway, Suite 350
Long Beach, California 90802
Attn: Project Manager
All approvals and decisions of DTSC made regarding such submittals and
notifications shall be communicated to KVI in writing by the Chief or his
designee. no informal advice, guidance, suggestions or comments by DTSC
regarding reports, plans, specifications, schedules or any other writing
prepared or submitted by or for KVI shall be construed to relieve KVI of its
obligations to obtain such formal approvals as may be required herein.
All other terms and conditions of the Consent Order as it may be amended to date
shall remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this First Amendment to Consent
Order as of the day first above written.
"DTSC" "KVI"
CALIFORNIA ENVIRONMENTAL KAISER VENTURES INC.
PROTECTION AGENCY a Delaware Corporation
DEPARTMENT OF TOXIC SUBSTANCES
CONTROL
By: Hamid Saebfar By: Gerald A. Fawcett
Its: Chief Its: President and Chief Operating
Site Mitigation Cleanup Operations Officer
Southern California Branch A
/s/ Hamid Saebfar /s/ /Gerald A. Fawcett
- --------------------------------------- -----------------------------------
<PAGE>
EXHIBIT 10.29.4
August 14, 1997
Union Bank of California, N.A.
70 South Lake Avenue, Suite 900
Pasadena, California 91101
Attention: Commercial Finance Division
RE: FIRST AMENDMENT TO PLEDGE AND SECURITY AGREEMENT; SECOND AMENDMENT TO
GUARANTY; FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT; AND GUARANTOR
CONSENT
Gentlemen:
We refer to the following documents: (i) the Revolving Credit and Term
Loan Agreement dated as of September 30, 1994, as amended by the First Amendment
to Revolving Credit and Term Loan Agreement dated as of January 30, 1997 and the
Second Amendment to Revolving Credit and Term Loan Agreement dated as of August
14, 1997 (the "Second Credit Agreement Amendment") (said Agreement, as so
---------------------------------
amended, herein called the "Credit Agreement"), between Fontana Water Resources,
----------------
Inc., a Delaware corporation (the "Borrower"), and Union Bank of California,
--------
N.A., a national banking association (successor in interest to Union Bank, a
California banking corporation) (the "Bank"); (ii) the Pledge and Security
----
Agreement dated as of September 30, 1994 (the "Pledge and Security Agreement")
-----------------------------
made by the Borrower in favor of the Bank; (iii) the Guaranty dated as of
September 30, 1994 made by Kaiser Ventures Inc., a Delaware corporation formerly
known as "Kaiser Resources Inc." (the "Guarantor"), in favor of the Bank, as
---------
amended by the First Amendment to Guaranty dated as of January 30, 1997 between
the Guarantor and the Bank (said Guaranty, as so amended, herein called the
"Guaranty"); and (iv) the Stock Pledge Agreement dated as of September 30, 1994
- ---------
(the "Stock Pledge Agreement") made by the Guarantor in favor of the Bank.
----------------------
Terms defined in the Credit Agreement and not otherwise defined herein have the
same respective meanings when used herein.
1. Subject to the terms and conditions of this letter amendment, (a)
Section 18(a) of the Pledge and Security Agreement and Section 16(a) of the
Stock Pledge Agreement are amended by adding the words and punctuation "all
Letters of Credit have expired," after the word "until" in each case, and (b)
Section 12(a) of the Guaranty is amended by adding the words and punctuation
"expiration of all Letters of Credit," after the word "until."
<PAGE>
August 14, 1997
Page 2
2. If you agree to the terms hereof, please evidence your agreement by
executing this letter amendment in the space provided below. This letter
amendment shall become effective as of the date first set forth above when and
if counterparts of this letter amendment have been executed and delivered by the
Borrower, the Guarantor and the Bank.
3. On and after the effective date of this letter amendment, each
reference in the Pledge and Security Agreement, the Guaranty and the Stock
Pledge Agreement to "this Agreement," "this Guaranty," "hereunder," "hereof,"
"herein" or any other expression of like import referring to the Pledge and
Security Agreement, the Guaranty or the Stock Pledge Agreement, as the case may
be, and each reference in the other Credit Documents to "the Pledge and Security
Agreement," "the Guaranty," "the Stock Pledge Agreement," "thereunder,"
"thereof," "therein" or any other expression of like import referring to the
Pledge and Security Agreement, the Guaranty or the Stock Pledge Agreement, as
the case may be, shall mean and be a reference to the Pledge and Security
Agreement, the Guaranty or the Stock Pledge Agreement, as applicable, as amended
by this letter amendment. Except as specifically amended above, the Pledge and
Security Agreement, the Guaranty and the Stock Pledge Agreement shall remain in
full force and effect and are hereby ratified and confirmed.
4. This letter amendment may be executed in any number of counterparts
and by any of the parties hereto in separate counterparts, each of which
counterparts shall be an original and all of which taken together shall
constitute one and the same letter amendment.
5. The Guarantor hereby consents to the Second Credit Agreement Amendment
and hereby confirms and agrees that the Guaranty is and shall continue to be in
full force and effect and is ratified and confirmed in all respects, except
that, on and after the effective date of the Second Credit Agreement Amendment,
each reference in the Guaranty to "the Credit Agreement," "thereunder,"
"thereof," "therein" or any other expression of like import referring to the
Credit Agreement shall mean and be a reference to the Credit Agreement as
amended by the Second Credit Agreement Amendment.
<PAGE>
August 14, 1997
Page 3
6. This letter amendment shall be governed by, and construed in
accordance with, the laws of the State of California applicable to contracts
made and performed in the State of California.
Very truly yours,
FONTANA WATER RESOURCES, INC.
By: /s/ Gerald A. Fawcett
---------------------
Gerald A. Fawcett
President
KAISER VENTURES INC.
By: /s/ Gerald A. Fawcett
---------------------
Gerald A. Fawcett
President & Chief
Operating Officer
Agreed to as of August 14, 1997:
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Richard P. DeGrey, Jr.
--------------------------
Richard P. DeGrey, Jr.
Vice President
<PAGE>
EXHIBIT 10.29.5
RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:
Pillsbury Madison & Sutro LLP
725 South Figueroa Street, Suite 1200
Los Angeles, California 90017-5443
Attention: Robert V. Slattery Jr.
SECOND MODIFICATION
-------------------
OF
--
DEED OF TRUST AND ASSIGNMENT OF LEASES AND RENTS
------------------------------------------------
This Modification is made as of August 14, 1997 by FONTANA WATER RESOURCES,
INC., a Delaware corporation ("Trustor"), and UNION BANK OF CALIFORNIA, N.A., a
-------
national banking association (successor in interest to Union Bank, a California
banking corporation) ("Beneficiary").
-----------
Recitals
--------
A. Trustor executed a Deed of Trust and Assignment of Leases and Rents
dated as of September 30, 1994 to First American Title Insurance Company, as
trustee ("Trustee"), for the benefit of Beneficiary, as amended by a First
-------
Modification of Deed of Trust and Assignment of Leases and Rents dated as of
January 30, 1997 between Trustee and Beneficiary (said Deed of Trust, as so
amended, herein called the "Deed of Trust"), covering interests in real property
-------------
located in San Bernardino, Riverside and Los Angeles Counties, California, as
more particularly described in Exhibit A to the Deed of Trust. The Deed of
Trust was recorded (1) in the Official Records of San Bernardino County on
October 7, 1994 as instrument number 94412304, (2) in the Official Records of
Riverside County on October 6, 1994 as instrument number 388292 and (3) in the
Official Records of Los Angeles County on October 13, 1994 as instrument number
94-1872435. Terms defined in the Deed of Trust and not otherwise defined herein
have the respective meanings given to such terms in the Deed of Trust. The Deed
of Trust secures, among other obligations, all of the obligations of Trustor to
Beneficiary under (1) the Amended and Restated Promissory Note dated January 30,
1997 in the maximum principal amount of $30,000,000 made by Trustor in favor of
Beneficiary and (2) the Revolving Credit and Term Loan Agreement dated as of
September 30, 1994, as amended by the First Amendment to Revolving Credit and
Term Loan Agreement dated as of January 30, 1997 (said Agreement, as so amended,
herein called the "Credit Agreement"), between Trustor and Beneficiary.
----------------
B. Concurrently herewith, Trustor and Beneficiary have executed a Second
Amendment to Revolving Credit and Term Loan Agreement dated as of August 14,
1997 for the purpose of providing for the issuance of letters of credit by
Beneficiary for the account of Trustor.
-1-
<PAGE>
C. Trustor and Beneficiary now wish to amend the Deed of Trust to modify
certain references therein, and they accordingly agree as set forth below.
Modification
------------
1. Amendments. The Deed of Trust is hereby amended as set forth below.
----------
(a) Section 1.2(c) of the Deed of Trust is amended in full to read as
follows:
"(c) Payment of all other moneys agreed or provided to be paid by
Trustor herein and/or in the Revolving Credit and Term Loan Agreement dated
as of September 30, 1994, as amended by the First Amendment to Revolving
Credit and Term Loan Agreement dated as of January 30, 1997 and the Second
Amendment to Revolving Credit and Term Loan Agreement dated as of August
14, 1997, between Trustor and Beneficiary, including any further renewals,
extensions, modifications, changes and/or amendments thereof (the "Credit
------
Agreement"), and performance of all other obligations of Trustor contained
----------
herein and/or in the Credit Agreement, including any modifications, changes
and/or amendments hereto or thereto; and."
(b) Section 2.18(a)(i) of the Deed of Trust is amended by adding the
punctuation and words ", all Letters of Credit (as defined in the Credit
Agreement) have expired" after the word "full."
2. Effect of Modification. On and after the effective date of this
----------------------
Modification, each reference in the Deed of Trust to "this Deed of Trust,"
"hereunder," "hereof," "herein" or any other expression of like import referring
to the Deed of Trust, and each reference in the Credit Agreement and the other
Credit Documents (as defined in the Credit Agreement) to "the Deed of Trust,"
"thereunder," "thereof," "therein" or any other expression of like import
referring to the Deed of Trust, shall mean and be a reference to the Deed of
Trust as amended by this Modification.
3. Other Terms Unchanged. Except as specifically amended above, the Deed
---------------------
of Trust shall remain in full force and effect and is hereby ratified and
confirmed.
4. Headings. The section headings used herein have been inserted for
--------
convenience of reference only and do not constitute matters to be considered in
interpreting this Modification.
5. Execution in Counterparts. This Modification may be executed in any
-------------------------
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed to be an original and
all of which taken together shall constitute one and the same instrument.
-2-
<PAGE>
6. Governing Law. THIS MODIFICATION SHALL BE GOVERNED BY, AND CONSTRUED
-------------
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS
MADE AND PERFORMED IN THE STATE OF CALIFORNIA.
IN WITNESS WHEREOF, Trustor and Beneficiary have executed this Modification
as of the date first written above.
FONTANA WATER RESOURCES, INC.
By: /s/ Gerald A. Fawcett
---------------------
Gerald A. Fawcett
President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Richard P. DeGrey, Jr.
--------------------------
Richard P. DeGrey, Jr.
Vice President
-3-
<PAGE>
State of California )
) ss.
County of _______________ )
On _____________, 1997 before me, ________________________, Notary Public,
personally appeared JAMES F. VERHEY, personally known to me (or proved to me on
the basis of satisfactory evidence) to be the person whose name is subscribed to
the within instrument and acknowledged to me that he executed the same in his
authorized capacity, and that by his signature on the instrument the person, or
the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
Signature ______________________
(Seal)
-4-
<PAGE>
State of California )
) ss.
County of ______________ )
On _____________, 1997 before me, _______________________, Notary Public,
personally appeared ___________________________________, personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person whose
name is subscribed to the within instrument and acknowledged to me that he
executed the same in his authorized capacity, and that by his signature on the
instrument the person, or the entity upon behalf of which the person acted,
executed the instrument.
WITNESS my hand and official seal.
Signature ____________________
(Seal)
-5-
<PAGE>
EXHIBIT 10.29.6
SECOND AMENDMENT
----------------
TO
--
REVOLVING CREDIT AND TERM LOAN AGREEMENT
----------------------------------------
This Amendment, dated as of August 14, 1997, is entered into by FONTANA
WATER RESOURCES, INC., a Delaware corporation (the "Borrower"), and UNION BANK
--------
OF CALIFORNIA, N.A., a national banking association (the "Bank").
----
Recitals
--------
A. The Borrower and the Bank have entered into a Revolving Credit and
Term Loan Agreement dated as of September 30, 1994, as amended by a First
Amendment to Revolving Credit and Term Loan Agreement dated as of January 30,
1997 (said Agreement, as so amended, herein called the "Credit Agreement").
----------------
Terms defined in the Credit Agreement and not otherwise defined herein have the
same respective meanings when used herein, and the rules of interpretation set
forth in Sections 1.2 and 1.3 of the Credit Agreement are incorporated herein by
reference.
B. The Borrower and the Bank wish to amend the Credit Agreement to
provide for the issuance of letters of credit by the Bank for the account of the
Borrower. Accordingly, the Borrower and the Bank agree as set forth below.
Section 1. Amendments to Credit Agreement. Effective as of the date
---------- ------------------------------
hereof and subject to satisfaction of the conditions precedent set forth in
Section 2, the Credit Agreement is hereby amended as set forth below.
(a) The definition of "Credit Documents" in Section 1.1 of the Credit
Agreement is amended in full to read as follows:
"'Credit Documents" means this Agreement, the Note, the Deed of Trust,
----------------
the Pledge and Security Agreement, the Guaranty, the Stock Pledge
Agreement, the Escrow Agreement, the Estoppel Certificate, the
Teletransmission Agreement, all Letter of Credit Requests executed by the
Borrower from time to time and all Letters of Credit issued from time to
time."
(b) The following new definitions are added to Section 1.1 of the
Credit Agreement in appropriate alphabetical order:
"'Letter of Credit" has the meaning set forth in 2.15(a)."
----------------
"'Letter of Credit Facility' has the meaning set forth in 2.15(a)."
-------------------------
"'Letter of Credit Request" means a request by the Borrower for the
-------------------------
1
<PAGE>
issuance of a Letter of Credit, on the Bank's standard form of Application
for Irrevocable Standby Letter of Credit, the current form of which is
attached hereto as Exhibit F, and containing such other terms and
conditions as may be satisfactory to the Bank in its sole discretion."
"'Teletransmission Agreement" means the Teletransmission Agreement
---------------------------
between the Borrower and the Bank substantially in the form of Exhibit G."
(c) Section 2.1(c) of the Credit Agreement is amended in full to read
as follows:
"(c) If at any time on or before the Revolving Commitment Termination
Date (i) the sum of the aggregate principal amount of all Loans outstanding
and the aggregate undrawn amount of all Letters of Credit outstanding
exceeds (ii) the Borrowing Base (any such excess herein called an
"Overadvance"), then the Borrower will pay the amount of such Overadvance
-------------
to the Bank in 4 substantially equal quarterly installments, payable on the
same dates on which interest is payable pursuant to Section 2.5(a),
commencing on the second such interest-payment date occurring after such
Overadvance is determined; provided, however, that any payment of an
-------- -------
installment of an Overadvance pursuant to this Section 2.1(c) shall be
applied first to prepay outstanding principal of the Loans and then, after
all outstanding Loans have been paid in full, held by the Bank as cash
collateral for the undrawn amount of any outstanding Letters of Credit;
further provided, however, that, in addition to the interest payable
------- -------- -------
pursuant to Section 2.5 and the fees payable pursuant to Section 2.15(e),
the unpaid amount of each Overadvance shall bear a premium of 1% per annum
--- -----
(payable at the same time as interest under Section 2.5(a)) until such
amount has been paid in full; further provided, however, that amounts paid
------- -------- -------
out of the escrow account maintained pursuant to the Escrow Agreement while
one or more Overadvances are outstanding shall be applied first, to the
-----
payment of interest or premium then due under this Agreement (including
pursuant to the first provision of this Section 2.1(c)), any fees due under
this Agreement and any costs and expenses due under this Agreement, second,
------
to the payment of any installments of such Overadvances then due pursuant
to this Section 2.1(c), third, to the payment of any regular principal-
-----
repayment installments then due on the Loans pursuant to Section 2.4,
fourth, to the payment of any mandatory prepayments of principal then due
------
on the Loans pursuant to Section 2.7, fifth, to the prepayment of any
-----
remaining installments scheduled on such Overadvances pursuant to this
Section 2.1(c), in inverse order of maturity, and sixth, if any amount is
-----
remaining, to the Borrower; further provided, however, that the last
------- -------- -------
scheduled installment of each Overadvance shall be in the amount necessary
to pay in full the unpaid amount of such Overadvance; and further provided,
------- --------
however, that the payment and prepayment of, and the payment of premium on,
-------
Overadvances as described above shall not be required if the Borrower or
the Guarantor provides the Bank additional collateral sufficient, in the
sole judgment of the Bank, when added to the Collateral, to adequately
secure the Obligations."
2
<PAGE>
(d) Article 2 of the Credit Agreement is amended by adding a new
Section 2.15, to read as follows:
"Section 2.15 Letters of Credit.
------------ -----------------
"(a) Letter of Credit Facility. On the terms and conditions
-------------------------
hereinafter set forth, the Borrower may request the Bank to issue, and the
Bank will if so requested issue, standby letters of credit (each a "Letter
------
of Credit") for the account of the Borrower from time to time on any
----------
Business Day from August 14, 1997 until 30 days before the Revolving
Commitment Termination Date, in an aggregate face amount not to exceed at
any time outstanding the lesser of $5,000,000 and the unused portion of the
Commitment (the "Letter of Credit Facility"). No Letter of Credit shall
--------------------------
have an expiration date (including all rights of renewal) later than 15
days before the Revolving Commitment Termination Date. Within the limits
of the Letter of Credit Facility, the Borrower may request the issuance of
Letters of Credit under this Section 2.15(a), repay any Loans resulting
from drawings thereunder pursuant to Section 2.15(c) and request the
issuance of additional Letters of Credit under this Section 2.15(a).
"(b) Request for Issuance. The Borrower may request the issuance
--------------------
of a Letter of Credit by giving the Bank a Letter of Credit Request that
must be received by the Bank at least 1 Business Day before the requested
date of issuance of such Letter of Credit (which shall be a Business Day).
Any Letter of Credit Request received by the Bank later than 3:00 p.m., Los
Angeles time, shall be deemed to have been received on the next Business
Day. Each Letter of Credit Request shall be sent by courier, United States
mail or telecopier (provided that any Letter of Credit Request sent by
telecopier shall be subject to the terms and conditions of the
Teletransmission Agreement and shall be confirmed by sending the original
to the Bank promptly by courier or United States mail), shall be signed by
an Authorized Officer, shall be irrevocable and shall be effective upon
receipt by the Bank. Provided that a valid Letter of Credit Request has
been received by the Bank and upon fulfillment of the other applicable
conditions set forth in Article 4, the Bank will issue the requested Letter
of Credit from its office specified in Section 8.2.
"(c) Drawing and Reimbursement. The payment by the Bank of a
-------------------------
draft drawn under any Letter of Credit shall constitute for all purposes of
this Agreement the making by the Bank of a Reference Rate Loan in the
amount of such draft (but without any requirement for compliance with the
conditions set forth in Article 4). The Borrower hereby agrees to the
provisions of the Letter of Credit Request form; provided, however, that
-------- -------
the terms of this Agreement shall take precedence if there is any
inconsistency between the terms of this Agreement and the terms of said
form.
"(d) Obligations Absolute. The obligations of the Borrower
--------------------
3
<PAGE>
under this Agreement and any other agreement or instrument relating to any
Letter of Credit shall be unconditional and irrevocable and shall be paid
strictly in accordance with the terms of this Agreement and such other
agreement or instrument under all circumstances, including the following:
(i) any lack of validity or enforceability of this Agreement, any Letter of
Credit or any other agreement or instrument relating thereto (collectively
the "LOC Documents"); (ii) any change in the time, manner or place of
-------------
payment of, or in any other term of, any or all of the Obligations of the
Borrower in respect of the Letters of Credit, or any other amendment or
waiver of, or consent to departure from, any or all of the LOC Documents;
(iii) the existence of any claim, setoff, defense or other right that the
Borrower may have at any time against any beneficiary or transferee of any
Letter of Credit (or any Person for which any such beneficiary or
transferee may be acting), the Bank or any other Person, whether in
connection with any LOC Document, any transaction contemplated thereby or
any unrelated transaction; (iv) any statement or any other document
presented under any Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect, or any statement therein being
untrue or inaccurate in any respect; (v) payment by the Bank under any
Letter of Credit against presentation of a draft or certificate that does
not comply with the terms of such Letter of Credit; (vi) any exchange,
release or nonperfection of any Collateral or other collateral, or any
release, amendment or waiver of, or consent to departure from, the Guaranty
or any other guaranty, for any or all of the Obligations of the Borrower in
respect of the Letters of Credit; or (vii) any other circumstance or
happening whatsoever, whether or not similar to any of the foregoing.
"(e) Compensation. The Borrower will pay the following to the
------------
Bank: (i) on the date of issuance of each Letter of Credit, a
nonrefundable issuance fee equal to the sum of $100 plus the greater of (A)
the product of (1) 1.5% per annum, (2) the maximum amount available to be
--- -----
drawn under such Letter of Credit (assuming compliance with all conditions
of drawing) and (3) the term of such Letter of Credit, in days, divided by
360 days and (B) $250; (ii) on the date of any amendment of any Letter of
Credit, an additional nonrefundable issuance fee, on the terms described in
clause (i) above, for the amended amount and extended term of such Letter
of Credit; and (iii) such additional fees and charges (including cable
charges) as are generally associated with letters of credit, in accordance
with the Bank's standard internal charge guidelines.
"(f) No Liability of Bank. The Borrower assumes all risks of the
--------------------
acts or omissions of any beneficiary or transferee of any Letter of Credit
with respect to its use of such Letter of Credit. Neither the Bank nor any
of its officers or directors shall be liable or responsible for any of the
following: (i) the use that may be made of any Letter of Credit or any act
or omission of any beneficiary or transferee in connection therewith; (ii)
the validity, sufficiency or genuineness of documents, or of any
endorsement thereon, even if such documents should prove to be in any or
all respects invalid, insufficient, fraudulent or forged; (iii) payment by
the Bank against presentation of documents that do not comply with the
terms
4
<PAGE>
of a Letter of Credit, including failure of any document to bear any
reference or adequate reference to a Letter of Credit; or (iv) any other
circumstance whatsoever in making or failing to make payment under any
Letter of Credit; provided, however, that the Borrower shall have a claim
-------- -------
against the Bank, and the Bank shall be liable to the Borrower, to the
extent of any direct, but not consequential, damages suffered by the
Borrower that the Borrower proves were caused by (A) the Bank's willful
misconduct or gross negligence in determining whether documents presented
under any Letter of Credit comply with the terms of such Letter of Credit
or (B) the Bank's willful failure to make lawful payment under a Letter of
Credit after the presentation to it of a draft and certificates strictly
complying with the terms and conditions of such Letter of Credit. In
furtherance and not in limitation of the foregoing, the Bank may accept any
document that appears on its face to be in order, without responsibility
for further investigation, regardless of any notice or information to the
contrary."
(e) Section 3.4 of the Credit Agreement is amended in full to read as
follows:
Section 3.4 Capital Adequacy. If the Bank determines that compliance
----------- ----------------
with any Governmental Rule of general application to similar banks or to
corporations similar to that controlling the Bank (whether or not having
the force of law), to the extent such compliance is based upon a change in
any Governmental Rule, or the introduction of a new Governmental Rule,
after the date of this Agreement, affects or would affect the amount of
capital required or expected to be maintained by the Bank or any
corporation controlling the Bank and that the amount of such capital is
increased by or based upon the existence of the Bank's commitment to lend
hereunder and other commitments of this type or the commitment to issue, or
the issuance of, Letters of Credit (or similar contingent obligations),
then, upon demand by the Bank, the Borrower will pay to the Bank, from time
to time as specified thereby, additional amounts sufficient to compensate
the Bank for its increased costs in the light of such circumstances, to the
extent that the Bank reasonably determines such increase in capital to be
allocable to the existence of the Bank's commitment to lend hereunder or
commitment to issue, or the issuance of, Letters of Credit. A certificate
as to such amounts submitted to the Borrower by the Bank shall be
conclusive and binding for all purposes, absent manifest error."
(f) Article 3 of the Credit Agreement is amended by adding a new
Section 3.6 to read as follows:
"Section 3.6 Increased Letter of Credit Costs. If, after the date
----------- --------------------------------
hereof, any change in any Governmental Rule or in the interpretation
thereof by any Governmental Person charged with the administration thereof
either (a) imposes, modifies or deems applicable any reserve, special-
deposit or similar requirement against letters of credit or guaranties
issued by, or assets held by, or deposits in or for the account of, the
Bank or (b) imposes on the Bank any other condition regarding this
Agreement, the Bank or any Letter of Credit, and the result of any
5
<PAGE>
event referred to in the preceding clause (a) or (b) is to increase the
cost to the Bank of issuing or maintaining any Letter of Credit, then, upon
demand by the Bank, the Borrower will pay to the Bank, from time to time as
specified thereby, additional amounts sufficient to compensate the Bank for
such increased cost. A certificate as to the amount of such increased cost,
submitted to the Borrower by the Bank, shall be conclusive and binding for
all purposes, absent manifest error."
(g) Article 4 of the Credit Agreement is amended by adding a new
Section 4.3 to read as follows:
"Section 4.3 Each Letter of Credit. The obligation of the Bank to
----------- ---------------------
issue each Letter of Credit is subject to the limitations of the
Commitment, to the performance by the Borrower of all of its obligations
under this Agreement and to the satisfaction of the following further
conditions:
"(a) the Bank shall have received a Letter of Credit Request with
respect to such Letter of Credit; and
"(b) the following statements shall be true, and the Bank shall
have received (by personal delivery (including courier) or by telecopier) a
certificate signed by an Authorized Officer of the Borrower, dated the date
of issuance of such Letter of Credit, stating that:
"(i) the representations and warranties of each Loan Party
contained in each Credit Document are correct in all material respects on
and as of the date of issuance of such Letter of Credit, before and after
giving effect to the issuance of such Letter of Credit, as though made on
and as of such date;
"(ii) no event has occurred and is continuing, or would
result from the issuance of such Letter of Credit, that constitutes a
Default or Event of Default; and
"(iii) the calculation of the Borrowing Base on and as of
the date of issuance of such Letter of Credit, as set forth in such
certificate (showing each step of such calculation), is correct and
complete; provided, however, that the Borrower shall not be required to
-------- -------
provide such calculation if the maximum amount of such Letter of Credit
does not exceed $500,000."
(h) The first sentence of Article 6 of the Credit Agreement is amended
in full to read as follows:
"So long as any of the Commitment is in effect, any Letter of Credit
is outstanding or any Obligation is unpaid, unless compliance has been
waived in writing by the Bank, the Borrower will observe the covenants set
forth below."
6
<PAGE>
(i) Section 6.10 of the Credit Agreement is amended in full to read as
follows:
"Section 6.10 Use of Loan Proceeds and Letters of Credit. The
------------ ------------------------------------------
Borrower will use the proceeds of the Loans only for its general corporate
purposes and to make loans or pay dividends to the Guarantor to be used for
the Guarantor's general corporate purposes, including the funding of
expenditures by the Guarantor or its Subsidiaries for (a) the continued
redevelopment of the Guarantor's mill site and Eagle Mountain properties
and (b) environmental remediation at the Guarantor's mill site, including
the provision of financial assurances to the DTSC concerning the same. The
Borrower will request Letters of Credit only for the general corporate
purposes of the Borrower, the Guarantor or any other Subsidiary of the
Guarantor."
(j) The portion of Section 7.1 after Section 7.1(m) is amended in full
to read as follows:
"then, and in any such event, the Bank may, by notice to the Borrower, (i)
declare the obligation of the Bank to make Loans and issue Letters of
Credit to be terminated, whereupon the same shall forthwith terminate,
and/or (ii) declare the Obligations, all interest thereon and all other
amounts payable under this Agreement and the other Credit Documents to be
forthwith due and payable, whereupon (A) the Obligations, all such interest
and all such amounts shall become and be forthwith due and payable, without
presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower, and (B) to the extent any
Letters of Credit are then outstanding, the Borrower will deposit with and
pledge to the Bank cash collateral in the aggregate face amount of such
Letters of Credit, and/or (iii) exercise any or all of its other rights and
remedies under the Credit Documents; provided, however, that, in the event
-------- -------
of an actual or deemed entry of an order for relief with respect to either
Loan Party under the Federal Bankruptcy Code, (x) the obligation of the
Bank to make Loans and issue Letters of Credit shall be terminated
automatically, and (y) the Loans, all such interest and all such amounts
(including such cash collateral) shall automatically become and be due and
payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived by the Borrower."
(k) The Credit Agreement is amended by adding Exhibits F and G
attached hereto as Exhibits F and G to the Credit Agreement.
Section 2. Conditions to Effectiveness. This Amendment shall become
---------- ---------------------------
effective when the Bank has received all of the following documents, each dated
the date of receipt thereof by the Bank (which date shall be the same for all
such documents), in form and substance satisfactory to the Bank and in the
number of originals requested by the Bank:
(a) this Amendment and the Teletransmission Agreement, duly executed
by the Borrower;
7
<PAGE>
(b) an amendment to the Pledge and Security Agreement for the purpose
of amending Section 18 thereof (the "Pledge and Security Agreement Amendment"),
---------------------------------------
duly executed by the Borrower;
(c) a modification to the Deed of Trust for the purpose, among others,
of making reference therein to the Letters of Credit and this Amendment (the
"Deed of Trust Modification"), duly executed by the Borrower, for recording in
- ---------------------------
the Official Records of San Bernardino, Riverside and Los Angeles Counties;
(d) an amendment to the Guaranty for the purpose of amending Section
12 thereof, together with a consent to this Amendment (collectively the
"Guaranty Amendment"), duly executed by the Guarantor;
- -------------------
(e) an amendment to the Stock Pledge Agreement for the purpose of
amending Section 16 thereof (the "Stock Pledge Agreement Amendment"), duly
--------------------------------
executed by the Borrower;
(f) copies of previously adopted resolutions of the Board of Directors
of each Loan Party approving those of this Amendment, the Teletransmission
Agreement, the Pledge and Security Agreement Amendment, the Deed of Trust
Modification, the Guaranty Amendment and the Stock Pledge Agreement Amendment
(the "Amendment Documents") to which such Loan Party is or is to be a party, and
-------------------
copies of all other documents evidencing necessary corporate action or
Governmental Action, if any, with respect to such Amendment Documents, certified
by the Secretary or an Assistant Secretary of such Loan Party to be correct and
complete and in full force and effect as of the date of execution of each such
document;
(g) a certificate of the Secretary or an Assistant Secretary of each
Loan Party as to the incumbency, and setting forth a specimen signature, of each
of the persons who has signed or will sign any Amendment Document, or any other
document delivered hereunder, on behalf of such Loan Party;
(h) one or more certificates of the appropriate Governmental Persons
of the States of Delaware and California, dated a recent date, certifying that
(i) such Loan Party has paid all franchise taxes in Delaware and California to
the date of such certificate and (ii) such Loan Party is duly incorporated and
in good standing under the laws of Delaware and is in good standing under the
laws of California;
(i) a certificate of each Loan Party, signed on behalf of such Loan
Party by its President or a Vice President and its Secretary or an Assistant
Secretary, certifying (i) that there has been no amendment on or after the
Closing Date to the bylaws of such Loan Party or to any of the Material
Contracts and the Commission Agreement to which such Loan Party is a party,
except as attached to such certificate and certified by such Loan Party to be
correct and complete and in full force and effect, (ii) that the charter
documents (including any amendments and other modifications) of such Loan Party
delivered to the Bank on or about January 30, 1997 have not been further amended
or otherwise further modified, (iii) that the representations and warranties
8
<PAGE>
of such Loan Party contained in each Credit Document are correct in all material
respects on and as of the date of such certificate, before and after giving
effect to the Amendment Documents, as though made on and as of the date of such
certificate, and (iv) that no event has occurred and is continuing, or would
result from the effectiveness of the Amendment Documents, that constitutes a
Default or an Event of Default;
(j) one or more favorable opinions of legal counsel to the Loan
Parties, to the effect that the Amendment Documents have been duly authorized,
executed and delivered by the Loan Parties, as applicable, and confirming the
opinion furnished on September 30, 1994 pursuant to Section 4.1(a)(viii) of the
Credit Agreement, with references therein to the Credit Documents to mean the
Credit Documents as amended by the Amendment Documents; and
(k) such other approvals, opinions and documents as the Bank may
reasonably request.
Section 3. Representations and Warranties of Borrower. The Borrower
---------- ------------------------------------------
represents and warrants to the Bank as set forth below.
(a) The execution, delivery and performance by the Borrower of the
Amendment Documents, and of the Credit Documents as amended thereby, to which
the Borrower is or is to be a party, and the consummation of the transactions
contemplated by such Amendment Documents and Credit Documents, are within the
Borrower's corporate powers, have been duly authorized by all necessary
corporate action and do not (i) contravene the Borrower's charter documents or
bylaws, (ii) violate any Governmental Rule, (iii) conflict with or result in the
breach of, or constitute a default under, any Material Contract, loan agreement,
indenture, mortgage, deed of trust or lease, or any other contract or instrument
binding on or affecting the Borrower or any of its properties, the conflict,
breach or default of which would be reasonably likely to have a materially
adverse effect on the business, condition (financial or otherwise), operations,
performance, properties or prospects of the Borrower or the ability of the
Borrower to perform its obligations under any of the Credit Documents, as
amended by the Amendment Documents, or (iv) result in or require the creation or
imposition of any Lien upon or with respect to any of the properties of the
Borrower, other than in favor of the Bank.
(b) Except for the recording of the Deed of Trust Modification in the
Official Records of San Bernardino, Riverside and Los Angeles Counties, no
Governmental Action is required for the due execution, delivery or performance
by the Borrower of any Amendment Document, or of any Credit Document as amended
thereby, to which the Borrower is a party.
(c) Each of the Amendment Documents, and each of the Credit Documents
as amended thereby, to which the Borrower is a party constitute legal, valid and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms, except as the enforceability thereof may
be limited by bankruptcy, insolvency, moratorium, reorganization or other
similar laws affecting creditors' rights generally.
(d) Each of the Collateral Documents, as amended by the Amendment
Documents, constitutes a valid and perfected first-priority Lien on the
Collateral purported to be
9
<PAGE>
covered thereby, enforceable against all third parties in all jurisdictions, and
secures the payment of all obligations of the Borrower under the Credit
Documents, as amended by the Amendment Documents; and the execution, delivery
and performance of the Amendment Documents do not adversely affect the Liens of
the Collateral Documents.
(e) The unaudited balance sheet of the Borrower as of June 30, 1997
and the related statements of income, retained earnings and cash flows of the
Borrower for the 6-month period then ended, certified by the chief financial
officer or chief accounting officer of the Borrower, fairly present the
financial condition of the Borrower as of such date and the results of the
operations of the Borrower for the 6-month period ended on such date, all in
accordance with generally accepted accounting principles applied on a consistent
basis. Since June 30, 1997 there has been no materially adverse change in the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Borrower. The Borrower has no contingent
liabilities, except as disclosed in such balance sheet or the notes thereto,
that would be reasonably likely to have a materially adverse effect on the
business, condition (financial or otherwise), operations, performance,
properties or prospects of the Borrower.
(f) There is no pending or, to the knowledge of the Borrower,
threatened action, suit, investigation, litigation or proceeding affecting the
Borrower before any Governmental Person or arbitrator that purports to affect
the legality, validity or enforceability of any Amendment Document or of any of
the Credit Documents as amended thereby.
Section 4. Reference to and Effect on Credit Documents.
---------- -------------------------------------------
(a) On and after the effective date of this Amendment, each reference
in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or
any other expression of like import referring to the Credit Agreement, and each
reference in the other Credit Documents to "the Credit Agreement," "thereunder,"
"thereof," "therein" or any other expression of like import referring to the
Credit Agreement, shall mean and be a reference to the Credit Agreement as
amended by this Amendment.
(b) Except as specifically amended by the Amendment Documents, the
Credit Agreement and the other Credit Documents shall remain in full force and
effect and are hereby ratified and confirmed. Without limiting the generality
of the foregoing, the Collateral Documents, as amended by the Amendment
Documents, and all of the Collateral described therein do and shall continue to
secure the payment of all obligations of the Borrower under the Credit
Documents, as amended by the Amendment Documents.
(c) The execution, delivery and effectiveness of the Amendment
Documents shall not operate as a waiver of any right, power or remedy of the
Bank under any of the Credit Documents or constitute a waiver of any provision
of any of the Credit Documents. The Borrower acknowledges and agrees that, as
of the date of this Amendment, it has no defenses, offsets or claims against the
Bank with respect to the Borrower's obligations to the Bank under the Credit
Documents.
Section 5. Costs and Expenses. The Borrower agrees to pay on demand all
---------- ------------------
reasonable
10
<PAGE>
costs and expenses of the Bank in connection with the preparation, execution and
delivery of the Amendment Documents and the other instruments and documents to
be delivered hereunder, including the reasonable fees and out-of-pocket expenses
of legal counsel for the Bank with respect thereto and with respect to advising
the Bank as to its rights and responsibilities hereunder and thereunder.
Section 6. Headings. The section headings used herein have been inserted
---------- --------
for convenience of reference only and do not constitute matters to be considered
in interpreting this Amendment.
Section 7. Execution in Counterparts. This Amendment may be executed in
---------- -------------------------
any number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
Section 8. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND
---------- -------------
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN THE STATE OF CALIFORNIA.
FONTANA WATER RESOURCES, INC.
By: /s/ Gerald A. Fawcett
---------------------
Gerald A. Fawcett
President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Richard P. DeGrey, Jr
-------------------------
Richard P. DeGrey, Jr.
Vice President
11
<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 January 20,
1998, with respect to the consolidated financial statements and schedules of
Kaiser Ventures Inc. and Subsidiaries included in this Annual Report (Form 10-K)
for the year ended December 31, 1997.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Riverside, California
March 26, 1998
93
<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, 1997 FORM 10-K REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,330,000
<SECURITIES> 0
<RECEIVABLES> 2,949,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,279,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 139,265,000
<CURRENT-LIABILITIES> 11,964,000
<BONDS> 8,982,000
0
0
<COMMON> 318,000
<OTHER-SE> 85,886,000
<TOTAL-LIABILITY-AND-EQUITY> 139,265,000
<SALES> 0
<TOTAL-REVENUES> 10,006,000
<CGS> 0
<TOTAL-COSTS> 3,654,000
<OTHER-EXPENSES> 4,161,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 672,000
<INCOME-PRETAX> 1,519,000
<INCOME-TAX> 671,000
<INCOME-CONTINUING> 848,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 848,000
<EPS-PRIMARY> $.08
<EPS-DILUTED> $.08
</TABLE>
