FORM 10-Q
UNITED STATES
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 June 30, 1997
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 reports(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, 1997:
Class C Common Stock ................... 10,088,879 shares
Class D Common Stock ................... 24,575,825 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 4. Submission of Matters to a Vote of Security Holders
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
June 30, June 30,
(dollars in millions,
except per share data) 1997 1996 1997 1996
Revenue $ 735 $ 718 $ 1,381 $ 1,363
Cost of Revenue (595) (598) (1,143) (1,159)
------ ------ ------- -------
140 120 238 204
General and Administrative Expenses (77) (63) (153) (125)
------ ------ ------- -------
Operating Earnings 63 57 85 79
Other Income (Expense):
Equity Earnings, net 15 3 20 3
Investment Income, net 13 18 27 37
Interest Expense, net (12) (8) (20) (15)
Other, net 7 9 20 14
------ ------ ------- -------
23 22 47 39
------ ------ ------- -------
Earnings Before Income Taxes and
Minority Interest 86 79 132 118
Provision for Income Taxes (33) (32) (50) (46)
Minority Interest in Net Loss (Income)
of Subsidiaries 3 (1) 9 (1)
------ ------ ------ -------
Net Earnings $ 56 $ 46 $ 91 $ 71
====== ====== ====== =======
Earnings Attributable to Class
B&C Stock $ 35 $ 29 $ 50 $ 36
====== ====== ====== ======
Earnings Attributable to Class
D Stock $ 21 $ 17 $ 41 $ 35
====== ====== ====== ======
Primary Earnings per Share:
Class B&C $ 3.70 $ 2.79 $ 5.34 $ 3.46
====== ====== ====== ======
Class D $ .87 $ .77 $ 1.67 $ 1.54
====== ====== ====== ======
Fully Diluted Earnings per Share:
Class B&C $ 3.55 $ 2.70 $ 5.13 $ 3.36
====== ====== ====== ======
Class D $ .87 $ .77 $ 1.67 $ 1.54
====== ====== ====== ======
Cash Dividends per Common Share:
Class B&C $ .70 $ .60 $ .70 $ .60
====== ====== ====== ======
Class D $ - $ - $ - $ -
====== ====== ====== ======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
June 30, December 28,
1997 1996
(dollars in millions, except per share data) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 388 $ 320
Marketable securities 368 426
Restricted securities 24 25
Receivables, less allowance of $18 and $20 421 357
Costs and earnings in excess of
billings on uncompleted contracts 95 80
Investment in construction joint ventures 113 91
Deferred income taxes 65 59
Other 50 45
------ -----
Total Current Assets 1,524 1,403
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $812 and $744 872 807
Investments 946 900
Intangible Assets, net 393 368
Other Assets 70 72
------ -----
$3,805 $3,550
====== ======
See accompanying notes to consolidated condensed financial statements.
PETER KIEWIT SONS', INC.
Consolidated Condensed Balance Sheets
June 30, December 28,
1997 1996
(dollars in millions, except per share data) (unaudited)
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 227 $ 235
Current portion of long-term debt:
Telecommunications 11 55
Other 3 2
Accrued costs and billings in excess
of revenue on uncompleted contracts 193 124
Accrued insurance costs 85 81
Other 142 140
------- -------
Total Current Liabilities 661 637
Long-Term Debt, less current portion:
Telecommunications 244 207
Other 149 125
Deferred Income Taxes 227 163
Retirement Benefits 47 48
Accrued Reclamation Costs 102 99
Other Liabilities 231 234
Minority Interest 218 218
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:
-0- outstanding in 1997 and 263,468 in 1996 - -
Class C, authorized 125,000,000 shares:
10,093,635 outstanding in 1997 and
10,743,173 in 1996 1 1
Class D, authorized 50,000,000 shares:
24,575,825 outstanding in 1997 and
23,219,744 in 1996 1 1
Additional paid-in capital 273 235
Foreign currency adjustment (8) (7)
Net unrealized holding gain 10 23
Retained earnings 1,649 1,566
------- ------
Total Stockholders' Equity 1,926 1,819
------- ------
$ 3,805 $3,550
======= ======
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) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 175 $ 137
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 186 194
Purchases of marketable securities (124) (156)
Change in restricted securities 2 2
Proceeds from sale of property, plant
and equipment, and other investments 26 20
Capital expenditures (132) (80)
Acquisitions and investments, net (89) (86)
Other - 2
------ -----
Net cash used in investing activities (131) (104)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 18 11
Payments on long-term debt, including
current portion (7) (17)
Net change in short-term borrowings - (45)
Repurchases of common stock (1) (15)
Dividends paid (25) (25)
Issuance of common stock 39 27
------ -----
Net cash provided by (used in) financing activities 24 (64)
------ -----
Net change in cash and cash equivalents 68 (31)
Cash and cash equivalents at beginning of period 320 457
------ -----
Cash and cash equivalents at end of period $ 388 $ 426
====== =====
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 28, 1996 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 28, 1996.
Receivables at June 30, 1997 and December 28, 1996 include approximately $72
million and $86 million, respectively of retainage on uncompleted projects,
the majority of which is expected to be collected within one year. Included
in the retainage amounts are $32 million and $53 million of securities which
are being held by the owners of various construction projects in lieu of
retainage.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
When appropriate, items within the consolidation condensed financial
statements have been reclassified from the previous periods to conform to
current year presentation.
2. Earnings Per Share:
Primary and fully diluted earnings per share of common stock have been
computed using the weighted average number of shares outstanding during each
period after giving effect to common stock equivalents and other dilutive
securities. The number of shares used in computing earnings per share was
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Primary earnings per share:
Class B&C 9,301,036 10,353,305 9,307,834 10,305,087
Class D 24,579,927 23,205,830 24,544,153 23,221,026
Fully diluted earnings per share:
Class B&C 9,737,869 10,712,305 9,744,667 10,664,087
Class D 24,579,927 23,205,830 24,544,153 23,221,026
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". The
statement establishes standards for computing and presenting earnings per
share and requires the restatement of prior period earnings per share data
presented. This statement is effective for financial statements issued for
periods ending after December 15, 1997 and earlier application is not
permitted. Basic and diluted earnings per share, as defined in SFAS No. 128,
are not expected to vary significantly from the primary and fully diluted
earnings per share shown on the consolidated statements of earnings.
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 ("KCG") contains the Company's construction and materials operations of
Kiewit Construction Group Inc. The Diversified Group ("KDG") contains coal
mining properties owned by Kiewit Coal Properties Inc., energy investments,
including 30% interests in CalEnergy Company, Inc. ("CalEnergy") and CE Electric
UK, plc ("CE Electric"), investments in international energy projects,
communications companies owned by C-TEC Corporation ("C-TEC"), California
Private Transportation Company, L.P. ("CPTC"), the owner-operator of the
SR91 toll road in California, an information services business and
miscellaneous investments, all owned by Kiewit Diversified Group Inc.
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 28, 1996 was derived from the audited financial
statements of the respective groups which were exhibits to the 1996 Form 10-K.
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.
(in millions, except per share data)
Construction & Mining Group:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Results of Operations:
Revenue $ 569 $ 570 $ 1,047 $1,072
Net earnings 35 29 50 36
Primary earnings per share 3.70 2.79 5.34 3.46
Fully diluted earnings per share 3.55 2.70 5.13 3.36
June 30, December 28,
1997 1996
Financial Position:
Working capital $ 324 $ 367
Total assets 1,117 1,042
Long-term debt, less current portion 16 12
Stockholders' equity 559 562
Included within the results of operations are mine management fees paid by the
Diversified Group of $7 million and $8 million for the three months ended
June 30, 1997 and 1996 and $16 million and $15 million for the six months
ended June 30, 1997 and 1996.
(in millions, except per share data)
Diversified Group:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Results of Operations:
Revenue $ 179 $ 162 $ 355 $ 317
Net earnings 21 17 41 35
Primary earnings per share .87 .77 1.67 1.54
Fully diluted earnings per share .87 .77 1.67 1.54
June 30, December 28,
1997 1996
Financial Position:
Working capital $ 539 $ 399
Total assets 2,715 2,528
Long-term debt, less current portion 377 320
Stockholders' equity 1,367 1,257
Included within the results of operations are mine management fees paid to the
Construction & Mining Group of $7 million and $8 million for the three months
ended June 30, 1997 and 1996 and $16 million and $15 million for the six
months ended June 30, 1997 and 1996.
4. Acquisitions:
In 1996, C-TEC purchased 80% of Freedom New York, L.L.C. ("Freedom"). Freedom
provides subscription television services using microwave frequencies in New
York City and selected areas of New Jersey. In March 1997, C-TEC paid
$40 million (including $10 million of non-capitalizable costs) in connection
with a series of transactions which resulted in C-TEC having a 100% ownership
interest in the assets of Freedom. The acquisition was accounted for as a
purchase. The purchase price (net of non-capitalizable costs) exceeded the fair
value of net assets acquired by $25 million, which is recognized as goodwill
and is being amortized over approximately 6 years.
On December 24, 1996, CE Electric which is 70% owned indirectly by CalEnergy and
30% owned indirectly by KDG, acquired majority ownership of the outstanding
ordinary share capital of Northern Electric plc ("Northern") pursuant to a
tender offer (the "Tender Offer") commenced in the United Kingdom by CE
Electric on November 5, 1996. As of March 18, 1997, CE Electric effectively
owned 100% of Northern's ordinary shares.
As of June 30, 1997, CalEnergy and KDG had contributed to CE Electric
approximately $410 million and $176 million, respectively, of the
approximately $1.3 billion required to acquire all of Northern's
ordinary and preference shares in connection with the Tender Offer.
The remaining funds necessary to consummate the Tender Offer were provided
by a term loan ($921 million) and revolving facility agreement obtained by
CE Electric. KDG has not guaranteed, and is not otherwise subject to
recourse for, amounts borrowed under these facilities.
On July 2, 1997, the Labour Party in the United Kingdom announced the
details of its proposed "Windfall Tax" to be levied against privatized
British utilities. This one-time tax will be 23% of the difference between
the value at the time of privatization and the utility's current value based
on profits over a period of up to four years. At the time of acquisition,
CE Electric accounted for the potential tax as a purchase accounting
contingent liability. However, the Securities and Exchange Commission
has subsequently permitted an acquiring company, in a similar situation,
to account for the tax as a one-time charge. CE Electric will take a charge
of approximately $200 million when the tax is enacted. The total impact to
the Company, directly through its investment in CE Electric and indirectly
through its investment in CalEnergy, is expected to approximate $85 million.
On April 18, 1997, KCG and a partner each invested $15 million to acquire a
96% interest in Oak Mountain Energy L.L.C. ("Oak Mountain"). Oak Mountain
then acquired the existing assets of an underground coal mine in Alabama for
approximately $18 million and assumed approximately $14 million of related
liabilities. Oak Mountain intends to use the remaining cash and $30 million
of nonrecourse bank borrowings to retire the existing debt and further
develop and modernize the mine. Oak Mountain's results are consolidated
with those of the Company on a pro-rata basis since the date of acquisition.
The coal mine's results of operations prior to the acquisition were not
significant relative to the Company's results.
5. Investments:
The Company is able to defer $40 million of taxable gain with respect to the
1995 Whitney Benefits litigation settlement by investing in real estate. In
February 1997, KDG purchased an office building in Aurora, Colorado for $22
million. KDG may make additional real estate investments to defer the
remaining balance. On June 30, 1997, KDG closed a $16 million financing
agreement with Metropolitan Life Insurance Company. The 15 year note is
collateralized by the Aurora property and carries an interest rate of 8.38%.
In late 1995, a KDG and CalEnergy venture, CE Casecnan Water and Energy
Company, Inc., ("Casecnan") closed financing and commenced construction of a
$495 million irrigation and hydroelectric power project located on the
Philippine island of Luzon. KDG and CalEnergy have each made $62 million of
equity contributions to the project.
The Casecnan project was being constructed on a joint and several basis by
Hanbo Corporation and Hanbo Engineering & Construction Co. Ltd. ("HECC"),
(together, "Contractors"), both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The Contractor's
obligations under the construction contract ("Hanbo Contract") are
guaranteed by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a large South
Korean steel company. In addition, the Contractor's obligations are secured
by an unconditional, irrevocable standby letter of credit issued by Korea
First Bank ("KFB") in the approximate amount of $118 million. During the
first quarter of 1997 Hanbo Corporation, HECC and Hanbo Steel each filed to
seek bankruptcy protection in South Korea and KFB's credit rating was
downgraded because of the substantial loans it made to Hanbo Steel.
On May 7, 1997, Casecnan announced that it had terminated the Hanbo Contract
and had entered into a new engineer, procure and construct contract to
complete the construction of the project (the "Replacement Contract"). The
work under the Replacement Contract will be conducted by a consortium of
contractors and subcontractors including Siemens A.G., Sulzer Hydro Ltd.,
Black & Veatch and Colenco Power Engineering Ltd., and will be headed by
Cooperativa Muratori Cementista CMC di Ravenna and Impressa Pizzarotti &
C. Spa. The Hanbo Contract was terminated because of events of default
under that contract including the fact that the Contractors had filed for
court receivership protection in South Korea. In connection with the
contract termination, Casecnan made a $79 million draw request under the
letter of credit issued by KFB to pay for certain transition costs and other
damages under the Hanbo Contract. KFB failed to honor the draw request and
Casecnan filed suit in New York State court. KFB funded, pursuant to a court
order, the $79 million into an interest bearing account at an independent
financial institution in the United States. This matter is still unresolved.
If KFB should fail to honor its obligations under the letter of credit, such
action may have a material adverse effect on the Casecnan project. However,
based on information available, KDG does not currently believe its investment
is impaired.
The Company and CalEnergy have agreed to jointly develop and construct
geothermal power facilities at the Dieng and Patuha sites in Indonesia.
Dieng Unit 1 is being constructed and is expected to be placed in commercial
operation later this year. An additional five units are expected to be
constructed on a modular basis as the geothermal resources are developed. On
June 12, 1997, the Company and CalEnergy closed a $400 million revolving
credit facility to finance the development and construction of the remaining
Indonesian projects. The credit facility is collateralized by the Indonesian
assets and is nonrecourse to the Company.
6. C-TEC Restructuring:
In February 1997, C-TEC announced a plan to separate its operations along
business lines into three separate, publicly traded companies:
Commonwealth Telephone Enterprises, Inc. containing the local
telephone group and related engineering business;
Cable Michigan, Inc., containing the cable television operations
in Michigan; and
RCN Corporation, Inc., which will consist of RCN Telecom Services;
C-TEC's existing cable systems in the Boston-Washington D.C.
corridor; and the investment in Megacable S.A. de C.V., a cable
operator in Mexico. RCN Telecom Services is a provider of
packaged local and long distance telephone, video, and internet
access services provided over fiber optic networks to residential
customers in Boston and New York City.
The restructuring should permit investors and the financial markets to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital on the most efficient terms.
In July 1997, C-TEC closed four separate credit facilities with a syndicate
of banks aggregating $410 million. C-TEC intends to use these credit
facilities to refinance the cable group's existing Senior Secured Notes and
to fund RCN's continued development.
On June 18, 1997, C-TEC received approval by the Internal Revenue Service to
conduct the tax-free spin-off of Cable Michigan and RCN Corporation. While
it is anticipated the proposed restructuring will occur by the fourth
quarter, the spin-offs are subject to receipt of other regulatory approvals
and certain other conditions. If the reorganization and spin-offs occur, KDG
will own less than 50% of the outstanding shares and voting rights of each
entity, and will therefore account for each entity using the equity method
for all of 1997.
On May 12, 1997, C-TEC announced that it had proposed to acquire the 38% of
the common stock of Mercom Inc. ("Mercom") not currently owned by it in
exchange for 8.75% of the common stock of Cable Michigan. The proposed
exchange ratio is based on the assumption that Cable Michigan will have
$125 million of debt outstanding at the time of the transaction.
The proposal is subject to certain conditions, including the consummation of
C-TEC's restructuring and the receipt of all required regulatory approvals.
On June 23, 1997, C-TEC announced that due to the earlier than anticipated
IRS approval of its own restructuring, it was suspending discussions
with Mercom until after its restructuring was complete. C-TEC reserves
the right to withdraw its proposal at any time prior to the execution of a
definitive agreement. There can be no assurance as to the terms of any
transaction or that any transaction will take place.
The following is financial information of the Company had C-TEC been accounted
for utilizing the equity method in the consolidated condensed financial
statements as of June 30, 1997, and December 28, 1996 and for the three and
six months ended June 30, 1997 and 1996.
June 30, December 28,
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 330 $ 244
Marketable securities 364 379
Restricted securities 24 25
Receivables, less allowance of $15 and $17 370 315
Costs and earnings in excess of billings on
uncompleted contracts 95 80
Investment in construction joint ventures 113 91
Deferred income taxes 55 49
Other 38 32
------- -------
Total Current Assets 1,389 1,215
Property, Plant and Equipment, net 377 339
Investments 1,211 1,166
Intangible Assets, net 45 38
Other Assets 44 47
------- -------
$ 3,066 $ 2,805
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 191 $ 197
Current portion of long-term debt 3 2
Accrued costs and billings in excess of revenue
on uncompleted contracts 180 112
Accrued insurance costs 85 81
Other 76 78
------- -------
Total Current Liabilities 535 470
Long-Term Debt, less current portion 149 125
Deferred Income Taxes 128 62
Retirement Benefits 45 45
Accrued Reclamation Costs 102 99
Other Liabilities 179 181
Minority Interest 2 4
Total Stockholders' Equity 1,926 1,819
------- -------
$ 3,066 $ 2,805
======= =======
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in millions) 1997 1996 1997 1996
Revenue $ 637 $ 625 $ 1,187 $ 1,180
Cost of Revenue (524) (534) (1,004) (1,035)
------ ------ ------- -------
113 91 183 145
General and Administrative Expenses (48) (42) (89) (82)
------ ------- ------ ------
Operating Earnings 65 49 94 63
Other Income (Expense):
Equity Earnings, net 10 (2) 11 (2)
Investment Income, net 11 15 22 30
Interest Expense, net (5) (3) (8) (3)
Other, net 6 13 20 20
------ ------- ------ -----
22 23 45 45
------ ------- ------ -----
Earnings Before Income Taxes and
Minority Interest 87 72 139 108
Provision for Income Taxes (32) (28) (50) (39)
Minority Interest in Net Loss
of Subsidiaries 1 2 2 2
------- ------- ----- -----
Net Earnings $ 56 $ 46 $ 91 $ 71
======= ======= ===== =====
Six Months Ended
June 30,
(dollars in millions) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 145 $ 105
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 142 76
Purchases of marketable securities (124) (104)
Change in restricted securities 3 2
Proceeds from sale of property, plant
and equipment, and other investments 26 20
Capital expenditures (74) (53)
Acquisitions and investments, net (61) (103)
Other - 1
------ ------
Net cash used in investing activities (88) (161)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 18 11
Payments on long-term debt including
current portion (2) (5)
Net change in short-term borrowings - (45)
Repurchases of common stock (1) (15)
Dividends paid (25) (24)
Issuance of common stock 39 27
------ ------
Net cash provided by (used in) financing activities 29 (51)
------ -----
Net change in cash and cash equivalents 86 (107)
Cash and cash equivalents at beginning of period 244 408
------ -----
Cash and cash equivalents at end of period $ 330 $ 301
====== =====
7. Other Matters:
On June 19, 1997, James Q. Crowe was appointed President and CEO of Kiewit
Diversified Group Inc. Mr. Crowe assumed the position previously held by
Richard R. Jaros, who will continue to serve on the PKS Board of Directors.
Mr. Crowe was the Chairman and CEO of MFS Communications Company until
December 31, 1996, when the company was purchased by WorldCom, Inc. MFS
was a subsidiary of the Company until September 1995, when it was spun-off
and became an independent, publicly owned corporation.
The Company 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
Company's financial position, future results of operations or future cash
flows.
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 a copy of each exhibit without charge upon
the written request addressed to Stock Registrar, Peter Kiewit Sons', Inc.,
1000 Kiewit Plaza, Omaha, Nebraska 68131.
Results of Operations- Second Quarter 1997 vs. Second Quarter 1996
Revenue from each of the Company's business segments for the three months
ended June 30 comprised the following (in millions):
1997 1996
Construction $ 569 $ 570
Coal Mining 54 58
Telecommunications 98 93
Other 27 11
Eliminations (13) (14)
------ -------
$ 735 $ 718
====== =======
Construction. KCG's construction operations can be separated into two
components; construction and materials. Revenue for the construction
business was down 3% to $494 million compared to $510 million in 1996.
The decline is due to several large projects being in the start-up phase and
the substantial completion of the San Joaquin toll road project at the end
of 1996. Although construction revenue was down, materials revenue
increased 25% due to the strong demand for aggregates in the Arizona market.
Contract backlog at June 30, 1997 was $3.5 billion of which 4% is attributable
to foreign operations located in Canada and Indonesia. Domestic projects are
spread geographically throughout the United States. Included in backlog is
$755 million for the "I-15" project awarded in late March. Kiewit is the
sponsoring partner on the design-build joint venture reconstructing 16 miles
of Interstate 15 through the Salt Lake City area. The project is expected to
be completed in 2001.
Margins on construction projects for the second quarter of 1997 increased to
13% compared to 10% for the same period in 1996. The recognition of
additional revenue from San Joaquin toll road was the primary factor
contributing to the increase. Material margins, as a percentage of revenue,
in 1997 were unchanged from 1996.
Mining. Mining revenue declined 7% in the second quarter of 1997 compared to
the same period in 1996. Commonwealth Edison Company ("Commonwealth") has
the flexibility under the amended contract to accelerate or defer delivery of
alternate source coal provided it accepts delivery of the aggregate minimum
commitment at the end of each year. In early 1996, alternate source coal
shipments fell below minimum levels. These shortfalls were partially made
up in the second quarter of 1996. In 1997, the opposite scenario occurred.
Commonwealth took delivery of more coal in the first quarter than the second
quarter. Partially offsetting the decline in alternate source coal sales were
additional spot sales to utilities in the northwestern United States.
Cost as a percentage of revenue for the coal mining operations in the second
quarter of 1997 was consistent with that of the prior year. A spot market
customer bought out a portion of its contract by making a payment equivalent
to 60% of the price of coal. These proceeds, with no corresponding costs,
offset the decline in higher margin alternate coal sales.
Telecommunications. The telecommunications segment is comprised of C-TEC's
telephone, cable and RCN groups. Due to the receipt of the IRS approval to
spin-off Cable Michigan and RCN, C-TEC has reclassified these businesses as
discontinued operations and has recognized, in the second quarter, their
estimated losses through the projected spin-off date. KDG's equity ownership
in all three businesses will remain at approximately 48% at the spin-off
date. Therefore, KDG will continue to reflect the operations of Cable
Michigan and RCN as continuing operations and has not accrued the estimated
losses of these businesses through the spin-off date.
Telecommunications revenue for the Company increased $5 million or 5% for
the three months ended June 30, 1997 compared to the same period in 1996.
The telephone group's revenue was essentially unchanged in 1997. Higher
local network service revenue, and interstate and intrastate access revenue
were primarily offset by a decline in construction revenue from the
communications services business. The communications services business is
continually subject to fluctuations due to its nonrecurring revenue streams,
market conditions and the effect of competition on margins. As of June 30,
1997, the business had minimal backlog and does not anticipate a significant
change in the foreseeable future. Sales for the cable group increased $5
million or 12% in 1997. The increase is attributable to higher basic
service revenue resulting from additional subscribers during the period and
the effects of a rate increase implemented during the first quarter of 1997.
RCN's revenue increased to $3 million in the second quarter of 1997. An
increase of subscribers in the Boston and New York markets is responsible
for the increase.
Telecommunications cost of sales increased 11% in the second quarter of 1997.
Expenses for the telephone group remained level with those of the same period
in 1996 as increases in advertising, information systems services expenses
and the costs associated with the development of a competitive local
telephone effort were substantially offset by lower materials costs associated
with the video conferencing sales and lower construction costs of the
communications services business resulting from the decline in sales. The
cable group's costs increased 10% in 1997. The increase is primarily
attributable to higher basic programming costs, resulting from higher
programming rates, additional channels and additional subscribers. The costs
associated with the development of new business in New York and Boston,
primarily personnel, advertising and programming, resulted in a $7 million
increase in RCN's costs.
General and Administrative Expenses. General and administrative expenses
increased 23% in the second quarter of 1997 compared to the same period in
1996. The expenses of Freedom and the professional fees incurred by C-TEC
for its restructuring were the primary factors for the increase. Also
contributing to the increase were general and administrative expenses
associated with the growing information services business.
Equity Earnings, net. Equity earnings increased significantly in 1997.
KDG's proportionate share of CalEnergy's earnings increased $5 million in
the second quarter of 1997 to $9 million. The conversion of CalEnergy
debentures to common stock and the exercising of options increased the
Company's ownership interest in CalEnergy from 23% at June 30, 1996 to 30%
at June 30, 1997. CalEnergy's earnings also increased primarily due to the
completion and commencement of operations in the Salton Sea Unit IV and two
Philippine geothermal facilities, the purchase of three cogeneration facilities
and the acquisition of Northern Electric, all of which occurred in the last
half of 1996. In addition to contributing to CalEnergy's earnings, KDG's
proportionate share of Northern Electric also provided $6 million of income.
Partially offsetting these gains were losses attributable to the Casecnan
project. The Casecnan loss during construction results from the variance in
borrowing and investing interest rates on the funds generated by the
project's debt offering in 1995.
Investment Income, net. The decline in investment income is attributable to
a reduction of interest income, due to a smaller average portfolio balance
and the conversion of CalEnergy debentures into common stock in September
1996, and a decline in gains on the disposal of marketable and equity
securities.
Interest Expense, net. Interest expense increased from $8 million in 1996
to $12 million in 1997. Interest of $2 million was capitalized by CPTC in
1996 due to the construction of the SR91 toll road. Due to the commencement
of operations, interest of $3 million was charged against earnings in 1997.
Other, net. Other income declined slightly in 1997. Gains on the disposal of
property, plant and equipment declined in the second quarter of 1997 to $5
million from $8 million in the same period in 1996. This decline was
partially offset by an increase in other miscellaneous income.
Provision for Income Taxes. The effective income tax rate for the second
quarter of 1997 and 1996 differs from the expected statutory rate of
35% primarily due to the state income taxes.
Minority Interest in Net Loss (Income) of Subsidiaries. C-TEC's losses,
primarily due to the development of the RCN business and restructuring
expenses, and the losses associated with the SR91 toll road, resulted in the
increased losses attributable to minority shareholders.
Results of Operations - Six Months 1997 vs. Six Months 1996
Revenue from each of the Company's business segments for the six months ended
June 30 comprised the following (in millions):
1997 1996
Construction $ 1,047 $ 1,072
Coal Mining 115 111
Telecommunications 194 183
Other 46 23
Eliminations (21) (26)
-------- -------
$ 1,381 $ 1,363
======== =======
Construction. Total revenue for the construction segment for the six months
ended June 30, 1997 decreased $25 million or 2% compared to the same period
in 1996. Revenue for the construction business was down 4% to $918 million
compared to $961 million in 1996. The decline is due to several large
projects being in the start-up phase and the substantial completion of the San
Joaquin toll road project at the end of 1996. Although construction revenue
was down, materials revenue increased 16% due to the strong demand for
aggregates in the Arizona market.
Margins on construction projects for the first six months of 1997 increased to
10% compared to 8% for the same period in 1996. Claim settlements received
in the first quarter of 1997 and the recognition of additional revenue from
San Joaquin toll road were the primary factors contributing to the increase.
Materials margins in 1997 were consistent with those of 1996.
Mining. Coal sales increased 4% during the first half of 1997. Additional spot
coal sales, partially due to a decline in hydroelectric power generated in
the northwestern United States, and additional contract sales to Mississippi
Power were primarily responsible for the increase in revenue.
Operating costs as a percentage of revenue were virtually unchanged from the
same period in 1996. The increase in lower margin contract and spot sales
was substantially offset by the proceeds from the partial buy-out of a spot
sales contract.
Telecommunications. The Company's telecommunications revenue increased 6% to
$194 million for the six months ended June 30, 1997 compared to the same
period in 1996. Sales for the telephone group were consistent with that of
the prior year. A decline in revenue from the communications services
business was substantially offset by increases in higher local network service
revenue, interstate and intrastate access revenue, and internet access
revenue. Sales for the cable group increased 9% to $79 million for the
period. The increase is primarily attributable to higher basic service revenue
resulting from additional subscribers and the effects of a rate increase
implemented during the first quarter of 1997. RCN's revenue increased $5
million to $6 million for the first half of 1997. This increase is due to
additional subscribers in the Boston and New York markets.
The cost of revenue for the Company's telecommunications segment increased 12%
in 1997. The costs associated with the development of a competitive local
telephone effort in 1997 and the positive effect of a one-time postemployment
benefit adjustment in 1996 were primarily responsible for the 5% increase in
the telephone group's cost of revenue. Partially offsetting these items was
a decline in costs for the communications services business resulting from a
decrease in sales. The cable group's costs increased 9% for the six months
ended June 30, 1997. The increase is primarily due to higher basic programming
costs. The development of the New York and Boston markets resulted in an
$11 million increase in costs for RCN during the period. The most
significant increases occurred in personnel related costs, origination
and programming costs and advertising expenses.
General and Administrative Expenses. General and administrative expenses
increased 22% in 1997. The expenses of Freedom, acquired by C-TEC in 1996,
and certain non capitalized costs of $10 million incurred in connection with
the March 1997 transactions with Freedom's minority shareholders, and the
professional fees incurred for C-TEC's restructuring were primarily
responsible for the higher costs. Also contributing to the increase was
additional costs associated with KDG's growing information services
business.
Equity Earnings, net. Equity earnings increased significantly in 1997. KDG's
proportionate share of CalEnergy's earnings increased $10 million in 1997 to
$16 million. An increase in the Company's share of CalEnergy's earnings and
improvements in those earnings, primarily due to the commencement of
operations of additional geothermal facilities, the acquisitions of three
cogeneration facilities and Northern Electric. KDG's share of Northern
Electric provided $9 million of income. Partially offsetting these gains
were losses attributable to the Casecnan project.
Investment Income, net. Investment income declined 27% in 1997. The
conversion of CalEnergy convertible debentures into common stock, a reduction
in the average portfolio balance due to significant investments in CE
Electric and the RCN businesses and a decline in the gains recognized on sales
of securities, all contributed to reduction in investment income.
Interest Expense, net. Interest expense increased in 1997 to $20 million from
$15 million in 1996. Through June 1996 and 1997, CPTC incurred $4 million
and $5 million of interest on its long-term debt. In 1996 the interest was
capitalized due to the construction of the SR91 toll road. In 1997 the
interest was charged against earnings.
Other, net. Other income is primarily comprised of gains and losses on the
sale and disposition of property, plant and equipment and other assets.
Increased income from the sale of operating assets, and the absence of a
one-time charge for C-TEC's write-off of regulatory assets, led to the
increase in other income.
Provision for Income Taxes. The effective income tax rate for 1997 and 1996
differs from the expected statutory of 35% primarily due to the state income
taxes.
Minority Interest in Net Loss (Income) of Subsidiaries. C-TEC's losses,
primarily due to the development of the RCN business, certain non-capitalized
costs incurred in connection with the March 1997 transactions with Freedom's
minority shareholders and restructuring expenses, and the losses associated
with the SR91 toll road, resulted in the increased losses attributable to
minority shareholders.
Financial Condition - June 30, 1997 vs. December 28, 1996
Excluding C-TEC, described in a separate paragraph below, The Company's
working capital increased $109 million or 15% during the first six months of
1997. The increase was mainly due to cash provided by operations, including
$93 million of tax refunds, and financing activities. The increase was offset
by cash used to fund investing activities.
Investing activities include $61 million of investments, and $74 million of
capital expenditures, including $62 million for construction equipment and $8
million for the information services business. The investments primarily
include KDG's $5 million investment in a Philippine power project, $14
million investment in three Indonesian power projects, $22 million for a
real estate investment and KCG's $15 million investment in Oak Mountain.
These capital outlays were partially offset by $17 million of net proceeds
from the sale of marketable securities and $26 million of proceeds from the
sale of property, plant and equipment and other assets.
Financing sources include $34 million and $5 million for the issuance of Class
C Stock and Class D Stock, and $16 million and $2 million of long-term debt
borrowing to finance KDG's real estate investment and to modernize KCG's Oak
Mountain mine. Financing uses primarily consisted of $13 million of Class C
dividends and $12 million of Class D dividends.
C-TEC's working capital decreased slightly in 1997. The series of
transactions with Freedom's minority shareholders for $40 million, $61
million of capital expenditures to expand the RCN, cable and telephone
networks, and $7 million to repay long-term debt and preferred dividends
were partially funded by the sale of marketable securities of $43 million.
The Company also anticipates making significant investments in its construction,
telecommunications and energy businesses - including its joint venture
agreement with CE covering international power project development activities
- - and searching for opportunities to acquire businesses which provide for
long-term growth. Other long-term liquidity uses include payment of income
taxes and repurchasing the Company's stock. The Company's current financial
condition and borrowing capacity should be sufficient for immediate
operating and investing activities.
In late 1995, a KDG and CalEnergy venture, CE Casecnan Water and Energy Company,
Inc., ("Casecnan") closed financing and commenced construction of a $495
million irrigation and hydroelectric power project located on the Philippine
island of Luzon. KDG and CalEnergy have each made $62 million of equity
contributions to the project.
The Casecnan project was being constructed on a joint and several basis by
Hanbo Corporation and Hanbo Engineering & Construction Co. Ltd. ("HECC"),
(together, "Contractors"), both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The Contractor's
obligations under the construction contract ("Hanbo Contract") are guaranteed
by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a large South Korean
steel company. In addition, the Contractor's obligations are secured by an
unconditional, irrevocable standby letter of credit issued by Korea First Bank
("KFB") in the approximate amount of $118 million. During the first quarter
of 1997 Hanbo Corporation, HECC and Hanbo Steel each filed to seek bankruptcy
protection in South Korea and KFB's credit rating was downgraded because of
the substantial loans it made to Hanbo Steel.
On May 7, 1997, Casecnan announced that it had terminated the Hanbo Contract
and had entered into a new engineer, procure and construct contract to
complete the construction of the project (the "Replacement Contract"). The
work under the Replacement Contract will be conducted by a consortium of
contractors and subcontractors including Siemens A.G., Sulzer Hydro Ltd.,
Black & Veatch and Colenco Power Engineering Ltd., and will be headed by
Cooperativa Muratori Cementista CMC di Ravenna and Impressa Pizzarotti & C
Spa. The Hanbo Contract was terminated because of events of default under
that contract including the fact that the Contractors had filed for court
receivership protection in South Korea. In connection with the contract
termination, Casecnan made a $79 million draw request under the letter of
credit issued by KFB to pay for certain transition costs and other damages
under the Hanbo Contract. KFB failed to honor the draw request and Casecnan
filed suit in New York State Court. KFB funded, pursuant to a court order,
the $79 million into an interest bearing account at an independent financial
institution. This matter still has not been resolved. If KFB would not be
required to honor its obligations under the letter of credit, such action may
have a material adverse effect on the Casecnan project. However, based on
the information available, KDG does not currently believe its investment
is impaired.
In February 1997, C-TEC announced a plan to separate its operations along
business lines into three separate, publicly traded companies:
Commonwealth Telephone Enterprises, Inc. containing the local
telephone group and related engineering business;
Cable Michigan, Inc., containing the cable television operations
in Michigan; and
RCN Corporation, Inc., which will consist of RCN Telecom Services;
C-TEC's existing cable systems in the Boston-Washington D.C.
corridor; and the investment in Megacable S.A. de C.V., a cable
operator in Mexico. RCN Telecom Services is a provider of packaged
local and long distance telephone, video, and internet access
services provided over fiber optic networks to residential
customers in Boston and New York City.
The restructuring should permit investors and the financial markets to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital on the most efficient terms.
In July 1997, C-TEC closed four separate credit facilities with a syndicate
of banks aggregating $410 million. C-TEC intends to use these credit
facilities to refinance the cable group's existing Senior Secured Notes and
to fund RCN's continued development.
On June 18, 1997 C-TEC received approval by the Internal Revenue Service to
conduct the tax-free spin-off of Cable Michigan and RCN Corporation. While
it is anticipated the proposed restructuring will occur by the fourth
quarter, the spin-offs are subject to receipt of other regulatory approvals
and certain other conditions. If the reorganization and spin-offs occur,
KDG will own less than 50% of the outstanding shares and voting rights of
each entity, and will therefore account for each entity using the equity
method.
On May 12, 1997, C-TEC announced that it had proposed to acquire the 38% of the
common stock of Mercom not currently owned by it in exchange for 8.75% of the
common stock of Cable Michigan. The proposed exchange ratio is based on the
assumption that Cable Michigan will have $125 million of debt outstanding at
the time of the transaction.
The proposal is subject to certain conditions, including the consummation of
C-TEC's restructuring and the receipt of all required regulatory approvals.
On June 23, 1997, C-TEC announced that due to the earlier than anticipated
IRS approval of its own restructuring, it was suspending discussions with
Mercom until after its restructuring was complete. C-TEC reserves the right
to withdraw its proposal at any time prior to the execution of a definitive
agreement. There can be no assurance as to the terms of any transaction or
that any transaction will take place.
PETER KIEWIT SONS', INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Corporation's annual stockholders meeting was held on June 7, 1997.
Stockholders were asked to elect separate Class C and Class D directors.
Proxies were received representing 9,085,115 of the 9,260,707 eligible Class
C votes and 22,593,124 of the 24,509,301 eligible Class D votes. Directors
were elected to serve one-year terms. A slate of nominees was proposed by the
incumbent directors. No additional nominations were received and all the
nominees proposed by the board were elected. The following table shows the
votes counted for each candidate and the votes counted against (or withheld
from) each candidate.
Class C Directors Votes For Votes Against
Richard W. Colf 9,085,115 -
Richard Geary 9,085,115 -
Bruce E. Grewcock 9,066,309 18,806
William L. Grewcock 9,079,815 5,300
Tait P. Johnson 8,907,701 177,414
Peter Kiewit, Jr. 9,085,115 -
Allan K. Kirkwood 9,085,115 -
Walter Scott, Jr. 9,077,515 7,600
Kenneth E. Stinson 9,085,115 -
George B. Toll 9,068,729 16,386
Class D Directors Votes For Votes Against
James Q. Crowe 22,548,802 44,322
Robert B. Daugherty 22,577,751 15,373
Charles M. Harper 22,577,751 15,373
Richard R. Jaros 22,517,106 76,018
PETER KIEWIT SONS', INC.
PART II - OTHER INFORMATION
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits filed as part of this report are listed below.
Exhibit
Number
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
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 1997.
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, 1997 \s\ Eric J. Mortensen
Eric J. Mortensen
Controller and Chief
Accounting Officer
PETER KIEWIT SONS', INC.
INDEX TO EXHIBITS
Exhibit
No.
11 Statement regarding computation of per share earnings
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 11
Peter Kiewit Sons', Inc.
Calculation or Earnings per Share
For the three and six months ended
June 30, 1997 and 1996
Class C Stock
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Actual weighted shares
outstanding for the period 9,301,036 10,353,305 9,307,834 10,305,087
Dilutive stock options using
average market price - - - -
--------- ---------- --------- ----------
Total number of shares used to
compute primary earnings per
share. 9,301,036 10,353,305 9,307,834 10,305,087
Additional dilutive stock
options using ending market
price - - - -
Additional dilutive shares
assuming conversion of
convertible debentures 436,833 359,000 436,833 359,000
--------- --------- -------- ----------
Total number of shares used
to compute fully diluted
earnings per share. 9,737,869 10,712,305 9,744,667 10,664,087
========= ========== ========= ==========
Net income available to common
shareholders $ 34,381 $ 28,877 $ 49,717 $ 35,648
Add: Interest expense,
net of tax effect associated
with convertible debentures 140 95 267 190
--------- ---------- ---------- ---------
Net income for fully diluted
shares $ 35,521 $ 28,972 $ 49,984 $ 35,838
========= ========== ========== =========
Primary earnings per share $ 3.70 $ 2.79 $ 5.34 $ 3.46
========= ========== ========== =========
Fully diluted earnings
per share $ 3.55 $ 2.70 $ 5.13 $ 3.36
========= ========== ========== =========
Class D Stock
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Actual weighted shares
outstanding for the period 24,512,273 23,205,830 24,476,499 23,221,026
Dilutive stock options using
average market price 67,654 - 67,654 -
---------- ---------- ---------- ----------
Total number of shares
used to compute primary
earnings per share. 24,579,927 23,205,830 24,544,153 23,221,026
Additional dilutive stock
options using ending
market price - - - -
Additional dilutive shares
assuming conversion of
convertible debentures - - - -
---------- ---------- --------- ----------
Total number of shares
used to compute fully
diluted earnings
per share. 24,579,927 23,205,830 24,544,153 23,221,026
========== ========== ========== ==========
Net income available to
common shareholders $ 21,499 $ 17,801 $ 40,967 $ 35,804
Add: Interest expense,
net of tax effect
associated with convertible
debentures - - - -
---------- ---------- ---------- ---------
Net income for fully
diluted shares $ 21,499 $ 17,801 $ 40,967 $ 35,804
========== ========== =========== =========
Primary earnings per share $ 0.87 $ 0.77 $ 1.67 $ 1.54
========== ========== =========== =========
Fully diluted earnings
per share $ 0.87 $ 0.77 $ 1.67 $ 1.54
========== ========== =========== =========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the period ending June 30, 1997 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-27-1997
<PERIOD-END> JUN-30-1997
<CASH> 388
<SECURITIES> 392
<RECEIVABLES> 439
<ALLOWANCES> 18
<INVENTORY> 19
<CURRENT-ASSETS> 1,524
<PP&E> 1,684
<DEPRECIATION> 812
<TOTAL-ASSETS> 3,805
<CURRENT-LIABILITIES> 661
<BONDS> 393
2
0
<COMMON> 0
<OTHER-SE> 1,924
<TOTAL-LIABILITY-AND-EQUITY> 3,805
<SALES> 1,143
<TOTAL-REVENUES> 1,381
<CGS> 978
<TOTAL-COSTS> 1,143
<OTHER-EXPENSES> 153
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> 132
<INCOME-TAX> 50
<INCOME-CONTINUING> 91
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91
<EPS-PRIMARY> $5.34<F1>
<EPS-DILUTED> $5.13<F2>
<FN>
<F1>$5.34 represents Class C Stock earnings per share, Class D earnings per share:
$1.67.
<F2>$5.13 represents Class C Stock earnings per share, Class D Stock earnings per
share $1.67.
</FN>
</TABLE>
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, 1997
and 1996 and the six months ended June 30, 1997 and 1996
Condensed Balance Sheets as of June 30, 1997 and December 28, 1996
Condensed Statements of Cash Flows for the six months ended June 30, 1997
and 1996
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,
except per share data) 1997 1996 1997 1996
Revenue $ 569 $ 570 $ 1,047 $1,072
Cost of Revenue (496) (511) (942) (989)
------ ----- ------- ------
73 59 105 83
General and Administrative Expenses (32) (29) (64) (59)
------ ----- ------- -------
Operating Earnings 41 30 41 24
Other Income (Expense):
Investment Income, net 5 4 8 8
Interest Expense, net (1) (1) (1) (2)
Other, net 13 15 35 29
------ ----- ------ -----
17 18 42 35
------ ----- ------ -----
Earnings Before Income Taxes 58 48 83 59
Provision for Income Taxes (23) (19) (33) (23)
------ ----- ------ -----
Net Earnings $ 35 $ 29 $ 50 $ 36
====== ===== ====== =====
Primary Earnings per Share $ 3.70 $2.79 $ 5.34 $3.46
====== ===== ====== =====
Fully Diluted Earnings per Share $ 3.55 $2.70 $ 5.13 $3.36
====== ===== ====== =====
See accompanying notes to condensed financial statements.
KIEWIT CONSTRUCTION & MINING GROUP
Condensed Balance Sheets
June 30, December 28,
1997 1996
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 127 $ 173
Marketable securities 33 54
Receivables, less allowance of $15 and $17 336 289
Costs and earnings in excess of
billings on uncompleted contracts 95 80
Investment in construction joint ventures 113 91
Recoverable income taxes 18 6
Deferred income taxes 69 64
Other 16 13
------ -------
Total Current Assets 807 770
Property, Plant and Equipment, less accumulated
depreciation and amortization of $426 and $429 201 165
Investments 87 94
Other Assets 22 13
------ -------
$1,117 $ 1,042
====== =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable, including retainage
of $35 and $33 $ 173 $ 164
Current portion of long-term debt 2 -
Accrued construction costs and billings in excess
of revenue on uncompleted contracts 180 112
Accrued insurance costs 85 81
Other 43 46
------ ------
Total Current Liabilities 483 403
Long-Term Debt, less current portion 16 12
Other Liabilities 59 65
Stockholders' Equity (Redeemable common stock,
$404 million aggregate redemption value):
Common equity 572 568
Net unrealized holding loss (7) (1)
Foreign currency adjustment (6) (5)
------ ------
Total Stockholders' Equity 559 562
------ ------
$1,117 $1,042
====== ======
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) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 37 $ 73
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities 44 67
Purchases of marketable securities (22) (57)
Proceeds from sales of property, plant and equipment 25 16
Acquisitions and investments, net (18) (3)
Capital expenditures (62) (36)
----- -----
Net cash used in investing activities (33) (13)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 2 -
Payments on long-term debt, including current portion - (2)
Net change in short-term borrowings - (45)
Issuance of common stock 34 27
Repurchases of common stock (1) (4)
Dividends paid (13) (12)
Exchange of Class B&C Stock for Class D Stock, net (72) (19)
----- -----
Net cash used in financing activities (50) (55)
----- -----
Net change in cash and cash equivalents (46) 5
Cash and cash equivalents at beginning of period 173 94
----- -----
Cash and cash equivalents at end of period $ 127 $ 99
===== =====
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 28, 1996 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 28, 1996.
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 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.
Receivables at June 30, 1997 and December 28, 1996 include approximately $72
million and $86 million of retainage on uncompleted projects, the majority of
which is expected to be collected within one year. Included in the retainage
amounts are $32 million and $53 million of securities which are being held by
owners of various construction projects in lieu of retainage.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
Where appropriate, items within the condensed financial statements have been
reclassified from the previous periods to conform to current year presentation.
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. In addition, fully
diluted earnings per share reflect the dilutive effect of convertible
debentures. The numbers of shares used in computing earnings per share was
as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Primary 9,301,036 10,353,305 9,307,834 10,305,087
Fully Diluted 9,737,869 10,712,305 9,744,667 10,664,087
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". The
statement establishes standards for computing and presenting earnings per
share and requires the restatement of prior period earnings per share data
presented. This statement is effective for financial statements issued for
periods ending after December 15, 1997 and earlier application is not
permitted. Basic and diluted earnings per share, as defined in SFAS No. 128,
are not expected to vary significantly from the primary and fully diluted
earnings per share shown on the statements of earnings.
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, and items
attributable to the Group are as follows:
(dollars in millions)
June 30, December 28,
1997 1996
Cash and marketable securities $ 11 $ 13
Property, plant and equipment, net 5 5
Other assets 2 1
------ -------
Total Assets $ 18 $ 19
====== =======
Accounts payable $ 2 $ 8
Long-term debt, including current portion 11 12
------ -------
Total Liabilities $ 13 $ 20
====== =======
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Other expense, net $ (1) $ - $ (1) $ (1)
Corporate general and administrative costs have been allocated to the Group.
These allocations were less than $1 million for the three and six months
ended June 30, 1997 and 1996.
Mine management income from the Diversified Group was $7 million and $8
million for the three months ended June 30, 1997 and 1996 and $16 million
and $15 million for the six months ended June 30, 1997 and 1996.
4. Acquisitions:
On April 18, 1997, the Group and a partner each invested $15 million to acquire
a 96% interest in Oak Mountain Energy L.L.C. ("Oak Mountain"). Oak Mountain
then acquired the existing assets of an underground coal mine in Alabama for
approximately $18 million and assumed approximately $14 million of related
liabilities. Oak Mountain intends to use the remaining cash and $30 million of
nonrecourse bank borrowings to retire the existing debt and further develop
and modernize the mine. Oak Mountain's results are consolidated with those
of the Group on a pro-rata basis since the date of acquisition. The coal
mine's results of operations prior to the acquisition were not significant
relative to the Group's results.
5. Other Matters:
The Group is involved in various lawsuits, claims and regulatory proceedings
incidental to its business. Management believes that any resulting
liability, beyond that provided, should not materially affect the Group's
financial position, future results of operations or future cash flows.
Kiewit Construction and Mining Group
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations - Second Quarter 1997 vs. Second Quarter 1996
Revenue from each of the Group's business segments for the three months ended
June 30 was (in millions):
1997 1996
Construction $ 494 $ 510
Materials 75 60
------ ------
$ 569 $ 570
====== ======
Construction. The Group's construction operations can be separated into two
components; construction and materials. Revenue for the construction
business was down 3% to $494 million compared to $510 million in 1996.
The decline is due to several large projects being in the start-up phase and
the substantial completion of the San Joaquin toll road project at the end of
1996. Although construction revenue was down, materials revenue increased
25% due to the strong demand for aggregates in the Arizona market.
Contract backlog at June 30, 1997 was $3.5 billion of which 4% is attributable
to foreign operations located in Canada and Indonesia. Domestic projects
are spread geographically throughout the United States. Included in backlog
is $755 million for the "I-15" project awarded in late March. Kiewit is the
sponsoring partner on the design-build joint venture reconstructing 16 miles
of Interstate 15 through the Salt Lake City area. The project is expected to
be completed in 2001.
Margins on construction projects for the second quarter of 1997 increased to
13% compared to 10% for the same period in 1996. The recognition of
additional revenue from San Joaquin toll road was the primary factor
contributing to the increase. Margins, as a percentage of revenue, for the
materials business were unchanged from the prior year.
General and Administrative Expenses. General and administrative expenses
increased 10% in 1997. An increase in travel and professional services
expenses were partially offset by a decline in insurance costs.
Other, net. Other income is primarily comprised of mine management income
from the Diversified Group and gains and losses on the disposition of
property, plant and equipment and other assets. Other income decreased 7%
in 1997 as compared to 1996. The decrease is attributable to lower mine
management fee income and decreased gains on the disposition of construction
equipment.
Provision for Income Taxes. The effective income tax rates for 1997 and 1996
are higher than the expected statutory rate of 35% primarily due to state
income taxes.
Results of Operations - Six Months 1997 vs. Six Months 1996
Revenue from each of the Group's business segments for the six months ended
June 30 was (in millions):
1997 1996
Construction $ 918 $ 961
Materials 129 111
------ ------
$1,047 $1,072
====== ======
Construction. The Group's total revenue for the six months ended June 30, 1997
decreased $25 million or 2% compared to the same period in 1996. Revenue for
the construction business was down 4% to $918 million compared to $961
million in 1996. The decline is due to several large projects being in the
start-up phase and the substantial completion of the San Joaquin toll road
project at the end of 1996. Although construction revenue was down,
materials revenue increased 16% due to the strong demand for aggregates in
the Arizona market.
Margins on construction projects for the first six months of 1997 increased to
10% compared to 8% for the same period in 1996. Claim settlements received
in the first quarter of 1997 and the recognition of additional revenue
from San Joaquin toll road were the primary factors contributing to the
increase. Materials margins in 1997, as a percentage of revenue, were
unchanged from the same period in 1996.
General and Administrative Expenses. General and administrative expenses
increased 8% in 1997 compared to 1996. The increase was attributable to
higher compensation, travel and professional services expenses.
Interest Expense, net. The repayment of short term borrowings in the first
and second quarter of 1996 was responsible for the reduction of interest
expense.
Other, net. The 21% increase in other income in 1997 is attributable to
higher mine management fee income and increased gains on the disposition of
construction equipment.
Provision for Income Taxes. The effective income tax rates for 1997 and 1996
differ from the expected statutory rate of 35% primarily due to state income
taxes.
Financial Condition - June 30, 1997 vs. December 28, 1996
The Group's working capital decreased $43 million or 12% during the first six
months of 1997. The decrease was primarily due to capital expenditures of
$62 million, investments and acquisitions of $18 million, the exchange and
repurchase of Class B&C stock totaling $73 million, dividend payments of $13
million and $37 million of cash used in operating activities. Partially
offsetting these uses were the issuance of common stock totaling $34 million,
net proceeds from the sale of marketable securities of $22 million, proceeds
from the sale of property, plant and equipment and other assets of $25 million
and $2 million of debt borrowings.
The Group typically anticipates investing between $40 and $75 million annually
in its construction business, including opportunities to acquire additional
businesses. On July 1, 1997, the Group paid $4 million to increase
its ownership in ME Holding Inc. to 80%. Other long term
liquidity uses include the payment of income taxes, repurchases and
conversions of common stock and the payment of dividends. The Group's
current financial condition and borrowing capacity together with anticipated
cash flows from operations should be sufficient for immediate cash
requirements and future investing activities.
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, 1997
and 1996 and the six months ended June 30, 1997 and 1996
Condensed Balance Sheets as of June 30, 1997 and December 28, 1996
Condensed Statements of Cash Flows for the six months ended June 30, 1997
and 1996
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,
except per share data) 1997 1996 1997 1996
Revenue $ 179 $ 162 $ 355 $ 317
Cost of Revenue (113) (102) (223) (197)
------ ------ ------ ------
66 60 132 120
General and Administrative Expenses (52) (42) (105) (81)
------ ------ ------ -----
Operating Earnings 14 18 27 39
Other Income (Expense):
Equity Earnings, net 13 2 18 1
Investment Income, net 10 15 21 31
Interest Expense, net (11) (7) (19) (13)
Other, net 2 3 2 1
------ ------ ----- -----
14 13 22 20
------ ------ ----- -----
Earnings Before Income Taxes and
Minority Interest 28 31 49 59
Provision for Income Taxes (10) (13) (17) (23)
Minority Interest in Net Loss (Income)
of Subsidiaries 3 (1) 9 (1)
------ ------ ----- -----
Net Earnings $ 21 $ 17 $ 41 $ 35
====== ====== ===== ======
Primary Earnings Per Share $ .87 $ .77 $1.67 $ 1.54
====== ====== ===== ======
Fully Diluted Earnings Per Share $ .87 $ .77 $1.67 $ 1.54
====== ====== ===== ======
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Balance Sheets
June 30, December 28,
1997 1996
(dollars in millions) (unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 261 $ 147
Marketable securities 335 372
Restricted securities 24 25
Receivables, less allowance of $3 and $3 97 76
Other 27 33
-------- -------
Total Current Assets 744 653
Property, Plant and Equipment,
less accumulated depreciation and
amortization of $386 and $345 671 642
Investments 859 806
Intangible Assets, net 369 353
Other Assets 72 74
-------- -------
$ 2,715 $ 2,528
======== =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 66 $ 79
Current portion of long-term debt:
Telecommunications 11 55
Other 1 2
Accrued costs and billings in excess
of revenue on uncompleted contracts 13 12
Accrued reclamation and other mining costs 16 19
Other 98 87
-------- -------
Total Current Liabilities 205 254
Long-Term Debt, less current portion:
Telecommunications 244 207
Other 133 113
Deferred Income Taxes 235 165
Retirement Benefits 47 48
Accrued Reclamation Costs 101 98
Other Liabilities 165 168
Minority Interest 218 218
Stockholders' Equity (Redeemable common stock
$1,333 million aggregate redemption value):
24,575,825 outstanding shares in 1997 and
23,219,744 in 1996
Common equity 1,352 1,235
Foreign currency adjustment (2) (2)
Net unrealized holding gain 17 24
-------- -------
Total Stockholders' Equity 1,367 1,257
-------- -------
$ 2,715 $ 2,528
======== =======
See accompanying notes to condensed financial statements.
KIEWIT DIVERSIFIED GROUP
Condensed Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
(dollars in millions) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 139 $ 77
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities and investments 142 127
Purchases of marketable securities (102) (99)
Decrease in restricted securities 2 2
Capital expenditures (70) (44)
Acquisitions and investments, net (70) (96)
Proceeds from sale of assets and other - 6
------ -----
Net cash used in investing activities (98) (104)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 16 11
Payments on long-term debt, including
current portion (8) (15)
Issuance of common stock 5 -
Repurchases of common stock - (11)
Exchange of Class B&C Stock for Class D Stock, net 72 19
Payments of dividends (12) (13)
------ -----
Net cash provided by (used in) financing activities 73 (9)
------ -----
Net change in cash and cash equivalents 114 (36)
Cash and cash equivalents at beginning of period 147 363
------ -----
Cash and cash equivalents at end of period $ 261 $ 327
====== =====
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 28, 1996 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 28, 1996.
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.
The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.
Where appropriate, items within the condensed financial statements have been
reclassified from the previous periods to conform to current year
presentation.
2. Earnings Per Share:
Primary and fully diluted earnings per share of common stock have been computed
using the weighted average number of shares outstanding during each period
after giving effect to stock options considered to be dilutive common stock
equivalents. The number of shares used in computing both primary and fully
diluted earnings per share were 24,579,927 and 23,205,830 for the three
months ended June 30, 1997 and 1996 and 24,544,153 and 23,221,026 for the six
months ending on the same dates.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". The
statement establishes standards for computing and presenting earnings per
share and requires the restatement of prior period earnings per share data
presented. This statement is effective for financial statements issued for
periods ending after December 15, 1997 and earlier application is not
permitted. Basic and diluted earnings per share, as defined in SFAS No. 128,
are not expected to vary significantly from the primary and fully diluted
earnings per share shown on the statements of earnings.
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, and specifically
attributable items are as follows:
(dollars in millions)
June 30, December 28,
1997 1996
Cash and marketable securities $ 4 $ 5
Property, plant and equipment, net 5 5
Other assets 2 1
------ ------
Total Assets $ 11 $ 11
====== ======
Accounts payable $ 6 $ 17
Long-term debt, including current portion 1 1
------ ------
Total Liabilities $ 7 $ 18
====== ======
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Other expense, net $ - $ - $ - $ (1)
Corporate general and administrative costs have been allocated to the Group.
These allocations were $2 million for the three months ended June 30, 1997
and 1996 and $3 million for the six months ended June 30, 1997 and 1996.
Mine management fees paid to the Construction & Mining Group were $7 million
and $8 million for the three months ended June 30, 1997 and 1996 and $16
million and $15 million for the six months ended June 30, 1997 and 1996.
4. Acquisitions:
In 1996, C-TEC purchased 80% of Freedom New York, L.L.C. ("Freedom").
Freedom provides subscription television services using microwave frequencies
in New York City and selected areas of New Jersey. In March 1997, C-TEC
paid $40 million (including $10 million of non-capitalized costs) in
connection with a series of transactions which resulted in C-TEC having a
100% ownership interest in the assets of Freedom. The acquisition was
accounted for as a purchase. The purchase price (net of non-capitalizable
costs) exceeded the fair value of net assets acquired by $25 million, which
is recognized as goodwill and is being amortized over approximately 6 years.
In December 1996, CE Electric which is 70% owned directly by CalEnergy and
30% owned by the Group, acquired majority ownership of the outstanding
ordinary share capital of Northern Electric plc. ("Northern") pursuant to a
tender offer (the "Tender Offer") commenced in the United Kingdom by CE
Electric in November 1996. As of March 18, 1997, CE Electric effectively
owned 100% of Northern's ordinary shares.
As of June 30, 1997, CalEnergy and the Group had contributed to CE Electric
approximately $410 million and $176 million, respectively, of the
approximately $1.3 billion required to acquire all of Northern's ordinary
and preference shares in connection with the Tender Offer. The remaining
funds necessary to consummate the Tender Offer were provided by term loan
($921 million) and revolving facility agreement obtained by CE Electric.
The Group has not guaranteed, and is not otherwise subject to recourse for,
amounts borrowed under these facilities.
On July 2, 1997, the Labour Party in the United Kingdom announced the details
of its proposed "Windfall Tax" to be levied against privatized British
utilities. This one-time tax will be 23% of the difference between the
value at the time of privatization and the utility's current value based on
profits over a period of up to four years. At the time of acquisition, CE
Electric accounted for the potential tax as a purchase accounting contingent
liability. However, the Securities and Exchange Commission has subsequently
permitted an acquiring company, in a similar situation, to account for the tax
as a one-time charge. CE Electric will take a charge of approximately $200
million when the tax is enacted. The total impact to the Group, directly
through its investment in CE Electric and indirectly through its investment
in CalEnergy is expected to approximate $85 million.
5. Investments:
The Group is able to defer $40 million of taxable gain with respect to the
1995 Whitney Benefits litigation settlement by investing in real estate. In
February 1997, the Group purchased an office building in Aurora, Colorado
for $22 million. The Group may make additional real estate investments to
defer the remaining balance. On June 30, 1997, the Group closed a $16
million financing agreement with Metropolitan Life Insurance Company. The
15 year note is collateralized by the Aurora property and carries an
interest rate of 8.38%.
In late 1995, a Group and CalEnergy venture, CE Casecnan Water and Energy
Company, Inc., ("Casecnan") closed financing and commenced construction of a
$495 million irrigation and hydroelectric power project located on the
Philippines island of Luzon. The Group and CalEnergy have each made $62
million of equity contributions to the project.
The Casecnan project was being constructed on a joint and several basis by
Hanbo Corporation and Hanbo Engineering & Construction Co. Ltd. ("HECC"),
(together, "Contractors"), both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The Contractor's
obligations under the construction contract ("Hanbo Contract") are guaranteed
by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a large South Korean
steel company. In addition, the Contractors' obligations are secured by an
unconditional, irrevocable standby letter of credit issued by Korea First
Bank ("KFB") in the approximate amount of $118 million. During the first
quarter of 1997 Hanbo Corporation, HECC and Hanbo Steel each filed to seek
bankruptcy protection in South Korea and KFB's credit rating was downgraded
because of the substantial loans it made to Hanbo Steel.
On May 7, 1997, Casecnan announced that it had terminated the Hanbo Contract
and had entered into a new engineer, procure and construct contract to
complete the construction of the project (the "Replacement Contract").
The work under the Replacement Contract will be conducted by a consortium of
contractors and subcontractors including Siemens A.G., Sulzer Hydro Ltd.,
Black & Veatch and Colenco Power Engineering Ltd., and will be headed by
Cooperativa Muratori Cementista CMC di Ravenna and Impressa Pizzarotti & C.
Spa. The Hanbo Contract was terminated because of events of default under
the contract including the fact that the Contractors had filed for court
receivership protection in South Korea. In connection with the contract
termination, Casecnan made a draw request of $79 million under the letter of
credit issued by KFB to pay certain transition costs and other damages under
the Hanbo Contract. KFB failed to honor the draw request and Casecnan filed
a suit in New York State Court. KFB funded, pursuant to a court order, the
$79 million into an interest bearing account at an independent financial
institution in the United States. This matter is still unresolved, however,
if KFB would not be required to honor its obligations under the letter of
credit, such action may have a material adverse effect on the Casecnan
project. Based on information available, the Group does not currently
believe its investment is impaired.
The Group and CalEnergy have agreed to jointly develop and construct
geothermal power facilities at the Dieng and Patuha sites in Indonesia.
Dieng Unit 1 is being constructed and is expected to be placed in commercial
operation later this year. An additional five units are expected to be
constructed on a modular basis as geothermal resources are developed. On
June 12, 1997 the Group and CalEnergy closed a $400 million revolving credit
facility to finance the development and construction of the remaining
Indonesian projects. The credit facility is collateralized by the
Indonesian assets and is nonrecourse to the Group.
6. C-TEC Restructuring:
In February 1997, C-TEC announced a plan to separate its operations along
business lines into three separate, publicly traded companies:
Commonwealth Telephone Enterprises, Inc., containing the local telephone
group and related engineering business;
Cable Michigan, Inc., containing the cable television operations in
Michigan; and
RCN Corporation, Inc., which will consist of RCN Telecom Services;
C-TEC's existing cable systems in the Boston-Washington, D.C. corridor;
and the investment in Megacable S.A. de C.V., a cable operator in
Mexico. RCN Telecom Services is a provider of packaged local and long
distance telephone, video, and internet access services provided over
fiber optic networks to residential customers in Boston and New York
City.
The restructuring should permit investors and the financial markets to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital on the most efficient terms.
In July 1997, C-TEC closed four committed credit facilities with a syndicate
of banks aggregating $410 million. C-TEC intends to use these credit
facilities to refinance the cable group's existing Senior Secured Notes and
to fund RCN's continued development.
On June 18, 1997 C-TEC received approval by the Internal Revenue Service to
conduct the tax-free spin-off of Cable Michigan and RCN Corporation.
While it is anticipated that the proposed restructuring will occur by the
fourth quarter, the spin-offs are subject to receipt of other regulatory
approvals and other conditions. If the reorganization and spin-offs occur,
the Group will own less than 50% of the outstanding shares and voting rights
of each entity, and will therefore account for each entity using the equity
method for all of 1997.
On May 12, 1997, C-TEC announced that it had proposed to acquire the 38% of
the common stock of Mercom Inc. ("Mercom") not currently owned by it in
exchange for 8.75% of the common stock of C-TEC Michigan. The proposed
exchange ratio is based on the assumption that C-TEC Michigan will have
$125 million of debt outstanding at the time of the transaction.
The proposal is subject to certain conditions, including the consummation of
C-TEC's restructuring and the receipt of all required regulatory approvals.
On June 23, 1997, C-TEC announced that due to the earlier than anticipated
IRS approval of its own restructuring, it was suspending discussions with
Mercom until after its restructuring was complete. C-TEC reserves the right
to withdraw its proposal at any time prior to the execution of a definitive
agreement. There can be no assurance as to the terms of any transaction or
that any transaction will take place.
The following financial information of the Group is presented as if C-TEC
had been accounted for utilizing the equity method in the condensed
financial statements as of June 30, 1997 and December 28, 1996 and for the
three and six months ended June 30, 1997 and 1996.
June 30, December 28,
(dollars in millions) 1997 1996
Assets
Current Assets:
Cash and cash equivalents $ 203 $ 71
Marketable securities 331 325
Restricted securities 24 25
Receivables 46 34
Other 15 4
------ ------
Total Current Assets 619 459
Net Property, Plant and Equipment 176 174
Investments 1,124 1,075
Intangible Assets, net 21 23
Other Assets 46 49
------- -------
$ 1,986 $ 1,780
======= =======
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 30 $ 41
Current portion of long-term debt 1 2
Accrued reclamation and other mining costs 14 19
Other 44 19
------- -------
Total Current Liabilities 89 81
Long-term Debt, less current portion 133 113
Deferred Income Taxes 136 64
Retirement Benefits 45 45
Accrued Reclamation costs 101 98
Other Liabilities 113 118
Minority Interest 2 4
Stockholders' Equity 1,367 1,257
------- -------
$ 1,986 $ 1,780
======= =======
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in millions) 1997 1996 1997 1996
Revenue $ 81 $ 69 $ 161 $ 134
Cost of Revenue (42) (38) (84) (73)
------ ------ ----- ------
39 31 77 61
General and Administrative Expenses (23) (21) (41) (38)
------ ------ ----- ------
Operating Earnings 16 10 36 23
Other Income (Expense):
Equity earnings, net 8 (3) 9 (4)
Investment income, net 8 12 16 24
Interest expense, net (4) (1) (7) (1)
Other, net 1 6 2 7
------ ------ ----- ------
13 14 20 26
------ ------ ----- ------
Earnings Before Income Taxes and
Minority Interest 29 24 56 49
Provision for Income Taxes (9) (9) (17) (16)
Minority Interest in Net
Loss of Subsidiaries 1 2 2 2
------ ------ ----- ------
Net Earnings $ 21 $ 17 $ 41 $ 35
====== ====== ===== ======
Six Months Ended
June 30,
(dollars in millions) 1997 1996
Cash flows from operations:
Net cash provided by operations $ 107 $ 32
Cash flows from investing activities:
Proceeds from sales and maturities of
marketable securities and investments 98 9
Purchases of marketable securities (102) (47)
Change in restricted securities 3 2
Capital expenditures (12) (17)
Acquisitions and investment, net (42) (100)
Other 1 5
------ ------
Net cash used in investing activities (54) (148)
Cash flows from financing activities:
Proceeds from long-term debt borrowings 16 11
Payments on long-term debt, including
current portion (2) (3)
Repurchases of common stock - (11)
Exchange of Class B&C Stock for Class D Stock 72 19
Payment of dividends (12) (12)
Issuance of common stock 5 -
------ ------
Net cash provided by financing activities 79 4
------ ------
Net change in cash and cash equivalents 132 (112)
Cash and cash equivalents at beginning of period 71 314
------ ------
Cash and cash equivalents at end of period $ 203 $ 202
====== ======
7. Other Matters:
On June 19, 1997, James Q. Crowe was appointed President and CEO of Kiewit
Diversified Group Inc. Mr. Crowe assumed the position previously held by
Richard R. Jaros, who will continue to serve on the PKS Board of Directors.
Mr. Crowe was the Chairman and CEO of MFS Communications Company until
December 31, 1996, when the company was purchased by Worldcom, Inc. MFS
was a subsidiary of the Group until September 1995, when it was spun-off
and became an independent, publicly owned corporation.
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, future results of operations
or future cash flows.
KIEWIT DIVERSIFIED GROUP
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations - Second Quarter 1997 vs. Second Quarter 1996
Revenue from each of the Group's business segments for the three months ended
June 30 comprised the following (in millions):
1997 1996
Coal Mining $ 54 $ 58
Telecommunications 98 93
Information Services 24 9
Other 3 2
------ ------
$ 179 $ 162
====== ======
Mining. Mining revenue declined 7% in the second quarter of 1997 compared to
the same period in 1996. Commonwealth Edison Company ("Commonwealth") has
the flexibility under the amended contract to accelerate or defer delivery
of alternate source coal provided it accepts delivery of the aggregate minimum
commitment at the end of each year. In early 1996, alternate source coal
shipments fell below minimum levels. These shortfalls were partially made
up in the second quarter of 1996. In 1997, the opposite scenario occurred.
Commonwealth took delivery of more coal in the first quarter than the second
quarter. Partially offsetting the decline in alternate source coal sales
were additional spot sales to utilities in the northwestern United States.
Cost as a percentage of revenue for the coal mining operations in the second
quarter of 1997 was consistent with that of the prior year. A spot market
customer bought out a portion of its contract by making a payment equivalent
to 60% of the price of coal. These proceeds, with no corresponding costs,
offset the decline in higher margin alternate coal sales.
Telecommunications. The telecommunications segment is comprised of C-TEC's
telephone, cable and RCN groups. Due to the receipt of the IRS approval to
spin-off Cable Michigan and RCN, C-TEC has reclassified these businesses as
discontinued operations and has recognized, in the second quarter, their
estimated losses through the projected spin-off date. The Group's equity
ownership in all three businesses will remain at approximately 48% at the
spin-off date. Therefore, the Group will continue to reflect the operations
of Cable Michigan and RCN as continuing operations and has not accrued the
estimated losses of these businesses through the spin-off date.
Telecommunications revenue for the Group increased $5 million or 5% for the
three months ended June 30, 1997 compared to the same period in 1996. The
telephone group's revenue was essentially unchanged in 1997. Higher local
network service revenue, and interstate and intrastate access revenue
were primarily offset by a decline in construction revenue from the
communications services business. The communications services business is
continually subject to fluctuations due to its nonrecurring revenue streams,
market conditions and the effect of competition on margins. As of June 30,
1997, the business had minimal backlog and does not anticipate a significant
change in the foreseeable future. Sales for the cable group increased $5
million or 12% in 1997. The increase is attributable to higher basic
service revenue resulting from additional subscribers during the period
and the effects of a rate increase implemented during the first quarter of
1997. RCN's revenue increased to $3 million in the second quarter of
1997. An increase of subscribers in the New York and Boston markets is
responsible for the increase.
Telecommunications cost of sales increased 11% in the second quarter
of 1997. Expenses for the telephone group remained level with those of the
same period in 1996 as increases in advertising, information systems
services expenses and the costs associated with the development of a
competitive local telephone effort were substantially offset by lower materials
costs associated with the video conferencing sales and lower construction
costs of the communications services business resulting from the decline in
sales. The cable group's costs increased 10% in 1997. The increase is
primarily attributable to higher basic programming costs, resulting from
higher programming rates, additional channels and additional subscribers.
The costs associated with the development of new business in New York and
Boston, primarily personnel, advertising and programming, resulted in a $7
million increase in RCN's costs.
Information Services. The Group's information services business provides
computer operations outsourcing and systems integration services to firms
that desire to focus resources on their core business. Systems integration
services include converting mainframe based systems to client/server
architecture, Year 2000 compliance, code restructuring and software
re-engineering. Revenue attributable to computer outsourcing and systems
integration increased 167% to $24 million for the three months ended June
30, 1997 compared to the same period in 1996. The increase in revenue is
attributable to signing of several major new outsourcing contracts in late
1996 and the increased focus of existing and new customers on Year 2000
compatibility.
The operating costs of the information services business doubled to $14 million
in 1997 primarily due to its continued growth. Hardware, communications and
personnel costs all experienced significant increases compared to the prior
year. Operational efficiencies were recognized in 1997 through the increased
utilization of existing computer hardware.
General and Administrative Expenses. General and administrative expenses
increased 24% in the second quarter of 1997 compared to the same period in
1996. The expenses of Freedom and the professional fees incurred by C-TEC
for its restructuring were the primary factors for the increase.
Also contributing to the increase was the additional overhead incurred by the
growing information services business.
Equity Earnings, net. Equity earnings increased significantly in 1997. The
Group's proportionate share of CalEnergy's earnings increased $5 million in
the second quarter of 1997 to $9 million. The conversion of CalEnergy
debentures to common stock and the exercising of options increased the Group's
ownership interest in CalEnergy from 23% at June 30, 1996 to 30% at June 30,
1997. CalEnergy's earnings also increased primarily due to the completion
and commencement of operations at the Salton Sea Unit IV and two Philippine
geothermal facilities, the purchase of three cogeneration facilities and the
acquisition of Northern Electric, all of which occurred in the last half of
1996. In addition to contributing to CalEnergy's earnings, the Group's
proportionate share of Northern Electric also provided $6 million of income.
Partially offsetting these gains were losses attributable to the Casecnan
project. The Casecnan loss during construction results from the variance
in borrowing and investing interest rates on the funds generated by
the project's debt offering in 1995.
Investment Income, net. The decline in investment income is attributable to
a reduction of interest income, due to a smaller average portfolio balance
and the conversion of CalEnergy debentures into common stock in September
1996, and a decline in gains on the disposal of marketable and equity
securities.
Interest Expense, net. Interest expense increased from $7 million in 1996
to $11 million in 1997. Interest of $2 million was capitalized by CPTC in 1996
due to the construction of the SR91 toll road. Due to commencement of
operations, interest of $3 million in 1997 was charged against earnings.
Other, net. The slight decline in other income in 1997 is due to fewer gains
on the disposal of property, plant and equipment and other assets.
Provision for Income Taxes. The effective income tax rate in 1996 differs
from the expected statutory rate of 35% primarily due to state income taxes.
Minority Interest in Net Loss (Income) of Subsidiaries. C-TEC's losses,
primarily due to the development of the RCN business and restructuring
expenses, and the losses associated with the SR91 toll road, resulted in the
increased losses attributable to minority shareholders.
Results of Operations - Six Months 1997 vs. Six Months 1996
Revenue from each of the Group's business segments for the six months ended
June 30 comprised the following (in millions):
1997 1996
Coal Mining $ 115 $ 111
Telecommunications 194 183
Information Services 40 19
Other 6 4
------ ------
$ 355 $ 317
====== ======
Mining. Coal sales increased 4% during the first half of 1997. Additional
spot coal sales, partially due to a decline in hydroelectric power generated
in the northwestern United States, and additional contract sales to
Mississippi Power were primarily responsible for the increase in revenue.
Operating costs as a percentage of revenue were virtually unchanged from the
same period in 1996. The increase in lower margin contract and spot sales
was substantially offset by the proceeds from the partial buy-out of a spot
sales contract.
Telecommunications. The Group's telecommunications revenue increased 6% to
$194 million for the six months ended June 30, 1997 compared to the same
period in 1996. Sales for the telephone group were consistent with that of
the prior year. A decline in revenue from the communications services business
was substantially offset by increases in higher local network service revenue,
interstate and intrastate access revenue, and internet access revenue.
Sales for the cable group increased 9% to $79 million for the period.
The increase is primarily attributable to higher basic service revenue
resulting from additional subscribers and the effects of a rate increase
implemented during the first quarter of 1997. RCN's revenue increased $5
million to $6 million for the first half of 1997. This increase is due to
the additional subscribers obtained in the New York and Boston markets.
The cost of revenue for the Group's telecommunications segment increased 12%
in 1997. The costs associated with the development of a competitive local
telephone effort in 1997 and the positive effect of a one-time postemployment
benefit adjustment in 1996 were primarily responsible for the 5% increase in
the telephone group's cost of revenue. Partially offsetting these items was
a decline in costs for the communications services business resulting from a
decrease in sales. The cable group's costs increased 9% for the six months
ended June 30, 1997. The increase is primarily due to higher basic programming
costs. The development of the New York and Boston markets resulted in an $11
million increase in costs for RCN during the period. The most significant
increases occurred in personnel related costs, origination and programming
costs and advertising expenses.
Information Services. Revenue for information services business increased
110% to $40 million for the six months ended June 30, 1997. The increase in
revenue is attributable to signing of several major new outsourcing contracts
in late 1996 and the increased focus of customers on Year 2000 compatibility.
The operating costs of the information services business increased 79% to $25
million in 1997 primarily due to its continued growth. Hardware,
communications and personnel costs all experienced significant increases
compared to the prior year. Operational efficiencies were recognized in 1997
through the increased utilization of existing computer hardware.
General and Administrative Expenses. General and administrative expenses
increased 30% in 1997. The expenses of Freedom, acquired by C-TEC in 1996,
and certain non-capitalized costs of $10 million incurred in connection with
the March 1997 transactions with Freedom's minority shareholders, and the
professional fees incurred for C-TEC's restructuring were primarily
responsible for the higher costs. Also contributing were the additional
costs associated with the growing information services business.
Equity Earnings, net. Equity earnings increased significantly in 1997. The
Group's proportionate share of CalEnergy's earnings increased $10 million in
1997 to $16 million. An increase in the Group's share of CalEnergy's
earnings and improvement in those earnings, primarily due to the commencement
of operations at additional geothermal facilities, and the acquisitions of
three cogeneration facilities and Northern Electric, contributed to the
increase. The Group's proportionate share of Northern Electric provided $9
million of income. Partially offsetting these gains were losses attributable
to the Casecnan project.
Investment Income, net. Investment income declined 32% in 1997. The
conversion of CalEnergy convertible debentures into common stock, a reduction
in the average portfolio balance due to significant investments in CE
Electric and the RCN businesses, and a decline in gains recognized on the sales
of securities, all contributed to the reduction in investment income.
Interest Expense, net. Interest expense increased in 1997 to $19 million from
$13 million in 1996. Through June 1996 and 1997, CPTC incurred $4 million
and $5 million of interest on its long-term debt. In 1996 the interest was
capitalized due to the construction of the SR91 toll road. In 1997 the
interest was charged against earnings.
Other, net. Other income is primarily comprised of gains and losses on the
sale and disposition of property, plant and equipment and other assets.
Increased income from the sale of operating assets, and the absence of
one-time charges for C-TEC's write-off of regulatory assets led to the
increase in other income.
Provision for Income Taxes. The effective income tax rate for 1996 differs
from the expected statutory of 35% primarily due to the state income taxes.
Minority Interest in Net Loss (Income) of Subsidiaries. C-TEC's losses,
primarily due to the development of the RCN business, certain non-capitalized
costs incurred in connection with the March 1997 transactions with Freedom's
minority shareholders and restructuring expenses, and the losses associated
with the SR91 toll road, resulted in the increased losses attributable to
minority shareholders.
Financial Condition - June 30, 1997 vs. December 28, 1996
Excluding C-TEC described in a separate paragraph below, the Group's working
capital increased $152 million or 40% during 1997. An increase in cash flows
from operations, primarily due to $93 million of federal tax and interest
refunds, and financing activities, was partially offset by investing
activities.
Investing activities primarily consist of $16 million of real estate
investments, $19 million of international energy projects, $12 million of
capital expenditures, including $8 million for the information services
business, and the net purchase of marketable securities of $4 million.
Financing sources include $72 million from the exchange of Class B&C Stock for
Class D Stock, $5 million from the issuance of common stock and $16 million
long-term debt borrowings. These sources were partially offset by $12
million for the payment of dividends.
C-TEC's working capital decreased slightly in 1997. The series of transactions
with Freedom's minority shareholders for $40 million, $61 million of capital
expenditures to expand the RCN, cable and telephone networks, and $7 million
to repay long-term debt and preferred dividends were partially funded by the
sale of marketable securities of $43 million.
The Group anticipates making significant investments in its telecommunications
and energy businesses - including its joint venture agreement with CE
covering international power project development activities - and searching
for opportunities to acquire 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 immediate operating and
investing activities.
In late 1995, a Group and CalEnergy venture, CE Casecnan Water and Energy
Company, Inc., ("Casecnan") closed financing and commenced construction of a
$495 million irrigation and hydroelectric power project located on the
Philippine island of Luzon. The Group and CalEnergy have each made $62
million of equity contributions to the project.
The Casecnan project was being constructed on a joint and several basis by
Hanbo Corporation and Hanbo Engineering & Construction Co. Ltd. ("HECC"),
(together, "Contractors"), both of which are South Korean corporations.
Hanbo Corporation and HECC are under common ownership. The Contractor's
obligations under the construction contract ("Hanbo Contract") are guaranteed
by Hanbo Iron & Steel Company, Ltd. ("Hanbo Steel"), a large South Korean
steel company. In addition, the Contractors' obligations are secured by an
unconditional, irrevocable standby letter of credit issued by Korea First Bank
("KFB") in the approximate amount of $118 million. During the first quarter
of 1997 Hanbo Corporation, HECC and Hanbo Steel each filed to seek
bankruptcy protection in South Korea and KFB's credit rating was downgraded
because of the substantial loans it made to Hanbo Steel.
On May 7, 1997, Casecnan announced that it had terminated the Hanbo Contract
and had entered into a new engineer, procure and construct contract to
complete the construction of the project (the "Replacement Contract").
The work under the Replacement Contract will be conducted by a consortium of
contractors and subcontractors including Siemens A.G., Sulzer Hydro Ltd.,
Black & Veatch and Colenco Power Engineering Ltd., and will be headed by
Cooperativa Muratori Cementista CMC di Ravenna and Impressa Pizzarotti &
C. Spa. The Hanbo Contract was terminated because of events of default under
the contract including the fact that the Contractors had filed for court
receivership protection in South Korea. In connection with the contract
termination, Casecnan made a draw request of $79 million under the letter
of credit issued by KFB to pay certain transition costs and other damages
under the Hanbo Contract. KFB failed to honor the draw request and Casecnan
filed a suit in New York State Court. KFB funded, pursuant to a court order,
the $79 million into an interest bearing account of an independent financial
institution in the United States. This matter is still unresolved, however,
if KFB would not be required to honor its obligations under the letter of
credit, such action may have a material adverse effect on the
Casecnan project. However, based on information available, the Group does
not currently believe its investment is impaired.
In February 1997, C-TEC announced a plan to separate its operations along
business lines into three separate, publicly traded companies:
Commonwealth Telephone Enterprises, Inc., containing the local
telephone group and related engineering business;
Cable Michigan, Inc., containing the cable television operations in
Michigan; and
RCN Corporation, Inc., which will consist of RCN Telecom Services;
C-TEC's existing cable systems in the Boston-Washington, D.C.
corridor; and the investment in Megacable S.A. de C.V., a cable
operator in Mexico. RCN Telecom Services is a provider of packaged
local and long distance telephone, video, and internet access
services provided over fiber optic networks to residential customers
in Boston and New York City.
The restructuring should permit investors and the financial markets to better
understand and evaluate C-TEC's various businesses. In addition, the
restructuring will allow C-TEC to raise capital on the most efficient terms.
In July 1997, C-TEC closed four committed credit facilities with a syndicate of
banks aggregating $410 million. C-TEC intends to use these credit facilities
to refinance the cable group's existing Senior Secured Notes and to fund
RCN's continued development.
On June 18, 1997 C-TEC received approval by the Internal Revenue Service to
conduct the tax-free spin-off of Cable Michigan and RCN Corporation. While
it is anticipated that the proposed restructuring will occur by the fourth
quarter, the spin-offs are subject to receipt of other regulatory approvals
and other conditions. If the reorganization and spin-offs occur, the Group
will own less than 50% of the outstanding shares and voting rights of each
entity, and will therefore account for each entity using the equity method
for all of 1997.
On May 12, 1997, C-TEC announced that it had proposed to acquire the 38% of
the common stock of Mercom not currently owned by it in
exchange for 8.75% of the common stock of C-TEC Michigan. The proposed
exchange ratio is based on the assumption that C-TEC Michigan will have $125
million of debt outstanding at the time of the transaction.
The proposal is subject to certain conditions, including the consummation of
C-TEC's restructuring and the receipt of all required regulatory approvals.
On June 23, 1997, C-TEC announced that due to the earlier than anticipated
IRS approval of its own restructuring, it was suspending discussions with
Mercom until after its restructuring was complete. C-TEC reserves the
right to withdraw its proposal at any time prior to the execution of a
definitive agreement. There can be no assurance as to the terms of any
transaction or that any transaction will take place.
