FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period to
Commission file number 0-15658
PETER KIEWIT SONS', INC.
(Exact name of registrant as specified in its charter)
Delaware 47-0210602
(State of Incorporation) (I.R.S. Employer
Identification No.)
1000 Kiewit Plaza, Omaha, Nebraska 68131
(Address of principal executive offices) (Zip Code)
402-342-2052
(Registrant's telephone number,
including area code)
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 report(s)), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of each class of the issuer's
common stock, as of August 1, 1995:
Class B Common Stock.................... 884,400 shares
Class C Common Stock...... ............. 13,943,665 shares
Class D Common Stock.................... 21,288,468 shares
PETER KIEWIT SONS', INC.
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statements of Earnings
Consolidated Condensed Balance Sheets
Consolidated Condensed Statements of Cash Flows
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Earnings
(unaudited)
Three months ended Six months ended
(dollars in millions, June 30, June 30,
except per share data) 1995 1994 1995 1994
Revenue $ 697 $ 656 $ 1,260 $ 1,194
Cost of Revenue (591) (555) (1,079) (1,022)
______ _______ _______ _______
106 101 181 172
General and Administrative
Expenses (53) (60) (108) (115)
______ _______ _______ ______
Operating Income 53 41 73 57
Other Income (Expense):
Gain on Subsidiary's
Stock Transactions,
net - 3 3 28
Investment Income, net 14 11 30 25
Interest Expense, net (6) (8) (24) (17)
Other, net 164 8 171 11
______ _______ _______ ______
172 14 180 47
Equity in Loss of MFS (43) (21) (85) (34)
______ _______ _______ ______
Earnings Before Income
Taxes and Minority
Interest 182 34 168 70
Provision for
Income Taxes (79) (10) (89) (25)
Minority Interest in
Net Income of
Subsidiaries (6) (2) (8) -
______ ______ ______ _____
Net Earnings $ 97 $ 22 $ 71 $ 45
====== ===== ======= =======
Earnings Attributable to
Class B & C Stock:
Net Earnings $ 36 $ 19 $ 34 $ 17
====== ====== ======= ======
Earnings per
Common and
Common Equivalent
Share $ 2.59 $ 1.24 $ 2.44 $ 1.10
====== ====== ======= =======
Earnings Attributable
to Class D Stock:
Net Earnings $ 61 $ 3 $ 37 $ 28
====== ====== ======= =======
Earnings per
Common and
Common Equivalent
Share $ 2.87 $ .14 $ 1.75 $ 1.35
====== ====== ======= =======
Cash Dividends per Common
Share:
B & C Stock $ .45 $ .45 $ .45 $ .45
====== ====== ======= =======
D Stock $ - $ - $ - $ -
====== ====== ======= =======
See accompanying notes to consolidated condensed financial
statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
June 30, December 31,
1995 1994
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 434 $ 400
Marketable securities 528 910
Receivables, less allowance
of $9 and $9 311 414
Note receivable from sale of
discontinued operations - 29
Costs and earnings in
excess of billings
on uncompleted contracts 130 126
Investment in construction
joint ventures 62 69
Deferred income taxes 65 74
Other 55 93
______ ______
Total Current Assets 1,585 2,115
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $665 and $731 630 1,244
Investments 450 314
Intangible Assets, net 401 749
Net Assets of MFS 447 -
Other Assets 72 82
______ ______
$3,585 $4,504
====== ======
See accompanying notes to consolidated condensed financial
statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
June 30, December 31,
(dollars in millions, 1995 1994
except per share data) (unaudited)
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 211 $ 344
Current portion of long-term debt:
Telecommunications 9 26
Other 5 7
Accrued costs and billings in excess
of revenue on uncompleted contracts 133 143
Accrued insurance costs 74 75
Other 151 218
______ _______
Total Current Liabilities 583 813
Long-Term Debt, less current portion:
Telecommunications 290 827
Other 89 81
Deferred Income Taxes 314 302
Retirement Benefits 48 67
Accrued Reclamation Costs 103 103
Other Liabilities 123 127
Minority Interest 193 448
Stockholders' Equity:
Preferred stock, no par value,
Authorized 250,000 shares: no shares
outstanding - -
Common stock, $.0625 par value,
$1.7 billion aggregate redemption
value:
Class B, authorized 8,000,000 shares:
884,400 outstanding in 1995 and
1,000,400 in 1994 - -
Class C, authorized 125,000,000 shares:
13,944,365 outstanding in 1995 and
15,087,028 in 1994 1 1
Class D, authorized 50,000,000 shares:
21,288,468 outstanding in 1995 and
20,391,568 in 1994 1 1
Additional paid-in capital 207 182
Foreign currency adjustment (4) (7)
Net unrealized holding gains (losses) 8 (8)
Retained earnings 1,629 1,567
______ ______
Total Stockholders' Equity 1,842 1,736
______ ______
$3,585 $4,504
====== ======
See accompanying notes to consolidated condensed financial
statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Cash Flows
(unaudited)
Six months ended
June 30,
(dollars in millions) 1995 1994
Cash flows from operations:
Net cash provided by continuing operations $ 208 $ 60
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities and investments 261 856
Purchases of marketable securities (203) (909)
Proceeds from sales of property, plant
and equipment, 9 9
Capital expenditures (83) (170)
Acquisitions, excluding cash acquired (143) (236)
Investment in CECI (29) (12)
Deferred development costs and other (21) (37)
______ _____
Net cash used in investing activities (209) (499)
Cash flows from financing activities:
Issuances of subsidiary's stock - 3
Proceeds from long-term debt borrowings 31 659
Payments on long-term debt, including
current portion (11) (184)
Repurchases of common stock (6) (30)
Issuances of common stock 26 19
Dividends paid (13) (13)
______ _____
Net cash provided by financing activities 27 454
Cash flows from proceeds due to sales
of discontinued packaging operations 29 7
Cash and cash equivalents of MFS at
beginning of period (22) -
Effect of exchange rates on cash 1 (3)
______ _____
Net change in cash and cash equivalents 34 19
Cash and cash equivalents at beginning of period 400 296
______ _____
Cash and cash equivalents at end of period $ 434 $ 315
====== =====
Noncash investing activities:
Issuance of MFS stock for purchase of
telecommunications companies - $ 23
MFS stock transactions to settle
contingent purchase price liability - 25
See accompanying notes to consolidated condensed financial
statements.
PETER KIEWIT SONS', INC
Notes to Consolidated Condensed Financial Statements
1. Basis of Presentation:
The consolidated condensed balance sheet of Peter Kiewit
Sons', Inc. ("PKS") and subsidiaries (the "Company") at December
31, 1994 has been condensed from the Company's audited balance
sheet as of that date. All other financial statements contained
herein are unaudited and, in the opinion of management, contain all
adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of financial position and results
of operations for the periods presented. The Company's accounting
policies and certain other disclosures are set forth in the notes
to the consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
The PKS Board of Directors preliminarily approved a plan to
make a tax-free distribution of its entire ownership interest in
MFS Communications Company, Inc. ("MFS") to the Class D
stockholders at a special meeting on June 9, 1995 (See Note 5).
The operating results of MFS have been classified as a single line
item on the statements of earnings for the three and six month
periods ended June 30, 1995 and 1994. The Company's proportionate
share of the net assets of MFS at June 30, 1995 of $447 million
have been reported separately in the consolidated balance sheet.
Operating results of MFS are summarized as follows (dollars in
millions):
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Revenue $140 $ 61 $258 $96
Loss from operations (59) (27) (115) (46)
Net loss (65) (32) (129) (50)
PKS equity in net
loss (43) (21) (85) (34)
At June 30, 1995 the net assets of MFS were as follows:
Assets:
Current $ 522
Networks and equipment, net 902
Other assets, net 403
______
Total 1,827
Liabilities:
Current 235
Long-term debt 597
Other noncurrent 32
______
Total 864
______
Net Assets $ 963
======
PKS Equity in Net Assets of MFS $ 447
======
Included in the net assets of MFS are $307 million of proceeds
from the offering of convertible preferred stock of which the
Company has no ownership interest.
The Company has approximately $93 million of deferred tax
liabilities recorded on gains from MFS stock transactions that
would no longer be payable if the distribution is consummated.
Marketable securities at June 30, 1995 and December 31, 1994
include approximately $57 million and $61 million, respectively, of
investments which are being held by the owners of various
construction projects in lieu of retainage. Receivables at June
30, 1995 and December 31, 1994 include approximately $56 million
and $48 million, respectively, of retainage on uncompleted projects
the majority of which is expected to be collected within one year.
Where appropriate, items within the consolidated condensed
financial statements have been reclassified from the previous
periods to conform to current year presentation.
PETER KIEWIT SONS', INC
Notes to Consolidated Condensed Financial Statements
2. Earnings Per Share:
Primary earnings per share of common stock have been computed
using the weighted average number of shares outstanding during each
period. Fully diluted earnings per share have not been presented
because it is not materially different from primary earnings per
share. The number of shares used in computing earnings per share
was as follows:
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Class B&C 13,998,740 15,232,250 13,954,135 15,306,347
Class D 21,257,541 20,446,882 21,261,632 20,497,789
3. Summarized Financial Information:
Holders of Class B&C Stock (Construction & Mining Group) and
Class D Stock (Diversified Group) are stockholders of PKS. The
Construction & Mining Group contains the Company's construction
operations and certain mining services. The Diversified Group
contains coal mining properties, telecommunications subsidiaries,
a data management services company, a minority interest in
California Energy Company, Inc. ("CECI") and miscellaneous
investments. Corporate assets and liabilities which are not
separately identified with the ongoing operations of the
Construction & Mining Group or the Diversified Group are allocated
equally between the two groups.
A summary of the results of operations and financial position
for the Construction & Mining Group and the Diversified Group
follows. The summary information for December 31, 1994 was derived
from the audited financial statements of the respective groups
which were exhibits to the 1994 Annual Report. All other summary
information was derived from the unaudited financial statements of
the respective groups which are exhibits to this Form 10-Q. All
significant intercompany accounts and transactions, except those
directly between the Construction & Mining Group and the
Diversified Group, have been eliminated.
Construction & Mining Group:
(In millions, except per share data)
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Results of Operations:
Revenue $ 562 $ 528 $ 988 $ 939
Net earnings $ 36 $ 19 $ 34 $ 17
Earnings per share $2.59 $1.24 $2.44 $1.10
June 30, December 31,
1995 1994
Financial Position:
Working capital $ 290 $ 333
Total assets 967 967
Long-term debt, less
current portion 7 9
Stockholders' equity 503 505
PETER KIEWIT SONS', INC
Notes to Consolidated Condensed Financial Statements
3. Summarized Financial Information (continued):
Included within earnings before income taxes is mine service
income from the Diversified Group of $7 million and $8 million
for the three months ended June 30, 1995 and 1994 and $15 million
for each of the six months ended June 30, 1995 and 1994.
Diversified Group:
(In millions, except per share data)
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Results of Operations:
Revenue $ 135 $ 128 $ 274 $ 255
Net earnings $ 61 $ 3 $ 37 $ 28
Earnings per share $2.87 $ .14 $1.75 $1.35
June 30, December 31,
1995 1994
Financial Position:
Working capital $ 712 $ 969
Total assets 2,633 3,549
Long-term debt, less
current portion 372 899
Stockholders' equity 1,339 1,231
Included within earnings before income taxes is mine
management fees paid to the Construction & Mining Group of $7
million and $8 million for the three months ended June 30, 1995 and
1994 and $15 million for each of the six months ended June 30, 1995
and 1994.
4. Acquisitions:
In February 1995, CECI, an equity method investee, completed
the purchase of Magma Power Company. The cash transaction, valued
at $950 million was partially financed by the sale of 17 million
shares of common stock at $17 per share. As part of this offering,
the Company purchased 1.5 million shares. In addition, during the
second quarter of 1995, the Company purchased an additional 200,000
common shares of CECI. The Company owns 22% of CECI's outstanding
common stock. Following these transactions, the Company's
cumulative investment in CECI common stock totals $146 million, $38
million in excess of the Company's proportionate share of CECI's
equity.
C-TEC Corporation ("C-TEC"), completed the first step of an
acquisition of Twin County Trans Video, Inc. ("Twin County") in May
1995. Twin County provides cable television service to 74,000
subscribers in eastern Pennsylvania. In consideration for 40% of
the capital stock of Twin County, C-TEC paid $26 million in cash
and issued a $4 million note of its subsidiary, C-TEC Cable
Systems, Inc. In addition, C-TEC paid $11 million in consideration
of a noncompete agreement. The acquisition of the remaining shares
is expected to be completed by year end.
In January 1995, C-TEC entered into an agreement to purchase
Buffalo Valley Telephone Company. The aggregate consideration for
the purchase ($55 million) will be a combination of cash and
convertible preferred stock in the Telephone Group of C-TEC. The
transaction is expected to close during 1995. Buffalo Valley
Telephone Company provides local telephone service to 17,300 access
lines in central Pennsylvania.
Also in January, 1995, C-TEC purchased, for $84 million in
cash, a 40% equity position in Megacable, S.A. De C.V., Mexico's
second largest cable television operator with 174,000 subscribers
in twelve cities. The purchase price is subject to adjustments
based on fourth quarter 1995 exchange rates.
5. Other Matters:
MFS Spin-off
PKS' management asked the Internal Revenue Service ("IRS") to
issue a ruling (the "Ruling") that would permit PKS to make a tax-
free distribution of its entire ownership interest in MFS to the
Class D stockholders (the "Spin-off"). In June 1995, PKS received
the Ruling from the IRS confirming that the Spin-off will be tax-
free to the holders of Class D Stock for United States federal
income tax purposes. The PKS Board of Directors preliminarily
approved the plan to implement the Spin-off (the "Plan") at a
special meeting on June 9, 1995.
In order to satisfy certain requirements of applicable tax law
relating to the Spin-off that are addressed by the Ruling, PKS and
Kiewit Diversified Group Inc., a wholly owned first-tier subsidiary
of PKS ("KDG") have agreed with MFS to effect a recapitalization of
MFS pursuant to which KDG would exchange 2,900,000 of the
42,962,658 shares of MFS Common Stock currently held by KDG for
15,000,000 shares of high-vote convertible preferred stock (the
"MFS Recapitalization").
The MFS Recapitalization has been approved by the MFS Board of
Directors, and by a special committee of the MFS Board of Directors
comprised solely of independent directors of MFS. Consummation of
the MFS Recapitalization is subject to approval by the holders of
MFS Common Stock at the MFS 1995 annual stockholders meeting, to be
held on August 24, 1995. In connection with obtaining approval of
the holders of MFS Common Stock, PKS has agreed to vote all of the
shares of MFS Common Stock owned or controlled by it in the same
manner as the majority of the non-PKS holders of MFS Common Stock
present in person or by proxy at the meeting vote. Thus, the MFS
Recapitalization will be approved only if supported by a majority
of such non-PKS stockholders of MFS. If the MFS Recapitalization
is not approved by the holders of MFS Common Stock, the MFS
Preferred Stock will not be issued and the Spin-off will not occur.
If the MFS Recapitalization is approved, it would be consummated
immediately prior to the Spin-off and PKS would distribute to Class
D stockholders both the MFS preferred stock and all of the common
stock of MFS then held by PKS.
The Plan provides for an exchange offer (the "Exchange Offer")
by PKS for Class D Stock, to be completed before the Spin-off.
Under an Exchange Offer, PKS would offer to exchange Class D Stock
for some or all of its outstanding Class B Stock and Class C Stock
("Class B&C Stock") on terms similar to those upon which Class B&C
Stock can be converted into Class D Stock during the annual
conversion period provided in the Company's Certificate of
Incorporation. It is presently expected that once the
registration statement presently on file with the Securities and
Exchange Commission is declared effective, the Exchange Offer will
be open for approximately four weeks, (the "Expiration Date")
unless the Exchange Offer is extended, abandoned, or modified.
The Company currently expects that, if the holders of a
majority of the MFS Common Stock present in person or by proxy and
voting at the 1995 MFS annual stockholders meeting, approve the MFS
Recapitalization, the Spin-off dividend will be declared as of, and
paid to holders of Class D Stock of record as of, the day after the
Expiration Date. If such favorable vote is not received, the
Exchange Offer will be abandoned, and the Spin-off will not occur.
Further, PKS reserves the right to abandon the Exchange Offer, or
both the Exchange Offer and the Spin-off, if the PKS Board of
Directors determines at any time that such abandonment would be in
the best interest of PKS and its stockholders, and PKS will abandon
the Exchange Offer if it abandons the Spin-off.
PKS also reserves the right to extend the Exchange Offer or to
modify in any manner the terms and conditions of the Exchange Offer
or the Spin-off or to defer the consummation of the Exchange Offer
or the Spin-off if the PKS Board of Directors determines at any
time that such action would be in the best interest of PKS and its
stockholders. Modification of the terms and conditions of the
Exchange Offer may include imposition by PKS of a limit on the
number of shares of Class B&C Stock that will be accepted by PKS in
the Exchange Offer.
Kinross Transaction
On June 26, 1995, the Company exchanged its interest in a
wholly-owned subsidiary involved in gold mining activities for 4
million common shares of Kinross Gold Corporation ("Kinross"), a
publicly traded corporation. The Company recognized a $21 million
pre-tax gain on the exchange based on the difference between the
book value of the subsidiary and the fair market value of the
Kinross stock on the date of the transaction.
MFS Litigation
In 1994, several former stockholders of a MFS subsidiary filed
a lawsuit against MFS, KDG and the chief executive officer of MFS,
in the United States District Court for the Northern District of
Illinois, Case No. 94C-1381. These shareholders sold shares of the
subsidiary to MFS in September 1992. MFS completed an initial
public offering in May 1993. Plaintiffs allege that MFS
fraudulently concealed material information about its plans from
them causing them to sell their shares at an inadequate price.
Plaintiffs have alleged damages of at least $100 million.
Defendants have meritorious defenses and intend to vigorously
contest this lawsuit. Defendants expect that a trial will be held
in the fall of 1995. Prior to the initial public offering, KDG
agreed to indemnify MFS against any liabilities arising from the
September 1992 sale; if MFS is deemed to be liable to plaintiffs,
KDG will be required to satisfy MFS' liabilities pursuant to the
indemnity agreement. Any judgement or settlement payments would
be treated as an adjustment of the original purchase price and
recorded as additional goodwill. If the Spin-off is approved by the
Company's Board of Directors and is consummated, KDG would remain
obligated to satisfy these liabilities.
Whitney Litigation:
In 1974, a subsidiary of the Company ("Kiewit"), entered into
a lease with Whitney Benefits,Inc., a Wyoming charitable
corporation ("Whitney"). Whitney was the owner, and Kiewit was the
lessee, of a coal deposit underlying a 1,300 acre tract in Sheridan
County, Wyoming. The coal was rendered unmineable by the Surface
Mining Control and Reclamation Act of 1977 ("SMCRA"), which
prohibited surface mining of coal in certain alluvial valley floors
significant to farming. In 1983, Kiewit and Whitney filed an
action, now titled Whitney Benefits, Inc. and Peter Kiewit Sons'
Co. v. The United States, in the U.S. Court of Federal Claims (the
"Claims Court"), alleging that the enactment of SMCRA constituted
a taking of their coal without just compensation. In 1989, the
Claims Court ruled that a taking had occurred and awarded the
plaintiffs the 1977 fair market value of the property ($60 million)
plus interest. In 1991, the U.S. Court of Appeals for the Federal
Court affirmed the decision of the Claims Court and the U.S.
Supreme Court denied certiorari. The government filed two post-
trial motions in the Claims Court during 1992. The government
requested a new trial to redetermine the 1977 value of the
property. The government also filed a motion to reopen and set
aside the 1989 judgment as void and to dismiss plaintiffs'
complaint for lack of jurisdiction. In May 1994, the Claims Court
entered an order denying both motions. In February 1994, the
Claims Court issued an opinion which provided that the $60 million
judgment would bear interest compounded annually from 1977 until
payment. The government appealed the February 1994 and May 1994
orders. A hearing on the appeals was held in February 1995.
On May 5, 1995, the government and the plaintiffs entered into
a settlement agreement. In settlement of all claims, the
government agreed to pay plaintiffs $200 million and plaintiffs
agreed to deed the coal underlying the real property to the
government. Kiewit and Whitney agreed in 1992 that Kiewit would
receive 67.5 percent of any award and Whitney would receive the
remainder. Peter Kiewit Sons' Co., a subsidiary of KDG, received
approximately $135 million on June 2, 1995.
Other Litigation
The Company is involved in other various lawsuits, claims and
regulatory proceedings incidental to its business. Management
believes that any resulting liability for legal proceedings beyond
that provided should not materially affect the Company's financial
position or results of operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Separate management's discussion and analysis of financial
condition and results of operations for the Kiewit Construction &
Mining Group and the Kiewit Diversified Group have been filed as
Exhibits 99.A and 99.B to this report. The Company will furnish
without charge a copy of such exhibits upon the written request of
a stockholder addressed to Stock Registrar, Peter Kiewit Sons',
Inc., 1000 Kiewit Plaza, Omaha, Nebraska 68131.
Results of Operations - Second Quarter 1995 vs. Second Quarter 1994
Revenue from each of the Company's business segments for the
three months ended June 30 comprised the following (in millions):
1995 1994
Construction $ 547 $ 517
Mining 62 62
Telecommunications 79 73
Other 9 4
_____ _____
$ 697 $ 656
===== =====
Construction:
Construction revenue rose 6% in the second quarter of 1995
compared to the second quarter of 1994. The increase is due to the
performance of additional work on joint ventures during this
period. Contract backlog at June 30, 1995 was $2.5 billion, of
which 13% is attributable to foreign operations, principally,
Canada and the Philippines. Projects on the west coast account for
38% of the total backlog which includes San Joaquin Toll Road
backlog of $260 million. San Joaquin is scheduled for completion
in 1997. Of the total backlog, $1.5 billion is not expected to be
completed during 1995. Backlog at June 1994, was $2.2 billion.
Gross margin on construction contracts increased to 8.2% from
7.4% during the same period in 1994 primarily as a result of a
claim settlement on a completed joint venture contract.
Mining:
Mining revenue, primarily coal sales, remained flat between
periods. A decrease in coal spot sale revenue was offset by an
increase in alternate source coal sales. The increased margin from
alternate source coal sales was offset by an increase in lower-
margin gold sales, an increase in coal sales to a large customer at
contract prices less than those of other primary customers and
renegotiated coal sales contract prices with certain customers.
Coal spot sales and their margins declined in 1995 as compared to
1994. The overall mining margin was 45% in 1995 and 49% in 1994
and is expected to continue to decline during the remainder of 1995
due to the factors mentioned above.
Telecommunications:
C-TEC's revenues increased from $73 million in 1994 to $79
million in 1995. C-TEC's 1994 revenue includes $8 million from its
cellular business which was sold during the third quarter of 1994.
The increase is primarily attributable to C-TEC's Cable and Long
Distance Groups which had increased revenues of $7 million and $5
million, respectively. Increased Cable Group revenues are
primarily due to the addition of 15,000 subscribers over the 1994
period and a revenue increase of approximately $4 million resulting
from the acquisition of Twin County in May 1995. The Long Distance
Group's sales increased due primarily to the resale of tariff
services to another long distance seller. The Group's arrangement
for sales of this product is expected to terminate later in 1995.
Increased Cable Group revenues were partially offset by
increased operating expenses associated with the addition of Twin
County subscribers and to higher basic programming costs resulting
from additional subscribers, rate increases and new channels,
however, operating income of this group improved in 1995. The
operating income of the Long Distance Group also improved in 1995
as the increased revenues described above were only partially
offset by increased operating costs.
C-TEC's Telephone Group revenues and operating income were
relatively flat between the 1995 and 1994 periods.
General and Administrative Expenses:
General and administrative costs declined 12% during the 2nd
quarter of 1995 as compared to the 2nd quarter of 1994. The sale
of C-TEC's mobile services group and an overall reduction in the
overhead costs attributable to C-TEC's current operating units were
primarily responsible for the decline. Partially offsetting these
declines were higher professional service fees associated with the
MFS spin-off.
Investment Income, net:
Investment income increased 27% for the three months ended
June 30, 1995 compared to the same period in 1994. Proceeds from
C-TEC's rights offering, the sale of C-TEC's mobile services group
and the settlement of the Whitney litigation resulted in a higher
average portfolio balance and an increase in investment income.
Interest Expense, net:
Interest expense decreased by $2 million in 1995 primarily due
to a decline in interest expense incurred by C-TEC from the
repayment of debt in the fourth quarter of 1994.
Other Income, net:
The settlement of the Whitney litigation for $135 million and
the gain from the Kinross transaction of $21 million comprise the
majority of other income in 1995. The remaining income is
comprised of gains and losses from the sale of operating assets and
other miscellaneous activities.
MFS Operations:
The telecommunications services revenue of MFS increased from
$47 million in 1994 to $117 million in 1995. The increase
partially relates to the acquisition of Centex, which was acquired
in May 1994, and to the acquisitions of RealCom and Cylix, which
were acquired in the fourth quarter of 1994. The remaining
increase resulted primarily from increased market penetration of
all other telecommunication services of MFS. Telecommunication
services operating expenses of MFS increased to $149 million in
1995 from $59 million in 1994. The primary reasons for the
increase in these costs are the acquisitions of Centex, RealCom and
Cylix in 1994, the expansion activities of MFS Intelenet, MFS
Datanet and MFS International and costs associated with new and
expanded networks. MFS expects to incur additional significant
expenses expanding its integrated, single-source telecommunications
services, high speed data communications and international services
throughout 1995.
Third-party revenue from services offered by MFS' network
integration services segment increased to $27 million from $15
million in 1994. The increase relates primarily to two projects.
Network systems integration services operating expenses increased
at approximately the same rate as revenues creating a small loss
from operations in both periods.
Income Taxes:
The effective income tax rate for the quarter ended June 30,
1995 differs from the expected statutory rate of 35% due primarily
to net operating loss limitations on losses generated by MFS.
Results of Operations - Six Months 1995 vs. Six Months 1994:
Revenue from each of the Company's business segments for the
six months ended June 30 comprised the following (in millions):
1995 1994
Construction $ 966 $ 922
Mining 127 119
Telecommunications 152 145
Other 15 8
______ ______
$1,260 $1,194
====== ======
Construction:
Construction revenues increased by 5% during the first six
months of 1995 compared to the same period in 1994. The increase
relates to additional joint venture activity and the inclusion of
an additional two months of materials revenue generated by the
APAC-Arizona companies which were acquired on February 28, 1994.
Gross margins on construction contracts were 5.5% in 1995 and
1994.
Mining:
Mining revenues, primarily coal sales, increased 7% in 1995.
The increase in revenue is primarily attributable to additional
alternate source coal sales. The increased margins from alternate
source coal sales were offset by an increase in lower-margin gold
sales, an increase in coal sales to a large customer at contract
prices less than those of other primary customers and renegotiated
coal sales contract prices with certain customers. Coal spot sales
and their margins declined in 1995 as compared to 1994. The
overall mining margin was 47% in 1995 and 48% in 1994 and is
expected to continue to decline during the remainder of 1995 due to
the factors mentioned above.
Telecommunications:
C-TEC's revenue increased from $145 million in 1994 to $152
million in 1995. C-TEC's 1994 revenue includes $15 million from
its cellular business which was sold during the third quarter of
1994. The increase is primarily attributable to C-TEC's Cable and
Long Distance Groups which had increased revenues of $7 million and
$11 million, respectively. Increased Cable Group revenues are
primarily due to an increase in the number of subscribers and a
revenue increase of approximately $4 million resulting from the
acquisition of Twin County in May 1995. The Long Distance Group's
sales increased due primarily to the resale of tariff services to
another long distance seller. The Group's arrangement for sales of
this product is expected to terminate later in 1995.
Increased Cable Group revenues were partially offset by
increased operating expenses associated with the addition of Twin
County subscribers and to higher basic programming costs resulting
from additional subscribers, rate increases and new channels,
however, operating income of this group improved in 1995. The
operating income of the Long Distance Group also improved in 1995
as the increased revenue described above was only partially offset
by increased operating costs.
C-TEC's Telephone Group revenues and operating income were
relatively flat between the 1995 and 1994 periods.
General and Administrative Expenses:
General and administrative costs declined 6% during the six
months of 1995 as compared to the same period of 1994. The sale of
C-TEC's mobile services group and an overall reduction in the
overhead costs attributable to C-TEC's current operating units were
primarily responsible for the decline. Partially offsetting these
declines were higher professional service fees associated with the
MFS spin-off.
Gain on Subsidiary's Stock Transactions, net:
The issuance of MFS stock for acquisitions by MFS and the
exercise of MFS employee stock options resulted in a $3 million net
gain to the Company in 1995. In 1994 the Company settled a
contingent purchase price adjustment resulting from MFS' 1990
purchase of Chicago Fiber Optics Corporation ("CFO"). The former
shareholders of CFO accepted MFS stock previously held by the
Company, valued at market prices, as payment of the obligation.
This transaction along with the issuances of stock for acquisitions
and employee stock options, resulted in a $28 million net gain
before taxes. The Company had recognized gains and losses from
sales and issuances of stock by MFS on the consolidated statement
of earnings, but the Company is now contemplating a spin-off (See
Note 5). Current accounting principles require recognition of the
above transactions as capital transactions when a spin-off is
contemplated. If the spin-off of MFS is completed, these types of
gains will no longer be recognized for MFS transactions.
Investment Income, net:
Investment income increased 20% for the six months ended June
30, 1995 compared to the same period in 1994. Proceeds from C-
TEC's rights offering, the sale of C-TEC's mobile services group
and the settlement of the Whitney litigation resulted in a higher
average portfolio balance and an increase in interest and dividend
income. Partially offsetting this increase were higher losses on
the disposition of marketable securities in 1995.
Interest Expense, net:
Interest expense increased by $7 million in 1995. Tax
deficiency interest expense of $11 million incurred in 1995 was
partially offset by a decline in interest expense incurred by C-TEC
due to the repayment of debt in the fourth quarter of 1994.
Other Income, net:
The settlement of the Whitney litigation for $135 million and
the gain from the Kinross transaction of $21 million comprise the
majority of other income in 1995. The remaining income is
comprised of gains and losses from the sale of operating assets and
other miscellaneous activities.
MFS Operations:
MFS' telecommunications services revenue increased to $221
million from $69 million in 1994. The increase primarily relates
to the acquisitions of Centex, RealCom and Cylix in 1994. The
remaining increase resulted primarily from increased market
penetration of all other telecommunication services of the Company.
MFS telecommunications services operating expenses increased to
$284 million from $88 million in 1994. The increase relates in
part to the acquisitions of Centex, RealCom and Cylix in 1994. In
addition, operating expenses increased due to expansion activities
of MFS Intelenet, MFS Datanet and MFS International and costs
associated with new and expanded networks. MFS expects to incur
additional significant expenses expanding its integrated, single-
source telecommunications services, high-speed data communications
and international services throughout 1995.
Third-party revenue from services offered by MFS' network
integration services segment, increased to $38 million from $27
million in 1994. The increase relates primarily to two projects.
Network systems integration services operating expenses increased
at approximately the same rate as revenues producing a small loss
from operations in both periods.
Income Taxes:
The effective income tax rate for the first six months of 1995
differs from the expected statutory rate of 35% due primarily to
net operating loss limitations on losses generated by MFS.
Financial Condition - June 30, 1995 vs. December 31, 1994
The Company's working capital, exclusive of MFS, decreased $17
million or 2% during the first six months of 1995. The decrease
was mainly due to cash flows from operations, including the Whitney
settlement of $135 million, being offset by significant investing
activities of $209 million.
Investing activities include $83 million of capital
expenditures and $172 million of investments. The investments
include C-TEC's $84 million outlay for 40% of Megacable and $38
million outlay for Twin County, KDG's $29 million purchase of
CECI's stock, $8 million outlay for a 19% interest in a healthcare
software development company and an additional $6 million
investment in a Philippine power project.
Financing sources for the six months include $14 million of
borrowings for the construction financing of a privately owned toll
road, $17 million of C-TEC borrowings on the Cable Group's
revolving credit agreement and $26 million from the sale of the
Company's common stock. Financing uses consisted of $5 million of
payments on stockholders' notes, $6 million for stock repurchases,
and $13 million of Construction & Mining Group stock dividends.
In 1995, the Company received the final payment ($29 million)
for the sale of certain discontinued packaging operations.
In addition to the C-TEC activities described below, the
Company anticipates investing between $45 and $85 million annually
in its construction and mining businesses, making significant (over
$50 million in 1995) investments in its energy businesses -
including its joint venture agreement with CECI covering
international power project development activities and searching
for opportunities to acquire capital intensive businesses which
provide for long-term growth. Other long-term liquidity uses
include payment of income taxes and the repurchase of stock. The
Company's current financial condition and borrowing capacity should
be sufficient for future operating activities and investing
activities, however, in the event of an MFS spin-off, the
Construction & Mining Group may incur debt in order to fund stock
conversions.
C-TEC intends to utilize its available cash and revolving
credit balances to fund operating activities, finance the pending
acquisition of Buffalo Valley, and to develop full service
networks.
See the "Other Matters" note to the consolidated condensed
financial statements with respect to the MFS spin-off.
PETER KIEWIT SONS', INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
In 1974, a subsidiary of the Company ("Kiewit"), entered into
a lease with Whitney Benefits,Inc., a Wyoming charitable
corporation ("Whitney"). Whitney was the owner, and Kiewit was the
lessee, of a coal deposit underlying a 1,300 acre tract in Sheridan
County, Wyoming. The coal was rendered unmineable by the Surface
Mining Control and Reclamation Act of 1977 ("SMCRA"), which
prohibited surface mining of coal in certain alluvial valley floors
significant to farming. In 1983, Kiewit and Whitney filed an
action, now titled Whitney Benefits, Inc. and Peter Kiewit Sons'
Co. v. The United States, in the U.S. Court of Federal Claims (the
"Claims Court"), alleging that the enactment of SMCRA constituted
a taking of their coal without just compensation. In 1989, the
Claims Court ruled that a taking had occurred and awarded the
plaintiffs the 1977 fair market value of the property ($60 million)
plus interest. In 1991, the U.S. Court of Appeals for the Federal
Court affirmed the decision of the Claims Court and the U.S.
Supreme Court denied certiorari. The government filed two post-
trial motions in the Claims Court during 1992. The government
requested a new trial to redetermine the 1977 value of the
property. The government also filed a motion to reopen and set
aside the 1989 judgment as void and to dismiss plaintiffs'
complaint for lack of jurisdiction. In May 1994, the Claims Court
entered an order denying both motions. In February 1994, the
Claims Court issued an opinion which provided that the $60 million
judgment would bear interest compounded annually from 1977 until
payment. The government appealed the February 1994 and May 1994
orders. A hearing on the appeals was held in February 1995.
On May 5, 1995, the government and the plaintiffs entered into
a settlement agreement. In settlement of all claims, the
government agreed to pay plaintiffs $200 million and plaintiffs
agreed to deed the coal underlying the real property to the
government. Kiewit and Whitney agreed in 1992 that Kiewit would
receive 67.5 percent of any award and Whitney would receive the
remainder. Peter Kiewit Sons' Co., a subsidiary of Kiewit
Diversified Group Inc., received approximately $135 million on
June 2, 1995.
Item 6. Exhibits & Reports on Form 8-K:
(a) Exhibits filed as part of this report are listed below:
Exhibit
Number
27 Financial Data Schedule (for electronic filing purposes
only)
99.A Kiewit Construction & Mining Group Financial Statements
and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.B Kiewit Diversified Group Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(b) No reports on Form 8-K were filed by the Company during the
second quarter of 1995.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
PETER KIEWIT SONS', INC.
Dated: August 14, 1995 /s/ R.E. Julian
Robert E. Julian
Executive Vice President
Chief Financial Officer
PETER KIEWIT SONS', INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
No.
27 Financial Data Schedule (For electronic filing purposes
only)
99.A Kiewit Construction & Mining Group Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.B Kiewit Diversified Group Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Exhibit 99.A
KIEWIT CONSTRUCTION & MINING GROUP
Index to Financial Statements and
Management's Discussion and Analysis
of Financial Condition and Results of
Operations
Financial Statements:
Condensed Statements of Earnings for the
three months ended June 30, 1995 and 1994 and the
six months ended June 30, 1995 and 1994
Condensed Balance Sheets as of June 30, 1995
and December 31, 1994
Condensed Statements of Cash Flows for the
six months ended June 30, 1995 and 1994
Notes to Condensed Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Statements of Earnings
(unaudited)
Three months ended Six months ended
June 30, June 30,
(dollars in millions) 1995 1994 1995 1994
Revenue $ 562 $ 528 $ 988 $ 939
Cost of Revenue (516) (485) (925) (878)
______ ______ ______ ______
46 43 63 61
General and Administrative
Expenses (29) (29) (61) (62)
______ ______ ______ ______
Operating Income (Loss) 17 14 2 (1)
Other Income (Expense):
Investment Income, net 3 4 6 6
Interest Expense - (1) (1) (1)
Other, net 35 12 46 22
_____ ______ ______ ______
38 15 51 27
_____ ______ ______ ______
Earnings Before
Income Taxes 55 29 53 26
Provision for Income Taxes (19) (10) (19) (9)
_____ ______ ______ ______
Net Earnings $ 36 $ 19 $ 34 $ 17
====== ====== ====== ======
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Balance Sheets
June 30, December 31,
1995 1994
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 84 $ 70
Marketable securities 100 156
Receivables, less allowance of
$7 and $7 244 260
Costs and earnings in excess of
billings on uncompleted
construction contracts 130 101
Investment in construction
joint ventures 62 69
Deferred income taxes 54 59
Other 21 23
_____ ______
Total Current Assets 695 738
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $404 and $395 161 140
Deferred Income Taxes - 4
Other Assets 111 85
_____ ______
$ 967 $ 967
===== ======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, including retainage
of $42 and $41 $ 169 $ 179
Current portion of long-term debt 2 3
Accrued construction costs and
billings in excess of revenue
on uncompleted contracts 119 106
Accrued insurance costs 74 73
Other 41 44
_____ ______
Total Current Liabilities 405 405
Long-Term Debt, less current portion 7 9
Deferred Income Taxes 5 -
Other Liabilities 47 48
Stockholders' Equity (Redeemable
Common Stock, $372 million
aggregate redemption value)
Common equity 508 513
Net unrealized holding losses - (1)
Foreign currency adjustment (5) (7)
_____ ______
Total Stockholders' Equity 503 505
_____ ______
$ 967 $ 967
===== ======
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Statements of Cash Flows
(unaudited)
Six months ended
June 30,
dollars in millions) 1995 1994
Cash flows from operations:
Net cash provided by operations $ 47 $ 42
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 147 138
Purchases of marketable securities (89) (97)
Proceeds from sales of property, plant
and equipment 9 6
Capital expenditures (47) (41)
Acquisition of APAC-Arizona, Inc. - (47)
Other (4) (7)
_____ _____
Net cash provided by (used in)
investing activities 16 (48)
Cash flows from financing activities:
Payments on long-term debt, including
current portion (2) (4)
Issuances of common stock 24 19
Repurchases of common stock (4) (9)
Dividends paid (13) (13)
Exchange of Class B&C Stock for Class D
Stock, net (54) (42)
_____ _____
Net cash used in financing activities (49) (49)
Effect of exchange rates on cash - (2)
_____ _____
Net change in cash and cash equivalents 14 (57)
Cash and cash equivalents at beginning
of period 70 99
_____ _____
Cash and cash equivalents at end of period $ 84 $ 42
===== =====
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Notes to Condensed Financial Statements
1. Basis of Presentation:
The condensed balance sheet of Kiewit Construction & Mining
Group (the "Group") at December 31, 1994 has been condensed from
the Group's audited balance sheet as of that date. All other
financial statements contained herein are unaudited and have been
prepared using the historical amounts included in the Peter Kiewit
Sons', Inc. ("PKS") consolidated condensed financial statements.
The Group's accounting policies and certain other disclosures are
set forth in the notes to the financial statements contained in
PKS' Annual Report on Form 10-K as an exhibit for the year ended
December 31, 1994.
Although the financial statements of PKS' Construction &
Mining Group and Diversified Group separately report the assets,
liabilities and stockholders' equity of PKS attributed to each such
group, legal title to such assets and responsibility for such
liabilities will not be affected by such attribution. Holders of
Class B&C Stock and Class D Stock are stockholders of PKS.
Accordingly, the PKS consolidated condensed financial statements
and related notes as well as those of the Kiewit Diversified Group
should be read in conjunction with these financial statements.
Marketable securities at June 30, 1995 and December 31, 1994
include approximately $57 million and $61 million, respectively, of
investments which are being held by the owners of various
construction projects in lieu of retainage. Receivables at June
30, 1995 and December 31, 1994 include approximately $56 million
and $48 million, respectively, of retainage on uncompleted
projects, the majority of which is expected to be collected within
one year.
Where appropriate, items within the condensed financial
statements have been reclassified from the previous periods to
conform to current year presentation.
2. Summarized Financial Information:
The Group's 50% portion of PKS' corporate assets and
liabilities and related transactions, which are not separately
identified with the ongoing operations of the Construction & Mining
Group or the Diversified Group, is as follows (in millions):
June 30, December 31,
1995 1994
Cash and cash equivalents $ - $ 25
Marketable securities 2 15
Property, plant and
equipment, net 5 5
Other assets 5 16
_____ _____
Total Assets $ 12 $ 61
===== =====
Accounts payable $ 24 $ 30
Convertible debentures 1 1
Notes to former stockholders 3 6
Other liabilities 3 2
_____ _____
Total Liabilities $ 31 $ 39
===== =====
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Investment income,
net of interest
expense $ - $ 1 $ - $ 1
Other costs,net (1) (1) (2) (2)
Corporate general and administrative costs have been
allocated to the Group. These allocations were $1 million and $7
million for the three months ended June 30, 1995 and 1994, and $1
million and $13 million for the six months ended June 30, 1995 and
1994. Due to a realignment of the corporate overhead departments
significantly all of the administrative functions and personnel
previously allocated to the Group are now located at the Group.
Mining service income from the Group's mine service agreement
with the Diversified Group was $7 million and $8 million for the
three months ended June 30, 1995 and 1994, and $15 million for each
of the six months ended June 30, 1995 and 1994.
3. Other Matters:
Kinross Transaction
On June 26, 1995, the Group exchanged its interest in a
wholly-owned subsidiary involved in gold mining activities for 4
million common shares of Kinross Gold Corporation, ("Kinross"), a
publicly traded corporation. The Group recognized a $21 million
pre-tax gain on the exchange based on the difference between the
book value of the subsidiary and the fair market value of the
Kinross stock on the date of the transaction.
MFS Spin-off
PKS' management asked the Internal Revenue Service ("IRS") to
issue a ruling (the "Ruling") that would permit PKS to make a tax-
free distribution of its entire ownership interest in MFS to the
Class D stockholders (the "Spin-off"). In June 1995, PKS received
the Ruling from the IRS confirming that the Spin-off will be tax-
free to the holders of Class D Stock for United States federal
income tax purposes. The PKS Board of Directors preliminarily
approved the plan to implement the Spin-off (the "Plan") at a
special meeting on June 9, 1995.
In order to satisfy certain requirements of applicable tax
law relating to the Spin-off that are addressed by the Ruling, PKS
and Kiewit Diversified Group Inc., a wholly owned first-tier
subsidiary of PKS ("KDG") have agreed with MFS to effect a
recapitalization of MFS pursuant to which KDG would exchange
2,900,000 of the 42,962,658 shares of MFS Common Stock currently
held by KDG for 15,000,000 shares of high-vote convertible
preferred stock (the "MFS Recapitalization").
The MFS Recapitalization has been approved by the MFS Board
of Directors, and by a special committee of the MFS Board of
Directors comprised solely of independent directors of MFS.
Consummation of the MFS Recapitalization is subject to approval by
the holders of MFS Common Stock at the MFS 1995 annual stockholders
meeting, to be held on August 24, 1995. In connection with
obtaining approval of the holders of MFS Common Stock, PKS has
agreed to vote all of the shares of MFS Common Stock owned or
controlled by it in the same manner as the majority of the non-PKS
holders of MFS Common Stock present in person or by proxy at the
meeting vote. Thus, the MFS Recapitalization will be approved only
if supported by a majority of such non-PKS stockholders of MFS. If
the MFS Recapitalization is not approved by the holders of MFS
Common Stock, the MFS Preferred Stock will not be issued and the
Spin-off will not occur. If the MFS Recapitalization is approved,
it would be consummated immediately prior to the Spin-off and PKS
would distribute to Class D stockholders both the MFS preferred
stock and all of the common stock of MFS then held by PKS.
The Plan provides for an exchange offer (the "Exchange Offer")
by PKS for Class D Stock, to be completed before the Spin-off.
Under an Exchange Offer,PKS would offer to exchange Class D Stock
for some or all of its outstanding Class B Stock and Class C Stock
("B&C Stock") on terms similar to those upon which Class B&C Stock
can be converted into Class D Stock during the annual conversion
period provided in the PKS Certificate of Incorporation. It is presently
expected that once the registration statement presently on file with the
Securities and Exchange Commission is declared effective, the Exchange Offer
will be open for approximately four weeks (the "Expiration Date") unless the
Exchange Offer is extended, abandoned, or modified.
PKS currently expects that, if the holders of a majority of
the MFS Common Stock present in person or by proxy and voting at
the 1995 MFS annual stockholders meeting, approve the MFS
Recapitalization, the Spin-off dividend will be declared as of, and
paid to holders of Class D Stock of record as of,the day after the
Expiration Date. If such favorable vote is not received, the
Exchange Offer will be abandoned, and the Spin-off will not occur.
Further, PKS reserves the right to abandon the Exchange Offer, or
both the Exchange Offer and the Spin-off, if the PKS Board of
Directors determines at any time that such abandonment would be in
the best interest of PKS and its stockholders, and PKS will abandon
the Exchange Offer if it abandons the Spin-off.
PKS also reserves the right to extend the Exchange Offer or to
modify in any manner the terms and conditions of the Exchange Offer
or the Spin-off or to defer the consummation of the Exchange Offer
or the Spin-off if the PKS Board of Directors determines at any
time that such action would be in the best interest of PKS and its
stockholders. Modification of the terms and conditions of the
Exchange Offer may include imposition by PKS of a limit on the
number of shares of Class B&C Stock that will be accepted by PKS in
the Exchange Offer.
Litigation
The Group is involved in various lawsuits, claims and
regulatory proceedings incidental to its business. Management
believes that any resulting liabilities for legal proceedings
beyond that provided should not materially affect the Group's
financial position or results of operations.
KIEWIT CONSTRUCTION & MINING GROUP
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - Second Quarter 1995 vs. Second Quarter 1994
Construction
Construction revenue rose 6% in the second quarter of 1995
compared to the second quarter of 1994. The increase is due to the
performance of additional work on joint ventures during this
period. Contract backlog at June 30, 1995 was $2.5 billion, of
which 13% is attributable to foreign operations, principally,
Canada and the Philippines. Projects on the west coast account for
38% of the total backlog which includes San Joaquin Toll Road
backlog of $260 million. San Joaquin is scheduled for completion
in 1997. Of the total backlog, $1.5 billion is not expected to be
completed during 1995. Backlog at June 1994, was $2.2 billion.
Gross margin on construction contracts increased to 8.2% from
7.4% during the same period in 1994 primarily as a result of a
claim settlement on a completed joint venture contract.
Other, net
In 1995 the Kinross transaction resulted in a $21 million gain
to the Group. Also contributing to the increased earnings was $2
million of additional gains recognized on the sale of operating
assets.
Results of Operations - Six Months 1995 vs. Six Months 1994
Construction
Construction revenues increased by 5% during the first six
months of 1995 compared to the same period in 1994. The increase
relates to additional joint venture activity and the inclusion of
an additional two months of materials revenue generated by the
APAC-Arizona companies which were acquired on February 28, 1994.
Gross margins on construction contracts were 5.5% in 1995 and
1994.
Other, net
The Kinross transaction resulted in a $21 million gain to the
Group in 1995. Also contributing to earnings in 1995 and 1994 were
mine service fees from the Diversified Group of $15 million and
gains on the disposition of operating assets of $7 and $5 million,
respectively.
Financial Condition - June 30, 1995 vs. December 31, 1994
The Group's working capital decreased $43 million or 13%
during the first six months of 1995. A significant portion of the
decline was due to the conversion and repurchase of 2.1 million
shares of Class B&C Stock totaling $58 million and dividend
payments of $13 million. Cash flows from operations of $47
million, and cash flows from investing activities, primarily the
net proceeds from sales of marketable securities of $58 million,
partially offset by capital expenditures of $47 million, resulted
in a net $14 million increase in cash for the period.
The Group anticipates investing between $40 and $75 million
annually in its construction business and purchasing additional
shares of an electrical contractor - the Group is committed to 80%
ownership by 1997. Other long-term liquidity uses include payment
of income taxes and repurchases and conversions of common stock.
The Group's working capital position at June 30, 1995,
together with anticipated cash flows from operations and existing
borrowing capacity, should be sufficient for immediate cash
requirements and future investing activities, however, in the event
of a MFS spin-off, the Group may incur additional debt to fund the
stock conversions.
See the "Other Matters" note to the condensed financial
statements with respect to the MFS spin-off.
Exhibit 99.B
KIEWIT DIVERSIFIED GROUP
Index to Financial Statements and
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Financial Statements:
Condensed Statements of Earnings for the
three months ended June 30, 1995 and 1994 and the
six months ended June 30, 1995 and 1994
Condensed Balance Sheets as of June 30, 1995
and December 31, 1994
Condensed Statements of Cash Flows for the
six months ended June 30, 1995 and 1994
Notes to Condensed Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
KIEWIT DIVERSIFIED GROUP
Condensed Statements of Earnings
(unaudited)
Three months ended Six months ended
June 30, June 30,
(dollars in millions) 1995 1994 1995 1994
Revenue $ 135 $ 128 $ 274 $ 255
Cost of Revenue (75) (70) (156) (144)
_____ _____ _____ _____
60 58 118 111
General and Administrative
Expenses (31) (39) (62) (68)
_____ _____ _____ _____
Operating Income 29 19 56 43
Other Income (Expense):
Gain on Subsidiary's Stock
Transactions, net - 3 3 28
Investment Income, net 11 7 24 19
Interest Expense, net (6) (7) (23) (16)
Other, net 136 4 140 4
_____ _____ _____ _____
141 7 144 35
Equity in Loss of MFS (43) (21) (85) (34)
_____ _____ _____ _____
Earnings Before
Income Taxes and
Minority Interest
in Net Income of
Subsidiaries 127 5 115 44
Provision for Income Taxes (60) - (70) (16)
Minority Interest in Net
Income of Subsidiaries (6) (2) (8) -
_____ _____ _____ _____
Net Earnings $ 61 $ 3 $ 37 $ 28
===== ===== ===== =====
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Balance Sheets
June 30, December 31,
1995 1994
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 350 $ 330
Marketable securities 428 754
Receivables, less allowance of
$2 and $2 77 157
Note receivable from sales
of discontinued operations - 29
Deferred income taxes 11 15
Other 34 95
______ ______
Total Current Assets 900 1,380
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $261 and $336 469 1,104
Intangible Assets, net 385 733
Investments 370 259
Net Assets of MFS 447 -
Other Assets 62 73
______ ______
$2,633 $3,549
====== ======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 42 $ 165
Current portion of long-term debt:
Telecommunications 9 26
Other 3 4
Accrued costs and billings in excess
of revenue on uncompleted contracts 14 37
Accrued reclamation and other
mining costs 17 20
Other 103 159
_____ _____
Total Current Liabilities 188 411
Long-Term Debt, less current portion:
Telecommunications 290 827
Other 82 72
Deferred Income Taxes 309 306
Retirement Benefits 47 67
Accrued Reclamation Costs 102 102
Other Liabilities 83 85
Minority Interest 193 448
Stockholders' Equity (Redeemable
Common Stock, $1.3 billion
aggregate redemption value)
Common equity 1,330 1,238
Foreign currency adjustment 1 -
Net unrealized holding gains (losses) 8 (7)
_____ _____
Total Stockholders' Equity 1,339 1,231
_____ _____
$2,633 $3,549
====== ======
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Statements of Cash Flows
(unaudited)
Six months ended
June 30,
(dollars in millions) 1995 1994
Cash flows from operations:
Net cash provided by continuing operations $ 161 $ 19
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities and investments 114 718
Purchases of marketable securities (114) (812)
Acquisitions, excluding cash acquired (139) (189)
Investment in CECI (29) (12)
Capital expenditures (36) (129)
Deferred development costs and other (21) (29)
_____ _____
Net cash used in investing activities (225) (453)
Cash flows from financing activities:
Issuances of subsidiary's stock - 3
Proceeds from long-term debt borrowings 31 659
Payments on long-term debt, including
current portion (9) (180)
Issuances of common stock 2 -
Repurchases of common stock (2) (20)
Exchange of Class B&C Stock for Class
D Stock, net 54 42
_____ _____
Net cash provided by financing activities 76 504
Cash flows from proceeds due to sales
of discontinued packaging operations 29 7
Cash and cash equivalents of MFS
at beginning of period (22) -
Effect of exchange rates on cash 1 (1)
_____ _____
Net change in cash and cash equivalents 20 76
Cash and cash equivalents at beginning
of period 330 197
_____ _____
Cash and cash equivalents at end of period $ 350 $ 273
===== =====
Noncash investing activities:
Issuance of MFS stock for the purchase of
telecommunications companies and
minority interest $ - $ 23
MFS stock transaction to settle
contingent purchase price liability - 25
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Notes to Condensed Financial Statements
1. Basis of Presentation:
The condensed balance sheet of Kiewit Diversified Group (the
"Group") at December 31, 1994 has been condensed from the Group's
audited balance sheet as of that date. All other financial
statements contained herein are unaudited and have been prepared
using historical amounts included in the Peter Kiewit Sons', Inc.
("PKS") consolidated condensed financial statements. The Group's
accounting policies and certain other disclosures are set forth in
the notes to the financial statements contained in PKS' Annual
Report on Form 10-K as an exhibit for the year ended December 31,
1994.
The PKS Board of Directors preliminarily approved a plan to
make a tax-free distribution of its entire ownership interest in
MFS Communications Company, Inc. ("MFS") to the Class D
stockholders at a special meeting on June 9, 1995 (See Note 4).
The operating results of MFS have been classified as a single line
item on the statements of earnings for the three and six month
periods ended June 30, 1995 and 1994. The Group's proportionate
share of the net assets of MFS at June 30, 1995 of $447 million
have been reported separately in the condensed balance sheet.
Operating results of MFS are summarized as follows (dollars in
millions):
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Revenue $140 $ 61 $258 $96
Loss from operations (59) (27) (115) (46)
Net loss (65) (32) (129) (50)
Group's Equity in
Net Loss (43) (21) (85) (34)
At June 30, 1995 the net assets of MFS were as follows:
Assets:
Current $ 522
Networks and equipment, net 902
Other assets, net 403
_____
Total 1,827
Liabilities:
Current 235
Long-term debt 597
Other noncurrent 32
_____
Total 864
_____
Net Assets $ 963
======
Group Equity in Net Assets of MFS $ 447
======
Included in the net assets of MFS are $307 million of proceeds
from the offering of convertible preferred stock of which the Group
has no ownership interest.
The Group has approximately $93 million of deferred tax
liabilities recorded on gains from MFS stock transactions that
would no longer be payable if the distribution is consummated.
Although the financial statements of PKS' Construction &
Mining Group and Diversified Group separately report the assets,
liabilities and stockholders' equity of PKS attributed to each such
group, legal title to such assets and responsibility for such
liabilities will not be affected by such attribution. Holders of
Class B&C Stock and Class D Stock are stockholders of PKS.
Accordingly, the PKS consolidated condensed financial statements
and related notes as well as those of the Kiewit Construction &
Mining Group should be read in conjunction with these financial
statements.
Where appropriate, items within the condensed financial
statements have been reclassified from the previous periods to
conform to current year presentation.
KIEWIT DIVERSIFIED GROUP
Notes to Condensed Financial Statements
2. Summarized Financial Information:
The Group's 50% portion of PKS' corporate assets and
liabilities and related transactions, which are not separately
identified with the ongoing operations of the Construction & Mining
Group or the Diversified Group, is as follows (in millions):
June 30, December 31,
1995 1994
Cash and cash equivalents $ - $ 25
Marketable securities 2 15
Property, plant and equipment, net 5 5
Other assets 5 16
_____ _____
Total Assets $ 12 $ 61
===== =====
Accounts payable $ 24 $ 30
Convertible debentures 1 1
Notes to former stockholders 3 6
Other liabilities 3 2
_____ _____
Total Liabilities $ 31 $ 39
===== =====
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
Investment income, net $ - $ 1 $ - $ 1
Other costs,net (1) (1) (2) (2)
Corporate general and administrative costs have been allocated
to the Group. These allocations were $1 million for each of the
three months ended June 30, 1995 and 1994, and $2 million and $4
million for the six months ended June 30, 1995 and 1994. Due to a
realignment of the corporate overhead departments, substantially
all of the administrative functions and personnel previously
allocated to the Group are now located at the Group.
Mining service expense from the Group's mine service agreement
with the Construction & Mining Group was $7 million and $8 million
for the three months ended June 30, 1995 and 1994, and $15 million
for each of the six months ended June 30, 1995 and 1994.
3. Acquisitions:
In February 1995, California Energy Company, Inc. ("CECI"), an
equity method investee, completed the purchase of Magma Power
Company. The cash transaction valued at $950 million was partially
financed by the sale of 17 million shares of common stock at $17
per share. As part of the offering, the Group purchased 1.5
million shares. In addition, during the second quarter of 1995,
the Company purchased an additional 200,000 common shares of CECI.
Following these transactions, the Group's cumulative investment in
CECI common stock totals $146 million, $38 million in excess of the
Group's proportionate share of CECI's equity.
C-TEC Corporation ("C-TEC") completed the first step of an
acquisition of Twin County Trans Video, Inc. ("Twin County") in May
1995. Twin County provides cable television service to 74,000
subscribers in eastern Pennsylvania. In consideration for 40% of
the capital stock of Twin County, C-TEC paid $26 million in cash
and issued a $4 million note of its subsidiary, C-TEC Cable
Systems, Inc. In addition, C-TEC paid $11 million in consideration
of a noncompete agreement. The acquisition of the remaining shares
is expected to be completed by year end.
In January 1995, C-TEC entered into an agreement to purchase
Buffalo Valley Telephone Company. The aggregate consideration for
the purchase ($55 million) will be a combination of cash and
convertible preferred stock in the Telephone Group of C-TEC. The
transaction is expected to close during 1995. Buffalo Valley
Telephone Company provides local telephone service to 17,300 access
lines in central Pennsylvania.
Also in January 1995, C-TEC purchased, for $84 million in
cash, a 40% equity position in Megacable, S.A. De C.V., Mexico's
second largest cable television operator with 174,000 subscribers
in twelve cities. The purchase price is subject to adjustment
based on fourth quarter 1995 exchange rates.
4. Other Matters:
MFS Spin-off
PKS' management asked the Internal Revenue Service ("IRS")
to issue a ruling (the "Ruling") that would permit PKS to make a
tax-free distribution of its entire ownership interest in MFS to
the Class D stockholders (the "Spin-off"). In June 1995, PKS
received the Ruling from the IRS confirming that the Spin-off will
be tax-free to the holders of Class D Stock for United States
federal income tax purposes. The PKS Board of Directors
preliminarily approved the plan to implement the Spin-off (the
"Plan") at a special meeting on June 9, 1995.
In order to satisfy certain requirements of applicable tax
law relating to the Spin-off that are addressed by the Ruling, PKS
and Kiewit Diversified Group Inc., a wholly owned first-tier
subsidiary of PKS ("KDG") have agreed with MFS to effect a
recapitalization of MFS pursuant to which KDG would exchange
2,900,000 of the 42,962,658 shares of MFS Common Stock currently
held by KDG for 15,000,000 shares of high-vote convertible
preferred stock (the "MFS Recapitalization").
The MFS Recapitalization has been approved by the MFS Board
of Directors, and by a special committee of the MFS Board of
Directors comprised solely of independent directors of MFS.
Consummation of the MFS Recapitalization is subject to approval by
the holders of MFS Common Stock at the MFS 1995 annual stockholders
meeting, to be held on August 24, 1995. In connection with
obtaining approval of the holders of MFS Common Stock, PKS has
agreed to vote all of the shares of MFS Common Stock owned or
controlled by it in the same manner as the majority of the non-PKS
holders of MFS Common Stock present in person or by proxy at the
meeting vote. Thus, the MFS Recapitalization will be approved only
if supported by a majority of such non-PKS stockholders of MFS. If
the MFS Recapitalization is not approved by the holders of MFS
Common Stock, the MFS Preferred Stock will not be issued and the
Spin-off will not occur. If the MFS Recapitalization is approved,
it would be consummated immediately prior to the Spin-off and PKS
would distribute to Class D stockholders both the MFS preferred
stock and all of the common stock of MFS then held by PKS.
The Plan provides for an exchange offer (the "Exchange
Offer") by PKS for Class D Stock, to be completed before the Spin-
off. Under an Exchange Offer,PKS would offer to exchange Class D
Stock for some or all of its outstanding Class B Stock and Class C
Stock ("Class B&C Stock") on terms similar to those upon which
Class B&C Stock can be converted into Class D Stock during the
annual conversion period provided in the PKS Certificate of
Incorporation. It is presently expected that once the
registration statement presently on file with the Securities and
Exchange Commission is declared effective, the Exchange Offer will
be open for approximately four weeks (the "Expiration Date") unless
the Exchange Offer is extended, abandoned, or modified.
PKS currently expects that, if the holders of a majority of
the MFS Common Stock present in person or by proxy and voting at
the 1995 MFS annual stockholders meeting, approve the MFS
Recapitalization, the Spin-off dividend will be declared as of, and
paid to holders of Class D Stock of record as of,the day after the
Expiration Date. If such favorable vote is not received, the
Exchange Offer will be abandoned, and the Spin-off will not occur.
Further, PKS reserves the right to abandon the Exchange Offer, or
both the Exchange Offer and the Spin-off, if the PKS Board of
Directors determines at any time that such abandonment would be in
the best interest of PKS and its stockholders, and PKS will abandon
the Exchange Offer if it abandons the Spin-off.
PKS also reserves the right to extend the Exchange Offer or
to modify in any manner the terms and conditions of the Exchange
Offer or the Spin-off or to defer the consummation of the Exchange
Offer or the Spin-off if the PKS Board of Directors determines at
any time that such action would be in the best interest of PKS and
its stockholders. Modification of the terms and conditions of the
Exchange Offer may include imposition by PKS of a limit on the
number of shares of Class B&C Stock that will be accepted by PKS in
the Exchange Offer.
MFS Litigation
In 1994, several former stockholders of an MFS subsidiary
filed a lawsuit against MFS, KDG and the chief executive officer of
MFS, in the United States District Court for the Northern District
of Illinois, Case No. 94C-1381. These shareholders sold shares of
the subsidiary to MFS in September 1992. MFS completed an initial
public offering in May 1993. Plaintiffs allege that MFS
fraudulently concealed material information about its plans from
them causing them to sell their shares at an inadequate price.
Plaintiffs have alleged damages of at least $100 million.
Defendants have meritorious defenses and intend to vigorously
contest this lawsuit. Defendants expect that a trial will be held
in the fall of 1995. Prior to the initial public offering, KDG
agreed to indemnify MFS against any liabilities arising from the
September 1992 sale; if MFS is deemed to be liable to plaintiffs,
KDG will be required to satisfy MFS' liabilities pursuant to the
indemnity agreement. Any judgement or settlement payments would be
treated as an adjustment of the original purchase price and
recorded as additional goodwill. If the Spin-off is approved by
the PKS Board of Directors and is consummated, KDG would remain
obligated to satisfy these liabilities.
Whitney Litigation
In 1974, a subsidiary of the Group ("Kiewit"), entered into a
lease with Whitney Benefits, Inc., a Wyoming charitable corporation
("Whitney"). Whitney was the owner, and Kiewit was the lessee, of
a coal deposit underlying a 1,300 acre tract in Sheridan County,
Wyoming. The coal was rendered unmineable by the Surface Mining
Control and Reclamation Act of 1977 ("SMCRA"), which prohibited
surface mining of coal in certain alluvial valley floors
significant to farming. In 1983, Kiewit and Whitney filed an
action, now titled Whitney Benefits, Inc. and Peter Kiewit Sons'
Co. v. The United States, in the U.S. Court of Federal Claims
("Claims Court"), alleging that the enactment of SMCRA constituted
a taking of their coal without just compensation. In 1989, the
Claims Court ruled that a taking had occurred and awarded
plaintiffs the 1977 fair market value of the property ($60 million)
plus interest. In 1991, the U.S. Court of Appeals for the Federal
Circuit affirmed the decision of the Claims Court and the U.S.
Supreme Court denied certiorari. The government filed two post-
trial motions in the Claims Court during 1992. The government
requested a new trial to redetermine the 1977 value of the
property. The government also filed a motion to reopen and set
aside the 1989 judgment as void and to dismiss plaintiffs'
complaint for lack of jurisdiction. In May 1994, the Claims Court
entered an order denying both motions. In February 1994, the
Claims Court issued an opinion which provided that the $60 million
judgment would bear interest compounded annually from 1977 until
payment. The government appealed the February 1994 and May 1994
orders. A hearing on the appeals was held in February 1995.
On May 5, 1995, the government and the plaintiffs entered into
a settlement agreement. In settlement of all claims, the
government agreed to pay plaintiffs $200 million and plaintiffs
agreed to deed the coal underlying the real property to the
government. Kiewit and Whitney agreed in 1992 that Kiewit would
receive 67.5 percent of any award and Whitney would receive the
remainder. Peter Kiewit Sons', Co. a subsidiary of KDG, received
approximately $135 million on June 2, 1995.
Other Litigation
The Group is involved in other various lawsuits, claims and
regulatory proceedings incidental to its business. Management
believes that any resulting liability for legal proceedings beyond
that provided should not materially affect the Group's financial
position or results of operations.
KIEWIT DIVERSIFIED GROUP
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - Second Quarter 1995 vs. Second Quarter 1994
Revenue from the Group's segments for the second quarter were (in
millions):
1995 1994
Mining $ 47 $ 53
Telecommunications 79 73
Other 9 2
_____ ____
$ 135 $128
===== ====
Mining
Mining revenues, primarily coal sales, decreased 11% in 1995.
The decrease in revenue is primarily attributable to a reduction in
coal spot sales partially offset by additional alternate source
coal sales. The increase in alternate source coal sales was primarily
responsible for margins as a percentage of revenue increasing 2% from 1994
to 1995. The higher margins from alternate source coal sales
were offset by an increase in coal sales to a large customer at
contract prices less than those of other primary customers,
renegotiated coal sales contract prices with certain customers and
reduced coal spot sale margins. The Group expects margins to decline
during the remainder of 1995 due to the factors mentioned above.
Telecommunications
C-TEC's revenues increased from $73 million in 1994 to $79
million in 1995. C-TEC's 1994 revenue included $8 million from its
cellular business which was sold during the third quarter of 1994.
The increase is primarily attributable to C-TEC's Cable and Long
Distance Groups which had increased revenues of $7 million and $5
million, respectively. Increased Cable Group revenues are
primarily due to the addition of 15,000 subscribers over the 1994
period and a revenue increase of approximately $4 million resulting
from the acquisition of Twin County in May 1995. The Long Distance
Group's sales increased due primarily to the resale of tariff
services to another long distance seller. The Group's arrangement
for sales of this product is expected to terminate later in 1995.
Increased Cable Group revenues were partially offset by
increased operating expenses associated with the addition of Twin
County subscribers and to higher basic programming costs resulting
from additional subscribers, rate increases and new channels,
however, operating income of this group improved in 1995 as
compared to 1994. The operating income of the Long Distance Group
also improved in 1995 as the increased revenues described above
were only partially offset by increased operating costs.
C-TEC's Telephone Group revenues and operating income were
relatively flat between the 1995 and 1994 periods.
General and Administrative Expenses
General and administrative costs declined 20% during the
second quarter of 1995 as compared to the second quarter of 1994.
The sale of C-TEC's mobile services group and an overall reduction
in the overhead costs attributable to C-TEC's current operating
units and other diversified businesses were primarily responsible
for the decline. Partially offsetting these declines were higher
professional service fees associated with the MFS spin-off.
Investment Income, net
Investment income increased 27% for the three months ended
June 30, 1995 compared to the same period in 1994. Proceeds from
C-TEC's rights offering, the sale of C-TEC's mobile services group
and the settlement of the Whitney litigation resulted in a higher
average portfolio balance and an increase in investment income.
Interest Expense, net
Interest expense decreased by $1 million in 1995 primarily due
to a decline in interest expense incurred by C-TEC from the
repayment of debt in the fourth quarter of 1994.
Other, net
The 1995 settlement of the Whitney litigation and the
subsequent payment by the government resulted in $135 million of
other income to the Group.
MFS Operations
The telecommunications services revenue of MFS increased from
$47 million in 1994 to $117 million in 1995. The increase
partially relates to the acquisition of Centex, which was acquired
in May 1994, and to the acquisitions of RealCom and Cylix, which
were acquired in the fourth quarter of 1994. The remaining
increase resulted primarily from increased market penetration of
all other telecommunication services of MFS. Telecommunication
services operating expenses of MFS increased to $149 million in
1995 from $59 million in 1994. The primary reasons for the
increase in these costs are the acquisitions of Centex, RealCom and
Cylix in 1994, the expansion activities of MFS Intelenet, MFS
Datanet and MFS International and costs associated with new and
expanded networks. MFS expects to incur additional significant
expenses expanding its integrated, single-source telecommunications
services, high speed data communications and international services
throughout 1995.
Third-party revenue from services offered by MFS' network
integration services segment increased to $27 million from $15
million in 1994. The increase relates primarily to two projects.
Network systems integration services operating expenses increased
at approximately the same rate as revenues creating a small loss
from operations in both periods.
Income Taxes
The effective income tax rate for the quarter ended June 30,
1995 differs from the statutory rate of 35% due primarily to net
operating loss limitation on losses generated by MFS.
Results of Operations - Six Months 1995 vs. Six Months 1994
Revenue from the Group's segments for the first six months of 1995
and 1994 were (in millions):
1995 1994
Mining $107 $106
Telecommunications 152 145
Other 15 4
____ ____
$274 $255
==== ====
Mining
Mining revenues primarily coal sales, increased 1% in 1995.
The increase in revenue is primarily attributable to additional
alternate source coal sales offset partially by reduced coal spot
sales. The increase in alternate source coal sales was primarily responsible
for margins as a percentage of revenue increasing 8% from 1994 to 1995
The higher margins from alternate source coal sales were
offset by an increase in coal sales to a large customer at contract
prices less than those of other primary customers, renegotiated
coal sale contract prices with certain customers and reduced coal
spot sales margins. The Group expects margins to decline during the
remainder of 1995 due to the factors mentioned above.
Telecommunications
C-TEC's revenue increased from $145 million in 1994 to $152
million in 1995. C-TEC's 1994 revenue included $15 million from
its cellular business which was sold during the third quarter of
1994. The increase is primarily attributable to C-TEC's Cable and
Long Distance Groups which had increased revenues of $7 million and
$11 million, respectively. Increased Cable Group revenues are
primarily due to an increase in the number of subscribers and a
revenue increase of approximately $4 million resulting from the
acquisition of Twin County in May 1995. The Long Distance Group's
sales increased due primarily to the resale of tariff services to
another long distance seller. The Group's arrangement for sales of
this product is expected to terminate later in 1995.
Increased Cable Group revenues were partially offset by
increased operating expenses associated with the addition of Twin
County subscribers and to higher basic programming costs resulting
from additional subscribers, rate increases and new channels,
however, operating income of this group improved in 1995 as
compared to 1994. The operating income of the Long Distance Group
also improved in 1995 as the increased revenues described above
were only partially offset by increased operating costs.
C-TEC's Telephone Group revenues and operating income were
relatively flat between the 1995 and 1994 periods.
General and Administrative Expenses
General and administrative costs declined 9% during the first
six months of 1995 as compared to the same period of 1994. The
sale of C-TEC's mobile services group and an overall reduction in
the overhead costs attributable to C-TEC's current operating units
and other diversified businesses were primarily responsible for the
decline. Partially offsetting these declines were higher
professional service fees associated with the MFS spin-off.
Gain on Subsidiary's Stock Transactions, net
The issuance of MFS stock for acquisitions by MFS and the
exercise of MFS employee stock options resulted in a $3 million net
gain to the Group in 1995. In 1994 the Group settled a contingent
purchase price obligation resulting from MFS' 1990 purchase of
Chicago Fiber Optics Corporation ("CFO"). The former shareholders
of CFO accepted MFS stock previously held by the Group, valued at
market prices, as payment of the obligation. This transaction
along with the issuances of stock for acquisitions and employee
stock options, resulted in a $28 million net gain before taxes.
The Group had recognized gains and losses from sales and issuances
of stock by MFS on the condensed statement of earnings, but the
Group is now contemplating a spin-off (See Note 4). Current
accounting principles require recognition of the above transactions
as capital transactions when a spin-off is contemplated. If the
spin-off is completed, these types of gains will no longer be
recognized for MFS transactions.
Investment Income, net
Investment income increased 26% for the six months ended June
30, 1995 compared to the same period in 1994. Proceeds from C-
TEC's rights offering, the sale of C-TEC's mobile services group
and the settlement of the Whitney Benefits litigation resulted in
a higher average portfolio balance and an increase in interest and
dividend income. Partially offsetting this increase were higher
losses on the disposition of marketable securities.
Interest Expense, net
Interest expense increased by $7 million in 1995. Tax
deficiency interest expense of $11 million incurred in 1995 was
partially offset by a decline in interest expense incurred by C-TEC
due to the repayment of debt in the fourth quarter of 1994.
Other, net
The resolution of the Whitney Benefits litigation and the
subsequent payment by the government in 1995 resulted in $135
million of other income for the Group.
MFS Operations
MFS' telecommunications services revenue increased to $221
million from $69 million in 1994. The increase primarily relates
to the acquisitions of Centex, RealCom and Cylix in 1994. The
remaining increase resulted primarily from increased market
penetration of all other telecommunication services of MFS. MFS'
telecommunications services operating expenses increased to $284
million from $88 million in 1994. The increase relates in part to
the acquisitions of Centex, RealCom and Cylix in 1994. In
addition, operating expenses increased due to expansion activities
of MFS Intelenet, MFS Datanet and MFS International and costs
associated with new and expanded networks. MFS expects to incur
additional significant expense expanding its integrated, single-
source telecommunications services, high-speed data communications
and international services throughout 1995.
Third-party revenue from services offered by MFS' network
integration services segment, increased to $38 million from $27
million in 1994. The increase relates primarily to two projects.
Network systems integration services operating expenses increased
at approximately the same rate as revenues producing a small loss
from operations in both periods.
Income Taxes
The effective income tax rate for the quarter ended June 30,
1995 differs from the statutory rate of 35% due primarily to net
operating loss limitations on losses generated by MFS.
Financial Condition - June 30, 1995 vs. December 31, 1994
The Group's working capital, exclusive of MFS, increased $26
million or 4% during the first six months of 1995. The increase
was mainly due to cash flows from operations, including the receipt
of the Whitney settlement of $135 million, and cash provided by
financing activities being partially offset by cash used in
investing activities.
Investing activities include $36 million of capital
expenditures and $168 million of investments. The investments
include C-TEC's $84 million outlay for 40% of Megacable, and $38
million outlay for Twin County, KDG's $29 million purchase of
CECI's stock, $8 million outlay for a 19% interest in a healthcare
software development company and an additional $6 million
investment in a Philippine power project.
Financing sources for the six months include $56 million of
stock conversions and sales, $14 million of borrowings for the
construction financing of a privately owned toll road and $17
million of C-TEC borrowings on the Cable Group's revolving credit
agreement. Financing uses consisted of C-TEC's $6 million outlay
for the payment of long-term debt, $3 million of payments on
stockholders' notes and $2 million for stock repurchases.
In 1995, the Group received the final payment ($29 million)
for the sale of certain discontinued packaging operations.
In addition to the C-TEC activities described below, the Group
anticipates making significant (over $50 million in 1995)
investments in its energy businesses - including its joint venture
agreement with CECI covering international power project
development activities - and searching for opportunities to acquire
capital intensive businesses which provide for long-term growth.
Other long-term liquidity uses include payment of income taxes and
repurchasing the Group's stock. The Group's current financial
condition and borrowing capacity should be sufficient for future
operating and investing activities. In the event of an MFS spin,
the Group may receive additional funds related to stock conversions
from the C Group.
C-TEC intends to utilize its available cash and revolving
credit balances to fund operating activities, finance the pending
acquisition of Buffalo Valley, and to develop full service
networks.
See the "Other Matters" note to the condensed financial
statements with respect to the MFS spin-off.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the period ending June 30, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 434
<SECURITIES> 528
<RECEIVABLES> 320
<ALLOWANCES> 9
<INVENTORY> 0
<CURRENT-ASSETS> 1,565
<PP&E> 1,295
<DEPRECIATION> 665
<TOTAL-ASSETS> 3,585
<CURRENT-LIABILITIES> 583
<BONDS> 379
<COMMON> 2
0
0
<OTHER-SE> 1,840
<TOTAL-LIABILITY-AND-EQUITY> 3,585
<SALES> 1,094
<TOTAL-REVENUES> 1,260
<CGS> 976
<TOTAL-COSTS> 1,079
<OTHER-EXPENSES> 108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 168
<INCOME-TAX> 89
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> $2.44<F1>
<EPS-DILUTED> $2.44<F1>
<FN>
<F1>$2.44 represents Class C Stock earnings per share, Class D Stock earnings per
share; $1.75
</FN>
</TABLE>
