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 EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES 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 May 1, 1995:
Class B Common Stock......................... 884,400 shares
Class C Common Stock.......................... 12,992,755 shares
Class D Common Stock.......................... 21,251,448 shares
<PAGE>
PETER KIEWIT SONS', INC.
Part I - Financial Information
Page
Item 1. Financial Statements
Consolidated Condensed Statements of Operations
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
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PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Operations
(unaudited)
Three months ended
March 31
(dollars in millions, except per share data) 1995 1994
Revenue $ 681 $ 573
Cost of Revenue (636) (506)
45 67
General and Administrative Expenses (81) (69)
Operating Loss (36) (2)
Other Income (Expense):
Gain on Subsidiary's Stock Transactions, net 3 25
Investment Income,net 18 21
Interest Expense, net (27) (17)
Other, net 7 3
1 32
Earnings (Loss) Before Income Taxes
and Minority Interest (35) 30
Provision for Income Taxes (3) (14)
Minority Interest in Net Losses of Subsidiaries 19 7
Net Earnings (Loss) $ (19) $ 23
Loss Attributable to Class B&C Stock:
Net Loss $ (2) $ (2)
Loss per Common and Common
Equivalent Share $ (.16) $(.14)
Earnings (Loss) Attributable to Class D Stock:
Net Earnings (Loss) $ (17) $ 25
Earnings (Loss) per Common and Common
Equivalent Share $ (.80) $1.21
Cash Dividends per Common Share:
B&C Stock $ - $ -
D Stock $ - $ -
See accompanying notes to consolidated condensed financial
statements.
<PAGE>
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
March 31, December 31,
1995 1994
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 392 $ 400
Marketable securities 706 910
Receivables, less allowance of
$9 and $9 372 414
Note receivable from sale of
discontinued operations - 29
Costs and earnings in excess of
billings on uncompleted contracts 143 126
Investment in construction
joint ventures 50 69
Deferred income taxes 68 74
Other 102 93
Total Current Assets 1,833 2,115
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $767 and $731 1,350 1,244
Investments 425 314
Intangible Assets, net 755 749
Other Assets 86 82
$ 4,449 $ 4,504
See accompanying notes to consolidated condensed financial
statements.
<PAGE>
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
March 31, December 31,
(dollars in millions, 1995 1994
except per share data) (unaudited)
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 338 $ 344
Current portion of long-term debt:
Telecommunications 28 26
Other 5 7
Accrued costs and billings in excess
of revenue on uncompleted contracts 150 143
Accrued insurance costs 71 75
Other 185 218
Total Current Liabilities 777 813
Long-Term Debt, less current portion:
Telecommunications 845 827
Other 84 81
Deferred Income Taxes 290 302
Retirement Benefits 48 67
Accrued Reclamation Costs 105 103
Other Liabilities 137 127
Minority Interest 436 448
Stockholders' Equity:
Preferred stock, no par value, Authorized
250,000 shares: no shares outstanding - -
Common stock, $.0625 par value,
$1.6 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:
13,006,455 outstanding in 1995 and
15,087,028 in 1994 1 1
Class D, authorized 50,000,000 shares:
21,251,591 outstanding in 1995 and
20,391,568 in 1994 1 1
Additional paid-in capital 180 182
Foreign currency adjustment (5) (7)
Net unrealized holding gains (losses) 4 (8)
Retained earnings 1,546 1,567
Total Stockholders' Equity 1,727 1,736
$4,449 $4,504
See accompanying notes to consolidated condensed financial
statements.
<PAGE>
PETER KIEWIT SONS', INC.
Consolidated Condensed Statements of Cash Flows
(unaudited)
Three months ended
March 31
(dollars in millions) 1995 1994
Cash flows from operations:
Net cash provided by continuing
operations $ 12 $ 3
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities and investments 347 992
Purchases of marketable securities (114) (1,355)
Proceeds from sales of property, plant
and equipment, and other investments 3 4
Capital expenditures (141) (74)
Acquisitions and investments in affiliates (130) (49)
Deferred development costs and other (12) (8)
Net cash used in
investing activities (47) (490)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 21 639
Payments on long-term debt, including
current portion (12) (159)
Net change in short-term borrowings - 1
Repurchases of common stock (5) (22)
Dividends paid (7) (6)
Other 1 (3)
Net cash provided by (used in)
financing activities (2) 450
Cash flows from discontinued packaging operations:
Proceeds from sales of discontinued
packaging operations 29 -
Other cash provided by discontinued
packaging operations - 2
Net cash provided by discontinued
packaging operations 29 2
Effect of exchange rates on cash - (2)
Net change in cash and cash equivalents (8) (37)
Cash and cash equivalents at
beginning of period 400 296
Cash and cash equivalents at end of period $ 392 $ 259
Noncash investing activities:
Issuance of MFS stock for purchase of
telecommunications companies $ 6 $ 19
MFS stock transactions to settle
contingent purchase price liability - 25
See accompanying notes to consolidated condensed financial
statements.
<PAGE>
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.
Marketable securities at March 31, 1995 and December 31, 1994
include approximately $59 million and $61 million, respectively, of
investments which are being held by the owners of various
construction projects in lieu of retainage. Receivables at March
31, 1995 and December 31, 1994 include approximately $60 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.
2. Earnings (Loss) Per Share:
Primary earnings (loss) per share of common stock have been
computed using the weighted average number of shares outstanding
during each period. Fully diluted earnings (loss) per share have
not been presented because they are not materially different from
primary earnings (loss) per share. The number of shares used in
computing earnings (loss) per share was as follows:
Three months ended
March 31
1995 1994
Class B&C 13,909,422 15,376,585
Class D 21,265,769 20,546,044
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,
data management services, 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.
<PAGE>
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:
Three months ended
March 31
1995 1994
Results of Operations:
Revenue $ 426 $ 411
Net loss $ (2) $ (2)
Loss per share $ (.16) $ (.14)
Financial Position:
Working capital $ 262 $ 333
Total assets 896 967
Long-term debt, less current portion 7 9
Stockholders' equity 448 505
Included within loss before income taxes is mine management income
from the Diversified Group of $8 million in 1995 and $7 million in
1994.
Diversified Group:
Three months ended
March 31
1995 1994
Results of Operations:
Revenue $ 257 $ 162
Net earnings (loss) $ (17) $ 25
Earnings (loss) per share $ (.80) $ 1.21
March 31, December 31,
1995 1994
Financial Position:
Working capital $ 794 $ 969
Total assets 3,575 3,549
Long-term debt, less current portion 922 899
Stockholders' equity 1,279 1,231
Included within earnings (loss) before income taxes are mine
management fees paid to the Construction & Mining Group of $8
million in 1995 and $7 million 1994.
<PAGE>
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. The net transaction
reduced the Company's ownership percentage of common stock in CECI
to 22%. Following the transaction, the Company's cumulative
investment in common stock totals $140 million, $37 million in
excess of the Company's proportionate share of CECI's equity.
C-TEC has entered into a merger agreement with Twin County Trans
Video, Inc. ("Twin County") and its shareholders. Twin County
provides cable television service to 74,000 subscribers in eastern
Pennsylvania. The transaction, subject to regulatory approval and
other conditions, is expected to close in the second quarter of
1995. In consideration for all the capital stock of Twin
County, C-TEC has deposited $5 million and will pay $43 million in
cash, issue a $4 million note and issue $52 million in exchangeable
preferred stock of its subsidiary, C-TEC Cable Systems, Inc. The
preferred stock will be exchangeable for C-TEC common stock under
certain conditions.
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 in the third quarter of 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
forty percent 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:
PKS' management has asked the Internal Revenue Service 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"). PKS' management proposed a plan
(the "Plan") to implement the Spin-off to PKS' Board of Directors
during the second quarter of 1995. If the Board of Directors
approves the Plan, and the Internal Revenue Service issues the
Ruling, PKS could complete the Spin-off as early as the third
quarter of 1995.
The Spin-off might not occur. For example, PKS might not receive
the Ruling or the Board might not adopt the Plan. In addition, the
issuance of the MFS Preferred Stock necessary to obtain the Ruling
(as described below), would require a favorable vote from a
majority of the minority common stockholders of MFS, other than the
Company, present and voting in person or by proxy at a special MFS
stockholders meeting. If the favorable vote is not received, MFS
would not be able to issue the MFS Preferred Stock and PKS would
not be able to complete the Spin-off. Also, the Spin-off is
<PAGE>
subject to receipt of certain other approvals, some of which might
not be received. Finally, if PKS' Board of Directors adopts the
Plan, it would reserve the right to abandon, defer or modify the
Spin-off at any time.
MFS has agreed in principle to issue the Company a special class of
high-vote convertible preferred stock (the "MFS Preferred Stock")
designed to permit PKS to satisfy certain requirements for
receiving the Ruling. MFS would issue the Preferred Stock to the
Company in exchange for the transfer by the Company to MFS of
approximately 3.0 million of the shares of MFS common stock
currently held by the Company. PKS anticipates that the MFS
Preferred Stock (i) would have a face value of approximately $15-25
million, (ii) would be convertible into MFS common stock at any
time after the first anniversary of the date the MFS Preferred
Stock is issued, (iii) would have dividend rate and a conversion
premium determined by market conditions at the time that the MFS
Preferred Stock is issued, (iv) would be redeemable at par six
years after the date of issuance, and (v) would be non transferable
for six years after the date of issuance except under certain
limited circumstances. At the option of MFS, dividends on the MFS
Preferred Stock could be paid either in cash or in shares of MFS
Common Stock. Each share of MFS Preferred Stock would have
approximately five votes per share in any election of MFS
directors. If the Spin-off occurs, PKS would distribute to Class
D stockholders both the MFS Preferred Stock and all of the common
stock of MFS then held by the Company. If the Spin-off does not
occur, MFS would not issue the MFS Preferred Stock to the Company.
The Plan would provide for an exchange offer (the "Exchange Offer")
by PKS for Class C 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 C Stock on terms similar
to those upon which Class C Stock can be converted into Class D
Stock during the annual conversion period provided in the Company's
Certificate of Incorporation. As a result, Class C Stockholders
wanting to convert Class C Stock to Class D Stock would not be
disadvantaged if the Spin-off were to be completed before the next
conversion permitted by the Certificate of Incorporation. If an
Exchange Offer could not be completed prior to the next conversion
under the Certificate of Incorporation, PKS probably would defer
any Spin-off until the first quarter of 1996.
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 summer 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 judgment or settlement payments would be
treated as an adjustment of the original purchase price and
<PAGE>
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.
In 1974, a subsidiary of the Company (Kiewit), entered into a lease
with Whitney Benefits, Inc., a Wyoming charitable corporation
(Whitney). Whitney is the owner, and Kiewit is 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. 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
will pay plaintiffs $200 million and plaintiffs will 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., will receive
approximately $135 million. Payment is expected in June 1995.
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.
PETER KIEWIT SONS', INC
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
part of 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.
<PAGE>
Revenue from each of the Company's business segments for the three
months ended March 31 comprised the following (in millions):
1995 1994
Construction $ 419 $ 405
Mining 65 57
Telecommunications 191 107
Other 6 4
$ 681 $ 573
Results of Operations - First Quarter 1995 vs. First Quarter 1994
Construction
Construction revenue increased by $14 million or 4% during the
first quarter of 1995. The increase relates to the inclusion of
an additional two months of materials revenue generated by the
APAC-Arizona companies acquired on February 28, 1994. Contract
backlog at March 31, 1995 was $2.4 billion, of which 14% is
attributable to foreign operations, principally, Canada and the
Philippines. Projects on the west coast account for 39% of the
total backlog of which the San Joaquin Toll Road represents $311
million. The San Joaquin project is scheduled for completion in
1997.
Direct costs associated with construction contracts increased $17
million or 4% in 1995. Construction margins were 4% in both
periods. The results of the quarter are not indicative of the
expected results for the year.
Mining
Mining revenue, primarily coal sales, increased by 14% in 1995.
Coal margins declined slightly in 1995 from 49% to 48% as a large
customer purchased more coal in 1995 than in 1994 at contract
prices less than those of other primary customers. Coal spot sales
and their margins remained at approximately the same levels during
the 1995 and 1994 periods.
Telecommunications
In 1995, telecommunications revenue increased nearly 79% from the
first quarter of 1994. MFS revenue increased by 237% and C-TEC
revenue remained constant. C-TEC's 1994 revenue reflected $7
million from its cellular business which was sold during the third
quarter of 1994.
The telecommunications services revenue of MFS increased from $22
million in 1994 to $104 million in 1995. The increase reflects the
acquisition of Centex, RealCom and Cylix in 1994, and increased
market penetration of all other telecommunications services.
MFS' telecommunications services operating expenses increased $109
million in 1995. The primary reasons for the increase is the
acquisition 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 expense expanding integrated, single-
<PAGE>
source telecommunications services, high-speed data communications
and international services throughout 1995.
C-TEC's Telephone Group and Cable Group revenues were flat between
1994 and 1995 at $31 million and $24 million for each period. The
Long Distance Group's sales increased by approximately $5 million
due primarily to the resale of tariff services to another long
distance reseller. The Long Distance Group's arrangement for sales
of this product are expected to terminate during the second quarter
of 1995. Operating expenses for each of C-TEC's operating segments
were relatively stable between 1994 and 1995.
General and Administrative Expenses
General and administrative expenses increased 17% in 1995 due to
the acquisitions of the Centex, Realcom and Cylix operations in
1994 and the higher costs associated with the expansion of MFS'
Intelenet, Datanet and International businesses.
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 valued at market prices, previously held by
the Company, as payment of the obligation. This transaction along
with the issuances of stock for acquisitions and employee stock
options, resulted in a $25 million net gain before taxes.
Investment Income, net
Investment income is principally comprised of interest and dividend
income of $20 million and $17 million in 1995 and 1994, and gains
and (losses) on the sale of securities of ($2) million in 1995 and
$2 million in 1994. The increase in interest and dividend income
is attributable to the proceeds C-TEC received from the sale of
its cellular operations and from the stock rights offering which C-
TEC concluded in December 1994.
Interest Expense, net
Interest expense increased 59% in 1995. The increase is primarily
attributable to $11 million in tax deficiency interest paid in 1995
and a $2 million increase in MFS' interest expense. Partially
offsetting the increases was a $3 million decline in interest for
C-TEC. This decline resulted from the repayment of debt in the
fourth quarter of 1994.
Income Taxes
The effective income tax rates in the first quarter of 1994 and
1995 differ from the expected statutory rate of 35% due primarily
to net operating loss limitations on losses generated by MFS.
Financial Condition - March 31, 1995 vs. December 31, 1994
Due to the significant investing activities described below, the
Company's working capital decreased $246 million or 19% during the
<PAGE>
first quarter of 1995.
Investing activities include $141 million of capital expenditures,
72% pertaining to MFS, and $130 million of investments in
affiliates. The investments in affiliates include C-TEC's $84
million outlay for 40% of Megacable, KDG's $26 million
participation in CECI's stock offering, $5 million acquisitions by
both MFS and C-TEC, and an additional $4 million investment in a
Philippine power project. In addition, C-TEC deposited $5 million
for the Twin Valley acquisition which is expected to be completed
in the second quarter of 1995.
Financing sources for the quarter include $8 million of borrowings
for the construction financing of a privately owned toll road and
$8 million of C-TEC borrowings on the Cable Group's revolving
credit agreement. Financing uses consisted of $6 million of
payments on stockholders' notes, $5 million for stock repurchases,
and $7 million of C Stock dividends.
In 1995, the Company received the final payment ($29 million) for
the sale of discontinued packaging operations.
In addition to the C-TEC and MFS 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 repurchases of stock. The
Company's current financial condition and borrowing capacity should
be sufficient for future operating and investing activities,
however, in the event of an MFS spin, the Construction and 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
acquisitions of Twin County and Buffalo Valley, and to develop full
service networks.
In late 1993, MFS announced its intention to accelerate the
expansion of its customer base, service offerings and existing
networks as well as the deployment of new networks. MFS estimated
that this expansion would require the expenditure of approximately
$1 billion over 3 to 5 years. During 1994, MFS continued to add
networks in new cities and increasingly focused on the development
of networks in business markets near its existing networks in major
metropolitan areas. MFS considers the development of these
business markets to be an efficient and cost-effective utilization
of capital and management resources.
Under the expansion plan referred to above, MFS estimates capital
expenditures of $350-400 million in 1995. During the three months
ended March 31, 1995, MFS invested $102 million, primarily for the
construction of networks and purchase of related equipment. As of
March 1995, MFS provides services on its networks, or through the
resale of services, or has network operations under development in
46 major metropolitan areas in the United States and Europe.
<PAGE>
To continue the funding of the expansion announced in late 1993,
MFS finalized arrangements for $250 million of revolving credit
facilities with a syndicate of commercial banks in April 1995 (the
Credit Facilities). The Credit Facilities mature at various times
through April 30, 2000 and bear interest at a floating rate. MFS
anticipates that the Credit Facilities, together with cash on hand
and internally generated funds, will be sufficient to fund its
anticipated operating losses, working capital needs and the
remaining capital spending requirements necessary to complete its
expansion. MFS may, however, obtain vendor financing as an
alternative to utilization of all or a portion of the Credit
Facilities.
As a result of the recent rapid pace of various regulatory,
legislative and competitive changes in the United States and
abroad, MFS has the opportunity to offer cost-effective
telecommunications services sooner and in more business markets
than had previously been expected. MFS believes that these
opportunities include the further acceleration of network
development in the United States, deployment of additional switches
resulting in the provision of switched services in approximately 50
metropolitan areas in the United States and the expansion of its
international operations. The international expansions contemplate
a total of approximately 25 business markets with an increasing
focus on facilities-based operations primarily in the European
Community.
In April 1995, MFS filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission for a public offering of
7,400,000 Depository Shares (the "Offering"), each representing an
interest in a share of convertible preferred stock. Each
Depository Share will be mandatorily convertible into one share of
common stock on June 15, 1999. The exact timing and size of the
offering will be subject to prevailing market conditions. In
addition to the Offering, MFS will continue to consider other
opportunities to sell equity or debt securities in the public or
private markets to implement its financing strategy of maintaining
financial flexibility to react to opportunities in the rapidly
evolving telecommunications marketplace while cost-effectively
funding the capital investments required to implement its business
development plan. The net proceeds of the Offering are expected to
provide the capital necessary to fund certain of these new business
opportunities. In addition MFS may obtain vendor financing and
utilize the Credit Facilities, to the extent available, to fund
certain aspects of its business development plan. MFS will
continue to consider other opportunities to sell equity or debt
securities in the public or private markets to implement the
financing strategy described above.
MFS from time to time evaluates acquisitions in pursuit of its
business strategy, either as an alternative to constructing
networks, adding customers, or to the introduction of services that
complement existing and/or planned services. Such acquisitions may
be significant in size and could use a substantial portion of MFS's
available cash.
From time to time, MFS has had discussions with other
communications entities concerning the establishment of possible
strategic relationships, including transactions involving
<PAGE>
substantial acquisitions, combinations and equity investments in
MFS or one of its subsidiaries. In addition, certain acquisitions,
may provide MFS with the opportunity to acquire an established
customer base. MFS intends to consider appropriate opportunities
to establish strategic relationships.
PKS' management has asked the Internal Revenue Service 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"). PKS' management proposed a plan
(the "Plan") to implement the Spin-off to PKS' Board of Directors
during the second quarter of 1995. If the Board of Directors
approves the Plan, and the Internal Revenue Service issues the
Ruling, PKS could complete the Spin-off as early as the third
quarter of 1995.
The Spin-off might not occur. For example, PKS might not receive
the Ruling or the Board might not adopt the Plan. In addition, the
issuance of the MFS Preferred Stock necessary to obtain the Ruling
(as described below), would require a favorable vote from a
majority of the minority common stockholders of MFS, other than the
Company, present and voting in person or by proxy at a special MFS
stockholders meeting. If the favorable vote is not received, MFS
would not be able to issue the MFS Preferred Stock and PKS would
not be able to complete the Spin-off. Also, the Spin-off is
subject to receipt of certain other approvals, some of which might
not be received. Finally, if PKS' Board of Directors adopts the
Plan, it would reserve the right to abandon, defer or modify the
Spin-off at any time.
MFS has agreed in principle to issue the Company a special class of
high-vote convertible preferred stock (the "MFS Preferred Stock")
designed to permit PKS to satisfy certain requirements for
receiving the Ruling. MFS would issue the Preferred Stock to the
Company in exchange for the transfer by the Company to MFS of
approximately 3.0 million of the shares of MFS common stock
currently held by the Company. The Company anticipates that the
MFS Preferred Stock (i) would have a face value of approximately
$15-25 million, (ii) would be convertible into MFS common stock at
any time after the first anniversary of the date the MFS Preferred
Stock is issued, (iii) would have dividend rate and a conversion
premium determined by market conditions at the time that the MFS
Preferred Stock is issued, (iv) would be redeemable at par six
years after the date of issuance, and (v) would be non transferable
for six years after the date of issuance except under certain
limited circumstances. At the option of MFS, dividends on the MFS
Preferred Stock could be paid either in cash or in shares of MFS
Common Stock. Each share of MFS Preferred Stock would have
approximately five votes per share in any election of MFS
directors. If the Spin-off occurs, PKS would distribute to Class
D stockholders both the MFS Preferred Stock and all of the common
stock of MFS then held by the Company. If the Spin-off does not
occur, MFS would not issue the MFS Preferred Stock to the Company.
The Plan would provide for an exchange offer (the "Exchange Offer")
by PKS for Class C 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 C Stock on terms similar
to those upon which Class C Stock can be converted into Class D
Stock during the annual conversion period provided in the Company's
<PAGE>
Certificate of Incorporation. As a result, Class C Stockholders
wanting to convert Class C Stock to Class D Stock would not be
disadvantaged if the Spin-off were to be completed before the next
conversion permitted by the Certificate of Incorporation. If an
Exchange Offer could not be completed prior to the next conversion
under the Certificate of Incorporation, PKS probably would defer
any Spin-off until the first quarter of 1996.
See Legal Proceedings with respect to the Whitney Benefits case.
PETER KIEWIT SONS', INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Whitney Litigation. In 1974, a subsidiary of the Company (Kiewit),
entered into a lease with Whitney Benefits, Inc., a Wyoming
charitable corporation (Whitney). Whitney is the owner, and Kiewit
is 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. 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
will pay plaintiffs $200 million and plaintiffs will 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., will receive
approximately $135 million. Payment is expected in June 1995.
<PAGE>
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
first 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: May 15, 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.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the period ending March 31, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> QTR-1
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 392
<SECURITIES> 706
<RECEIVABLES> 381
<ALLOWANCES> 9
<INVENTORY> 0
<CURRENT-ASSETS> 1,833
<PP&E> 2,117
<DEPRECIATION> 767
<TOTAL-ASSETS> 4,449
<CURRENT-LIABILITIES> 777
<BONDS> 929
<COMMON> 2
0
0
<OTHER-SE> 1,725
<TOTAL-LIABILITY-AND-EQUITY> 4,449
<SALES> 484
<TOTAL-REVENUES> 681
<CGS> 438
<TOTAL-COSTS> 636
<OTHER-EXPENSES> 81
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> (35)
<INCOME-TAX> 3
<INCOME-CONTINUING> (19)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19)
<EPS-PRIMARY> $(.16)<F1>
<EPS-DILUTED> $(.16)<F1>
<FN>
<F1>$(.16) represents Class C Stock loss per share, Class D Stock loss per share;
$(.80).
</FN>
</TABLE>
Exhibit 99.A
KIEWIT CONSTRUCTION & MINING GROUP
Index to Financial Statements and
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Page
Financial Statements
Condensed Statements of Operations for the three months
ended March 31, 1995 and 1994
Condensed Balance Sheets as of March 31, 1995 and
December 31, 1994
Condensed Statements of Cash Flows for the three months
ended March 31, 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 Operations
(unaudited)
Three months ended
March 31
(dollars in millions, except per share data) 1995 1994
Revenue $ 426 $ 411
Cost of Revenue (409) (393)
17 18
General and Administrative Expenses (32) (33)
Operating Loss (15) (15)
Other Income (Expense):
Investment Income, net 3 2
Interest Expense (1) -
Other, net 11 10
13 12
Loss Before Income Taxes (2) (3)
Benefit for Income Taxes - 1
Net Loss $ (2) $ (2)
Loss Per Common & Common
Equivalent Share $(.16) $(.14)
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Balance Sheets
March 31, December 31,
1995 1994
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 84 $ 70
Marketable securities 98 156
Receivables, less allowance of $7 and $7 235 260
Costs and earnings in excess of billings
on uncompleted construction contracts 118 101
Investment in construction joint ventures 50 69
Deferred income taxes 54 59
Other 18 23
Total Current Assets 657 738
Property, Plant and Equipment, less
accumulated depreciation and amortization
of $400 and $395 150 140
Deferred Income Taxes 4 4
Other Assets 85 85
$ 896 $ 967
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, including retainage
of $43 and $41 $ 166 $ 179
Current portion of long-term debt 2 3
Accrued construction costs and
billings in excess of revenue
on uncompleted contracts 113 106
Accrued insurance costs 71 73
Other 43 44
Total Current Liabilities 395 405
Long-Term Debt, less current portion 7 9
Other Liabilities 46 48
Stockholders' Equity,
($332 million aggregate redemption value)
Common equity 454 513
Net unrealized holding losses - (1)
Foreign currency adjustment (6) (7)
Total Stockholders' Equity 448 505
$ 896 $ 967
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Statements of Cash Flows
(unaudited)
Three months ended
March 31
(dollars in millions) 1995 1994
Cash flows from operations:
Net cash provided by operations $ 41 $ 18
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 102 109
Purchases of marketable securities (42) (78)
Proceeds from sales of property,
plant and equipment 3 2
Capital expenditures (22) (12)
Acquisition of APAC-Arizona, Inc. - (49)
Other (1) (2)
Net cash provided by (used in)
investing activities 40 (30)
Cash flows from financing activities:
Payments on long-term debt, including
current portion (3) (4)
Repurchases of common stock (3) (8)
Dividends paid (7) (6)
Exchange of Class B&C Stock for
Class D Stock, net (54) (44)
Net cash used in financing activities (67) (62)
Effect of exchange rates on cash - (2)
Net change in cash and cash equivalents 14 (76)
Cash and cash equivalents at beginning
of period 70 99
Cash and cash equivalents at end of period $ 84 $ 23
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 March 31, 1995 and December 31, 1994
include approximately $59 million and $61 million, respectively,
of investments which are being held by the owners of various
construction projects in lieu of retainage. Receivables at March
31, 1995 and December 31, 1994 include approximately $60 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. Loss Per Share:
Primary loss per share of common stock have been computed using the
weighted average number of shares outstanding during each period.
The number of shares used in computing loss per share was
13,909,422 for the three months ended March 31, 1995 and
15,376,585 for the three months ended March 31, 1994.
3. 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):
Group
March 31, December 31,
1995 1994
Cash and cash equivalents $ - $ 25
Marketable securities 2 15
Property, plant and equipment, net 5 5
Other assets 2 16
Total Assets $ 9 $ 61
Accounts payable $ 22 $ 30
Convertible debentures 1 1
Notes to former stockholders 3 6
Other liabilities 1 2
Total Liabilities $ 27 $ 39
Group
Three months ended
March 31,
1995 1994
Other income (expense), net (1) 1
Corporate general and administrative costs have been allocated to
the Group based upon certain measures of business activities, such
as employment, investments, and sales, which management believes to
be reasonable. These allocations were less than $1 million for the
three months ended March 31, 1995 and $6 million for the three
months ended March 31,1994. Due to a corporate realignment,
significantly all of the administrative functions and personnel
previously provided to the Group are now located at the Group.
Mine management income from the Diversified Group was $8 million in
1995 and $7 million in 1994.
4. Other Matters:
PKS' management has asked the Internal Revenue Service 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"). PKS' management proposed a plan
(the "Plan") to implement the Spin-off to PKS' Board of Directors
during the second quarter of 1995. If the Board of Directors
approves the Plan, and the Internal Revenue Service issues the
Ruling, PKS could complete the Spin-off as early as the third
quarter of 1995.
The Spin-off might not occur. For example, PKS might not receive
the Ruling or the Board might not adopt the Plan. In addition, the
issuance of the MFS Preferred Stock necessary to obtain the Ruling
(as described below), would require a favorable vote from a
majority of the minority common stockholders of MFS, other than
PKS, present and voting in person or by proxy at a special MFS
stockholders meeting. If the favorable vote is not received, MFS
would not be able to issue the MFS Preferred Stock and PKS would
not be able to complete the Spin-off. Also, the Spin-off is
subject to receipt of certain other approvals, some of which might
not be received. Finally, if PKS's Board of Directors adopts the
Plan, it would reserve the right to abandon, defer or modify the
Spin-off at any time.
MFS has agreed in principle to issue PKS a special class of high-
vote convertible preferred stock (the "MFS Preferred Stock")
designed to permit PKS to satisfy certain requirements for
receiving the Ruling. MFS would issue the Preferred Stock to PKS in
exchange for the transfer by PKS to MFS of approximately 3.0
million of the shares of MFS common stock currently held by PKS.
PKS anticipates that the MFS Preferred Stock (i) would have a face
value of approximately $15-25 million, (ii) would be convertible
into MFS common stock at any time after the first anniversary of
the date the MFS Preferred Stock is issued, (iii) would have
dividend rate and a conversion premium determined by market
conditions at the time that the MFS Preferred Stock is issued, (iv)
would be redeemable at par six years after the date of issuance,
and (v) would be non transferable for six years after the date of
issuance except under certain limited circumstances. At the option
of MFS, dividends on the MFS Preferred Stock could be paid either
in cash or in shares of MFS Common Stock. Each share of MFS
Preferred Stock would have approximately five votes per share in
any election of MFS directors. If the Spin-off occurs, PKS would
distribute to Class D stockholders both the MFS Preferred Stock and
all of the common stock of MFS then held by PKS. If the Spin-off
does not occur, MFS would not issue the MFS Preferred Stock to PKS.
The Plan would provide for an exchange offer (the "Exchange Offer")
by PKS for Class C 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 C Stock on terms similar
to those upon which Class C Stock can be converted into Class D
Stock during the annual conversion period provided in the Company's
Certificate of Incorporation. As a result, Class C Stockholders
wanting to convert Class C Stock to Class D Stock would not be
disadvantaged if the Spin-off were to be completed before the next
conversion permitted by the Certificate of Incorporation. If an
Exchange Offer could not be completed prior to the next conversion
under the Certificate of Incorporation, PKS probably would defer
any Spin-off until the first quarter of 1996.
The Group is involved in 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 CONSTRUCTION & MINING GROUP
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - First Quarter 1995 vs. First Quarter 1994
Construction
Construction revenue increased by $14 million or 4% during the
first quarter of 1995. The increase relates to the inclusion of an
additional two months of materials revenue generated by the APAC-
Arizona companies acquired on February 28, 1994. Contract backlog
at March 31, 1995 was $2.4 billion, of which 14% is attributable to
foreign operations, principally, Canada and the Philippines.
Projects on the west coast account for 39% of the total backlog of
which the San Joaquin Toll Road represents $311 million. The San
Joaquin project is scheduled for completion in 1997.
Direct costs associated with construction contracts increased $17
million or 4% in 1995. Construction margins were 4% in both
periods. The results of the quarter are not indicative of the
expected results for the year.
Investment Income, net
Investment income is principally comprised of interest and dividend
income of $4 million and $2 million in 1995 and 1994, and gains and
(losses) on the sale of securities of ($1) million in 1995 and $1
million in 1994.
Other, net
Other income consists of mine management fees of $8 and $7 million
in 1995 and 1994, gains and losses from asset dispositions and
other miscellaneous activities.
Financial Condition - March 31, 1995 vs. December 31, 1994
The Group's working capital decreased $71 million or 21% during the
first quarter 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 $57 million and dividend payments of $7 million.
Cash flows from operations, of $41 million, and cash flows from
investing activities, primarily the net proceeds from sale of
marketable securities, of $60 million, and capital expenditures of
$22 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 March 31, 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,
the Group may incur additional debt to fund the stock conversions.
PKS' management has asked the Internal Revenue Service 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"). PKS' management proposed a plan
(the "Plan") to implement the Spin-off to PKS' Board of Directors
during the second quarter of 1995. If the Board of Directors
approves the Plan, and the Internal Revenue Service issues the
Ruling, PKS could complete the Spin-off as early as the third
quarter of 1995.
The Spin-off might not occur. For example, PKS might not receive
the Ruling or the Board might not adopt the Plan. In addition, the
issuance of the MFS Preferred Stock necessary to obtain the Ruling
(as described below), would require a favorable vote from a
majority of the minority common stockholders of MFS, other than
PKS, present and voting in person or by proxy at a special MFS
stockholders meeting. If the favorable vote is not received, MFS
would not be able to issue the MFS Preferred Stock and PKS would
not be able to complete the Spin-off. Also, the Spin-off is
subject to receipt of certain other approvals, some of which might
not be received. Finally, if PKS' Board of Directors adopts the
Plan,it would reserve the right to abandon, defer or modify the
Spin-off at any time.
MFS has agreed in principle to issue PKS a special class of high-
vote convertible preferred stock (the "MFS Preferred Stock")
designed to permit PKS to satisfy certain requirements for
receiving the Ruling. MFS would issue the Preferred Stock to PKS in
exchange for the transfer by PKS to MFS of approximately 3.0
million of the shares of MFS common stock currently held by PKS.
PKS anticipates that the MFS Preferred Stock (i) would have a face
value of approximately $15-25 million, (ii) would be convertible
into MFS common stock at any time after the first anniversary of
the date the MFS Preferred Stock is issued, (iii) would have
dividend rate and a conversion premium determined by market
conditions at the time that the MFS Preferred Stock is issued, (iv)
would be redeemable at par six years after the date of issuance,
and (v) would be non transferable for six years after the date of
issuance except under certain limited circumstances. At the option
of MFS, dividends on the MFS Preferred Stock could be paid either
in cash or in shares of MFS Common Stock. Each share of MFS
Preferred Stock would have approximately five votes per share in
any election of MFS directors. If the Spin-off occurs, PKS would
distribute to Class D stockholders both the MFS Preferred Stock and
all of the common stock of MFS then held by PKS. If the Spin-off
does not occur, MFS would not issue the MFS Preferred Stock to PKS.
The Plan would provide for an exchange offer (the "Exchange Offer")
by PKS for Class C 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 C Stock on terms similar
to those upon which Class C Stock can be converted into Class D
Stock during the annual conversion period provided in the Company's
Certificate of Incorporation. As a result, Class C Stockholders
wanting to convert Class C Stock to Class D Stock would not be
disadvantaged if the Spin-off were to be completed before the next
conversion permitted by the Certificate of Incorporation. If an
Exchange Offer could not be completed prior to the next conversion
under the Certificate of Incorporation, PKS probably would defer
any Spin-off until the first quarter of 1996.
Exhibit 99.B
KIEWIT DIVERSIFIED GROUP
Index to Financial Statements and
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Page
Financial Statements
Condensed Statements of Operations for the
three months ended March 31, 1995 and 1994
Condensed Balance Sheets as of March 31, 1995
and December 31, 1994
Condensed Statements of Cash Flows for the
three months ended March 31, 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 Operations
(unaudited)
Three months ended
March 31,
(dollars in millions, except per share data) 1995 1994
Revenue $ 257 $ 162
Cost of Revenue (229) (113)
28 49
General and Administrative Expenses (57) (43)
Operating Earnings (Loss) (29) 6
Other Income (Expense):
Gain on Subsidiary's Stock Transactions, net 3 25
Investment Income, net 15 19
Interest Expense, net (26) (17)
Other, net 4 -
(4) 27
Earnings (Loss) Before Income Taxes and
Minority Interest (33) 33
Provision for Income Taxes (3) (15)
Minority Interest in Net Losses
of Subsidiaries 19 7
Net Earnings (Loss) $ (17) $ 25
Earnings (Loss) Per Common & Common
Equivalent Share $ (.80) $ 1.21
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Balance Sheets
March 31, December 31,
1995 1994
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 308 $ 330
Marketable securities 608 754
Receivables, less allowance of
$2 and $2 150 157
Note receivable from sale of
discontinued operations - 29
Deferred income taxes 14 15
Other 109 95
Total Current Assets 1,189 1,380
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $367 and $336 1,200 1,104
Investments 370 259
Intangible Assets, net 740 733
Other Assets 76 73
$3,575 $ 3,549
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 172 $ 165
Current portion of long-term debt:
Telecommunications 28 26
Other 3 4
Accrued costs and billings in excess
of revenue on uncompleted contracts 37 37
Accrued reclamation and other
mining costs 17 20
Other 138 159
Total Current Liabilities 395 411
Long-Term Debt, less current portion:
Telecommunications 845 827
Other 77 72
Deferred Income Taxes 294 306
Retirement Benefits 48 67
Accrued Reclamation Costs 104 102
Other Liabilities 97 85
Minority Interest 436 448
Stockholders' Equity ($1,280 million
aggregate redemption value)
Common equity 1,274 1,238
Foreign currency adjustment 1 -
Net unrealized holding gains (losses) 4 (7)
Total Stockholders' Equity 1,279 1,231
$3,575 $ 3,549
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Statements of Cash Flows
(unaudited)
Three months ended
March 31
(dollars in millions) 1995 1994
Cash flows from operations:
Net cash used in continuing operations $ (29) $ (14)
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities and investments 245 882
Purchases of marketable securities (72) (1,277)
Capital expenditures (119) (62)
Acquisitions and investment in affiliates (129) -
Deferred development costs and other (12) (4)
Net cash used in investing activities (87) (461)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 21 639
Payments on long-term debt, including
current portion (9) (155)
Repurchases of common stock (2) (14)
Exchange of Class B&C Stock for Class D Stock 54 44
Other 1 (2)
Net cash provided by financing activities 65 512
Cash flows from discontinued packaging operations:
Proceeds from sales of discontinued
packaging operations 29 -
Other cash provided by discontinued
packaging operations - 2
Net cash provided by discontinued
packaging operations 29 2
Net change in cash and cash equivalents (22) 39
Cash and cash equivalents at beginning
of period 330 197
Cash and cash equivalents at end of period $ 308 $ 236
Noncash investing activities:
Issuance of MFS stock for the purchase of
telecommunications companies $ 6 $ 19
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.
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.
2. Earnings (Loss) Per Share:
Primary earnings (loss) per share of common stock have been
computed using the weighted average number of shares outstanding
during each period. The number of shares used in computing
earnings (loss) per share was 21,265,769 for the three months
ended March 31, 1995 and 20,546,044 for the three months ended
March 31, 1994. Fully diluted earnings (loss) per share have not
been presented because they are not materially different from
primary earnings per share.
3. 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):
Group
March 31, December 31,
1995 1994
Cash and cash equivalents $ - $ 25
Marketable securities 2 15
Property, plant and equipment, net 5 5
Other assets 2 16
Total Assets $ 9 $ 61
Accounts payable $ 22 $ 30
Convertible debentures 1 1
Notes to former stockholders 3 6
Other liabilities 1 2
Total Liabilities $ 27 $ 39
Other income (expense), net $ (1) $ 1
Corporate general and administrative costs have been allocated to
the Group. These allocations were $ 1 million for the three months
ended March 31, 1995 and $3 million for the three months ended
March 31, 1994. Due to a corporate realignment, significantly all
of the administrative functions and personnel previously provided
to the Group are now located at the Group.
Mine management expense with the Construction & Mining Group was $8
million in 1995 and $7 million in 1994.
4. 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 this offering, the Group purchased 1.5 million shares.
The net transaction reduced the Group's ownership percentage of
common stock in CECI to 22%. Following the transaction, the Group's
cumulative investment in common stock totals $140 million, $37
million in excess of the Group's proportionate share of CECI's
equity.
C-TEC has entered into a merger agreement with Twin County Trans
Video, Inc. ("Twin County") and its shareholders. Twin County
provides cable television service to 74,000 subscribers in eastern
Pennsylvania. The transaction, subject to regulatory approval and
other conditions, is expected to close in the second quarter of
1995. In consideration for all the capital stock of Twin
County, C-TEC has deposited $5 million and will pay $43 million in
cash, issue a $4 million note and issue $52 million in
exchangeable preferred stock of its subsidiary, C-TEC Cable
Systems, Inc. The preferred stock will be exchangeable for C-TEC
common stock under certain conditions.
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 in the third quarter of 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
forty percent 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:
PKS' management has asked the Internal Revenue Service 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"). PKS' management proposed a plan
(the "Plan") to implement the Spin-off to PKS' Board of Directors
during the second quarter of 1995. If the Board of Directors
approves the Plan, and the Internal Revenue Service issues the
Ruling, PKS could complete the Spin-off as early as the third
quarter of 1995.
The Spin-off might not occur. For example, PKS might not receive
the Ruling or the Board might not adopt the Plan. In addition, the
issuance of the MFS Preferred Stock necessary to obtain the Ruling
(as described below), would require a favorable vote from a
majority of the minority common stockholders of MFS, other than
PKS, present and voting in person or by proxy at a special MFS
stockholders meeting. If the favorable vote is not received, MFS
would not be able to issue the MFS Preferred Stock and PKS would
not be able to complete the Spin-off. Also, the Spin-off is
subject to receipt of certain other approvals, some of which might
not be received. Finally, if PKS' Board of Directors adopts the
Plan, it would reserve the right to abandon, defer or modify the
Spin-off at any time.
MFS has agreed in principle to issue PKS a special class of high-
vote convertible preferred stock (the "MFS Preferred Stock")
designed to permit PKS to satisfy certain requirements for
receiving the Ruling. MFS would issue the Preferred Stock to PKS in
exchange for the transfer by PKS to MFS of approximately 3.0
million of the shares of MFS common stock currently held by PKS.
PKS anticipates that the MFS Preferred Stock (i) would have a face
value of approximately $15-25 million, (ii) would be convertible
into MFS common stock at any time after the first anniversary of
the date the MFS Preferred Stock is issued, (iii) would have
dividend rate and a conversion premium determined by market
conditions at the time that the MFS Preferred Stock is issued, (iv)
would be redeemable at par six years after the date of issuance,
and (v) would be non transferable for six years after the date of
issuance except under certain limited circumstances. At the option
of MFS, dividends on the MFS Preferred Stock could be paid either
in cash or in shares of MFS Common Stock. Each share of MFS
Preferred Stock would have approximately five votes per share in
any election of MFS directors. If the Spin-off occurs, PKS would
distribute to Class D stockholders both the MFS Preferred Stock and
all of the common stock of MFS then held by PKS. If the Spin-off
does not occur, MFS would not issue the MFS Preferred Stock to PKS.
The Plan would provide for an exchange offer (the "Exchange Offer")
by PKS for Class C 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 C Stock on terms similar
to those upon which Class C Stock can be converted into Class D
Stock during the annual conversion period provided in the Company's
Certificate of Incorporation. As a result, Class C Stockholders
wanting to convert Class C Stock to Class D Stock would not be
disadvantaged if the Spin-off were to be completed before the next
conversion permitted by the Certificate of Incorporation. If an
Exchange Offer could not be completed prior to the next conversion
under the Certificate of Incorporation, PKS probably would defer
any Spin-off until the first quarter of 1996.
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 summer 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 judgment or settlement payment would be
treated as an adjustment of the original purchase price and
recorded as additional goodwill. If the Spin-off is approved by
PKS' Board of Directors and is consummated, the Group would remain
obligated to satisfy these liabilities.
In 1974, a subsidiary of the Group ("Kiewit"), entered into a lease
with Whitney Benefits, Inc., a Wyoming charitable corporation
("Whitney"). Whitney is the owner, and Kiewit is 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. 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
will pay plaintiffs $200 million and plaintiffs will 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., will receive cash of
approximately $135 million. Payment is expected in June 1995.
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.
KIEWIT DIVERSIFIED GROUP
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations - First Quarter 1995 vs. First Quarter 1994
Mining
Mining revenue increased by 13% in 1995. Mining margins declined
slightly in 1995 from 49% to 48% as a large customer purchased more
coal in 1995 than in 1994 at contract prices less than those of
other primary customers. Coal spot sales and their margins remained
at the same level during the 1995 and 1994 periods.
Telecommunications
In 1995, telecommunications revenue increased nearly 79% from the
first quarter of 1994. MFS revenue increased 237% and C-TEC
revenue remained constant. C-TEC's 1994 revenue reflected $7
million of revenue from its cellular business which was sold during
the third quarter of 1994.
The telecommunications services revenue of MFS increased from $22
million in 1994 to $104 million in 1995. The increase reflects the
acquisition of Centex, RealCom and Cylix in 1994, and increased
market penetration of all other telecommunications services.
MFS' telecommunications services operating expenses increased $109
million. The primary reasons for the increase were the acquisition
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 expense expanding integrated, single-source
telecommunications services, high-speed data communications and
international services throughout 1995.
C-TEC's Telephone Group and Cable Group revenues were flat between
1994 and 1995 at $31 million and $24 million for each period. The
Long Distance Group's sales increased by approximately $5 million
due primarily to the resale of tariff services to another long
distance reseller. The Long Distance Group's arrangement for sales
of this product are expected to terminate during the second quarter
of 1995. Operating expenses for each of C-TEC's operating segments
were relatively stable between 1994 and 1995.
General and Administrative Expenses
General and administrative expenses increased 17% in 1995. The
increase is due to the MFS acquisitions of the Centex, Realcom and
Cylix operations in 1994 and the higher costs associated with the
expansion of MFS Intelenet, Datanet and International.
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 adjustment 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 $25 million net gain before taxes.
Investment Income, net
Investment income is principally comprised of interest income of
$15 million and $13 million in 1995 and 1994, and gains and
(losses) on the sale of securities of ($1) million in 1995 and $2
million in 1994. The increase in interest income is attributable
to the proceeds C-TEC received from the sale of its cellular
operations and from the stock rights offering C-TEC concluded in
December 1994.
Interest Expense, net
Interest expense increased 53% in 1995. The increase is primarily
attributable to $11 million in tax deficiency interest payments in
1995 and a $2 million increase in MFS' interest expense. Partially
offsetting the increases was a $3 million decline in interest for
C-TEC. This decline resulted from the repayment of debt in the
fourth quarter of 1994.
Income Taxes
The effective income tax rates in the first quarter of 1994 and
1995 differ from the expected statutory rate of 35% primarily due
to net operating loss limitations on losses generated by MFS.
Financial Condition - March 31, 1995 vs. December 31, 1994
Due to the significant investing activities described below, the
Group's working capital decreased $175 million or 18% during the
first quarter of 1995.
Investing activities include $119 million of capital expenditures,
86% pertaining to MFS, and $129 million of investments in
affiliates. The investments in affiliates include C-TEC's $84
million outlay for 40% of Megacable, KDG's $26 million
participation in CECI's stock offering, $5 million acquisitions by
both MFS and C-TEC, and an additional $4 million investment in a
Philippine power project. In addition, C-TEC deposited $5 million
for the Twin Valley acquisition which is expected to be completed
in the second quarter of 1995.
Financing sources for the quarter include $54 million of stock
conversions, $8 million of borrowings for the construction
financing of a privately owned toll road and $8 million of C-TEC
borrowings on the Cable Group's revolving credit agreement.
Financing uses consisted of $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 discontinued packaging operations.
In addition to the C-TEC and MFS 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
repurchases of 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 from stock conversions.
C-TEC intends to utilize its available cash and revolving credit
balances to fund operating activities, finance the pending
acquisitions of Twin County and Buffalo Valley, and to develop full
service networks.
In late 1993, MFS announced its intention to accelerate the
expansion of its customer base, service offerings and existing
networks as well as the deployment of new networks. MFS estimated
that this expansion would require the expenditure of approximately
$1 billion over 3 to 5 years. During 1994, MFS continued to add
networks in new cities and increasingly focused on the development
of networks in business markets near its existing networks in major
metropolitan areas. MFS considers the development of these
business markets to be an efficient and cost-effective utilization
of capital and management resources.
Under the expansion plan referred to above, MFS estimates capital
expenditures of $350-400 million in 1995. During the three months
ended March 31, 1995, MFS invested $102 million, primarily for the
construction of networks and purchase of related equipment. As of
March 1995, MFS provides services on its networks, or through the
resale of services, or has network operations under development in
46 major metropolitan areas in the United States and Europe.
To continue the funding of the expansion announced in late 1993,
MFS finalized arrangements for $250 million of revolving credit
facilities with a syndicate of commercial banks in April 1995 (the
"Credit Facilities"). The Credit Facilities mature at various times
through April 30, 2000 and bear interest at a floating rate. MFS
anticipates that the Credit Facilities, together with cash on hand
and internally generated funds, will be sufficient to fund its
anticipated operating losses, working capital needs and the
remaining capital spending requirements necessary to complete its
expansion. MFS may, however, obtain vendor financing as an
alternative to utilization of all or a portion of the Credit
Facilities. As a result of the recent rapid pace of various
regulatory, legislative and competitive changes in the United
States and abroad, MFS has the opportunity to offer cost-effective
telecommunications services sooner and in more business markets
than had previously been expected. MFS believes that these
opportunities include the further acceleration of network
development in the United States, deployment of additional switches
resulting in the provision of switched services in approximately 50
metropolitan areas in the United States and the expansion of its
international operations. The international expansions contemplate
a total of approximately 25 business markets with an increasing
focus on facilities-based operations primarily in the European
Community.
In April 1995, MFS filed a Registration Statement on Form S-3 with
the Securities and Exchange Commission for a public offering of
7,400,000 Depository Shares (the "Offering"), each representing an
interest in a share of convertible preferred stock. Each
Depository Share will be mandatorily convertible into one share of
common stock on June 15, 1999. The exact timing and size of the
offering will be subject to prevailing market conditions. In
addition to the Offering, MFS will continue to consider other
opportunities to sell equity or debt securities in the public or
private markets to implement its financing strategy of maintaining
financial flexibility to react to opportunities in the rapidly
evolving telecommunications marketplace while cost-effectively
funding the capital investments required to implement its business
development plan. The net proceeds of the Offering are expected to
provide the capital necessary to fund certain of these new business
opportunities. In addition MFS may obtain vendor financing and
utilize the Credit Facilities, to the extent available, to fund
certain aspects of its business development plan. MFS will
continue to consider other opportunities to sell equity or debt
securities in the public or private markets to implement the
financing strategy described above.
MFS from time to time evaluates acquisitions in pursuit of its
business strategy, either as an alternative to constructing
networks, adding customers, or to the introduction of services that
complement existing and/or planned services. Such acquisitions may
be significant in size and could use a substantial portion of MFS'
available cash.
From time to time, MFS has had discussions with other
communications entities concerning the establishment of possible
strategic relationships, including transactions involving
substantial acquisitions, combinations and equity investments in
MFS or one of its subsidiaries. In addition, certain acquisitions,
may provide MFS with the opportunity to acquire an established
customer base. MFS intends to consider appropriate opportunities
to establish strategic relationships.
PKS' management has asked the Internal Revenue Service 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"). PKS' management proposed a plan
(the "Plan") to implement the Spin-off to PKS' Board of Directors
during the second quarter of 1995. If the Board of Directors
approves the Plan, and the Internal Revenue Service issues the
Ruling, PKS could complete the Spin-off as early as the third
quarter of 1995.
The Spin-off might not occur. For example, PKS might not receive
the Ruling or the Board might not adopt the Plan. In addition, the
issuance of the MFS Preferred Stock necessary to obtain the Ruling
(as described below), would require a favorable vote from a
majority of the minority common stockholders of MFS, other than
PKS, present and voting in person or by proxy at a special MFS
stockholders meeting. If the favorable vote is not received, MFS
would not be able to issue the MFS Preferred Stock and PKS would
not be able to complete the Spin-off. Also, the Spin-off is
subject to receipt of certain other approvals, some of which might
not be received. Finally, if PKS' Board of Directors adopts the
Plan, it would reserve the right to abandon, defer or modify the
Spin-off at any time.
MFS has agreed in principle to issue PKS a special class of high-
vote convertible preferred stock (the "MFS Preferred Stock")
designed to permit PKS to satisfy certain requirements for
receiving the Ruling. MFS would issue the Preferred Stock to PKS in
exchange for the transfer by PKS to MFS of approximately 3.0
million of the shares of MFS common stock currently held by PKS.
PKS anticipates that the MFS Preferred Stock (i) would have a face
value of approximately $15-25 million, (ii) would be convertible
into MFS common stock at any time after the first anniversary of
the date the MFS Preferred Stock is issued, (iii) would have
dividend rate and a conversion premium determined by market
conditions at the time that the MFS Preferred Stock is issued, (iv)
would be redeemable at par six years after the date of issuance,
and (v) would be non transferable for six years after the date of
issuance except under certain limited circumstances. At the option
of MFS, dividends on the MFS Preferred Stock could be paid either
in cash or in shares of MFS Common Stock. Each share of MFS
Preferred Stock would have approximately five votes per share in
any election of MFS directors. If the Spin-off occurs, PKS would
distribute to Class D stockholders both the MFS Preferred Stock and
all of the common stock of MFS then held by PKS. If the Spin-off
does not occur, MFS would not issue the MFS Preferred Stock to PKS.
The Plan would provide for an exchange offer (the "Exchange Offer")
by PKS for Class C 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 C Stock on terms similar
to those upon which Class C Stock can be converted into Class D
Stock during the annual conversion period provided in the Company's
Certificate of Incorporation. As a result, Class C Stockholders
wanting to convert Class C Stock to Class D Stock would not be
disadvantaged if the Spin-off were to be completed before the next
conversion permitted by the Certificate of Incorporation. If an
Exchange Offer could not be completed prior to the next conversion
under the Certificate of Incorporation, PKS probably would defer
any Spin-off until the first quarter of 1996.
See Note 5 to the Financial Statements with regard to the Whitney
Benefits case.
